Skip to main content

Business Testimony

1

1 UNITED STATES FEDERAL TRADE COMMISSION
 
2 and
 
3 UNITED STATES DEPARTMENT OF JUSTICE
 
4
 
5
 
6
 
7 SHERMAN ACT SECTION 2 JOINT HEARING
 
8 UNDERSTANDING SINGLE-FIRM BEHAVIOR
 
9 SECTION 2 POLICY ISSUES
 
10 TUESDAY, MAY 1, 2007
 
11
 
12
 
13
 
14
 
15 HELD AT:
 
16 UNITED STATES FEDERAL TRADE COMMISSION
 
17 CONFERENCE CENTER
 
18 601 NEW JERSEY AVENUE, N.W.
 
19 WASHINGTON, D.C.
 
20 1:00 P.M. TO 5:00 P.M.
 
21
 
22
 
23 Reported and Transcribed by:
 
24 Susanne Bergling, RMR-CLR
 
25  

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

2

1 MODERATORS:
 
2 William Blumenthal
 
3 General Counsel
 
4 Federal Trade Commission
 
5 and
 
6 Dennis W. Carlton
 
7 Deputy Assistant Attorney General for Economic Analysis
 
8 Department of Justice
 
9
 
10 PANELISTS:
 
11
 
12 William J. Baer
 
13 Jonathan B. Baker
 
14 Stephen Calkins
 
15 Einer R. Elhauge
 
16 Jonathan M. Jacobson
 
17 William J. Kolasky
 
18 Thomas G. Krattenmaker
 
19 Janet L. McDavid
 
20 Robert D. Willig
 
21
 
22
 
23
 
24
 
25  

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

3

1 C O N T E N T S
 
2
 
3 Introduction........................................................................................................................................................ 4
 
4
 
5 Moderated Discussion:
 
6      By Mr. Blumenthal......................................................................................................................................... 5
 
7      By Mr. Carlton............................................................................................................................................. 89
 
8
 
9 Conclusion.........................................................................................................................................................162
 
10
 
11
 
12
 
13
 
14
 
15
 
16
 
17
 
18
 
19
 
20
 
21
 
22
 
23
 
24
 
25  

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

4

1 P R O C E E D I N G S
 
2 - - - - -
 
3 MR. BLUMENTHAL: Well, good afternoon,
 
4 everybody. I am Bill Blumenthal from the FTC staff, and
 
5 I am one of the moderators for our program this
 
6 afternoon.
 
7 This is the first of two sessions we are going
 
8 to be conducting to wrap up the series of hearings that
 
9 I think, as all of you know, DOJ and the FTC have been
 
10 conducting jointly for the past year or so into issues
 
11 posed by Section 2, and more generally, dominance and
 
12 monopolization and single-firm conduct.
 
13 I had the honor to moderate the first of the
 
14 hearings that we had. That was the kick-off on June
 
15 20th of 2006, where the speakers were FTC Chairman
 
16 Debbie Majoras, AAG for Antitrust Tom Barnett, Dennis
 
17 Carlton when he was still a professor in the private
 
18 sector, and Herb Hovenkamp, and basically today and next
 
19 week we are coming full circle.
 
20 Dennis, now in the Antitrust Division, will be
 
21 joining us as co-moderator a little later this
 
22 afternoon, and Tom and Debbie will be co-moderating the
 
23 final, final hearing a week from today, Tuesday, May
 
24 8th, from 9:00 a.m. until 1:00 p.m., and at that point
 
25 we will turn our attention to next steps.

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

5

1 I want to thank the FTC and DOJ staffs for
 
2 organizing this session. Today's hearing is going to be
 
3 different from the way we have done all of the hearings
 
4 up until now in this series. All of the ones to date
 
5 have been basically set presentations with a little bit
 
6 of Q&A at the end, and instead, today's entire session
 
7 is unscripted.
 
8 Dennis and I will be posing questions and asking
 
9 the panel to respond and to discuss, and we are honored
 
10 to have with us a truly all-star group. Both today and
 
11 next week, we have truly all-star panels of
 
12 practitioners, consultants, and academics who I think
 
13 are basically of the caliber that we need to be able to
 
14 handle the extemporaneous back and forth that we are
 
15 going to have.
 
16 Let me introduce all of them. They will be
 
17 brief inductions. More detailed bios are available in
 
18 the bio packet, copies of which are on the table as you
 
19 enter the Conference Center, and I think probably all of
 
20 these folks are known to you, but I will just go down
 
21 for the record. Starting.
 
22 With Bill Baer, down at the end, a partner at
 
23 Arnold & Porter and former Director of the Bureau of
 
24 Competition at the FTC. Jon Baker, Professor at
 
25 American University and a former Director of the FTC's

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

6

5

1 Bureau of Economics. Steve Calkins, former General
 
2 Counsel and a Professor at Wayne State. Einer Elhauge,
 
3 who is a Professor at Harvard Law School, and I might
 
4 add, I see the prop right there. Hold it up. The
 
5 author, co-author, of the just released Foundation Press
 
6 Case book, the first, I believe, to deal with the topic
 
7 of multi-jurisdictional competition law.
 
8 John Jacobson, a partner at the Wilson Sonsini
 
9 firm and a member of the Antitrust Modernization
 
10 Commission. Shifting over to this side, Bill Kolasky, a
 
11 partner at WilmerHale and a former Deputy AAG in the
 
12 Antitrust Division. Tom Krattenmaker, Of Counsel of the
 
13 Wilson Sonsini firm, more recently; before that, a front
 
14 office advisor at the FTC, and before that, a Professor
 
15 with an illustrious career in academia. Jan McDavid,
 
16 partner at Hogan & Hartson, and Bobby Willig, Professor
 
17 of Economics and Public Policy at Princeton and, years
 
18 ago, one of the Deputy AAGs in the Antitrust Division
 
19 front office.
 
20 DR. WILLIG: Not like decades. You didn't say
 
21 MR. BLUMENTHAL: We were all young.
 
22 With Bill Baer, down at the end, a partner at
 
23 Okay, before we start, some housekeeping
 
24 matters. Actually, I have to check my own. Cell
 
25 phones, BlackBerries, other electronic devices, please

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

7

1 turn them into vibrate or manner mode. While we are on
 
2 cell phones, Steve Calkins has asked me to let you know
 
3 that if he has to step out to take a call, it was
 
4 because it was unavoidable. One of his classes is
 
5 having its final exam right now in Michigan -- well, it
 
6 starts in 25 minutes -- but in Michigan, and he is
 
7 standing by for the sorts of emergencies that sometimes
 
8 come up.
 
9 MR. CALKINS: So, if my phone rings, that is bad
 
10 news, and it means I blew it and need to grab a file and
 
11 run away and answer a stupid question.
 
12 DR. WILLIG: It means we are all posed a new
 
13 question; namely, the one on your exam.
 
14 MR. CALKINS: Right.
 
15 MR. BLUMENTHAL: Speaking of emergencies,
 
16 second, in case the building alarms go off, stay calm,
 
17 follow instructions -- we do this at every one of
 
18 these -- and if you must leave the building, you are
 
19 supposed to exit from the New Jersey Avenue exit by the
 
20 guard's desk out here. Please follow the stream of FTC
 
21 staffers who are leaving the building to a gathering
 
22 point and await further instruction and stay calm.
 
23 Third, restrooms, outside the double doors,
 
24 across the lobby, just follow the signs.
 
25 Finally, we ask that you not make comments or

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

8

1 ask questions during the session, but we are going to
 
2 take a break around 2:45 or 3:00, and if people want to
 
3 slip questions to the moderators, we will, if they are
 
4 reasonable questions, find a way to work those in.
 
5 Okay, with that, we will start the round table
 
6 discussion, and the first question to the panel -- we
 
7 can do this in reverse alphabetical order, we are going
 
8 to start with Bobby Willig down at that end and work
 
9 around -- but I want to start with the broad picture
 
10 question, and I will ask it three different ways, and
 
11 take whichever variation you want to use.
 
12 What do you regard as the one or two issues that
 
13 the agencies most urgently need to address in the
 
14 Section 2 report, or if you prefer to think of it a
 
15 slightly different way, what are the one or two things
 
16 we ought to be trying to achieve in the report, or what
 
17 do you regard as the one or two biggest problems in
 
18 Section 2 doctrine as it stands today?
 
19 If you don't want to do one or two, if you want
 
20 to do three or four, that is okay, but let's just work
 
21 around the horn with Bobby Willig, you first.
 
22 DR. WILLIG: Well, thank you, thank you. You
 
23 connect your commentary on my age to the difficulty of
 
24 the question to be posed, somebody -- with the number of
 
25 years behind me -- of course, you have been at the front

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

9

1 the whole time, so...
 
2 I have read through these 15 pages, the extant
 
3 agenda as of at least yesterday, called "Questions for
 
4 Hearing." There are many sections of these questions.
 
5 The first section is called "General Standards." There
 
6 follows many, many other sections about particular areas
 
7 of conduct. Each of the sections, in essence, as I read
 
8 them, poses the same question, and it is the fundamental
 
9 question that makes these very exciting times for those
 
10 who like to think about Section 2, competition, and firm
 
11 conduct, and that is, what should our attitude be as an
 
12 enforcement community, as a competition policy
 
13 community? What should our overall philosophy be in
 
14 considering the everyday legal and counseling issues
 
15 that arise under Section 2?
 
16 Is there a philosophy that should come out of
 
17 academia that should generate particular standards for
 
18 various contexts and various practices? Should there be
 
19 one philosophy that actually itself applies in every
 
20 context and to every set of practices? Or is it really
 
21 hopeless and all we can do is blunder along in each
 
22 separate context and make use of whatever experience we
 
23 have, which differs from context to context, and use the
 
24 accumulation of case law and footnotes and various
 
25 economic articles and give up for another decade or so

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

10

1 some sort of overall, coherent view of philosophy in
 
2 forming standards, in forming particular lines of useful
 
3 evidence?
 
4 This to me is the big question of the day. It
 
5 is an exciting question. It is really at its peak in
 
6 terms of the span of time that I have spent in this
 
7 profession right now, and around this horseshoe, and
 
8 once again a few days from now, are the leading mouths,
 
9 if not the leading minds, of the community, and if not
 
10 us, who, and if not now, then when?
 
11 What makes this worthwhile from my point of view
 
12 is that, look, if we spend four hours and actually make
 
13 some progress on it all -- and there is enough of a
 
14 chance of that in my mind to have motivated the train
 
15 trip -- it will be an even more exciting time as we can
 
16 move forward from that kind of progress. So, I would
 
17 hope that we can do that. I would hope we set ourselves
 
18 to that task as a group. If we make any progress at all
 
19 in that respect, I would hope that the organizers and
 
20 the authors of the subsequent report highlight that and
 
21 say it as clearly as possible -- within the bounds of
 
22 politeness in any event -- because such a move by such a
 
23 group will actually help enormously in terms of framing
 
24 where we go in the journals and even where we go in case
 
25 decision-making over the next decade.

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

11

1 That would be my thoughts.
 
2 MR. BLUMENTHAL: We will talk about general
 
3 standards.
 
4 Jan, same question.
 
5 MS. McDAVID: Well, first of all, I want to
 
6 applaud the agencies for doing this. These hearings and
 
7 the AMC hearings and report have really provided a
 
8 wonderful opportunity to consider the questions that
 
9 have been vexing many of us in antitrust law for a very
 
10 long time, and I think it has provided a terrific forum.
 
11 The AMC report -- congratulations Jonathan and to the
 
12 staff and to the other commissioners -- it is a
 
13 wonderful piece of scholarship and provides a lot of
 
14 useful guidance, and I hope this report will do the
 
15 same.
 
16 I would make two relatively simple pleas. The
 
17 first would be practical advice. On a day-to-day basis,
 
18 the issues governing Section 2 are applied by
 
19 businesspeople, inside counsel, and outside counsel in a
 
20 counseling setting, applying these standards to real
 
21 life business questions as they arrive without the
 
22 benefit of Dr. Willig and his colleagues and --
 
23 DR. WILLIG: I am always ready to serve.
 
24 MS. McDAVID: -- I know, but it is rarely
 
25 practical here -- trying to determine whether there is

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

12

1 or is not a price above average variable cost, or
 
2 whatever measure of cost one might be thinking to apply.
 
3 So, try to provide some practical guidance that can
 
4 actually be used to provide horseback advice, which is
 
5 what most of us do on a day-to-day basis. You can also
 
6 do the deep thinking, but we need some guidance in that
 
7 way.
 
8 I would eschew the request for the Holy Grail.
 
9 The question as to whether there is a single standard
 
10 that should be applicable to all conduct under Section 2
 
11 I think is probably an interesting intellectual
 
12 exercise, but I would be very surprised if there is one.
 
13 I do not think there is. Everything I have read
 
14 recently leads me to think that it is very
 
15 fact-specific, and that should not surprise us.
 
16 Antitrust analysis is inherently very fact-specific and
 
17 very dependent on the particular effects of the
 
18 particular conduct at issue and the justifications for
 
19 it, and so I would eschew the quest for the Holy Grail
 
20 and a single standard.
 
21 MR. BLUMENTHAL: Tom Krattenmaker?
 
22 MR. KRATTENMAKER: Thanks, Bill.
 
23 I agree with Jan, I think the hearings and the
 
24 AMC have been terrific contributions to antitrust
 
25 jurisprudence, and everybody should be congratulated for

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

13

1 them. I have had the great good fortune in my life to
 
2 spend a fair amount of time on the enforcement side and
 
3 an even longer time on the academic side, and from the
 
4 enforcement side, my recommendation to those of you
 
5 writing the report, Bill, and your colleagues, is that
 
6 you should follow the path of the article "Cheap
 
7 Exclusion" in the 2005 Antitrust Law Journal, of which I
 
8 am a very junior author. That article tries to explain,
 
9 at least in terms of enforcement priorities, there is
 
10 behavior out there that is relatively cheap to engage in
 
11 and oftentimes, nevertheless, promises large and durable
 
12 pockets of market power, and that is where enforcers
 
13 ought to be looking, and I still believe that is the
 
14 case.
 
15 From my academic studies of Section 2, the
 
16 conclusion I draw or drew and still do is that when you
 
17 have got a Section 2 case, you begin with remedies; you
 
18 do not end with remedies. I think the landscape is
 
19 littered with Section 2 cases, that when they were all
 
20 over, there was a victory, but it was completely
 
21 pyrrhic. Sort of the best metaphor I have is that we
 
22 were given 15 pages of very, very good questions for
 
23 this session, and the last page was about remedies. The
 
24 next time you do this, make the first page about
 
25 remedies. Before you start to talk about Alcoa, tell me

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

14

1 the remedy; before you start to talk about Aspen Ski,
 
2 tell me the remedy; before you bring the Microsoft case,
 
3 talk about what the remedy is. So, I would hope the
 
4 report will focus on remedies a lot. That is
 
5 substantively.
 
6 In terms of what I think the report might
 
7 achieve -- and as Bill knows, I have also had the chance
 
8 to be Mr. Inside on this, because I had something to do
 
9 with setting up some of these hearings in a different
 
10 life -- I would like to see the report call for
 
11 contributions from outside what I call the fraternity.
 
12 There are a whole bunch of people in here that belong to
 
13 the antitrust fraternity. One of the things I learned
 
14 is -- and maybe it is, again, because I had another
 
15 life -- is that we actually do not know everything that
 
16 is relevant to antitrust. I will give you two examples.
 
17 If you want to learn about immunities, you ought
 
18 to go talk to somebody who does Constitutional law and
 
19 public choice. You will be shocked if you think you
 
20 know what Noerr Pennington is about if you go talk to
 
21 somebody who only does First Amendment law. Find me a
 
22 Noerr Pennington case that has the phrase "commercial
 
23 speech doctrine" in it. Find me a Noerr case that says
 
24 we are dealing here with a content-neutral statute that
 
25 serves an important governmental interest and is

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

15

1 entirely unrelated to the suppression of free
 
2 expression. These phrases are littered throughout First
 
3 Amendment jurisprudence, and they have never been tied
 
4 in, because somehow Noerr became captured by the
 
5 antitrust people and not by the First Amendment people.
 
6 The second example, which I do not have as much
 
7 familiarity with -- as you would probably guess, I used
 
8 to be a First Amendment teacher -- is what about, as Jan
 
9 referred to, people are confused to some extent.
 
10 Section 2 law contains many vague admonitions and
 
11 somewhat inconsistent admonitions. How does this affect
 
12 business decision-making? I do not know the exact
 
13 phrase, but there is something like behavioral
 
14 psychologists, and they are out there in universities
 
15 and they are in business schools, and you could ask
 
16 people to come tell you about what difference it makes
 
17 if you have trouble guessing exactly what the rule is.
 
18 I really do not know what the outcome is going
 
19 to be, because it is not my field, but instead of having
 
20 somebody in here all the time telling us, "Our clients
 
21 cannot possibly live under that rule of law," or as I
 
22 now tell people, "My clients cannot possibly live under
 
23 this vague standard," we have got people out there who
 
24 might actually be able to address those questions.
 
25 Finally, I hope that the first sentence of the

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

16

1 report will be, "The fundamental purpose of the
 
2 antitrust enforcement program at the antitrust agencies
 
3 is to prevent firms from acquiring and exercising market
 
4 power to the detriment of consumers." If you write that
 
5 as your first sentence -- it is the second sentence of
 
6 the "Cheap Exclusion" article -- I think you will get
 
7 everything else right. I think your first legal point
 
8 should be as follows: "Predatory pricing is not the
 
9 only paradigm."
 
10 Thank you.
 
11 MR. BLUMENTHAL: Bill Kolasky, what are the one
 
12 or two or four things we ought to address?
 
13 MR. KOLASKY: First of all, I want to join Jan
 
14 and Tom in complimenting the agencies in having these
 
15 hearings. I think that it is very important and very
 
16 useful, especially when the European Commission is going
 
17 through a similar process on the other side of the
 
18 Atlantic and has put out a very thoughtful discussion
 
19 paper, which is I think both provocative and in some
 
20 ways troubling, while still being reassuring in other
 
21 ways.
 
22 I would say three things very quickly. First, I
 
23 think it is very important that the report focus on what
 
24 the analytical framework for applying Section 2 ought to
 
25 be, and I prefer to think about it in terms of an

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

17

1 analytical framework rather than general standards.
 
2 Because antitrust is highly fact-specific, I do not
 
3 think you can have general standards. I think you need
 
4 a sound analytical framework that you apply through our
 
5 traditional common law means.
 
6 I actually think that has worked quite well in
 
7 the Section 2 area but that we have in some ways lost
 
8 sight of the analytical framework that Chief Justice
 
9 White first conceived way back in Standard Oil and
 
10 applied to Section 2 as well as to Section 1, and that
 
11 is the rule of reason, and I think that that is the
 
12 framework that we should go back to applying under
 
13 Section 2.
 
14 Second, I think it is very important that we
 
15 focus attention on what is happening on the other side
 
16 of the Atlantic and that we continue to have a dialogue
 
17 about how we should apply our antitrust and competition
 
18 laws to unilateral conduct, and I think there are at
 
19 least three areas that I would focus on there.
 
20 The first and most general is the extent to
 
21 which antitrust authorities -- I hesitate to call them
 
22 regulators -- should intervene in the operation of
 
23 markets and substitute their judgment for the judgment
 
24 of markets. When I say that the European Commission's
 
25 discussion paper is troubling in some respects, it is

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

18

1 because, while the discussion is extremely
 
2 sophisticated, it is very difficult to imagine how you
 
3 would reach decisions, taking into account all of the
 
4 factors that the discussion paper puts forward with
 
5 respect to many types of unilateral conduct, and what
 
6 that suggests, again, is, as with Section 1, we
 
7 basically need a sound analytical framework and a set of
 
8 presumptions that we then apply case by case.
 
9 Second, I think we need to pay close attention
 
10 to the whole issue of compulsory access to intellectual
 
11 property, because that is the area in which
 
12 decision-making by one competition authority can have
 
13 the greatest spillover effects on other economies.
 
14 Third, in that regard, I think we need to
 
15 restore a greater role for the notion of international
 
16 comity, the idea that one jurisdiction will defer to
 
17 another jurisdiction which has more substantial and
 
18 significant contacts with the conduct at issue.
 
19 Then third and finally, I think that it would be
 
20 very useful, in whatever reports come out of this
 
21 hearing, for the report to address particular types of
 
22 unilateral conduct on which the law is now most
 
23 confused, and the one that springs to mind immediately
 
24 is the whole subject of bundled discounts.
 
25 I think it is a very difficult subject. It is

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

19

1 certainly not one on which I would pretend to have the
 
2 answers, but I think the law, after LePage's, is
 
3 extremely confused in that area, making it very
 
4 difficult for us to counsel our clients.
 
5 MR. BLUMENTHAL: Jonathan?
 
6 MR. JACOBSON: Bill, thanks.
 
7 I agree largely with what all of the panelists
 
8 have said so far, particularly Jan's comment on
 
9 counseling and Bill's endorsement of it. I think
 
10 counseling in the single-firm conduct area is extremely
 
11 difficult. Clients want to obey the law. They want to
 
12 be able to engage in activities that are not going to
 
13 get them sued or investigated, and today, there are a
 
14 couple of areas, in particular, where counseling is
 
15 extremely difficult.
 
16 One of them certainly is bundling. I do think
 
17 some clarity in bundling is desirable. I am fond of the
 
18 AMC's proposed test for bundling, which I do not think
 
19 is intended by anyone as sort of a final measure on it
 
20 but is sort of an interim measure until something better
 
21 comes along, and I am sure we will discuss that in more
 
22 detail today.
 
23 The second area where counseling is extremely
 
24 difficult is refusals to deal, and, in particular, how
 
25 do you deal with a rival in the same market, the Aspen

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

20

1 context; how do you deal with a rival in an adjacent
 
2 market, Otter Tail and numerous other cases, AT&T; what
 
3 is the standard for refusals to deal with customers and
 
4 suppliers that impact horizontal competition in the
 
5 defendant's market? There is no accepted standard for
 
6 these areas. The issue arises constantly, and
 
7 businesses are in dire need of some guidance on how to
 
8 conduct their affairs in these areas.
 
9 Then, just sort of going upwards to the larger
 
10 issues, I do think it is critical that the report say
 
11 something about the overall framework and the general
 
12 standards, if any, for Section 2 jurisprudence. I think
 
13 it is important that the agencies repudiate the no
 
14 economic sense test as a general test applicable to all
 
15 forms of conduct. I am sure we will talk about that
 
16 later. No economic sense has its application in
 
17 predatory pricing and in some refusals to deal, but it
 
18 is not a general test, and I think a lot of time and
 
19 attention is being spent on it when that time and
 
20 attention would be better devoted to other areas.
 
21 If we can start with an overall framework, as
 
22 Bill mentioned, with the rule of reason as articulated
 
23 in 1911, I think that would be a good place to start.
 
24 MR. BLUMENTHAL: Einer?
 
25 DR. ELHAUGE: I think the number one issue

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

21

1 should be increasing clarity. I happened to last week
 
2 be at a Federal Judicial Conference event, and four
 
3 judges, when they were introduced to me and found out I
 
4 was an antitrust professor, sua sponte, volunteered they
 
5 had each had a recent antitrust case, and they had no
 
6 idea what the antitrust law meant on their case. These
 
7 were very smart people. They are doing the
 
8 instructions. They do not even know what it means. So,
 
9 it is not surprising that you have trouble counseling
 
10 firms about what the antitrust law might mean.
 
11 I think in order to achieve greater clarity, we
 
12 actually need some more analytical clarity in separating
 
13 out three questions relevant to this single standard
 
14 issue. One is, what should the ultimate metric of
 
15 social desirability be? On that, I actually think we do
 
16 need one single standard, because we need to know what
 
17 we are trying to maximize.
 
18 The second question is, what set of rules and
 
19 standards will, given the imprecision of rules and
 
20 standards in application, best advance that ultimate
 
21 metric of social desirability? And the two are not at
 
22 all the same.
 
23 So, for example, for driving, I think the
 
24 ultimate metric is, we want everybody to drive the
 
25 socially optimal speed, taking into account the

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

22

1 advantages of speed and the safety risks. We do not say
 
2 just maximize safety; otherwise, the speed limit would
 
3 be zero, and our cars would stay in the garage all the
 
4 time, right?
 
5 So, we have some policy speed limit, but having
 
6 decided that the optimal rule -- that that is what we
 
7 are trying to maximize, we do not make the law, oh,
 
8 drive the speed that maximizes total driver welfare,
 
9 because nobody would know what that meant on a
 
10 case-by-case basis. Instead, we have rules, set
 
11 particular speed limits for particular areas, so there
 
12 is a set of rules, they are over and under-inclusive,
 
13 but they are designed, given the imprecision of
 
14 application, to best achieve overall results of
 
15 optimality.
 
