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UNITED STATES FEDERAL TRADE COMMISSION
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and
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UNITED STATES DEPARTMENT OF JUSTICE
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SHERMAN ACT SECTION 2 JOINT HEARING
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UNDERSTANDING SINGLE-FIRM BEHAVIOR:
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MONOPOLY POWER SESSION
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THURSDAY MARCH 8, 2007
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HELD AT:
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UNITED STATES FEDERAL TRADE COMMISSION
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601 NEW JERSEY AVENUE, N.W.
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WASHINGTON, D.C.
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9:30 A.M. TO 4:30 P.M.
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Reported and transcribed by: |
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Susanne Bergling, RMR-CLR |
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MODERATORS: |
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THOMAS J. KLOTZ
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Attorney, Policy Studies
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Office of the General Counsel, Federal Trade Commission
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and
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GREGORY J. WERDEN
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Senior Economic Counsel
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Antitrust Division, Department of Justice
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PANELISTS: |
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Andrew Chin
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Robert H. Lande
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Richard Schmalensee
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Alan H. Silberman
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Michael A. Williams
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P R O C E E D I N G S
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- - - - -
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MR. KLOTZ: Good morning. I am Tom Klotz, an |
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attorney in the Office of General Counsel at the Federal |
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Trade Commission, and I am one of the moderators for |
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this morning. My co-moderator is Greg Werden, Senior |
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Economic Counsel at the Antitrust Division of the |
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Department of Justice. |
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Before we get into the substance of the program, |
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I want to go through a couple of preliminaries. First, |
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I want to thank our colleagues at the Department of |
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Justice for jointly presenting this program, and on |
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behalf of the Federal Trade Commission, I would like to |
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thank each of the panelists for agreeing to participate |
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with us today. |
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As I cover a couple of housekeeping matters, I |
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would ask first of all that you turn off any cell |
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phones, BlackBerries or other devices that would make |
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noise and that would interrupt our panel. Second, the |
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restrooms are outside the double doors. Just go across |
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the lobby, and there are signs that will help direct you |
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to the appropriate place. |
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Third, particularly for visitors, in the |
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unlikely event that the building alarms go off, we ask |
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that you please proceed calmly and quickly as |
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instructed. If we leave the building, we will go out |
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the exit on New Jersey Avenue, past the guard's desk, |
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and just follow the group of people across the street to |
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await further instructions. |
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Finally, given the format of the program, we ask |
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that you not make comments or ask questions during the |
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session, and we will proceed from there. |
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Yesterday, we began the program on monopoly |
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power and market definition, and today we are going to |
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continue that discussion, and at this point, I will turn |
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things over to Greg Werden. |
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DR. WERDEN: Thank you. |
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This is the last of our three sessions on |
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monopoly power. This session is focused in particular |
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on technology markets, with all the possible meanings of |
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that term, and single-brand markets. I want to join my |
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FTC colleague in thanking the panelists for appearing |
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here today and to thank the staffs of the two agencies |
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for doing quite a bit of work in organizing these |
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sessions. |
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These are sessions in a continuing process of |
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hearings that the Antitrust Division and the Federal |
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Trade Commission began last June on the law and policy |
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concerning single-firm conduct addressed under Section 2 |
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of the Sherman Act. The materials from these hearings |
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are being made available on the agencies' web sites. |
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Submissions of panelists, their slides, and ultimately |
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transcripts, although they run a little behind, are |
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being made available. The sessions are being also |
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videotaped. I am not sure whether they will be |
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available for sale or not, but you might want to put |
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your orders in. |
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Our panelists today, in the order that they will |
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be speaking, are first Richard Schmalensee, who is the |
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John C. Head, III Dean and Professor of Economics and |
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Management at Sloan School at MIT. I am sure everybody |
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is very familiar with Dick's contributions to industrial |
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organization and antitrust policy, and he will speak |
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with particular experience from some work that he has |
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done in technology markets in recent decades. |
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Second, we have Mike Williams, director of ERS |
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Group, formerly, a long time ago, a colleague of mine at |
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the Antitrust Division at the Department of Justice. |
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If he arrives, we will then have third Andrew |
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Chin, Associate Professor of Law at the University of |
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North Carolina, who worked a little bit with Judge |
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Jackson on the Microsoft case, a little behind the |
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scenes, we learned about that recently. |
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Then Bob Lande, Venable Professor of Law at the |
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University of Baltimore School of law, frequent |
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commentator on antitrust policy issues and long ago with |
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the Federal Trade Commission. |
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And finally, Alan Silberman, a partner at |
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Sonnenschein Nath & Rosenthal, LLP, a long-time |
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practitioner of antitrust law who will be bringing the |
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practitioner perspective to these issues. |
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With that, I will add that we unreasonably |
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refuse to allow audience participation in any way, shape |
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or form, but we will allow people to submit written |
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comments for the record if they want. |
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I now turn it over to Dick Schmalensee. |
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DR. SCHMALENSEE: Okay, thanks, Greg, and thank |
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you for having me. This is a set of semi-disconnected |
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comments on markets that are experiencing or could be |
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experiencing rapid technological change. |
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Now, there are a number of basic features of |
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in these markets. Greg pointed out that occasionally |
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witnesses in these hearings go over well-known ground, |
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and I am going to do a little bit of that today, but I |
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think we do that to make sure everybody remembers that |
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this is well-known ground. |
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In markets with rapid technological change, you |
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expect to see market power because that is the reward to |
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innovation. So, you would be surprised in a market |
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where there is a lot of innovation going on if you did |
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not see some market power, because that is the return |
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for the investment. To find monopoly power, the issue |
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is typically durability of that market power. Is this |
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the blink of an eye in a Schumpeterian world, or is this |
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something that is likely to endure long enough to be an |
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issue? |
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Typically we address the issue of durability by |
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looking at entry barriers, but entry barriers usually |
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involve me-too entry, of a similar product. The hard |
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part -- and it is a hard part, though I am not making a |
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pitch that it is ubiquitous or inevitable is that in |
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markets with rapid technological change, entry may take |
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a rather different form than the incumbent's product |
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even if matching the incumbent's product is difficult. |
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So, in markets like that, when rapid technological |
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change is possible, the key to market performance is |
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competition to innovate, is competition on technology or |
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dynamic competition. |
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Unfortunately, I do not have any solutions to |
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this. This is a cautionary tale. If you ignore the |
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special features of these markets, you will tend to find |
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monopoly power where, in fact, it is relatively |
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transient. If you exaggerate those features, you will |
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tend to think it is transient when it is not. And there |
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are no bright lines that I can think of for reasons I |
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will discuss. |
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So, I am going to focus on three issues. The |
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first is, the difficulty of thinking about whether rapid |
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technological change is of the disruptive sort. Let me |
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be clear that technological change comes in various |
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flavors. If you think about microprocessors, there has |
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been enormous technical change, but nothing truly |
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disruptive for some time; very rapid increases in |
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performance, but incremental change; no one innovation |
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has radically disrupted things. Other markets have been |
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marked by rapid, disruptive change. Both pose problems, |
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and the tricky part is predicting whether disruptive |
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change is likely. |
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Then I want to talk about network effects |
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briefly. This is, I think, relatively well-understood |
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stuff. Finally, then I want to say a little bit about |
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something have been interested in for the last several |
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years: Two-sided businesses, which I do not think of as |
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two-sided markets. I will spend a little time on that. |
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So, if there is Schumpeterian competition, |
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competition for the market, the kind of competition that |
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in the Microsoft case we noted had occurred with some |
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regularity in the early years of PC software when |
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dominant products losted their positions, then short-run |
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market power is less of a concern. You still worry, |
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properly, about an incumbent's ability to use short-run |
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power to stifle that dynamic competition, but if |
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competition is healthy, the fact that a software product |
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sells for well over its marginal cost is not |
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problematic. |
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The problem is that that kind of competition |
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often comes in bursts. If you look at the automobile |
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industry early on, it is really quite extraordinary, |
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right? You had steam, you had electric, you had the |
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invention of the starter, you had the innovation of the |
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closed body, you had all kinds of things going on, and |
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then quiet. There is a great quote in Alfred P. Sloan's |
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book, My Years with General Motors, to the effect that |
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by the mid-1920s, the automobile and the industry were |
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set, and that is about right. Sloan was writing in the |
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late fifties. |
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You could argue that was an industry with rapid |
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technological change for a time and then it was not. |
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There was innovation after the 1920s: Engines got |
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better as did many other things, but nothing disruptive |
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happened. So, if you were trying to make policy in the |
