Understanding Single-Firm Behavior: Tying Session

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2 and











20 9:00 A.M. TO 1:00 P.M.

24 Reported and transcribed by:

25 Susanne Bergling, RMR-CLR




3 Director, Bureau of Economics

4 Federal Trade Commission

5 and


7 Economist

8 Antitrust Division, U.S. Department of Justice


12 David Evans

13 Robin Cooper Feldman

14 Mark Popofsky

15 Donald J. Russell

16 Michael Waldman

17 Robert D. Willig



1 C O N T E N T S

3 Introduction

5 Presentations

6      David Evans

7      Robin Cooper Feldman

8      Mark Popofsky

9      Donald J. Russell

10      Michael Waldman

11      Robert D. Willig

13 Moderated Discussion

15 Conclusion



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

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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?


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


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?


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


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


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


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


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


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


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


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


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


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,


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.


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


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


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


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


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


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


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


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.


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


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


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


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


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.


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


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


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


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


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


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.


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


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,


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


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


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


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


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


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


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


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,


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


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.


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


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


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


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


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


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


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


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


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,


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


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


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.


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


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.


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


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.


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


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


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


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


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


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


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


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


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.


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


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.


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


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


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


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


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.


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


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


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


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


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.


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


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


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


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


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


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


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


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


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


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?


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


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


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


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


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


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.


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


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


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,


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.


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


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


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.


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


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... .


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


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


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


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.


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


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


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


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?


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


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


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,


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


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


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.


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


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


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


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


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


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


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


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?


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


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


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


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


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.


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


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


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


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


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?


25 MS. LEE: Okay. Can we go back to slide seven?


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.


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


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?


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


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


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


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


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


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.


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


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.)



1 C E R T I F I C A T I O N O F R E P O R T E R



4 DATE: NOVEMBER 1, 2006

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.

  DATED: 11/21/2006
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

20 I HEREBY CERTIFY that I proofread the transcript

21 for accuracy in spelling, hyphenation, punctuation and

22 format.


Updated June 25, 2015