16 In some cases, we have a back-stop standard
 
17 where if it is, in fact, icy -- you may or may not know
 
18 this -- but you cannot drive the speed limit if it is
 
19 very icy. Instead, there is a backup standard that
 
20 says, you know, in bad conditions, then we fall back to
 
21 a more general standard of driving safely.
 
22 So, I think for antitrust, I guess the analogy
 
23 would be, we evolve that metric, and I would say
 
24 consumer welfare, given our history, one might argue for
 
25 total welfare.

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

23

1 Second, we need to have a set of rules that are
 
2 designed to maximize that. Having a test that was, oh,
 
3 just act in whatever way maximizes consumer welfare,
 
4 will lead to no guidance and lots of error, but we could
 
5 have specific rules for particular suites of antitrust,
 
6 that is, a rule for predatory pricing, another rule for
 
7 loyalty discounts, another for bundled discounts, et
 
8 cetera, et cetera, and then have a backup standard for
 
9 when none of those rules apply.
 
10 My nominee is my own article, which is whether
 
11 or not you are advancing monopoly efficiency or
 
12 succeeding by depriving rivals of efficiency, and I
 
13 share the skepticism about the profit sacrifice test.
 
14 But anyway, I think we need to relegate it to separate
 
15 out those three things, because they are analytically
 
16 three very separate questions: Ultimate metric, rules
 
17 that advance that metric generally, and backup
 
18 standards.
 
19 The second thing I think you need to emphasize
 
20 in any report you write is to make sure that whatever
 
21 rules we pick are clearly founded in economics. I would
 
22 describe sort of the broad history of antitrust was we
 
23 used to have silly, liberal rules based on formalisms.
 
24 Economics critiqued those successfully, but it has led
 
25 to a lot of open-ended standards, and there is a risk,

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

24

1 unless we have pretty clear rules that are based in some
 
2 serious economics, we will instead have silly formalisms
 
3 of another kind, and I think there is a lot of sort of
 
4 silly conservative rule formalisms also based on
 
5 autonomy notions that have nothing to do with economics
 
6 that are out there now. So, I think you can be
 
7 rule-like, but be a functionalist and not be a
 
8 formalist.
 
9 MR. BLUMENTHAL: Steve?
 
10 MR. CALKINS: My colleague Baker tells me that
 
11 you emailed me this question this morning, but I was
 
12 traveling and did not get it. Previously, I had
 
13 received the 15 pages of detailed questions, and I do
 
14 not read 15 pages of questions, so instead, I spent my
 
15 time reading transcripts of these hearings, and it is
 
16 really a treat. I mean, it is a genuine feast of
 
17 people's views, and let me just toss out four things
 
18 that caught my eye as I was reading the transcripts,
 
19 and, frankly, I am hoping I can go find somebody who
 
20 will commission me to write a little article with what
 
21 you can learn from these, because it is really
 
22 fascinating. It is a real treasure trove of materials.
 
23 I have four things to mention.
 
24 First, Ron Stern, General Electric: counseling
 
25 in the world of Section 2, is very, very easy. The U.S.

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

25

1 has a massive safe harbor. You do not need to think
 
2 about antitrust so long as your market share is not over
 
3 50 percent, and maybe it has to be beyond that, and it
 
4 is very easy for him to figure that out, and it is just
 
5 not a problem counseling in the world of Section 2,
 
6 contrast dramatically the very, very different standards
 
7 in other parts of the world, where agencies care about
 
8 firms that have market shares that are somewhere below
 
9 50 percent. That is where you have interesting,
 
10 difficult counseling questions. In the U.S., things are
 
11 very clear, very easy. There are big safe harbors. He
 
12 would like to see more, but in general, we do not have a
 
13 big problem in the vast majority of cases.
 
14 Second, this was a terrific collection of
 
15 distinguished economists, and one theme sang loud and
 
16 clear throughout their testimony, and that is that we do
 
17 not know very much. Again and again and again, people
 
18 would say: we do not know this, we do not know that; it
 
19 could be this, it could be that; it could be this way,
 
20 could be that way; maybe it is going to lessen
 
21 competition, maybe it won't; we have a lot of
 
22 uncertainty, we are just beginning to learn this kind of
 
23 thing. Of course, the interesting question then is:
 
24 okay, if that is true, what do you do?
 
25 Some would say what you do is you bring no

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

26

1 lawsuits because you do not know enough, and so when in
 
2 doubt, do not sue; and others would say, what you do is
 
3 you create a bunch of rules of per se lawfulness because
 
4 that is a way of making sure that lawsuits do not get
 
5 brought; whereas others say, golly, if you do not know
 
6 things, maybe you should hesitate before trying to lock
 
7 in per se rules one way or the other when you do not
 
8 know what the right answer is, and maybe you should
 
9 hesitate before trying to solidify things exactly where
 
10 they are today when we have so much uncertainty.
 
11 Third, if I could get a penny for every time
 
12 there was mention of the word "Microsoft" or "Dentsply"
 
13 or "American Airlines" or "LePage's," I could retire
 
14 right now. My children's college tuition would be taken
 
15 care of. That is what comes through this. Every time
 
16 you come to another commentator, he or she says, "Well,
 
17 since LePage's, we have had 50 different articles
 
18 exploring these issues;" or "since Microsoft, we have
 
19 begun to learn about tying law and dominant firms using
 
20 tying law" -- and so on and so forth.
 
21 The thing that comes out is you stop and you
 
22 say, my golly, put aside whether those were meritorious
 
23 cases or whether they should have been brought or who
 
24 should have won. Think how impoverished our antitrust
 
25 law and economic learning would be had they not been

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

27

1 brought! I mean, the positive externalities of one
 
2 interesting, important monopoly case are really
 
3 extraordinary, and I hope that one thing that comes
 
4 through this report is to remind the Department of
 
5 Justice that, you know, if once every administration or
 
6 two you bring a monopoly case -- maybe it will be a good
 
7 case, maybe it won't -- but at least it will stimulate
 
8 all sorts of learning and scholarship, which may advance
 
9 the dialogue.
 
10 The last point was the very interesting lesson
 
11 that came out of the monopoly power hearing where you
 
12 had a number of people saying, golly, it is really hard
 
13 to think about monopoly power, because let's go back and
 
14 go back to the Department of Justice Guidelines, and how
 
15 were we able to think about power issues there? We were
 
16 able to think about power issues because we knew what
 
17 our goal was. Our goal was to prevent a certain kind of
 
18 merger, and having figured out our goal, we could then
 
19 use that goal to think about the test that we would use
 
20 for deciding whether the merger would result in an
 
21 excessive increase in power.
 
22 The problem with Section 2 law is that we do not
 
23 have that nice, bright, widely-agreed-to goal that is
 
24 motivating what enforcers are doing, and because we do
 
25 not, it makes the measuring -- the determining -- of

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

28

1 monopoly power much, much more difficult. So, I guess I
 
2 would go back to Tom and say we need, in part, to have
 
3 some lessons here about what we are about. Just in
 
4 closing on that one, it seems to me critical to remind
 
5 people that monopoly enforcement is not just about
 
6 preventing the attaining of monopoly power; it is also
 
7 about preventing the wrongful maintaining of monopoly
 
8 power, and that is a message that ought to come through
 
9 the report loud and clear.
 
10 Thanks.
 
11 MR. BLUMENTHAL: All right.
 
12 DR. BAKER: Well, thank you.
 
13 Let me begin by echoing many of my colleagues
 
14 before in commending the agencies and the AMC and others
 
15 who are doing similar work for systematically thinking
 
16 about antitrust among the competition community. This
 
17 is a great way of developing a basis for enforcement
 
18 programs, for influencing how the courts think about
 
19 things, and for giving Steve a treasure trove of
 
20 testimony to work through.
 
21 As to the report, I would recommend beginning by
 
22 re-affirming that monopolization is a legitimate area of
 
23 antitrust enforcement, that firms can harm competition
 
24 through acts that permit them to achieve or maintain
 
25 monopoly, and that exclusion can be as harmful as

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

29

1 collusion. I imagine the report would likely go on and
 
2 launch into some cautions, the sorts of things that many
 
3 people also talk about, difficulties that arise in
 
4 telling apart harmful conduct from procompetitive
 
5 conduct; concerns about the motives of rivals when they
 
6 complain about exclusion, and those are all legitimate,
 
7 but I would start with a big endorsement of Section 2
 
8 and its importance.
 
9 I would also recommend that the report question
 
10 an argument I sometimes hear, that when you consider
 
11 false acquittals and false convictions, that that
 
12 thinking should somehow suggest putting a thumb on the
 
13 scales when analyzing monopolization in favor of
 
14 defendants. The range of tests that are proposed I
 
15 think of as the "thumb on the scales" tests -- profit
 
16 sacrifice, no economic sense, disproportionate impact,
 
17 things like that -- I think should be questioned and
 
18 that the report should instead endorse a reasonableness
 
19 approach, which I have heard some of my colleagues
 
20 endorse also earlier on in the panel, either in an
 
21 unstructured way, but potentially in the structured kind
 
22 of way with shifting presumptions in the way that the
 
23 Microsoft decision of the D.C. Circuit analyzed
 
24 monopolization. I thought that was a sensible approach
 
25 and would be an appropriate standard for the Commission

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

30

1 and the Justice Department to endorse.
 
2 Now, that does not mean you should stop there.
 
3 I certainly understand the importance of counseling and
 
4 practical guidance, not just for firms who want to stay
 
5 within the antitrust laws, but also for Einer's judges
 
6 who need to understand how to apply them in court, and
 
7 it would certainly be appropriate for the agencies to
 
8 propose various kinds of guide posts for implementing
 
9 the general reasonableness standard in the form of
 
10 presumptions, for example, in specific types of cases to
 
11 get some of the benefits of bright line standards,
 
12 either in settings where there is a reason to think harm
 
13 is likely, or harm is not likely, or maybe there is no
 
14 basis for intervention because there is no practical
 
15 remedy. Those would all be good reasons to generate
 
16 guide posts.
 
17 We can go into the details of this later on as
 
18 we get into cases, but I think that is the general
 
19 framework that I would suggest approaching in the
 
20 report.
 
21 MR. BAER: Thanks, Bill. It is great to be
 
22 considered a leading mouth, Bobby, and I thank you for
 
23 that.
 
24 One of the great benefits of going last, of
 
25 course, is that most of the things that you might want

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

31

1 to observe have already been articulated well by others,
 
2 and so I will try and be very brief.
 
3 I do think a report out of these hearings ought
 
4 to indicate the agencies' belief in the value of Section
 
5 2 enforcement. A number of people have talked about
 
6 that. I think there ought to be a priority given to
 
7 articulating, as best we can -- and we cannot in all
 
8 areas -- what the standards are that ought to be
 
9 applied. I think we need to appreciate not only the
 
10 point that Jan and others made that guidance to clients,
 
11 for those of us who are in private practice, are
 
12 important, but that guidance to enforcers and to judges
 
13 and to private plaintiff lawyers is of great value, too.
 
14 One of the most extraordinary benefits, I think,
 
15 of the Merger Guidelines was the fact that it created
 
16 common terminology, common ground, for enforcers and
 
17 private parties to engage in understanding the key
 
18 issues that needed to be addressed, and I think to the
 
19 extent we can or this report can articulate comparable
 
20 Section 2 standards, there is tremendous value to that.
 
21 Specifically, I do think the confusion over
 
22 bundled discounts is an area where the business
 
23 community, the courts, are crying out for guidance, and
 
24 having this report begin to advance that dialogue is
 
25 important, but it has to be accompanied, I think, with a

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

32

1 commitment to intervene and articulate the standard in
 
2 courts in the hopes of expediting a refinement of what
 
3 the law is on bundled discounts.
 
4 Finally, I agree with Tom's point that thinking
 
5 about remedy, not as the throw-away issue but as a
 
6 front-end issue, do not go in without knowing this has a
 
7 foreign policy implications, too, without knowing where
 
8 it is you want to come out or where you think you
 
9 realistically can come out is a key consideration in
 
10 terms of Section 2 enforcement.
 
11 MR. BLUMENTHAL: Well, thank you all. That is a
 
12 lot to start, and as a moderator, it is almost the
 
13 question of where do we go next.
 
14 You know, there are a number of themes that come
 
15 out of the nine sets of comments. Let me start with
 
16 this one. A number of people have spoken about the
 
17 importance of re-affirming Section 2 as a basis for
 
18 enforcement. Does anyone want to take the opposite side
 
19 of that and stand up for the proposition that we ought
 
20 to be expressing caution about excessive enforcement in
 
21 the area?
 
22 If the answer is no, if that is the sense of the
 
23 panel -- Steve?
 
24 MR. CALKINS: Bill, it is hard to say file fewer
 
25 cases than the Justice Department is filing, because I

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

33

1 do not think the current Justice Department has filed a
 
2 single case under Section 2. It is hard to say you want
 
3 to cut back on that.
 
4 MR. BLUMENTHAL: Although I will say, in
 
5 fairness, that Dennis is not here yet, so we do not have
 
6 the Justice representative up here to defend himself,
 
7 and I do not carry around a list of Justice Section 2
 
8 cases the way I do with FTC Section 2.
 
9 MR. JACOBSON: That is because there are not
 
10 any, and Dennis would say, "I just got there."
 
11 MR. CALKINS: I mean, the question here is --
 
12 private enforcement is what a lot of this is all about.
 
13 I mean, even some of the people who say, "Let's be
 
14 cautious, let's cut back, let's have bright rules or
 
15 bright line rules about why defendants should win," will
 
16 concede that, in the end, what they are talking about is
 
17 private litigation. Indeed, I think it was Dan Crane in
 
18 his session who specifically said that he would like to
 
19 have a different rule for a government case than he
 
20 would for a private case.
 
21 So, when you are talking about enforcement,
 
22 nobody could suggest that the Justice Department should
 
23 file fewer suits. If people think there is too much
 
24 litigation going on, they usually have in mind private
 
25 enforcement, and, of course, that is controlled by the

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

34

1 private litigants.
 
2 MS. McDAVID: I would like to echo at least the
 
3 implicit point Steve has made that there is a role for
 
4 government enforcement in Section 2. That is something
 
5 I have believed for a very long time. Let's remember
 
6 that private cases often involve rivals who have axes to
 
7 grind and may be fighting their battles in multiple
 
8 fora, whereas the Antitrust Division and the Commission
 
9 speak for the United States, and they speak for the
 
10 consumers of the United States. So they do not bring
 
11 those biases, and presumably can bring the kind of
 
12 objectivity as to whether an appropriate case should or
 
13 should not be brought that may be lacking in the private
 
14 context. So, I think there is an important role for
 
15 public enforcement of Section 2, in addition to having
 
16 public advocacy with respect to Section 2.
 
17 MR. JACOBSON: Bill, if I could just endorse
 
18 what Steve and Jan and John, in particular, said
 
19 earlier, that we would be hard-pressed to say that there
 
20 should be less Section 2 enforcement than there is
 
21 today, and I think if one goes back through history and
 
22 looks at the conduct that has had long-term deleterious
 
23 impacts on consumers, we will focus on single-firm
 
24 conduct a good deal more than we will focus on
 
25 collusion.

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

35

1 Cartels are short-lived, there is cheating, they
 
2 have no redeeming value, but the raw amount of harm that
 
3 they inflict on consumers is a good deal less than the
 
4 durable monopolies. One example that I go back to, and
 
5 there are many others, but if you look at the motion
 
6 picture patents case, you are looking at largely
 
7 single-firm conduct based on the tying of the motion
 
8 picture projector patent that messed up the motion
 
9 picture industry for almost a century. I mean, it is
 
10 still messed up today as a result the cartelization that
 
11 was formed as a result of the tying arrangements
 
12 associated with the Edison patent, and there are
 
13 numerous examples, maybe not as dramatic as that, but
 
14 the harm inflicted on the economy by unlawful
 
15 monopolization is very, very severe and much
 
16 longer-lasting than cartels.
 
17 MR. BLUMENTHAL: We are going to come back to
 
18 that, but, Tom, you had --
 
19 MR. KRATTENMAKER: Well, yes, I will just
 
20 congratulate Steve for having signed onto the
 
21 Baer-Krattenmaker Doctrine, and the same kind of
 
22 thought, if you think about remedies, that might shape a
 
23 case you would bring, and also, at least -- forgive me
 
24 if it is heresy, but if you think about a case and you
 
25 say here is a Section 2 case, what is the end result

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

36

1 going to be, somebody is going to pay treble damages to
 
2 somebody else, and there is going to be no other change
 
3 in the world, I have to wonder whether that is something
 
4 that is a good use of social resources.
 
5 So, whether you have the basis in this record
 
6 for that kind of thing, I just do not know, Bill, but I
 
7 do think that -- I think we have all seen -- and I do
 
8 not know how many times I have wanted to ask somebody,
 
9 you are proposing this standard, are you proposing this
 
10 standard for the definition of monopoly, of a legal
 
11 monopoly, or are you proposing this standard for the
 
12 definition of illegal monopoly in a treble damages
 
13 private action case? It is remarkable how often the
 
14 explicit or implicit answer is it is only the latter
 
15 that I have in mind.
 
16 I do not know that it is the burden of these
 
17 hearings, but I do not know that it is right that the
 
18 law of monopolization ought to be driven by the rules of
 
19 standing to bring private treble damage actions, and I
 
20 am glad Steve put that -- let me say, that issue, I
 
21 think, should be on the table. I won't say I am glad
 
22 Steve put it on the table. Maybe he does not find it
 
23 that way, so I will take responsibility for it.
 
24 DR. WILLIG: But to go back to your question,
 
25 Mr. Chair, do we see too many or too few cases and what

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

37

1 are the dangers, how do they balance going forward, to
 
2 me this comes back to the standards question, to the
 
3 question of what are the standards that the enforcement
 
4 decision has in our collective minds and stomachs about
 
5 bringing public cases, and how do courts react, and what
 
6 are the footnotes in the latest Supreme Court case?
 
7 These are all extremely important, as we all know, for
 
8 the flow of cases and for the flow of counseling
 
9 instructions that shape business based on liabilities
 
10 and expected trouble in litigation.
 
11 All of this, at the end of the day, really does
 
12 stem in ways that we can all appreciate from what is the
 
13 general view, if there is a consensus, of what are the
 
14 right standards to guide business conduct in specific
 
15 areas unilaterally. I would like to put in my voice,
 
16 once again, to say everything everyone has said is
 
17 great, but, at the end of the day, we have got to get
 
18 our standards straight, understand what the philosophy
 
19 is, where we are coming from, and then what are the
 
20 horseback implications, Jan, but you have got to start
 
21 from a framework that makes sense, and, yes, makes sense
 
22 economically as well as legally.
 
23 DR. ELHAUGE: I was going to say, I agreed very
 
24 much with the comments that Tom made, and I wanted to
 
25 relate it to the issue of EC convergence, because often

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

38

1 we say the EC has broader standards, but since there is
 
2 very little private litigation, and thus, less of an
 
3 over-deterrence problem, because almost every case is
 
4 brought by a disinterested regulator who, in theory, has
 
5 no interest in bringing it if he thinks it is desirable
 
6 conduct, it actually makes sense for the EC to have
 
7 broader standard than the U.S. has for the same sort of
 
8 statute that is also enforceable with private actions.
 
9 That same kind of logic may suggest that the
 
10 standards that the Government applies to enforcement
 
11 action should be broader than the standards we apply in
 
12 private litigation. A little harder to do for the
 
13 Department of Justice, because it is the same statute; a
 
14 little easier to do with the FTC Act, as they could
 
15 limit these broader rules of FTC Act Section 5, which is
 
16 not enforceable by the private parties.
 
17 MR. BLUMENTHAL: Although I suppose one could
 
18 ask whether the absence of private cases ought to go to
 
19 broader standards or simply a more active set of
 
20 enforcement activities by the Government. In other
 
21 words, it may be that we have the same set of standards
 
22 but not necessarily the same bundle of government
 
23 activity.
 
24 DR. ELHAUGE: Right, but I think different
 
25 standards are optimal, though. I do think, though, if,

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

39

1 for example, you have some remedy -- if at the end you
 
2 decide there is no equitable remedy, you might decide
 
3 the only thing we can do is deter this conduct with
 
4 treble damages, and so the Government may say this is
 
5 very important, we just do not have treble damages in
 
6 our arsenal of remedies, and that is why we leave it to
 
7 private litigation.
 
8 MR. BLUMENTHAL: Let's chase down that line for
 
9 a second. Does anyone have any views on whether we
 
10 ought to be looking at a different set of standards for
 
11 government enforcement versus private damage cases?
 
12 MR. JACOBSON: Well, I will take the contrary
 
13 position. I believe one of the most important reasons
 
14 for private enforcement law is government inactivity,
 
15 and I think it is essential -- and I have said this
 
16 publicly very recently in connection with the AMC -- it
 
17 is important to have a robust private enforcement
 
18 mechanism to make up for periods, as we are living
 
19 through today, of under-enforcement by the Federal
 
20 Government.
 
21 Why is this not a problem in my judgment? It is
 
22 because, at the end of the day, there is no remedy other
 
23 than what the courts grant, and there is no
 
24 self-enforcing private enforcement mechanism. You have
 
25 to get a court, sometimes a jury, usually the district

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

40

1 judge as well, finding the facts, and you have to get it
 
2 through a court of appeals, and if you get through those
 
3 hurdles and to get some relief, the private firm is
 
4 going to have to have a very meritorious case, and if
 
5 the private firm has a meritorious case and has been
 
6 found to have standing and antitrust injury under the
 
7 case law that has developed, I do not see why the
 
8 substantive standard should be different than when the
 
9 Federal Government sues.
 
10 I do think Section 5 has a role to play in terms
 
11 of experimentation by the FTC that is broader than
 
12 Section 2, but fundamentally, I think private
 
13 enforcement is a good thing, and we should not be
 
14 embarrassed about it.
 
15 DR. BAKER: I have a comment on the number of
 
16 cases, private and government. I did a little research
 
17 this morning, but it was not, you know, what you would
 
18 like to do in going through the dockets in all the
 
19 courts and actually count cases, but in terms of -- it
 
20 might be useful to lay this out a little bit.
 
21 The Government, since about 1977, has basically
 
22 brought about one monopolization case a year, and during
 
23 the past -- during the current administration, they have
 
24 essentially been all at the FTC. The FTC is bringing
 
25 cases at the rate that has been common for the

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

41

1 Government since then. In the sixties and early
 
2 seventies, it was about three times a year.
 
3 Now, in private monopolization cases, what I
 
4 learned was I went back and read -- looked at Steve
 
5 Salop and Larry White's work on the Georgetown Treble
 
6 Damages Study. They were looking at 1973 to 1983, and
 
7 monopoly or monopolization was a primary allegation,
 
8 they say, in only 3.7 percent of private antitrust
 
9 complaints. That is what I found. It was a secondary
 
10 allegation in another almost 9 percent, but a primary
 
11 allegation in less than 4 percent of the cases.
 
12 Now, I also happened to notice that predatory
 
13 pricing was a primary allegation in about 3 percent of
 
14 the cases, and you did not have to bring a predatory
 
15 pricing case as a monopolization case, but it is
 
16 possible that most -- and I just do not know this --
 
17 that most of those cases were predatory pricing. This
 
18 study was done before Matsushita and before Brooke
 
19 Group, and so the predatory pricing cases have become
 
20 much more difficult to bring.
 
21 In addition, the antitrust injury requirements
 
22 operate particularly on monopolization cases in private
 
23 litigation, because they are often brought by
 
24 competitors who then have to prove their antitrust
 
25 injury. So, my suspicion, based on this limited

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

42

1 analysis, is that there is not a plague of bad
 
2 monopolization cases going on right now and that one
 
3 could overstate the concern with what would happen if
 
4 private litigation were somehow -- or what does happen
 
5 in private litigation, and, therefore, overstate a need
 
6 to have a different standard for private litigation than
 
7 for the Government.
 
8 MR. CALKINS: Well, I have to object. Although
 
9 I love doing research, and I love having other people do
 
10 research even better than doing it myself, the problem
 
11 with looking at the Georgetown study to figure out how
 
12 many private monopoly cases exist is that you have to
 
13 remember that back in '73 to '83, there was a viable
 
14 Section 1 private jurisprudence, and if you were a
 
15 private party, you could bring a Section 1 case
 
16 involving something other than cartels and expect to
 
17 win.
 
18 Gradually, over time, we have learned that under
 
19 Section 1, the defendants always win -- that is an
 
20 overstatement -- unless it is a cartel; just you rattle
 
21 through it: you know, it is very, very hard to win an
 
22 exclusive dealing case (Section 1), or a tying case
 
23 (Section 1), or any kind of Section 1 case. And what
 
24 has happened? The answer is that innovative private
 
25 plaintiffs' lawyers are not stupid. They have learned

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

43

1 that if you want to survive summary judgment or a motion
 
2 to dismiss, the thing to do is to not bring a case
 
3 unless you either can allege some kind of thing that is
 
4 like a cartel or something that you can say with a
 
5 straight face is a Section 2 case.
 
