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Misleading And Deceptive Conduct

Slide 1

Federal Trade Commission/Department of Justice
Hearings on Single-Firm Conduct
Berkeley, January 2007



 

The Economics of Monopolization
A Simple (as possible) Antitrust Analysis


Timothy F. Bresnahan
Stanford University


 

 


Slide 2

 

 

Much Recent Action in the Courts

  • Boundary with law or regulation
    • Trinko (Supreme Court)
    • Xerox (Federal Circuit)
  • Pricing
    • Spirit (6th Circuit)
    • AA (District Court)
  • Bundling & c.
    • LePage's (3rd Circuit)
    • Microsoft (DC Circuit)
    • Dentsply (3rd Circuit)

All working on the standards for monopolization / exclusion under § 2


Slide 3

 

A Rule of Reason Enquiry

  • Structure is economic
  • Economics enters at two key junctures
    • Market power (should be competitive effects!)
    • Causation from alleged anticompetitive acts to changes in market power
  • Much can be gained by thinking carefully about the competitive effects and causation arguments first
 

Consistent with judicial analysis in bundling cases

Slide 4

 

Difficult!

  • Most exclusionary conduct would be an ordinary and competitive business practice in some or even most industries.
  • Legal Perspective
    • § 2 leads to an unstructured rule of reason analysis
  • Economic Perspective
    • Monopolization leads to a highly structured competitive effects analysis

Slide 5

 

Dentsply:
Economic Analysis of Monopoly Maintenance

  • There is a monopoly in prefab artificial teeth.
  • There could be competition in the market from a number of far smaller and lower priced competitors.
  • But exclusive contracts with dealers block smaller competitors from offering consumers effective tooth choice.

Slide 6

 

... Horizontal competitive effects

  • The impact of Dentsply’s contracts is to reduce competition in the market for prefab artificial teeth.

 

...Vertical restraints logic

  • Dentsply’s contracts are with third parties, the dealers. Their economic effect is to prevent valuable distribution contracts between the third parties and Dentsply’s competitors.
    • vs. Efficient Vertical Contracts

Slide 7

 

Theory of (Anti)Competitive Effects

More Market Power for Defendant(s)

Arrow pointing up   Exclusionary Act

Less Market Power for Defendant(s)

 


Slide 8

 

Dentsply Theory – Much for Plaintiff to Show

  • There is a monopoly in prefab artificial teeth.

There is a monopoly in prefab artificial teeth.

[D]


  • There could be competition in the market from a number of far smaller and lower priced competitors.

There could be competition in the market from a number of far smaller and lower priced competitors.

[D]


  • But exclusive contracts with dealers block smaller competitors from offering consumers effective tooth choice.

But exclusive contracts with dealers block smaller competitors from offering consumers effective tooth choice.

[D]


Slide 9

Much for Plaintiff to Show
Market Power (Competitive Effects) & Causation

  • There is market power, but there could be competition...
    • Usual investigation of market power (analysis of substitution to competitors, entry barriers) ..
    • ... rendered more difficult for plaintiff by the requirement to show that a more competitive regime could arise.
    • The most direct route for plaintiff: show that entry barriers arise from challenged acts
  • Bulk up this enquiry of causation
    • Why do third parties go along with anticompetitive contracts?
    • Why is use of third parties an effective barrier?

Slide 10

Much for Plaintiff to Show
Test vs. Efficiency Theories

  • (v.1) Would the anticompetitive acts be profitable for defendant and make business sense without diminishing competition?
    • aka the “sacrifice” test.
      • Does the act involve a departure from ordinary business (competitive) behavior that is costly to the firm?
      • Will the firm recoup that cost only through monopoly power?
  • (v.2) (Called for by every monopolization defendant in living memory.) Calculate how well off is society (or are consumers) with and without the conduct.
    • My theoretical colleagues’ “assume you have a can opener”

Slide 11

x v. Microsoft 3.1
US v. Microsoft (Browser Case)


Slide 12

Microsoft Monopoly Maintenance Example

  • There is a Windows monopoly.

There is a monopoly in prefab artificial teeth.

[D]


  • There could be dynamic competition for the operating system market if Internet entrepreneurs built standards in new markets.

There could be competition in the market from a number of far smaller and lower priced competitors.

[D]


  • But contracts with distributors and with other complementors kept the Internet entrepreneurs from getting a market test.

But exclusive contracts with dealers block smaller competitors from offering consumers effective tooth choice.

