Understanding Single-Firm Behavior: Tying Session

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1	UNITED STATES FEDERAL TRADE COMMISSION
2	and
3	UNITED STATES DEPARTMENT OF JUSTICE
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5
6
7	SHERMAN ACT SECTION 2 JOINT HEARING
8	UNDERSTANDING SINGLE-FIRM BEHAVIOR:
9	TYING SESSION
10	WEDNESDAY, NOVEMBER 1, 2006
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12
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15	HELD AT:
16	UNITED STATES FEDERAL TRADE COMMISSION
17	HEADQUARTERS BUILDING, ROOM 432
18	600 PENNSYLVANIA AVENUE, N.W.
19	WASHINGTON, D.C.
20	9:00 A.M. TO 1:00 P.M.
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22
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24	Reported and transcribed by:
25	Susanne Bergling, RMR-CLR

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1	MODERATORS:
2	MICHAEL SALINGER
3	Director, Bureau of Economics
4	Federal Trade Commission
5	and
6	JUNE LEE
7	Economist
8	Antitrust Division, U.S. Department of Justice
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10	PANELISTS:
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12	David Evans
13	Robin Cooper Feldman
14	Mark Popofsky
15	Donald J. Russell
16	Michael Waldman
17	Robert D. Willig
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1	C O N T E N T S
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3	Introduction
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5	Presentations
6	David Evans
7	Robin Cooper Feldman
8	Mark Popofsky
9	Donald J. Russell
10	Michael Waldman
11	Robert D. Willig
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13	Moderated Discussion
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15	Conclusion
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1	P R O C E E D I N G S
2	- - - - -
3	MR. SALINGER: Good morning. I am Michael
4	Salinger. I am one of the moderators of this session.
5	My co-moderator is June Lee from the Antitrust Division
6	at DOJ.
7	Before we start, I have a few housekeeping
8	matters. First, please turn off your cell phones,
9	BlackBerries and any other devices that might ring in
10	the middle.
11	Second, the men's room is immediately to the
12	left through the double doors you just came through.
13	The women's room is on the left on the far side of the
14	elevator banks.
15	Third, one safety tip, particularly for
16	visitors. In the unlikely event the building alarms go
17	off, please proceed calmly and quickly as instructed.
18	If we must leave the building, take the stairway, which
19	is to the right on the Pennsylvania Avenue side. After
20	leaving the building, please follow the stream of FTC
21	people, we have practiced this many times, and we will
22	all go to the Sculpture Garden, which is across the
23	intersection of Constitution Avenue and Seventh Street
24	at the other end of the building.
25	DR. WILLIG: And have lunch?

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1	MR. SALINGER: It is a very nice place to have a
2	fire drill on a day like today.
3	Finally, we request that you not make comments
4	or ask questions during the session. Thank you.
5	We are honored to have assembled a distinguished
6	panel of practitioners and professors who are well
7	versed in the issue we will tackle today involving tying
8	and product design. Our panelists this morning are
9	Michael Waldman, the Charles H. Dyson Professor of
10	Management and Professor of Economics at Cornell; David
11	Evans, who is the managing director of LECG's Global
12	Competition Policy Practice and is Chairman of
13	eSapience; Donald Russell, a partner at Robbins,
14	Russell, Englert, Orseck & Untereiner; Mark Popofsky, an
15	Adjunct Professor at Georgetown University Law Center
16	and a partner at Kaye Scholer; Robin Cooper Feldman, an
17	Associate Professor of Law at the Hastings College of
18	Law at the University of California; and Robert Willig,
19	Professor of Economics and Public Affairs at the Woodrow
20	Wilson School at Princeton, Director of Competition
21	Policy Associates, and a former Deputy Assistant
22	Attorney General in DOJ's Antitrust Division.
23	In Jefferson Parish, the Court argues, "It is
24	far too late in the history of our antitrust
25	jurisprudence to question the proposition that certain

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1	tying arrangements pose an unacceptable risk of stifling
2	competition, and therefore, are unreasonable per se."
3	That was in 1984. We are now even later in the
4	history of our antitrust jurisprudence, and yet we find
5	ourselves reconsidering that question. We are doing so
6	I think because the tying doctrine has turned out to be
7	such a central issue in many of the most important
8	antitrust cases of recent years.
9	I suspect, although I probably should not make
10	forecasts of this sort, that the easy part of today will
11	be to get agreement on the proposition that per se
12	treatment is inappropriate. Indeed, I read the passage
13	I just quoted as, in fact, an admission that if we were
14	to start over, that the Court would not choose per se
15	treatment.
16	The harder task is to figure out how, if the
17	Court moves to a rule of reason, as many people think it
18	might, how to go about deciding whether a tie is
19	reasonable; how, in principle, you distinguish a
20	competitive from an anticompetitive tie; and what sort
21	of evidence you need. Do you rely on company documents
22	about the rationale behind a tie, or if you are
23	skeptical of the ability to use company documents to
24	determine intent, what objective factors would you look
25	to?

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1	We have a really distinguished panel today to
2	help us sort through those issues, and so I would like
3	to thank them now, and I will probably do it again, but
4	I wanted to take the time to do that.
5	Now I will turn the microphone over to June to
6	make some introductory remarks of her own and to give a
7	more complete introduction of the speakers.
8	MS. LEE: Welcome to the tying panel, part of an
9	ongoing series of hearings into single-firm conduct.
10	The Department of Justice's Antitrust Division and the
11	Federal Trade Commission are jointly sponsoring these
12	hearings to help the advancement of the development of
13	the law of Section 2 of the Sherman Act. Transcripts
14	and other materials from previous sessions can be found
15	on the Department of Justice and Federal Trade
16	Commission web sites. Upcoming panels include exclusive
17	dealing on November 15th and bundled loyalty discounts
18	on November 29th, so mark your calendars.
19	Today's session concerns the law and economics
20	of tying. As Michael has noted, the treatment of tying
21	under the antitrust laws has shifted significantly over
22	time. Courts are far less likely to condemn ties today
23	than 50 years ago when Justice Felix Frankfurter stated
24	in Standard Stations that tying arrangements serve
25	hardly any purpose beyond the suppression of

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1	competition. While economists, some of whom are on this
2	panel today, have identified situations where ties pose
3	a threat to competition and situations where ties result
4	in efficiencies, assessing likely competitive effects in
5	a given situation remains a challenge.
6	I look forward to learning more about this
7	complex topic today. I would like to thank my
8	colleagues at the FTC and DOJ for organizing this
9	hearing. In particular, I thank Don O'Brien and Joe
10	Matelis, and I again reiterate Michael's thanks to the
11	panelists for participating in today's panel.
12	The organization of the panel is as follows:
13	The first four panelists will speak. We will then have
14	a short break, followed by the final two panelists.
15	Those speakers will then have an opportunity to respond
16	to each other's presentations, and this will be followed
17	by a moderated discussion.
18	Let me now introduce the first speaker. More
19	complete biographical descriptions can be found in the
20	handout and also can be found on the Antitrust Division
21	and FTC's web sites.
22	Our first speaker is Michael Waldman, who holds
23	the Charles H. Dyson Chair in Management and is a
24	Professor of Economics at the Johnson Graduate School of
25	Management at Cornell University. Professor Waldman's

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1	main research area is applied microeconomic theory, and
2	his main fields of interest are industrial organization
3	and organizational economics. In these areas, he is
4	best known for his work on learning and signaling in
5	labor markets, the operation of durable goods markets,
6	and the strategic use of tying and bundling in product
7	markets.
8	Professor Waldman's work has been published in
9	many of the top journals in economics, and he is
10	currently a co-editor at the Journal of Economic
11	Perspectives and an associate editor at the quarterly
12	Journal of Economics.
13	Michael?
14	DR. WALDMAN: Thank you.
15	Sorry, I am used to using overheads, and they
16	are not set up for that.
17	So, I want to start just by saying that a lot of
18	my work on or a lot of my thinking on tying comes out of
19	discussions with Dennis Carlton, so although Dennis is
20	not responsible for any mistakes I make in the
21	discussion, he is responsible for lots of the smart
22	things I say during the discussion.
23	Okay, so basically tying behavior has become a
24	lot more focused in the economic theory literature over
25	the last, say, 10 or 15 years, and the rationale for

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1	that is that with the Microsoft case, there has been a
2	lot more attention to it, and what has happened since
3	the Microsoft case is there has been a lot of
4	theoretical contributions trying to focus on getting a
5	better understanding of tying. So, you know, as of 15
6	years ago, there was this sort of Chicago School
7	argument sitting out there, and then Mike Whinston came
8	along and sort of tried to sort of get a better sense of
9	the Chicago School argument, and then when the Microsoft
10	case came out, there has been lots of theory, some by me
11	and Dennis, Choi and Stefanides, Barry Nalebuff, to try
12	and get a better understanding of the theory associated
13	with tying behavior, and there has been a lot of
14	progress in terms of that issue, in terms of getting a
15	better understanding of tying.
16	But in terms of antitrust, it is not so
17	clear-cut. So, there is lots of progress on the theory
18	side, less progress or less consensus, I should say, in
19	terms of what the progress on the theory side tells us
20	for what the right policies concerning antitrust should
21	be given our advances in terms of the theory.
22	So, what I am going to try to do in this
23	presentation is use theory and to some extent the old
24	theory and the new theory to use as a guide to think
25	about, okay, now, if we want to think about

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1	reformulating optimal antitrust policy, which is what
2	the panel is about, what does the theory tell us about
3	that?
4	So, in the talk, what I am going to do is I am
5	going to review various theories concerning sort of
6	theoretical perspectives concerning tying, efficiency,
7	price discrimination, exclusionary motivations and other
8	strategic motivations, and then use the lessons of the
9	various theories to talk about what that means in terms
10	of optimal antitrust policy, and basically kind of jump
11	to the conclusion.
12	Although Dennis and I have been involved in
13	writing a number of papers talking about how tying can
14	be used for exclusionary or other types of behaviors
15	that lower social welfare, my sense is that, in general,
16	one should be very hesitant in terms of intervening in
17	terms of tying policies. Although there certainly are
18	cases -- and my view is the Microsoft case would be a
19	good example -- where tying was used in an
20	anticompetitive way that lowered social welfare, it is
21	very difficult, given the frequency with which ties
22	either have a positive social welfare effect, say
23	through efficiency rationales or ambiguous social
24	welfare effect through price discrimination rationales,
25	it is very hard to kind of have -- I think it is wrong

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1	to have a very interventionist policy, because on net,
2	given the difficulty the courts have in trying to
3	identify the relevant motivations, very aggressive
4	interventionist policy is likely to lower social welfare
5	more often than raise it.
6	So, here is what I will go through. I will talk
7	briefly about efficiency rationales, price
8	discrimination rationales. I think everyone is pretty
9	familiar with those. I will not spend too much time
10	talking about them. Then I will talk some about where
11	most of the new literature has appeared, which is the
12	exclusionary tying, start with the Chicago School
13	argument and then talk about some of the more recent
14	literature which talks about, you know, sort of how
15	robust or in some sense when doesn't the Chicago School
16	argument hold, both in terms of monopolies and tying,
17	the tied market, and monopolizing the tying market. I
18	will talk about a few other strategic rationales
19	associated with tying and then get back to kind of
20	antitrust perspectives, which I just very briefly
21	mentioned.
22	One of the reasons that it is hard to think
23	about antitrust intervention in terms of tying is
24	because there are so many efficiency reasons associated
25	with tying. So, if I just think about it from a

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1	transactions costs standpoint, there are very many
2	reasons to tie goods. So, you would have right shoes
3	and left shoes. People do not want to go shopping for a
4	right shoe and then go to a different box for a left
5	shoe. You know, cars and radios, people typically want
6	to have the radio put directly into the car. So, there
7	are lots of efficiency rationales for tying, and in some
8	sense, almost any good you can find, defined in some
9	sense, is a tying of various goods. So, when I bought
10	this shirt, clearly the buttons were in some sense tied
11	on, both figuratively and literally, okay?
12	So, other efficiency rationales are search and
13	sorting, which goes back to the old Kenney and Klein
14	argument, and then you have variable proportion. So,
15	the variable proportions arguments says that, well,
16	suppose you have two goods, one that is someone with
17	power and one without, if the goods are not tied, then
18	there is going to be this inefficient substitution that
19	consumers are going to do trying to substitute away from
20	the product with market power which has an above
21	marginal cost price.
22	There has been a fair amount of research on that
23	idea, Malella and Nahata has an early paper talking
24	about it, Tirole talks about that, in terms of extending
25	to after-market monopolization, and I have a paper with

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1	Dennis and a paper with a Dr. Morita showing how you can
2	sort of take that same idea and extend it to
3	after-market monopolization by competitive selling.
4	I am going to skip over the details of
5	after-market monopolization and go straight to price
6	discrimination. So, another important reason that one
7	might tie is for price discrimination reasons. So,
8	there are sort of basically two arguments there. The
9	initial argument goes back to a paper by George Stigler,
10	1968, which talks about negative correlations of values,
11	and in Stigler -- so, there is just a simple example.
12	Suppose you have an individual one who has a valuation
13	on product A of 10 and product B of 6, and individual
14	two has the reverse, product A of six and product B of
15	ten, well, if you try to sell just product A or if you
16	try to sell just product B, you have these heterogenous
17	valuations, and so you cannot extract all the consumer
18	surplus. By tying them together, creating a bundle, you
19	have homogenized the valuations, you are able to extract
20	all the surplus.
21	Since that initial paper, it has been pointed
22	out by a number of authors, in particular McAfee,
23	McMillan and Whinston, that, in fact, this negative
24	correlation of values is not required to get their
25	argument to go through, and so there, I just give an

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1	example where the valuations are actually independent of
2	each other, equal probabilities, and if you worked out
3	the profits associated with it, you will see the same
4	basic result that Stigler found even though there is no
5	negative correlation of values.
6	The second price discrimination story is the
7	classic metered sales story that goes back to the old
8	IBM punch card case kind of concerning -- actually,
9	before computers, concerning -- oh, what is the term --
10	well, anyway, and basically the idea that you have punch
11	cards and you have, let's say, computers -- it was not
12	computers -- and what you are doing is you are trying to
13	price discriminate. You are trying to give the higher
14	price to the individuals who use the good more
15	intensively. If the individuals who use the good more
16	intensively use the variable commodity, in this case the
17	punch cards, at a higher rate, what you do is then you
18	can charge a higher price for the variable commodity,
19	the punch cards, a lower price on the machine, and that
20	allows you to price discriminate.
21	Clearly there are social welfare implications.
22	It is well known that price discrimination has ambiguous
23	social welfare implications, so from the standpoint of
24	tying behavior in terms of antitrust, it is not clear
25	why you would want to eliminate the ability to use tying

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1	for price discrimination and allow price discrimination
2	in lots of other types of activities. That is likely to
3	cause distortions in terms of people trying to price
4	discriminate in other ways and might create additional
5	distortions.
6	Okay, the more recent literature is focused on
7	exclusionary tying, and it starts with the Chicago
8	School arguments. So, the Chicago School argument says
9	you would never tie to extend your market power from
10	market A to market B if you are already a monopolist in
11	market A, and the standard example that is given is
12	think about right shoes and left shoes, and there I just
13	work through a little example of suppose P equals A
14	minus bX as demand for pairs of shoes and there is a
15	constant marginal cost for shoes, then by basically
16	being a monopolist on right shoes, you can extract all
17	the monopoly power into left shoes as being sold
18	competitively.
19	Mike Whinston, in a very important paper, shows
20	that that argument is correct in some settings but is
21	not completely robust. What he shows is that in a
22	one-period setting, if the monopolist's primary good is
23	essential, then that argument goes through, but if
24	you -- for various reasons or in various ways, if you
25	move away from that basic one-period essential setting,

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1	the argument breaks down. So, in Mike's initial paper,
2	he says, well, suppose that the primary good is not
3	essential, and so there are some uses for the
4	complementary good that do not use the primary good,
5	then in some cases, what you can do is you can tie, you
6	can drive out the competitors in the complementary
7	market, and that allows you to monopolize this part of
8	the market that does not use the primary good.
9	He and Barry Nalebuff also have arguments where
10	the goods are independent and show that tying can
11	sometimes be used to get the monopolist to become a more
12	aggressive competitor, and that can cause exit, which
13	again, is similar to his original argument, and then
14	improve profitability.
15	Dennis and I have a working paper where we move
16	away from the one-period setting, and you still have
17	this essential nature of the good, but by moving away
18	from the one-period setting as we specifically do in
19	terms of durable goods, we show that tying can be used
20	to capture later profits given upgrades and switching
21	costs, which are common in durable goods markets.
22	So, just a very quick summary in terms of tied
23	good markets. If it is a one-period setting and the
24	product is essential, then tying cannot be used to
25	improve profitability, to monopolize this other market.

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1	It is not going to be a profitable thing to do, but
2	there are various reasons that that old Chicago result,
3	classic Chicago result is going to go away as you move
4	away. It is not as robust a finding as people have
5	thought.
6	Another basic argument is monopolizing the tying
7	market, and there are a number of papers looking at
8	that. So, the arguments that I just talked about with
9	saying I am going to use tying to take a monopoly in
10	product A and in some sense move it to product B and
11	increase my profitability this way, there are a number
12	of papers. Whinston in his initial paper has an
13	argument along these lines. Dennis and I have an
14	argument in a Rand paper of 2002 basically saying that
15	what you can sometimes use tying to do is increase or
16	preserve your market power in that initial monopolized
17	market. In some sense, the paper that Dennis and I have
18	formalized the Justice Department argument in the
19	Microsoft NetScape browser case, and Choi and Stefanides
20	also has an article along those lines.
21	There are other strategic rationales I will talk
22	about somewhat briefly. There are a pair of nice papers
23	by Carbajo, De Meza, Seidman and Chen in 1977, and they
24	basically show how tying can sometimes be used as a
25	product differentiation device, and the basic idea is if

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1	you have this alternative product where, say, Bertrand
2	competition with identical products, then you know there
3	is going to be zero profits in that market, and what
4	they show is that by tying, you get away from that
5	Bertrand competition/zero profit result, and that can
6	actually improve profitability.
7	The other one which I will just mention very
8	briefly is Dennis and I, along with Joshua Gans from the
9	University of Melbourne, are looking at an argument
10	where tying is used to shift rents from an alternative
11	producer to the monopolist. The sort of novel part of
12	that argument is that what happens is actually you tie,
13	and the consumers still use the alternative producer's
14	product, but that you have changed the nature of the
15	pricing game, and it moves some of the profits from the
16	alternative producer to the monopolist, and that turns
17	out to be, in general, not a good thing for social
18	welfare, because the monopolist is spending resources
19	producing this alternative product, in which stuff winds
20	up not getting used. We are hoping to have a finished
21	product in just a month or two.
22	So, just in terms of summary, there are a number
23	of different rationales for tying, and they have
24	different social welfare implications. Efficiency
25	rationales tend to increase social welfare when there is

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1	tying. Price discrimination results tend to be
2	ambiguous. Exclusionary tying, social welfare tends to
3	fall if you go through the details of these analyses,
4	though it is not always guaranteed to do so, and the
5	other strategic rationales, the product differentiation
6	argument tends to have ambiguous welfare consequences,
7	while the rent-shifting argument tends to lower social
8	welfare.
9	So, now let's turn to what this means in terms
10	of antitrust policy. So, I think what it means in terms
11	of antitrust policy is that for various types of tying,
12	the tying should basically be allowed. So, if it looks
13	like efficiency, then clearly there is no reason to
14	intervene. If it looks like price discrimination,
15	again, price discrimination could hurt, but it could
16	also help. Price discrimination has ambiguous social
17	welfare consequences, and generally, given that price
18	discrimination is allowed in lots and lots of other
19	types of activities, it seems odd and probably decreases
20	social welfare to just rule this particular type of
21	price discrimination illegal.
22	Product differentiation, again, if you go
23	through the details of those analyses, it tends to be
24	ambiguous social welfare effects, and finally, our sense
25	or my sense is if the motivation is unclear but the