6 So, what might have been a Section 1 case back
 
7 during the Georgetown study era might very well, today,
 
8 be a Section 2 case. It might not. I am not saying
 
9 there are lots of private Section 2 cases. I am just
 
10 saying that you have to be careful before drawing a
 
11 conclusion from how many there were to how many there
 
12 are today.
 
13 DR. BAKER: Fair enough, but you still have to
 
14 prove monopoly power under Section 2, which you do not
 
15 have to prove in Section 1.
 
16 MR. CALKINS: Well, and on that one, I am going
 
17 to flip back to your should we use Section 5 kind of
 
18 thing and might ever there be an appropriate situation
 
19 where the Federal Trade Commission maybe should prevail
 
20 in a Section 5 case, whereas it might be hard for a
 
21 private party to prevail in a private treble damages
 
22 case. I cannot say that I am ready to sit down and
 
23 write a different legal standard, right, but in most of
 
24 these cases, it is really about a story. It is not
 
25 usually a single act. It is usually a story of what the

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

44

1 defendant has done that has allegedly lessened
 
2 competition.
 
3 As a practical matter, a whole lot of these
 
4 cases are won by defendants getting summary judgment for
 
5 failure to show sufficiently high market share. Might
 
6 there sometime be a situation where, we might decide
 
7 that the Government, in a Section 5 case, should be able
 
8 to intervene and prevent some pernicious activity even
 
9 if, you know, maybe there is more of a debate about
 
10 market power or maybe the market share is only 60
 
11 percent and not the 70 percent maybe that circuits seems
 
12 to require in a private case?
 
13 Well, I would certainly want at least to leave
 
14 that question open and think about it -- not as a matter
 
15 of a different standard, as such, but maybe as applied.
 
16 There may well be a time when there is a role for
 
17 Section 5 here.
 
18 DR. ELHAUGE: In my earlier comment, I was not
 
19 trying to suggest that private litigation, we need to
 
20 clamp down on it more now. Instead, I was making a
 
21 quite different point, that current Section 2 law, it
 
22 seems to me, is already constrained by the fear of
 
23 over-deterrence because of private litigation, and if we
 
24 decouple the standards, then the Government could be
 
25 freer to choose broader standards, because it may be the

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

45

1 case that the open-ended contextual standard, when
 
2 applied by a disinterested regulator, makes sense, but
 
3 if I were working for the Department of Justice, I would
 
4 hesitate to establish that as the law through a case
 
5 when I know every private party will be able to operate
 
6 under the same standard. If you decouple them, then you
 
7 may find, instead, a different standard would instead
 
8 make sense.
 
9 DR. WILLIG: Does this go back to the questions
 
10 of remedies that some of the panelists have put in the
 
11 forefront? When I saw the remedy page of the 15, I just
 
12 scribbled notes that said it is the last page, it is a
 
13 throw-away, because we all know -- but I really do not
 
14 know, this is a question for the practitioners -- but I
 
15 would suggest that we all know that the real force
 
16 behind counseling and behind your clients paying
 
17 attention to your counseling is not the fear of remedies
 
18 imposed by the Government or even by a private court,
 
19 but instead, the massive treble damages in all the
 
20 follow-on cases. Isn't that the real force that leads
 
21 up to deterrence if we had clear and sensible standards?
 
22 And if that's right, maybe we can leave the remedies
 
23 page at the back of the stack instead of at the front.
 
24 MR. BLUMENTHAL: Does anyone have any comments
 
25 on that?

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

46

1 MR. JACOBSON: I think that is absolutely right.
 
2 DR. WILLIG: No further questions.
 
3 MR. BLUMENTHAL: I want to come back to the
 
4 standards question in a minute, but first, let me do a
 
5 little bit more just to make sure we are all grounded on
 
6 the too much or too little dimension.
 
7 A couple of people have expressed the view that
 
8 exclusion is as big a problem as collusion. Somebody
 
9 said it is a bigger problem than collusion can be. I
 
10 know of at least a few speeches from the enforcement
 
11 agencies in this decade that express a contrary view.
 
12 So, I thought I would just, again, go around the horn
 
13 and get a sense as to do people share that sense, that
 
14 exclusion -- you know, not in theory, but as an
 
15 empirical matter, as a practical matter, in terms of
 
16 effects on the economy -- is likely to be as big a
 
17 problem as collusion?
 
18 MR. KOLASKY: I will take a first stab at that
 
19 since I have been fairly quiet.
 
20 I actually think that collusion is still a more
 
21 serious problem than exclusion, and if you look at the
 
22 kinds of multi-national cartels that we have seen over
 
23 the last 10 to 20 years, oh, you know, starting with
 
24 vitamins and lysene and continuing through air cargo and
 
25 some of the other cartels that we have seen recently, it

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

47

1 is very clear that we still have very large-scale cartel
 
2 activity going on, which is taking huge amounts of money
 
3 away from consumers.
 
4 The whole area of exclusion, as we are going to
 
5 be talking about when we start talking about the
 
6 analytical framework, it is much more difficult, I
 
7 think, to determine whether a firm has acquired and
 
8 maintained a "dominant market position" through greater
 
9 efficiency and aggressive competition as opposed to
 
10 through exclusion.
 
11 So, you know, I think naked cartel behavior
 
12 still should be the number one enforcement priority of
 
13 our agencies, but I do think that the agencies have been
 
14 paying too little attention to Section 2 and looking for
 
15 exclusion cases, and when they do conduct investigations
 
16 or bring the complaints, not prosecuting them as quickly
 
17 and efficiently as they need to.
 
18 You know, I think one of the things which
 
19 distinguish the Microsoft era, if you will, is if you
 
20 look back at the Section 2 cases that the Justice
 
21 Department brought during the late 1990s, the Microsoft
 
22 case, the American Airlines case, the Dentsply case, all
 
23 of those cases were tried relatively quickly, and we
 
24 ended up with court of appeals decisions in a matter of
 
25 just a few years. I think it is very important in terms

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

48

1 of the development of the law that we prosecute
 
2 monopolization cases vigorously, not just often.
 
3 MR. BAER: Just to follow on Bill's point, and I
 
4 agree with it, I mean, I do not know whether cartel
 
5 misconduct creates more consumer injury than Section 2
 
6 misconduct, but I do know that detecting cartel conduct
 
7 and being confident that you are dealing with a real
 
8 problem that is producing consumer injury is easier than
 
9 where we are today with Section 2, with evolving
 
10 standards, and more uncertainty, and more of a risk that
 
11 you actually will be penalizing successful single-firm
 
12 conduct. So, it is just a harder question for me to
 
13 answer than it is with regard to cartel.
 
14 MR. BLUMENTHAL: Tom?
 
15 MR. KRATTENMAKER: Bill Kolasky is certainly
 
16 right I am sure about the harm from collusion, and the
 
17 international stuff is really quite powerful. I do not
 
18 think your question can be answered, Bill, and the
 
19 reason for it is there just are incommensurate things
 
20 here. When you say "exclusion," you probably do not
 
21 mean, for example, the massive amount of exclusion that
 
22 takes place because of government-controlled spectrum in
 
23 communications industries; you do not mean the massive
 
24 amount of consumer harm that is inflicted by entry
 
25 requirements in the various professions or simple jobs

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

49

1 like being a barber or a beautician. So, we do not have
 
2 a way of measuring these kinds of -- that is why I
 
3 suggested, you know, a focus on them, and if you know
 
4 anything about remedies, if you think about immunities,
 
5 then you are thinking about exclusion.
 
6 So, I mean, it is a fair question to ask, but I
 
7 think the right answer is, gee, you really cannot
 
8 measure those things, because we have a sense of what we
 
9 mean by collusion that harms consumer welfare, so the
 
10 definition of collusion is that kind of cooperative
 
11 activity among competitors that does not have some
 
12 consumer welfare justification, but when we say
 
13 exclusion, different people hear different things.
 
14 MR. BLUMENTHAL: And you are right, for purposes
 
15 of my question, I was excluding all sorts of
 
16 anticompetitive effects --
 
17 MR. KRATTENMAKER: No pun intended, you were
 
18 excluding all the other --
 
19 MR. BLUMENTHAL: -- including government
 
20 exclusionary conduct, also government collusion type
 
21 mandated --
 
22 MR. KRATTENMAKER: And I am not sure that it
 
23 makes any sense to weigh those two things.
 
24 DR. BAKER: I just want to add to the
 
25 uncertainty rather than subtract from it. I am

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

50

1 wondering whether if we were thinking about harms to
 
2 innovation rather than harms to price, whether we
 
3 wouldn't be more concerned about exclusion. I am not
 
4 sure, but we might. We have this general view, I think,
 
5 that it is unlikely that firms collude in research.
 
6 DR. ELHAUGE: I think it likely dependent on the
 
7 industry. In some industries, like cement, it seems
 
8 collusion is clearly a bigger problem. Other industries
 
9 where patents allow initial grants of monopoly power,
 
10 you know, medical devices, drugs, new technology, they
 
11 are more likely to have monopolists, because they do not
 
12 need to collude with anybody, so they are more likely to
 
13 engage in exclusionary conduct, and, of course, the
 
14 whole thing is endogenous.
 
15 If you responded to the present-day sentiments,
 
16 we are not going to enforce unless there is exclusion,
 
17 then that is what you will see a lot more of. So, I am
 
18 not sure that this question really helps you to frame a
 
19 report.
 
20 MR. JACOBSON: Let me just clarify what I was
 
21 saying. I am not saying that exclusion by a
 
22 substantial, durable, economic monopoly is more
 
23 prevalent than cartels. I do not think anyone has an
 
24 empirical basis to say yes or no to that. What I am
 
25 saying is that a given economic monopoly that is durable

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

51

1 and long-lasting can inflict as much or greater harm
 
2 than a cartel.
 
3 Now, I would say that vitamins and lysene were
 
4 particularly extraordinary cases in the audacity of the
 
5 conduct and the degree of consumer harm they inflicted.
 
6 I would compare that -- and I think Bill Baer can vouch
 
7 for this -- you know, we are being told that, you know,
 
8 DRAM was a massive cartel. I can tell you that DRAM has
 
9 generated a lot of fines, but to compare it against
 
10 vitamins, would be demonstrating a gross ignorance of
 
11 the facts.
 
12 DR. WILLIG: If we are talking about enforcement
 
13 priorities rather than what would be a lovely academic
 
14 study to somehow trace out consumer harm from various
 
15 categories -- that has never really been done and I can
 
16 see why -- but clearly it is enforcement priorities that
 
17 are most important in terms of what we might say that
 
18 would be of use at this point, and I totally agree with
 
19 those of us who have said that very, very hard
 
20 enforcement against collusion is certainly socially
 
21 appropriate, not only because you catch some huge
 
22 miscreants occasionally and create some of the morasses
 
23 that may or may not be socially appropriate, as in
 
24 semiconductors, but to lay out a clear competitive code
 
25 of conduct for the entire economy, and the best way to

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

52

1 do that is to have the big clear cases and criminal
 
2 penalties and huge fines that we teach in our classrooms
 
3 and just infuse the business sector with an
 
4 understanding of what that code of conduct is, is of
 
5 primary importance here and abroad, to be sure.
 
6 If only we had such clarity of purpose and of
 
7 discernment in the exclusion area. What I would say in
 
8 this same tone is that where we do find instances of
 
9 clear exclusion, where it really does matter -- and I
 
10 believe there are such instances in many different
 
11 industries, I cannot tell you the prevalence, but one
 
12 sees instances recurrently -- that if we had the right
 
13 standards and could promulgate them and teach them by
 
14 bringing the right cases and making a big show of them,
 
15 the economy would be in better shape as a result.
 
16 It is a secondary priority compared to the
 
17 competitive code of conduct, anticollusion, but a very
 
18 important one nevertheless, and it falls to us to say
 
19 this today and to say what the standards ought to be
 
20 behind such red letter cases.
 
21 MR. BLUMENTHAL: The last of the scoping
 
22 questions that I have based on the introductory remarks,
 
23 I think it was Steve Calkins who attributed to one of
 
24 the in-house practitioners the observation that dealing
 
25 with Section 2 in the United States is quite easy and

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

53

1 that there are enough safe harbors that it is not a real
 
2 problem, and I certainly know of one former practitioner
 
3 who practiced about 25 years before entering government
 
4 service who used to say to his clients that when it
 
5 comes to Section 2, that is a success problem. You
 
6 really do not need to worry about it. It is kind of a
 
7 lightning strike, and every so often, every so often, a
 
8 bolt will come out of the blue, but generally, just go
 
9 ahead with the single-firm conduct of the type that you
 
10 want, and we will deal with it later.
 
11 Other than in the bundled discount area, which I
 
12 think a few people have cited, does anyone have concerns
 
13 about over-deterrence from ambiguity in current Section
 
14 2 standards?
 
15 MR. JACOBSON: I think some of the refusal to
 
16 deal area, because it lacks clarity, does cause a number
 
17 of businesses to stop engaging in conduct that would be
 
18 procompetitive or beneficial. I think refusals to deal
 
19 are not as acute a problem as bundling, because you have
 
20 LePages out there, which just says there is no standard
 
21 at all, but I do think additional clarity is highly
 
22 desirable.
 
23 MR. CALKINS: Bill, even on bundling -- just to
 
24 make the GE point again -- bundling law is completely
 
25 clear, transparent, and the defendant always wins so

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

54

1 long as you do not have a market share that is not
 
2 comfortably well above 50 percent. So even though it
 
3 would be nice if there were more clarity, let's not
 
4 exaggerate the extent of the problem. This is a
 
5 nonissue for the vast majority of American firms.
 
6 DR. ELHAUGE: I agree with that, actually,
 
7 because you do not have to be a monopolist to have a
 
8 Clayton Act Section 3 case or a Sherman Act Section 1
 
9 case with an agreement to abide by the bundling
 
10 condition, so I do not see why that --
 
11 MR. CALKINS: I review every case that is handed
 
12 down, and plaintiffs win almost no Clayton Act Section 3
 
13 cases. You know, plaintiffs are not out there winning
 
14 bundling cases without alleging Section 2. Heck, they
 
15 are rarely winning bundling cases as it is, and the
 
16 reason LePage's is such a big deal is because nobody had
 
17 ever won a case before -- that is an exaggeration --
 
18 but --
 
19 MR. JACOBSON: Well, Steve, in fairness, there
 
20 are a lot of differentiated products where you do not
 
21 know where the market definition fight is going to come
 
22 out, and you have to be concerned in terms of day-to-day
 
23 counseling, and you have products like pharmaceuticals,
 
24 each of which, arguably, has a monopoly in its product
 
25 line, and you have to be concerned about counseling

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

55

1 those companies as well. So, I would not say it is a
 
2 zero.
 
3 MR. CALKINS: I am not going to say it is a
 
4 zero, and I will concede there is ambiguity there, and
 
5 clarity would certainly be a good thing -- but I just do
 
6 not want to exaggerate the extent of the problem.
 
7 MR. BLUMENTHAL: If it is okay with the group,
 
8 let's turn to general standards.
 
9 MR. JACOBSON: Oh, no.
 
10 MR. BLUMENTHAL: Well, you know, I couldn't help
 
11 but notice that three or maybe four of you unilaterally
 
12 took a swipe at no economic sense and profit sacrifice,
 
13 and I guess my question is whether anyone is going to
 
14 stand up for the opposite side and say, yeah, those are
 
15 appropriate tests, at least for some purposes.
 
16 Jan?
 
17 MS. McDAVID: Well, as someone who does not
 
18 think there is a single standard, I do think profit is a
 
19 sacrifice appropriate test, but I do not think it is THE
 
20 appropriate test. Based on the briefing in the Trinko
 
21 case and the Trinko decision. I think is it is
 
22 sufficient but not necessary in some circumstances.
 
23 There are a range of other tests that may be more
 
24 appropriate depending on the particular type of conduct
 
25 and effect involved. So, I think the profit sacrifice

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

56

1 test is a very useful paradigm, and it really is what we
 
2 are talking about in predatory pricing, and now, it
 
3 turns out, also in predatory purchasing, but it is not
 
4 the only test.
 
5 MR. BLUMENTHAL: Well, I know others have things
 
6 to say, but let me just sort of step back to the
 
7 logically prior question of single standard versus
 
8 multiple standards that might track to, say, type of
 
9 conduct. Where are all of you on that?
 
10 Bill?
 
11 MR. JACOBSON: Can I give a first crack at that?
 
12 I think Bill Kolasky in his opening remarks hit it right
 
13 on the head. You need an overall concept of what it is
 
14 that your objective is, and --
 
15 MR. BLUMENTHAL: Several people said that.
 
16 MR. JACOBSON: -- you know, whether it be
 
17 consumer welfare or total welfare or a rule of reason
 
18 context -- mine would be consumer welfare in the rule of
 
19 reason context -- I think you need to have, at the very
 
20 apex, an idea of what your goal is.
 
21 It is when you get past that to the next level
 
22 of analysis, is there a test, where I think -- I think
 
23 the consensus today is that there cannot be a single
 
24 test for all aspects of conduct, because, for example,
 
25 to take predatory pricing, we want to single out that

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

57

1 behavior as being particularly hard for plaintiffs to
 
2 attack, because it is price competition by definition.
 
3 If we want to single it out for special treatment, that
 
4 very concept precludes applying the same standard to
 
5 other aspects of conduct that are not so uniformly
 
6 beneficial to consumers.
 
7 MR. BLUMENTHAL: Bill?
 
8 MR. KOLASKY: Just to follow up on that, the
 
9 reason I think that the rule of reason framework that
 
10 derives from Chief Justice White's opinion in Standard
 
11 Oil is the right framework is that it allows you to
 
12 undertake what Justice Souter called in California
 
13 Dental an inquiry meet for the case, and the point is
 
14 that what you ought to look at first is the alleged
 
15 anticompetitive harm, the alleged exclusionary conduct,
 
16 and how serious is the anticompetitive effect.
 
17 The more serious the anticompetitive effect, the
 
18 more closely you want to scrutinize the justifications
 
19 that are proffered by the defendant for that conduct.
 
20 So, if you have something in which the exclusionary
 
21 effect is, at worst, mild, you are going to then give a
 
22 great deal of deference to the judgment of even a
 
23 monopolist to undertake the particular conduct in
 
24 question, and you are not going to look that closely at
 
25 whether there might have been less restrictive ways to

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

58

1 accomplish the same legitimate objectives.
 
2 On the other hand, if the exclusionary effect is
 
3 very severe and serious, then you are going to subject
 
4 it to a much closer, much more detailed scrutiny, and I
 
5 cannot remember which one of the panelists on the other
 
6 side noted the importance of looking beyond antitrust,
 
7 but I think that is a very important point. When I was
 
8 preparing for the hearings here last summer, I was
 
9 working with a summer associate from Harvard who had
 
10 just taken Constitutional law, and she was reminding me
 
11 that under both the First Amendment and equal protection
 
12 balancing test, the degree of scrutiny depends on the
 
13 nature of the restriction, and it struck me, well, that
 
14 is exactly right. That is how it should be and how it
 
15 is under Section 1 rule of reason analysis, and why
 
16 shouldn't it be the same under Section 2?
 
17 The other point is, you know, I think one of the
 
18 things that we have really learned over the last 20
 
19 years is the importance of looking at the purposes and
 
20 effects of the conduct as opposed to simply trying to
 
21 label it, and that is particularly important here, I
 
22 think, because some of the conduct that you talk about
 
23 in Section 2 cases -- bundling, tying, exclusive
 
24 dealing -- can also be a violation of Section 1, and it
 
25 is by no means clear to me why the standards applied and

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

59

1 the analytical framework applied to that conduct should
 
2 be different under Section 2 than it is under Section 1.
 
3 Under Section 1, using our common law approach
 
4 over the last 100 years, we have evolved a set of
 
5 presumptions, a set of virtual safe harbors, so that now
 
6 the case law on exclusive dealing under Section 1 is
 
7 pretty clear that if the percent of the market that is
 
8 foreclosed is less than 40 percent, it is very unlikely
 
9 that the plaintiff is going to be able to prevail, and,
 
10 you know, why should the standard be any different under
 
11 Section 2?
 
12 MR. BLUMENTHAL: Bill, when you speak in favor
 
13 of the Standard Oil rule of reason test --
 
14 MR. KOLASKY: Yes.
 
15 MR. BLUMENTHAL: -- are you distinguishing that
 
16 from the D.C. Circuit Microsoft standard?
 
17 MR. KOLASKY: Only slightly. You know, I think
 
18 the D.C. Circuit rule of reason standard that they set
 
19 forth in Microsoft or the framework they set forth is
 
20 exactly the right one. It is a little bit confusing,
 
21 because they talk about a four-part test, and I tend to
 
22 think of the rule of reason as basically being a
 
23 three-part test. The plaintiff initially has the burden
 
24 of showing anticompetitive effect. If they succeed at
 
25 that, the burden shifts to the defendant to proffer some

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

60

1 justifications for it. If the defendant does so, then
 
2 the plaintiff gets another shot to show that there were
 
3 other less restrictive ways to achieve that. Then, at
 
4 the end of the day, the Court may have to balance.
 
5 But, in fact, when you look at the decisions,
 
6 the courts never reach that final balancing stage,
 
7 because they obviate the need for that by adjusting the
 
8 degree of scrutiny that they engage in with respect to
 
9 steps two and three, depending on how strong a showing
 
10 the plaintiff makes in step one, an inquiry meet for the
 
11 case, and I think that is the sound analytical approach.
 
12 MR. BLUMENTHAL: Leaving aside the relationship
 
13 between Section 1 and Section 2, which I think raises
 
14 some other issues that we will get into if we have time,
 
15 just focusing on the application of the rule of reason
 
16 to Section 2, if I hear you right, it sounds as if your
 
17 view would be that that ought to be used as an
 
18 overarching standard, where the variations by type of
 
19 conduct would come in the application of the rule of
 
20 reason, but the standard itself is the same.
 
21 MR. KOLASKY: That is right, and, in fact, I
 
22 think that is implicit in the standard that the courts
 
23 have articulated under Section 2 where they talk about
 
24 whether or not the conduct is "unnecessarily
 
25 exclusionary." How do you determine whether it is

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

61

1 unnecessarily exclusionary without basically going
 
2 through that three-part rule of reason analysis?
 
3 MR. BLUMENTHAL: What do the other panelists
 
4 think of that?
 
5 MR. JACOBSON: Well, I have spoken before, but I
 
6 am going to be brief on this. I do not mean to
 
7 interrupt.
 
8 I have a couple of articles out there on
 
9 exclusive dealing that state exactly what Bill said, so
 
10 let me agree with that. I do view that, though, as a
 
11 test rather than an overall standard. I view consumer
 
12 welfare as the standard and then rule of reason as the
 
13 presumptive way of getting there, with some special
 
14 rules like predatory pricing that would be outside of
 
15 this same framework, but fundamentally, I think that
 
16 articulation that Bill gave is dead on for the vast
 
17 majority of cases.
 
18 MR. BLUMENTHAL: Let me just ask this: If I
 
19 hear you right, a rule of reason test, calling it a
 
20 test, would be something that could be applied
 
21 regardless of whether consumer welfare or total welfare
 
22 or something else was the standard, just that the detail
 
23 of the application might vary?
 
24 MR. JACOBSON: Correct.
 
25 MR. BLUMENTHAL: Okay. Does anybody disagree

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

62

1 with all of that?
 
2 DR. WILLIG: Well, I disagree with this
 
3 articulation of the rule of reason as being antithetical
 
4 to or even separate from the idea of the no economic
 
5 sense test or the test for sacrifice, and let me say the
 
6 obvious and get your reactions to it.
 
7 In the articulations of the no economic sense
 
8 test or the sacrifice test, the first legs of the test
 
9 are whether there is anticompetitive effect, and, of
 
10 course, in the history of Section 2 jurisprudence -- I
 
11 am no scholar of this -- but I am told that in the bad
 
12 old days, folks were not really careful about actually
 
13 seeing first whether there was an anticompetitive
 
14 effect, and, indeed, making sure, before proceeding to
 
15 the tougher part of the analytics, that, indeed, there
 
16 is a causal relationship shown between the challenged
 
17 conduct and the alleged anticompetitive effect.
 
18 So, I think it is appropriate to break down that
 
19 first stage -- and maybe that is conventional, maybe it
 
20 is not, from the case law, you will tell me -- to break
 
21 it down into is there competition at stake here in a
 
22 relevant market, and then second of all, is that
 
23 possible harm to competition or the maintenance of the
 
24 absence of competition, does it flow causally from the
 
25 challenged conduct? If we can all agree on that, that

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

63

1 is actually progress, I think, but that is the way I
 
2 understand it.
 