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auto industry in 1910, you would have this question of |
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how long will this healthy dynamic competition continue, |
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and there would have been no easy answer. |
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It is also hard -- and this is troubling in |
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these markets -- by the nature of disruptive innovation |
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to predict its direction and source. Most of us, I |
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hope, can remember when the Walkman owned the carrying |
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around music business. It was wiped out not by somebody |
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who did anything with tape but by a very different |
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approach based on disk drives. The difficulty with |
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looking at who is spending what on innovation, which I |
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think is a useful thing to do, is that it may miss the |
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radical, the novel. |
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Now, again, this is a call for skepticism. |
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There are two possible errors. One is ignoring the |
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disruptive that is being developed over here in the next |
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room out of sight of the industry players, and the other |
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is reading my alma mater's alumni publication Technology |
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Review, too closely and becoming convinced that every |
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technology they talk about is going to come to market |
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tomorrow and disrupt its industry. Both are wrong, and |
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finding the truth is hard. Ignoring the potential for |
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disruptive innovation, however, gives you the bias of |
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assuming the status quo is forever. |
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In a number of markets marked by rapid |
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technological change, network effects can lead some |
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firms to high shares. If you have a snapshot in which |
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network effects have led to a dominant position, that |
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snapshot is consistent with a world of vigorous |
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Schumpeterian competition, in which the next hot product |
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may displace the leader. Think word processors in the |
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early days. WordStar dominates; WordPerfect comes along |
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and is better, and wham, WordPerfect owns the market. |
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Why? Network effects. So, a snapshot in which |
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WordPerfect owns the market is consistent with vigorous |
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Schumpeterian competition. It is also consistent with |
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its absence. So, just looking at the leader's share, |
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just looking at its apparent dominance, just looking at |
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the network effect, does not tell you whether there is |
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dynamic competition in the market. You have to look |
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beyond the snapshot. |
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One important thing that I would point out is |
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that network effects build large shares, build |
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apparently dominant positions, through expectations. |
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You can have a large share because everyone expects you |
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to have a large share. PCs wiped out Wang word |
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processors very quickly. WordPerfect took over from |
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WordStar very quickly, and Word took over from |
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WordPerfect very quickly. These things happened |
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rapidly, but -- and again, I will come back to my |
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cautionary note -- it is hard to predict the pace of |
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that kind of change. |
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There was discussion in the Microsoft trial of |
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software as a network-based service. This idea was in |
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the air then, it was being discussed by the engineers, |
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but it has taken a long time to happen. Could you know |
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it was going to take a long time to happen? Maybe; |
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maybe not. But that seemed to me to be a relevant |
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question. Google now has an online service offering |
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that may actually be serious. There has not been |
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anything terribly serious until now. |
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Finally, let me talk about multi-sided |
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businesses, my third topic. There are a whole set of |
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businesses that fit this two-sided market paradigm. If |
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you think of businesses that bring different customer |
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groups together, there are indirect network effects, and |
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the Coase theorem fails. This means that a wheat market |
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that brings buyers and sellers together really does not |
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quite do this if it is just buyers and sellers, because |
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you know that the price structure does not matter, |
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right? You can tax the buyer; you can tax the seller; |
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the end result is the same. |
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An important point here is that the term |
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"two-sided markets" is, a misnomer, because it is not |
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necessarily a characteristic of a market; it is a |
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characteristic of a business model. This is a strategy. |
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You could have some firms competing with two-sided |
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models with firms that do not. Two-sided medels apply, |
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as Rochet and Tirole pointed out, to a wide variety of |
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businesses: Obviously marriage brokers; media bring |
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eyeballs and advertisers; shopping malls bring customers |
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and stores. |
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In case of securities exchanges, one thinks of |
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the group as buyers and sellers, but, in fact, if you |
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look closely, it is providers and consumers of |
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liquidity. A number of exchanges have what are called |
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"maker-taker" models where, in fact, if you post a |
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standing order and somebody comes in and takes you up on |
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it, you are paid. So, it is a more complicated thing |
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than buyers and sellers. And payment cards, of course, |
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connect merchants and consumers. |
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This class of business strategies has become |
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more important recently because software platforms are |
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in a number of settings a natural way to build a |
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business like this. The Windows platform is an obvious |
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one. It links applications developers, not all of whom |
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work for Microsoft, and end users. The firm that has |
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the platform, Microsoft or Apple, needs to court its |
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developers, and its end users. |
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I want to make a few points about these business |
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models, based in part of a book David Evans and I have |
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coming out from the Harvard Business School Press this |
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spring. First, one of the surprising features is how |
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often in practice pricing is quite asymmetric; that is |
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to say, all the money is made from one of the groups. |
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Theory does not predict this. |
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In credit cards, if you pay on time and do not |
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have an annual fee, you do not pay anything to use a |
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credit card. The merchant pays. But, of course, for |
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any two-sided business, all the groups it deals with |
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need to be treated as customers, even if they are not |
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directly the source of profits. |
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One can have competition involving firms with |
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the same business model; that would be overlapping |
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platforms. One can have a platform competing with a |
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single-sided business, i.e., a business that targets |
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only one customer group, or one can have a competition |
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involving intersecting platforms that target only some |
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groups in common. This would happen if I target groups |
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A and B, and you target groups B and C. These potential |
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patterns of competition, complicate assessment of market |
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power. |
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The business in these cases is not just sales to |
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the profitable side. So, if you think about the |
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business that the credit card companies are in as sales |
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to merchants, you fundamentally misunderstand what is |
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going on. The money is directly made on the merchant |
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side, but, in fact, the consumer who carries the card is |
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just as important as the merchant that takes the card. |
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That is an obvious mistake one would not make in this |
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setting, but it is less obvious elsewhere. |
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Think about video game console makers. They |
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also have to court game developers, because if there are |
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not games for the consoles, the consoles do not sell. |
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So, they are in the business of dealing with both |
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groups, not just selling consoles. And, in fact, |
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consoles, as we know, are not the source of profit in |
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that business. |
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A two-sided business also has to worry about |
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competition from different business models. Satellite |
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radio is a single-sided business by and large. I mean, |
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it is not heavily advertising-dependent, yet it deals |
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with the same listeners that broadcast FM deals with. |
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Broadcast radio deals with those listeners with |
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two-sided models, advertisers and consumers; satellite |
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radio, consumers only. |
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Google and magazines compete for advertisers, |
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but they do it in different ways. Magazines use content |
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to assemble eyeballs; Google uses search to assemble |
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eyeballs or, better, to assemble focused eyeballs. |
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Craig's List has kind of wiped out newspaper want-ads; |
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it is again, a very different model. |
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The price-cost margin is pretty useless in |
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assessing the market power of two-sided businesses |
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because of asymmetric pricing, how do you compute the |
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price-cost margin? Think about a video game console |
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maker. Video game consoles are sold at a loss or at |
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break-even, depending on the maker and the year, but |
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that is not where the money comes from. The money comes |
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typically from sales of games you make yourself and |
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license fees from independent people like Electronic |
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Arts that make games to run on your console. |
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So, what is the price-cost margin? It is not |
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the loss on the consoles, and as to the royalties, there |
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is no cost or a very tiny cost associated with the |
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royalties you get from Electronic Arts. So, it is very |
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hard to figure out how to do a price-cost margin with |
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these businesses, and if you leap into some calculation, |
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it will likely be misleading. |
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As to market definition, the Guidelines approach |
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can be hard to adapt. The problem is multiple groups |
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and different models. In video games, the money is made |
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from the games. In contrast, in games that run on PCs, |
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the PC software platform vendor, does not make anything |
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from the game developers. So, games are not a source of |
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profits in the PC gaming, but they are the source of |
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profits for consoles. How do you think about a price |
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reduction or a price increase for purpose of market |
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definition -- which price? |
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Another problem is posed by feedback effects. |
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If you sell to A and B, you go through a hypothetical |
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price increase to A that reduces demand from A, but, of |
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course, if there are indirect network effects, that will |
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make the platform less attractive to B. There will be a |
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reduction of demand on the B side, which in turn will |
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make the platform less attractive to A, and so on. |
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Now, it is not hard to write down the |
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mathematics. It is just hard to think about how you |
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would do the calculation correctly in practice. The |
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existence of this sort of feedback effect does not mean |