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1	primary market is competitive, like in the 1992
2	U.S.-Kodak case, it basically makes sense to allow the
3	tying, because we know that competitive markets tend to
4	maximize social welfare, and in particular, in that
5	case, I think that the courts made a mistake, because
6	sort of the theory for what was going on there had not
7	been spelled out, and they went with some very
8	speculative theories. I think the right theory was
9	actually one where they were using it to increase
10	profits.
11	When might courts think about intervening?
12	Well, they might think about intervening in cases of
13	exclusion or rent shifting, although I think the
14	rent-shifting argument, which Dennis and Joshua and I
15	are working on, is one that is very difficult, because
16	the details of that argument say that that only works
17	when, in fact, there is an efficiency associated with
18	the tie if the tie had actually been used. So, I think
19	it is very hard in that case to sort of say that there
20	was not an efficiency possibility in that.
21	So, evidentiary hurdles should be high in these
22	cases. Why should the evidentiary hurdle be high? They
23	should be high because it is very difficult to judge
24	motivation, and as I was just saying earlier on, in the
25	absence of being able to judge motivation, if you try to

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1	intervene aggressively, you are going to wind up hurting
2	social welfare more often than helping social welfare.
3	I do believe that it makes more sense to intervene on
4	contractual ties rather than product design ties,
5	because in product design ties, you are getting into the
6	kind of internal workings of the firm, and it is a very
7	dangerous thing for firms to be doing.
8	So, I know we do not have any time, so just to
9	give a 15-second conclusion, there has been a lot of
10	recent progress in terms of the theory of tying sort of
11	going beyond the old Chicago School argument. Although
12	we have identified various reasons for why tying could
13	make sense from an exclusionary standpoint and we have a
14	much better sense of that than before, I think at the
15	end of the day, even with those extra things in the
16	literature by Barry Melba (ph), myself, Mike Whinston,
17	given the difficulty courts have in terms of judging
18	motivation, there still should be a very high hurdle
19	before intervening in a tying case.
20	Okay, thank you very much.
21	(Applause.)
22	MS. LEE: Thank you.
23	Our next speaker is David Evans, who is the
24	Managing Director of LECG's Global Competition Policy
25	Practice and Chairman of eSapience. The author of four

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1	books and over 70 journal articles, he is an authority
2	on the economics of high technology and patent-based
3	businesses, primarily as it relates to competition
4	policy and intellectual property, both in the U.S. and
5	the EU.
6	He has served as an expert and testified before
7	courts, arbitrators, regulatory authorities, and
8	legislatures in the U.S. and Europe. In addition to his
9	consulting practice, David is an Executive Director of
10	the Institute for Competition Law and Economics at the
11	University College, London, where he is a visiting
12	professor.
13	David?
14	DR. EVANS: Thanks a lot. I have to say that I
15	loved Mike's talk, and I agree with most of it, so I
16	could probably just start with a "ditto" and sit down,
17	but since I have 15 minutes, I will talk.
18	So, I would like to make two points today.
19	First, the enforcement agencies really should take a
20	leadership position in ending per se liability for
21	tying, and they should abandon any form of per se
22	analysis themselves, and they should advocate change in
23	both Congress and the Supreme Court.
24	My second point is that tying is a routine
25	competitive practice, as you have heard, and the courts

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1	and competition authorities should presume that tying is
2	efficient or at least benign in the absence of
3	significant contrary evidence.
4	So, what I would like to do is to turn to my
5	first point. So, under Jefferson Parish versus Hyde, at
6	least as it is widely understood, a firm that has market
7	power in product A is liable under Section 1 of the
8	Sherman Act for requiring consumers to take product B.
9	Now, hardly anyone in the antitrust profession
10	supports what we might call a conditional per se
11	analysis. There are lots of articles on tying, many of
12	which Michael has surveyed, but you are more likely to
13	be hit by lightning than to find a paper by an economist
14	that comes close to supporting the Jefferson Parish test
15	or anything really like it. Hardly any legal scholars
16	advocate that test either. There is just no significant
17	economic or judicial learning that supports the view
18	that tying should be an especially pernicious business
19	practice for which there ought to be an especially high
20	level of judicial scrutiny.
21	Now, despite that consensus, per se tying cases
22	keep on trucking. More than 30 private antitrust cases
23	with a per se tying claim have been filed in the last
24	five years. Recent ones, just taking a quick look,
25	include Jenson versus Oldcastle, importantly, Broadcom

25

1	versus Qualcom, which is a case not only in the U.S. but
2	is pretty much worldwide, Munford versus GMNC
3	Franchising, and so forth.
4	Now, you might also recall that the biggest
5	settlement in antitrust history came just three years
6	ago after a District Court judge found that MasterCard
7	and Visa failed the major elements of the Jefferson
8	Parish test as a matter of law on summary judgment. He
9	noted, the District Court judge noted, the possibility
10	that the courts might require a showing of competitive
11	harm, and he left that issue and essentially that issue
12	alone for a jury trial. Not surprisingly, MasterCard
13	and Visa settled very soon after that.
14	Now, some commentators have suggested that
15	Independent Ink shows that the Supreme Court has backed
16	away from Jefferson Parish. I think there is a recent
17	Seventh Circuit decision that suggests just that. Now,
18	I really wish it were true in the sense that matters for
19	lower courts and businesses, but Justice Stevens appears
20	to have been quite careful, at least in my reading, in
21	saying nothing whatsoever in his decision in Independent
22	Ink that repudiates his decision in Jefferson Parish.
23	We continue to have conditional per se liability for
24	tying that follows really all too easily from having
25	market power in the tying product.

26

1	There are good vibes from Independent Ink, and
2	like many, I am optimistic that the Court will
3	eventually conclude that tying is a relic of a bygone
4	era in antitrust when populist hostility toward business
5	practices prevailed and economics had not pointed the
6	way, but the U.S. Department of Justice and the Federal
7	Trade Commission should not in my view just sit still
8	and wait another five years or ten years or whatever for
9	that to happen. So, I have, if you will, four
10	recommendations for the agencies.
11	First, the Justice Department should adopt a
12	policy that it will not file claims that companies have
13	committed a per se violation of Section 1 of the Sherman
14	Act as a result of engaging in tying. Now, I am not
15	suggesting that DOJ has, in fact, been trigger-happy.
16	In fact, as far as I can tell, the Department has not
17	filed any Section 1 tying cases in the last five years,
18	although I also do not believe that it has filed any
19	significant single-firm conduct cases of any strength in
20	the last five years. Maybe I have not counted properly.
21	Second, at the next opportunity, DOJ and the FTC
22	should encourage the Supreme Court to overrule Jefferson
23	Parish. Unfortunately, as far as I can tell, there is
24	not anything in the pipeline -- again, at least as far
25	as I know -- that would allow the Supreme Court to do

27

1	that.
2	The two enforcement agencies should also
3	encourage Congress to modify or kill Section 3 of the
4	Clayton Act. By the way, and maybe I am just not on top
5	of what is going on, it is unfathomable to me that the
6	Antitrust Modernization Commission has not considered
7	tying as part of its agenda for reform. It seems to me
8	that the antitrust laws for the 21st Century should not
9	target tying as an especially pernicious practice, and I
10	think from what we have heard thus far from Michael, I
11	think there is a consensus in the profession on this.
12	My third point for the agencies is there is a
13	bill in Congress now to repeal certain exemptions that
14	the insurance industry has from the antitrust laws.
15	This is the McCarran-Ferguson Act. Now, that is a
16	debate that I sure do not want to wade into today, but
17	HR-2401 perpetuates the mistake of treating tying as a
18	separate and presumably especially harmful antitrust
19	offense, and in my view, the enforcement agencies should
20	oppose that provision of the bill.
21	Fourth, the Justice Department should embark on
22	a global recall of American tying law, perhaps prodded
23	by the FTC's Bureau of Consumer Protection. Following
24	our lead, the courts and competition authorities in many
25	jurisdictions have subjected tying to some form of per

28

1	se or conditional per se liability. We should let them
2	know, and the Justice Department talks to the agencies
3	around the world all the time, that there is no sound
4	support for that approach.
5	Of course, saying farewell to per se liability,
6	on which I think we have a consensus, leaves open, as
7	Michael suggested earlier, the question of what approach
8	we should welcome in its place. That brings me to my
9	second proposition. The antitrust laws should set a
10	high bar for finding that tying is anticompetitive and
11	proscribe a structure to guide that analysis. To
12	explain why, let me take a brief detour.
13	I hazard to say this, and I have been advised
14	not to, but most of us I think are Bayesian at heart;
15	that is, to make decisions, we combine prior experience
16	with the knowledge at hand, we recognize that given the
17	inherent uncertainty, we will surely make mistakes, and
18	we consider the likelihood and costs of making the wrong
19	decision, and the courts have adopted precisely that
20	kind of reasoning implicitly. It really underlies the
21	whole distinction between per se and the rule of reason.
22	Moreover, the courts have adopted that kind of
23	reasoning more or less explicitly. Brooke Group is the
24	leading example in antitrust, and there are other recent
25	cases in criminal law where the courts adopt more or

29

1	less this kind of Bayesian or error cost kind of
2	analysis.
3	When it comes to single-firm conduct, I think it
4	is helpful then to think about what prior information
5	tells us, what the likelihood of error is, and the cost
6	of those errors, and with that I have three general
7	observations on analyzing single-firm conduct.
8	First and perhaps most importantly, when
9	practices are common in pretty competitive markets, we
10	have prior information that these practices are
11	efficient. That does not mean that they could not be
12	used to harm competition, but it does mean that there
13	should be a presumption that these practices are
14	procompetitive. They really could not survive otherwise
15	in competitive markets. Will Baumol and Dan Swanson
16	have made this point in their article on price
17	discrimination, and the Supreme Court recognized it,
18	precisely that point, in Independent Ink, citing their
19	paper.
20	Second, juries have a lot of trouble deciding
21	complex cases. I have testified before a lot of juries,
22	and I have a great respect for the jury system, but
23	let's face it, the single-firm cases require complex
24	assessment of facts and legal nuances. The DOJ and FTC
25	have had trouble agreeing on how to treat bundled

30

1	rebates. Asking 12 average citizens to do so, to
2	analyze single-firm conduct cases, I think really
3	invites error, and this is a particular problem, of
4	course, in private litigation and especially in treble
5	damage class action litigation involving single-firm
6	conduct.
7	My third point, and I think I am in complete
8	agreement with Michael Waldman, modern industrial
9	organization economics, at least insofar as he has
10	discussed it with respect to tying, really I think
11	emphasizes the need for caution. We can define in the
12	industrial organization literature that businesses have
13	the incentive and ability to engage in anticompetitive
14	conduct in fairly limited circumstances, and there is
15	not a lot of empirical evidence that these circumstances
16	hold in practice and not a lot of guidance on how to
17	figure them out, and, of course, that varies between
18	different practices. I want to be careful in not
19	generalizing too much, but I generally think that the
20	thrust of the IO literature really does need to suggest
21	caution.
22	Now, I am absolutely, positively not arguing for
23	the repeal of Section 2 or for gutting Section 2 in
24	practice. It plays a very important role in
25	disciplining businesses with significant market power.

31

1	I also believe, as Michael pointed out, that as economic
2	learning progresses, we may find that it is easier to
3	separate bad business practices from good ones, but for
4	now, we ought to be pretty cautious about letting the
5	courts and ultimately jurors in private litigation
6	embark on a rule of reason inquiry without some
7	structure, some discipline on it, to reduce the
8	likelihood and cost of errors.
9	So, let me apply those considerations to tying,
10	and at the risk of restating what everyone knows and
11	what the courts have acknowledged in Fortner, Jefferson
12	Parish and Independent Ink, tying is ubiquitous, it is
13	utterly common. Firms make decisions all the time on
14	how to design their products and what product lines to
15	offer. They take into account consumer demand for
16	different options. That demand depends, as Michael
17	pointed out, on transactions costs and information
18	costs, and those have critical implications for what
19	consumers want and what firms ought to offer them to
20	maximize profits, and firms take into account their own
21	costs of offering different product offerings. As a
22	practical matter, that results in product offerings that
23	could be characterized as tying pretty much all over the
24	place.
25	Mike and I, as I think many of you, have a

32

1	series of papers that go into many of these
2	considerations. Perhaps the most important observation
3	from that line of papers is that there are fixed costs
4	of offering different product combinations, and that
5	necessarily limits the variants offered by firms and can
6	result in pure bundling or tying.
7	Now, the case law sometimes talks about tying
8	denying consumers' choice. The fact of the matter is
9	that a lot of times, consumers do not want choice. They
10	want producers to make decisions for them, because the
11	producers are in a better position to really do that,
12	and consumer choice is not costless. It can raise
13	prices for all consumers as the market gets fragmented.
14	So, our prior explication, when we see tying, is
15	it is probably efficient and as a result of market
16	forces. As the D.C. Circuit noted in its unanimous
17	decision in Microsoft, "Bundling by all competitive
18	firms implies strong net efficiencies."
19	Now, that does not end the analysis. One might
20	imagine that economists have spent the last 20 years
21	researching the subject of tying and concluded that, as
22	a matter of theory, it was a highly plausible,
23	anticompetitive strategy for firms with significant
24	market power, and you might imagine that economists had
25	actually discovered empirical evidence that supported

33

1	those theories, but you would, indeed, be imagining
2	this, as Michael's presentation really emphasizes. We
3	have lots of insights, but it is very clear from the
4	literature that lots of assumptions need to be true in
5	order for us to find anticompetitive tying.
6	So, how, then, should we analyze tying going
7	forward? Well, I agree with Michael, where tying is
8	simply a device to engage in price discrimination, I
9	would make it per se unlawful. There is no strong
10	economic basis, you can have price discrimination in
11	common and competitive markets. Michael went through
12	whether social welfare increases or decreases, but I
13	think what he left out, I think many of us have strong
14	priors that in a lot of cases, price discrimination is
15	probably beneficial.
16	Now, the law of patent misuse could still
17	address whether we should limit the returns from
18	intellectual property rights by prohibiting tying, but I
19	do not think there is any basis a priori for allowing
20	patent holders to engage in price discrimination in a
21	primary market but not through mechanisms that involve a
22	secondary market.
23	Otherwise, we should leave open the possibility
24	that under the rule of reason, tying practices could be
25	found unlawful; however, there again, I agree with

34

1	Michael that plaintiffs should have a high hurdle, and
2	if I could have perhaps one extra minute, I will tell
3	you what I think that hurdle should be.
4	First, plaintiffs should, of course, as a
5	starting matter have to show that the defendant has
6	significant market power in the tying product that the
7	plaintiff has posited, and that, in itself, is a
8	movement away from Jefferson Parish, merely inserting
9	the words "significant market power" or "monopoly
10	power."
11	Second, plaintiffs should have to show that the
12	tying practice has the likely effect of excluding a
13	significant amount of competition from the market for
14	the tied product. Such exclusion, at least as I
15	understand the literature, is really the source of
16	competitive harm in really all the economic work or much
17	of the economic work in this area.
18	Third, plaintiffs should have to raise
19	significant doubts that the tying practice is not just
20	normal competitive practice that is explained by
21	efficiencies for consumers or firms. That means
22	plaintiffs should have to show that there are two
23	separate products and that in the absence of an
24	anticompetitive, exclusionary strategy, we would expect
25	that consumers would be offered the tied product without

35

1	the tying product. So, I would put that burden onto the
2	plaintiff in the first instance.
3	And fourth, plaintiffs should have to show by
4	way of economic theory and empirical evidence that the
5	defendant has, in fact, embarked on a plausible
6	anticompetitive strategy, and we can leave for the
7	discussion what that actually requires.
8	Ultimately, of course, plaintiffs need to be
9	able to demonstrate persuasively that tying will cause a
10	net reduction in consumer welfare. I do not think that
11	these are impossible hurdles by any means. Plaintiffs
12	ought to be able to find evidence to support each of
13	these tests if, in fact, a firm has engaged in tying to
14	acquire a monopoly in a secondary market or maintain a
15	monopoly in a primary market, as might be suggested by
16	some of the Carlton/Waldman works.
17	So, that is where I end up, all in all pretty
18	consistent with Michael. Thank you very much.
19	MS. LEE: Thank you.
20	(Applause.)
21	MS. LEE: Our next speaker is Don Russell, who
22	is a partner at Robbins, Russell, Englert, Orseck &
23	Untereiner. In 1977, he joined the Antitrust Division
24	of the U.S. Department of Justice, where he served for
25	24 years. He was Assistant Chief of the Communications

36

1	and Finance Section from 1986 to 1992, lead attorney in
2	the Division's 1994 monopolization case against
3	Microsoft, and Chief of the Telecommunications Task
4	Force from 1995 to 2001. He is a founding partner of
5	his law firm, where he maintains an active antitrust
6	practice.
7	Don?
8	MR. RUSSELL: Thank you. I am happy to be here
9	this morning with five very smart panelists who are
10	going to answer the hard questions, and I am going to
11	address the easy one, to a large extent repeating and
12	emphasizing, again, what you just heard from David
13	Evans, with very small areas of disagreement.
14	My basic proposition this morning -- the two
15	basic propositions I want to assert are, number one, the
16	single most important thing that the FTC and the
17	Antitrust Division can do and the easiest thing for them
18	to do in this area is to say publicly, clearly,
19	frequently and to the Supreme Court, as soon as they get
20	a chance to do so, get rid of the per se rule for tying,
21	whatever is left of it. We all recognize that it is not
22	a true per se rule, but as David explained, it is enough
23	of a per se rule that it still causes substantial harm
24	and confusion and harm to consumer welfare. So, we
25	ought to get rid of it.