3 Then, the way I see the schematic, if the
 
4 answers to those questions are there may very well be
 
5 room for concern here, competition is at stake, and it
 
6 does flow from the conduct, the next question is, well,
 
7 what is this conduct? Is this conduct really part of
 
8 competition that is happening in these circumstances to
 
9 be knocking out valuable and scarce competitors? That
 
10 is one way to ask the question, is it a reasonable
 
11 practice or is there a social rationale for it?
 
12 Another way to ask the question is whether
 
13 competitors would be doing this absent the impact on
 
14 competition, knocking rivals out, and is there economic
 
15 sense to it? These are all different ways to say, at
 
16 the end of the day, whether there is something
 
17 inherently efficient about the practice in its context.
 
18 MR. BLUMENTHAL: Okay, let me make sure I
 
19 understand what I think you are saying, but I am not
 
20 sure. I mean, you live in a world of topology and Zajac
 
21 geometry and things like that where doughnuts can get
 
22 reshaped into coffee cups and the like.
 
23 DR. WILLIG: Right. It beats stare decisis and
 
24 Latin stuff.
 
25 MR. BLUMENTHAL: Perhaps.

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

64

1 Is the proposition that if you just run the
 
2 right transformation program, the rule of reason and the
 
3 no economic sense test map into one and the same thing?
 
4 DR. WILLIG: Well, I think that is something for
 
5 us to explore. That is not a position that I come into
 
6 today holding, but it is worth pushing it to see where
 
7 it breaks down, if it does. So, after seeing that there
 
8 is anticompetitive effect of the conduct, the next step,
 
9 we all agree, is examining the conduct to see whether
 
10 there is a rationale for it in some sense, and now,
 
11 where do we depart? It is the weighing step, I would
 
12 imagine.
 
13 MR. CALKINS: Well, everybody (I suspect) would
 
14 agree that the no economic sense question is a really
 
15 good question to ask. I frankly think that Greg
 
16 Werden -- sitting right there -- and his co-authors have
 
17 greatly enriched the dialogue. They have provided a lot
 
18 of help to counselors, because you can turn to a
 
19 businessperson and ask why he or she is doing this and,
 
20 you know, you have a question to think about -- does
 
21 this make economic sense apart from injuring
 
22 competition -- and it is a wonderfully important
 
23 question that very often will answer the question as to
 
24 how concerned are we about what is going on here.
 
25 I think the question is, is it, as Jan says, the

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

65

1 only question? Is it THE question? Is it always going
 
2 to be the question? I suspect that the reluctance you
 
3 are hearing around this table is that people may be
 
4 reluctant to sign onto it as THE question, as such, but
 
5 I am guessing that many of us -- certainly I think it is
 
6 an important, interesting question in many cases. I
 
7 think, frankly, it helps -- if you want to buy into a
 
8 Microsoft balancing or call it a pre-Microsoft
 
9 balancing, in the process of that balancing or that
 
10 staggered series of questions, you would often be
 
11 thinking about the no economic sense question as part of
 
12 the analysis.
 
13 DR. ELHAUGE: I actually strongly disagree with
 
14 this claim. I think the no economic sense test makes no
 
15 economic sense. It seems to me it comes in two flavors.
 
16 One is wrong, the other flavor is conclusory and
 
17 obfuscatory. The wrong one is the one that actually
 
18 makes no value judgments about where the profits come
 
19 from. It just asks, is it profitable to exclude your
 
20 rivals, without asking whether it is anticompetitive
 
21 exclusion or not.
 
22 The trouble with that is there is all kinds of
 
23 desirable conduct that excludes rivals and requires
 
24 short-term profit sacrifice, like innovating to create
 
25 patents. There is also all kinds of anticompetitive

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

66

1 exclusions that require no profit sacrificing, like a
 
2 lot of bundled pricing in the short run. So, that
 
3 version doesn't work I think is the problem.
 
4 The other version used to save it is to say,
 
5 well, we only need to ask the question of whether
 
6 excluding the profits that were gained through
 
7 anticompetitive exclusion, would it be profitable, but
 
8 that presupposes we know whether the exclusion was
 
9 anticompetitive or not, and if we knew that, we would
 
10 know how to resolve the whole case. So, I think it ends
 
11 up begging the normative question about how to judge the
 
12 conduct and burying what looks like a mathematical
 
13 question about profit, and thus, obscures the question
 
14 we have to ask, which is, is this conduct that excludes
 
15 rivals actually anticompetitive or not?
 
16 MR. KOLASKY: Two quick points: One, I agree
 
17 that focusing on profit sacrifice and whether the
 
18 conduct makes economic sense is one of the questions
 
19 that we ought to ask. From the standpoint of the
 
20 counselor, it is a very useful question to ask your
 
21 clients.
 
22 The two things that concern me about that test
 
23 as opposed to the type of structured rule of reason
 
24 framework that, you know, several of us have outlined,
 
25 is first, at least the articles I have read do not

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

67

1 explicitly acknowledge that the degree of scrutiny needs
 
2 to depend on the nature of the alleged exclusionary
 
3 conduct and how anticompetitive it is in the sense of
 
4 how likely to harm consumer welfare.
 
5 The second problem I have is that it focuses, in
 
6 my mind, too much attention on whether the conduct makes
 
7 sense from the standpoint of the alleged monopolist as
 
8 opposed to what is its effect on the consumer, does it
 
9 make sense from the consumer's perspective?
 
10 If you look back at the Aspen Ski case, one of
 
11 the key things that jumps out at you in that case is
 
12 that, assuming the facts are as the Court recited them,
 
13 the conduct that Aspen was engaging in was degrading the
 
14 quality of its product, making it less attractive for
 
15 consumers, and costing it consumer good will, clearly
 
16 not something that you would engage in unless you had
 
17 some very strong reason for doing so.
 
18 Now, the record, at least as I read it, is
 
19 silent on whether or not there was a short-term profit
 
20 gain from the standpoint of the Aspen Ski Co. from
 
21 engaging in that conduct. The revenues they may have
 
22 gained by having skiers ski their three mountains
 
23 instead of Highlands may well have exceeded the revenues
 
24 they lost because fewer skiers came to the Aspen area if
 
25 they could only ski three mountains instead of four.

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

68

1 The record is silent on that, but I do not think that is
 
2 the important question.
 
3 To me, the important question is, you know, was
 
4 this a monopolist, assuming he was a monopolist, who was
 
5 degrading the quality of its product, and was the effect
 
6 of that to exclude its only rival? If those are the
 
7 facts, then that is a pretty strong monopolization case.
 
8 MR. BLUMENTHAL: Tom, you are wearing that
 
9 bright yellow "Cheap Exclusion" button. Where are you
 
10 on this issue?
 
11 MR. KRATTENMAKER: Which issue?
 
12 MR. BLUMENTHAL: Whether there is an easy
 
13 transformation between a rule of reason standard and the
 
14 no economic sense standard. I mean, the reason I point
 
15 to you in looking at "Cheap Exclusion" is it seems to me
 
16 that that is the easiest candidate to disprove the
 
17 symmetry.
 
18 MR. KRATTENMAKER: I think it depends on the
 
19 level of generality with which you are speaking. I
 
20 liked Einer's speed limit stuff. If you are speaking at
 
21 a level of generality of could you map a profit
 
22 sacrifice test onto a general welfare standard, yes, you
 
23 could, but you shouldn't, and the reason you shouldn't I
 
24 thought was well said by Einer.
 
25 If you are saying that we should have a kind of

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

69

1 a Microsoft approach, a general approach, a multipart
 
2 test for all kinds of monopoly cases, could you just map
 
3 profit sacrifice onto that? No, I do not think so,
 
4 because I think that you can map that onto predatory
 
5 pricing, but I do not think you can map it onto what we
 
6 have called a couple of times in here naked exclusion,
 
7 or the extreme Steve Salop and I once called something,
 
8 stark naked exclusion.
 
9 For the reasons that Bill Kolasky expressed, I
 
10 do not think that kind of behavior gets subjected to a
 
11 profit sacrifice test. So, if I understood your
 
12 question, Bill, no, I do not think it could be mapped.
 
13 MR. JACOBSON: Bill, could I raise just a couple
 
14 more things?
 
15 MR. BLUMENTHAL: Please.
 
16 MR. JACOBSON: First, if the no economic sense
 
17 or profit sacrifice test is being applied by Greg
 
18 Werden, Bobby Willig, and Doug Melamed, I think we will
 
19 get the right result that almost everyone here will
 
20 agree on most of the time, but the problem is that it is
 
21 a very, very difficult test to administer. Its
 
22 proponents say that it is an easier test to administer
 
23 than the rule of reason. I couldn't disagree more with
 
24 that. I think it is extremely difficult, and depending
 
25 on the type of conduct, it is unintelligible.

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

70

1 I go back to the example I used, which is
 
2 exclusive dealing. Exclusive dealing, in the
 
3 traditional case, you have an exclusive deal with a
 
4 dealer to get dealer focus, to have the dealer focus on
 
5 your products, to distribute them more effectively, and
 
6 not to be distracted by distributing other products as
 
7 well. Well, that is a procompetitive effect, but why is
 
8 it procompetitive? It is procompetitive precisely
 
9 because you were excluding others from access to that
 
10 dealer.
 
11 So, the test in that, you know, very recurring
 
12 context is circular, and you can only apply it
 
13 accurately if you go to Bobby Willig, Greg Werden, or
 
14 Doug Melamed and, you know, that is a scarce resource,
 
15 even collectively.
 
16 DR. WILLIG: Well, since the scarce resource is
 
17 represented here, Greg?
 
18 No, let's talk about exclusive dealing.
 
19 Hypothetically, you have got a manufacturer. The
 
20 manufacturer is big in its own space. It would love to
 
21 have some dealers really focused on its product line.
 
22 It is costly to it to expand the domain of the dealers
 
23 who are exclusive, because to sign up a big store and
 
24 say, just handle my line, you are going to have to give
 
25 that dealer a really good deal; otherwise, the dealer is

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

71

1 going to say, no way, I want five different brands, that
 
2 is what my customers like. It is costly to buy
 
3 exclusives. It is good to have some, but from the point
 
4 of view of your ordinary bottom line, it is costly to
 
5 have too many. Now, where is that line? Business
 
6 people worry about this all the time, as you know, and
 
7 they reach their own judgments.
 
8 Now, if I were a manufacturer and I was trying
 
9 to monopolize my product space and I had some shot at
 
10 doing that, I would very gladly overspend on a raft of
 
11 exclusives to tie up the market, foreclose my product
 
12 rival from the distribution she needs to get adequate
 
13 scale economies, and I could monopolize the world this
 
14 way, but you know what, I would be sacrificing profit by
 
15 the no economic sense test or the sacrifice test,
 
16 because I would be overspending on these relationships
 
17 for a purpose -- a profitable purpose, but an
 
18 anticompetitively profitable purpose -- namely, knocking
 
19 my rival out of the product market, so its brand goes
 
20 away, and it cannot come back tomorrow and bother me
 
21 anymore.
 
22 MR. JACOBSON: But why should liability turn on
 
23 whether you did the math right? Why shouldn't liability
 
24 turn on whether the effects of the exclusion are
 
25 outweighed by the procompetitive aspects of the

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

72

1 exclusive dealing?
 
2 DR. WILLIG: Well, the first step is to notice
 
3 that you are monopolizing, and in the hypothetical, you
 
4 are, otherwise, it is not an issue, but the next step
 
5 is, is there something good about this kind of set of
 
6 relationships and does it have to go this far? Under
 
7 your version of rule of reason, I do not know who is
 
8 going to sit back and make that judgment, but under the
 
9 no economic sense test, the benchmark is what would a
 
10 competitor do if the life's blood of one's competing
 
11 brand name were not at stake, what would be a sensible
 
12 business decision about the extent of exclusivity to
 
13 purchase from your dealer?
 
14 MR. JACOBSON: No, it depends on how you do the
 
15 math, how you calculate the cost, what variable costs
 
16 you include, what nonvariable costs you include, how you
 
17 expense the expenditure in terms of exclusivity. It
 
18 reduces to math something that is one step removed from
 
19 the analysis of whether there is an impact on
 
20 competition or not, and that is the problem with the
 
21 test.
 
22 DR. WILLIG: Well, I think it would be very
 
23 interesting to actually apply that same sort of
 
24 recognition of the practical difficulties to the stomach
 
25 test of what is too much in the way of purchased

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

73

1 exclusivity for the sake of consumers, to weigh it
 
2 against the impact on the product market. How do you do
 
3 that weighing?
 
4 MR. BLUMENTHAL: I think a related question to
 
5 the group as a whole, try this proposition: No economic
 
6 sense is more administerable than a rule of reason test.
 
7 Agree or disagree?
 
8 MR. KRATTENMAKER: To what kind of case? Like
 
9 an above cost price cut that drives out rivals who are
 
10 not quite as efficient?
 
11 MS. McDAVID: Across the board?
 
12 MR. KRATTENMAKER: Or an exclusive dealing case
 
13 or a false advertising case?
 
14 MR. BLUMENTHAL: I offer it as an
 
15 across-the-board statement --
 
16 MR. KRATTENMAKER: Nobody agrees to that.
 
17 Nobody would treat the no economic sense test as an
 
18 across-the-board statement. If you destroy your rivals
 
19 by false advertising in a market where you were going to
 
20 be advertising anyway, because nobody can survive
 
21 without advertising, you just decide to put it "not" in
 
22 the ad, nobody can argue that there is a profit
 
23 sacrifice involved in there in any way other than
 
24 perhaps John Jacobson's point, as applied by sensible
 
25 people. Willig, Werden, and Melamed, they will figure

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

74

1 it out.
 
2 MR. BLUMENTHAL: That may be a perfectly good
 
3 argument for why it is the wrong test, but just in terms
 
4 of administerability.
 
5 MR. KRATTENMAKER: I have never heard anybody
 
6 argue that you should apply a profit sacrifice test in
 
7 an above cost price point.
 
8 MR. KOLASKY: Two quick points: One is that
 
9 nobody's arguing I think that you should take any of
 
10 these tests, whether it is the no economic sense test or
 
11 the rule of reason, and apply it in a vacuum. You start
 
12 out with the fact that we do have a hundred years of
 
13 case law from which you can derive certain presumptions
 
14 and even rules in some cases, and so you start with that
 
15 framework, and you are using this rule of reason
 
16 framework to decide the cases that are not decided by
 
17 that set of presumptions and rules that have evolved
 
18 over a hundred years of jurisprudence.
 
19 Second, in terms of balancing, the way I always
 
20 think of it, and one of the questions I put to my
 
21 clients, is you are not balancing in a vacuum either or
 
22 thinking about, you know, two pans and which one weighs
 
23 more. The question you are asking is, what is the
 
24 likely net effect on output and on consumer welfare? Is
 
25 this conduct that, net-net, is likely to increase

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

75

1 output, increase competition and increase output, or is
 
2 it conduct that is likely to raise prices and restrict
 
3 output? That is how you balance.
 
4 MR. JACOBSON: Ditto.
 
5 DR. ELHAUGE: I agree as well. I think it is
 
6 much less administerable. In fact, I think you have to
 
7 do the rule of reason output in order to do the profit
 
8 sacrifice test correctly, because you have to figure out
 
9 first whether the conduct was anticompetitive in order
 
10 to apply it. The other problem I guess is it makes the
 
11 case about the virtue of the defendant rather than about
 
12 the effects of their conduct in a certain way, and that,
 
13 it seems to me, is to obscure the utility of rule of
 
14 reason.
 
15 Maybe the only place where I would differ, it
 
16 seems to me the rule of reason is a good way to start to
 
17 develop more precise rules. Its utility, as you do it a
 
18 lot of times, it is the backup standard, but hopefully
 
19 it will lead to more and more clear rules as we apply
 
20 it.
 
21 DR. WILLIG: Let's talk for a minute about the
 
22 over/under cost pricing, because I think that is a good
 
23 example, and the way I like to look at that example is
 
24 to say that, yeah, if we had all the information in the
 
25 world, the firm did and counsel did and the agency and

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

76

1 the court did, it might make sense to say that there is
 
2 above-cost predation, that there are price cuts above
 
3 cost that might really be aimed at just knocking off
 
4 competitors, and when those competitors are knocked off,
 
5 it is not good for the market, it is not good for
 
6 consumers, and protecting that sort of pricing would not
 
7 be useful.
 
8 But we all agree as a community that the kind of
 
9 information necessary to make that call is so impossible
 
10 to imagine happening, and asking our assistant to make
 
11 those case decisions based on five years of Ph.D.
 
12 analysis of elasticities on which nobody will agree even
 
13 after five years, that in view of the importance of the
 
14 right to drop prices and in view of the importance of
 
15 not getting every pricing case tied up in court
 
16 inconclusively for a decade, it makes a lot of sense to
 
17 make a rule of thumb, as Areeda Turner suggested, and
 
18 for that carry forward as the horseback rule of the day
 
19 in the area of predatory pricing.
 
20 I think it is conceivable that we develop such
 
21 rules of thumb in other areas of conduct as well,
 
22 stemming from consumer welfare, understanding that
 
23 competitive practices are generally good ones, which is
 
24 the no economic sense/sacrifice test, but driving toward
 
25 rough and ready understanding of what we are going to

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

77

1 allow and where concerns will be raised in an everyday
 
2 practical context.
 
3 DR. BAKER: I want to say a couple things about
 
4 this. If the profit sacrifice or no economic sense test
 
5 differs from the reasonableness analysis, it is doing so
 
6 in order, as I said before, to put a thumb on the scales
 
7 in favor of defendants. Now, maybe there are some areas
 
8 where you worry very particularly about chilling
 
9 legitimate conduct, and predatory pricing may be one,
 
10 and there may be others, but it certainly does not make
 
11 any sense to do that across the board.
 
12 That is, in effect, what the profit sacrifice or
 
13 no economic sense tests do if they matter, and if they
 
14 do not matter, then we do not need them, and they also
 
15 have the disadvantage that Einer emphasized, that you
 
16 take your eye off the ball. You are not focusing
 
17 anymore on the harm to competition. You are focusing
 
18 on -- he had a very nice word -- the defendant's virtue.
 
19 I like that.
 
20 In any case, in terms of your administrability
 
21 point, even the price-cost test that we are so used
 
22 to -- and it is hard to think what else we would do in
 
23 the predatory pricing area -- has tremendous problems
 
24 with administrability. I mean, if you are going to use
 
25 some fact to create a presumption, which is, in effect,

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

78

1 what we are doing with a price below cost, you want it
 
2 to be something that is easy to observe and something
 
3 that is related to the harm, and, again, cannot be
 
4 easily manipulated, and at least on the first two
 
5 categories, cost is not a very good -- price-cost is not
 
6 a very good measure.
 
7 I mean, it can often be impractical to observe
 
8 costs, particularly for multi-product firms, or when the
 
9 key decisions involve things like capacity addition or
 
10 expansion or entry. You know, this was the problem --
 
11 rather than incremental production, which is the problem
 
12 in American Airlines, and it is not at all clear that
 
13 that below-cost pricing itself is a good signal of
 
14 anything.
 
15 I mean, whenever you have a case with a price
 
16 that is below whatever the measure of cost is that we
 
17 permit the case to go forward, the defense is going to
 
18 have a good story about why the conduct is efficient,
 
19 and a lot of those stories might well be good. There
 
20 are all sorts of reasons that prices could appear to be
 
21 below cost, and that could be okay, but, you know -- I
 
22 mean, it could be accounting problems in how you are
 
23 recording the investments and R&D and advertising,
 
24 making costs look -- or depreciation, making costs look
 
25 high, and it could be that the actual prices -- the

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

79

1 price is low relative to whatever the measure is because
 
2 the firms are making all sorts of investments in market
 
3 share or to induce people to try the product,
 
4 replacement sales, after-market sales, or, or create
 
5 scale economies or learning. There are all sorts of
 
6 good reasons that firms might price below costs, and it
 
7 still could be okay.
 
8 But by the same token, it could be above costs
 
9 and still -- and that does not necessarily mean
 
10 procompetitive, and Bobby just gave an example, I guess,
 
11 or at least alluded to the fact that there are examples
 
12 in the economics literature, and on top of that, there
 
13 is the difficulty in administering this price-cost test.
 
14 You know, you are arguing about defendant's cost
 
15 accounting, not about exclusion and harm to competition.
 
16 So, I mean, I am not sure we have any practical
 
17 alternative but to use the price-cost test in these
 
18 cases, but I am very troubled by it on administrability
 
19 grounds, and the same problems of administrability that
 
20 come up here are going to come up in any kind of analog
 
21 that generalizes the idea of below cost pricing to a
 
22 broader profit sacrifice or no economic sense test.
 
23 DR. WILLIG: How does rule of reason solve those
 
24 problems?
 
25 MR. JACOBSON: Because it looks at the net

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

80

1 effect on price and output, which is what the answer
 
2 should be and the question should be from the outset.
 
3 That is how it solves those problems. It goes directly
 
4 to the point that you really care about. Why would you
 
5 take a circuitous shortcut that is so difficult to
 
6 administer that you will trip up on the way to get
 
7 there, rather than just asking the question you really
 
8 care about? That is why.
 
9 MR. KOLASKY: And also, the rule of reason test
 
10 allows you to take into account in doing your analysis
 
11 and applying the test the administerability issues and
 
12 the remedy issues. You know, if you look back at some
 
13 of the early articles by Don Turner in the fifties and
 
14 sixties about the rule of reason, that was part of what
 
15 he argued needed to be part of the application of the
 
16 rule of reason.
 
17 MR. BLUMENTHAL: Let me ask a couple of
 
18 questions about the application of the rule of reason in
 
19 this context, and, you know, I do not know that the
 
20 answer would be materially different from the answers
 
21 you would give me in a Section 1 context, so it may be
 
22 that your answer is, well, it is all the same as we are
 
23 used to, but let me at least try to focus it here.
 
24 The first proposition, I take it that the bottom
 
25 line, we are trying to balance procompetitive effect

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

81

1 against anticompetitive effect of a particular product,
 
2 okay?
 
3 MR. JACOBSON: In the sense that Bill was
 
4 talking about.
 
5 MR. CALKINS: I do not think that is it.
 
6 MR. BLUMENTHAL: Okay.
 
7 MR. CALKINS: Indeed, you go back to Bill
 
8 Kolasky -- he says you do not balance until you get to
 
9 the last step, and you never get to the last step, and
 
10 so it is not really a balancing, five of these and four
 
11 of those; rather, it is simply a sequence of questions
 
12 like, the Joel Klein step-wise approach to the rule of
 
13 reason and all these other different things. But it is
 
14 not really a story about two scales to balance.
 
15 MR. BLUMENTHAL: I will adopt that. Whether we
 
16 deal with it as a series of screens and steps or whether
 
17 ultimately we get to the balance or not, what I really
 
18 wanted to tee up was the question, how does one deal
 
19 with uncertainty in measuring the effect?
 
20 Bill, in describing the application of the test,
 
21 spoke repeatedly about the likelihood, and recognizing
 
22 there is some significant uncertainty in what those
 
23 likelihoods are going to be, how do you factor that in?
 
24 Let me just say, I am raising that to tee up what is
 
25 really the ultimate question I wanted to raise, which is

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

82

1 whether the assessment of those likelihoods, the sort of
 
2 discounts you would apply, how you would think about
 
3 false positives and false negatives, should that vary by
 
4 the type of conduct we are dealing with, or is that
 
5 something that itself can be applied to the general
 
6 standard? How should we think about that?
 
7 MR. KRATTENMAKER: I will start and say, if I
 
8 heard you right -- and it would be my fault if I
 
9 didn't -- you said how do we assess or measure the
 
10 effect --
 
11 MR. BLUMENTHAL: How do we deal with the
 
12 uncertainty?
 
13 MR. KRATTENMAKER: With the uncertainty, excuse
 
14 me, not the effect, and this is not the whole answer,
 
15 but I think part of it is.
 
16 Unlike Steve Calkins, I have never tried to read
 
17 all the cases, but from the ones I have read, what I
 
18 would like to suggest is that one of the ways you try to
 
19 deal with some of the uncertainty -- it goes back to
 
20 Einer's thing about the judges all said this stuff just
 
21 does not mean anything to me, and I am sorry, I do not
 
22 know what your reaction was, Einer, but mine was, it is
 
23 really not all that unclear.
 
24 So, I think you deal in part with the
 
25 uncertainty by defining carefully what it is that you

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

83

1 are worried about. It is things like defining what you
 
2 mean by a market and defining what you mean by things
 
3 like market power and deciding whether you mean
 
4 transitory or durable market power. In other words, the
 
5 first way you deal with uncertainty, I think, is to try
 
6 to decide what is it you are trying to be certain about,
 
7 and it has been my observation from looking at cases or
 
8 proposed cases that people might talk about here at the
 
9 Commission or in private practice, that oftentimes there
 
10 has not been a careful assessment of what we are talking
 
11 about.
 