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there is a death spiral with quantities driven to zero |
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-- things converge typically. The point is just that |
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you have to be very careful, and the typical Guidelines |
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approach is not well-suited to market definition in |
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these contexts, nor do we have data that lets us measure |
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those kinds of externalities. |
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Finally, and this is a cute feature of these |
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businesses, you must have both groups. The simplest |
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case is singles bars. For a heterosexual singles bar, |
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you really have to get both men and women in the door, |
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and if you have to spend a lot of money to persuade one |
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group or the other to come, it does not matter if you |
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have dominance, so to speak, on the other side. |
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Competition for the patronage of men or the patronage of |
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women, depending on the market, can eliminate profits. |
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So, you have to look at both sides, because again, the |
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key to these businesses is the need to balance, and the |
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need to balance means competition on either side can |
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dissipate profits. |
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Now, this is not obviously a presentation that |
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gives you answers, but I have tried at least to pose |
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some important questions. I wish I could be more |
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upbeat, but sometimes life is hard. |
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Thank you very much. |
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(Applause.) |
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DR. WERDEN: Mike Williams. |
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MR. WILLIAMS: Okay, thanks a lot, Greg. |
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So, I am going to talk about technology markets |
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in a different sense than Dick just talked about them. |
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I am going to talk about technology markets as they are |
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defined in the FTC and DOJ IP Guidelines, and those |
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technology markets are really literally markets for |
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ideas. So, they are markets for intellectual property. |
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They are not markets for widgets or even software. They |
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are markets for intellectual property. |
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I will start with just a few of the more |
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prominent cases. I think the main take-away from this |
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overview slide is some of the bigger cases is just that, |
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number one, there have been a number of them. Number |
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two, economists always get in trouble for making |
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predictions, but I think it is a fairly safe prediction |
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that there is going to be more, and probably |
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disproportionately more, as obviously intellectual |
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property is so critical to future markets. |
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Another quick take-away from this is that I have |
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put in quotes after each case what the technology was |
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that was being disputed, and I think another thing to |
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draw from this is that there are certainly a lot of |
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examples where the technology in question was |
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intellectual property for what we would traditionally |
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call high technology industries, but there is also |
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intellectual property for very mundane things. |
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For example, the DOJ versus American National |
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Can case, the laminated tube-making was -- at least in |
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part the intellectual property was the patents that |
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protected a certain way of making toothpaste tubes. So, |
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you can have intellectual property for high technology |
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things and intellectual property for very ordinary |
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things. |
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I will not spend a lot of time on this slide. |
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This is literally just the language right out of the IP |
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Guidelines. So, what is a technology market? It |
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consists of intellectual property that is licensed and |
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its close substitutes; that is, the technologies or |
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goods that are close enough substitutes significantly to |
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constrain the exercise of market power. So, the main |
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thing to take away there is certainly sort of the |
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primary intellectual property that we are thinking of is |
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generally patents, but you may have a circumstance where |
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other technology -- and by "other technology," it could |
7 |
just be know-how, it does not necessarily have to be |
8 |
patented -- and then goods. You can certainly imagine a |
9 |
circumstance where there is an allegation that somebody |
10 |
has market power over a certain kind of intellectual |
11 |
property embodied in patents, but there may be a |
12 |
physical product that is a good substitute for that |
13 |
technology. |
14 |
So, three general points that I just want to |
15 |
touch on in this short talk. What are some of the |
16 |
challenges that you face when you try to define the |
17 |
markets? What are some of the challenges you face when |
18 |
you try to assign market shares? And what are some of |
19 |
the challenges you face when you try to determine |
20 |
whether or not a firm has market or monopoly power in a |
21 |
technology market? |
22 |
So, the first thing to recognize is that these |
23 |
are all derived demands. Nobody wants to license |
24 |
intellectual property just for the heck of it. You want |
25 |
to license it to do something with it, to make a product |
22
1 |
that can then be sold. So, you can obviously, going |
2 |
back all the way to the 19th Century, Alfred Marshall's |
3 |
Four Laws of Derived Demand can help you organize your |
4 |
thoughts about when a putative market for intellectual |
5 |
property may or may not qualify in terms of actually |
6 |
meeting the Horizontal Merger Guidelines test for an |
7 |
actual antitrust market. |
8 |
Again, it really boils down to, is the demand |
9 |
for this intellectual property inelastic? Is it |
10 |
inelastic enough that a hypothetical monopolist would |
11 |
find it profitable to raise price? And I should mention |
12 |
that the Intellectual Property Guidelines are quite |
13 |
clear that even though the idea of a market for patents |
14 |
or a market for intellectual property is a new |
15 |
construct, the basic market definition methodology in |
16 |
the Horizontal Merger Guidelines is still quite |
17 |
applicable. |
18 |
So, what are some of the practical problems you |
19 |
face when you try to define a technology market in this |
20 |
sense? One is that firms generally do not license their |
21 |
patents one at a time. They will generally license |
22 |
their entire portfolio. A portfolio generally has a lot |
23 |
of complementary technologies within it. As I am sure |
24 |
you are aware, a lot of big companies have hundreds if |
25 |
not thousands of patents. The patents generally are |
23
1 |
not -- I mean, you would be surprised if they were |
2 |
substitutes, right? I mean, the whole point that they |
3 |
are patenting different things, and they tend to be |
4 |
complements, but they tend not to be sold one at a time. |
5 |
Another way to think about it is, I have often |
6 |
found a good way to organize your thoughts when you are |
7 |
asking kind of what data are available, what do I have, |
8 |
is to ask, what is the perfect data set? What would I |
9 |
really like to have, and then what can I actually get? |
10 |
So, if you said, "Well, what is the perfect data set for |
11 |
thinking about technology markets," what you would |
12 |
really like to see is each patent licensed separately so |
13 |
you could look at the patents across portfolios, |
14 |
across -- in other words, suppliers of intellectual |
15 |
property -- and each patent licensed at an explicit |
16 |
price. |
17 |
So, you could use the royalty revenues, but in |
18 |
most circumstances, we do not have either one of those |
19 |
things. They generally get licensed in a bundle, in a |
20 |
portfolio, that has substitutes and complements all |
21 |
mixed together, and they generally do not have their |
22 |
license revenues broken out certainly by patent or even |
23 |
in many circumstances -- I will get to this in a |
24 |
minute -- in many circumstances, no money changes hands, |
25 |
because many companies do these in royalty-free |
24
1 |
exchanges. So, those are challenges that you face when |
2 |
you try to think about how to define these markets. |
3 |
Assuming that you have managed to define a |
4 |
technology market in this sense, now we face the |
5 |
challenge of assigning market shares. So, you are in a |
6 |
world where, I guess the first thing to say is, what is |
7 |
the principle? What is it we are trying to accomplish |
8 |
when we assign market shares? Going back to the |
9 |
Horizontal Merger Guidelines, the answer, of course, is |
10 |
we are looking for a statistic that gives us the best |
11 |
indicator of a firm's future competitive significance. |
12 |
That is what a market share is supposed to tell us. |
13 |
So, I mentioned earlier that you do not have |
14 |
royalty payments generally, so what are the normal ways |
15 |
in which we would think about assigning market shares? |
16 |
You might do it on the basis of output, you might do it |
17 |
on the basis of revenues, sales and so on, but most of |
18 |
the time we do not have royalty payments, because, for |
19 |
example, like cross-licensing, we do not have the |
20 |
ability to disentangle all of the IP within a portfolio |
21 |
because they were packaged as a portfolio and sold as a |
22 |
portfolio. |
23 |
Of course, unfortunately, the whole notion of a |
24 |
capacity or a shipment does not make any sense in this |
25 |
context. There is no capacity constraint to an idea. |
25
1 |
So, those are challenges. |
2 |
So, what have people done to try and assign |
3 |
market shares in technology markets? I think there is |
4 |
basically two approaches that have been offered. One is |
5 |
sort of what your Bayesian priority would be if you had |
6 |
a really diffuse knowledge, which would just be I really |
7 |
am not sure what to do, I am just going to say it is |
8 |
1/N. Now, I say that is an advantage because it is |
9 |
simple to compute, because that is conditional on |
10 |
agreeing what N is, and, of course, reasonable people in |
11 |
any particular case might have fundamental disagreements |
12 |
about what N is, because again, think about N can be |
13 |
patents, it can be just know-how, and it can be physical |
14 |
products that arguably compete in the same technology |
15 |
market. |
16 |
When would 1/N be a good statistic? When would |
17 |
it tell you the likely future competitive significance |
18 |
of a given firm in a technology market, the answer would |
19 |
be -- and this quoted out of the IP Guidelines -- is |
20 |
does 1/N give you a good estimate for the ability of |
21 |
firms to produce close substitutes at comparable costs? |
22 |
So, another way to say it is, suppose for the |
23 |
sake of argument we had four different patent |
24 |
portfolios, four different providers of intellectual |
25 |
property. If each of those patent portfolios provided |
26
1 |
the downstream manufacturers that were actually going to |
2 |
bend the metal and make a product with the intellectual |
3 |
property, do each of those four patent portfolios give |
4 |
the downstream manufacturers the ability to produce |
5 |
close substitutes at comparable costs? |
6 |
If you thought that was right, then 1/N probably |
7 |
would be a good statistic, because you are saying that |
8 |
each of those four patent portfolios is reasonably equal |
9 |
in terms of what their probable future competitive |
10 |
significance is, because they all seem to be about |
11 |
equally valuable in the sense that if they were |
12 |
purchased by one of these downstream manufacturers, the |
13 |
downstream manufacturer, arguably in this hypothetical, |
14 |
would be somewhat indifferent between which of the four |
15 |
patent portfolios it used, because each of them, by |
16 |
hypothesis, is reasonably good at enabling the |
17 |
downstream manufacturer to produce close substitutes at |
18 |
comparable costs. |
19 |
There are some disadvantages to the 1/N method, |
20 |
namely, the flip side, which is, what if the four patent |
21 |
portfolios are not equally valuable to the downstream |
22 |
manufacturers? Of course, that is -- at least that is |
23 |
what my prior is, is that these patent portfolios are |
24 |
very heterogenous animals. You know, one firm has got |
25 |
200 patents; one has got one. Of course, in principle, |
27
1 |
the one patent could be more valuable than the 200 |
2 |
patents, you just do not know, but you would be |
3 |
surprised if each of the four patent portfolios in my |
4 |
simple little example were equally valuable to the |
5 |
downstream firms. |
6 |
I mean, I think going into it, at least my prior |
7 |
is it is more likely that they are highly differentiated |
8 |
in terms of their fundamental value to downstream firms |
9 |
in terms of making the products that can then be sold. |
10 |
So, the patent portfolios are highly differentiated. |
11 |
Another aspect that comes up in this is that if |
12 |
you think about the IP suppliers, there is actually two |
13 |
things that they do. They provide ideas, they provide |
14 |
patented technology, but they also work with the firms |
15 |
that bend the metal, and so if you think, for example, |
16 |
about firms that license technology to make memory |
17 |
chips, for example, they license the idea, but they also |
18 |
work closely with the companies that try to actually |
19 |
make the computer chips, because if you think about it, |
20 |
they are the ones who in some sense know more about how |
21 |
the product is supposed to work. |
22 |
Now, they may not have the same engineering |
23 |
expertise that the downstream manufacturer has, but a |
24 |
complementary service that they are offering is, how do |
25 |
you actually implement my idea? Of course, the IP |
28
1 |
suppliers could differ quite generally in their ability |
2 |
to work with the downstream manufacturers; their ability |
3 |
to actually get their ideas implemented. So, even |
4 |
though you might have four equally valuable patent |
5 |
portfolios, one of the firms might be much better at |
6 |
working with the downstream firms to turn their ideas |
7 |
into real products. |
8 |
The last bullet, I will not really go over, it |
9 |
frankly, it just takes too long to explain, and |
10 |
colleague of mine and I have -- Ashish Nayyar -- an |
11 |
article that is just devoted to that particular subject, |
12 |
but I do not have time to get into that just now. So, |
13 |
1/N is one approach. |
14 |
A second approach is to say I am going to look |
15 |
at in some sense how manufacturers have voted with their |
16 |
dollars. In other words, if I cannot directly observe |
17 |
and assign market shares based because I do not have |
18 |
royalties, the patents are not licensed individually, I |
19 |
am going to look at how manufacturers have voted with |
20 |
their dollars to pick amongst, for example, these four |
21 |
patent portfolios. |
22 |
If I look at what the manufacturers have picked, |
23 |
who has been successful in the marketplace? Has one |
24 |
manufacturer been much more successful than the other |
25 |
manufacturers because it used firm one's patent |
29
1 |
portfolio instead of firm two's? So, if you think about |
2 |
it, that is kind of the mirror image of what we are |
3 |
trying to observe, that is kind of the mirror image of |
4 |
how that technology has played out in the marketplace. |
5 |
Has one technology proven, based on the choices of |
6 |
manufacturers and ultimately the choices of consumers, |
7 |
to be more valuable than another set of technology? |
8 |
So, an advantage to that is that it arguably |
9 |
captures the differentiated nature of the portfolios, |
10 |
because one will probably be better than another, but as |
11 |
with all these things, there is some disadvantages to |
12 |
it. Suppose you have -- and this is common -- suppose |
13 |
you have a manufacturer deciding that he needs to |
14 |
license technology from two of the intellectual property |
15 |
providers. Well, now, how are you going to assign |
16 |
shares now? You have got two of the four, in my |
17 |
example, patent portfolio providers. Both of their |
18 |
technologies are being purchased by one manufacturing |
19 |
firm to produce one product. Well, now you have a |
20 |
problem. How are you going to sign, using this kind of |
21 |
mirror image approach, how are you going to assign those |
22 |
sales to one of the two patent portfolio providers or to |
23 |
the firms competing in the technology market? |
24 |
Finally we get to really the last question, |
25 |
which is how are we going to measure monopoly power in a |
30
1 |
technology market? As with most instances in antitrust |
2 |