37

1	The second point I want to make, and the one
2	that I want to spend most of my time on, is the point
3	that I think the Supreme Court has indicated very, very
4	clearly they are ready to take this step. Certainly
5	lower courts have recognized that it would be an
6	appropriate step, and many other people have as well,
7	and this is the area where I might have a slight
8	disagreement with David's reading of the Independent Ink
9	decision, which I will get to in a few minutes.
10	Let's start with the Jefferson Parish decision
11	in 1984. I think you are all probably familiar with the
12	basic facts there. I will point out the holding of that
13	case, which is that there was no violation of the
14	antitrust laws, no tying violation, when the defendant
15	did not have market power. That is the holding. Now,
16	there are many other things that were said in the case
17	that I would describe as dicta, the most famous part of
18	that being the one that is up on the slide now and the
19	one that Mike Salinger referred to earlier.
20	In the opinion, the majority opinion by Justice
21	Stevens, he said, "It is far too late in the history of
22	our antitrust jurisprudence to question the proposition
23	that certain tying arrangements pose an unacceptable
24	risk of stifling competition and therefore are
25	unreasonable per se." A couple of things I want to

38

1	point out about this sentence, first, as you heard
2	earlier, one very easy way to read this sentence is that
3	Justice Stevens is saying, well, we really are not sure
4	that this is right, but it is far too late to do
5	anything about it.
6	The second thing I want to point out, going to
7	the underlined language on the screen, is the sentence
8	is really fundamentally inconsistent with virtually
9	everything else that the Supreme Court has said about
10	per se rules, the proposition that certain tying
11	arrangements, but not necessarily all, pose an
12	unacceptable risk to competition. In every other
13	context the Supreme Court has said the fact that certain
14	do does not mean that you need to have a per se rule
15	that encompasses all of them. Per se treatment is
16	reserved only for those situations in which it is
17	virtually always the case that there is harm to
18	competition and virtually never the case that there is a
19	substantial efficiency rationale. Therefore, just
20	reading this sentence in that context, it makes no
21	sense.
22	Going to one of the concurring opinions in
23	Jefferson Parish signed by two of the justices, they,
24	again, make this point very clearly, that whatever merit
25	the policy arguments against the per se rule might have,

39

1	Congress has not done anything about it, and again, this
2	seems to me to be pretty clear even back then that these
3	two Justices had substantial doubts that the rule made
4	any sense, but for other reasons, they did not think it
5	was appropriate at that time to do anything about it.
6	There were four Justices in that case who, as
7	you know, came out and said very plainly and
8	straightforwardly, tying should not be regarded as per
9	se illegal in any sense, it should be evaluated under
10	the rule of reason, and the reason that they said that
11	was stated very clearly. It incurs the cost of a rule
12	of reason approach without achieving its benefits.
13	The second quote there, "The legality of
14	petitioners' conduct depends on its competitive
15	consequences, not whether it can be labeled 'tying.' If
16	the competitive consequences are not those to which the
17	per se rule is addressed, then it should not be
18	condemned irrespective of its label."
19	Now, there may be a few people in the audience
20	who have studied all of this history very carefully who
21	will realize that what I have done here is played a late
22	Halloween trick on you. The second quote there is
23	actually from the majority opinion. It is in a footnote
24	in Justice Stevens' opinion for the majority. So, even
25	then, as he is saying this is per se illegal if the

40

1	defendant has market power, he is saying in almost the
2	same breath, well, of course, you really have to look at
3	the competitive consequences, not labels, which sounds
4	to me an awful lot like rule of reason.
5	Looking more specifically at what Justice
6	Stevens said were the competitive concerns with tying,
7	he identified two. The first is that it would insulate
8	the tied product from competitive pressures, and the
9	second is that it might increase the social costs of
10	market power by facilitating price discrimination, and
11	those were the reasons that he advanced for the Court's
12	historical hostility towards tying.
13	So, let's fast forward to the case that the
14	Supreme Court decided earlier this term, the Independent
15	Ink case, and again, the basic pattern in the
16	proceedings below were quite similar to what had
17	happened in Jefferson Parish. The District Court had
18	the good sense to rule in favor of the defendant. The
19	Court of Appeals, thinking that it was bound by old
20	Supreme Court precedence, said no, you cannot rule in
21	favor of the defendant here. In Independent Ink, it was
22	because of the statement that Justice Stevens had made
23	in Jefferson Parish and that the Court had made in other
24	cases, if the Government has granted the seller a
25	patent, it is fair to presume that the inability to buy

41

1	the product elsewhere gives the seller market power.
2	So, when the Supreme Court got this case, which
3	had been decided below based on what Justice Stevens had
4	said in Jefferson Parish, the Supreme Court unanimously
5	reversed in an opinion written by Justice Stevens,
6	ironically enough. Why does it change here between what
7	Stevens said in Jefferson Parish and what Stevens said
8	in Independent Ink?
9	The one area where I think I may disagree with
10	David Evans is he looks at the Independent Ink decision
11	and says Justice Stevens was very careful not to say
12	anything that would undermine what he had said about per
13	se illegality in Jefferson Parish. I think that is
14	factually true. There is nothing that is flatly
15	inconsistent between the two decisions, but as I read
16	the Independent Ink decision, it is written the way that
17	it is precisely because Justice Stevens and the rest of
18	the unanimous Court are inviting a re-examination of
19	this per se rule and signaling very clearly that they no
20	longer believe that it makes any sense.
21	Let me go through specifically the reasons why I
22	believe that. First, if you look at the actual issue
23	that was presented in Independent Ink, it was a very
24	simple and very narrow issue. Should you presume market
25	power from the fact that there is a patent? The issue

42

1	that was presented in the case had absolutely nothing to
2	do with assuming that there is market power, what is the
3	appropriate mode of analysis of the antitrust issues?
4	But when you look at the Independent Ink decision, the
5	Court spends a great deal of time and devotes a great
6	deal of attention to precisely that second issue which
7	was not raised in this case, and I think it is
8	significant that they did so.
9	For those of you who are particularly fascinated
10	by these issues, I will recommend to you an article that
11	was written by Kevin MacDonald, "There's No Tying in
12	Baseball," in which I think Kevin does a very, very good
13	job of explaining why if you want to look at the narrow
14	issue that was presented in Independent Ink, there are
15	many, many, many ways the Court could have come out, as
16	it did, addressing only the fact that all of its old
17	precedence about patents and copyrights and presumptions
18	were really being misread. People were relying on
19	dicta, and the Court very easily could have
20	distinguished those cases and said, you know, that is
21	just wrong. When we look at this narrow issue, it has
22	to come out the other way. But they went well beyond
23	that.
24	The first reason they gave for the way they came
25	out was the presumption that a patent confers market

43

1	power is a vestige of the Court's historical distrust of
2	tying arrangements, which seems to me a very odd thing
3	to say. It was not saying, you know, the Court's
4	historical belief that patents confer market power. It
5	was an historical distrust of tying arrangements
6	generally, and they emphasized that is what we are
7	addressing today. There are some specific quotes here.
8	Over the years, this Court's strong disapproval
9	of tying arrangements has substantially diminished. The
10	dissenters' view in Fortner that tying arrangements may
11	well be procompetitive ultimately prevailed. The
12	assumption that tying arrangements serve hardly any
13	purpose beyond the suppression of competition has not
14	been endorsed in any opinion since. That seems to me to
15	be very strong language supporting the rule of reason
16	analysis.
17	When you look at the specific concern that
18	Justice Stevens had articulated as a rule in favor of a
19	per se prohibition of tying, price discrimination, what
20	the Court said in Independent Ink is, "While price
21	discrimination may provide evidence of market power...it
22	is generally recognized that it also occurs in fully
23	competitive markets."
24	The Court in Independent Ink gave a second
25	reason for why they were coming out differently today

44

1	than they had in the past. They emphasized over and
2	over again that there was a very, very solid consensus
3	among economists and legal scholars that the old rule
4	made no sense, and I think what we have heard from this
5	morning and what we probably all knew before we came in
6	this morning is as to the per se rule against tying,
7	there is a very substantial, very solid, very
8	long-standing scholarly consensus that that rule makes
9	no sense. In Independent Ink, the Supreme Court is
10	saying that kind of a consensus is a very important
11	consideration when we are deciding these cases.
12	The third rule, which is particularly
13	interesting, I think, is the Supreme Court talked about
14	congressional action that kind of ratified this view
15	that maybe tying arrangements are not so bad after all.
16	Now, if you look at the legislation they were pointing
17	to, they were actually pointing to legislation about,
18	you know, this presumption of market power, but look
19	again at the way Justice Stevens described this concept.
20	"At the same time that our antitrust jurisprudence
21	continued to rely on the assumption" -- not about market
22	power -- "the assumption that tying arrangements
23	generally serve no legitimate purpose, Congress began
24	chipping away at the assumption."
25	So, again, I think this opinion in a way is

45

1	misleading and misstating what actually happened but in
2	a way that suggests to me that the Court is paving the
3	way to get rid of the last vestige of the per se rule.
4	And, of course, as to congressional action, they again
5	emphasized in Independent Ink, as they have said in
6	other recent cases, you know, even this assumption that
7	we normally would take congressional acquiescence as
8	some sign in favor of keeping our old precedents intact,
9	in the antitrust area, it is different, because Congress
10	has basically delegated to the courts this common law
11	authority to change doctrine over time, and they
12	repeated that observation in Independent Ink and
13	emphasized it again. So, even if congressional action
14	would be helpful to persuade them that they should
15	overrule prior cases, they do not regard it as necessary
16	in the antitrust arena.
17	Reason number four is I think the most important
18	reason for today's discussion. The Supreme Court said,
19	well, the other thing that has changed is the
20	Government's position, the position of the enforcement
21	agencies, and again, they walked through a history,
22	which some, including Kevin MacDonald, is kind of a
23	creative rereading or rewriting of history, to say what
24	we did in the past was because the Government was
25	telling us to do it in the past. The Government today

46

1	is telling us something very different, and we are going
2	to follow the Government's advice, suggesting, again, to
3	me that it would be very, very important for the
4	Division, for the FTC, to offer that advice to the Court
5	and that there is a very high likelihood that the Court
6	will accept that advice.
7	So, if you want to sum up what the Supreme Court
8	said in Independent Ink to explain their decision there,
9	almost the last sentence of the opinion says, "Congress,
10	the antitrust enforcement agencies, and most economists
11	have all reached this conclusion. Today, we reach the
12	same conclusion."
13	I think that is a very clear indication, you
14	know, here is the road map, here are the things we will
15	look at if this remaining per se rule comes before us,
16	and I think when you look at the record, it is pretty
17	clear how they would come out on that.
18	Now, I will admit that I may be reading too much
19	into this, and I will certainly agree with David,
20	virtually every quotation I have put on the screen
21	there, you can read it in a different context and you
22	can say, well, it is not really inconsistent with the
23	per se rule, it is not really inconsistent with
24	Jefferson Parish, and they were really just talking
25	about this narrow issue about patents and presumptions,

47

1	but I do not really think that that is right, and one of
2	the reasons that I do not think it is right, in addition
3	to the things that the opinion itself says, are the
4	questions and the comments that various Justices made
5	during the argument in Independent Ink.
6	Justice Stevens was the most active questioner
7	and the most active participant in this argument, and
8	time after time after time, the issue he focused on is,
9	does this per se rule make sense? And if you want to
10	get to what seems to be his tentative conclusion, the
11	last quote on this screen, "It doesn't seem to me it
12	makes any difference whether General Motors has a
13	monopoly or not," that is, whether they have market
14	power or not, "when it wants to sell two components as
15	part of the same package." What he seems to be saying
16	here, the question that he keeps asking is, you know,
17	why shouldn't that be okay?
18	Justice Roberts had an even stronger statement.
19	"Much of the economic literature sort of sweeps away
20	this question because it rejects the notion of tying as
21	a problem in the first place."
22	Justice Breyer, again, had many questions all
23	devoted to the same point, and, among other things,
24	focusing specifically on price discrimination, in which
25	he says, "I think most economists, in fact, everyone I

48

1	have read agrees with the notion that price
2	discrimination is sometimes good and sometimes bad. The
3	scholarly consensus that you see later on when the
4	opinion comes out.
5	And Justice Scalia, again, in a provocative way
6	says, is there anything to this notion of tying as an
7	anticompetitive practice at all?
8	So, to focus here, I think the Supreme Court in
9	the Independent Ink decision has laid out very clearly
10	what arguments it needs to hear with respect to the
11	remaining per se rule, and they have indicated, I think
12	pretty clearly, how they will come out on that question
13	if and when it is put in front of them. The first
14	point, they point to the Supreme Court's prior
15	recognition that tying is often a procompetitive
16	practice, which is the way they are now reading that
17	history.
18	Second, they point to a scholarly consensus,
19	which I think we will hear today and we have heard
20	elsewhere is clearly in place with regard to the per se
21	treatment of tying.
22	Third, congressional action, the Supreme Court
23	has already identified congressional action that they
24	think is an indication that maybe tying is not so bad
25	all the time anyway.

49

1	The thing that is missing at the moment and the
2	thing that I think is critical, which is why I focused
3	my remarks this morning on this, is support for a change
4	in the rule from the antitrust agencies. There was an
5	opportunity for the Government to do this in the
6	Independent Ink case. The question was asked very
7	clearly, what is your position on this? And the
8	Government's lawyer said, well, Justice O'Connor, who
9	argued for rule of reason treatment, made persuasive
10	points, but we have not taken a position on that
11	question.
12	I want to make it clear I am not criticizing
13	that answer. I think it was perfectly appropriate in
14	the context of that case, but I also think it is very
15	important, very critical, that the next time the
16	question comes up that the Government does take a
17	position, which is the per se rule makes no sense. This
18	should be a rule of reason analysis.
19	(Applause.)
20	MS. LEE: Thank you.
21	Our final speaker before we take a short break
22	is Mark Popofsky, who has been a partner at Kaye Scholer
23	since leaving the Antitrust Division of the Department
24	of Justice in 1999, where he was senior counsel to the
25	Assistant Attorney General. Mark works in the

50

1	antitrust, intellectual property and technology practice
2	groups at Kaye Scholer and chairs the firm's technology
3	and competition practices.
4	Mark is an Adjunct Professor at Georgetown
5	University Law Center where for several years he has
6	taught the Advanced Antitrust Law and Economics Seminar.
7	Mark?
8	MR. POPOFSKY: Thanks, June. It is a pleasure
9	to be here today. I would like to thank both
10	enforcement agencies for holding these hearings and for
11	inviting me to participate in them, and it is nice to
12	see so many familiar and well-respected faces here in
13	this room, both in the audience and on the panel today.
14	I approach this topic like Don Russell as a simple
15	country practitioner, a formal federal enforcer, and a
16	veteran of several rounds in the Microsoft jungle, a
17	veteran of those wars.
18	I think it is fair to say, to start with the
19	issue that Don talked about and David Evans touched on,
20	that if the Supreme Court today were hearing a case
21	about whether Jefferson Parish should be overruled,
22	there is no doubt in my mind there is a majority on the
23	Court right now to overrule Jefferson Parish. I think
24	it is notable in my view that Justice Stevens is not
25	among them, and my slight disagreement with Don will be

51

1	I see the opinion in Independent Ink as very craftily
2	written by Justice Stevens, who has had a 40-year agenda
3	in this area, to say, well, what we are talking about
4	today is not Jefferson Parish at all but a special per
5	se rule that was applicable to intellectual property and
6	perhaps even only to patent ties, and I am here today,
7	Justice Stevens, writing for the Court, to address only
8	the viability of that per se rule.
9	To be sure, much in the decision and especially
10	in his reasoning probably was prompted by many of his
11	colleagues to get them all on board, and this suggests
12	exactly what I said a few minutes ago, there is a
13	majority out there to overrule Jefferson Parish, but I
14	think it would indeed need a swift kick in the Supreme
15	Court's rear by the enforcement agencies, among others,
16	to get them to take that next step. I do not think it
17	is inevitable.
18	But why I think we are here today is to not talk
19	about that next step, which may not be inevitable but
20	perhaps is upon us soon, but to talk about what happens
21	after that. After all, we are here in the Section 2
22	single-firm conduct hearings. Whether or not Jefferson
23	Parish remains or falls, tying will remain unlawful
24	under Section 1 either under the strange presumptive per
25	se rule of illegality, which is rebuttable in some

52

1	senses, as Jefferson Parish articulated, or under a full
2	or truncated rule of reason. Why are we here, in other
3	words, to talk about tying under Section 2 of the
4	Sherman Act? What does it accomplish?
5	In my view, that question depends on answering
6	two questions. The first is the conduct subject to
7	Section 2 from a legal perspective. I am not one of
8	these fancy guys with a Ph.D. or fancy gals with a Ph.D.
9	In a legal sense, does Section 2 reach a broader range
10	of conduct that can be labeled tying in Section 1? And
11	two, and perhaps most importantly, regardless of the
12	answer to that first question, should we have different
13	rules of liability for Section 2 for tying-like conduct
14	than Section 1? I will address each of these briefly in
15	turn.
16	I believe it is fairly clear that Section 2 does
17	reach a broader array of tying-like conduct than Section
18	1. Let me give you three examples. A conditioned
19	refusal to deal, which is set up like a good old
20	fashioned Colgate policy. The monopolist says to its
21	customers, I will not deal with you in the future unless
22	you take this tied good with the tying good. The
23	customer acquiesces.
24	Suppose, like in a Colgate situation, we do not
25	have enough of a basis to infer a Section 1 vertical

53

1	agreement and all we have is, technically, unilateral
2	conduct. That is something that Section 2 and, indeed,
3	perhaps even Clayton Act Section 3 would reach that
4	Sherman Act Section 1 does not, the conditional refusal
5	to deal, which could, of course, ripen into an agreement
6	but need not.
7	The second and more intriguing and important
8	example, which I gather we will discuss after the break,
9	is technological tying and product design. Now, it is
10	notable that the Microsoft case, which I lived, did
11	treat technological tying and product design as conduct
12	subject to both Section 1 and Section 2, but I think the
13	Court really glossed over the issue there. If all you
14	have is a monopolist or would-be monopolist designing a
15	product, it is not clear to me that every court is going
16	to reach the conclusion that that is the functional
17	equivalent of an agreement or a contractual tie. I
18	think it is an issue of great dispute in the case law,
19	and that might be yet a second area where a Section 2
20	liability rule used for tying makes a substantial
21	difference.
22	The third and presently very hot area brought to
23	us by one of Don Russell's partners in the LePage's
24	cases is bundled discounts, which, of course, is a
25	category of conduct that can achieve similar results to

54

1	tying and exclusive dealing. Indeed, tying and
2	exclusive dealing, of which there is, of course, going
3	to be another forum and of which tying is but a form,
4	are just extreme forms of bundled discount. There is a
5	discrete rule here. There is law dating back at least
6	to the Way and Means case in the Northern District of
7	California as to when a bundled discount should be
8	treated as an outright tie depending on what percentage
9	of the tied item is purchased outside of the bundle, but
10	that rule, as I just mentioned, is discreet. It would
11	only capture some forms of bundled discounting under
12	Section 1, and there will be a large number of bundled
13	discounts reached only under Section 2 and not Section
14	1.
15	Bottom line, in my view, there very much is a
16	difference between the coverage of the two provisions,
17	Section 1 and Section 2, with respect to tying and
18	tying-like conduct, and I think it is largely settled
19	that there is a difference and it will remain.
20	The second issue I wish to address today, the
21	appropriate legal standard, is, by contrast, extremely
22	unsettled. The issue, put brightly, is whether Section
23	2's legal test for liability for tying is different than
24	Section 1's, even assuming here we have the Don Russell,
25	David Evans, post-Jefferson Parish, halcion world of

55

1	being under the full rule of reason. So, what I am
2	about to say assumes that Don Russell and David Evans
3	have, perhaps rightly, won the battle and we are
4	confronted with a Section 1 rule of reason rule for
5	tying, and the question is, what should we do under
6	Section 2?
7	Now, stepping back for a minute, I think it is
8	critical that the answer to that question we observe to
9	turn on what sort of conduct we are talking about. So,
10	let me start with the brightest beacon in this area in
11	the last ten years, and that is the Microsoft case, for
12	that is an intriguing case I think for tying, despite
13	the fact that the Government, of course, brought a per
14	se claim, and I was in the room when that decision was
15	made.
16	There was, of course, a holding by the Court of
17	Appeals that the tie-in in this case involving not just
18	a technological tie-in but related conduct should be
19	evaluated under the rule of reason, not the per se rule,
20	number one, and two and more importantly, and I am sure
21	the economists will start jumping up and down, the
22	Microsoft Court held there is a difference in what you
23	do depending on what market you are looking at.
24	And what did the Microsoft Court hold? The
25	Microsoft Court held that Section 1 tying law, under the

56

1	rule of reason -- so this is presumably the
2	post-Jefferson Parish world come a little sooner because
3	the Microsoft Court created an exception to Jefferson
4	Parish -- the Court said Section 1 is concerned
5	exclusively with harms to competition in the tied
6	product market. Look only to harms in the browser
7	market, the Court said, ignore this monopoly of
8	maintenance in the tying product market, operating
9	systems. The Court said, we are, in other words,
10	concerned only with how the tied market can be affected.
11	Strikingly, the Court also said the standard of
12	liability here is higher in some sense under Section 1
13	when you are looking at a tied product market than
14	Section 2, which, of course, the Court said had to do
15	with in that case the tying product market. The Court
16	said for a Section 1 rule of reason tying claim, we need
17	actual harm to competition in the tied product market.
18	The Government must define that market with precision,
19	they must show a substantial likelihood of
20	anticompetitive effects. Government, you have not even
21	gotten past go on that issue, you are likely to lose.
22	We are not willing to do what we did in the Section 2
23	side of the case -- where the Court said the concern
24	about tying under Section 2 requires looking at the
25	upstream tying product market -- where the Court was