12 It is one thing to say consumer welfare. It is
 
13 another thing to take it to another level to say let's
 
14 be careful what we mean by consumer welfare, what are
 
15 the elements of diminution to consumer welfare, and what
 
16 do you need to know about to measure that. So, that is
 
17 a partial response to your question. I think you deal
 
18 with some of the level of uncertainty, and I think it
 
19 has a practical application, you know, also in the sense
 
20 that you might not find so many kind of screwy appearing
 
21 cases if people had focused on things like is there a
 
22 market here? Is there a market on which somebody could
 
23 exercise market power? Is there some chance that this
 
24 firm gained or is acquiring or is maintaining market
 
25 power as a result of this conduct?

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

84

1 Is that responsive to your question, in part? I
 
2 will settle for in part.
 
3 MR. CALKINS: Bill, you are saying let's go talk
 
4 about competitive effect and -- and I think that the
 
5 true answer is that it is often very hard. You look at
 
6 Dentsply, right? Dentsply had exclusive dealing
 
7 arrangements, and then you sit around and you ask,
 
8 competitive effect? You say, well, these other firms
 
9 did not do very well; and the defendant says, sure,
 
10 because they were incompetent; and it is a very
 
11 difficult process.
 
12 It is not like -- there will be times when a
 
13 firm with monopoly power sees a rival coming along the
 
14 path, adopts some practice that is specifically designed
 
15 to exclude, and you can see how that works out. You can
 
16 conclude that the practice does not have any legitimate
 
17 justification, and you can feel pretty comfortable. But
 
18 there can be lots of times where competitive effect
 
19 is --
 
20 MR. KRATTENMAKER: That case will never be
 
21 reported in any reporter, because it will not get
 
22 anywhere. No, it is just a matter of probabilities, I
 
23 mean, with anything in life.
 
24 MR. CALKINS: This is not easy.
 
25 MR. KRATTENMAKER: We do not --

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

85

1 DR. ELHAUGE: I guess on your question on
 
2 whether with some things we would be more worried about
 
3 false positives than others, I think the answer is yes,
 
4 and it is conduct that is unavoidable, particularly
 
5 every firm has price, the price it buys things at, the
 
6 price it sells things at, and decides who to sell it to.
 
7 So, those seem the three activities that we most worry
 
8 about over-deterrence, because we are concerned that we
 
9 are going to make prices -- cause people to elevate
 
10 prices to avoid antitrust liability or deal with
 
11 everybody no matter how inefficient it is to do so.
 
12 Conduct that is more avoidable, we have somewhat
 
13 less concern about that. So, you do not have to
 
14 condition your price on excluding rivals. You do not
 
15 have to have agreements for exclusive dealing or tying
 
16 agreements. So, it seems to me that more the conduct
 
17 is, in fact, conduct that every firm does not have to
 
18 engage in, the less we have concern, we worry about the
 
19 false positives.
 
20 MR. BAER: I would also say that, you know, if
 
21 you look at the false positive/false negative continuum,
 
22 we would all probably agree that, you know, you are
 
23 willing to tolerate some false negatives on competitor
 
24 collaboration, because it is more often likely to be
 
25 problematic, on balance. Most people would probably,

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

86

1 you know, be more worried about over-deterrence on
 
2 horizontal mergers, but you might be willing to tolerate
 
3 coming a little bit on the over-deterring side of the
 
4 line, and so then you get into the Section 2 area.
 
5 Well, I mean, one area where I would be less
 
6 willing to tolerate a lot of false positives is areas
 
7 where the net result of the conduct is that prices are a
 
8 lot lower, and you would want to be very, very careful
 
9 before you adopted a rule that would deter a whole lot
 
10 of that conduct. You would want to be able, whether you
 
11 were doing a rule of reason balancing test or what, to
 
12 make sure you had a fairly confident sense that the net
 
13 effect of allowing that conduct to continue would
 
14 dramatically change the market and lock it up for the
 
15 dominant firm for the foreseeable future.
 
16 So, you know, for one, at least I would probably
 
17 be less willing to accept over-deterrence there, because
 
18 I think consumers more likely than not are going to
 
19 benefit from the conduct.
 
20 MR. JACOBSON: Let me add, though, I think the
 
21 problem is larger in the eyes of the enforcement
 
22 community than it is in the real world. Number one, in
 
23 litigation, defendants usually get summary judgment even
 
24 in rule of reason cases. Either the plaintiff has not
 
25 defined the market properly or the competitive effects

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

87

1 that they prove impacted only themselves rather than the
 
2 market as a whole. The myth that if you are in a rule
 
3 of reason case, it almost always goes to the jury, is a
 
4 myth. So, I think in a litigation context, it is
 
5 overblown.
 
6 It is more of a problem in the counseling
 
7 context, but even in the counseling context, my
 
8 experience is if the question you pose to the
 
9 businessperson is, do you think this is going to raise
 
10 prices in the marketplace, the businesspeople get that
 
11 and can at least as often as not guide their businesses
 
12 accordingly, and even when that is not true, I think you
 
13 go back to what Brandeis said in the hearings on the
 
14 Clayton Act before he was on the Bench, which is that if
 
15 you want me to tell you how close can I get to the line
 
16 without tipping over it, no, I cannot do that, but if
 
17 you want me to tell you what I can do that is safe, yes,
 
18 that I can do, and I think that is the case here.
 
19 MR. KOLASKY: Well, to follow up on that, I love
 
20 the reference back to Brandeis, because we all should
 
21 remember that Brandeis was one of the most vocal critics
 
22 of the Standard Oil decision, because he thought the
 
23 rule of reason did not provide efficient counsel or
 
24 guidance to business, and the result was, of course, he
 
25 lobbied for the Clayton Act, and I am not sure that any

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

88

1 of us think the Clayton Act did a particularly better
 
2 job than the rule of reason has, but the more serious
 
3 point is that, following up on John's comments and
 
4 Bill's, competitor collaborations are increasingly and
 
5 extremely common in today's economy where companies are
 
6 very often not pure rivals but are also suppliers to one
 
7 another, and I, at least, find that I have many more
 
8 counseling questions involving competitor collaborations
 
9 than I do single-firm conduct, and, you know, we have
 
10 confidence that the courts are going to be able to apply
 
11 the rule of reason in competitive collaboration cases,
 
12 notwithstanding the kind of uncertainty, Bill, that you
 
13 have referred to, which is every bit as present there as
 
14 it is in single-firm conduct cases.
 
15 So, you know, why do we think they will do any
 
16 worse job resolving the uncertainty in Section 2 cases,
 
17 where they have the guidance of the Supreme Court from
 
18 Trinko, that they have to take account of the potential
 
19 chilling effect of false positives, than they do in
 
20 Section 1 cases?
 
21 MS. McDAVID: Well, and Jonathan's statement
 
22 suggests that the false positive risk is somewhat more
 
23 ephemeral than is widely bandied about.
 
24 MR. BLUMENTHAL: Is that a shared view?
 
25 DR. ELHAUGE: Is what a shared view?

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

89

1 MR. BLUMENTHAL: That false positive risk is
 
2 more ephemeral than is commonly put forward.
 
3 MR. JACOBSON: Yes.
 
4 MR. KRATTENMAKER: Yes.
 
5 MR. BLUMENTHAL: It looks to me like the group
 
6 is a little bit tuckered out, and we probably ought to
 
7 do a recharge. Why don't we --
 
8 MR. KRATTENMAKER: Does that mean you didn't
 
9 like the answer?
 
10 DR. BAKER: A new panel for the next session.
 
11 MR. BLUMENTHAL: I do see the relief pitcher has
 
12 arrived back there. Why don't we break for 10 or 12
 
13 minutes and come on back, and we will pick up on
 
14 monopoly power or something like that.
 
15 (A brief recess was taken.)
 
16 MR. BLUMENTHAL: If I could ask everybody to
 
17 take their seats, we are going to resume, and let me
 
18 turn the floor over to the emcee for the rest of the
 
19 afternoon, Dennis Carlton.
 
20 MR. CARLTON: Okay, it is a pleasure to be here
 
21 and to be the moderator for such a distinguished panel.
 
22 I came in at the tail end of the last session where I
 
23 heard Bill say that everyone was tired and you should
 
24 take a break, and then he also told me that we, out of
 
25 the 15 pages of questions, we have gotten through two

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

90

1 pages, so --
 
2 MS. McDAVID: I thought we were still on page 1.
 
3 MR. CARLTON: -- so, I will do my --
 
4 DR. BAKER: With occasional peeks at the very
 
5 end.
 
6 MR. CARLTON: I will do my best, and to make
 
7 sure we get everybody's views, if we could sort of try
 
8 and maybe have two or three people talk about each topic
 
9 for a few minutes so we can cover a lot of topics, but
 
10 what I will do so that nobody feels they missed an
 
11 opportunity to say something that they really want to
 
12 say, at the very end, probably around 4:30, what I am
 
13 going to do is try and wrap up, and what I am going to
 
14 do is ask each one of you to pose the question you wish
 
15 either Bill or I had asked you, and then you can answer
 
16 it for a few minutes, just so we get your views on
 
17 probably what you think is the most important issue in
 
18 these hearings.
 
19 So, let me start off with a question -- and I
 
20 apologize, I do not know if we have asked you one of
 
21 these questions -- but it is this, it is the following:
 
22 In Section 2 cases, we have treble damages. We know
 
23 from the economic theory of damages that multiplication
 
24 is appropriate when you have difficulty detecting. Is
 
25 it people's views that we should change the multiple in

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

91

1 Section 2 cases, at least some Section 2 cases, and, in
 
2 particular, if, for example, there is an overt act that
 
3 everybody can see, is it people's views that we should
 
4 have only single damages?
 
5 So, anyone want to pick up on that? Yes.
 
6 DR. ELHAUGE: I do not think so. I think you
 
7 are right, detection is sort of the main thing, but
 
8 there is also adjudication costs or likelihood of
 
9 adjudication, but in addition, there is the fact that we
 
10 have treble damages, not necessarily treble the entire
 
11 consumer harm, so usually the overcharge is treble that
 
12 the defendant pays, not all of -- you do not get a
 
13 measure of the foregone sales, and that is a big part of
 
14 the loss. Prejudgment interest usually is not
 
15 available, and given how long these cases last, that is
 
16 a big factor.
 
17 I think Easterbrook once did some study showing
 
18 that when you took this into account, it went from at
 
19 least from treble to double, and you might get down to
 
20 single, too, if you also take into account the fact that
 
21 if you raise market prices, you may raise them for other
 
22 people. So, we think of it as treble damages and tend
 
23 to ally quickly that that means treble of the total harm
 
24 created, and that is not necessarily the case.
 
25 MR. CARLTON: But to a large degree, it would

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

92

1 suggest a different multiple between covert and overt;
 
2 whether it is one to three is a different question.
 
3 DR. ELHAUGE: Yes, I think that is right, but I
 
4 think it is not just detection. It is detection times
 
5 the odds of actually successful -- successfully
 
6 adjudicate -- in some cases it may be very obvious to
 
7 see, but nobody would bother to bring a case against it,
 
8 because it is too hard to get a class action, say, and
 
9 nobody else has standing, simple cases like that.
 
10 MR. CARLTON: Anyone else? Bobby?
 
11 DR. WILLIG: Yeah, I think we began to speak
 
12 earlier about another role for treble and multiplying
 
13 other than the difficulties of detection, and that is
 
14 deterrence, deterrence of the act which has been found
 
15 to be bad for the economy, and in the Section 2 context,
 
16 where remedies are sometimes very difficult to think of
 
17 in advance, and even if we can think of them, very hard
 
18 to hold the liable firm to after the fact. We have
 
19 examples of that phenomena all the time.
 
20 Deterrence is a better remedy for the entire
 
21 context, treble, as well as other institutions, like the
 
22 private case follow-ons, for example, and the follow-ons
 
23 to the follow-ons, help to deter, and if we have good
 
24 standards -- and we seem to disagree about what they
 
25 are -- but if we had good standards, that would be a

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

93

1 good thing, to deter those practices about which
 
2 liability would be found.
 
3 MS. McDAVID: Well, and I think Einer's point
 
4 about the absence of prejudgment interest is also well
 
5 taken. These cases, after all, tend to be the Jarndyce
 
6 v. Jarndyce of the antitrust world, and as a
 
7 consequence, if you would apply interest for the
 
8 duration of the harm to the point of final judgment, who
 
9 knows how they would come out.
 
10 MR. KRATTENMAKER: I am having a little trouble
 
11 following the conversation, because I am assuming we are
 
12 starting from the baseline that in almost all other
 
13 areas of the law, we do not have treble damages.
 
14 MR. CARLTON: Well --
 
15 MR. KRATTENMAKER: I am trying to figure out
 
16 what made it special.
 
17 DR. ELHAUGE: Well, we have punitive damages for
 
18 a lot of torts. We have treble damages for RICO
 
19 violations. So, there is a lot of -- I mean, sometimes
 
20 there is a conscious effort to bring down the punitive
 
21 damages to some multiple, but that is a standard
 
22 deterrence mode.
 
23 MR. KRATTENMAKER: Well, I mean, I just -- if we
 
24 are talking about ordinary tort, contract, property,
 
25 landlord-tenant law, whatever, we do not start from the

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

94

1 proposition that you owe three times damages. Dennis
 
2 started by saying that the literature would teach that
 
3 this is an unusual thing to do, that would generally be
 
4 tied to the -- something about the facts of the case,
 
5 not the kind of law involved.
 
6 MR. CARLTON: Yes. If you focus on
 
7 deterrence -- no, you are absolutely right. If you
 
8 focus on deterrence, you know, taking what Einer said on
 
9 lost consumer surplus --
 
10 MR. KRATTENMAKER: Right, I think antitrust is
 
11 important, but why is it more important to deter
 
12 violations of the antitrust laws than of the securities
 
13 laws or the labor laws or the National Security Act? I
 
14 am not sure I know.
 
15 MR. JACOBSON: Well, let me, first of all,
 
16 incorporate by reference the AMC report on this in my
 
17 current statement and --
 
18 MS. McDAVID: All 400 pages?
 
19 MR. JACOBSON: Yes.
 
20 MR. CALKINS: Including Dennis' footnote
 
21 dissent?
 
22 MR. JACOBSON: No. So, Dennis knows my views on
 
23 this, and I will just be very brief, which is that the
 
24 treble damages are there for the principal reason of
 
25 inducing private enforcement of the antitrust laws.

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

95

1 That is, in part, a deterrence factor, but it is, in
 
2 part, getting private individuals, given that the
 
3 Government has limited resources and in recent years
 
4 limited inkling to enforce Section 2, to undertake the
 
5 enormous effort of putting together an antitrust case at
 
6 great risk in a world where standing rules, very
 
7 appropriately, are designed to tightly cabin the number
 
8 of private litigants that can proceed, in which, you
 
9 know, summary judgment, there is a different standard in
 
10 antitrust, and, again, I think it is a good thing, but I
 
11 think to compensate from that, to have the law enforced,
 
12 you absolutely have to have private enforcement, and you
 
13 do not have private enforcement of antitrust without
 
14 treble damages.
 
15 MS. McDAVID: I think the European experience
 
16 right now, with the study that they are doing on private
 
17 enforcement, takes you to that question. Private
 
18 enforcement is hypothetically available in Europe, but
 
19 given the absence of a whole series of mechanisms, one
 
20 of which is the absence of treble damages or some
 
21 multiplier, means that there just is not any private
 
22 enforcement.
 
23 MR. CARLTON: Yes, although what is interesting
 
24 about most of the responses is they are talking about
 
25 the cost of bringing an antitrust action and also

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

96

1 talking about the incentive to bring one, which I think
 
2 is completely appropriate, but what has always struck me
 
3 as a bit odd is that the literature, the economic
 
4 literature, although those points are certainly
 
5 recognized, it is the detection probability that is most
 
6 often used to justify a multiple. These other things
 
7 are understood, and it does not mean you cannot build a
 
8 model that includes them, but it does suggest that
 
9 unless -- the costs of bringing the lawsuit is the
 
10 hurdle rather than the gain or the harm the action
 
11 creates.
 
12 You would think that there should be different
 
13 multiples depending upon the detection probability, and
 
14 whether it is one, one and a half, two, or overt and a
 
15 different multiple for covert, I do not know, but it did
 
16 strike me -- and John made reference to the AMC
 
17 hearings -- it did strike me as odd that I was so much
 
18 in the minority that these multiples should depend on
 
19 the type of act.
 
20 MR. CALKINS: Once you start fine tuning it,
 
21 though, you have to reduce the multiple when it is
 
22 following onto a successful government prosecution, and
 
23 then you have to reduce it by perhaps a different amount
 
24 if there is a report in the newspaper that there is a
 
25 government investigation -- and, you know, could we

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

97

1 construct a world wherein you did it differently and you
 
2 took into account various interests, and would we have a
 
3 different set of legal rules? Yes. Would it be better
 
4 in some ways? Perhaps. It ain't going to happen.
 
5 MR. CARLTON: Yeah, I think it may not happen.
 
6 I think it overstates the case to state it should be so
 
7 finely graded. I mean, two multiples is better than
 
8 one, and I would be happy with two. I do not need an
 
9 infinite number, but --
 
10 DR. ELHAUGE: I was going to say, I think there
 
11 is a distinction between detection of the conduct and
 
12 detection of whether it has anticompetitive effects,
 
13 because there is some conduct that cartels, in many you
 
14 have to detect whether it occurs, and this may create a
 
15 detection problem, but for monopolist conduct, it is
 
16 often overt in the sense you mean, but the fact that you
 
17 know the conduct occurred does not mean you know whether
 
18 it is anticompetitive, and you may not know until you
 
19 incur all the costs of discovery and --
 
20 MR. CARLTON: Yes, that is actually a good
 
21 point. Now, Bobby raised something about remedies, so I
 
22 guess one question is, what are your views on whether
 
23 the Government should bring a Section 2 case unless, in
 
24 advance, it can figure out what the remedy is? Should
 
25 the Government have the right to fine people, which I

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

98

1 think it does not in a Section 2 case, or should it say,
 
2 "I cannot figure out a remedy, so let them keep doing
 
3 it"?
 
4 DR. WILLIG: That makes it real cheap for the
 
5 follow-on cases, and that provides the deterrent in the
 
6 first place. Once the law is clear, the public case can
 
7 accomplish that.
 
8 MR. CARLTON: Right. So, private remedies
 
9 following on a government case finding liability -- in
 
10 which there is liability found, even if the Government
 
11 cannot articulate a remedy.
 
12 DR. WILLIG: And then creating a good precedent
 
13 and a clear precedent for subsequent behavior.
 
14 DR. ELHAUGE: Plus the Government might possibly
 
15 be able to get disgorgement of profits as an equitable
 
16 measure.
 
17 MS. McDAVID: But I think that as a practical
 
18 matter, the agencies do try to think through the
 
19 question of remedy in terms of determining whether to
 
20 exercise the prosecutorial discretion and invest
 
21 resources in this particular case, because perhaps there
 
22 are better places to spend it if they cannot accomplish
 
23 anything at the other end. Teeing up a private lawsuit
 
24 is probably not on the list of agency priorities.
 
25 MR. CALKINS: Just to be a little contrary, I

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

99

1 cannot picture a good government enforcer saying that I
 
2 think this is illegal, and I cannot think of any good
 
3 thing to do about it, but I am going to sue and just
 
4 hope to win and have the judge say, "You win, thanks
 
5 very much, go away." I would assume that at the end of
 
6 the day, the Government is going to ask for some remedy,
 
7 and I would think that as a matter of good government,
 
8 the Government ought to think in advance about what that
 
9 remedy is, and if you cannot look in the mirror and say
 
10 that if you win, the world will be a better place
 
11 because of something that is going to happen in this
 
12 lawsuit -- well, then, you probably should not be
 
13 bringing that lawsuit.
 
14 MR. CARLTON: I guess the hard question that you
 
15 raise is, let's suppose in the context of an individual
 
16 case, whatever remedy you can conceive of would not make
 
17 things better but would actually make things worse. On
 
18 the other hand, it would set a precedent for deterrence,
 
19 which was what Bobby was talking about earlier. Then it
 
20 seems to me a more difficult question, and I suspect
 
21 most people would be unlikely to impose a remedy that
 
22 makes things worse in a particular case would be my
 
23 hunch.
 
24 MR. BAER: Although they might end up with a
 
25 remedy that, you know, that that is an effort to do

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

100

1 something, and really, at the end of the game, from the
 
2 point of the view of the agency enforcement's objective,
 
3 is to establish the precedent. If you look at what the
 
4 FTC has just concluded in its Rambus standard-setting
 
5 case, you know, they went through an elaborate focus on
 
6 whether the conduct at the end of the day constituted
 
7 illegal conduct under Section 2 and concluded it did,
 
8 wrote a very strong, forceful opinion, and then found
 
9 itself tied in total knots about what to do with regard
 
10 to remedy.
 
11 They ended up allowing a limited royalty to be
 
12 collected, but only on sales that occur from the date of
 
13 the entry of the order, and 90-95 percent of the
 
14 products have already been sold. So, Rambus really, at
 
15 the end of the day, has gotten a slap on the wrist. It
 
16 is going to be allowed on future sales to collect a very
 
17 small royalty, but it is going to be able to go to court
 
18 and collect all the back royalties it claims it is owed,
 
19 which is billions of dollars, and, you know, you
 
20 could -- that, to me, was a mistake. Obviously I was
 
21 involved in the case and have some strong views on it,
 
22 but at the same time, you could make the argument, which
 
23 is I think your point, Dennis, is at the end of the day,
 
24 in terms of a standard of conduct that will cause people
 
25 to behave perhaps better in the course of

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

101

1 standard-setting organizations, there is a marker laid
 
2 down there which may have some general deterrence,
 
3 although if, in fact, at the end of the day, you would
 
4 be allowed to keep your overcharges, maybe you do not
 
5 think twice about it.
 
6 MR. JACOBSON: Dennis, I think if the only
 
7 remedy you can think of would harm consumers, then there
 
8 is something wrong with the liability case. So, I think
 
9 if you are facing that scenario, I think you need to
 
10 take another look at the liability case and see whether
 
11 there is really a case to be brought.
 
12 MR. CARLTON: Well, it is a little tricky
 
13 between a monopolization case when a monopoly has not
 
14 been established and a person is being snuffed out. If
 
15 you could have stopped it earlier, it would have helped
 
16 consumers, but now you cannot. They are guilty of
 
17 monopolization. What are you going to do? I mean, that
 
18 was what I had in mind.
 
19 The benefit, I think, you know, the Rambus case
 
20 is a good example where you are hopefully setting
 
21 precedent to prevent future harms from occurring or you
 
22 forgo a remedy in a particular case.
 
23 MR. JACOBSON: It would depend what the conduct
 
24 was in that case, but normally -- my firm represents
 
25 Rambus, so I will not comment on Bill's point on that

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

102

1 case -- but normally you would think about, you know,
 
2 royalties in cases of intellectual property-related
 
3 violation. I thought the Judge Jackson remedy in
 
4 Microsoft was a sound remedy. I think the main
 
5 beneficiaries of that, candidly, would have been the
 
6 shareholders of Microsoft. Obviously management thought
 
7 differently, but I think it is an unusual Section 2 case
 
8 that has a strong liability basis that yields no
 
9 productive remedy.
 
10 MR. CARLTON: Let me turn to some specific
 
11 topics, and one I wanted to turn to was exclusive
 
12 dealing, and I want to use exclusive dealing to pose a
 
13 question.
 
14 Under a rule of reason analysis, we often say we
 
15 weigh the procompetitive effects against the
 
16 anticompetitive effects and then come to a decision, and
 
17 I am wondering if that is an accurate characterization
 
18 of not what is said, but what is done, and whether a
 
19 weighing of procompetitive benefits verse
 
20 anticompetitive harm really ever gets done in these
 
21 Section 2 cases or whether we do something a bit
 
22 different, which is try and figure it out and then say
 
23 there are no benefits, there are only costs, you cannot
 
24 do it; or the reverse, there are only benefits, there
 
25 are no costs, so you can do it.

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

103

1 MS. McDAVID: Well, we talked about it in terms
 
2 of burden-shifting at the very beginning of the program,
 
3 and in the sense of the Microsoft Court of Appeals
 
4 opinion.
 
5 MR. KRATTENMAKER: No court has ever written an
 
6 opinion saying, now that it is all over, we find that
 
7 there are these harms and these efficiencies and we are
 
8 now going to weigh them and we are going to choose
 
9 between the two.
 