economics, there is kind of two ways to think about |
3 |
monopoly power or how we would investigate monopoly |
4 |
power. One is structural, and one is performance. |
5 |
So, from a structural perspective, remember, by |
6 |
this point we have defined a market as best we could, we |
7 |
have assigned shares as best we could, given all these |
8 |
problems that I have talked about, and you are going to |
9 |
get some measure of market concentration. Now, it might |
10 |
be an interesting statistic, you might view it with a |
11 |
lot of skepticism, but you will have some measure of |
12 |
market concentration, and then you would look at, again, |
13 |
kind of a traditional factor, barriers to entry. |
14 |
Now, the barriers to entry tend to take kind of |
15 |
a different nature in a technology market. There is |
16 |
different kinds of things that firms have to do, invent |
17 |
around the IP, defend against patent infringement |
18 |
claims. If you are an entrant into a technology market, |
19 |
one of the things you might well have to do is indemnify |
20 |
people buying your technology against patent |
21 |
infringement claims from, say, an incumbent provider of |
22 |
technology. So, that gives you kind of a structural way |
23 |
to think about how one might study the existence of |
24 |
monopoly power in technology markets. |
25 |
Then finally, a different way to think about it |
31
1 |
is, can I study the performance of these markets and |
2 |
gain any insight as to whether or not these firms or one |
3 |
firm seems to have monopoly power? I think in some |
4 |
circumstances it might be possible to look at changes in |
5 |
royalty rates. I wrote in the parenthetical, "assume |
6 |
marginal costs are not possible to measure but |
7 |
constant." So, it is very difficult to know what the |
8 |
marginal cost of a patent is. |
9 |
I mean, in one sense, on a forward-looking |
10 |
basis, really the marginal cost of a patent is the cost |
11 |
of enforcing it, because the costs of coming up with it |
12 |
are all sunk, so we may not know what the marginal costs |
13 |
are, but if we are willing to make perhaps a rogue |
14 |
assumption that those costs are constant, then changes |
15 |
or increases in royalty rates might be informative. |
16 |
Then finally, there are certain circumstances |
17 |
where IP gets licensed with what are called tie-ins or |
18 |
tie-outs or in some circumstances -- and this falls back |
19 |
to a bit more traditional perspective -- if you are |
20 |
familiar with, for example, the patent misuse law, |
21 |
patent misuse occurs when a firm has arguably expanded |
22 |
the temporal or the product aspect of what they are |
23 |
trying to enforce beyond the four square corners of the |
24 |
patent. So, sometimes firms will actually ask for, when |
25 |
they are licensing their IP, they will ask for long-term |
32
1 |
contracts that exceed the length of the patent life, and |
2 |
so that arguably is a performance indication that maybe |
3 |
this firm does have some substantial market or monopoly |
4 |
power. |
5 |
So, thank you very much. |
6 |
(Applause.) |
7 |
DR. WERDEN: Andrew Chin. |
8 |
DR. CHIN: Thank you. Here is a picture from |
9 |
the last time I saw Dean Schmalensee in the Microsoft |
10 |
case. |
11 |
My name is Andrew Chin. My web site is |
12 |
andrewchin.com. You can get two of my recent articles I |
13 |
will be talking about on that web site, recently |
14 |
published, and the title of my talk is Defining Software |
15 |
Product Markets. |
16 |
There is time for just one main point, and that |
17 |
is that relevant software product markets can be |
18 |
correctly delineated using the existing techniques that |
19 |
are described in the Merger Guidelines. By "correctly," |
20 |
I mean that the resulting market that you find is |
21 |
appropriate, is an appropriate subject for antitrust |
22 |
concern. |
23 |
There is one tricky aspect to this, and that is |
24 |
what I am focusing on today, is that the key to doing |
25 |
this correctly is describing software products |
33
1 |
accurately and at the right level of abstraction to |
2 |
perform the analysis, because here is what can happen if |
3 |
you get it wrong. |
4 |
The conclusions of law of the District Court in |
5 |
Microsoft grounded the liability for attempted |
6 |
monopolization in a market for "platform level browsing |
7 |
software for Windows." On appeal, the D.C. Circuit |
8 |
found this description of the market to be varying and |
9 |
imprecise and as a consequence reversed the attempted |
10 |
monopolization liability and remanded the tying claim |
11 |
for a rule of reason analysis under which the plaintiff |
12 |
would have one hand tied behind their back. They would |
13 |
be barred from more careful approaches to market |
14 |
definition. |
15 |
The approach of defining the browser software |
16 |
product market in this way, though, was doomed to |
17 |
failure because it defined the software product as "code |
18 |
and nothing else," as essentially adopting the position |
19 |
taken by Microsoft throughout the trial, that a software |
20 |
product consists of code and nothing else. |
21 |
Consider whether Microsoft would have taken the |
22 |
same litigation position in a copyright infringement |
23 |
suit. Had I purchased Office XP and made several copies |
24 |
and sold those, put them on eBay, I doubt that a defense |
25 |
that I had bought the code and therefore could do |
34
1 |
anything I wanted with it would avail me very much in a |
2 |
copyright infringement suit. So, the absurdity of that |
3 |
position percolates throughout the D.C. Circuit's tying |
4 |
analyses, both in the consent decree case and in the |
5 |
appeals decision. I have argued in my Wake Forest Law |
6 |
Review piece that throughout the D.C. Circuit's |
7 |
analysis, it relies on this fallacy, and then go into |
8 |
some of the consequences of relying on that fallacy in |
9 |
that article. |
10 |
Well, another approach was available to the D.C. |
11 |
Circuit and to the District Court in the conclusions of |
12 |
law, and that was kind of buried in the findings of |
13 |
fact, but there was a discussion of a "market for web |
14 |
browsing functionality," essentially defining the web |
15 |
browser software product in terms of what it does. It |
16 |
enables a user to browse the web; in short, to select, |
17 |
retrieve and perceive web resources. |
18 |
The conclusions of law did not cite this |
19 |
finding. The D.C. Circuit followed suit and did not |
20 |
cite it either but said as to the combined opinions of |
21 |
the District Court that it failed to enter "detailed |
22 |
findings defining what a browser is or what products |
23 |
might constitute substitutes." |
24 |
From that I take two points: One, that |
25 |
antitrust analysis requires description in detailed |
35
1 |
terms as to what a software product is and in explicit |
2 |
terms. Tell us what it is, not what it does. Well, at |
3 |
one level of abstraction, a fairly high level, you can |
4 |
just define what it is as the set of legal rights and |
5 |
technological capabilities that enable a user to select, |
6 |
retrieve and perceive web resources. You get two clues |
7 |
as to what those rights and capabilities are, and they |
8 |
come in the box. |
9 |
They come in the box in the form of software |
10 |
code on some tangible medium, such as a CD-ROM, and |
11 |
accompanying documentation. Microsoft holds the |
12 |
copyright on both the code on the medium and on the |
13 |
documentation, so you do not own those, but the legal |
14 |
rights and technological capabilities are defined by |
15 |
reference to those accompaniments. |
16 |
More detail is available but entirely |
17 |
unnecessary; however, they are available. I describe |
18 |
them fully in my Harvard Journal on Technology piece to |
19 |
give comfort to those who may not be convinced that |
20 |
these are well-defined concepts, and also, to address |
21 |
the misconception that arises from viewing these |
22 |
products as code that, for example, these are integrated |
23 |
by virtue of being supported by the same body of code. |
24 |
So, this addresses the product integration rhetoric that |
25 |
came throughout the case. |
36
1 |
Now, so, why do we not need that level of |
2 |
detail? Because all that antitrust analysis requires is |
3 |
in the language of Dupont, is first to identify |
4 |
reasonably interchangeable software products from the |
5 |
user perspective for performing the same purposes or |
6 |
supporting the same user purposes. So, here is an |
7 |
example. Here is an example of two products that |
8 |
support the same user purpose at some level of |
9 |
abstraction. |
10 |
Converting binary to BCD. For those of you with |
11 |
patent law backgrounds, this is the algorithm that was |
12 |
found to be non-patentable in Gotshall versus Benson by |
13 |
the Supreme Court. So, it is an historically |
14 |
interesting example. You do not need to know what BCD |
15 |
is, but this is a DOS program that will take a base 2 |
16 |
number and convert it to BCD. |
17 |
Another way of doing this is create a Windows |
18 |
application, a calculator with a bin-to-BCD button on |
19 |
it. You type in the number, you click the button, and |
20 |
it performs the same calculation. At some level we know |
21 |
that these two applications serve the same user purpose. |
22 |
So, if we run through the Merger Guidelines |
23 |
analysis, we can look on the demand substitution side, |
24 |
we see they are functionally interchangeable insofar as |
25 |
they support the same user purpose; however, if we dig |
37
1 |
deeper, they run on different code. How important is |
2 |
that? Well, maybe if the user notices that one set of |
3 |
code runs more slowly than the other, that might factor |
4 |
into their preferences. The different user interfaces, |
5 |
one might appeal more to some sets of consumers than |
6 |
others. They run on different operating systems. So, |
7 |
there is different platform preconditions for both |
8 |
pieces of software, both software programs to operate, |
9 |
but there is high overlap. Basically all modern Windows |
10 |
applications have a DOS shell that you can go out to and |
11 |
run the DOS program with. So, there is a high overlap, |
12 |
but all of these can factor into the reasonable |
13 |
substitutability or reasonable interchangeability |
14 |
calculus. |
15 |
Then on the supply side, you can identify |
16 |
structural barriers to entry. For example, if a firm |
17 |
with market power controls some of the preconditions for |
18 |
either of these programs to operate. |
19 |
But what we might need more structure on -- all |
20 |
of these inquiries are fairly familiar, and whether you |
21 |
are analyzing flexible wrapping materials or software |
22 |
products, these are familiar modes of analysis to us |
23 |
except possibly for the user purpose. How do you define |
24 |
the user purpose for which a software product is used? |
25 |
What is the appropriate level of abstraction? |
38
1 |
Well, software engineering provides us a tool |
2 |
for identifying the user purpose for a software product |
3 |
at what I believe is the right level of abstraction. |
4 |
So, if you look at this, this is called the essential |
5 |
use case, and this is a way of describing the |
6 |
functionality of a software product in terms of what the |
7 |
user intends the system to do and how the system |
8 |
responds to that intention. Does it meet its |
9 |
responsibilities? |
10 |
So, there are many ways of describing a web |
11 |
browser. You could operate it, you could select items |
12 |
with a mouse, you could use a trackball, you could use |
13 |
voice. At this level of abstraction, those design |
14 |
choices do not matter. The code that supports those |
15 |
designs and implementations do not matter. All that |
16 |
matters is what from the user's point of view is the |
17 |
purpose supported. The precondition matters, and the |
18 |
user intention system responsibilities matter. So, that |
19 |
is the appropriate level of abstraction. |
20 |
So, what I argue is that the box containing the |
21 |
software and documentation, this Windows 98 item that |
22 |
Microsoft markets, competes in at least two relevant |
23 |
product markets, and both of the relevant product |
24 |
markets that were described in the tying analysis, and |
25 |
those are technically end use segments, one of which is |
39
1 |
providing platform software that can be pre-installed to |
2 |
meet the preconditions to run the Windows 98 |
3 |
applications; the other is providing legal and |
4 |
technological support for performing web transactions in |
5 |
the manner that I have described. |
6 |
The best analogy to this is not self-repairing |
7 |
copiers or cameras but two services provided through one |
8 |
facility. Just as in Jefferson Parish, |
9 |
anesthesiological and operating surgical services are |
10 |
provided on the same operating table but the patient |
11 |
does not own the operating table, the same facility, the |
12 |
code on the CD-ROM, is the same facility through which |
13 |
those services are provided. So, in a very real sense, |
14 |
the service conception of software products is already |
15 |
here even though, as Dean Schmalensee says, this sort of |
16 |
network-centric approach is not quite with us yet. |
17 |
So, these end use segments are properly |
18 |
conceptualized in terms of the Guidelines as price |
19 |
discrimination markets. As former Chairman Pitofsky |
20 |
points out, Cellophane was probably not susceptible to |
21 |
captive end use segments for -- the end use segment for |
22 |
wrapping cigarettes was probably not captive because of |
23 |
arbitrage; however, DRM in the area of software is very |
24 |
powerful in preventing arbitrage, and in particular, as |
25 |
Professor Felton showed during the trial, the end use |
40
1 |
segment for web browsing was particularly captive |
2 |
because DRM was available to reduce the quality or |
3 |
eliminate that functionality altogether. |
4 |
So, we can extend this idea of a price |
5 |
discrimination market, of course, to quality-adjusted |
6 |
price discrimination markets, and that brings in |
7 |
Professor Felton's analysis. |
8 |
So, what are the benefits of this approach? |
9 |
Well, I claim that if we define markets in this way, |
10 |
what we end up with is competition recognized to design |
11 |
the product that best supports each software |
12 |
functionality for which a market exists. We come up |
13 |
with the competition to support a given essential use |
14 |
case, to make the system responsibility best meet the |
15 |
user intentions, and this is a classic definition of |
16 |
usability of products in general and of software |
17 |
usability specifically, and the human-centric vision of |
18 |
Michael Dertouzos, another witness in Microsoft. |
19 |
In particular, in markets characterized by |
20 |
strong network effects, this leads to the recognition of |
21 |
harms to competition in the form of foreshortening of |
22 |
the already limited competitive windows that are |
23 |
available for product competition. It leads to a |
24 |
software developer-centric understanding of freedom to |
25 |
innovate, another slogan from the Microsoft trial, in |
41
1 |
that each software developer is free to use the code |
2 |
that is to be executed when a user chooses its software |
3 |
product for a particular purpose, and design choices are |
4 |
made by the software developer, not by courts or |
5 |
monopolists. So, there is further reading on my web |
6 |
site if you are interested. |
7 |
Thank you. |
8 |
(Applause.) |
9 |
DR. WERDEN: Bob Lande. |
10 |
DR. LANDE: Thank you very much, Greg. |
11 |
The title of my remarks is Market Power Without |
12 |
a Large Market Share: The Role of Imperfect Information |
13 |
and Other Consumer Protection Market Failures. |
14 |
There actually are two very different sources of |
15 |
market power in antitrust cases. The first is |
16 |
traditional market share-based market power. Market |
17 |
power in antitrust cases can also come, however, from |
18 |
significantly imperfect information, deception, |
19 |
asymmetric information, or other sources of market |
20 |
failure that are more commonly associated with consumer |
21 |
protection violations. |
22 |
In antitrust cases, these consumer protection |
23 |
market failures are present, and market power can rise |
24 |
even if no firm has a market share large enough for a |
25 |
finding of traditional market share-based market power. |
42
1 |
However, instead of traditional end use |
2 |
consumers being victimized, the victims of this |
3 |
deception or imperfect information are businesses. |
4 |
Since this can result in harm to competition in entire |
5 |
markets, including higher prices, and these harms will |
6 |
not be prevented by competition in the relevant market, |
7 |
they quite properly give rise to antitrust violations. |
8 |
Now, the consumer protection types of market |
9 |
power have in theory been part of mainstream antitrust |
10 |
for decades, and it certainly is used from time to time |
11 |
in current antitrust cases. The purpose of my talk |
12 |
today, however, is to urge that it play an even larger |
13 |
role in the day-to-day world of antitrust, perhaps |
14 |
almost as prominent a role as this type of market |
15 |
failure plays in consumer protection cases. |
16 |
At the end, I will discuss some of the |
17 |
implications that could arise for antitrust, and if we |
18 |
grant this source of market power the attention it |
19 |
deserves, in addition to having an effect on how we |
20 |
assess market power, it also could have important |
21 |
effects on related antitrust areas as market definition |
22 |
and entry analysis. |
23 |
To begin with, all market power requires a |
24 |
market failure. Now, this is true for market power that |
25 |
comes from having a large market share. In the |
43
1 |
antitrust world, when we say "market power," we almost |
2 |
always mean market share-based market power that gives a |
3 |
firm the power to raise price, and, of course, a firm |
4 |
can only have a traditionally defined market power if it |
5 |
has a market share of 60 percent or 90 percent or |
6 |
whatever percentage you think is large enough. |
7 |
Of course, even if it has such a large enough |
8 |
critical market share, it only has the power to raise |
9 |
price for a significant period of time if entry is |
10 |
difficult and certain other conditions are met. Even a |
11 |
large market share, in other words, only gives a firm |
12 |
the power to raise price when there is a significant |
13 |
market failure. Imperfections in the marketplace |
14 |
involving the role of capital or time lags and other |
15 |
market failures can give a firm the power to charge |
16 |
super-competitive prices for a significant period of |
17 |
time. |
18 |
In addition to that traditional market power, a |
19 |
firm can attain the ability to raise prices from the |
20 |
types of market failures usually associated with |
21 |
consumer protection violations. The most common of |
22 |
these are coercion, undue influence, deception, |
23 |
incomplete or asymmetric information, or unreliable, |
24 |
uncertain or overly complicated information. |
25 |
Now, this list of what I am calling consumer |
44
1 |
protection market failures is really not all that |
2 |
different from the type of market failures that protects |
3 |
a firm's monopoly market share; however, consumer |
4 |
protection problems occur inside the head of the |
5 |
ultimate consumers. That is, the consumer protection |
6 |
problems from deception, et cetera, indeed do occur |
7 |
inside the heads of the ultimate consumers of these |