[D]


Slide 13

Economics of the PC Industry Very Relevant

  • Internet Entrepreneurs were not horizontal competitors for Windows.
    • Browser from Netscape, Java from Sun not operating systems
    • Industry experience is that vertical disintegration leads to competition for the market
    • Microsoft Internal documents foreground this (rare) feature of this industry

Slide 14

PC Industry View of Vertical Disintegration
Andrew S. Grove

The Old Vertical Computer Industry -
Circa 1980

sales and distribution        
application software        
operating system        
computer        
chips        
  IBM DEC Sperry Univac Wang

The New Horizontal Computer Industry-
Circa 1995

(not to scale)

sales and distribution
Retail Stores
Superstores
Dealers
Mail Order
 
application
software
Word
WordPerfect
Etc.
 
operating system DOS and Windows OS/2 Mac UNIX
 
computer
Compaq
Dell
Packard Bell
Hewlett-Pachard
IBM
Etc.
 
chips
Intel Architechure
Motorola
RISCs

More competitive,
More innovative


Slide 15

Two (of many) Internal Discussions

  • Paul Maritz:
Apps
Java runtime
Windows
Arrow pointing right
Apps
Java runtime
"Java OS"
  • Bill Gates

A new competitor "born" on Internet is Netscape Their browser is dominant with 70% usage share, allowing them to determine shich network extensions will catch on. They are pursuing a multi-platfrom strategy where they move the key API into the client to commoditize the underlying operating system. They have attracted anumber of public network operators to use their platform to offer information and directory services. We have to match and beat their offerings including working with MCI, newspapers, and other who are considering their products.

One scary possibility being discussed by Internet fans is whether they should get together and create something far les expensive that a PC which is powerful enough for Web browsing. This new platform would optimize for the datatypes on the Web Gordon Bell and other approached Intel on this and decided Intel didn't care about a low cost device so they started suggesting that General Magic or another operating system with a non0Intel chip is the best solution.


Slide 16

Antitrust in Network Industries
...is ordinary antitrust

Government’s theory of the case: competition for the market against Windows.

Competition in the market is rare in industries like this.


Slide 17

... the rest of Microsoft is much like Dentsply

  • Anticompetitive contracts were with third parties, such as sellers of computers and providers of online access.
    • Prevent widespread distribution of browser, java
  • Plaintiff needed to show lack of distribution was causal and Defendant could show (as in Dentsply) that it was not

Slide 18

Microsoft’s Trial Defenses

  • We have no market power
    • Competition or the imminent threat of competition from everything (down to the electric toaster) against Windows
  • Our reaction to the browser wasn’t strategic
    • No competitive threat from the Internet entrepreneurs, the CEO “had no idea what Netscape was doing at that time.”
image of train wreck

Slide 19

Microsoft Remedy Fizzle

Government Settles

States Go On

Class Action Attorneys Emerge

image of fire truck and a dog


Slide 20

Defense Options

Argue that vertical restraints can’t ever be anticompetitive.

Argue that vertically restricting the existing distribution system isn’t anticompetitive because (either)

Entry barriers in distribution are low.

Distributors could refuse exclusive contracts if they were anticompetitive.

Present affirmative efficiencies story of exclusivity (free riding?)

Argue that there is never monopoly power.

Argue that there is no monopoly power (no entry barriers and no efficient entrants)

Argue that competition would not change absent exclusive contracts (causation)


Slide 21

Common Elements in
Dentsply and Microsoft

Potential of Existing Monopoly to Change

Dentsply, Competition in the market for teeth
Microsoft, Competition for the operating system market

Causal Link Between Alleged Acts and Monopoly Maintenance

Dentsply, Exclusive contracts nakedly excluded competitor
Microsoft, Exclusive (de facto) contracts excluded browser & java; entry barriers in operating system market would have fallen othewise

Both changes in market power and causal links are amenable to economic analysis


Slide 22

Easy Errors to Make (Ignoring Economics)

  • Proper Assessment of Competitive Effects requires proof of harm to competition, not just to competitors
  • Plaintiff error: we were harmed,
    ...so competition must have been harmed.
  • Defendant error: they were harmed,
    ...so this is case about harm to competitors, not harm to competition.
  • Plaintiff: Prove market power but not that it could go away
  • Defendant: Attempt, implausibly, to disprove market power pretrial
    • Leaves economist expert incredible

Slide 23

Lessons from Dentsply and Microsoft

Monopolization is dependent on highly industry specific conditions.

  • Market must be capable of having two competitive regimes.
    • Economic Analysis relevant
  • Exclusionary practices must have enough causal heft to move market to less competitive regime.
    • Economic Analysis relevant
  • ...monopolization cases will be rare (≠ nonexistent).
  • ...enquiry will be highly specific to industry and will turn on economic analysis of changes in competition and of causal impact of alleged exclusionary practices

 

Updated January 4, 2024