10 MR. CARLTON: Yes, that is my sense.
 
11 MR. KRATTENMAKER: Bill explained -- well, Bill
 
12 can say it better than I can -- they changed the earlier
 
13 step analysis to avoid that.
 
14 MR. KOLASKY: The point we were making earlier
 
15 was that you have basically a step-wise analysis. I
 
16 disagreed with the way that Joel Klein defined the
 
17 steps, but the term is exactly right. The rule of
 
18 reason involves a step-wise analysis where you first
 
19 look at how serious are the anticompetitive harms, what
 
20 are the procompetitive justifications, are they
 
21 credible, and if they are, the plaintiff then has the
 
22 burden of trying to show that the defendant could have
 
23 achieved those same objectives in a less anticompetitive
 
24 manner, but the real key is that the degree of scrutiny
 
25 that you apply according to the strength of the showing,

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

104

1 so that you have what Justice Souter called an inquiry
 
2 meet for the case. The stronger the showing of
 
3 anticompetitive harm, the more closely you are going to
 
4 scrutinize the procompetitive justifications that are
 
5 offered.
 
6 MR. CARLTON: Yeah.
 
7 MR. KRATTENMAKER: And the more likely you are
 
8 to have found some other way to have done it, find some
 
9 less restrictive alternative, and that is why they avoid
 
10 that ultimate fourth question or how they avoid it,
 
11 overtly balancing.
 
12 MR. JACOBSON: Well, and just to close that off
 
13 and to restate what Bill said earlier, the ultimate
 
14 inquiry into net effect on competition, is the net
 
15 effect of this practice going to increase or decrease
 
16 output -- in particular, are prices, quality-adjusted,
 
17 going to go up or not -- that that is where the
 
18 balancing takes place in determining whether there is an
 
19 output restriction or not. If there is no output
 
20 restriction, there is no ephemeral balancing to be done.
 
21 MR. CALKINS: The problem I have with this is
 
22 that it sounds nice, and I do not have any trouble with
 
23 any of it, but I am not sure that is what really
 
24 happens. I mean, take exclusive dealing, right? There
 
25 are a whole series of cases where a judge says, ah-ha,

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

105

1 here is a contract -- it is a short-term contract -- it
 
2 is less than a year, and, therefore, I conclude that it
 
3 is procompetitive, and I am done.
 
4 One of the things that I like about the Dentsply
 
5 case is that the Government won that case even though
 
6 those contracts were terminable, as I recall, either on
 
7 notice or in a short period of time, and the judge was
 
8 able to say, no, harm can be lessened if reality is that
 
9 those dealers are not about to give up dealing with
 
10 Dentsply, and so even though it is terminable on short
 
11 notice, an exclusive dealing clause can harm
 
12 competition.
 
13 So, although we can sit here and talk about --
 
14 you know, it is nice, look at this and look at this --
 
15 the hard part often is not really that. It is how do
 
16 you decide whether this particular arrangement is
 
17 lessening competition or likely to lessen competition,
 
18 and it becomes all too easy for people, I think, to go
 
19 off the track one way or the other in trying to sort
 
20 that out.
 
21 MR. KOLASKY: I guess the point is -- I mean,
 
22 you are absolutely right, the Court did the right thing
 
23 to look at whether the exclusives in that case had
 
24 teeth -- sorry.
 
25 MR. CALKINS: The question was whether they were

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

106

1 "edentulous."
 
2 MR. KOLASKY: Yes. But the point is -- and
 
3 actually, exclusive dealing is a perfect model for this,
 
4 I think -- you know, the courts over the years have
 
5 basically evolved a presumption, developed a
 
6 presumption, that if you have short-term contracts that
 
7 are terminable in less than a year, they are unlikely to
 
8 have a durable anticompetitive effect.
 
9 On the other hand, it is a rebuttable
 
10 presumption. It is not a conclusive presumption. So,
 
11 the plaintiff has the opportunity, as the Justice
 
12 Department did in Dentsply, of showing that,
 
13 notwithstanding that the exclusives are nominally
 
14 terminable, as a practical matter, the distributors have
 
15 to carry Dentsply teeth or dentures, and, therefore, the
 
16 exclusives have it.
 
17 MR. CARLTON: I wanted to follow up on the point
 
18 about the length of the contract and the notion that the
 
19 distributorship contracts are terminable at will.
 
20 Courts have often placed a reliance on that when, what
 
21 is interesting, is, if anything, the economics
 
22 literature, especially the recent economics literature,
 
23 has gone in a completely opposite direction, saying it
 
24 is not a long-term tie-up of the dealerships that is the
 
25 issue; it is the simultaneous incentives created by the

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

107

1 large market power that the incumbent has, and in light
 
2 of that, those incentives make everybody want to deal
 
3 with him. That is the exclusion.
 
4 I am wondering, from your comments, can we infer
 
5 that the courts are relaxing their view about that
 
6 presumption, that duration is key, or is that still
 
7 going to remain?
 
8 MR. JACOBSON: Dennis, let me take a quick shot
 
9 at that. The one-year presumption starts with the
 
10 remedy in motion picture advertising back 50 years ago,
 
11 over 50 years ago, and it is from that that courts later
 
12 extrapolated a one-year presumption in these cases.
 
13 Now, what is important to recognize is that the
 
14 law developed when exclusive dealing arrangements were
 
15 subject to attack under much smaller market shares than
 
16 you have today. So, when you are dealing with a firm
 
17 with a 15 percent market share, then you are really
 
18 going to want to insist much harder on longer term
 
19 exclusives.
 
20 Now that the law has evolved to require much
 
21 more significant market shares of the defendant and much
 
22 more significant foreclosure in the real world, then the
 
23 duration issue has less importance and less centrality
 
24 than it used to have, and it has been informed, I
 
25 believe, by the economic advances that focus more on the

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

108

1 incentives than, rather, on the specific terms of the
 
2 contract.
 
3 DR. WILLIG: From the point of view of those
 
4 incentives, the question is whether the economics that
 
5 says the degree of scale economies is all important for
 
6 judging the competitive consequences of the scope of the
 
7 exclusivity, has that made its way into the courtroom
 
8 yet?
 
9 MR. JACOBSON: Has it made its way into the
 
10 courtroom? Yes. Has it made its way into Federal
 
11 Supplement and F.3d?
 
12 MS. McDAVID: Or Antitrust Law Developments?
 
13 MR. JACOBSON: Well, it has made its way into
 
14 Antitrust Law Developments, but no, the cases have not
 
15 really caught up with it.
 
16 DR. ELHAUGE: On this point, I agree with you
 
17 totally about the economic literature. It does not
 
18 really suggest terminability should matter, because that
 
19 was suggested, for some reason, the economic incentives
 
20 to enter into these agreements are different from ones
 
21 to not terminate, but I think I disagree that the law is
 
22 clear. I mean, there are some lower court cases that
 
23 have cited treatise to this effect, but, in fact, the
 
24 Supreme Court authority is pretty clear.
 
25 There are a number of Supreme Court cases,

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

109

1 including the FTC Brown Shoe case, after motion
 
2 pictures, that said, you know, it did not matter, and
 
3 that case was voluntarily terminable at any time. The
 
4 motion pictures case was actually just about the
 
5 remedy -- clearly they took a remedy in that particular
 
6 case. So, we kind of have an area where somehow
 
7 everybody forgot about the old Supreme Court authority.
 
8 There is some recent appellate authority that
 
9 just sort of lobbed onto this nice presumption, but this
 
10 is one of those examples I think that I was talking
 
11 about earlier of a silly formalism that is not really
 
12 well based in economics, before you came here, that we
 
13 need to avoid. Unless we can base it in some sound
 
14 economic theory, it shouldn't be limiting the
 
15 application of antitrust law.
 
16 MR. JACOBSON: Let me just add, though, that the
 
17 silly court of appeals decisions start off with Dick
 
18 Posner in Roland Machinery, for what it is worth.
 
19 MR. KOLASKY: I also want to come back to a
 
20 theme that we started out talking about, and that is the
 
21 importance of needing some presumptions, at least, so
 
22 that we can counsel our clients and that companies have
 
23 a better sense of how to shape their -- structure their
 
24 conduct. So, the real question is, even if the
 
25 economics literature has evolved this new way of

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

110

1 thinking about exclusive dealing arrangements that are
 
2 terminable at will, are we sufficiently confident with
 
3 that that we want to abandon what is a relatively
 
4 administrable presumption, that in the real world has
 
5 helped a great deal, I think, in helping clients figure
 
6 out how to structure their exclusive dealing
 
7 arrangements so that they are less obviously
 
8 anticompetitive.
 
9 DR. ELHAUGE: I am just not sure they are less
 
10 anticompetitive just because they are terminable. I
 
11 think it is a misguided presumption. It may give
 
12 defense false hope and lead them into liability that
 
13 they could well be advised to avoid.
 
14 MS. McDAVID: Well, the temporal nature of an
 
15 exclusive dealing arrangement is just part of the
 
16 overall foreclosure analysis, and I think when the
 
17 courts began to grapple with the temporality issue, it
 
18 was part of the move away from Standard Stations, where
 
19 we had this de minimus foreclosure being held unlawful,
 
20 when, in fact, if they had focused on the fact that
 
21 everyone was doing the same kind of practice, they might
 
22 have gotten to illegality. But it really is about the
 
23 extent of foreclosure, and duration is part of that.
 
24 MR. CARLTON: Yes, although it seems like there
 
25 are really two separate forces going on. One is if I

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

111

1 have a long-term contract with all of the distributors
 
2 and there is no entry, I am really the monopolist of
 
3 distribution, and no one else can get in unless I charge
 
4 them a monopoly price, and it is hard to keep them out.
 
5 An alternative mechanism is simply there are economies
 
6 of scale in distribution, and I do not have any
 
7 long-term contracts, but I am the big guy on the block,
 
8 and everybody has to use me, and I have a contractual
 
9 term that forces people to choose between me and my
 
10 rival, and they always choose me.
 
11 So, let me turn to a question about refusals to
 
12 deal, and I am curious whether there is anyone on the
 
13 panel who thinks that the Essential Facilities Doctrine
 
14 should be a doctrine that ultimately the Supreme Court
 
15 endorses, or should we just get rid of it? And I guess
 
16 related to that is whether sort of the decision in
 
17 Trinko, which I think pretty well establishes that
 
18 rivals have no duty to deal with other rivals except in
 
19 rare exceptions. Even there, I think the Court is
 
20 wrong, but I am curious what other people think.
 
21 So, one, do people think the Essential
 
22 Facilities Doctrine really should disappear forever from
 
23 now, and two, whether they think that the Trinko
 
24 standard is the right standard as I have interpreted it?
 
25 MR. JACOBSON: As you know, I have great

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

112

1 difficulties with the Trinko case, so let me start
 
2 first. I think most would agree, and I certainly would
 
3 agree, that the Essential Facilities Doctrine as an
 
4 independent basis of liability does not belong. I do
 
5 think in determining whether there has been an attempt
 
6 to monopolize an adjacent market, that the inquiries
 
7 that you make in an essential facilities analysis are
 
8 relevant and appropriate, and one area where I think the
 
9 law and the enforcement, particularly of late, has been
 
10 lax is in cavalierly accepting the single monopoly
 
11 profit assumption as dispositive in adjacent market
 
12 cases.
 
13 Although it was correct to throw out the Berkey
 
14 Photo Doctrine, that an attempt to gain a competitive
 
15 advantage in a second market could be a basis for
 
16 liability, I do think there is a problem, depending on
 
17 the nature of the conduct, with using monopoly power in
 
18 one market to monopolize a second market. The Essential
 
19 Facilities Doctrine, one of the inquiries that it makes
 
20 is one way of approaching that.
 
21 I do not think Trinko really articulates a
 
22 standard. I do think that in the context of refusals to
 
23 deal in the same market with a rival, the Aspen context,
 
24 that there has to be, you know, a very, very, very
 
25 narrow stroke, if any, of liability, but I think in the

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

113

1 adjacent market context, we are talking about a much
 
2 different problem.
 
3 DR. ELHAUGE: To me I think the answer depends
 
4 on what we think Trinko means, and other than it is at
 
5 or near Aspen, maybe beyond or before, I am not even
 
6 sure, I am not exactly sure. If we read it to mean that
 
7 discrimination among outsiders on the basis of rivalry,
 
8 that is, you sell to some outsiders voluntarily but not
 
9 to rivals, if that is a necessary condition, then I
 
10 agree with Trinko and think that the Essential
 
11 Facilities Doctrine is mistaken because it does not
 
12 incorporate that requirement.
 
13 But if you think that the key part is the other
 
14 part of Trinko that emphasizes termination of rivals and
 
15 that was emphasized in Aspen, that actually, it seems to
 
16 me, is a misbegotten notion. It's like confusing tenure
 
17 for law professors. It seems to me that essentiality is
 
18 actually a better test than whether I once dealt with
 
19 them and have now terminated them, because after all, in
 
20 Aspen Ski, it was not essential -- the mountain still
 
21 remained in the market. So, it is not clear to me why
 
22 we wouldn't be asking if the Essential Facilities
 
23 Doctrine is narrower than the Aspen doctrine.
 
24 MR. CARLTON: Do people regard the Essential
 
25 Facilities Doctrine as an alternative to regulation and

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

114

1 that, therefore, it should be preserved, or do they
 
2 think that that is a dangerous route to go down in which
 
3 you have judges, in a sense, determining the terms on
 
4 which one rival deals with another?
 
5 DR. WILLIG: I would agree with John that this
 
6 is all properly viewed under a good analysis under
 
7 Section 2, that the kinds of fact patterns that arise
 
8 and the old standards of essential facilities are fact
 
9 patterns that should be analyzed under appropriate use
 
10 of essential facilities, and that might come out either
 
11 way depending upon the fine-grain details of the case.
 
12 I think there are lots of conceivable instances
 
13 where we do not want to see traditional public utility
 
14 style regulation applied to a bottleneck, because it is
 
15 not pervasive enough, it is not long-lived enough, but
 
16 where nevertheless there may be antitrust issues, and so
 
17 I am thoroughly agreeing with John, strange though it
 
18 feels to agree with learned counsel.
 
19 MR. JACOBSON: I made economic sense for once.
 
20 DR. WILLIG: But do not sacrifice on my part.
 
21 DR. BAKER: I think I am more or less in the
 
22 same place. It seems to me the question about you want
 
23 to preserve any role for the Essential Facilities
 
24 Doctrine has to do with whether -- a policy question
 
25 about whether you want to use the antitrust laws in

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

115

1 certain kinds of natural monopoly settings rather than
 
2 creating a commission, and there are pros and cons about
 
3 that, and the modern trend is to not to do that, but,
 
4 you could think about it.
 
5 I mean, I do not think I have anything to say
 
6 other than spotting it as a policy question, although on
 
7 the question of refusals to deal generally, it seems to
 
8 me that with rivals, that Aspen is still the law, and
 
9 that Trinko reaffirms it, maybe at the outer limits, but
 
10 it is still the law, and if you have a termination of a
 
11 rival and it harms competition, I think there was a
 
12 pretextual justification in -- as was in Dentsply, too,
 
13 for -- so, there was no good business justification for
 
14 doing it. It is a perfectly legitimate basis for
 
15 inferring harm to competition if a monopolist excludes a
 
16 rival without a good justification.
 
17 MR. KOLASKY: I would just add, I think my view
 
18 may be at the extreme end of this discussion, is after
 
19 Trinko, the essential facilities RIP, rest in peace, and
 
20 I do not think there really is anything left of the
 
21 Essential Facilities Doctrine, and I hope that it will
 
22 ultimately be interred, but I do think that the small
 
23 window that the Supreme Court left open in Trinko for
 
24 finding a refusal to deal with rivals to be a violation
 
25 of Section 2 is an important one, and I think that the

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

116

1 key thing is the element that the Supreme Court
 
2 mentioned there and that John alluded to, and that is
 
3 the element of discrimination, that, you know, the
 
4 refusal to sell to rivals on the same terms that you are
 
5 selling to the public generally, and one of the reasons
 
6 why that is so important is that that then gives you an
 
7 administrable remedy.
 
8 The big concern I have with the Essential
 
9 Facilities Doctrine or any kind of refusal to deal as a
 
10 basis for a Section 2 violation is, you know, how does
 
11 the court enforce the terms of access without becoming a
 
12 regulator? And that is not a role I think we want the
 
13 antitrust courts to play, but so long as you have the
 
14 discrimination element present, as it was in Aspen, then
 
15 a court could impose a compulsory duty to deal.
 
16 MS. McDAVID: Absent some preservation of some
 
17 duty to deal, depending on the circumstances, then we
 
18 are throwing ourselves into a regulatory regime and all
 
19 the things that go with it, including capture. The
 
20 preference for regulation was one of the things about
 
21 the Trinko decision that puzzles me, frankly, given all
 
22 we have learned about regulation and the fact that we
 
23 all thought we were moving to a deregulated world in
 
24 which markets worked.
 
25 MR. CARLTON: I guess the real question is, do

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

117

1 you think there could be a market solution when you have
 
2 to have access when there is a claim that a rival has
 
3 been deprived of it? And I take Bill's point to be
 
4 sometimes that may be easy to do in some fact patterns,
 
5 but there are clearly other fact patterns where I think
 
6 that would be quite difficult, and I am worried about
 
7 precisely the choice you described, which is having a
 
8 judge, who may not have any expertise, trying to
 
9 regulate an industry versus a regulatory authority,
 
10 which also has its own costs.
 
11 MS. McDAVID: Perhaps it takes us back to the
 
12 question of what is the appropriate remedy and whether,
 
13 in a circumstance like that, a structural remedy avoids
 
14 the need for getting into the question of the royalty.
 
15 DR. ELHAUGE: I think it also goes to the
 
16 elements, because I think Bill is exactly right. If it
 
17 is a discriminatory element, then you can foresee what
 
18 the application is going to be, and I think it can be
 
19 administered by randomly selected judges and juries.
 
20 The problem is if it is just a refusal outright,
 
21 somebody has set the price who is supposed to have done
 
22 that, and in constructing the refusal, charging too high
 
23 a price, when does that really count as a refusal, and
 
24 people have to be careful, what is a judge or jury going
 
25 to say ten years later, they are not going to know what

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

118

1 to do, that is I think a powerful argument for limiting
 
2 the Essential Facilities Doctrine, a nondiscriminatory
 
3 one, the two cases of where there really is a regulator
 
4 available to tell you prospectively what these actors
 
5 are supposed to do.
 
6 DR. WILLIG: That is not the way I read that
 
7 part of Trinko, Dennis. I am intrigued by your reading.
 
8 I thought the court was stating that the regulation
 
9 exists, the agency exists, the regulation explicitly
 
10 covers the terms of such pricing, and the issue is
 
11 whether to impose antitrust on that rather than to make
 
12 it an initial choice between those two modes in
 
13 regulating the market.
 
14 MR. CARLTON: Yes, I think that is exactly
 
15 right. So, just to be clear, the question I was posing
 
16 is, in an unregulated industry, if there is a challenge
 
17 based on essential facilities, do we feel comfortable in
 
18 having the judge issue a remedy in which he has to say
 
19 what the transaction terms are? That makes me nervous,
 
20 and that is why I do not like it as a method. I think
 
21 the fact pattern that Bill talked about can get you
 
22 around it sometimes, but in the large majority of cases,
 
23 we might not see these outside offers.
 
24 MR. BAER: Even in the AT&T case, it was the
 
25 best of worlds, it was the worst of worlds, right? The

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

119

1 divestiture, the clean remedy basically introduced a
 
2 structural mode to things, but Judge Harold Green spent
 
3 a hell of a lot of time regulating, and some would say
 
4 maybe not doing the best job in the world of that. I
 
5 mean, it was an impossible job, and once he got the
 
6 structural part done, I mean, he really had no choice
 
7 but to stick with it, and that was tough.
 
8 MR. KOLASKY: And what a great job the FCC did
 
9 after they took over the job.
 
10 MR. BAER: Right, good point.
 
11 MR. CARLTON: Yeah, let's go to a different
 
12 topic now on predatory bidding, and let's talk a little
 
13 bit about the Weyerhaeuser case or at least how I read
 
14 that, which I generally like what the Court said, but I
 
15 was a little worried that in discussing predatory
 
16 bidding or, in general, discussing monopsony, I get the
 
17 feeling sometimes when I read decisions or even
 
18 sometimes the legal literature or the economics
 
19 literature, that there is a confusion between monopsony
 
20 and monopoly, and there is a failure to recognize that
 
21 you can monopsonize the input market but have no effect
 
22 on output prices.
 
23 Now, if that were the case, does anyone have
 
24 misgivings about any of the language in Weyerhaeuser,
 
25 that someone could interpret what they are saying as,

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

120

1 well, there is an output effect, so, therefore, that is
 
2 what I am basing my decision on? In other words, in the
 
3 absence of an output effect, would you be happy with
 
4 condemning monopsony is the question.
 
5 MR. JACOBSON: Well, output. As you and I have
 
6 discussed, it is not monopsony unless you have an upward
 
7 sloping supply curve, and the result of the exercise of
 
8 monopsony power is to restrict the quantity that is
 
9 purchased in the market. What Weyerhaeuser does not
 
10 recognize, although I do not think he could write the
 
11 opinion differently, is that the differences between
 
12 monopsony and monopoly relate importantly to the
 
13 incentives to engage in monopsonistic behavior, because
 
14 a firm that has very little or no market power in the
 
15 output market, as did Weyerhaeuser, is going to have
 
16 mixed incentives when it comes to monopsonizing an input
 
17 market, because the degree to which they restrict the
 
18 quantity of logs purchased is correspondingly going to
 
19 impair their ability to profit in the output market.
 
20 So, what Thomas' opinion misses -- and I think
 
21 it is a very good opinion and this issue was not raised
 
22 so it was unnecessary to decide it -- but I think later
 
23 cases, to the extent there are any, are going to have to
 
24 focus on whether this conduct, which may be ambiguous,
 
25 is likely to harm consumers given that the incentives of

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

121

1 the monopsonist may be altered in a way that would not
 
2 be true in a selling case.
 
3 DR. ELHAUGE: I actually think this is -- I
 
4 thought the court did address this in footnote 2, that
 
5 it was quite clear that they understood this was not a
 
6 case likely to affect output. This was just likely to
 
7 affect the upstream market, but I do not think that is a
 
8 problem. That is, if there is a monopsony in some
 
9 upstream local market, it is a lot like the Manfeld
 
10 case, which also was buyer cartel with the same kind of
 
11 upstream local market/downstream national market case.
 
12 The only effect on national output could be
 
13 negative. It might have no effect or a negative effect
 
14 by reducing output from that particular region with a
 
15 subcompetitive price. So, there is no possible positive
 
16 effect on consumer welfare that one might think should
 
17 counterveil the negative effect on the upstream sellers
 
18 of lumber or the rice growers in Manfeld.
 
19 So, it seems to me, you know, antitrust law,
 
20 although consumer welfare trumps other interests, if
 
21 consumer welfare is not, in fact, being enhanced by some
 
22 conduct, but it is anticompetitive and it is harming
 
23 somebody else, they have always recognized the ability
 
24 to protect those other groups of producers.
 
25 MR. CARLTON: Do you think the recognition that

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

122

1 monopsony power is a problem by itself is actually an
 
2 example that shows that it is not a consumer welfare
 
3 standard that we really have in all cases and that --
 
4 DR. ELHAUGE: No, no, I think it --
 
5 MR. CARLTON: -- that it suggests that it could
 
6 be properly viewed as a total welfare standard
 
7 sometimes?
 
8 DR. ELHAUGE: No, I think they have always been
 
9 clear that they are interested in harm to anybody. I
 
10 think that it is just if there are benefits to consumers
 
11 and harm to competitors, then it is about, you know,
 
12 consumer welfare and not competitors, but, you know, not
 
13 only Manfeld in this case, but boycotts with no
 
14 particular -- just boycott one particular firm out of
 
15 thousands, in Clorz, they have always been pretty clear,
 
16 it seems to me, that if there is no actual benefit to
 
17 consumer welfare, we are willing to use the antitrust
 
18 laws to protect other people from anticompetitive harms.
 
19 MR. CARLTON: Okay, all right.
 
20 DR. WILLIG: Are workers consumers?
 
21 MR. CARLTON: I do not think under the standard
 
22 interpretation of people who want to use the consumer
 
23 welfare standard. I think they view it as buyers, and,
 
24 therefore, if you are on the demand curve, it counts,
 
25 but if you are on the supply curve, it does not count.

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

123

1 DR. WILLIG: Even if you are a person?
 
2 MR. CARLTON: Even if you are a person, and even
 
3 if buyers and sellers are not technically people but
 
4 they are both firms owned by people, even the same
 
5 people. So, it depends on whether you are up or down, I
 
6 guess.
 