8 |
products. |
9 |
However, by contrast, corporate officials also |
10 |
can be victimized by deception or imperfect information. |
11 |
Sometimes this will affect only that corporation, but |
12 |
sometimes it can hurt competition in an entire market. |
13 |
It is crucial to note that these violations can occur |
14 |
even if the firm committing the act in question does not |
15 |
have a monopoly market share. We, of course, prosecute |
16 |
a firm for fraud even if it is not a monopoly. We, of |
17 |
course, prosecute firms for fraud even if 80 percent of |
18 |
the companies in that particular market are honest. The |
19 |
same thing should be done, and sometimes is done, when |
20 |
these consumer protection market failures give rise to |
21 |
antitrust violations. This can happen even if the firms |
22 |
in question do not have a traditionally large market |
23 |
share at the time of the alleged violation. |
24 |
To show how this is, in fact, a part of |
25 |
mainstream antitrust, I am going to very briefly discuss |
45
1 |
three very well-known antitrust cases, Kodak, Rambus and |
2 |
Jefferson Parish. Each involved an alleged antitrust |
3 |
violation by a firm that did not before the violation |
4 |
have a monopoly market share as traditionally defined. |
5 |
Each case alleged, however, a market failure that is |
6 |
more often than not associated with a consumer |
7 |
protection violation, such as overly complicated |
8 |
information, a mistake or unexpected change in corporate |
9 |
policy, third-party payments or deception. Each |
10 |
presented allegations which, if true, could have |
11 |
resulted in antitrust harm. |
12 |
Let me start with Kodak, because it is almost |
13 |
certainly the antitrust case that most prominently |
14 |
stands for the proposition that market power can arise |
15 |
from information that is imperfect or overly |
16 |
complicated. As most of you know, Kodak involved that |
17 |
firm's requirement that its customers purchase a firm's |
18 |
maintenance service in order to obtain its spare parts. |
19 |
Kodak's tying is of special interest because it had only |
20 |
20 to 23 percent of the market for sales of copier |
21 |
machines and thus would not be considered to have market |
22 |
power under traditional standards. |
23 |
The key to the court's decision, of course, was |
24 |
its concern over a possible change in Kodak's policy |
25 |
that had been unanticipated by its customers. Another |
46
1 |
important issue is the customers' inability to calculate |
2 |
the life cycle pricing of their copier repairs and spare |
3 |
parts. As you know, due to a lock-in caused by the |
4 |
transaction cost of shifting to different copiers, |
5 |
purchasers became vulnerable to exploitation from |
6 |
Kodak's tying arrangements. |
7 |
This case is significant because it reminds us |
8 |
that it was possible for purchasers that were |
9 |
businesses, no traditional end use consumers, to be |
10 |
vulnerable to information imperfections. Just because |
11 |
businesses are involved, we should not assume they |
12 |
always will possess information perfect enough to ensure |
13 |
a competitive outcome, or that a market that seems to be |
14 |
competitive would assist in terms of traditional market |
15 |
shares inevitably will supply the necessary information |
16 |
to the marketplace in a timely manner. |
17 |
My second example is Rambus and similar cases |
18 |
alleging the deception of standard-setting |
19 |
organizations, and I promise, Tom, to be very general |
20 |
about this and say the word "alleged" a lot, okay? Two |
21 |
minutes of "alleged." |
22 |
A firm that has secured or knows it is about to |
23 |
secure a patent on the intellectual property covered by |
24 |
a standard might be able to misrepresent to a |
25 |
standard-setting organization that no such patent |
47
1 |
exists. This could induce the adoption of technology |
2 |
that relies on the patent and thereby greatly increases |
3 |
its value. The firm might be able to wait until the |
4 |
industry has committed itself to the standard and then |
5 |
to assert its patent rights. |
6 |
The FTC's case in Rambus involved essentially |
7 |
these allegations. The FTC alleged, in effect, that |
8 |
Rambus was guilty of illegally monopolizing the relevant |
9 |
markets even though the company might have had no market |
10 |
power before the deception was made if market power were |
11 |
traditionally defined as requiring a huge market share |
12 |
of a rigorously defined market. |
13 |
Moreover, it would have been very difficult to |
14 |
determine defendant's market share at the time of the |
15 |
alleged deception -- Dr. Williams talked about some of |
16 |
these issues -- because at the time of its alleged |
17 |
deceptions, its patents, or perhaps some other firm's |
18 |
patents, could have become crucial or could have become |
19 |
worth very little depending upon the actions of the |
20 |
standard-setting organizations. |
21 |
But even if Rambus' pre-deception market power |
22 |
was uncertain if assessed under a conventional approach, |
23 |
the FTC alleged that it had the power to deceive the |
24 |
standard-setting organization in a manner that gave |
25 |
itself post-deception monopoly power. |
48
1 |
Finally, I will talk for just a minute about |
2 |
Jefferson Parish, because this case raised the |
3 |
possibility that market power that can flow from what I |
4 |
am calling consumer protection violations can come from |
5 |
market failures other than imperfect or deceptive |
6 |
information. Now, Jefferson Parish did reject a finding |
7 |
of market power by a firm with 30 percent of the market. |
8 |
It held this was insufficient despite the existence of |
9 |
market imperfections such as high transaction costs, the |
10 |
cost of patients getting to different hospitals, and the |
11 |
prevalence of third-party payments. |
12 |
So, this case maybe stands for the proposition |
13 |
that there is a 30 percent safe harbor, at least among |
14 |
sellers, in these cases, but it also established that |
15 |
market failures other than imperfect or deceptive |
16 |
information can be crucial to a court's market power |
17 |
determination. |
18 |
Since I have given you three cases, now let me |
19 |
give you three implications of results that might arise |
20 |
if the antitrust world takes these ideas a bit more |
21 |
seriously. |
22 |
Imperfect information and all these other |
23 |
transaction costs are everywhere. A crucial issue, |
24 |
however, is how significant they have to be before they |
25 |
constitute a market failure that should affect antitrust |
49
1 |
decision-making. These are extremely difficult |
2 |
evaluations, as is the assessment of traditional market |
3 |
share-based market power. If antitrust were to take |
4 |
these principles more seriously than it does today, |
5 |
however, they would have profound effects on the |
6 |
analysis of market power and also the related areas of |
7 |
market definition and entry. |
8 |
First, market share requirements for market |
9 |
power can change. As I said, Kodak only had 20 to 23 |
10 |
percent of its relevant market. In today's antitrust |
11 |
world, of course, it is almost inconceivable that a firm |
12 |
with double this market share would be found to have |
13 |
traditionally defined market power, yet if the |
14 |
allegations in Kodak were true, competition in the |
15 |
market did not protect consumers adequately, and the |
16 |
harms to consumers were serious. |
17 |
A similar implication is that we should be more |
18 |
cautious about establishing substantial market |
19 |
share-based safe harbors in the Merger Guidelines and |
20 |
Joint Venture Guidelines and consider using the existing |
21 |
market share screens more strictly. |
22 |
A second implication is that markets should be |
23 |
defined differently, sometimes more narrowly. Imperfect |
24 |
information can cause more narrowly defined relevant |
25 |
markets because it could effectively prevent customers |
50
1 |
from turning to certain potential substitutes. Some |
2 |
customers might not know of an option's existence. If a |
3 |
significant percentage of potential consumers of plastic |
4 |
conduits, student loans, nonfluorescent light bulbs, you |
5 |
name the product, were unaware of the existence of a |
6 |
close substitute, perhaps a close substitute should not |
7 |
be considered to be within the same relevant product |
8 |
market. |
9 |
Moreover, some customers might not realize that |
10 |
a certain product is a cost-effective substitute, and |
11 |
for other customers, the transaction costs of finding |
12 |
another choice or customers' beliefs about the size of |
13 |
these transaction costs might be so large that the firm |
14 |
in question has some degree of pricing freedom. To |
15 |
investigate these questions, we should attempt to |
16 |
ascertain the information about the products in question |
17 |
that was actually in the minds of potential customers, |
18 |
rivals and entrants. This will tell us whether products |
19 |
could effectively work as substitutes. |
20 |
All this could lead to markets being defined |
21 |
more narrowly and to larger shares being imputed to the |
22 |
firms within these markets. This could sometimes have |
23 |
the effect of making it more likely that a firm will be |
24 |
found to have market power. |
25 |
The final implication is that entry analysis |
51
1 |
also could be affected significantly. Currently, entry |
2 |
that takes place within two years is considered easy and |
3 |
short term; however, when we compute this period, we |
4 |
should not assume that the would-be entrants quickly |
5 |
spot the profit opportunity and instantly make the |
6 |
corporate decision to enter. This certainly is not |
7 |
always true, yet these factors are not discussed in the |
8 |
Merger Guidelines. |
9 |
Moreover, the 5 to 10 percent test for entry and |
10 |
market definition would have to be modified, because |
11 |
potential entry and customer reactions to a price rise |
12 |
should only count if they knew the rise was due to |
13 |
market power. By contrast, perceptions if prices rose |
14 |
due to increased costs would allow firms to increase |
15 |
prices without as much fear of entry. |
16 |
Suppose potentially entering firms did not |
17 |
realize that prices rose due to an increase in market |
18 |
power but instead believe that prices rose due to cost |
19 |
increases. How sure will potential entrants be that |
20 |
there will be super-competitive profits to be earned in |
21 |
that market? If they believe the entire price increase |
22 |
might well have been due to cost increases, they would |
23 |
be very reluctant to enter. So, these market |
24 |
imperfections could mean that a price increase due to |
25 |
increased market power would not cause entry; thus, the |
52
1 |
likely test for entry would be affected as well as the |
2 |
timely test. |
3 |
Now, in conclusion, we all understand that no |
4 |
plaintiff has won an antitrust case at the Supreme Court |
5 |
in more than a decade. Also, the expansionist portions |
6 |
of some of the cases I have cited were mostly discussed |
7 |
only as possibilities, and even those possibilities have |
8 |
been largely ignored by many recent court decisions. |
9 |
Nevertheless, it is true that consumer protection laws' |
10 |
assumptions about consumers' capabilities, |
11 |
vulnerabilities, and needs sometimes should apply to |
12 |
businesses as well. These ideas' potential has not been |
13 |
forgotten, of course, as Rambus and related cases |
14 |
demonstrate, and the more serious consideration would |
15 |
also be consistent with the way that we approach |
16 |
potential consumer protection violations. |
17 |
It also would be sound public policy to take the |
18 |
potential of this form of market power more seriously. |
19 |
Deception, imperfect information, and other consumer |
20 |
protection problems, when they have market-wide effects |
21 |
and are not likely to be prevented by competition in the |
22 |
relevant market, should give rise to antitrust |
23 |
violations. This is in part because they can cause harm |
24 |
in addition to higher prices, including allocated |
25 |
inefficiency and umbrella effects. Antitrust remedies, |
53
1 |
including treble damages, are, indeed, appropriate for |
2 |
these situations. |
3 |
For these reasons, as the agencies contemplate |
4 |
future dominant firm cases, they should give more |
5 |
attention to the possibility that so-called consumer |
6 |
protection market failures might create market power |
7 |
even in relatively unconcentrated markets and by |
8 |
defendants with a relatively modest market share. |
9 |
Thank you. |
10 |
(Applause.) |
11 |
DR. WERDEN: Alan Silberman. |
12 |
MR. SILBERMAN: Good morning. |
13 |
Having listened to the last four presentations |
14 |
closely, I am now fully convinced that I am a thorn |
15 |
among the lilies, and I will start with an obvious |
16 |
disclaimer. I am not an economist, I am not an |
17 |
academic, I do not do research, because at that point, |
18 |
all my biases would be able to be tested against the |
19 |
facts, and it would also, of course, limit my ability to |
20 |
represent inconsistent views for different clients, so I |
21 |
am left to focus truly as a practicing lawyer, |
22 |
particularly a practicing lawyer who deals with problems |
23 |
of distribution, distribution systems, franchise systems |
24 |
and related after-markets. |
25 |
In that capacity, I confront a repeated |
54
1 |
challenge. I look at Section 2 cases, both complaints |
2 |
and interim opinions and final dispositions by |
3 |
particularly district courts but also sometimes courts |
4 |
of appeal and perhaps more in the great heartland of the |
5 |
country, that is, the area between the Delaware Water |
6 |
Gap and the Pacific Coast where there is perhaps a |
7 |
little more mischief or misunderstanding, let's say, |
8 |
about antitrust than there is in Washington. I look at |
9 |
those cases, and I have a sense, particularly in private |
10 |
antitrust litigation, that labels and key words that are |
11 |
used in Section 2 of the Sherman Act are being used and |
12 |
misused in ways that I find problematic and that the |
13 |
result is both cost to litigants and overall cost to the |
14 |
system, because we are using the judicial resources |
15 |
excessively for matters that really do not necessarily |
16 |
fit or should not fit within Section 2 private |
17 |
litigation. |
18 |
The sense I have is that we are in this problem |
19 |
because all of our high-level discussion of |
20 |
monopolization, market share, market power, fails to get |
21 |
put inside a coherent structure that can be understood |
22 |
with a high degree of confidence by ordinary people. |
23 |
Now, perhaps that has just excluded everyone in the |
24 |
room, but I believe that that is a key public policy |
25 |
goal, and the ordinary perception of monopolization is |
55
1 |
simply you are too big and you do bad things, there must |
2 |
be something wrong with that. Clearly that is not what |
3 |
the last four speakers exactly have been talking about, |
4 |
Bob Lande perhaps to the contrary. |
5 |
Let me give you some examples of what troubles |
6 |
me, and I confess at the beginning that I focus on |
7 |
things, you know, in an excessively simple way. There |
8 |
are cases that I see that involve unfairness deception |
9 |
that have exclusionary effects. That is sort of what |
10 |
Bob was just talking about. Conwood is a perfectly good |
11 |
example of that. It is terrible behavior. Nobody |
12 |
doubts that it is terrible behavior. The question is, |
13 |
was that a Section 2 case or was it an unfair practice |
14 |
case? Was it a case that the Federal Trade Commission |
15 |
should have taken up under Section 5? There are all |
16 |
sorts of other possibilities other than monopolization. |
17 |
That is not to say that you cannot have a good |
18 |
Section 2 case where you also have bad behavior. |
19 |
Certainly you can. But if you look at the facts of |
20 |
Conwood, you see extraordinary things where market share |
21 |
is increasing, where there is no exit, where all sorts |
22 |
of data support the conclusion that competition was |
23 |
still ongoing, but you had extraordinary bad behavior. |
24 |
I find myself troubled by those kinds of cases. |
25 |
The second category, cases where, as we have |
56
1 |
already noted, market share does not always indicate |
2 |
that there is exercisable market power. I will give you |
3 |
some examples of things that I encounter. One very |
4 |
simple one is the problem in the distribution system of |
5 |
the wholesaler. The wholesaler represents two, three, |
6 |
four competitors but distributes products to like |
7 |
outlets, so the wholesaler does a wonderful job. The |
8 |
wholesaler has 95 percent of all the sales in a |
9 |
geographic area. In fact, the wholesaler acts to |
10 |
exclude his remaining competition, buys up the other 5 |
11 |
percent or says to the suppliers -- each individually, |
12 |
of course -- says, "I want an exclusive." Now he has |
13 |
got 100 percent market share, but is there market power? |
14 |
I will give you two answers for that. One is |
15 |
the minute that that wholesaler begins to try to follow |
16 |
strategies of raising price and reducing output and |
17 |
thereby reducing the sales of his principal, he is out |
18 |
of business, because the principal has options. There |
19 |
are no barriers to prevent manufacturers from creating |
20 |
relatively quickly ways around that wholesaler, |
21 |
notwithstanding the fact that he has 100 percent market |
22 |
share. Now, if you have that situation, you do not have |
23 |
market power. The market share there is simply an |
24 |
indication of good performance by the wholesaler. |
25 |
Another example that is not a wholesale |
57
1 |
situation, where there is no barrier to entry, entry is |
2 |
possible within six months. Customers for this product |
3 |
are largely big companies, the Office Max, Office Depot, |
4 |
Staples, this category. The company selling the product |
5 |
does a wonderful job. The customers like it, end users |
6 |
like it, and so on. There is no entry. Entry is |
7 |
possible, but there is no entry, and, indeed, given the |
8 |
performance, even price might even increase a bit. If |
9 |
we look at this purely in terms of numbers, we would |
10 |
say, well, is there a problem there? And yet we all |
11 |
know there is no problem there, because there is some |
12 |
other factor that will ultimately discipline the |
13 |
exercise of market power. So, we have to keep |
14 |
remembering that there are those situations and that |
15 |
they are real world -- they are not econometric |
16 |
models -- they are real world situations. |
17 |
The third example involves situations where you |
18 |
are challenging conduct as of today when, in fact, the |
19 |
competitive forces that we expect to have had in play |
20 |
were ones that played out a year before, six years |
21 |
before, some other period. Let me give you the simplest |
22 |
example. The franchise situation where for years we |
23 |
went through this discussion, particularly in |
24 |
franchising but in other areas, too, of lock-in as a |
25 |
substitute for market power, but lock-in is nothing more |
58
1 |
than relational power created by the contract, and the |
2 |
question then is, was the formation of the contract |
3 |
subject to appropriate competitive forces? And if it |
4 |
was, then we shouldn't have had to worry about what |
5 |
today's market power perception is. |
6 |
An example of that, you know, go back to Kodak, |
7 |