57

1	willing to infer causation of anticompetitive harm
2	merely from the fact that Microsoft engaged in a
3	category of conduct which the Court said was likely to
4	cause anticompetitive effects.
5	So, just to step back and summarize, we have a
6	clear difference, the Court of Appeals says, for Section
7	2 tying and Section 1 tying. Section 1, give me actual
8	effects in the tied product market. Section 2 tying,
9	give me a reasonable likelihood that we have conduct
10	likely to cause upstream monopolization for Section 2
11	tying. The liability standard in a very discrete way is
12	lower, ironically, under Section 2 after the Microsoft
13	decision than Section 1, at least in terms of what is
14	the nuance and the measure and the strength of the story
15	you have to have as a plaintiff to infer competitive or
16	show competitive harm.
17	I think this was no accident in this unanimous
18	per curiam en banc opinion. Tying, as we have heard, is
19	ubiquitous in competitive markets. If you have a legal
20	rule that it is very easy to show anticompetitive
21	effects that satisfy the rule of reason under Section 1,
22	you are potentially going to be condemning under Section
23	1 a broad swath of otherwise benign conduct. It is very
24	easy to get to those jurors David Evans mentioned if you
25	can have a Section 1 tying rule that says, basically,

58

1	have any story of plausible anticompetitive effects and
2	have a story of some market power. Differentiated
3	products, we all know, is very easy to show some market
4	power over.
5	So, the Court is saying, higher standard for
6	liability, at least under some categories of cases under
7	Section 1, there -- technological tying. Perhaps a
8	break to the plaintiff under Section 2, provided the
9	plaintiff has a clear story of how the tie-in can
10	actually lead to monopolization of the tying market, and
11	it was a story of how NetScape's distribution of
12	browsers would enable Microsoft to prevent NetScape from
13	reaching certain economies of scale to grow into a
14	threat for Microsoft.
15	So, whether or not one agrees with what the
16	Microsoft Court said about the concern of each provision
17	of the Sherman Act, exclusively downstream for Section
18	1, exclusively upstream for Section 2, you have a court
19	saying the rules are different depending on what you are
20	looking at for tying, and this leads to my final major
21	point.
22	This says something more general, I think, about
23	Section 2 tying, where we are going in this area, and
24	importantly, what the enforcement agencies can
25	contribute. As I have written recently in an Antitrust

59

1	Law Journal article, there is a holy war raging over the
2	appropriate liability standard under Section 2
3	generally. Everything, at least almost everything, save
4	perhaps very discrete areas like charging a monopoly
5	price and after-Trinko refusals to deal, are up for
6	grabs.
7	In fact, I think this revolution in Section 2 is
8	inherent in Trinko, where Trinko itself, often read as a
9	very pro-defendant decision, says in designing Section 2
10	legal standards, we should be Bayesians, as David Evans
11	said. We should look at the risk of type one errors,
12	the risk of false positives, type two errors, the risk
13	of false negatives, the relative likelihood and the
14	magnitude of the likely effects of each, and enforcement
15	costs, and under that process, in a very common law
16	fashion, courts will arrive at the appropriate Section 2
17	doctrine or legal rule for the conduct at issue.
18	I think that is where we really are with Section
19	2 law and tying. Much is up for grabs despite what
20	Microsoft said about the difference and focus between
21	Section 1 and Section 2, and I think what is yet to be
22	written in the next ten years I think will show us is
23	where the courts go applying many of the principles that
24	Dr. Waldman, Dr. Evans, and I am sure Ms. Feldman will
25	enlighten us of about the economic learning and

60

1	translating that into concrete legal tests for discrete
2	situations.
3	Now, there is no time today for me to lay out
4	plausible stories of where this will take us and
5	specific examples of what legal rules might emerge for
6	Section 2 law in tying, but let me give you sort of
7	three rules of thumb as I see it.
8	First, I think as Dr. Waldman said, condemning
9	tying through contracts likely poses fewer risks of
10	false positives than condemning unilateral tying, true
11	unilateral tying, like product design. This suggests
12	that some forms of "unilateral tying" reached only under
13	Section 2 might have applied to them a more lenient
14	legal test for the defendant than Section 1. We might
15	indeed have the courts leading to a higher standard of
16	what the plaintiff has to show.
17	Now, there have been some cases which have gone
18	the other way recently. The Teva-Abbott decision, which
19	some of you may be aware of, held that a monopolist
20	product design decision should be analyzed under the
21	rule of reason, did not really get into what that means.
22	The next step will be deciding what that rule of reason
23	entails under Section 2, whether it is a different
24	standard than under Section 1 or the same, and there is
25	a good argument it should be different.

61

1	That said, how tying should be treated under
2	Section 2 really should not depend on a game of
3	formalisms, is it unilateral, is it contractual,
4	although that can inform, as I just said, the analysis.
5	What is important in this area is that related forms of
6	conduct, related from an economic perspective, be
7	treated similarly under the antitrust laws. The last
8	thing we want is courts all over the country coming up
9	with different legal rules that create incentives for
10	firms to inefficiently substitute to different conduct
11	to avoid the most plaintiff friendly doctrine, and let
12	me give you an example of that.
13	Suppose courts come out with a rule that
14	exclusive dealing, if you have a contract, is under the
15	full rule of reason, but exclusive dealing done in the
16	form of a conditional refusal to deal, I will only deal
17	with you if you deal with me exclusively or I will deal
18	with you with bundled discounts and induce you to
19	exclusivity, is determined under some different test.
20	Courts should think very carefully before taking that
21	step. The last thing we want is to induce firms to
22	inefficiently substitute to perhaps less efficient
23	conduct to avoid what they perceive as the most
24	restrictive doctrine.
25	The third factor I will mention is that some

62

1	forms of tying present strong or unusual cases for
2	efficiencies. Certain bundles of IP rights, for
3	example, may provide an insurance function that other
4	tying arrangements lack. There may be special
5	efficiencies for certain forms of bundled discounting or
6	volume discounts, and those situations might argue for
7	differently restructured analyses than the traditional
8	general rule of reason, taking into account, as I said,
9	you want to treat what the economists demonstrate to be
10	economically similar arrangements similarly.
11	Backing up in my final point, what does this
12	suggest about the role of the enforcement agencies in
13	this area? Putting aside the issue of whether the
14	agencies should jump on the next opportunity to overrule
15	Jefferson Parish v. Hyde, I think through their closing
16	statements at the end of investigations, the Section 2
17	cases they elect to bring, importantly, the amicus
18	briefs they elect to file (a lot of the actions are
19	private), the business review letters they issue, and
20	the competition advocacy in which the agencies engage,
21	particularly as regimes overseas decide what their
22	Section 2-like rules of the road are going to be, the
23	agencies can play an important role in shaping what
24	Section 2's rule of reason looks like as applied to
25	tying arrangements in the years to come.

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1	As I said, much is up for grabs, and this is the
2	moment when the agencies should seize the initiative and
3	set forth what their views should be of where these
4	arrangements should and should not cross the line.
5	Thank you very much.
6	(Applause.)
7	MS. LEE: We will now take a short break and
8	reconvene at five after 11:00.
9	(A brief recess was taken.)
10	MR. SALINGER: Welcome back. Our next speaker
11	is Robin Cooper Feldman. Professor Feldman is an
12	Associate Professor of Law at the University of
13	California, Hastings College of the Law. She
14	specializes in law and bioscience and is Director of
15	Hastings' Law and Bioscience Project. Professor Feldman
16	also serves on the Executive Committee of the Antitrust
17	Section of the American Association of Law Schools.
18	Professor Feldman has produced many publications
19	in the intellectual property, antitrust, biotechnology
20	areas. She received her JD from Stanford, where she
21	served in the Articles Department of the Stanford Law
22	Review. After graduating from law school, Professor
23	Feldman clerked for The Honorable Joseph Sneed at the
24	U.S. Court of Appeals for the Ninth Circuit.
25	Also, I understand that Professor Feldman is

64

1	going to have to leave the session a little bit before
2	we end, so I will take the opportunity now to thank you
3	in advance for taking the time to be with us today. So,
4	Professor Feldman.
5	PROFESSOR FELDMAN: Thank you.
6	I agree with our moderators who said that you
7	will probably find considerable consensus about moving
8	away from a per se rule for tying, the notion that all
9	tying is bad and it should be enough to just point out
10	the behavior of tying, and maybe with a little more
11	information, we can condemn it. I am a little bit word
12	worried that in our rush to move away from that old
13	position we are going to swing all the way in the other
14	direction and end up saying, nothing to see here, folks,
15	just move right along, all tying is good. I think there
16	is a consensus in the legal, academic and the economic
17	literature that all tying is not bad, but it is not true
18	that the legal and economic literature believes that all
19	tying is good. So, the question is, how do we find out
20	how do we identify what it is that we are concerned
21	about if we continue to acknowledge that there is
22	something of concern?
23	I want to talk about Section 2 as it relates to
24	technology markets, both high-tech and biotech, and in
25	particular, I want to highlight the fact that in my

65

1	view, pharma and biotech are the next frontiers for
2	antitrust enforcement in general and for Section 2 in
3	particular, and I have chosen some of my examples with
4	that in mind.
5	I also want to frame my comments in terms of
6	what is different about technology markets and what is
7	not different about technology markets. In terms of
8	what is different about technology markets, I want to
9	talk about a particular kind of leveraging, and that is
10	what I call defensive leveraging. For almost a century
11	legal scholars and economists have struggled to
12	understand leveraged behavior and determine when it is
13	harmful. Most of that debate has centered on what I
14	would call traditional leverage, in which a monopolist
15	in one product tries to leverage its power in a
16	complementary product. You can imagine an ice cream
17	monopolist who bundles and says I will not sell my ice
18	cream unless you buy cones as well. With the more
19	traditional form of leverage, the economic debate
20	concerns whether monopolists can get any profit out of
21	that or cause any harm that. But there is another form
22	of leveraging, and in this form of leveraging, the
23	monopolist is not trying to reach into another market
24	and grab more monopoly profits. The monopolist is
25	trying to protect its original monopoly from the next

66

1	generation of products that could serve as substitutes.
2	It is using the power of multiple markets to maintain
3	its original monopoly, and I call this defensive
4	leveraging.
5	Now, technology markets are ripe for this form
6	of leveraging, among other reasons, because of their
7	tendencies towards network effects. That is, they tend
8	to be industries in which there are advantages in doing
9	what everyone else is doing. Where there are network
10	effects, a monopolist who has the bulk of the customers
11	can use its existing base to project into the market for
12	new technologies that are threatening to erode its
13	original monopoly. So, tech markets are different
14	because of their strong potential for defensive
15	leveraging.
16	They are also different because of product
17	design challenges, and here, let me offer you a pharma
18	example. A few years ago the FTC brought a successful
19	enforcement case against a pharmaceutical house that
20	sought to tie its dominant drug to a new monitoring
21	product. Now, this monitoring product could have been
22	used just as easily with all the competitors' drugs, but
23	the pharmaceutical company wanted to say we will only
24	sell our monitoring product if you will also buy our
25	version of the drug. The concern was that the pharma

67

1	house was trying to use its new monitoring product to
2	protect its power in the drug market as its power
3	started to wane.
4	Now, if we would not allow a company in these
5	circumstances to tie a drug together with a product that
6	monitors the drug, why would we allow a product designed
7	to do both, that is, to administer the drug and monitor
8	it at the same time? Or from another perspective,
9	should we allow two products to be bio-engineered so
10	that they work only in combination with each other?
11	That is an issue in agri-biotech. If we are not careful
12	in the area of product design, what we are doing is
13	simply inviting parties to design around the patent laws
14	and the antitrust laws, and then the question of whether
15	behavior violates the antitrust laws becomes a
16	scientific question rather than an economic one, the
17	question being, "Is it feasible to combine products
18	technologically?" If so, you have no problem with
19	enforcement agencies. It should not be that our legal
20	decisions turn on questions like that.
21	There are tremendous challenges in the areas of
22	product design, but whatever benchmarks we develop in
23	the law, I believe it is critically important not to be
24	dazzled by the wonderful science involved in product
25	design. Technology and biodesign are increasingly

68

1	offering avenues for avoiding the appearance of tying
2	and bundling simply by manipulating the product. These
3	are wonderful products, and it is so easy to be swayed
4	by how wonderful they look without asking what is
5	happening behind the science. We still have to
6	delineate, even if you are talking about biodesign and
7	product design, what is reasonable and what is not
8	reasonable.
9	And finally, technology markets are different
10	because of patent groupings. Patents tend to travel in
11	packs. Companies build or acquire portfolios, and they
12	typically engage in defensive patenting; that is, trying
13	to file patents for all of the space surrounding their
14	key patent so nobody else can develop any substitutes to
15	compete. And most importantly, tech products have
16	multiple patents within them, which creates
17	patent-groupings.
18	Now, patent-groupings can be and often are
19	perfectly procompetitive or they can create
20	opportunities for strategic anticompetitive behavior.
21	The key is, how are we going to find the difference
22	between these?
23	I talked a little bit about the fact that I
24	think there are differences with technology markets.
25	They operate differently from what we are accustomed to

69

1	seeing in traditional markets, and they present
2	interesting challenges for analyzing behavior. While
3	technology markets are different, they are not sacred,
4	and I am very concerned by language in some recent court
5	decisions which suggest that markets that relate to
6	intellectual property should be treated more gently
7	under antitrust laws. It is an eerie throw-back to
8	language in the early 1900s when courts were struggling
9	with the question of whether antitrust laws could even
10	be applied to patents or to other intellectual property
11	rights.
12	Intellectual property rights are not sacred
13	monopolies. They are not even monopolies at all, at
14	least not in the antitrust sense of the word. They may
15	be downright worthless, and I can discuss some of this
16	in the question period. They are not even an exclusive
17	right, again, not in the way that antitrust thinks about
18	it. There are certainly challenges in understanding
19	these rights, but they need to receive the same reasoned
20	consideration as other types of products. I use the
21	term "reasoned" carefully and also intentionally. It is
22	certainly true, as all of the panelists have pointed
23	out, that we have moved away from a strict per se rule
24	in tying cases, and that we appear poised to move even
25	closer to a rule of reason approach, if not completely

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1	to a rule of reason approach. I am going to jump to a
2	world in which we have moved very close or completely to
3	the rule of reason. I think the important part of this
4	shift will be figuring out how to react when companies
5	that engage in tying behavior claim to have very good,
6	procompetitive reasons for the tie.
7	How do we analyze what is a legitimate
8	procompetitive reason and what is not? To do this, I
9	want to suggest that we borrow from the experience of
10	regulators at other agencies in different contexts, and
11	I think there is a perfect example from Patent and
12	Trademark Office experience. The PTO requires that
13	parties who want to make certain types of claims must
14	show that those claims are substantial, and credible.
15	I would like to spin out how it works there and how I
16	think it would work here.
17	A few years back, researchers began fishing out
18	little pieces of genes, not the whole gene, but some
19	little pieces from a soup of genetic material, and they
20	wanted to get a patent on that little piece that they
21	found. Now, in order to get a patent, you have to tell
22	the PTO how you can use the thing that you are
23	patenting. When they fish this little piece out of the
24	genetic soup, researchers had no idea what it was. They
25	did not know what gene it came from, they did not know

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1	whether it promoted disease or whether it helped fight
2	against disease. They just had a little snippet, and
3	they did not have a use for it.
4	They began to file patents using very general
5	uses. They said, "These little snippets can also be
6	used for fishing out other snippets or for doing
7	research." This is when the PTO developed its test:
8	Specific, substantial and credible. Don't just tell us
9	something general that can be true of any of the
10	category of things that you are talking about. Tell us
11	something specific to what it is that you have found and
12	what it is that you are doing.
13	I think a test like that, specific, substantial
14	and credible, is the essence of what courts and
15	regulators are going to have to ask about procompetitive
16	defenses offered in tying cases. Don't just give us
17	general reasons that would apply to any tie or that
18	would apply to any tie in your industry. Give us
19	something that is specific to your product and to your
20	tie.
21	So, in computers, for example, anyone can say it
22	is easier for consumers if you put things together in an
23	operating system. When different applications are
24	together in an operating system, Ma and Pa do not have
25	to worry about loading things together, they do not have

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1	to worry about interoperability. There are always
2	consumer advantages when things are put together in
3	computers, but it cannot be that any tie in the computer
4	industry is always okay. You must tell us something
5	about what it is that you are doing and why we should
6	see this as procompetitive.
7	If you think outside of computers to products in
8	general, any company can say, "We can control quality
9	better if we control all the parts you use with our
10	equipment or all the pieces that might integrate
11	together. Our customers do not suffer through people
12	finger-pointing about which part is wrong. They only
13	have to call one person when they need a repair." But
14	again, that is true of any combination of things. If
15	you want to claim a procompetitive benefit, I would say
16	tell us something that is specific to your product and
17	to your tie.
18	I want to point out, again, the reason I am
19	concerned is that there has been a swing in the
20	pendulum. We needed to talk about what was
21	procompetitive about tying in order to move away from
22	the notion that all tying is bad. We want to be
23	careful, once we have talked about ways in which ties
24	can be good, that that does not blind us, and that now
25	all we ever talk about are the good things in tying.

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1	Let me give you an example of something that I
2	think would qualify as a specific, procompetitive
3	defense for a tie. There was a pharmaceutical house
4	that recently received a lot of criticism when it sought
5	regulatory approval to combine its existing cholesterol
6	drug, that was losing market share, with a new
7	blockbuster heart drug and to sell them only as a single
8	pill formation. They had a product that was losing
9	market share, and they were going to combine it with a
10	new kind of blockbuster as the only way consumers were
11	going to be able to get it. The company only agreed to
12	sell the two separately after a lot of public criticism.
13	Imagine, instead, that the company's drug is
14	about to be pulled from the market for dangerous side
15	effects. You can fill in the name of a number of recent
16	drugs that have gotten into trouble. Now, suppose the
17	company sought regulatory approval to produce only a
18	combined pill including another substance that would
19	mitigate the dangerous side effects. That is a
20	legitimate and specific procompetitive benefit for
21	bundling a product. In other words, tell me something
22	about your product and your tie that helps us understand
23	why this is a good thing that you are doing.
24	I suggested asking whether the claim is
25	specific, substantial and credible, and in evaluating

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1	credibility, I would borrow a page from another agency,
2	the SEC. The SEC looks very closely at stock
3	transactions that occurred right before big news. They
4	find these highly suspect. In the same vein, I believe
5	we should look at the market timing of a company's
6	decision to tie in order to test the credibility of its
7	claims of procompetitive benefits.
8	For example, I would be very wary when a company
9	seems to find all kinds of procompetitive reasons for
10	tying just before the patent on its blockbuster drug is
11	about to expire or just when a fundamental market shift
12	is taking place. Under those circumstances, one might
13	have reason to doubt the sincerity of the company's
14	procompetitive fervor.
15	In short, what I want to say today is that
16	markets related to high-tech and biotech present
17	significant pressures and opportunities for
18	anticompetitive behavior. We should be aware of those
19	as we move forward in the new sets of tests. The
20	challenge for law makers and for regulators is to be as
21	intellectually creative as the emerging markets
22	themselves in order to preserve competition without
23	hampering the innovation that we have come to expect in
24	technology, both biotech and high-tech.
25	Thank you very much.