7 DR. WILLIG: That means you hang out with
 
8 lawyers too much.
 
9 MR. CALKINS: Dennis, the debates on this -- you
 
10 have been a part of the debates forever. I have never
 
11 actually understood -- and a quick clarification: I
 
12 missed the question because the phone rang, and it was
 
13 not a problem with my exam. It was just my daughter
 
14 wanting free advice.
 
15 MS. McDAVID: An antitrust problem?
 
16 MR. CALKINS: Ah, no.
 
17 MR. CARLTON: She is taking the final exam right
 
18 now.
 
19 MR. CALKINS: I have never understood exactly
 
20 why there is such a big problem here. Imagine a cartel
 
21 that fixes the price that they are paying to suppliers.
 
22 Assume that I have declared I care about consumers and
 
23 only consumers -- I am not a total welfare person -- I
 
24 would have thought that I could easily say that, of
 
25 course, when I said that, I meant I care about the

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

124

1 people who are buying from a cartel, and if the cartel
 
2 is fixing the prices that they are paying to suppliers,
 
3 I just treat those folks as the equivalent of consumers
 
4 for the purpose of discussion. Of course, I always
 
5 meant to protect them equally. So, I do not have to
 
6 change any adherence to a consumer welfare standard to
 
7 accommodate a buyer cartel.
 
8 MR. CARLTON: But if you want to define the
 
9 suppliers of the input as consumers, you are absolutely
 
10 correct, but I think that that really proves the point,
 
11 that the logical consistency is you really do need
 
12 something like a total welfare standard; otherwise, you
 
13 get -- you have to have either an exception or you have
 
14 to explain it in some other way.
 
15 What I have always found peculiar about this,
 
16 really two things: One, that the cost-benefit analysis
 
17 in other parts of economics as it is applied, it is
 
18 standard to use total surplus for evaluating the welfare
 
19 of certain projects, but two, that despite that and
 
20 despite my view, which is it should be total welfare and
 
21 total surplus, which I do think is more in line with
 
22 what the economics profession would say, if you go
 
23 around the world, that is not the typical standard they
 
24 have, with the exception of Canada and New Zealand,
 
25 which do consider total welfare. Most of the world does

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

125

1 follow what we do.
 
2 MR. KOLASKY: I guess I have one -- like Steve,
 
3 I have a question about this, because clearly this is a
 
4 subject that is the topic of a lot of debate in
 
5 connection with merger enforcement policy and how we
 
6 should consider efficiencies, and there seem to be
 
7 differences of view among jurisdictions, but if you look
 
8 at our case law, of course, it is hard for me to think
 
9 of any case in which a court has ever really focused on
 
10 this distinction between consumer welfare and total
 
11 welfare, and then the further question is, even if they
 
12 did focus on it, in what areas would our Section 2 law,
 
13 since that is what we are talking about, be any
 
14 different, applying a total welfare standard rather than
 
15 a consumer welfare standard?
 
16 MR. CALKINS: Let me give you one question --
 
17 and I do not know the answer to this, but I was thinking
 
18 about it while I was reading all those transcripts.
 
19 What if we have somebody that is a monopolist, and it is
 
20 engaging in a -- it is clearly a monopolist, we all
 
21 agree it is a monopolist, it has been a monopolist for a
 
22 long term, and it is charging monopoly prices that are
 
23 way above whatever one would say is a competitive price
 
24 -- and is engaging in a practice that Bobby Willig has
 
25 come in and testified under oath does no good for the

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

126

1 people buying its product at all, but increases its
 
2 profits.
 
3 Could you imagine that you might ever say that,
 
4 golly, if we were looking at a merger that was going to
 
5 save the two firms lots of money, we would approve it
 
6 just based upon that figure, that some of it would
 
7 eventually end up in consumers' hands and we are not
 
8 going to worry about it too much, so we will go with
 
9 total welfare under our merger analysis, figuring that
 
10 it will all shake out in the end -- but maybe we
 
11 wouldn't be quite so eager in approving a monopoly
 
12 situation where we really thought this was not doing
 
13 consumers any good at all? And I was just wondering
 
14 whether you might ever come up with more enthusiasm for
 
15 total welfare in a merger context than you would in some
 
16 monopoly context, and I do not know the answer. I was
 
17 just wondering about it.
 
18 DR. ELHAUGE: First of all, I agree with your
 
19 earlier comments, but then I disagreed with you twice
 
20 before, that I think you can go with a total welfare of
 
21 the victims to be consistent with your approach, that
 
22 is, the upstream producers or the consumers, but not
 
23 necessarily those who are doing the cartel or the
 
24 anticompetitive conduct. Their welfare does not have to
 
25 be included in the calculus.

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

127

1 There is a case, Superior Propane, in Canada,
 
2 that did do the total welfare analysis and did find the
 
3 efficiencies outweighed the anticompetitive effects on
 
4 consumers. Now, they had to exclude all the
 
5 non-Canadian consumers to do this, which actually makes
 
6 an interesting question of political economy. There is
 
7 a global market when you have got multiple
 
8 jurisdictions.
 
9 One nice thing about a consumer welfare standard
 
10 is that every jurisdiction, to an extent, in just
 
11 imposing remedies has a sense to just protect its
 
12 consumers and not overdo antitrust law or underdo
 
13 antitrust law, but if you thought the right standard was
 
14 total welfare, then a lot would turn on whether the
 
15 producers are in your country and the consumers
 
16 elsewhere. So, it might make it much harder to
 
17 coordinate jurisdiction.
 
18 You could simply, in other words, rely on
 
19 whoever the consuming nations in enforcing the antitrust
 
20 law and figure that the producing agencies will just
 
21 unreinforce it, but we do not have to worry about that
 
22 because somebody else is protecting consumers.
 
23 MR. CARLTON: And also, when you take into
 
24 account total welfare, you are correct that the
 
25 countries that do try and look at foreign ownership, for

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

128

1 example, who owns stock in the company, and that can be
 
2 quite complicated, as well as who is consuming it. What
 
3 is interesting, what I have always found interesting, is
 
4 that New Zealand is one of these countries that uses
 
5 total surplus, and one of the justifications they give
 
6 is that they rely on international trade, and,
 
7 therefore, I am very concerned about having efficient
 
8 firms, and, therefore, they want to give a lot of weight
 
9 in having efficient firms who can engage in
 
10 international trade, even if domestically prices might
 
11 rise.
 
12 But the place -- I mean, I agree with Bill that
 
13 there is not a big -- probably in most cases, there
 
14 wouldn't be a huge bit of -- a huge difference whether
 
15 you used total surplus or consumer surplus, that I think
 
16 is right, but the one place where it does apply a lot or
 
17 could has to do with fixed costs and R&D, and I think
 
18 those may become more important in the future, and I
 
19 think if you only are focusing on price effects to
 
20 consumers in the short run, you tend to overestimate the
 
21 importance of marginal cost savings relative to what I
 
22 will call a fixed cost savings, but it is a recurring
 
23 fixed cost savings that in the long run really is a
 
24 variable cost.
 
25 DR. BAKER: There is another place which cuts

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

129

1 the other way, because we are talking about exclusion
 
2 cases with monopolization. So suppose you had a
 
3 practice that excluded rivals and the firm lowered its
 
4 costs and maybe lowered its price a little bit?
 
5 Consumers seem to benefit, but under a total welfare
 
6 standard, you would have to take into account the lost
 
7 profits to the rivals, the producer surplus to them, and
 
8 you might end up deciding that the practice harms the
 
9 competition under your total welfare standard.
 
10 So, just the way you want to ask the consumer
 
11 welfare folks how they can get to objecting to
 
12 monopsony, the question for the total welfare defender
 
13 is how you cannot avoid attacking exclusion in that
 
14 circumstance.
 
15 MS. McDAVID: Exclusion may also matter in the
 
16 context of innovation. If someone refuses to deal in a
 
17 way that precludes innovation, you may be able to reach
 
18 that best with a total welfare standard.
 
19 DR. ELHAUGE: I would also think you could
 
20 always convert a gain in total welfare to a gain in
 
21 consumer welfare if you really had to, because if you
 
22 had a big fixed cost savings, it is not clear why you do
 
23 not just fund some consumer trust that pays consumers
 
24 every time you sell or do something like that and make
 
25 sure that the consumers benefit on balance.

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

130

1 MR. JACOBSON: There is no answer to this harm
 
2 to competitors. Competitors are part of the total
 
3 welfare analysis. So, you could have a practice that
 
4 lowers prices to consumers, but if it hurts competitors
 
5 more, it violates the total welfare standard, and that
 
6 is just -- you know, no one believes that. So, you have
 
7 to make ad hoc exceptions to the total welfare standard
 
8 that you do not have to do under the consumer welfare
 
9 standard, so people are really applying consumer
 
10 welfare. They just do not want to admit it.
 
11 MR. CARLTON: That I don't think is true,
 
12 because the examples John gave about sort of rivals and
 
13 the harm to rivals, which depends on whether -- their
 
14 efficiency relative to the incumbent firm, it really has
 
15 to do with what is called in a cost-benefit analysis
 
16 sort of second best analysis or what happens in other
 
17 markets or what happens to output in which price does
 
18 not equal marginal cost. As far as I know, no one has
 
19 ever advocated that we should look in a -- you know, in
 
20 doing cost-benefit analysis in antitrust at ancillary
 
21 effects in unrelated -- in related markets. Let me give
 
22 you an example.
 
23 If there were a merger of tennis racket
 
24 producers, so the output of tennis rackets went down
 
25 because they are going to raise price, that might have

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

131

1 an effect on the tennis ball market. As far as I know,
 
2 no one on this panel would suggest that if we had a
 
3 Section 2 case involving tennis rackets, we should also
 
4 look at tennis balls and, you know, if there is less
 
5 tennis balls sold, maybe people go to fewer health clubs
 
6 to play tennis.
 
7 I mean, I think you have to -- even if your
 
8 objective is to maximize total welfare, that the process
 
9 by which you do it may well be you should ignore
 
10 secondary market considerations. I think that is just
 
11 a -- sort of a logical point about how you pursue the
 
12 process of figuring out how to maximize total welfare,
 
13 but I think -- I did want to say something about what I
 
14 understood about -- isn't there more money basically
 
15 because it is efficient? And in New Zealand, they
 
16 actually have some -- there is no simple solution to
 
17 this problem, but they actually have pursued ideas like
 
18 maybe I should make a company a mutual and give
 
19 consumers shares in the company, and they have tried to
 
20 pursue some of these other remedies that in the United
 
21 States we have not actually looked at.
 
22 MR. JACOBSON: But, Dennis, why is effect on
 
23 competitors in the same market a second order effect?
 
24 It does not seem to be.
 
25 MR. CARLTON: It is second order -- second order

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

132

1 is probably a poor choice of terms, actually first
 
2 order. You have a first order effect any time an action
 
3 in one market -- the output of one firm affects the
 
4 output of other firms and the output of those other
 
5 firms is not being sold at marginal cost. That happens
 
6 all the time, and if you started taking account of it,
 
7 my hunch is it would lead to a very unwieldy analysis.
 
8 MR. JACOBSON: Which is why you should use a
 
9 consumer welfare standard.
 
10 MR. CARLTON: No, consumer welfare, you have the
 
11 same effects on consumer welfare, the same -- the
 
12 problem persists no matter what the standard is.
 
13 DR. WILLIG: There is another way to think about
 
14 it. There are horrible examples that we economists
 
15 cannot get around, for example, of markets full of
 
16 differentiated products, they compete with each other,
 
17 they are not priced to marginal cost because there are
 
18 brand-specific fixed costs, and where the horrible fact
 
19 is that there can be and generally often is excess entry
 
20 in an open marketplace, where that last firm or the last
 
21 three firms to want to go into the market, in fact,
 
22 benefit the consumers of those products, they cover
 
23 their costs, but they divert so much profitability from
 
24 their rivals that the total social welfare impact is
 
25 negative from open entry in such market.

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

133

1 It is not generally true in a branded market,
 
2 but it is generally true in a Cournot market. There are
 
3 firms with that effect, as economists know, and does
 
4 that mean that we embrace entry barriers or we embrace
 
5 predation as somehow bringing us a welfare superior
 
6 answer? No, we do not, and as Greg is fond of saying,
 
7 that is why in some sense we do not really adhere to a
 
8 welfare standard, we adhere to a competition standard
 
9 under the general belief, which is somewhat -- how
 
10 should I put it -- religious for some of us or maybe a
 
11 generalization that we think is far more true than not
 
12 true, even though there are counter-examples, and that
 
13 is really the standard that antitrust uses, is follow
 
14 procompetitive enforcement decisions and case law
 
15 standards, not social welfare or consumer welfare,
 
16 except inasmuch as they usually go along with
 
17 competition.
 
18 MR. CARLTON: Yes, let me just -- I would phrase
 
19 that slightly differently, but the process of
 
20 competition is the process we think ultimately, given
 
21 our limited abilities to adjudicate matters, that will
 
22 lead to highest total welfare.
 
23 DR. WILLIG: Right.
 
24 MR. CARLTON: I mean, that is my sense, and I
 
25 actually think the lawyers figured that out before the

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

134

1 economists. They are much more concerned about process
 
2 than -- economists sometimes were over -- in my view are
 
3 over-confident they can get every case right, so they do
 
4 not really -- these error costs are low, but once you
 
5 realize --
 
6 DR. ELHAUGE: If you really believed that, you
 
7 would be breaking up monopolies right and left because
 
8 we would have more process of competition.
 
9 MR. CARLTON: Yes, absolutely. That is why if
 
10 you go back to the fifties and you look at the
 
11 literature, it would turn your hair less gray or more
 
12 gray.
 
13 MR. KOLASKY: But also shifting to some of the
 
14 transatlantic dialogue that we have had over the years,
 
15 the danger in going down that road is you run into the
 
16 argument that we used to hear over in Europe and now
 
17 occasionally hear, how can you protect competition
 
18 without protecting competitors? And I do not think we
 
19 want to go there.
 
20 MR. CALKINS: One of the interesting debates
 
21 that came up back in the hearings that I read was a
 
22 disagreement about whether or not we should be sad that
 
23 there has been a long-term durable monopoly -- with I
 
24 think Professor Feldman saying that that is something we
 
25 are sad about (not condemn it by itself, but we would be

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

135

1 sad about it) whereas I think it was David Evans, who
 
2 came back and said, no, I have got no troubles with a
 
3 long-term monopoly so long as it is an efficient
 
4 monopolist. It was interesting simply to see a
 
5 disagreement as to whether when we get up in the
 
6 morning, we are unhappy or not with a long-term
 
7 monopoly, which goes back to the welfare we are
 
8 concerned about.
 
9 MR. CARLTON: Let me actually follow up a little
 
10 bit on that in contrasting Europe to the United States
 
11 on Section 2-like cases. I think it is fair to say they
 
12 think we are not as aggressive as they are and that they
 
13 have proper enforcement standards, although I think the
 
14 differences are narrowing between us and them, but our
 
15 enforcement of Section 2 or our willingness to enforce
 
16 Section 2 depends upon sort of trading off an aggressive
 
17 policy where we think we will be stopping -- where the
 
18 benefits would be stopping competitive harms, but the
 
19 costs are chilling competition, and let's suppose
 
20 someone poses to you the question, what justifies or on
 
21 what basis do you think the less aggressive policy of
 
22 the United States is justified by the empirical evidence
 
23 and what empirical evidence is there about basically
 
24 type one and type two errors on Section 2 cases?
 
25 MR. KOLASKY: Let me take a first cut at this,

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

136

1 because I have been thinking about this a fair amount of
 
2 late, and I have a new theory which I am going to throw
 
3 out into the discussion, and that is a new way of
 
4 looking at ours as more of a market-based approach, and
 
5 that is one of the reasons why our courts, I think, are
 
6 more liberal in terms of how they apply Section 2; that
 
7 is, they are less likely to find conduct violates
 
8 Section 2 because they are very concerned about the
 
9 risks of false positives, and those false positives
 
10 derive from our judicial system, our treble damages,
 
11 class actions, one-way fee shifting, jury trials.
 
12 But I would suggest that what that means is that
 
13 our antitrust laws may, in fact, be more self-enforcing
 
14 in the sense that companies are more likely to want to
 
15 not get too close to the line and risk being found
 
16 guilty of violating our antitrust laws because of all of
 
17 those consequences, whereas the European approach --
 
18 again, going back to its heritage -- is much more
 
19 status. They are much more willing to have the
 
20 administrative authorities decide whether conduct is or
 
21 is not anticompetitive, and they do not want to have in
 
22 their legal system all of these features that we have
 
23 that causes ours to be more of a market-based system.
 
24 DR. ELHAUGE: So, two things: One, I am not
 
25 sure about the premise that the EC is more aggressive.

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

137

1 On some things, it is a little bit more aggressive, but
 
2 actually, when I was writing this book, I was surprised
 
3 at how similar a lot of these things are. In some
 
4 respects, they are actually less aggressive. They have
 
5 more safe harbors, a smaller percentage of foreclosure.
 
6 They do not have the attempted monopolization law. So,
 
7 even though they are dominant-central with the monopoly
 
8 power standards, on balance it is not clear that that is
 
9 much more aggressive.
 
10 But the other thing I would add, which I said in
 
11 the earlier panel, is because there is no private
 
12 litigation, there is less concern about over-deterrence
 
13 there, and it makes sense to actually have somewhat
 
14 broader law in a lot of areas, because it is only really
 
15 being enforced by disinterested government regulators,
 
16 whereas here, if you are enforcing -- I think the
 
17 current state of our law, in part, the fact is every
 
18 judge writing a Section 2 opinion is thinking about the
 
19 private treble damages litigant and not a world where
 
20 everything is an agency enforcement.
 
21 MR. CALKINS: This is something that -- I mean,
 
22 I have been writing about this forever, the
 
23 equilibrating tendencies I call them -- and let me just
 
24 put in a good word for the private enforcement system.
 
25 The one great thing about the U.S. system for private

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

138

1 enforcement is that we have laws, and one cannot bring
 
2 an action and establish some rule of law without knowing
 
3 that a private party may then invoke this in front of a
 
4 court and win some kind of a judgment.
 
5 A downside of a European model is that it -- or
 
6 any regulatory model, and, indeed, part of the U.S.
 
7 merger system now to some extent -- is that it opens up
 
8 the regulators and the system to accusations that
 
9 decisions are being made not based upon consumer welfare
 
10 or total welfare, but rather, favoritism for the home
 
11 team, and that is a very unhappy place for antitrust to
 
12 find itself.
 
13 I think one of the great fears about the
 
14 emerging economies and their use of antitrust is that
 
15 maybe they will not really be using antitrust for
 
16 anybody's welfare other than the welfare of the home
 
17 team, and one of the reasons why it is good to have
 
18 standards, principles, things to which people can point,
 
19 is because it gives you some grounding and some comfort
 
20 that decisions are being made on some basis other than
 
21 favoritism, and that is really a terribly important
 
22 value to try to achieve.
 
23 MR. CARLTON: There was something Bill said I
 
24 wanted to follow up on. There is certainly a history of
 
25 intervening in Europe and regulating, and one of the

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

139

1 things we know from our experience in the United States
 
2 is that when regulators get involved, sometimes price
 
3 discrimination becomes something they become quite
 
4 concerned about, either they do not like it or they
 
5 encourage it because of cross-subsidies, but one or the
 
6 other sometimes, and in particular, in the United
 
7 States, it is not an -- putting Robinson-Patman to one
 
8 side, price discrimination by itself need not be an
 
9 antitrust violation.
 
10 In Europe, there seems to me to be a much
 
11 greater sensitivity towards price discrimination, and I
 
12 think in certain aspects of transactions, they bar price
 
13 discrimination, and I am wondering whether anyone has
 
14 any thoughts on what would account for that.
 
15 MR. KOLASKY: Well, is not part of that the
 
16 nature of Article 82, which is talking about abuse of
 
17 dominance rather than monopolization, and so there still
 
18 is a remnant that worries about exploitative abuses, not
 
19 just exclusionary abuses, and, you know, I think the
 
20 other thing which we have to be conscious of is that
 
21 while all of us would like to forget that the
 
22 Robinson-Patman Act exists -- and I certainly endorse
 
23 the AMC's recommendation that it cease to exist -- the
 
24 fact of the matter is that historically, there was a
 
25 fair amount of enforcement under the Robinson-Patman Act

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

140

1 that has dropped off considerably in the last decade or
 
2 so, but we have our own dirty laundry here.
 
3 DR. BAKER: Also, in Europe, they have had a
 
4 long-standing concern right from the inception with
 
5 price differences across nations -- across borders.
 
6 MS. McDAVID: Across borders.
 
7 DR. BAKER: -- across borders, and their whole
 
8 effort has been to create a national market to get rid
 
9 of those differences, and so those kind of price
 
10 differences have always been --
 
11 MR. CARLTON: That is a legislative solution
 
12 rather than a market solution that gets rid of
 
13 artificial transaction costs. That is what is peculiar.
 
14 In other words, in the United States, our view is, I
 
15 think, that price discrimination should not be an
 
16 antitrust violation. In Europe, I think there is much
 
17 less of that view.
 
18 MR. JACOBSON: Well, because of the common
 
19 market, the point that John is making, it is historical,
 
20 it is engrained in the whole structure of the European
 
21 Union. Here, I think it is very clear that price
 
22 discrimination does not violate Section 2, and who is
 
23 the last plaintiff that won a case under the
 
24 Robinson-Patman Act? One has to have a better memory
 
25 than me to remember who that was.

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

141

1 MR. CARLTON: Let me turn to one final topic
 
2 before I turn it over to you guys to ask questions of
 
3 yourselves. I wanted to talk about tying and bundling,
 
4 and I will try and keep the time -- I will cut off the
 
5 discussion, so everybody knows we have five to ten
 
6 minutes.
 
7 One of the things I find interesting in
 
8 discussions about bundling and tying is they are put in
 
9 separate categories, especially in the legal literature.
 
10 I think that is not really true in the economics
 
11 literature, they are treated as a very similar
 
12 phenomenon, and one of the questions I had was in the
 
13 tests for bundling, one common test, sometimes called
 
14 the Ortho test, the AMC outlines a test that is very
 
15 similar, and it always follows, you look basically to
 
16 see whether the product that is sold separately, suppose
 
17 is product A, you look at its price, you look at the
 
18 packaged price of A and B, and then you look at the
 
19 incremental revenue you get from selling the package,
 
20 and you compare it to the marginal cost of B, and if
 
21 that is positive, that is sort of price above marginal
 
22 cost. So, that is the analogy, and that is fine.
 
23 In the AMC report, there were two other
 
24 components to the test, but I just want to stop on the
 
25 first component, that first component, which seems to

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

142

1 have relatively widespread agreement. I think in the
 
2 AMC, everybody voted for it, though I have a dissenting
 
3 statement but an explanation of what more they should
 
4 have voted for. There is this analogy to predation. I
 
5 mean, that is clearly what price versus marginal cost is
 
6 doing, yet in the economics literature, when you look at
 
7 strategic behavior, although we understand predation,
 
8 most of the stories in which you get an anticompetitive
 
9 harm from tying or exclusive dealing or whatever it is
 
10 has to do with scale economies, and that is a different
 
11 theory than predation. Predation theory, we understand.
 
12 Scale economies, we also understand.
 
13 I am just curious, do people have the view that
 
14 the bundling theory, at least in the legal literature or
 
15 the economics/legal literature, is really talking about
 
16 what economists call mixed bundling, and it is really
 
17 focusing only on the predation part of the story and it
 
18 is missing the usual -- not usual, but the other parts
 
19 of the story that we usually relate to tying? Is
 
20 that --
 
21 DR. ELHAUGE: I think they are missing. I agree
 
22 with you completely on what the economic literature
 
23 shows, and I think there is a lot of tendency to get
 
24 beguiled by the word "discounts." Actually, all we know
 
25 is there is a price difference that is conditioned. We

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

143

1 do not know anything about any discount from any but-for
 
2 price. The noncompliant price is higher than the
 
3 compliant price, that is all. There is a difference.
 
4 We could call it -- if we called it disloyalty
 
5 penalties, we would have a very different flavor to this
 
6 doctrine.
 
7 But I think it is also -- I mean, it is a
 
8 predation thing, and I think it has the odd element as a
 
9 result of focusing, again, more on the virtue of the --
 
10 before I talked earlier about not focusing on the virtue
 
11 of the defendant but on the effects. Here they are
 
12 focusing on the virtue of the rival, whether the rival
 
13 is equally efficient, as if that is a good proxy for
 
14 anticompetitive effects, whereas a less efficient rival
 
15 may well restrain a monopolist to price below a monopoly
 
16 price, and if you actually have this economy of scale
 
17 denial, you are raising your costs, and this test has
 
18 the odd feature of allowing you to bootstrap yourself
 
19 into a defense. It assumes away the very
 
20 anticompetitive effect of interest by assuming the rival
 
21 is equally efficient when the whole point of the conduct
 
22 may have been to make them less efficient.
 