because in Kodak, Kodak is not able to say that my |
8 |
initial transaction was subject to market power, not |
9 |
only because of problems of life cycle pricing and |
10 |
information failure and so on, but because Kodak did not |
11 |
tell anybody that -- maybe they did not know -- but they |
12 |
did not tell anybody that downstream, we are going to |
13 |
some years later decide that we are going to get rid of |
14 |
the independent service organizations. |
15 |
So, Kodak is in a position where it is hoist on |
16 |
its own guitar. It cannot argue that, "Well, the time |
17 |
for looking at the proper exercise of market power was |
18 |
back when we first made these contracts." It tries to |
19 |
do that by saying, "Look, I was subject to competition |
20 |
with others," but that was complicated by their own |
21 |
failure. But if you look at post-Kodak cases, like PSI |
22 |
and then the franchise cases like Queen City and Wilson |
23 |
versus Mobil Oil, you find that the courts are saying |
24 |
very clearly, if the information was disclosed at the |
25 |
beginning of the transaction, even to the point where it |
59
1 |
is very general -- because in both Queen City and in |
2 |
Wilson versus Mobil Oil, which is Judge Vance in New |
3 |
Orleans, there was the smallest amount of information. |
4 |
There was no projection that said, "Well, you know, |
5 |
because of these restrictions that you are agreeing to |
6 |
and the relations that are created, we will be able to |
7 |
raise price three years later." It just said, recognize |
8 |
this is -- this is the situation. |
9 |
Now, number four, confusion about relevant |
10 |
markets in measuring monopoly power. I got onto this |
11 |
one in two ways. One is similar to the franchise |
12 |
discussion we have been having where when a franchise is |
13 |
first issued, what is the competitive market that we |
14 |
should be looking at? We should be looking at all |
15 |
alternatives that the individual had for capital, |
16 |
personal time, et cetera. The fact that they bought a |
17 |
widget franchise does not mean that the market is |
18 |
widgets, and the fact that the widget franchisor has 83 |
19 |
percent, 22 percent, 99 percent of a market, is |
20 |
irrelevant to the decision. In fact, that is a good |
21 |
example potentially of a 1/N market where you just take |
22 |
all the various alternatives and treat them all equally. |
23 |
You do not necessarily measure that issue by looking at |
24 |
the market share of the franchisor, because what you |
25 |
really should be asking is a question of what are the |
60
1 |
constraints that affect the formation of the contract. |
2 |
This is just a sidebar on that, if you go to the |
3 |
EU, you see that what they want to do, in single-brand |
4 |
distribution systems, they want to aggregate all the |
5 |
sales at the retail level. That is possibly reasonable |
6 |
in some situations in measuring market share, but it is |
7 |
certainly not reasonable in situations where the |
8 |
retailer or wholesaler or both have the ability to |
9 |
control output and price, and therefore, can actually |
10 |
alter the consolidated market share by their own |
11 |
tactics, and there is no point to impute that upstream. |
12 |
Again, what is the question that is being missed |
13 |
in all of these situations? The question is, what |
14 |
constraint are we relying on in order to measure |
15 |
monopoly power? And that is really the burden of my |
16 |
entire pitch. |
17 |
Number one, if we are going to have a coherent |
18 |
way of organizing this, we ought to begin at the |
19 |
threshold by recognizing that there is a semi-safe |
20 |
harbor that we always need, semi-safe because it never |
21 |
excludes the possibility of reasoned inquiry through |
22 |
study and possible action by an administrative agency, |
23 |
but we are not going to have public resources used, |
24 |
particularly in private litigation. |
25 |
Second, we need to identify and articulate the |
61
1 |
constraints that we rely on in each set of |
2 |
circumstances. That is the starting point. What is it |
3 |
that we expect will prevent the undue exercise of power |
4 |
in the future? Once we have articulated that, we can |
5 |
then test whether the conduct at issue affects that |
6 |
constraint. If it does not affect that constraint, as |
7 |
in the wholesale case or a couple of the other ones that |
8 |
I mentioned, we just do not have an issue. |
9 |
What that leads to, the third point, is what |
10 |
practicing lawyers and businesspeople need, as a crying |
11 |
need, is a decision tree that they can look at that will |
12 |
help them understand a rational sequence of a Section 2 |
13 |
analysis and the points at which certain types of |
14 |
behavior can be ruled out, at least from the standpoint |
15 |
of private antitrust litigation. |
16 |
Last, I believe that going along with this is a |
17 |
need for continued and if not increased competition |
18 |
advocacy by the agencies, which means not only being |
19 |
able to guide courts and counsel in terms of where there |
20 |
are problems, where there are not problems, and the |
21 |
methods by which we test that, but also considering |
22 |
amicus briefs in district courts, helping to guide |
23 |
courts in dealing with problems that are plenty |
24 |
complicated, as you obviously know from the last four |
25 |
presentations, and even to the point of recognizing that |
62
1 |
there may be cases for primary jurisdiction where |
2 |
district courts ought to be taking Section 2 claims and |
3 |
referring them to the Federal Trade Commission and |
4 |
asking the Federal Trade Commission to parse certain |
5 |
basic questions. That will obviously require increased |
6 |
funding, increased personnel, but I think is a direction |
7 |
we ought to be considering. |
8 |
Now, please understand, I do not want to chill |
9 |
or limit the scope or depth of any of the inquiry that |
10 |
the other speakers have suggested. What I do suggest |
11 |
that we do is take one step back and try to frame our |
12 |
discussion of Section 2 of the Sherman Act with plain |
13 |
speaking and commonly understood language if not also |
14 |
common sense. |
15 |
Thank you. |
16 |
(Applause.) |
17 |
DR. WERDEN: All right, we are going to take a |
18 |
let's say 10-minute break right now, then we will come |
19 |
back for a discussion among our panelists. |
20 |
(A brief recess was taken.) |
21 |
DR. WERDEN: Okay, let's get started. We are |
22 |
going to spend just a few minutes, I hope, giving the |
23 |
speakers the opportunity to say anything that they are |
24 |
just aching to say given the remarks of any of the other |
25 |
speakers. I know at least one of our panelists is |
63
1 |
aching to say a couple of things about the Microsoft |
2 |
case. |
3 |
DR. SCHMALENSEE: Let me just say a word, if I |
4 |
may. Andrew is, of course, right. The way to define |
5 |
software products is functionality and rights. I find |
6 |
it interesting that Microsoft is blamed for being "it is |
7 |
only code" since the number of times I was told, "Do not |
8 |
call Internet Explorer a browser, it is the browsing |
9 |
functionality in the Windows software product," which, |
10 |
of course, no one ever said out loud. |
11 |
In that case, I would say both sides were |
12 |
inconsistent as between code and functionality, and I do |
13 |
not think that is why there was not a market, a |
14 |
satisfactory browser market, introduced. The Government |
15 |
just did not bother to put up a witness who said, "This |
16 |
is the browser market." Had they done that, I think |
17 |
despite the confusion, there would have been a market. |
18 |
In any case, the whole tying analysis and the question |
19 |
of removal of code and the commingling error that was |
20 |
made was because of the confusion between code and |
21 |
functionality. |
22 |
The proper question was, was it a violation of |
23 |
tying browser functionality to this product, regardless |
24 |
of how you did it, and should Microsoft have provided a |
25 |
way for consumers easily to have disabled the |
64
1 |
functionality? You can get to the core questions |
2 |
without the code confusion, and Andrew has the right way |
3 |
to put it, clearly. It is about functionality. |
4 |
Apple's operating system and Windows both |
5 |
provided browser functionality out of the box. They did |
6 |
it in different ways to the end user. It shouldn't |
7 |
matter. |
8 |
DR. WERDEN: Anybody else dying to say |
9 |
something? |
10 |
Okay, Bob Lande. |
11 |
DR. LANDE: Sure. I would like to take a |
12 |
challenge to step back for a second, ask the larger |
13 |
question, hopefully express it in easy-to-understand |
14 |
terms. |
15 |
What is antitrust? What is consumer protection? |
16 |
That is, you have got cases like Conwood where there was |
17 |
coercion, and is that an antitrust issue or should we |
18 |
let some other area of law deal with it? How about a |
19 |
case like Kodak? Is that antitrust or should we say, |
20 |
"No, this is not antitrust, let consumer protection law |
21 |
or something else deal with it"? |
22 |
I will give you a proposal for how we tell the |
23 |
difference between antitrust law and consumer protection |
24 |
law, and this a plug for this article which I will sell |
25 |
you at marginal cost, I think, or marginal -- whatever, |
65
1 |
you can have a copy for free if you want it. |
2 |
We propose that antitrust is about distorting |
3 |
options in the marketplace, an artificial distortion of |
4 |
the options that competition otherwise would have |
5 |
presented, whereas a consumer protection violation |
6 |
detrimentally affects consumers' inability to choose |
7 |
from among the options presented by the marketplace. |
8 |
So, in a case like Conwood, if the torts were |
9 |
bad enough to affect competition in the marketplace, |
10 |
that is, they did not just destroy a couple of racks of |
11 |
a, you know, competing brand of cigarettes or smokeless |
12 |
tobacco, but it was enough to affect competition in the |
13 |
marketplace, then it is going to be affecting choices in |
14 |
the marketplace, and it certainly belongs in the world |
15 |
of antitrust. |
16 |
Tying is sort of right on the border. It |
17 |
affects choice in the marketplace, because it says, if |
18 |
you want to buy one product, you have got to buy the |
19 |
other product. On the other hand, the Kodak-like |
20 |
violations certainly are consumer protection as well. |
21 |
So, tying is right in the middle, but something like |
22 |
Conwood certainly belongs in the antitrust world. |
23 |
DR. WERDEN: Okay, thank you. |
24 |
We are now going to have a round of questions to |
25 |
the panelists which the other panelists are invited to |
66
1 |
comment on as well and on the answers given thereto, and |
2 |
we will go down the line here starting with Dick. |
3 |
I enjoyed and pretty much agreed with everything |
4 |
you said on assessing the competitive effects, but |
5 |
mostly what you have told us is this is tricky. That is |
6 |
true. You implied, if not actually said, that error |
7 |
costs can be high and that errors are likely because it |
8 |
is all pretty tricky. |
9 |
If I have got you right, then, I am wondering, |
10 |
so, what do we do about it? And I will put to you, is |
11 |
what we do about it to minimize the extent to which |
12 |
judges and juries have to actually figure out tricky |
13 |
questions by structuring a process to minimize the need |
14 |
to do that, for example, with market share safe harbors, |
15 |
conduct-based safe harbors, and burden-shifting |
16 |
approaches, in order to put off as much as possible as |
17 |
much tricky analysis as you can put off? |
18 |
DR. SCHMALENSEE: I live in fear of unstructured |
19 |
rule of reason proceedings because they do put you into |
20 |
coin-flip country, so I am a fan of either clear rules |
21 |
or putting structure on the inquiry where we know how to |
22 |
do it. My comments pointed to some of the areas in |
23 |
which I do not know how to do it. If you say that the |
24 |
real question is, "Boy, this is a bubbling caldron of |
25 |
technological competition, there is a lot of innovation |
67
1 |
going on, will it continue? Can you count on that |
2 |
happening to discipline short-term power over the next |
3 |
five-ten years?" |
4 |
There are things I would look at. I would look |
5 |
at spending. Are people spending money to try to |
6 |
displace the leader? Unfortunately, those data are not |
7 |
always available. I do not know how to compute |
8 |
meaningful shares. People make mistakes. Not all |
9 |
technologies succeed. |
10 |
Yes, I would like rules and I would like |
11 |
structure on the analysis where possible. There are |
12 |
some areas where I am not sure I know how to impose good |
13 |
rules, and I am afraid in those areas, you have to let |
14 |
dueling advocates duel. It does not make me |
15 |
comfortable, and I hasten to add, the recipe is not that |
16 |
the Antitrust Division and the Federal Trade Commission |
17 |
should avoid intervention, because that is wrong, too. |
18 |
DR. WERDEN: Okay. Well, it seems to me the way |
19 |
people actually do these things is when the facts are so |
20 |
hard they cannot figure stuff out, it all comes back to |
21 |
what they believed before they looked at the facts, and |
22 |
if you read judicial decisions, I think that is what |
23 |
they are all saying, too. So, when you have one of |
24 |
these bubbling caldrons of technology, are you supposed |
25 |
to believe that the market will fix itself or are you |
68
1 |
not supposed to believe the market will fix itself? |
2 |
DR. SCHMALENSEE: I think the easiest thing and |
3 |
the most plausible thing for judges to do -- and this |
4 |
was certainly done in Microsoft -- is to say, "This is |
5 |
all hypothetical. You are telling me that things might |
6 |
happen, but I am going to make the assumption that the |
7 |
world as I see it will persist. Absent, evidence that |
8 |
entry barriers are low, this is what it looks like, and |
9 |
I am going to deal with it on its face." |
10 |
That is probably better on average as an |
11 |
assumption than the opposite, which is, "I assume that |
12 |
these are just fleeting bubbles of market power that |
13 |
will soon go away because they have gone away in the |
14 |
past." As I say, bursts of innovation do tend to be |
15 |
limited in time, but, of course, an assumption that they |
16 |
will be short lived will occasionally be quite wrong. |
17 |
DR. WERDEN: Thanks. |
18 |
Any other panelists want to comment on that? |
19 |
MR. SILBERMAN: Yeah, let me just go back to |
20 |
dueling advocates first. Dueling advocates is a bad |
21 |
model, because in litigation, when two advocates duel, |
22 |
they do not get hurt. The ones who get hurt are the |
23 |
clients and perhaps the economy. The advocates love it. |
24 |
I enjoy dueling, but I think -- and I was with you up to |
25 |
the point where you said minimize the need for tricky |
69
1 |
analysis and then say but now we should do that by safe |
2 |
harbors and presumptions. |
3 |
I know this requires major change, but I think |
4 |
you have to structure it by, A, getting a whole set of |
5 |
questions that are too tricky and too difficult and too |
6 |
uncertain out of the courts. You have to make the |
7 |
standard for Section 2 violation a higher degree of |
8 |
certainty and then leave open the remaining inquiry. |
9 |
Some issues, like functionality, where it is clear that |
10 |
something is an effort to improve functionality of a |
11 |
product, I think we just cancel the inquiry. |
12 |
I mean, you know, Henry Ford originally did not |
13 |
put headlights on the Model T, and then he put |
14 |
headlights on the Model T and made a design decision |
15 |
that was integral to the car. Now, I guess we could |
16 |
have applied a tying analysis to that, but we were all |
17 |
convinced I think that that was integral to the |
18 |
function. Microsoft was probably less convinced, but |
19 |
that does not mean that we should be turning judges and |
20 |
juries loose on that very difficult question. |
21 |
DR. WERDEN: I would only comment that what you |
22 |
are describing there is precisely what I mean by a |
23 |
conduct-based safe harbor. The conduct of putting |
24 |
headlights on the Model T is conduct we could place in a |
25 |
safe harbor and never inquire as to whether that is a |
70
1 |
good thing or a bad thing for consumers. |
2 |
MR. SILBERMAN: That one I would agree with, and |
3 |
that would avoid also the semantic gamesmanship of |
4 |
having to -- how you describe it. I mean, we did that |
5 |
years ago with McDonald's and the alleged tie of the |
6 |
real estate and the franchise, so we taught everybody to |
7 |
say, you are not offering a trademarked franchise and |
8 |
then requiring that they rent real estate. You are |
9 |
offering an operating rights contract in which, of |
10 |
course, in order to operate, you need to have both real |
11 |
estate and intellectual property rights. |
12 |
Okay, that was creative, but it is a waste of |
13 |
resources for lawyers and clients to be devoting their |
14 |
time to that kind of wordsmanship. So, I agree with you |
15 |
on some things, yes. |
16 |
DR. WERDEN: Okay. Dick has a look of |
17 |
bemusement. Do you wish to comment? |
18 |
DR. SCHMALENSEE: Well, I am just bemused that |
19 |
you know for certainty that adding headlights to cars or |
20 |
perhaps air conditioners to cars or perhaps |
21 |
spellcheckers to word processors or graphics features to |
22 |
spreadsheets are procompetitive, but adding browsing |
23 |
functionality to Windows was anticompetitive. I think |
24 |
competitive effects are a little bit hard to determine. |
25 |
DR. WERDEN: Well, if your point is it is hard |
71
1 |
to know how to draw these lines, you are absolutely |
2 |
right. It is a hard problem. |
3 |
DR. SCHMALENSEE: Then we are in agreement. |
4 |
MR. SILBERMAN: Okay. |
5 |
MR. WILLIAMS: So, what is a conduct safe harbor |
6 |
then? I mean, if Microsoft -- I know that they |
7 |
contemplated -- I do not want to speak for Dick, but I |
8 |
know they at least contemplated putting virus protection |
9 |
into the -- and my guess is, I am not -- I do not work |
10 |
for Microsoft, but my guess is they decided not to do it |
11 |
because they probably thought they would have an |
12 |
antitrust case on their desk the next day. |
13 |
DR. WERDEN: In some countries. |
14 |
DR. SCHMALENSEE: They would have had a private |
15 |
case. |
16 |
MR. WILLIAMS: They would have had a private |
17 |
case certainly. Again, I do not work for Symantec, I do |
18 |
not work for Microsoft, but I am just going to take a |
19 |
wild guess that Symantec would have sued. |
20 |
DR. WERDEN: Well, the Microsoft Court of |
21 |
Appeals in the en banc opinion drew a distinction which |
22 |
is not easy to draw but can be drawn between entirely |
23 |
new products and product design issues. It said, right |
24 |
or wrong, that the issues that it had with Microsoft |
25 |
were about product design, not about new products, and |
72
1 |
while this is a tricky line to draw, it could be drawn, |
2 |
and then you would end up litigating about which side of |
3 |
the line you were on rather than something else. Is |
4 |
that a productive exercise or an unproductive exercise? |
5 |
That is the question. |
6 |
DR. SCHMALENSEE: That is a tricky line. |
7 |
MR. WILLIAMS: So, what did the safe harbor buy |
8 |
you? |
9 |
DR. WERDEN: I just told you what it bought you. |
10 |
It bought you litigating about which side of the line |
11 |
you were on rather than about whether consumers were |
12 |
better off because Microsoft did X, Y and Z, which would |
13 |