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1	(Applause.)
2	MR. SALINGER: Our final speaker today before we
3	begin our round table discussion is Robert Willig,
4	Professor of Economics and Public Affairs at Princeton
5	University, where he teaches in the Economics Department
6	and also in the Woodrow Wilson School of Public and
7	International Affairs, where he serves as the Faculty
8	Chair of the Masters of Public Affairs Program.
9	He served as Deputy Assistant Attorney General
10	at the Department of Justice, Antitrust Division, from
11	1989 to 1991. Before joining the Princeton faculty in
12	1978, he was a supervisor in the Economics Research
13	Department, Bell Laboratories. He received his Ph.D. in
14	economics from Stanford University in 1973, an MS in
15	Operations Research from Stanford in 1968, and an AB
16	from Harvard in 1967.
17	Bobby has written, lectured --
18	DR. WILLIG: Have I been around that long?
19	MR. SALINGER: Apparently.
20	DR. WILLIG: Only in the eyes of some beholders.
21	MR. SALINGER: It seems shorter because we have
22	been having such a good time with you.
23	DR. WILLIG: Okay.
24	MR. SALINGER: Bobby has written, lectured and
25	consulted widely on the subjects of industrial

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1	organization, the relationships between government and
2	business and domestic and international microeconomic
3	policy. He has served as a consultant and advisor for
4	the FTC and DOJ on antitrust policy, for OE CD, the
5	Inter-American Development Bank, and the World Bank on
6	global trade, competition, regulatory and privatization
7	policy, and for governments of several nations on
8	microeconomic reforms, and so with no further
9	introduction, Bobby.
10	DR. WILLIG: I am going to tie my conception of
11	my time slot to that which we have already experienced
12	from some of the previous speakers, not the last one,
13	but particularly the first one. Nice, long, lazy, but
14	hopefully very illuminating.
15	I have been asked to speak today, challenging
16	subject, and that is not only to make it unanimous, I,
17	too, am against per se treatment of tying under the
18	antitrust laws. I, too, think there is no business or
19	economic or indeed any logical justification for such a
20	treatment by the courts. I, too, would have the
21	agencies articulate that at every possible forum,
22	including the high courts of the land. Okay, let's get
23	down to the hard work.
24	To really advance that position -- I am not sure
25	how courts actually work, Don is obviously all over

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1	this -- but Don, do you think they will go ahead and do
2	that without some clear idea about how to go forward
3	under a rule of reason?
4	MR. RUSSELL: We are going to give it to them.
5	DR. WILLIG: So, we have got to work this out
6	today, I would say, and we have got a half hour for me
7	and then an extra hour and a half to see if we all
8	agree, that will be great, but it is particularly
9	challenging when it comes to a particular form of tying,
10	namely, the kind that kind of underlay the Microsoft
11	case, although only, I think, spiritually, and that is
12	tying in a technological fashion, not tying by contract,
13	not tying in such an obvious way that the weight of
14	public opinion and the law would come down on the
15	alleged perpetrator, but instead, tying in a much more
16	subtle way of the kind Robin was just talking about,
17	perhaps, but in other domains as well.
18	We can call this tying via product innovation,
19	product innovation being blessed in our society, and
20	therefore, perhaps, more untouchable than other forms of
21	tying, or technological tying, which is a very good pat
22	phrase that I do not think I tried to invent, so I use
23	it with humility.
24	I would like to start with general thoughts
25	about monopolization and then move swiftly to general

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1	thoughts about tying, and then, after a few minutes,
2	specialize down to the subject of tying through
3	technological design. In general, we all know that
4	there is a problem, a challenge, in issues of
5	monopolization, because the very same practices that
6	have the potential to harm competition in the antitrust
7	sense, frequently those very same practices also may be
8	very good for consumers and, indeed, be an intrinsic
9	part of competition, even though perhaps, like other
10	forms of competition, if the succeeding firm undoes the
11	market presence of the losers, then, in fact,
12	competition can be weakened by the very process of
13	competition, at least in the short run. So, we have
14	this conflict between good and bad practices or
15	practices that can be good or bad depending upon their
16	setting, and so we have a tough decision process and the
17	need for an analytic framework.
18	I would suggest, and I think experience really
19	does endorse this observation, that we do need to be
20	especially careful when the practices at issue do affect
21	innovation, because after all, innovation we all know is
22	particularly valuable to consumer welfare and to the
23	course of social welfare. This has been amply studied
24	by economists going back to Schumpeter and before, and
25	also, the other side of the coin is that innovation is

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1	particularly vulnerable in its underlying incentives.
2	It is really distressingly easy to stultify the
3	incentives for innovation by misuse of antitrust or by
4	any other form, a policy that tends to strip off some of
5	the rewards to victory, because innovation is so
6	intrinsically risky as an economic activity, so we need
7	to be really careful with innovation generally.
8	Big picture, how do we go about assessing
9	monopolization? This is writ very large, but I would
10	say there are two basic phases. The first involves
11	asking the question whether the challenged practice has
12	actually harmed competition, or on the come, is there a
13	dangerous probability that it will? That, of course, is
14	easy to say. It is not so easy to analyze, and lots and
15	lots and lots of mistakes are made in judicial settings,
16	and plaintiffs are crazy in terms of their allegations
17	frequently.
18	This involves causality. It involves
19	understanding what is competition. It is not just
20	market share, it is not just the number of competitors
21	involved in a marketplace, it is something more subtle
22	than that. We, in this room, probably all understand
23	this very well. I need not preach to you on the
24	subject. I will just post it up there as the first of
25	the two phases.

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1	The second phase is, well, perhaps the
2	challenged practice has, indeed, harmed competition.
3	Things like that happen. Some competitors are more
4	efficient than others, and they exercise their
5	efficiency in the marketplace. They win, they knock out
6	their less efficient rivals or rivals with less
7	efficient products, and now there is only a few or even
8	one left in that relevant market, at least for a while.
9	What should we do about that? Has the practice been
10	monopolizing or has it been successfully competitive?
11	What is the framework for that inquiry?
12	I list here five different articulations which
13	are part of what Mark characterized as the blazing wars
14	of Section 2 turf today, various articulations to me.
15	For present purposes, I think they are all close enough.
16	Is the practice part of competition? I like to
17	put it that way. As DOJ says, does the practice make
18	economic sense? The difference between those two -- I
19	have parsed Greg Werden's writings, and it is tough to
20	find them, but his writing is very smart. I am sure
21	there is a difference, but for present purposes...
22	Is there a sound business rationale? Courts
23	used to say that. Is that really any different?
24	Grinnell, is the harm to competition willful? Well, I
25	am a little nervous about that language, because

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1	sometimes it is viewed as a directive for a
2	psychological study of subjective intent, reading of
3	locker room type business documents and trying to infer
4	psychology from them, but as long as we understand
5	willfulness to be revealed only by careful economic
6	analysis, then I think that, too, is a nearly equivalent
7	articulation.
8	And then my personal favorite, whether there is
9	sacrifice of profit, turns out to be a very nuanced way
10	to say it as well. Lots of issues about how to unpack
11	that neat phrase, but I think for present purposes, we
12	can perhaps all agree -- Mark Popofsky sometimes does
13	not agree with this --
14	MR. POPOFSKY: We are not to Q&A session here,
15	Bob.
16	DR. WILLIG: I am just trying to stick a little
17	pin in for later, you have got that question in your
18	presentation, but yeah, I think we can all agree that
19	somewhere among those five articulations lies our
20	consensus view.
21	Turning to tying instead of monopolization
22	generally, how do we see whether there is, indeed, harm
23	to competition, the first leg of those two for the
24	assessment? I think this is right. Maybe we can agree.
25	The first question is whether consumers are really

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1	impelled, really strongly forced, to buy the tying good,
2	the one that purportedly has this levering power, and
3	thus, the tied good, because of the tie, by market power
4	that surrounds either the tying good itself or the
5	system, the combination of the tied good along with the
6	tying good. Are the market forces so strong that,
7	indeed, consumers are pushed very hard into that
8	behavior? Because if not, where is the tie? It is just
9	consumers making a choice. So, that is the first leg,
10	at least to an economist, this economist, for labeling
11	whether or not the tie has the potential of harming
12	competition.
13	That is not enough, though. Consumers can be
14	impelled to buy the system whether or not there is a
15	resulting harm to the ability of rivals in some relevant
16	market to compete in view of the fact that consumers are
17	being pushed to buy the tying and the tied good
18	together. So, does the unavailability of the tied
19	sales, that unavailability created by the tie, is that
20	harmful to rivals' ability to compete, and are those
21	rivals so precious and so unreplaceable to competition
22	in some relevant market that competition is truly harmed
23	as a result?
24	That question can go either way, but I think it
25	is the right question, and I have seen a lot of cases

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1	where those two reductions of the issues have been
2	missed, but I think they are pretty persuasive in terms
3	of the underlying logic.
4	I probably should not take the time to go
5	through this slide, but here is how to think about those
6	issues in a more organized way, sensitive to I think
7	standard practice, at least among the practitioners in
8	this room. We need a relevant market. We need to know
9	who the participants are. We need to know whether the
10	unavailability of the tied sales weakens rivals who are
11	scarce, concentration, and irreplaceable. We need to
12	look at potential entry into the relevant market as
13	well. We know that loss of share is not enough to claim
14	competitive harm.
15	We should be looking at whether it is a good
16	deal for consumers to buy the tied system. As a result
17	of the rivals being purportedly weakened and not just
18	harmed, but weakened, have prices gone up? Are things
19	worse for consumers as a result? I like the scale
20	economies test, the room to dance test myself, getting
21	underneath to the underlying opportunities that
22	competitors need to be strong.
23	Is there enough of the market left, after the
24	tied sales have been accounted for, to keep the other
25	rivals? Although they are sad to have lost those

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1	opportunities, is there still enough room for them to
2	function, to do what they need to do effectively to
3	remain as important competitors? Does their R&D hold
4	up? Do their selling efforts hold up, for example? Can
5	they bounce back in due course?
6	Maybe those rivals were inefficient anyway and
7	weakening anyway and here they are complaining because
8	their last best asset is the right to bring an antitrust
9	case. These are the usual kinds of issues that come up
10	in Section 2, and they are particularly important, I
11	think, and to remind ourselves of their importance in
12	this context of tying.
13	Okay, so suppose there is a tie, suppose it does
14	harm competition. That does not mean that we should
15	come down on it with antitrust, because there is still
16	the second important phase, and that is where the
17	challenged tie is truly part of competition, which just
18	sometimes happen to weaken competition because the
19	successful firm is emerging in a more concentrated form,
20	and, of course, I think we can agree that since the
21	valid policy goal here is competition itself, business
22	conduct which is really part of competition should not
23	be condemned, and we should not be deterring competitive
24	conduct through the sort of distortion of the use of
25	antitrust.

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1	In a more particular way, we have a challenged
2	tie. Would that challenged tie be profitable without
3	taking into account this harm to competition and its
4	impact on monopoly power that has been found in the
5	first phase? We have found, say, that tying has harmed
6	competition. Would the tie have been profitable for the
7	perpetrator even without that extra monopoly power? I
8	think that is a good organizing question before moving
9	on.
10	So, let's move on. Here we are now finally in
11	the setting of tying via technology, via product design,
12	and let me paint what for me is the toughest scenario.
13	It is the most interesting scenario, where we actually
14	do have a plausible allegation of exclusion through the
15	technological tie. So, we have got a new product design
16	that has been launched, and it technologically ties two
17	components together of a system, of a duo, that could
18	conceivably otherwise be open without the technological
19	tie.
20	If there are two pills tied together chemically,
21	that is a great example. It is the old local phone
22	system and long distance when the Bell System was in
23	charge before antitrust. It is a much more lurid
24	example of Microsoft. Imagine if Windows had little
25	explosive devices where if you tried to plug NetScape

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1	into it, the computer would fry. I mean, some alleged
2	that was the case, but usually they forgot to do some
3	sequencing keypunches that allow it to happen, depending
4	on which side of Microsoft you are on, but that would
5	have been a much more telling example of a technological
6	tie.
7	How about the iPod, which are said to be
8	technologically tied to iTunes, through the protocol in
9	which the music is encoded and now the video as well?
10	That is certainly a technological tie, or at least it is
11	alleged to be in some sense.
12	In the good old days, remember mainframe
13	computers? They had their plugs changed, allegedly, so
14	only IBM peripherals could plug into the mainframes.
15	That was surely a technological tie. To say nothing of
16	the radios in GM cars and so on.
17	Okay, so as a result of this product design, the
18	two components, one of which at least has real
19	potentially competitive marketplace forces bearing on
20	it, these two components are tied because of the product
21	design. So, what could possibly be anticompetitive
22	about that?
23	Well, suppose that they are rivals for at least
24	one of those components. There is NetScape as a
25	browser, there are other web sites where you can go to

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1	get music, but that music does not go into the iPod.
2	There are other places to go for pills that have some of
3	the same therapeutic functions, not exactly the same,
4	but surely substitutes. So, these rivals of the other
5	competitive entrants into this marketplace are shut out
6	of the system by the technological tie.
7	Now, there are two lead theories of how that
8	might create market power. The sellers of these other
9	potentially competitive components have a much reduced
10	ability to sell in the bad story. They lose economies
11	of scale, they lose the impetus for R&D, and so they
12	have a harder time competing for other applications of
13	those same kinds of components.
14	One of the applications is the kind that is
15	subject to the tie, but there are non-coincident
16	markets, not implicated directly by the tie, in which
17	the NetScape alike has been competitively harmed by the
18	inability of NetScape to be appealing to those who are
19	running Windows in the Microsoft story.
20	The other version of that story is that there is
21	the potential for harm to competition in the market for
22	the bottleneck, for the tying good. In Microsoft, the
23	story, the DOJ economist's story anyway, as I understood
24	it, was that with NetScape together with Java could form
25	a competitive threat to Windows itself, so that to

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1	preserve the power over the bottleneck, Microsoft is
2	said to have needed to weaken its potential rival in the
3	potentially competitive browser market to preserve its
4	power in the market in which it has much of a
5	bottleneck. So, there is a competitive threat at both
6	levels which might be mitigated, protecting monopoly
7	power, by the technological harm.
8	Well, that is the bad story, but on the other
9	hand, we are talking about product design. We are
10	talking about innovation, and, of course, we might well
11	have a welfare-increasing innovation in our hands, and
12	how are we to sort out whether the innovation is largely
13	welfare-enhancing as an innovation or whether, instead,
14	it is just a ruse, it is just a business tactic to
15	preserve or create monopoly power?
16	I have got a theorem or two for you. It is set
17	in this picture. This picture has a long heritage in my
18	life, but I need not go into that. My introduction was
19	embarrassing enough about dates and years. A1 is the
20	bottleneck that belongs to firm 1. It is the lever off
21	of which the tying might go. A2 is the component that
22	serves the ancillary function, the browser as it were,
23	made by the same firm. So, firm A has a 1 and a 2.
24	B2 is the other firm's substitute for the
25	product which is here tied. It is NetScape, it is the

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1	other browser. NetScape could work with Windows, if you
2	take Windows to be A1, so the horizontal line between
3	them shows that they interoperate. They both feed into
4	the systems market, which is what consumers want. They
5	want systems. They want combinations of the operating
6	system and the browser.
7	Meanwhile, C1 is lurking up there in the right,
8	that is Java. When Java works together with NetScape it
9	has the potential for actually performing the same
10	functionality or maybe a degraded version, as would
11	Windows with Explorer or Windows and NetScape. So, that
12	is the story without the tie. Everybody interoperates,
13	there may be some degradation of function, there are
14	pricing issues, but that is the world without the
15	technological tie.
16	Now, in the bottom part of the picture, along
17	comes a new version of the operating system, A1 prime, a
18	new version of the browser, A2 prime, they work
19	together, but you know what, there are no APIs at all.
20	There is no way that your NetScape can interoperate with
21	them. There is a true technological tie here depicted
22	on the picture. As the bottleneck holder moves from the
23	upper system to the lower one, it implements the perfect
24	technological tie, thereby shutting out B2.
25	The bad stories are that B2 has to go out of

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1	business, it is so weakened by the inability to sell,
2	and so if it had any other uses, like on servers, forget
3	it, it is going to have to leave the entire space, it
4	loses the economies of scale and scope, and then Java,
5	C1, has got no partner to play with, so it evolves in an
6	entirely different direction. It is no longer a
7	candidate for the central part of a desktop operating
8	system. It also goes off into server land, and the new
9	Windows survives as the undisputed champion, delivered
10	into that throne by the technological tie. So, it is
11	the same story, but now it is on this picture, where we
12	can start putting symbols for pricing and costs and
13	things like that.
14	I need to define a thought for you, the
15	compensatory price. Just imagine that the open design
16	bottleneck persisted even when the new system came out.
17	The new system comes out. It is technologically tied,
18	but imagine that the old open design system is still out
19	there. This is just a mental exercise. Imagine it is
20	still out there, and it is made available to consumers
21	as well as to competitors at a compensatory price. If
22	it is just out there and priced at an infinitely high
23	level, it is not really a competitive force.
24	Some court might rule that it had to be given
25	away, but that would not be a marketplace solution. A

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1	compensatory price, by definition, puts the same profit
2	margin on the use of the open access bottleneck, the
3	same profit margin as the new system earns. The new
4	system is the one with the tie. So, your perpetrator
5	comes out with a tie, charges a lot for it, and that
6	margin is now built into a compensatory price for the
7	old open design system.
8	The theorem is that when the open design
9	bottleneck system is still available in the market at
10	this high compensatory price that builds in the same
11	profit margin, then the technological tie, the new
12	system's introduction, eliminates the competitors if and
13	only if the new closed system is actually socially
14	superior to the open one, and here I wrote, "Ex-post,
15	the R&D costs," the next slide -- and I am running out
16	of patience and so are you for this -- the next slide
17	will also talk about the R&D costs and reach essentially
18	the same result.
19	So, what does this say? This says that if you
20	had a world where the open design system were still
21	there, priced in the same high-priced way as the new
22	system, then the marketplace would work, that the
23	competitors would be knocked out if and only if they
24	deserved to be knocked out on grounds of true total
25	social welfare, that the new system is worth the R&D

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1	costs, it has improved functionality, it has better
2	costs perhaps or some balance of all of those elements,
3	sufficient to make it better for true social welfare as
4	economists measure it than the old system, so that this
5	innovation is not just a hokey thing designed just to
6	knock out the competitors under the ruse of somehow
7	coming out with something new.
8	It is not newness for its own sake, it is not
9	newness for the sake of monopolization, it is really a
10	better system. That is true only if the standard is
11	being held that the open system is still available at a
12	compensatory price. Without that design of the theorem,
13	you can knock out the competitors without having the new
14	and better system. You can just technologically tie
15	them to death.
16	So, here the right standard is what would happen
17	in the market if the open design system were there at a
18	compensatory price, then market outcomes are telling of
19	efficiency. So, it is a very powerful result I think.
20	It dates back a long way. I will not even highlight
21	that, it is Ord over a long time ago, but it has new
22	significance today, I believe.
23	What does that mean for antitrust? Well, in
24	antitrust, if, indeed, the open system is available, the
25	old one, at a compensatory price, and there is a

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1	technological tie and the competitors are knocked out,
2	the theorem would say, you really should not be coming
3	down on that kind of innovation, because according to
4	the theorem, that is good innovation, as proven by the
5	continued availability of the old system at a fair
6	price.
7	Now, oftentimes the old system cannot or will
8	not be left in place, although this kind of raises the
9	question of why not, and maybe if this were part of the
10	antitrust standard, that would be an impetus for
11	companies to take some pains to keep the old systems
12	alive. Maybe not. It does tell us, though, what the
13	right standard is for this economic framework. If the
14	open system is not preserved, we still have a mental
15	standard, a but-for test, which is well adapted to
16	technological tying for assessing whether we should
17	condemn or smile upon the win in the marketplace by the
18	new system.
19	That standard is whether the competitors would
20	still be going down, still be losing, if, in the but-for
21	world, they would not be successful, and here the
22	but-for world is the continued availability of the open
23	design system, the alternative, at this fairly high
24	compensatory price that builds in the full profit margin
25	earned by the new system, that if you want to know

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1	whether or not we have an offense here or not, ask
2	yourself the question, would the competitors have been
3	beat anyway even if they had access to an open design
4	version at a compensatory price?
5	This question was not asked in Microsoft. It is
6	not asked in Microsoft today in Europe. I do not know
7	what the answer would be, I am not a partisan in those
8	debates, but the theorems say that is the right question
9	to ask. That is a good standard. Just like marginal
10	cost is a good standard for Areeda-Turner, this is a
11	good standard when it comes to technological tying in
12	the role of exclusion accomplished through that kind of
13	a tie.
14	There are a bunch of caveats. The first caveat
15	is, how do you know whether the R&D costs that were
16	expected at the time of the decision by the
17	technological tyer, how do you know what those really
18	were? If they were very low, then that makes the system
19	look better in terms of the standard. If they were
20	expected to be higher than the skies, then it goes the
21	other way. Part of what the fact-finder needs to do is
22	assess the expected R&D costs as we get deep into this
23	phase of the antitrust analysis. Obviously a tough task
24	for the fact-finder.
25	How can the fact-finder do this but-for test?