23 MR. CARLTON: Anyone else?
 
24 DR. WILLIG: Yes, I agree with you, Dennis, that
 
25 the literature, when it comes to foreclosure of various

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

144

1 kinds, including price predation, is really all about
 
2 scale economies, either volumetrically at one point in
 
3 time or scale economies or scope across time -- if we
 
4 can't sell it today, we are not going to be around
 
5 tomorrow -- which is what recoupment is all about, and
 
6 the idea of the bundling, the Ortho test, with all of
 
7 the complications that I understand the Commission has
 
8 now come to grips with, which I hope is great, has to do
 
9 with using this kind of bundling to close off parts of
 
10 some element of the market to your rival.
 
11 What makes economic sense and what is consistent
 
12 with the literature is that the purpose might be to
 
13 limit the quantity that that rival can sell, thereby
 
14 drive up the average cost curve, and make it less able
 
15 to compete with the perpetrator in other parts of the
 
16 market, a noncoincident market, another segment of
 
17 consumers, another state, or later on in time. So, in
 
18 that sense, under that theory, it is very related to
 
19 predatory pricing and very appropriate to look at the
 
20 incremental price against the incremental cost as the
 
21 standard.
 
22 MR. KOLASKY: I guess what I would say on
 
23 this -- and, again, I said at the outset, I do not
 
24 pretend to be an expert on bundling -- but from the
 
25 literature I have read, this seems to be an area in

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

145

1 which the literature itself is still, I think, quite
 
2 confused, and the case law is very underdeveloped, and
 
3 so I cannot think of another area that more cries out
 
4 for an article in the nature of the Areeda Turner
 
5 article on predatory pricing that lays out an
 
6 administerable standard or poses an administerable
 
7 standard, following which there can be several years of
 
8 debate in the law review and economic literature, and
 
9 then finally the courts will settle on something.
 
10 MR. CALKINS: But that is the problem for this
 
11 project and this report. I mean, right now, with
 
12 bundling, I think Einer is correct, in that people have
 
13 basically looked at this and said, ah-ha, it results in
 
14 a lower price, we like lower prices, and so let's
 
15 analogize it to the predatory pricing standards with a
 
16 twist, and then they say because bundling is very common
 
17 and very good thing and so is allegedly predatory
 
18 pricing -- and on you go.
 
19 Then you get nervous, because bundling is not as
 
20 good as low pricing, because you can come up with ways
 
21 that it can harm competition, and so you get a little
 
22 bit nervous about whether or not you ought to adopt a
 
23 standard that you know is under-inclusive, that we
 
24 adopted deliberately because we wanted to protect
 
25 something that is the ultimate value -- one of the

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

146

1 ultimate values -- low prices, and maybe these values
 
2 are not quite so ultimate.
 
3 We are working our way through it, and the
 
4 flourishing of literature in this area has been
 
5 immensely helpful and immensely interesting, and the
 
6 problem for you folks who have to deal with this is are
 
7 you ready to say, ah-ha, we now are prepared to be the
 
8 Areeda Turner and to declare a standard that exactly
 
9 balances it and will enshrine the correct answer for all
 
10 time -- or is this something whereby we need a little
 
11 more work before we are ready to do that?
 
12 MR. CARLTON: Okay, why don't we start going
 
13 around, and we will start with Bill. So, as I said at
 
14 the outset of this panel, I think it would be useful if
 
15 each one of you could, you know, pose a question that
 
16 you think is the most important one that has not yet
 
17 been posed or if you want to reiterate or elaborate on a
 
18 point.
 
19 MR. BAER: Well, a question that comes to mind,
 
20 having sat unusually quietly through a lot of this, is
 
21 the extent to which the Section 2 behaviors we are
 
22 talking about is the prevalence of those behaviors, and
 
23 we haven't really talked about that. We have talked
 
24 about, you know, bundled discounts, we just finished
 
25 talking about that, and concerns with how you

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

147

1 appropriately analyze them, refusals to deal.
 
2 I mean, the extent to which, as a counselor, I
 
3 deal with Section 2-type issues, I deal with them, but I
 
4 deal with them less than collaborative issues and ones
 
5 you run afoul of, and what I am trying to get a handle
 
6 out of in this discussion is at the end of the day how
 
7 important resolving a lot of these issues is in the
 
8 scheme of things, and is Section 2 monopolistic,
 
9 anticompetitive conduct a sufficiently small part about
 
10 what we worry about in the economy that we shouldn't
 
11 overdo our analysis and our attention to it?
 
12 I do not know the answer to that question based
 
13 on -- I haven't read all the transcripts, although there
 
14 have been summaries of all the prior hearings, and the
 
15 discussion here today. So, that is the question I have.
 
16 DR. BAKER: I have a brief comment about a
 
17 proposition that did not really come up today but could
 
18 have, and that has to do with the question of whether
 
19 the market will cure all these monopolization problems
 
20 on its own. My comment has to do with thinking about
 
21 some of the recent cases, the government cases, which I
 
22 know a little better than the private cases. But it
 
23 seems to me if you accept that -- if you accept the
 
24 allegations that were made by the Government or the
 
25 facts as found by the courts that the market power in

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

148

1 the cases that I am thinking of was all essentially
 
2 durable and would not have eroded absent government
 
3 action. I am thinking about UNOCAL and Rambus, where
 
4 the allegations were deceit in the adoption of a
 
5 standard that conferred market power a firm, and on
 
6 Biovale and BristolMyers Squibb, the FTC cases where
 
7 there was fraud on, again, obtaining regulatory
 
8 protection against new competition, and then some of the
 
9 government -- the Justice Department cases, Dentsply, at
 
10 least we think we understand this naked exclusion
 
11 equilibrium where it is durable absent government
 
12 action, and Microsoft, the facts as found by the court,
 
13 it seems to me that the market power in operating
 
14 systems is not forever but durable in an important sense
 
15 for antitrust law.
 
16 So, I think that the argument sometimes made
 
17 that we can just sit back and ignore monopolization
 
18 because market power disappears on its own is -- does
 
19 not seem to be true in the cases where the enforcement
 
20 is.
 
21 MR. CALKINS: I would ask: what else do you see
 
22 in the hearings that you thought was interesting and has
 
23 not been mentioned -- and I would rattle off five very
 
24 quick things.
 
25 First, on Jon Baker's point, Mike Scherer

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

149

1 talking about the lasting harm done by U.S. Steel in
 
2 sort of stultifying the steel industry for a long
 
3 time -- the example of the long-term harm to come out.
 
4 Beyond that, it was interesting that sometimes people in
 
5 testifying forget that they are talking about monopoly
 
6 cases, so that in terms of bundling, one of the
 
7 witnesses was saying one of the great things about
 
8 bundling is it could help to undo a situation of
 
9 conscious perilism in an oligopoly. Well, that is not
 
10 really relevant if we are suing a firm that is a
 
11 monopoly -- if it has gotten an 80 percent share -- and
 
12 so sometimes the people testifying forgot that they are
 
13 talking about standards for judging a monopolist. I
 
14 thought that was something that ought to be remembered.
 
15 There did not seem to be a lot of joinder and
 
16 agreement on exactly what is a legitimate business
 
17 justification. Some people say -- they seem to be
 
18 thinking that any time a monopolist could say it is
 
19 going to increase the monopolist's revenues, that is
 
20 legitimate business justification, that is what they are
 
21 supposed to do when they get up in the morning. The
 
22 problem with that, of course, is that would justify
 
23 bombing your rivals' plants, because that would improve
 
24 your revenues, improve your profits and things -- and so
 
25 I would suggest that the legitimate business

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

150

1 justification probably ought to be keyed to something
 
2 that is going to be benefiting a consumer at some point
 
3 in the future, and that is something that is a very
 
4 important part of the case law and something that is
 
5 very underdeveloped.
 
6 Third, Dan Rubinfeld had an interesting
 
7 discussion talking about the applications barrier to
 
8 entry in the Microsoft case, saying that when that case
 
9 began, nobody talked about the applications barrier to
 
10 entry, and they spent a whole lot of that case trying to
 
11 persuade the judge that there was such a thing, and I am
 
12 going to try to remember that every time that somebody
 
13 says that a plaintiff should lose unless it can prove
 
14 entry barriers, and I am going to try to remind myself
 
15 that, golly, you know, maybe it is not so easy all the
 
16 time to prove entry barriers. So, before I say a
 
17 defendant should win summary judgment because the
 
18 plaintiff has not proven entry barriers, I am going to
 
19 try to remind myself that sometimes it is hard to think
 
20 through entry -- and you know this very well -- but
 
21 entry is very difficult, and so I think we ought to
 
22 worry about entry more than we do.
 
23 And I guess last, in terms of candor, the
 
24 observation that I liked best was the comment from the
 
25 representative of the Chamber of Commerce who conceded,

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

151

1 without much cross examination, that, in truth, we do
 
2 not really value or care about convergence. What we are
 
3 interested in is convergence to standards that we like,
 
4 and convergence is not really a value at all, and I
 
5 think that the next time someone writes a paragraph
 
6 about convergence, you should stop and think, do people
 
7 really value convergence, or do they just want standards
 
8 they do not like to be changed into standards they do
 
9 like -- which goes back to Bobby's point, which is that
 
10 this is all about trying to figure out good standards.
 
11 DR. ELHAUGE: So, the first question I would ask
 
12 is, we have been talking a lot about the rule of reason,
 
13 is there any role in Section 2 for an abbreviated rule
 
14 of reason analysis in cases where the defendant cannot
 
15 come forward with any plausible procompetitive
 
16 justification? So, we tend to critique a lot the
 
17 Europeans for their loyalty discount rule, for example,
 
18 as a kind of per se rule, but actually, all these
 
19 opinions are cases where they say the defendant failed
 
20 to come forward with any procompetitive justification at
 
21 all. So, you might think, just like we do it for
 
22 Section 1, we would say, well, maybe there is something
 
23 anticompetitive, I do not really know, and I have got
 
24 nothing on the positive side of the ledger, so why don't
 
25 I condemn those kind of cases?

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

152

1 But also, we might also have some -- this goes
 
2 to the other question whether there is some meaningful
 
3 review to be done at the motion to dismiss stage. So,
 
4 now everything tends to be motion for summary judgment.
 
5 We could apply this for the California Dental analysis
 
6 where first the plaintiff has the burden of proving some
 
7 plausible anticompetitive theory, then the defendant has
 
8 the burden of proving some procompetitive theory, and
 
9 those could be done at the motion of dismiss with regard
 
10 to the facts, and then we wait for summary judgment.
 
11 The second question was to answer the question
 
12 which was raised and we never got to, but is there any
 
13 reason to be more worried about false positives than
 
14 false negatives? And actually, I think in a global
 
15 economy, there is, or global markets there is, for this
 
16 reason: If you imagine every regulator in a global
 
17 market is optimizing over-deterrence and
 
18 under-deterrence, and sometimes they make mistakes, the
 
19 problem is since the most aggressive regulator wins in
 
20 the sense that they make the difference.
 
21 Over-deterrence dominates more on global markets,
 
22 because whenever -- if they each make the over -- if any
 
23 one of them makes the over-deterrence error, then we
 
24 would have over-deterrence, where it sort of takes both
 
25 of them to make the under-deterrence error. So, that

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

153

1 may mean that in global markets there is some reason to
 
2 think that the standards should be more tighter and more
 
3 concerned about over-deterrence.
 
4 MR. JACOBSON: The question I would ask is what
 
5 is with this AMC standard for bundling and why is there
 
6 this Dennis Carlton footnote? So, I cannot answer the
 
7 second, but I think I can answer the first.
 
8 Bundling has aspects of different types of
 
9 behavior, but it is really its own category. It has
 
10 aspects of predatory pricing because bundling, by
 
11 definition, involves some price reduction. It is
 
12 something that customers frequently seek out and expect.
 
13 They say, if I am buying two for one, I need to pay less
 
14 if I was buying one, and so it is a common form of
 
15 discounting, so that you cannot rule out a predatory
 
16 pricing issue.
 
17 It has aspects of tying because you are
 
18 combining the sale of different products, and there is
 
19 some compulsion from the bundle that induces the
 
20 purchase of the second, more competitive product. It is
 
21 different, though, than tying, because there is no
 
22 coercion, as such, in a bundling case. It has aspects
 
23 of exclusive dealing because, at least in the extreme,
 
24 one effect of a bundled price arrangement is to induce
 
25 exclusive or quasi-exclusive dealing by the customer.

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

154

1 So, it has aspects of all these behaviors.
 
2 It is also, when you think of the bundling, as
 
3 such, as just a pricing decision, it is a type of
 
4 conduct that may enhance competition but has few
 
5 cost-saving efficiencies. There may be some transaction
 
6 cost savings, there typically will be, and there may be
 
7 in some cases some shipping cost savings, but you do not
 
8 get the level of efficiencies that you would see in the
 
9 typical exclusive dealing arrangements or in most tying
 
10 arrangements. So, it is a practice that defies easy
 
11 categorization.
 
12 Now, the default rule that, you know, I have
 
13 gone on at length today in saying should apply in
 
14 Section 2 cases is the structured rule of reason
 
15 analysis that we have from the Microsoft case. The
 
16 reason the AMC has a standard that has that as the third
 
17 part, as the back-stop, but we have two safe harbors
 
18 because bundling is so prevalent, because in most cases
 
19 it is simply a price reduction, and because we do want
 
20 to err at least a bit on the side of not discouraging
 
21 procompetitive pricing behavior.
 
22 So, the first safe harbor is basically the Ortho
 
23 test. It is the test that says if you take the total
 
24 discount applied for the entire bundle and you subtract
 
25 that from the revenues that you would normally sell for

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

155

1 the competitive product on a stand-alone basis, if that
 
2 attributed price is above the incremental cost, we are
 
3 basically thinking variable costs here, then that
 
4 pricing practice cannot exclude -- not necessarily the
 
5 plaintiff, but it cannot exclude a hypothetical equally
 
6 efficient competitor, and so on that basis, we are going
 
7 to say that that is a safe harbor. If the plaintiff
 
8 cannot show that the pricing is below attributed price
 
9 costs on that basis, that the defendant wins.
 
10 We have a second safe harbor that is not
 
11 particularly safe that is a recoupment safe harbor.
 
12 Now, one can do a recoupment safe harbor in a number of
 
13 different ways. The AMC did it to determine whether the
 
14 defendant is going to likely recover the "lost profits"
 
15 from the calculation of below-cost pricing on the basis
 
16 I described. Whether those profits are going to be
 
17 recovered at all -- and, of course, in most bundling
 
18 contexts, recoupment can be simultaneous, and it
 
19 typically is, because the total bundled price typically
 
20 exceeds the total bundled costs. So on that basis, if
 
21 recoupment is simultaneous, the recoupment safe harbor
 
22 does not apply. It is there, it is there largely I
 
23 think because Commissioner Birchfield said, well, we
 
24 need to have something that sounds like Brooke, so we
 
25 wanted to have something with a price-cost test as well

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

156

1 as a recoupment element. So, it is there, but I
 
2 wouldn't pay an awful lot of attention to it.
 
3 But then at the end, we have the basic test of
 
4 the rule of reason. Is the net effect of this practice
 
5 going to be to harm competition and to restrict output
 
6 and raise prices to consumers? And it may not be the
 
7 perfect test that endures as long as Areeda and Turner,
 
8 I mean, that has been pretty impressive, you know, 32
 
9 years since 1975, but I think it is by far the best
 
10 available today. Certainly none of the alternative
 
11 tests that people have come up with come close to this
 
12 one in terms of administerability, intelligibility,
 
13 ability to counsel clients, and part of the good news is
 
14 that just a few weeks ago, the 9th Circuit called for
 
15 amicus briefs in a bundling case where the jury was
 
16 instructed under LePages. The case is called Peace
 
17 Health, and a number of amicus briefs were submitted,
 
18 and Deborah Valentine and I submitted one articulating
 
19 the AMC standard, so we will see what shakes out of
 
20 that.
 
21 But one thing I hope in terms of the agencies is
 
22 when that case reaches the petition for certiorari
 
23 stage, which it will, that the agencies, you know, get a
 
24 sufficient act together to file a brief with the Supreme
 
25 Court articulating some standard, hopefully the AMC

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

157

1 standard, for both.
 
2 MR. CARLTON: Okay, thank you. If anyone wants
 
3 to read my footnote, you are welcome to. I will just
 
4 say one thing. I won't explain the footnote, because we
 
5 do not have much time. When you teach bundling in
 
6 economics, and if you look at the economics literature,
 
7 it is called mixed bundling, because you are offering
 
8 product A and product A and B together and then maybe
 
9 product B, and the economics literature is pretty well
 
10 developed, you know, many years ago, I think starting in
 
11 the seventies, in which they describe mixed bundling as
 
12 a way to price-discriminate. It had nothing to do with
 
13 harming competition, bettering your ability to charge a
 
14 high price because your competitor is harmed. Pure
 
15 price discrimination.
 
16 Failure to appreciate that will mean that you
 
17 will see people failing the Ortho test, the first prong
 
18 that John described, even though they are doing nothing
 
19 that harms competition. So, that was -- that is the
 
20 short version, and you can read the long version in the
 
21 report as to why I think there needs to be something
 
22 more expansive.
 
23 In any case, Bill.
 
24 MR. KOLASKY: I will be very brief. I have a
 
25 question to which I do not have an answer, and it is the

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

158

1 very important subject that we did not get a chance to
 
2 discuss today, and that is monopoly power.
 
3 All of us know that market share is a relatively
 
4 poor surrogate for market power, and all of us know that
 
5 it is exceedingly difficult to define markets in
 
6 monopoly cases. We have a very good test, the
 
7 hypothetical monopolist test, to use in mergers, because
 
8 there we have a base price, the pre-merger price, from
 
9 which to work, and we do not have that in monopolization
 
10 cases generally.
 
11 So, my question really is, especially in
 
12 high-tech markets, markets characterized by intellectual
 
13 property in which recurring innovation is important and,
 
14 therefore, you have recurring fixed costs, so that it is
 
15 inevitable that prices are going to have to be well
 
16 above marginal cost, how are the courts to define
 
17 substantial and durable market power sufficient to
 
18 create a monopoly?
 
19 MR. KRATTENMAKER: I guess I want to say the
 
20 first three questions I would have asked myself have
 
21 already been asked, so I won't answer them, and I think
 
22 we have done such a terrific job of posing a lot of good
 
23 questions that there are not a lot left, so with that
 
24 qualification, if I were to ask myself or if you were to
 
25 ask me what has not been asked, I would say when you

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

159

1 look at the law of Section 2, what do you see that we
 
2 haven't talked about?
 
3 I would say when I look at Section 2, I see it
 
4 encrusted with a lot of barnacles, a whole bunch of
 
5 immunities, areas to which Section 2 does not apply at
 
6 all, for example, so-called petitioning the Government
 
7 or so-called state action, a whole bunch of exemptions,
 
8 a whole bunch of activity at the federal level where
 
9 comparable monopoly is not only tolerated, but it is
 
10 fostered, and so I would ask myself the question, if we
 
11 are having a series of hearings or writing a report
 
12 about Section 2, can we leave out what I might call the
 
13 ghosts in the room or the barnacles on the back of
 
14 Section 2 that protect and sometimes foster monopoly in
 
15 ways that are entirely lawful under the parameters of
 
16 the rest of the discussion we have had today?
 
17 MS. McDAVID: One issue we haven't talked about
 
18 at all today, and I do not honestly know the answer to
 
19 it either, is in a framework that applies the rule of
 
20 reason to Section 2 cases, what is the role of what
 
21 someone might loosely call intent or might be called
 
22 contemporaneous business evidence of why a practice was
 
23 engaged in. We all understand the risk that it can be
 
24 misconstrued, and that is why we have tended to play it
 
25 down. But we look at ex post justifications in figuring

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

160

1 out what the efficiencies are, shouldn't we also be
 
2 informed to some extent about the prior explanations as
 
3 to why the practice was being proposed, and is that an
 
4 appropriate part of this analysis? Today, I think we
 
5 exclude intent in the predatory pricing arena almost
 
6 entirely, but I am not certain that is appropriate in
 
7 all section 2 cases.
 
8 DR. WILLIG: Thank you. I would like to throw
 
9 out two things, one very short, because we spent a lot
 
10 of time on it already, and that is the idea of the test
 
11 or is there an overarching philosophy. To bring it back
 
12 to some comments we were sharing on consumer welfare,
 
13 total welfare, or competitive process, I think
 
14 competitive process is really what our ability to
 
15 analyze is about, and I will just put out as a
 
16 proposition that the no economic sense test, the
 
17 sacrifice test, are about protecting conduct that is
 
18 part of the competitive process. We can all go home and
 
19 think about it.
 
20 On monopolization, market power, I would love it
 
21 if the report would come out and say that this is no
 
22 longer viewed as a paradox that in any way should slow
 
23 down our ability to do Section 2 analysis. The
 
24 Cellophane Fallacy was a fallacy, but it is not a
 
25 paradox. We know the way out of that fallacy, and it is

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

161

1 real simple. It is just staying somewhat clear-headed
 
2 about what is the issue, and just in case we do not all
 
3 agree on it yet, I think we probably do, but let me do a
 
4 two-minute version of it.
 
5 We have got a firm, the defendant, it has got
 
6 some nice market position, it puts out a practice that
 
7 is a killer practice. The practice takes out some
 
8 competitors, and yeah, later on we will talk about
 
9 whether it was a valid practice or not in some sense,
 
10 but first let's talk about just the precondition. Is
 
11 there a monopoly power issue?
 
12 I would like to emphasize the way to analyze
 
13 that is to focus on the situation before the killer
 
14 practice, we have got the victims of the practice, and
 
15 we have got other possible sources of competition
 
16 disciplining the defendant, and the issue that we can
 
17 resolve using regular monopolist 5 percent test kinds of
 
18 mind-sets is to ask before the killer practice went into
 
19 effect, how important in the firmament of competitive
 
20 forces were those who were the victims of the practice
 
21 i.e., what is their share?
 
22 We can do that in the ordinary sort of measuring
 
23 system. We can ask what was the share of the defendant
 
24 in that market and what is the increment to its market
 
25 power viewed through the regular lens, i.e., what was

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

162

1 the share of the competitors who were being slain? How
 
2 many others are there who are also sources of
 
3 competitive discipline? These are share-based kinds of
 
4 questions. We can put entry into it. We can use
 
5 uncommitted and committed -- actually, we can use the
 
6 whole paraphernalia from the Guidelines, as long as we
 
7 remember to do it pre-kill.
 
8 Now, maybe it is five years later and the kill
 
9 is over, but mentally, we can go back to before the kill
 
10 and still ask those questions, and there is a relevant
 
11 market that's pertinent for this analysis. I would love
 
12 it if the report would say, there is no more Cellophane
 
13 paradox, there never really was, we just weren't being
 
14 very clear-eyed about it.
 
15 MR. CARLTON: On that note, unless there are any
 
16 questions from the audience, I would like to say two
 
17 things. One, I have already mentioned a disclaimer,
 
18 that my views, if I expressed any today, are mine alone,
 
19 not those of the Department of Justice, and also, I want
 
20 to thank this very splendid panel. It's rare to have
 
21 such talent in one room, and I am grateful to all of you
 
22 for taking the time to give us your views. Thank you
 
23 very much.
 
24 (Applause.)
 
25 (Whereupon, at 4:57 p.m., the hearing was

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

163

1 concluded.)
 
2
 
3
 
4
 
5
 
6
 
7
 
8
 
9
 
10
 
11
 
12
 
13
 
14
 
15
 
16
 
17
 
18
 
19
 
20
 
21
 
22
 
23
 
24
 
25  

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

164

1 C E R T I F I C A T I O N O F R E P O R T E R
 
2 DOCKET/FILE NUMBER: P062106
 
3 CASE TITLE: SECTION 2 HEARING
 
4 DATE: MAY 1, 2007
 
5
 
6 I HEREBY CERTIFY that the transcript contained
 
7 herein is a full and accurate transcript of the notes
 
8 taken by me at the hearing on the above cause before the
 
9 FEDERAL TRADE COMMISSION to the best of my knowledge and
 
10 belief.
 
11
 
12 DATED: 5/3/2007
 
13
 
14
 
15
 
16 SUSANNE BERGLING, RMR-CLR
 
17
 
18 C E R T I F I C A T I O N O F P R O O F R E A D E R
 
19
 
20 I HEREBY CERTIFY that I proofread the transcript
 
21 for accuracy in spelling, hyphenation, punctuation and
 
22 format.
 
23
 
24
 
25 DIANE QUADE

For The Record, Inc.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555

 

Updated January 2, 2024