be hard to figure out, of course. |
14 |
MR. WILLIAMS: Yeah. |
15 |
DR. SCHMALENSEE: But I do not understand the |
16 |
distinction between -- well, I would have to go back and |
17 |
read the Court of Appeals' opinion, but I thought the |
18 |
Court of Appeals in its first opinion basically said |
19 |
product improvement is not a violation. |
20 |
DR. LANDE: Right. |
21 |
DR. WERDEN: Well, let's not talk about what the |
22 |
Court of Appeals said in Microsoft. |
23 |
Mike, question for you. |
24 |
MR. WILLIAMS: Sure. |
25 |
DR. WERDEN: I see that we get antitrust issues |
73
1 |
in technology markets with some frequency, but I am not |
2 |
so sure I see that we need to assign market shares to |
3 |
analyze these things. So, can you give us something |
4 |
more specific, what you have in mind about why a court |
5 |
would feel the need to figure out what the market shares |
6 |
would be in order to assess a competitive issue in a |
7 |
technology market? |
8 |
MR. WILLIAMS: Well, I can give you -- I would |
9 |
like to give you a good one from the Rambus case, but |
10 |
ERS was -- we were the consulting experts for the |
11 |
Complaint Counsel, so I probably shouldn't talk about |
12 |
that. |
13 |
MR. KLOTZ: Can you illustrate it with UNOCAL? |
14 |
MR. WILLIAMS: Well, I do not know -- the short |
15 |
answer is no. |
16 |
DR. WERDEN: Was not UNOCAL's share 100 percent? |
17 |
MR. WILLIAMS: Well, no, I think that is right. |
18 |
I think UNOCAL's share was 100 percent. |
19 |
DR. WERDEN: Then an easy question. |
20 |
MR. WILLIAMS: Okay, well, assuming there are |
21 |
examples where -- for example, again, by way of full |
22 |
disclosure, I probably should have said on the |
23 |
Gemstar/Echostar case, I along with David Sibley and |
24 |
Roger Noel were the experts for Echostar, Pioneer and |
25 |
Scientific Atlanta. That was a circumstance where |
74
1 |
Gemstar at least allegedly had monopolized the |
2 |
technology for interactive program guides, but they |
3 |
certainly did not have a 100 percent market share. |
4 |
Now, there was -- Janusz Ordover was Gemstar's |
5 |
expert. There was a big debate about what their market |
6 |
share was. He thought it was maybe one-third of the |
7 |
market, I thought it was closer to two-thirds, but it |
8 |
certainly was not black and white. It certainly was not |
9 |
a circumstance where anyone could look at it and say it |
10 |
was 100 percent. I mean, even the plaintiffs did not |
11 |
allege it was 100 percent. It was a more traditional |
12 |
fight about whether it was one-third or was it |
13 |
two-thirds. |
14 |
DR. WERDEN: Are you talking about our case now? |
15 |
MR. WILLIAMS: No, no, no, no, I am not talking |
16 |
about the -- I am talking about the private case between |
17 |
Gemstar, Echostar, Pioneer and Scientific Atlanta, where |
18 |
Gemstar sued on patent grounds, those three companies |
19 |
countersued on antitrust grounds, and there was a fight. |
20 |
Does Gemstar have a monopoly position in the IP |
21 |
technology market? And everyone agreed that they did |
22 |
not have 100 percent. So, then it was a fight, what was |
23 |
their share? |
24 |
DR. WERDEN: It seems to me in cases like that |
25 |
one and others, the really hard problem is one that you |
75
1 |
did not really talk about, and it is that you do not |
2 |
know exactly what the intellectual property right means. |
3 |
That has not been decided yet. You do not know, for |
4 |
example, whether some other technology is infringing. |
5 |
MR. WILLIAMS: Well, that is right, and, I mean, |
6 |
again, not to focus too narrowly on the Gemstar case, |
7 |
but in that case, Gemstar had sued every company that |
8 |
had come out with a rival interactive program guide. |
9 |
They actually had lost all the cases, but they announced |
10 |
that they had over 200 patents and they were going to |
11 |
keep suing people one at a time, and -- |
12 |
DR. WERDEN: And if I recollect, there was |
13 |
considerable doubt about whether they were right in all |
14 |
of this. |
15 |
MR. WILLIAMS: It depends on who you ask, I |
16 |
suppose, but -- |
17 |
DR. WERDEN: It always does. |
18 |
MR. WILLIAMS: -- you are right. I mean, at the |
19 |
level of, you know, what exactly was their technology |
20 |
protecting, if Janusz was here, he would say there was a |
21 |
big fight, for example, Gemstar did or did not have |
22 |
blocking patents, okay, and they took a very fine line |
23 |
and said, "We do not have blocking patents, but it is |
24 |
impossible to make a commercially operational IPG |
25 |
without violating our patents." That was their |
76
1 |
position. |
2 |
So, now you ask, well, what exactly are they |
3 |
protecting? Well, the plaintiff's position certainly |
4 |
was that they monopolized a market for the provision of |
5 |
intellectual property, the only intellectual property |
6 |
that can be used to actually make a functioning IPG. |
7 |
DR. WERDEN: Okay, thank you. Any panelists, |
8 |
anyone have any comment on any of that? No? That is |
9 |
fine. |
10 |
Andrew, I am not sure where your analysis is |
11 |
actually taking us. The concept of a price |
12 |
discrimination market, of course, is at least a quarter |
13 |
century old, and it does not get applied all that much, |
14 |
but it certainly is applied by the agencies in merger |
15 |
analysis quite a bit. So, when it comes to monopoly |
16 |
cases, I took your suggestion to be that it applies in |
17 |
exactly the same way, but would a court be a little more |
18 |
skeptical about a price discrimination market in a |
19 |
Section 2 case? |
20 |
DR. CHIN: Well, my point on market definition |
21 |
based on price discrimination was to ground this in the |
22 |
existing approach. The agency guidelines do support the |
23 |
definition of price discrimination markets, and by |
24 |
extension, quality-adjusted price discrimination |
25 |
markets, and this should counter the intuition that it |
77
1 |
might be seen as improper to see the same item, the same |
2 |
box of Windows 98 participating in two distinguishable |
3 |
relevant product markets, as I argue it actually did. |
4 |
So, on the substantive point of where this is |
5 |
taking us, if I could sort of return to our discussion |
6 |
of the line-drawing, one special feature of the web |
7 |
browser software product market -- or actually, there |
8 |
are two. One is sort of its ancillarity. The features |
9 |
that a consumer would be interested in in getting a |
10 |
desirable web browser were very different than the |
11 |
considerations that would apply to the choice of an |
12 |
operating system, particularly if you are considering |
13 |
when the installed base was formed several years before |
14 |
the existence of the web. So, that ancillarity speaks |
15 |
to the kinds of information deficiencies in the market |
16 |
that, you know, result in the installed base opportunism |
17 |
that really was attacked by the tying claim. |
18 |
The other feature -- and this is a special |
19 |
feature of the browser market, in particular -- is its |
20 |
role in providing meta information about all the content |
21 |
on the web, which include viruses and everything from |
22 |
viruses to immensely valuable information products, and |
23 |
to the extent that the computer scientists refer to it |
24 |
as a web agent, it really does stand in the position of |
25 |
an agent in terms of providing that meta information |
78
1 |
about the value of transactions that a user might |
2 |
participate in on the web. |
3 |
So, that is very specific to the web browser |
4 |
sorts of information imperfection that I think pushes |
5 |
browsers towards one side of the line, but it is things |
6 |
like that, it is things like whether there is temporal |
7 |
deferment of the purchase of the tied product, these |
8 |
sorts of things that might provide some guidance as to |
9 |
where to draw the line. |
10 |
DR. WERDEN: Dick? |
11 |
DR. SCHMALENSEE: Just a quick response. |
12 |
I think this points in large part to the |
13 |
absurdity that is now generally recognized of having a |
14 |
per se tying law, particularly when it applies to |
15 |
product design. We could have this argument all day |
16 |
long. I would counter that every other operating system |
17 |
provided a web browser; they just did it differently. |
18 |
So, it is hard to say that it is inessential in any |
19 |
commercial sense. |
20 |
Its a general matter I am very nervous about, |
21 |
using the tying law or any other law as a way to let |
22 |
courts at product design decisions except in extreme |
23 |
cases. There certainly are cases where product design |
24 |
has been used as an exclusionary device, and I am not |
25 |
saying one would never want to get at design decisions, |
79
1 |
but boy, is tying law ever a blunt instrument for this. |
2 |
"Have market power and you cannot add a feature" is not |
3 |
a good way to address issues that are occasionally posed |
4 |
by product design, and I would emphasize "occasionally." |
5 |
DR. WERDEN: Of course, the Court of Appeals saw |
6 |
things pretty much the way you do on this question, did |
7 |
not affirm liability on the tying claim, held that the |
8 |
per se rule would not apply in this case, and said you |
9 |
guys figure this out, and it died. |
10 |
DR. SCHMALENSEE: But it remanded in a way that |
11 |
the Government could not effectively pursue the claim, |
12 |
because it said you can do tying, but you cannot define |
13 |
a market for the tied product. How could that work? |
14 |
I think we still have this issue in tying law |
15 |
that there is not a distinction between product design |
16 |
that puts two features together and bundling by |
17 |
contract, so to speak, and to my mind, that is a very |
18 |
important distinction. |
19 |
MR. KLOTZ: But how do we tie that back to our |
20 |
issue today, to our issue of market power and market |
21 |
definition? |
22 |
DR. SCHMALENSEE: I am not sure we do, but it |
23 |
came up. |
24 |
DR. WERDEN: Bob, did you want to make a |
25 |
comment? |
80
1 |
DR. LANDE: It was a bit overtaken by the |
2 |
remarks, but I just wanted to say that it was the |
3 |
exclusionary features of Microsoft that bothered some of |
4 |
us. |
5 |
DR. SCHMALENSEE: No, that is the issue. |
6 |
DR. LANDE: Exclusive dealing arrangement, a |
7 |
very different issue, of course. |
8 |
DR. WERDEN: Yes, okay. While you are up, Bob, |
9 |
a question for you. |
10 |
DR. LANDE: Sure. |
11 |
DR. WERDEN: Your discussion, unless I missed |
12 |
it, never drew any distinction between market power and |
13 |
monopoly power between Section 1 cases and Section 2 |
14 |
cases. Do you believe that the kind of market power you |
15 |
were talking about is sufficiently durable to constitute |
16 |
monopoly power and to give rise to a Section 2 |
17 |
violation? |
18 |
DR. LANDE: Sure. |
19 |
DR. WERDEN: You can stop there if you want. |
20 |
DR. LANDE: Okay, okay. |
21 |
DR. WERDEN: Okay. |
22 |
DR. LANDE: Yeah. In other words, for antitrust |
23 |
to worry about market power or monopoly power, it has to |
24 |
be durable, and we could quibble over do you mean two |
25 |
years, do you mean some other figure, but whatever the |
81
1 |
relevant figure is, if it is not at least that figure, |
2 |
then it is de minimus and trivial and we do not worry |
3 |
about it, of course. Can imperfect information, |
4 |
deception, give rise to that kind of a problem? Sure. |
5 |
DR. WERDEN: Do you think it -- |
6 |
DR. LANDE: Oh, in your Section 1 versus Section |
7 |
2, I only talked about Section 2 because that is what I |
8 |
thought we were supposed to talk about, but -- |
9 |
DR. WERDEN: It was. |
10 |
DR. LANDE: -- in Section 1, it happens all the |
11 |
time. Think of the advertising restriction cases. |
12 |
Lawyers cannot advertise, dentists cannot advertise, all |
13 |
that kind of thing, durable problems in those markets |
14 |
created by information problems. |
15 |
MR. KLOTZ: But does that analysis enter the |
16 |
question when the court is looking at does the firm have |
17 |
monopoly power or does that monopoly power, as you are |
18 |
defining it, enter in the competitive effects analysis? |
19 |
DR. LANDE: If we are trying to figure out |
20 |
whether other products, other firms compete with the |
21 |
products in question, and how long does it take to enter |
22 |
the market, then I think these issues of deception, in |
23 |
the case of Conwood coercion, imperfect information, |
24 |
would play a role in how long does it take firms to |
25 |
enter the market, what competes with what, what do |
82
1 |
consumers think competes with what, that should all be |
2 |
part of the process. |
3 |
DR. WERDEN: Anybody -- |
4 |
DR. SCHMALENSEE: Just a quick reaction. |
5 |
I think it is worthwhile thinking about |
6 |
information, but I think you cannot paint with too broad |
7 |
a brush. I mean, it is well known that all consumers do |
8 |
not have to be informed for prices to be affected. |
9 |
Depending on the situation, it may be adequate for a |
10 |
small number of informed customers to switch patronage |
11 |
and drive prices into alignment. |
12 |
That said, it may be possible to discriminate |
13 |
against ignorant customers for a long time, and one may |
14 |
want to worry about that. It is an interesting |
15 |
phenomenon that when generics enter the market, the |
16 |
prices of brand name, formerly patented drugs, tend to |
17 |
go up, not down, suggesting power against uninformed |
18 |
buyers, but I guess my sense is that these are probably |
19 |
not typically phenomena that give rise to the level of |
20 |
power that one talks about for a Section 2 case. |
21 |
All of the Rambus allegations sound like |
22 |
something that, could potentially give rise to Section 2 |
23 |
levels of power. I am not involved with the case, and I |
24 |
am not familiar with it. I am not a fan of the Kodak |
25 |
decision, and, I am glad it has not had the impact many |
83
1 |
of us feared. So, I think by and large, these things do |
2 |
not get you to the Section 2 level of monopoly power, |
3 |
but, you know, one wants to keep an open mind. |
4 |
DR. WERDEN: All right. Let me turn to Alan |
5 |
Silberman. |
6 |
You mentioned franchising several times and |
7 |
mentioned a line of franchising cases which almost |
8 |
uniformly have found for the defendant franchisors in |
9 |
these tying and other scenarios, and it seems to me that |
10 |
the courts have generally said, "The contract defined |
11 |
the rights and responsibilities, you knew what the deal |
12 |
was when you signed the contract, and if you got |
13 |
exploited, it was your own fault, you should have |
14 |
negotiated your way around that." It seemed to me that |
15 |
these courts were saying that this might be different |
16 |
from other cases because there was a formal contract |
17 |
defining all these rights and responsibilities. |
18 |
Do you have a similar view, or do you think that |
19 |
there is nothing different about the franchise cases |
20 |
than about other lock-in type scenarios? |
21 |
MR. SILBERMAN: Number one, they got it right in |
22 |
those cases with the possible add-on that it may not |
23 |
have been the contract, it may have been also the |
24 |
disclosures made at the beginning coupled with the |
25 |
contract, but they got it right. So, there is no reason |
84
1 |
to think about lock-in theory as a source of market |
2 |
power in franchising or other distribution relations. |
3 |
Then the question is, can that analysis carry |
4 |
you into other kinds of cases and can you then say, |
5 |
"Well, if, in fact, we are dealing with relational power |
6 |
where we have a sense that there was a competitive |
7 |
process, shouldn't we stop there and not worry about the |
8 |
alleged anticompetitive effect today and simply direct |
9 |
people to deal with these issues at the inception of |
10 |
relationships?" |
11 |
There I think there is room to take that line of |
12 |
thinking and apply it more clearly in other cases, and |
13 |
certainly I think lock-in theory, I do not encounter |
14 |
people, you know, really arguing lock-ins anymore as a |
15 |
source of market power, but essentially to stop the |
16 |
anticompetitive rhetoric in cases that is purely based |
17 |
on, well, either look what you are doing today or a |
18 |
plaintiff claiming I have a civil right to be in |
19 |
business for some segment of your business. In other |
20 |
words, you have designed the product in a certain way, |
21 |
you have succeeded, and now I want to claw back a little |
22 |
part of it for myself. |
23 |
In all those situations, we should be simply |
24 |
responding the way the franchise cases do and say, "The |
25 |
transaction was properly subject to competitive factors, |
85
1 |
they were not impaired at the time the relationships |
2 |
were established, and therefore, end of inquiry." |
3 |
DR. WERDEN: Anybody have another view to add? |
4 |
No? |
5 |
Okay, we are going to do, as we sometimes do in |
6 |
these cases, put up a couple of simple propositions. |
7 |
Okay, we are going to start off simple. Since |
8 |
we talked a lot about technology, and we like to start |
9 |
with things we can agree on and then move from there -- |
10 |
consensus is good -- so we start off with the |
11 |
proposition, "Innovation is a powerful force in |
12 |
enhancing the well-being of consumers," and I doubt that |
13 |
we are going to get a dissent on this, but we can |
14 |
quickly move on if we do not. |
15 |
Okay, not hearing any dissent, so, now what? |
16 |
So, it seems to follow that antitrust analysis in the |
17 |
Section 2 area should be concerned about protecting the |
18 |
innovation process. Can we all agree on that as well? |
19 |
Okay, good. |
20 |
Okay, then the question is, well, how do you do |
21 |
that? That is the hard one, okay, and, of course, this |
22 |
line of logic leads some people to say, well, that means |
23 |
you need to intervene a lot, and it leads other people |
24 |
to say, no, no, no, that means you should hardly ever |
25 |
intervene. Anybody care to weigh in on that debate? |
86
1 |
Yes, Alan? |
2 |
MR. SILBERMAN: No, you do not put barriers in |
3 |
front of people who are attempting to innovate by later |
4 |
saying, "Well, you know, you guessed wrong," or, "It did |
5 |
not really specifically enhance the well-being of a |
6 |
consumer." It is the process. So, the principle ought |
7 |
to be that where the evidence is that you are trying to |
8 |
innovate and you are trying to, in effect, build a |
9 |
better mousetrap, you are doing what we expect |
10 |
competitors to do, and if you succeed, you should get |
11 |
the reward, and if it turns out that you were somewhat |
12 |
mistaken and there was not a direct consumer benefit, |
13 |
the only time we should be very concerned about it is if |
14 |
there is some collateral effect from what you are doing |
15 |
that prevents some other kind of competition. |
16 |
DR. SCHMALENSEE: Yeah, I think the issue is not |
17 |
intervene a lot or intervene a little; it is intervene |
18 |
with care, because this is a process we do not |
19 |
understand terribly well, and avoid obvious pitfalls. |
20 |
The most obvious pitfall is "the competitor, having been |
21 |
urged to compete, must not be turned upon when he wins." |
22 |
That is a natural impulse and is to be resisted not in |
23 |
the face of any possible conduct but is to be resisted |
24 |
since the reward for innovation and major innovation is |
25 |
typically monopoly power for a time. |
87
1 |
DR. WERDEN: Bob? |
2 |
DR. LANDE: I agree with everything that both |
3 |
former speakers said, but still, there is a difference |
4 |
between innovating yourself and trying to prevent others |
5 |
from innovating. There is a difference between running |