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1	Well, at least it is an organized test, the theorem
2	tells you what to look for, but this is not necessarily
3	an easy job for a judge and a jury in an antitrust
4	court, to do this kind of but-for test. If you do not
5	have this kind of a structured standard, how is the
6	fact-finder going to in some other way decide whether
7	the new system is really good or not? Talk about
8	keeping science out of the antitrust case, this is
9	science and consumer preference rolled together. How
10	good is the innovation? I would not trust a judge to
11	make that answer without an economic framework.
12	On the economic side, the theorems, which I
13	think are really very powerful, they are in a very
14	oversimplified setting, as usual, but maybe even more
15	than normal. This setting, in which these theorems are
16	proved, is a setting in which there are no other issues
17	whatsoever for social welfare besides the ones that the
18	theorems focus on, namely, the possibility of
19	monopolization through the technological tie. All other
20	economic imperfections have been ruled out by the design
21	of the abstract marketplace. And we know from common
22	sense and from economics that in marketplaces where
23	innovation is important, there are typically all kinds
24	of other things that can go wrong, ambiguous
25	externalities, inappropriability of benefits of

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1	innovation on the one side of the ledger and negative
2	externalities conveyed by the innovator on others who
3	are competing with the innovator in the market, lost
4	profits to other market participants.
5	On the one hand, you get too little innovation
6	because of inappropriability issues, or you get too much
7	innovation because of negative profit externalities, and
8	in most economic models, the ones that I teach in my
9	classes, it is thoroughly ambiguous whether innovation
10	comes out just right even without antitrust issues, and
11	all of those kinds of complications must be ruled out to
12	get these neat results that our theorems get. Which way
13	that biases the answer is decades away from my students
14	and yours being able to figure out, and maybe never is
15	the right answer. I mean, in a model you can figure it
16	out, but how the model corresponds to reality is far
17	beyond the state of the art.
18	So, what did we learn from all of this other
19	than the fact that you are very kind and patient? One
20	additional lesson is that as a matter of economic logic,
21	technological tying is real. It is a real possibility
22	on the blackboard, in the journals, and there they may
23	be very genuine, even strong incentives to do
24	technological tying for anticompetitive reasons, but
25	also for a long list of procompetitive reasons, the same

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1	kinds of reasons we heard about from earlier panelists,
2	as well as a host of other ones arising just because it
3	is innovation, and so, yeah, you cannot just say, oh, it
4	does not happen or it cannot happen as a matter of
5	logic. It can happen, it may happen, and on the other
6	hand, technological tying may be a very, very good thing
7	in many settings.
8	The second point, which is newer and I really
9	hope that you believe a little bit, is that there are
10	logical and intuitive tests and, indeed, standards for
11	analysis that would allow us to assess product design
12	for monopolization by a tie-in. This is the kind of
13	test that I was just talking about, the but-for being
14	open standard with compensatory pricing. These are not
15	easy to apply. They do organize the mind, but they are
16	hard to apply empirically, especially in a litigation
17	setting, and so great humility is certainly called for
18	in this area.
19	Well, if we combine humility, due humility, with
20	how delicate and important innovation really is, we
21	reach the same policy bottom line that everybody else
22	has reached, certainly no per se treatment, my goodness,
23	but even more so in the world of rule of reason, we need
24	to protect innovation as a process from being stultified
25	by litigation with very, very strict and very demanding

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1	hurdles in front of litigation which must impose a tough
2	discipline on the use of antitrust in this area, both by
3	private parties and by the agencies, and that goes
4	largely, I think, to the first part of the test, that
5	there really has to be demonstrated harm to competition
6	in a relevant market through the technological tie. It
7	has got to be causal, and taking that part of the test
8	very seriously alone would knock down most of the cases
9	that I have been exposed to.
10	So, that is my plea, and I thank you.
11	(Applause.)
12	MR. SALINGER: Well, we are now going to give
13	each of the panelists a chance to respond to the others.
14	I do not know how long Professor Feldman is going to be
15	with us, but since there seems to be perhaps some
16	disagreement between you and Bobby on your --
17	DR. WILLIG: You think?
18	MR. SALINGER: -- on your take on how to deal
19	with technologically advanced markets, maybe we will
20	start with you.
21	PROFESSOR FELDMAN: Well, let me start with,
22	again, what we agree on, which is that we knock out per
23	se, and I would not disagree about the importance of the
24	harm to competition element. I begin by assuming that
25	we are in something like a rule of reason setting in

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1	which we have already looked for market power and we
2	have already looked for market power and we have already
3	looked for harm and then we are trying to analyze what
4	the claims are. Given that you are a very big guy and
5	given that what you are doing is harmful to competition
6	as opposed to competitors, how do we evaluate the things
7	that you have said are so good about what it is that you
8	are doing? So, I would not disagree there.
9	I might disagree on what we talk about in terms
10	of the harm to competition, again, remembering that
11	particularly for innovation markets, such as high-tech
12	and biotech, that these markets evolve so rapidly that
13	the harm to competition is happening in the future.
14	That can be difficult to measure in an economic analysis
15	in a courtroom.
16	What we want when you have a monopoly is that
17	the natural forces of competition will make that
18	monopoly erode and you will get new products that will
19	look better and you will not have monopolists. If you
20	have settings in which the monopolist can project into a
21	new area as soon as new things are discovered, you are
22	going to have monopolists who can stay in an entrenched
23	base for a while, and that is a problem.
24	You will have to tell me whether we disagree
25	strongly on technological ties. I suspect there is a

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1	fair amount of agreement here. I think technological
2	ties can be useful. I am wary of them, and I think we
3	have to be careful of them in certain settings that
4	already look anticompetitive to begin with.
5	DR. WILLIG: How could I disagree?
6	We agree on the logical possibility of
7	technological tying. We agree on the importance of
8	technological advances and competition that drive them.
9	I think we agree -- I do not really know much, and you
10	obviously know a lot -- that in biotech, there are
11	opportunities every bit as lurid as they were in old
12	mainframe computer spaces changing the metaphorical plug
13	on the mainframe. Here, sprinkling a new coating over a
14	pill and bonding it with some other pill, I mean,
15	apparently the pharmas can do this all the time, and --
16	PROFESSOR FELDMAN: Not all the time, but enough
17	that I would worry about it.
18	DR. WILLIG: But they can, anyway, they can.
19	PROFESSOR FELDMAN: Yes.
20	DR. WILLIG: And that certainly raises the issue
21	of whether that kind of "innovation" is genuine,
22	socially useful by an economist's measure, or whether it
23	is a ruse to extend monopoly power. So, I think we
24	really have a bonding here ourselves.
25	MR. SALINGER: Well, maybe we can call on some

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1	of the attorneys on the panel to see whether they have
2	heard enough agreement that they feel confident they can
3	go into court with good arguments about how to
4	distinguish procompetitive from anticompetitive ties.
5	MR. RUSSELL: I would like to jump in with a
6	question for Professor Feldman about this concept of
7	specificity when it is applied to the procompetitive
8	explanation, and I may have misunderstood what you were
9	saying, but if I were a lawyer on the other side, the
10	way I would characterize your position is the fact that
11	a particular kind of efficiency is seen so often in so
12	many products and is so powerful, which is the natural
13	inference I draw from the fact that it is seen so often
14	in so many products, for that reason, you are completely
15	disregarding it.
16	PROFESSOR FELDMAN: I understand your concern
17	about that, and maybe I can frame it again by looking at
18	the point at which this inquiry comes up. We are
19	already at a point where we have a monopolized tying
20	product. We already are at a point where we have
21	established that there is harm to competition. Now we
22	are looking at the reasons for that, and I think that
23	the concerns you have can be taken care of in the first
24	two.
25	What I am concerned about is when we get to this

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1	point, there will be boilerplate language in which
2	everyone will essentially be saying the same general
3	things that can always be said about ties and about the
4	right shoe and the left shoe and about why things in
5	combination are appealing to consumers. If we credit
6	that type of an argument, we will be unable ever to
7	target things that are anticompetitive, because those
8	defenses are always available.
9	MR. SALINGER: David, I find it hard to believe
10	that you do not want to chime in here, so...
11	MR. EVANS: Well, I am puzzled about a couple of
12	things, both with respect to some of the things Bobby
13	said and also some of the things Robin said, especially
14	in the last statement, so the first thing I have always
15	been confused about, and it comes up in Bobby's talk, is
16	this term "harm to competition," because maybe I just do
17	not know enough economics, but I do not really know what
18	that means.
19	I know what it means to talk about reducing
20	long-run consumer welfare and stuff like that, but I
21	guess my experience in these cases is when I start
22	hearing phrases like "harm to competition," it leads to
23	theological discussions of what competition is or is
24	not, and depending upon the market structure and so
25	forth, you know, competition means different things,

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1	including competition for the market and ultimately
2	having a monopoly and having a monopoly despite what you
3	said, Robin, that we actually do not want to have its
4	power eroded, at least so long as it is efficient.
5	The second thing I get confused about and do not
6	really understand is this sequence where we talk about
7	harm to competition and then say, "Oh, gee, then let's
8	take a look and see whether there are efficiency
9	benefits that offset that harm to competition." I mean,
10	it seems to me that ultimately the inquiry is whether
11	there is a harm to long-run consumer welfare, and I do
12	not really understand the unbundling of the efficiency
13	explanation for the practice and this term "harm to
14	competition."
15	I mean, if I think about markets, I would think
16	that the whole issue of why one engages in a
17	technological tie or any other kind of tying practice
18	has to be sort of an integrated aspect of the whole
19	discussion of whether there is "harm to competition,"
20	whatever that means.
21	And I guess just the final thing that I will say
22	both with respect to Robin's talk and Bobby's talk is
23	both of them do kind of lead to this unstructured --
24	well, maybe I am being unfair to Bobby -- I am being
25	unfair to Bobby.

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1	DR. WILLIG: Yes, indeed.
2	MR. EVANS: But it does seem to lead to a
3	relatively unstructured rule of reason inquiry, and I
4	really do think, as I think many of the speakers have
5	pointed out, that we need to start with a position on
6	where we are in terms of priors concerning where the
7	timing is bad and error cost and so forth, and we need
8	to start with that, and maybe you disagree that -- that
9	anticompetitive tying is uncommon, in which case you can
10	state that as a prior and go forward, but it seems to me
11	you need to start with a position before we can really
12	get into conversations on who ought to bear the purpose
13	and stuff like that.
14	So, I do not see how at the end of the day we
15	can impose the burden of proof on a defendant for
16	establishing efficiencies, as Don says, for a practice
17	that we know is presumptively efficient. It does not
18	make any sense to me.
19	MR. SALINGER: Michael, David in his talk talked
20	about how he was largely agreeing with you. Is there
21	complete agreement among the economists or is there more
22	of a wedge there than just --
23	DR. WILLIG: Not anymore.
24	DR. WALDMAN: Well, listening to David's
25	response, I basically agree with almost everything he

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1	said. I agree that if I am thinking -- I do not think
2	the right thing to think about is harm to competition.
3	I think the right thing to think about is social
4	welfare. There are lots of examples that one could
5	come -- sort of formal models that one can show where
6	thinking about tying as eliminating competition is
7	actually social welfare improving.
8	So, if you wind up focusing too much on the harm
9	to competition, you will wind up allowing or eliminating
10	tying when, in fact, you really would not want that,
11	because in some sense there is sort of a larger
12	competition ex ante or something else which says that
13	the competitive process, thought of more generally, that
14	particular submarket where you are not allowing
15	competition is actually a good thing rather than a bad
16	thing.
17	Also, you know, I am not sure David exactly
18	specified this, but, you know, so I think consistent
19	with what he is saying, you know, when I think about
20	kind of how do I judge these cases, I want to say let's
21	think about the different theories in some of these
22	situations you can automatically almost rule out as
23	saying, well, that looks okay, it is efficiency or it is
24	price discrimination, and at least as a first blush, and
25	I do not do court cases, but I would have thought that

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1	the -- or at least the way I conceptualized it is to
2	think about from a rule of reason standpoint, is there
3	an exclusionary argument that typically one would think
4	of from a theoretical perspective that will lower social
5	welfare? Does it fit the facts of the case well? And
6	then say, is there no efficiency argument that fits the
7	facts of the case well?
8	If those two things hold, then you are sort of
9	in the ballpark to think that maybe this might be a case
10	that you would want to intervene, but if those two
11	things do not hold, then that seems like a dangerous
12	type of case in which to intervene. Maybe there is some
13	general rule that Bobby is talking about that one could
14	apply sort of to oversee it, but at least my sense of
15	the literature is that these different types of cases
16	are sufficiently kind of nuanced and different that I am
17	a little skeptical, but I do not know the specifics as
18	well, so I am hesitating to say too much there.
19	But again, I would want to see more before I
20	thought that there was some really general rule that one
21	could apply rather than just kind of fitting the facts
22	of the case to a specific theory.
23	MR. SALINGER: Bobby, before you jump back in, I
24	want to give Mark an opportunity to comment on whatever
25	it is he has heard that he wants to comment on.

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1	MR. POPOFSKY: Well, I want to go back to what
2	David Evans was talking about and his observation about
3	the debates between Professor Willig and Professor
4	Feldman, which is this: Until we have a definition of
5	what the target is for harm to competition, we are not
6	going to be able to advance the ball a lot here. All
7	the action is going to be there. It is to put the
8	action -- the debate very precisely, will you for tying
9	arrangements under Section 2 require something like a
10	profit sacrifice, for the plaintiff to get to the next
11	step and put the burden on the defendant to show
12	justification? Is that going to be the test for
13	identifying a presumptively anticompetitive tie?
14	Will that be a universal rule applied across all
15	ties, or will we have the other extreme, where we have
16	some broad, vague, potentially innovation-deterring, as
17	Bobby suggested, rule of reason even for technological
18	ties where you are not making unbundled option
19	available, to be precise about what a technological tie
20	is, or will we be somewhere in the middle, as Michael
21	just suggested, perhaps, where we can identify some
22	discrete categories of ties, where we say for this
23	category of tie, the plausibility of anticompetitive
24	effects, i.e., long-run cost to consumers and harm to
25	social welfare, is real enough that we are going to give

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1	a little leeway in the joints and have the rule of
2	reason apply, which is in some sense less of a burden on
3	the plaintiff, or is it going to be a category of ties
4	where we think intervention potentially carries such
5	high costs, and for some that is product design, I think
6	there are some arguments there that would require more
7	of a showing from the plaintiff to go forward, maybe a
8	profit sacrifice, maybe something else, and, indeed,
9	taking that to an extreme, might there be categories of
10	tie-ins where you really have a safe harbor absent a
11	very strong showing for the plaintiff? That seems to me
12	the type of thinking that needs to occur.
13	MR. SALINGER: Okay, well, now that we have
14	found some daylight within us, as we organize these
15	hearings, we have tried to see whether or not there are
16	agreements on various propositions and disagreements on
17	various propositions, and we have a set of these for the
18	panelists to comment on, so I will turn the mike over to
19	June to lead us in that discussion.
20	MS. LEE: Before I start, let me give Bobby a
21	chance to respond to some of the comments.
22	DR. WILLIG: Oh, thank you.
23	Well, first of all, I was only invited to
24	comment on Robin, and I had no problem with Robin, but
25	these other folks, I just... .

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1	MS. LEE: Please.
2	DR. WILLIG: Well, first of all, I do not know
3	if we can go off the record here or expunge the record,
4	but if the Supreme Court ever heard the things that have
5	been said in the last ten minutes, there is no way we
6	are going to get off the per se standard. I mean, if
7	all these learned people cannot figure out rule of
8	reason or even what harm to competition is, then I think
9	we are going to be stuck with the per se test for
10	another generation. So, can we go into private session
11	so the Justices cannot hear us? I am just kidding, of
12	course. I think we actually know a lot more than the
13	last ten minutes has suggested.
14	Well, let me pose to Michael and David and I
15	guess Mark, too -- and, Robin, you are free of this
16	mistake, I would say --
17	PROFESSOR FELDMAN: It is the only one I am free
18	of.
19	DR. WILLIG: No, that is okay.
20	The hard case, I agree with all of us who have
21	said that price discrimination ought to be very, very
22	presumptively innocent for a wide variety of deep
23	economic reasons as well as just commonplace
24	observations that the most competitive of industries are
25	full of instances of price discrimination, at least one

110

1	of us has written that it is parador superior (ph) to
2	have price discrimination and so forth. Price
3	discrimination is basically a good thing. There are
4	counter-examples, but we do not know how to spot them.
5	So, we certainly ought to be allowing business the
6	freedom to do price discrimination. And we all
7	understand that a very important function of lots of
8	tying practices is to permit firms better, more
9	effectively, to do price discrimination.
10	And so I agree with those who have said if we
11	can spot that there is a tie which effectuates price
12	discrimination, then we ought not to be overly
13	suspicious of it, and there should be a huge burden of
14	proof on the part of the enforcers or the plaintiffs to
15	overturn the presumption that tying to effectuate price
16	discrimination is basically probably a good thing. It
17	is only presumptively a fine business practice. I agree
18	with all of that.
19	On the other hand, it is very easy to imagine a
20	circumstance where the tying does effectuate price
21	discrimination in a very real way that is important to
22	the business, and at the very same time, the important
23	rivals are shut out by that same tie. Think about razor
24	blades. This is a cartoon version, but Gillette comes
25	out with a new overpoweringly good system, gives away

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1	the razor dirt cheap, charges a fortune for the blades,
2	and very neatly ties the two together with patents and
3	with interoperating devices that make sure that rival
4	blades cannot use the same razor. There have been cases
5	like this.
6	We all say, oh, that is fine, that is price
7	discrimination, that is promotional pricing, that is a
8	good thing, if you happen to like the razor, which I did
9	for two blades but not for four, but that is another
10	subject entirely. Suppose that all the branded rivals
11	of Gillette go out of business -- this has not happened
12	to my knowledge, but just imagine in the cartoon. We
13	have got two things going on. We have got exclusion and
14	we have got product innovation inspired by the
15	opportunity to do effective price discrimination. They
16	are both running in the same case.
17	I suggest there is a lot of this in the economy,
18	certainly in the antitrust courts. I think it is really
19	very overly easy to say, oh, tying for price
20	discrimination is fine, tying for exclusion is bad.
21	They both tend to run together, and certainly plaintiffs
22	will feel that they do if they are an aggrieved
23	competitor who has lost out from this innovation.
24	I think you have got to address -- and Mark, you
25	too, don't look so quiet over there -- what do we do

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1	with those cases? Do we say the jury or the judge ought
2	to weigh the pluses and the minus and be a meter of
3	consumer welfare? Is the innovation permitted and
4	motivated by the price discrimination? Together with
5	the benefits of price discrimination, together --
6	sufficiently a plus that the harm to consumers in the
7	longer run from the loss of these important competitors
8	does not outweigh it? Do we have a consumer welfare
9	meter? Do we know how to do that? Do we trust
10	ourselves, no less judges and juries, to do that? That
11	is one possibility, quote, "the consumer welfare
12	standard," Mark.
13	The other possibility is that we say, look,
14	there is a legitimate rationale, namely, the price
15	discrimination and the innovation. Yeah, you cannot
16	make an omelet without breaking eggs, competition has
17	losers, successful products do raise some legitimate
18	monopoly power for a while, and we have got to let the
19	competitive process work. Do we say that?
20	That is the big issue of the day. That is what
21	the wars are about in the journals, and I do not think
22	we can be quiet about that in this forum. So, I put
23	that in your laps, gentlemen.
24	MR. POPOFSKY: Let me make one comment. I am
25	glad to see, Bobby, you actually read my article.

