Steven C. Salop Presentation

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Anticompetitive Overbuying

Steven C. Salop
Georgetown University Law Center
CRA International

FTC Hearings
June 21, 2006

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Anticompetitive Exclusion

• Two distinct exclusion paradigms
  • Predatory pricing (on seller side)
  • Raising rivals’ costs (“RRC”) (non-price predation)
• RRC raises greater antitrust concerns
  More likely to succeed and harm consumers
  • No need to induce competitors to exit
  • No need for short-run profit sacrifice
  • No inherent short-run consumer benefit
    • RRC can cause immediate consumer harm

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Anticompetitive Overbuying

• Two distinct overbuying allegations
  • Predatory overbuying (predatory bidding)
  • Raising rivals’ costs (“RRC”) overbuying
• Allegations correspond analytically to the two anticompetitive paradigms

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Antitrust Evaluation: Predatory Overbuyinig

• Goal: Buyer-side mkt power in input (upstream) market
• 4-step legal standard
  • Buyer power and artificially inflated input purchasing
    • Is increased purchasing “artificial”
    • “Warehousing” inputs raises greatest concerns
    • Require proof of purchasing to point where output price below-cost (i.e., MRP < input price)(Brooke Group)
  • Exit or permanent capacity reduction by input market competitors
  • Recoupment thru buyer-side monopsony power in input market
  • Net consumer harm on balance over entire time frame (predatory + recoupment periods)

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Antitrust Evaluation: RRC Overbuying

• Goal: Seller-side mkt power in output (downstream) market
• 4-step legal standard
  • Buyer power and artificially inflated input purchasing
    • Is increased purchasing “artificial”
    • “Naked” purchasing and “Warehousing” inputs raise greatest concerns
    • Do not require proof of purchasing to point where output price below-cost (i.e., MRP < input price)
  • Raising rivals costs (harm to competitors)
  • Downstream mkt power over price (harm to competition)
  • Net consumer harm: Benefits to consumers from procompetitive benefits do not outweigh consumer harms from market power
• Step-1 standard for RRC overbuying is more interventionist because of greater competitive concerns than for predatory overbuying
• “Consumer harm” means true consumer welfare standard

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Economic Welfare Standards

• True consumer welfare standard
  • Consumer surplus
• Total welfare standard
  • Total surplus
  • Bork’s deception? or just confusion?
• Why use true consumer welfare standard?
  • Does not permit competitor injuryto trump consumer benefits
    • But, total welfare standard does --Did Bork know?
  • Consistent with precedent
  • Simpler to evaluate (price and output)
  • Induces efficient conduct
    • Firm can marginally restructure transaction in efficient way to eliminate consumer harm
      • Offsets inability of courts/agencies to rigorously apply less restrictive alternative std or gain full information about potential alternatives, thereby preventing inefficiencies
    • Supports innovation

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Innovation Incentives

Consider impact on innovation incentiveswhen standards focus on short-run effects

• Consumer welfare standard supports greater overallinnovation incentives
  • TW std allows dominant firm to destroy higher cost rivals thatwould innovate, thereby reducing innovation
  • TW std allows mergers that eliminate competition, leadingmerged firm to have less incentive to innovate
  • These harms likely are larger than any efficiency benefits from allowing mergers or exclusionary conduct that modestlyreduce costs, while leading to higher prices to consumers
• Thus, using the consumer welfare std leads to higher long-run total welfare, plus higher long-run consumer welfare.