6 |
faster to race and putting stumbling blocks deliberately |
7 |
in front of competitors, but, of course, if you are just |
8 |
running faster, then God bless you, and that is |
9 |
wonderful with everybody. |
10 |
DR. SCHMALENSEE: I have no dispute with that |
11 |
statement. |
12 |
DR. WERDEN: Before, Mike, you chime in, I think |
13 |
we do all agree with that statement, but the question |
14 |
is, so? |
15 |
DR. LANDE: Right, right. |
16 |
DR. WERDEN: Do you have anything to add? |
17 |
DR. SCHMALENSEE: The answer is yes. |
18 |
DR. WERDEN: So, what do you do about it? |
19 |
MR. SILBERMAN: Be cautious. |
20 |
DR. WERDEN: How do you draw the line? |
21 |
DR. SCHMALENSEE: Carefully. |
22 |
DR. WERDEN: Okay, we have one answer. |
23 |
All right, we will turn it over to Mike. |
24 |
MR. WILLIAMS: Okay, I wanted to suggest one |
25 |
thing that Preston McAfee and I have talked about from |
88
1 |
time to time, and again, I am not going to talk about |
2 |
the Rambus case, but my point is going to be related to |
3 |
the Rambus case, and that is a conduct that is -- so, I |
4 |
am not an attorney, but so far as I understand it, it is |
5 |
perfectly legal, and that is submarine patents, where a |
6 |
company knows it has a or believes it has a patent that |
7 |
covers what another company is about to engage in, stays |
8 |
silent until the sunk costs are made, all the |
9 |
investments are put in place, and then it holds its hand |
10 |
up and says, "A-Ha, I gotcha." |
11 |
Now, from an economist's perspective, that seems |
12 |
at least arguably like anticompetitive conduct. I mean, |
13 |
so far as I know, it is perfectly legal, but it is |
14 |
certainly not procompetitive. In other words, it is |
15 |
just an odd phenomena that somebody can have |
16 |
intellectual property, keep it hidden, not -- well, |
17 |
hidden in the sense that it is public that they have the |
18 |
patent, if somebody, you know, looked hard enough, but |
19 |
it is hard to find everybody's intellectual property. |
20 |
There is I do not know how many millions of |
21 |
patents that are out there. They know that what they |
22 |
are doing is going to cause an enormous disruption of |
23 |
somebody else's business. They keep quiet, they wait |
24 |
until all the investments have been made, and then they |
25 |
cause havoc, and so far as I know, it is perfectly |
89
1 |
legal. So, I just wanted to suggest that to me that is |
2 |
that is just what I would regard as not very |
3 |
procompetitive conduct. |
4 |
DR. WERDEN: I think we might all agree that |
5 |
that is not nice, but I think we probably all agree that |
6 |
is not in the antitrust laws business. |
7 |
MR. SILBERMAN: Right, it is not part of the |
8 |
antitrust laws business, and if we had the right email |
9 |
inside the company that laid out this procedure, I |
10 |
expect that you would have a great tort remedy, and in |
11 |
certain states in this country, you would get to a jury |
12 |
and you would get a punitive damage verdict that would |
13 |
make treble damages look puny. |
14 |
DR. WERDEN: That would be an interesting case. |
15 |
If you have one, then that is nice. |
16 |
DR. SCHMALENSEE: Just using quasi-rents -- |
17 |
MR. SILBERMAN: My phone number is... |
18 |
DR. LANDE: You do tort law, too? |
19 |
MR. SILBERMAN: That is all antitrust is, is |
20 |
tort law. |
21 |
DR. LANDE: True. |
22 |
DR. WERDEN: I do not think we are going to all |
23 |
agree on that one. |
24 |
DR. SCHMALENSEE: No, no, we are not. |
25 |
DR. WERDEN: Okay, next -- and last -- of these |
90
1 |
propositions -- we only had two. "A competitive |
2 |
foremarket precludes monopoly power in the aftermarket." |
3 |
This one might be more controversial than the |
4 |
last one. This, of course, was basically what Kodak was |
5 |
saying in the Kodak case, and the Supreme Court sort of |
6 |
kind of said, "No, we don't think so," but a lot of |
7 |
people say the court got that one wrong. |
8 |
DR. LANDE: Well, I mean, Alan and I sort of |
9 |
disagree on this one. We each addressed the issue, and |
10 |
I think we are going to have to agree to disagree on |
11 |
this one. |
12 |
MR. SILBERMAN: Well, I am going to give you a |
13 |
little different view of this, and this is a private and |
14 |
maybe practical analysis, but I believe that the |
15 |
discussion in the opinions was framed, unfortunately, by |
16 |
the way Judge Schwarzer handled the issue in the |
17 |
District Court. That is, Judge Schwarzer, being a great |
18 |
advocate of summary judgment, strong-armed the issue, an |
19 |
issue that should have required proof, and said instead, |
20 |
"No, it can never be. There is no case in which, given |
21 |
a competitive foremarket, there can ever be downstream |
22 |
monopoly power under any circumstances." |
23 |
Well, that is wrong. It was wrong, and had he |
24 |
allowed the parties to develop a record in the trial |
25 |
court on that issue, then the issue I believe thereafter |
91
1 |
would have been clearer, because my guess is that |
2 |
Kodak's position was correct, but it was a position that |
3 |
requires proof. |
4 |
DR. WERDEN: I do not think you mischaracterized |
5 |
what happened, but I would add that on opposing summary |
6 |
judgment, the plaintiff was perfectly permitted to lay |
7 |
out whatever theories he wanted to lay out and stick in |
8 |
whatever economists' affidavits he wanted to stick in |
9 |
and make whatever allegations he wanted to make about |
10 |
market power in copiers and micrographics and kind of |
11 |
passed on all of that. |
12 |
MR. SILBERMAN: Um-hum. |
13 |
DR. WERDEN: But not in the Supreme Court. In |
14 |
the Supreme Court, he had evidence and arguments on all |
15 |
of these points, including, Bob Lande, that Kodak had |
16 |
monopoly power in both copiers and micrographics with a |
17 |
market share of over 70 percent. |
18 |
DR. LANDE: Really? |
19 |
DR. WERDEN: Really. |
20 |
DR. LANDE: I got the 20 and 23 percent. I |
21 |
think I got it from the District Court opinion, but -- |
22 |
DR. WERDEN: You may well have. |
23 |
DR. LANDE: -- I could check that, but anyway, |
24 |
so it changed by the time they got to the Supreme Court? |
25 |
DR. WERDEN: Nobody ever decided what the |
92
1 |
relevant markets were. |
2 |
DR. LANDE: Right, right. |
3 |
DR. WERDEN: And the plaintiff, who might have |
4 |
had a live claim that there was a market in which Kodak |
5 |
was a monopoly, chose to make that argument only in the |
6 |
Supreme Court. |
7 |
Anybody else want to weigh in on aftermarkets, |
8 |
any related issues? |
9 |
DR. SCHMALENSEE: I think -- |
10 |
DR. WERDEN: I think we have dealt with them -- |
11 |
DR. SCHMALENSEE: -- "preclude" may be -- I |
12 |
would almost go there. I would say establishes a very |
13 |
strong presumption, a rebuttable presumption, but a |
14 |
strong presumption. Not market power. When you say |
15 |
market power -- monopoly power, yes. I will give you |
16 |
market power. I do not think it establishes a |
17 |
presumption there, but as to the level and durability of |
18 |
market power that rises to monopoly power level with |
19 |
competition in the foremarket -- it can happen but I |
20 |
think there is a strong presumption of against. |
21 |
MR. KLOTZ: You are suggesting there is a |
22 |
difference between market power and monopoly power. |
23 |
Where are you drawing those lines and where do others |
24 |
draw those lines? |
25 |
DR. SCHMALENSEE: Well, I think it is a |
93
1 |
difference of degree, not of kind, and I do not have a |
2 |
firm doctrine in my head as to where the line should be |
3 |
drawn. I think it has to do with the extent of power |
4 |
over price and the durability of power over price, but |
5 |
they are both about power over price. |
6 |
DR. WERDEN: If the law were as you would have |
7 |
it be, then what is it that a plaintiff would do in |
8 |
opposing summary judgment in one of these cases in order |
9 |
to say, "A-ha, this is the exception"? |
10 |
DR. SCHMALENSEE: Introduce the kind of evidence |
11 |
that would be required to show monopoly power, period. |
12 |
Well, there is a danger in talking when you have not |
13 |
thought through a subject, and this is not one on which |
14 |
I have spent a lot of time, but I think the presumption |
15 |
is that competition in the foremarket makes even |
16 |
considerable short-run power in the aftermarket have |
17 |
less durability than one would want for a Section 2 |
18 |
claim. |
19 |
Now, I mean, if the things last 100 years and |
20 |
you are locked in forever you can surely make a |
21 |
durability claim, but a short-lived capital good does |
22 |
not strike me as having that level of durability. |
23 |
DR. WERDEN: And do you have any view you are |
24 |
willing to share about where you draw that durability |
25 |
line? Is it two years? Is it ten years? |
94
1 |
DR. SCHMALENSEE: No. |
2 |
DR. WERDEN: No view you mean? |
3 |
DR. SCHMALENSEE: No -- no thoughtful view, no. |
4 |
I have not thought about it. |
5 |
DR. WERDEN: Anybody want to weigh in on |
6 |
durability? |
7 |
Bob? |
8 |
DR. LANDE: It really comes down to what do we |
9 |
consider de minimus; that is, maybe in the best of all |
10 |
worlds, if we were omniscient intervenors, we would |
11 |
roust every little bit of market power that lasts even |
12 |
for a month, but you say, "Well, look, hey, that is |
13 |
ridiculous. We are imperfect. The world does not work |
14 |
that way." If it is less than two years, forget about |
15 |
it, there is nothing you can do about it given that |
16 |
every case takes five years. You just have to have a de |
17 |
minimis standard and you forget about it. |
18 |
So, if we said 10 percent for two years is de |
19 |
minimus, okay, let's just forget about that as a |
20 |
practical matter. If you think we should draw the line |
21 |
a little different, you know, reasonable people can |
22 |
disagree, but two years, 10 percent, seems like a |
23 |
reasonable de minimus standard to me. |
24 |
DR. WERDEN: Well, is de minimus really the |
25 |
right concept here? We are talking about monopoly power |
95
1 |
now. |
2 |
DR. LANDE: If you were to say do I like it if I |
3 |
have to pay 5 percent more for a month due to a merger? |
4 |
No, I do not like it, but as a practical matter, the |
5 |
world's not perfect, you cannot intervene everywhere, we |
6 |
are never sure, et cetera, et cetera, so if it is less |
7 |
than 10 percent for two years, I am willing to say let's |
8 |
forget it. |
9 |
DR. WERDEN: But my question then is, are you |
10 |
suggesting that the law should view Section 7 and |
11 |
Section 1 and Section 2 all in the same terms, or should |
12 |
the bar be higher in a single-firm conduct case, which |
13 |
the Supreme Court has said that it is higher? |
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DR. LANDE: Now, if you mean a per se |
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violation -- as you know, if you fix prices, we do |
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not -- |
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DR. WERDEN: No, I do not. |
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DR. LANDE: Okay. Are you talking about mergers |
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then? |
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DR. WERDEN: Mergers, rule of reason Section 1 |
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cases. |
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DR. LANDE: Merger is supposed to be |
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prophylactic. It is supposed to have a lower standard |
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than for monopolization. |
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DR. WERDEN: Okay, forget about mergers then, |
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because you have got a point there. So, let's just talk |
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about the Sherman Act. The Supreme Court has said there |
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is a significant difference -- some people say they are |
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wrong, I guess -- between Section 1 and Section 2 on the |
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standards for intervention. They say this is clearly |
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part of the scheme Congress contemplated, and we are |
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going to carry that scheme out. |
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DR. LANDE: But you are not talking about the |
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per se cases? |
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DR. WERDEN: No. |
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DR. LANDE: So it is rule of reason Section 1 |
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versus Section 2? |
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DR. WERDEN: Yes. |
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DR. LANDE: Should there be a different standard |
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for market definition, market power, monopoly power? |
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DR. WERDEN: Well, again, we keep coming back to |
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market versus monopoly power, how durable it has to be, |
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and what is the standard for intervention? I think -- |
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we will put this to the panel, but I would hope there is |
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a consensus that to be a monopolist, even as the law |
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defines that term, requires a whole lot more than merely |
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to possess the market power that might be required for a |
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threshold showing in a Section 1 case. |
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DR. LANDE: Sure. |
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MR. WILLIAMS: Greg, can I -- the FERC I know |
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1 |
has asserted I believe monopoly power in hourly |
2 |
electricity markets, and that is not very durable. |
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DR. WERDEN: I do not know why they would have |
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any occasion to even use the term, and if they did, it |
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would not really have any consequence, because they are |
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not enforcing Section 2 of the Sherman Act. |
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MR. WILLIAMS: Right, but they certainly have |
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tried to -- they have defined relevant markets that |
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consisted of very short time periods. |
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DR. WERDEN: So have we in the Department of |
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Justice in merger cases defined that, but -- |
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MR. WILLIAMS: And if you -- |
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DR. WERDEN: -- these are conditions that recur |
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over and over again forever. |
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MR. WILLIAMS: Exactly, exactly, that is the |
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question. |
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DR. SCHMALENSEE: If you always own the peak |
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market in LA for 20 years, the fact that it is of fairly |
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short duration does not matter. It is the long duration |
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of control. |
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DR. WERDEN: And, of course, if it was one hour, |
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then the de minimus standard might kick in, and you say, |
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"One hour? Come on, that is not what we are worried |
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about." |
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DR. SCHMALENSEE: Give me LA for one hour. |
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DR. WERDEN: I said "might." |
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All right, well, I will give everybody one last |
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chance, and if there is nothing more to be said, then we |
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will call it a day. |
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DR. SCHMALENSEE: Wow. |
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DR. WERDEN: Okay? |
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All right, then we stand adjourned. As I said |
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at the outset, the next round of hearings on remedies |
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issues will be I believe March 25th and 6th -- no, 28th |
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and 9th -- later this month. Look it up. Anyway, later |
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this month. Stay tuned, watch the web sites. About a |
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day before the hearing, we will post something. |
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(Applause.) |
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(Whereupon, at 11:58 a.m., the hearing was |
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adjourned.) |
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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 |
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CASE TITLE: SECTION 2 HEARING |
4 |
DATE: MARCH 8, 2007 |
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|
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I HEREBY CERTIFY that the transcript contained |
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herein is a full and accurate transcript of the notes |
8 |
taken by me at the hearing on the above cause before the |
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FEDERAL TRADE COMMISSION to the best of my knowledge and |
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belief. |
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|
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DATED: 3/12/2007
|
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|
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|
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|
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SUSANNE BERGLING, RMR-CLR
|
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|
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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 |
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|
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I HEREBY CERTIFY that I proofread the transcript |
21 |
for accuracy in spelling, hyphenation, punctuation and |
22 |
format. |
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|
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|
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DIANE QUADE
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