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1	DR. WILLIG: No, just the first paragraph and
2	the like. A hundred pages of footnotes, Mark, I cannot
3	do it.
4	MR. POPOFSKY: And none of them cited you, I
5	think we have pointed out.
6	DR. WILLIG: That was the point.
7	MR. POPOFSKY: Nothing from 25 years ago. I
8	think to try to answer your question, Bobby -- since you
9	put the pitch right over the plate, let me see if I can
10	hit it over second base.
11	As the hypothetical in my article implied, which
12	is close to yours, there is a very sympathetic case
13	there that the Microsoft Court of Appeals vague rule of
14	reason standard is the last thing you want courts and
15	juries to be doing in a case like that in some vague
16	way, and the way Professor Salop somewhat suggests in
17	his articles, reckoning up the social costs today
18	against the social benefits tomorrow, you take that
19	logic to the extreme, you would have courts regulating
20	significant aspects of the economy. That cannot be what
21	the rule of reason is all about.
22	So, in devising the right legal rule -- and I am
23	not sure what it is, to be honest, to answer your
24	precise hypothetical -- you want to perhaps take into
25	account what would be the detrimental impact of

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1	innovation on intervention, and that might mean you
2	structure the rule of reason differently, it might mean
3	you go to the profit sacrifice test, but you certainly
4	do not want what you painted as the boogeyman of juries
5	just saying, what is the net contribution to social
6	welfare of this conduct? That cannot be what we are
7	doing.
8	DR. WILLIG: We can quote you on that?
9	MR. POPOFSKY: Oh, yeah. It is on the record
10	now.
11	DR. WILLIG: Okay.
12	PROFESSOR FELDMAN: May I point out what is one
13	other point of agreement among the panelists. In
14	addition to the notion that per se is not the way to go,
15	an open-ended rule of reason also is not where we should
16	go. There must be some type of structure in the rule of
17	reason for the benefit of all the parties involved. Are
18	we in general agreement with that?
19	MR. SALINGER: Yes. Okay, well, we should let
20	June get into her areas to nail down points of agreement
21	or disagreement.
22	MS. LEE: Indeed, just to clarify some of these
23	things, let's start with the first one, I do not think
24	there will be disagreement with this one, which is
25	certain tying arrangements pose an unacceptable risk of

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1	stifling competition and therefore are unreasonable per
2	se. I do not think anyone on the panel agrees with
3	this, but please correct me if I am wrong.
4	Okay, so let me flip this question a little bit.
5	Does anyone on the panel think that tying should be per
6	se legal?
7	(No response.)
8	Okay. Then let me just -- backing down from
9	that a little bit, are there any tying arrangements that
10	are always or nearly always procompetitive and thus
11	appropriate candidates for a safe harbor?
12	Bobby and some others discussed a little bit
13	that tying for price discrimination reasons should not
14	be illegal.
15	MR. EVANS: But then he backed away from that.
16	MS. LEE: Yes, so --
17	DR. WILLIG: Yeah, because I think typically it
18	is hard to separate.
19	MS. LEE: Right.
20	DR. WILLIG: -- the enabling of price
21	discrimination from the exclusion. I penciled on my
22	notepad that tying arrangements are nearly always
23	procompetitive where there are ample choices available
24	to consumers among alternatives, both at the level of
25	the tying good and at the level of the entire system of

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1	tying tied to the tied good, i.e., if there are other
2	operating systems and browsers or other MP3 players and
3	MP3 formats, if there are system alternatives available
4	in ample supply, then within that framework, I think we
5	should have per se legality.
6	MS. LEE: Okay. Does anyone else have
7	categories for which they would say that tying should be
8	per se legal? Don?
9	MR. RUSSELL: I just want to ask a follow-up
10	question for Bobby. When you say there are
11	alternatives, are you saying there is no market power or
12	is that different?
13	DR. WILLIG: No, ample, ample alternatives.
14	MR. RUSSELL: But is it basically a market power
15	test that you are advocating there?
16	DR. WILLIG: Well, we gave up perfect
17	competition a long time ago, but, you know, workably
18	competitive set of alternatives, if you will.
19	MR. POPOFSKY: No power of antitrust concern,
20	Bobby?
21	DR. WILLIG: No?
22	MR. POPOFSKY: Power of antitrust concern?
23	DR. WILLIG: That is in the eye of the beholder,
24	Mark, yeah.
25	MS. LEE: David, did you have a comment?

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1	MR. EVANS: Yeah, well, I think what we have
2	just -- I think what Bobby just said is that where there
3	is not significant market power, that ought to be per se
4	legal. I think that the debate in question, I think
5	this is one of the questions you ask later, is what
6	exactly does that mean?
7	I am not exactly sure what the answer to that is
8	from the state of the theory and empirical evidence at
9	this point, but keep in mind that the starting point
10	with Jefferson Parish I believe is some market power. I
11	think the consensus here is it ought to be significant
12	market power. Whether that corresponds to a share of 50
13	percent or whether it has to be a hell of a lot more I
14	think is an interesting question for the initial screen.
15	Whether it has to be something that is closer to
16	monopoly power given where we are in the theoretical
17	literature, I am not sure I know the answer to that.
18	MS. LEE: Okay. Let's move on to actual --
19	actually let's skip the next proposition and move on to
20	the third one. Tie-ins may entail economic benefits as
21	well as economic harms. So, I think everyone on the
22	panel agrees with this. Let me make sure that everyone
23	has -- can opine on their priors, as David Evans
24	suggested, which is something that we should do. I
25	mean, lots of commentators have observed that most ties

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1	are procompetitive. Does everyone agree with that?
2	PROFESSOR FELDMAN: I would not agree that most
3	ties are procompetitive. I would not fall into that,
4	certainly not -- not in the industries or areas that I
5	have talked about. I certainly believe that there are
6	many procompetitive ties, but I would never say most
7	ties are procompetitive.
8	MR. POPOFSKY: Let me just make a comment. We
9	really have to be careful what we are talking about here
10	in distinguishing bundling from tying. Most bundles may
11	be procompetitive in the sense of offering two things
12	to -- two items together.
13	What a tie-in is is not offering the consumer
14	the choice of taking the tying good without the tied
15	good. It is not offering the car without the radio.
16	And, you know, and maybe we can think of many, many
17	examples throughout the economy where that is
18	commonplace, it is plainly efficient, but what I think
19	Robin is suggesting is those that come under the
20	antitrust microscope, it is not clear what you are going
21	to count them up and say you have seen more good ones
22	than bad ones.
23	Certainly going back to my favorite poster
24	child, the Microsoft case was certainly one the
25	Department thought and the court agreed, at least under

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1	Section 2, was a bad tying arrangement, but there are
2	other software ties that are similar which are good, and
3	you really have to be careful what you are talking
4	about. The problem in Microsoft was in not offering the
5	unbundled option, so phrased that way, we might reach a
6	different conclusion.
7	MS. LEE: Let me give Robin a chance to clarify
8	what she said. Would you sign onto what Mark said, that
9	what you are talking about is ties that come under
10	antitrust scrutiny, most of those are not
11	procompetitive, or are you talking more generally?
12	PROFESSOR FELDMAN: I do not think I would say
13	that those ties that come under antitrust scrutiny are
14	mostly anti-competitive and those ties that don't come
15	under antitrust scrutiny are procompetitive. I would
16	agree that if we were talking about a form of tie
17	leverage that is not somehow forced, where you can, as
18	Mark was just saying, get to the product other than
19	through the tie, that is not a problem. I would not,
20	however, make the sweeping statement that tying and
21	leveraging are almost always acceptable without a lot
22	more discussion of what we meant by that.
23	MS. LEE: Okay, Bobby?
24	DR. WILLIG: Maybe we can all agree on the
25	following language that I penned: Most arrangements,

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1	both technological and contractual, in our economy that
2	do impel purchasers to buy two products together are
3	procompetitive. So, it is not just antitrust, and it
4	is -- it does not comment on whether the tie is
5	artificial or not, which some of this discussion has
6	suggested, just empirically, looking out at all
7	arrangements, both technological, things just put
8	together, and contractual, that impel, not force, but do
9	result in purchasers actually buying two products
10	together, that in that domain we are apt to see
11	procompetitive effects rather than anticompetitive ones.
12	DR. WALDMAN: I would certainly agree with that.
13	MR. RUSSELL: Yes.
14	MR. EVANS: Yes.
15	MS. LEE: Robin?
16	PROFESSOR FELDMAN: I'm afraid I will stay as
17	the stick in the mud here. I can follow all of that
18	language with all of the caveats we put in place as we
19	discuss it. I can imagine that language taken out of
20	context in which suddenly the conclusion becomes that
21	tying is always procompetitive. Then, if tying is a
22	good thing, what are the antitrust agencies doing
23	looking at tying at all? That is the pendulum swing
24	that I am very worried about.
25	So, when the economists are all here placing

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1	things in context and with caveats, everything is fine.
2	The statement taken as general is one I have great
3	concerns about, however. If courts hear "Tying is
4	generally procompetitive," there will never be another
5	successful typing case.
6	DR. WILLIG: But that will be misuse of that
7	statement.
8	PROFESSOR FELDMAN: ... and that never happens.
9	MS. LEE: What significance, if any, should be
10	given to evidence that a challenged tie is similar to a
11	tie used in the competitive industry?
12	David Evans in his talk suggested that that
13	should be evidence of efficiencies. Would the other
14	panelists agree with that?
15	PROFESSOR FELDMAN: This is going to come back
16	to me. Yes, I do see that as evidence of efficiencies,
17	subject to timing questions. If you have a market in
18	which you see a key patent about to expire, and the
19	patent holder suddenly finds efficiencies pointing to
20	everybody else around, I find that action and that
21	timing suspect.
22	MS. LEE: Anyone else?
23	MR. RUSSELL: And I think there is a great deal
24	of ambiguity when you talk about similar arrangements,
25	because in my experience, the tying issues that come up

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1	often have very unique characteristics that make them
2	very different from other arrangements, even at the same
3	time that you could look at some aspects of them and say
4	they are very similar. So, I think that is a very fuzzy
5	concept for me at least.
6	MS. LEE: Mike Waldman, do you have anything?
7	DR. WALDMAN: Well, I think it is evidence, but
8	I think it is not definitive evidence, so it is one
9	thing that you could weigh in terms of trying to make a
10	decision as to whether it is procompetitive or
11	anticompetitive.
12	DR. WILLIG: I think it is useful evidence, but
13	it needs to be probed for all the elements that might or
14	might not make the two circumstances the same or
15	different.
16	MS. LEE: Okay, let's move on to the next one.
17	The time has come to abandon the per se label
18	and refocus the inquiry on the adverse economic effects,
19	and the potential economic benefits, that the tie may
20	have.
21	And everyone I believe agrees with this, but
22	please let me know if you do not.
23	(No response.)
24	MS. LEE: Okay, I am going to take that as
25	agreement.

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1	If we move to a rule of reason analysis on
2	tying, does economics give us the tools needed to
3	determine whether a tie is reasonable? Let me start
4	with you, Mike Waldman?
5	DR. WALDMAN: As I was saying before, I mean, I
6	do not have as much experience with cases, but the cases
7	that I have looked at in detail, there is typically a
8	theory of exclusion, and then the question is, how well
9	does the theory -- does the facts of the case match the
10	theory, and at least my experience in sort of looking at
11	these cases is they do not push it hard enough, but I
12	think that is the right approach, which is the theories
13	are sort of all over the place.
14	There is not kind of one general theory that one
15	can apply, and one has to say, okay, here is a theory
16	that is well founded theory from an economic theory
17	standpoint, let's really probe the facts of the case and
18	see whether it matches or do the facts of the case say,
19	no, there is some alternative efficiency argument that
20	is really driving this. That is how I would think about
21	proceeding.
22	MS. LEE: David?
23	MR. EVANS: Yeah, I agree with that. I think we
24	understate how much progress the economic literature has
25	actually made in understanding tying practices, and I

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1	think the literature, including Michael's paper with
2	Dennis, for example, you know, it is an example of a
3	good theoretical framework that you can employ in cases.
4	I have the same problem with the actual cases that
5	Michael points to, which is oftentimes you basically get
6	lip service regarding the economic literature.
7	So, rather than the literature and the economics
8	being taken seriously and people actually testing with
9	evidence the assumptions of the theory and the
10	implications of the theory, you know, too often it is,
11	you know, so and so economists wrote a paper that says
12	tying can be anticompetitive in these kind of
13	circumstances, therefore, this is anticompetitive.
14	And what I see lots of times in the cases is
15	really not taking the theory seriously, and I think if
16	we do go to a rule of reason analysis, we do need to
17	take the economics of this a lot more -- a lot more
18	seriously with evidence and so forth.
19	MS. LEE: Anyone else? Go ahead, Don.
20	MR. RUSSELL: I almost always presume that more
21	information is better than less, and I think that
22	economic analysis, economic theory, economic evidence is
23	very, very helpful. It is not perfect. It will not
24	give you the right answer all of the time, because of
25	inherent limitations, but it is clearly very important

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1	and something that we need to use and need to use
2	better.
3	I would also, though, like to make a pitch,
4	which some may disagree with, that it is sometimes
5	equally useful to look at intent, not in a sense of,
6	well, they wanted to take customers away from a
7	competitor, which I think is completely meaningless in
8	antitrust terms, but more in the situation, as an
9	example that Robin has given, if you look at the timing
10	when a tie was first introduced, if you look at the
11	documents within the company explaining why they were
12	adopting the tie at that point in time, I think that
13	will often give you a very useful indicator whether they
14	are doing this for beneficial reasons or whether they
15	are doing it for anticompetitive reasons.
16	MS. LEE: What about the situation in which we
17	do not have a preexisting theory that nicely fits the
18	facts? Do we have the economic tools necessary to
19	determine whether or not a given situation is pro or
20	anticompetitive?
21	DR. WILLIG: Oh, we could make up new theories
22	at the drop of a hat. It is putting them to the facts
23	that is trickier.
24	PROFESSOR FELDMAN: I do not know whether this
25	is where the question is going, but there are some

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1	suggestions in the legal literature that we have to take
2	hands off approach because economics is not clear enough
3	or does not give us tools that we can apply in the
4	judicial setting. In other words, we should be doing
5	nothing here because economics cannot help us, so hands
6	off.
7	I think economics actually has come a tremendous
8	distance in the last decade in terms of analyzing tying,
9	understanding what its procompetitive and
10	anticompetitive. If economics does not have an answer
11	for us, however, that does not mean that the law should
12	simply sit on its hands and say we cannot do anything.
13	This is not economics. These are legal decisions, and
14	we have to act within the legal realm. Sometimes we may
15	have to actually translate economics into intuitive
16	arguments that others will understand. We cannot always
17	just ask if economics already has a theory that fits
18	what is in front of us.
19	MS. LEE: David?
20	MR. EVANS: So, first of all, it seems to me the
21	fact that we do not have good theoretical reasons to
22	generally think that anticompetitive tying is going to
23	exist, that has to be a factor that the courts take into
24	account in thinking about legal rules. So, I think one
25	of my problems with the last series of questions is it

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1	does sort of presuppose that we are in this full-blown
2	rule of reason analysis or asking the question, well,
3	what can economics do? And it seems to me we need to
4	take into account the prior information that we sort of
5	know from the theory, that boy, tying, as Michael has
6	pointed out, can be used anti competitively only in
7	limited circumstances, and the ability of the economists
8	to identify those limited circumstances is not all that
9	great.
10	Having said that, no, I do not think that for a
11	rule of reason case you always have to have a
12	preexisting economic theory. In fact, I think a lot of
13	economic theories actually come as a result of theorists
14	trying to fit the theory to whatever case they happen to
15	be working on or have heard about. So, I think so long
16	as the economists can come up with a logical story based
17	on economic evidence that there is -- I keep saying
18	long-run consumer harm, if there is a consensus that it
19	ought to be long-run social welfare harm, you know, that
20	is peachy by me. But yeah, I mean, I think the
21	economists can do that in a case. Whether they should
22	do that, I am less sure about.
23	MR. POPOFSKY: One further comment there. You
24	know, one of the most puzzling comments I have read in
25	an antitrust case in the last 15 years is Justice Scalia

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1	dissenting in Kodak, a tying case in part, back in 1993,
2	where he said practices normal or ubiquitous in
3	competitive markets can take on an exclusionary hue when
4	practiced by a monopolist, and that comment has always
5	puzzled me, but what you said, David Evans, I think puts
6	it in a new light, which is what you need as a Section 2
7	plaintiff is you need a story of exclusion that makes
8	some economic sense, whether or not it is theoretical
9	grounded.
10	MR. EVANS: Um-hum.
11	MS. LEE: If the per se rule is abandoned, if
12	the rule of reason standard yields a sufficiently clear
13	and objective rule to determine when a tie is unlawful?
14	Let the record note there was a lot of laughter.
15	Don, why don't we start with you.
16	MR. RUSSELL: Well, I think the first issue that
17	any counselor would look at under a per se analysis, I
18	think, is do you have market power, are there separate
19	products, are you forcing somebody to take both of the
20	products? Those, of course, are the kinds of questions
21	that are currently asked in deciding whether a tie is
22	illegal under the so-called per se rule that we have in
23	place today.
24	I think those questions will give you the right
25	answer most of the time in the real world. There will

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1	undoubtedly be clients that would come to you who
2	probably do have market power, who probably are trying
3	to force customers to take two distinct products, and I
4	think that the answer to your question -- that Bobby
5	will forgive me for stating this out loud -- we do not
6	have those answers today because we have been living
7	under this bizarre per se rule of law for so many years.
8	So, in terms of the legal answer to that
9	question, I think at this point it is very hard to say
10	other than the very general concept of the rule of
11	reason that is out there and the kinds of factors that
12	you would look at in any rule of reason case, but over
13	time, quite likely, I think refinements of that will be
14	developed and rules of thumb and maybe a more structured
15	analysis will be adopted by the courts, but it is going
16	to take a while to get there.
17	DR. WILLIG: I would like to advance as a
18	proposition that we really are very good as a community,
19	even though after the per se rule in some sense we are
20	in new waters, but I think old waters will be fully
21	adequate for addressing the first part of the inquiry,
22	namely, whether or not the tie, the alleged tie,
23	actually does pose a threat or a harm to competition,
24	where that phrase is understood in the usual way, as it
25	has evolved in the merger domain and in other elements

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1	of Section 2 analysis.
2	When it goes on to this next phase, namely,
3	whether the good and the bad impacts of the tying
4	practice should balance one way or the other, I think
5	those are fresher waters, and as our colloquy suggests,
6	we need to talk that through as a community more over
7	the next few years.
8	I would like to ask a subquestion on that
9	proposition to the panel. Do we all agree that when it
10	comes to assessing whether a tie does harm competition,
11	do you all agree with me that the so-called diminution
12	in consumer choice that is the result of the tie is not
13	part of what we mean or should mean by "harm to
14	competition"? I am talking about noncoincident markets.
15	We are talking about in the Microsoft case,
16	monopolization back at the level of the tying good. We
17	are not talking about the fact that the consumer is
18	being forced by the tie to choose the tied good that the
19	owner of the tying good is imposing on the market. That
20	is not part of the harm to competition. That is my
21	position. I am ready to defend it, but I just wonder if
22	we all agree on that.
23	MR. EVANS: Your proposition is that the denial
24	of consumer choice should not be what, under your
25	terminology, is harm to competition?

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1	DR. WILLIG: Right, it is not an element of it.
2	It may cause it indirectly, but it is not -- yes.
3	MR. EVANS: Putting aside my previous
4	qualification that I do not think you have adequately
5	addressed on harm to competition, yes, I agree with
6	that.
7	MS. LEE: Anyone else?
8	DR. WILLIG: Well, don't be silent, members of
9	the panel. Let's all agree on this.
10	MS. LEE: Mike, do you have anything to say?
11	DR. WALDMAN: Despite my setting antitrust
12	policy back ten years, I still think that harm to
13	competition is not the right way to think about it, so I
14	am a little fuzzy on an answer to which I do not think
15	is a relevant question.
16	MR. EVANS: And in terms of -- since Michael
17	just teed that up, I did not take that as my mandate in
18	answering your question, but since you have teed up, you
19	know, the use of the merger guidelines framework for
20	thinking about harm to competition, I do not actually
21	think for Section 2 that is how the courts do or should
22	think about things. I mean, we allow monopolies, we
23	allow them to do things that raise prices, we want them
24	to do all sorts of things, and I am not sure that I
25	would want to import a merger guidelines framework into

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1	Section 2, but --
2	DR. WILLIG: Well, we allow harm to competition.
3	The question is, do we know it when we see it?
4	MR. EVANS: Yeah, that is the question.
5	DR. WILLIG: That is the question.
6	MS. LEE: That is indeed the question.
7	MR. EVANS: Yep.
8	MS. LEE: Can we skip to page 9, Brandon?
9	Antitrust law should treat ties where the tied
10	product is used in variable proportions and ties where
11	the tied product is used in fixed proportions with the
12	tying product differently.
13	Should the law make such a distinction? So,
14	essentially when we are talking about tied products used
15	in variable proportions, talking about instances such as
16	metering, such as the issue in Independent Ink, examples
17	of fixed proportions tying include Jefferson Parish and
18	Microsoft.
19	Mark, do you have any thoughts on this?
20	MR. POPOFSKY: You know, I think we are still at
21	a point where, you know, one could argue there is no
22	reason for differentiating under either the rule of
23	reason or the applicable Section 2 test between them,
24	but plaintiff is going to need a story of that magic
25	thing called harm to competition. It does not seem to

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1	me that whether the story makes sense is something that
2	is cognizable, something that really sheds light on what
3	is going to happen with the practice depends on what
4	type of tie it is.
5	As Bobby suggested, at the outset, you can
6	imagine stories of variable proportion ties, where there
7	is some anticompetitive aspect to it, and certainly you
8	can imagine fixed proportion ties which are
9	competitively benign.
10	MS. LEE: Robin, I know you have to go shortly.
11	Do you have any comments?
12	PROFESSOR FELDMAN: I do not have anything to
13	add to what Mark said.
14	MS. LEE: Michael?
15	DR. WALDMAN: I mean, I think there is a
16	distinction in the sense that the set of theories that
17	apply are different, and so one has to be careful in
18	that sense. So, from a -- the variable proportions
19	case, there is the efficiency issues concerning
20	monopoly, something to competition, trying to use tying
21	to avoid these inefficiencies, on the other hand, there
22	is price discrimination arguments, and that is only
23	going to apply in the variable proportions case, not the
24	fixed proportions case.
25	So, as long as there is a clear understanding

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1	that these two different types lead into different
2	theories, and so you want to be sort of focusing on the
3	relevant theory, then I think that is really the issue
4	in terms of thinking about those two different types.
5	DR. WILLIG: Yeah, I would much rather, if we
6	are going to try to endorse the proposition, substitute
7	for variable proportions the idea of price
8	discrimination as a cause and motivation of the tie.
9	Think about the radio, the prototypical radio in the
10	automobile case. There is only one radio. You would be
11	crazy to have two radios.
12	But on the other hand, you could have a radio
13	and CD player and MP3 player and super base speakers, or
14	just the very simple stripped-down radio, with or
15	without satellite. That is still economically variable
16	proportions, but would the law recognize it if that were
17	the phrase that we were to go with? So, I think the
18	idea of price discrimination as a concomitant of the tie
19	would be the right way to structure this sort of
20	proposition.
21	MR. SALINGER: If I can push you on that one, I
22	think there is general agreement that the metering type
23	of tying is often about price discrimination, but if you
24	take the car and the radio example, that while the price
25	discrimination might explain bundling, typically the

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1	opportunities for price discrimination are greatest with
2	mixed bundling, which would not be tying from a legal
3	standpoint, and so you would -- if you observe tying,
4	then at least if you are not careful about it, you might
5	use the Ordover Willig type of test to say, look,
6	therefore, go on your profit opportunity, it must be
7	anticompetitive.
8	DR. WILLIG: You are saying an important part of
9	the whole stratagem would be offering the car without
10	anything, a hole in the dashboard, at all, that would
11	make it even more effective to price discriminate.
12	MR. SALINGER: That is right.
13	DR. WILLIG: Well, that is a possibility, but I
14	think it is arguable whether that is actually true or
15	not.
16	MR. SALINGER: Well, Mike, do you disagree that
17	in general the price discrimination argument pushes
18	towards mixed bundling as distinct from tying?
19	DR. WALDMAN: I think that is right, but I am
20	not -- I would have to go back and think about it some
21	more. That is my best memory, but that is not something
22	I reviewed right beforehand.
23	MS. LEE: Let's go to the next proposition.
24	Antitrust law should treat contractual ties and
25	technological ties differently.

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1	PROFESSOR FELDMAN: Well, since I am about to
2	head out the door, and I have already commented on this,
3	let me just add one thought. I think there is a real
4	problem in doing that given the state of technology in
5	many of our industries. You drive behavior towards
6	technological ties, you just encourage people to change
7	their products in order to avoid enforcement. So, you
8	distort choices, and you are not effectively catching
9	the behavior that you want to catch. So, I think it is
10	a problem for that reason. There are product design
11	issues you have to deal with when you are talking about
12	technological ties, but I would be very wary of
13	something that says we focus only on contractual ties
14	and not technological ties.
15	And as my last comment, I would like to point to
16	the early 1900s. Treating contractual ties and
17	technological ties differently is so close to the theory
18	that the courts started out with, that is, antitrust
19	enforcement only applies to contractually based
20	behaviors and not to behaviors that are intellectual
21	property based. That was such a disaster because
22	suddenly everybody organized their affairs so that the
23	anticompetitive behavior revolved around patents.
24	Eventually the courts and Congress had to respond to
25	that. I think we would be tempting the same kind of

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1	behavioral changes now, a hundred years later.
2	Thank you for having me. I am so sorry that I
3	have to leave, but I do need to get back to California,
4	and I appreciate being included in this panel.
5	MS. LEE: Thank you for coming.
6	David, I under --
7	MR. EVANS: Yeah, so three quick comments. If
8	you adopted the kind of structured rule of reason
9	approach that I suggested with a high hurdle for
10	plaintiffs, then no, I would not make technological ties
11	different from contractual ties. I would have the same
12	high standard for both of them. So, that is point
13	number one.
14	Point number two, if you told me that the --
15	that it was going to be an unstructured rule of reason
16	analysis but I had the possibility of making a
17	distinction between technological ties and contractual
18	ties, then yes, I think my prior would be that
19	technological ties are even more likely to be
20	anticompetitive and more likely to lead to errors than
21	contractual ties, so then I would make a distinction.
22	But third, and this would be my caveat to that,
23	I have not looked at these cases for a long -- for a
24	while, but my impression of the technological tying
25	cases is that you basically have courts that really do

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1	not like the Jefferson Parish test and have tried to
2	figure out ways out of it, and I swear that I have
3	looked at some of these cases, and I cannot for the life
4	of me figure out why it was a technological tie and not
5	a contractual tie.
6	MR. POPOFSKY: Let me make a couple of comments
7	before Bobby hits them back over the plate, which are
8	these:
9	You certainly, as Professor Feldman said, worry
10	about inefficient substitution and other practices, if
11	you condemn one thing under a higher standard than
12	another, I mentioned that in my talk.
13	On the other hand, to answer David's point, I
14	have looked at the technological tying cases and what is
15	really striking to me about them or you know aside from
16	Microsoft saying we should have the rule of reason and
17	not Jefferson Parish, is that those that were trying to
18	deal with the issues universally condemned the
19	technological tying only when there really was nothing
20	on the other side to show any good in it.
21	When you go back to the peripheral cases with
22	the mainframes Bobby mentioned, the CalComs case, all
23	the way through Microsoft, those courts have said, this
24	is anticompetitive, have really concluded it is
25	anticompetitive because we see nothing good there. We

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1	see only bad. And the cases where it has basically been
2	mixed, the defendant has won. And whether or not the
3	legal rule is going to be a profit sacrifice, a
4	structured rule of reason, I think that is really
5	telling as a descriptive matter of when those ties get
6	condemned.
7	MR. RUSSELL: My view is that what Mark just
8	described is almost inevitable, because I think judges
9	feel quite comfortable in saying we will not let you
10	enforce this contract. They feel extraordinarily
11	uncomfortable in saying you should have designed a
12	product that would -- they feel perfectly qualified to
13	do one and completely unqualified to do the other, and I
14	think the difference that is perceived by most courts
15	and judges is not so great in reality as what they are
16	perceiving, but I think inevitably they will perceive
17	that, and they will treat them differently, whether they
18	articulate a formal rule for doing so or not.
19	MS. LEE: Bobby?
20	DR. WILLIG: Thank you.
21	I think at bottom the intellectual framework for
22	judging both can be the same, but I think the facts will
23	inevitably come in somewhat differently, because in
24	part, along with a technological tie comes a product
25	design decision which is far more apt to have an

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1	efficiency rationale or excuse attached to it as opposed
2	to lawyers saying, oh, I just had to write the contract
3	that way, and inevitably there is more efficiencies that
4	the court has to deal with, and I think that is part of
5	what Mark was just saying.
6	Also, from the point of view of social policy, I
7	think there is more at stake, because I do think
8	innovation is more delicate or more vulnerable to
9	suppressing it than we are to a suppression of the
10	writing of complex tying contracts, and so it is right
11	to give more respect to the implementation of the tie
12	through product design.
13	But I do want to say that the right intellectual
14	framework will give us the ability to avoid the abuse of
15	the respect given to innovation, the false product
16	design. It may be a little bit new, but still the main
17	point is to exclude. In the situation like that, the
18	test that I have suggested, and I think we are all
19	pretty much on the same page with trying to uncover that
20	kind of innovation, that we should proceed right to a
21	real systematic look at the exclusion that takes place,
22	even if it is driven technologically.
23	MS. LEE: Did you have anything?
24	MR. SALINGER: No.
25	MS. LEE: Okay. Can we go back to slide seven?

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1	Exclusive dealing is a rule of reason offense,
2	requiring a plaintiff to show that the defendant has
3	significant market power, the exclusivity arrangement
4	serves to deny market access to one or more significant
5	rivals, and that market output to consumers is lower (or
6	prices higher) as a result. Perhaps the Supreme Court
7	will see fit to put tying law on the same course.
8	So, do the panelists agree with this statement
9	as it applies to tying? I think this is very close to
10	what David Evans suggested in a structured rule of
11	reason.
12	David, do you want to start?
13	MR. EVANS: Well, I do not know if that is a
14	structured rule of reason, but --
15	MS. LEE: No?
16	MR. EVANS: -- but certainly it is a better rule
17	of reason, I guess. So, I do not think I have anything
18	more to say on that other than that there is a very
19	interesting 1956 paper by Justice Stevens before he was
20	Justice Stevens on precisely that topic that is
21	interesting to read.
22	MS. LEE: Bobby, what do you think?
23	DR. WILLIG: I am a little worried about the
24	middle of it, the one that --
25	MS. LEE: Okay.

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1	DR. WILLIG: -- the part that says the
2	exclusivity arrangement serves to deny market access to
3	one or more significant rivals. As long as the second
4	part of that sentence is really treated very seriously
5	and endemically, then I am feeling somewhat comfortable
6	about it, but just denying market access itself does not
7	strike me as anticompetitive or as creating harm to
8	competition, but if it does, then -- excuse the phrase,
9	gentlemen -- but there is harm to competition, if as a
10	result of the denial of access competition is harmed,
11	the sign of that is output is lower and/or price is
12	higher, and so we are definitely in the framework of
13	having found that there is a problem.
14	We are still, then, looking at the next step,
15	which is to decide whether the process is essentially a
16	competitive one or is it an anticompetitive one. So, we
17	are not done. But I guess that is what Hovenkamp has in
18	mind here.
19	MS. LEE: Don, do you have any reaction to the
20	statement?
21	MR. RUSSELL: I agree with the statement.
22	MS. LEE: Okay. Anyone else?
23	(No response.)
24	MS. LEE: Okay.
25	MR. SALINGER: I mean, just to follow up a

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1	little bit, I mean, what the statement seems to be
2	saying is that tying should be treated comparably to
3	exclusive dealing. One might argue that exclusive
4	dealing is a more problematic practice from an antitrust
5	standpoint. So, is there agreement here that tying is
6	at least as problematic a practice as exclusive dealing?
7	DR. WILLIG: No.
8	MR. EVANS: No.
9	DR. WALDMAN: I do not necessarily see it that
10	way. It is a question of is the evidence there, is the
11	price going to be higher, is the output going to be
12	lower? So, it could be the case that it is less
13	problematic because it is less likely to cause the price
14	to go up and supply to go down, but that the test is
15	still the same. So, I think you want to be a little
16	careful in terms of kind of that sort of analogy, the
17	way you are flushing out the analogy.
18	MR. POPOFSKY: One further comment on that,
19	Michael. In all these vertical restraint cases, these
20	labels, exclusive dealing, tying, bundled discounts,
21	they are all imperfect ways of describing what Barry
22	Nalebuff has described as a unitary phenomena where you
23	are just changing it slightly. So, I think we want to
24	be a little careful in saying one is inherently more
25	problematic than the other, one is more benign than the

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1	other. As was just said, you have to look at what is
2	going on in a particular segment.
3	MS. LEE: David?
4	MR. EVANS: Let me push back on that just a
5	little bit. I think this is a view that Bill Kovacic
6	and other people have as well, that we ought to get rid
7	of these categories and recognize that there is
8	substitution -- I think you are right about that,
9	Mark -- that there is potential substitution between
10	these practices, and if we have different legal
11	standards, we will observe companies substituting
12	between them, and I think you are quite right that that
13	is a concern.
14	I think as a practical matter, certainly for
15	economists and I suspect the courts, I think there are
16	sufficient differences between these different practices
17	that it is actually useful to think about them
18	differently, recognizing that they intersect in various
19	places. So, when I think about the economics of tying,
20	while I recognize that there are overlaps with bundled
21	discounts, you know, they are different considerations,
22	and the way we think about the models and the way we
23	think about efficiency effects and so forth, they are
24	different, and they educate the analysis.
25	I think my concern in just saying, well, there

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1	is just this stuff out there and we just need to look at
2	competitive effects and that is what we should do, I
3	think that is problematic because that kind of puts us
4	back into this rule of reason stew where, you know,
5	everything just goes into it, and we think that juries
6	will come out with the best result.
7	So, I think we actually do need to pay attention
8	to the kinds of practices, make some progress with the
9	economics, come up with some priors and some
10	understanding of what the rules should be, recognizing
11	that Mark is right, that there is going to be some
12	substitution if we have different standards in different
13	parts of Section 2, but I do not see losing the
14	distinctions as being a practical thing to do either for
15	economists or for the courts.
16	MR. POPOFSKY: And let me just interject, I
17	actually agree, David, with everything you have said.
18	My only concern is --
19	MR. EVANS: My God, I must have said something
20	wrong.
21	MR. POPOFSKY: No, for once everything is right.
22	We just have to recognize, as you said, the linkage
23	between these various practices. That is all.
24	MS. LEE: Okay, I want to give the panelists a
25	last opportunity to say anything if they like before

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1	concluding. Anyone? Bobby, you do not want the last
2	word?
3	DR. WILLIG: Oh, I would like the last word. I
4	am still worried about the Hovenkamp --
5	MR. EVANS: Could I suggest you not go first if
6	you want the last word?
7	DR. WILLIG: Oh, I see what you mean. I would
8	like to hear your reaction.
9	It does sound in the Hovenkamp proposition like
10	there is an engagement of a consumer welfare meter. It
11	reminds me of the situation which is simpler but still
12	maybe imponderable to us, a competitor innovates, is
13	very successful, the innovation knocks out competitors,
14	so a year later, the competitors are gone because they
15	have been beat by the innovator, whereupon the
16	monopolist really has the monopoly position, at least
17	for a while, until the next generation of competitors
18	come along.
19	We honor the process. We like innovation. If
20	we compare consumer welfare before the innovation to
21	consumer welfare a year later, after the competitors are
22	gone, it could be that prices are up and output is down,
23	although that happened through a process that we
24	basically honor and we expect another few years will go
25	by and the world will be a better place. That is a very

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1	real sort of scenario, I think, and I think applying the
2	consumer welfare meter to that situation would be
3	telling us wrongly that innovation is destructive.
4	I am kind of worried that when we are talking
5	about Section 2 and all of these kinds of practices,
6	exclusive dealing and/or tying, that the Hovenkamp
7	formulation would be condemning the process, and I think
8	in a way that would be unfortunate for antitrust.
9	What do you think?
10	MR. POPOFSKY: Well, I am going to go next,
11	because one of the great things about hiring Bobby as an
12	expert, which I have, is I can go after him and not give
13	him the last word.
14	DR. WILLIG: Redirect, recross?
15	MR. POPOFSKY: Your concern is well founded,
16	Bobby, why don't courts condemn monopoly pricing? After
17	all, a court could argue we are better off having lower
18	prices today even if it deters innovation tomorrow.
19	There are in the law safe harbors. There are in the law
20	ways of structuring the analysis, whether it is
21	structured rule of reason, Ordover-Willig or other
22	things, that will filter out, at least in my view, the
23	most troubling scenarios, such as designing the better
24	mousetrap being found anticompetitive, something we
25	should not have done, and the challenge is to really, in

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1	a particularized way, as David Evans was suggesting, to
2	figure out what those are.
3	DR. WILLIG: Well, let's do it.
4	MR. POPOFSKY: The next panel.
5	DR. WILLIG: Oh.
6	MS. LEE: Anyone else? Yes?
7	DR. WALDMAN: I actually want to go back to
8	something David was saying I think similar to what I
9	have said, which is in terms of the case, I think what
10	is very important is not to just have an existence group
11	that some smart economist sat somewhere and came up with
12	a theory that this sort of matches on the surface. I
13	think that really, given the prevalence of efficient
14	tying, I think you really want to make sure that the
15	facts of the case fit the theory. Otherwise, you are
16	likely to make lots of mistakes, and I think that when
17	you go to a rule of reason approach, that is really
18	something that needs to be emphasized.
19	MR. EVANS: I will just make one sort of
20	technical comment, which probably is not a good way to
21	end my discussion, but we have kind of gone back and
22	forth in the discussion between consumer welfare and
23	total welfare, and probably for this area and lots of
24	other areas in Section 2, I mean, it really makes a
25	difference whether you are talking about consumer

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1	welfare or total welfare, and it also makes a difference
2	in whether you are talking to economists, because,
3	Michael, you are probably in a better position to tell
4	me whether this is true or not, but my sense is that
5	almost all the theories talked about social welfare, and
6	the courts talk about consumer welfare, and the
7	connection between the social welfare results and the
8	theory and the consumer welfare results that the courts
9	presumably care about are not quite as tight as we might
10	like them.
11	So, maybe another panel someday, another topic
12	ought to be should there be a total welfare standard
13	instead of a consumer welfare standard? It would make
14	it easier for the economists.
15	MS. LEE: Please join me in thanking our
16	panelists for their presentations and our discussion.
17	(Applause.)
18	(Whereupon, at 12:56 p.m., the hearing was
19	concluded.)
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25

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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: NOVEMBER 1, 2006
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: 11/21/2006
13
14
15
16	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.
23
24
25	DIANE QUADE