1 |
1 | UNITED STATES FEDERAL TRADE COMMISSION
| 2 | and
| 3 | UNITED STATES DEPARTMENT OF JUSTICE
| 4 |
| 5 |
| 6 |
| 7 | SHERMAN ACT SECTION 2 JOINT HEARING
| 8 | UNDERSTANDING SINGLE-FIRM BEHAVIOR
| 9 | SECTION 2 POLICY ISSUES
| 10 | TUESDAY, MAY 1, 2007
| 11 |
| 12 |
| 13 |
| 14 |
| 15 | HELD AT:
| 16 | UNITED STATES FEDERAL TRADE COMMISSION
| 17 | CONFERENCE CENTER
| 18 | 601 NEW JERSEY AVENUE, N.W.
| 19 | WASHINGTON, D.C.
| 20 | 1:00 P.M. TO 5:00 P.M.
| 21 |
| 22 |
| 23 | Reported and Transcribed by:
| 24 | Susanne Bergling, RMR-CLR
| 25 | |
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1 | MODERATORS:
| 2 | William Blumenthal
| 3 | General Counsel
| 4 | Federal Trade Commission
| 5 | and
| 6 | Dennis W. Carlton
| 7 | Deputy Assistant Attorney General for Economic Analysis
| 8 | Department of Justice
| 9 |
| 10 | PANELISTS:
| 11 |
| 12 | William J. Baer
| 13 | Jonathan B. Baker
| 14 | Stephen Calkins
| 15 | Einer R. Elhauge
| 16 | Jonathan M. Jacobson
| 17 | William J. Kolasky
| 18 | Thomas G. Krattenmaker
| 19 | Janet L. McDavid
| 20 | Robert D. Willig
| 21 |
| 22 |
| 23 |
| 24 |
| 25 | |
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1 | C O N T E N T S
| 2 |
| 3 | Introduction........................................................................................................................................................ 4
| 4 |
| 5 | Moderated Discussion:
| 6 | By Mr. Blumenthal......................................................................................................................................... 5
| 7 | By Mr. Carlton............................................................................................................................................. 89
| 8 |
| 9 | Conclusion.........................................................................................................................................................162
| 10 |
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1 | P R O C E E D I N G S
| 2 | - - - - -
| 3 | MR. BLUMENTHAL: Well, good afternoon,
| 4 | everybody. I am Bill Blumenthal from the FTC staff, and
| 5 | I am one of the moderators for our program this
| 6 | afternoon.
| 7 | This is the first of two sessions we are going
| 8 | to be conducting to wrap up the series of hearings that
| 9 | I think, as all of you know, DOJ and the FTC have been
| 10 | conducting jointly for the past year or so into issues
| 11 | posed by Section 2, and more generally, dominance and
| 12 | monopolization and single-firm conduct.
| 13 | I had the honor to moderate the first of the
| 14 | hearings that we had. That was the kick-off on June
| 15 | 20th of 2006, where the speakers were FTC Chairman
| 16 | Debbie Majoras, AAG for Antitrust Tom Barnett, Dennis
| 17 | Carlton when he was still a professor in the private
| 18 | sector, and Herb Hovenkamp, and basically today and next
| 19 | week we are coming full circle.
| 20 | Dennis, now in the Antitrust Division, will be
| 21 | joining us as co-moderator a little later this
| 22 | afternoon, and Tom and Debbie will be co-moderating the
| 23 | final, final hearing a week from today, Tuesday, May
| 24 | 8th, from 9:00 a.m. until 1:00 p.m., and at that point
| 25 | we will turn our attention to next steps. |
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1 | I want to thank the FTC and DOJ staffs for
| 2 | organizing this session. Today's hearing is going to be
| 3 | different from the way we have done all of the hearings
| 4 | up until now in this series. All of the ones to date
| 5 | have been basically set presentations with a little bit
| 6 | of Q&A at the end, and instead, today's entire session
| 7 | is unscripted.
| 8 | Dennis and I will be posing questions and asking
| 9 | the panel to respond and to discuss, and we are honored
| 10 | to have with us a truly all-star group. Both today and
| 11 | next week, we have truly all-star panels of
| 12 | practitioners, consultants, and academics who I think
| 13 | are basically of the caliber that we need to be able to
| 14 | handle the extemporaneous back and forth that we are
| 15 | going to have.
| 16 | Let me introduce all of them. They will be
| 17 | brief inductions. More detailed bios are available in
| 18 | the bio packet, copies of which are on the table as you
| 19 | enter the Conference Center, and I think probably all of
| 20 | these folks are known to you, but I will just go down
| 21 | for the record. Starting.
| 22 | With Bill Baer, down at the end, a partner at
| 23 | Arnold & Porter and former Director of the Bureau of
| 24 | Competition at the FTC. Jon Baker, Professor at
| 25 | American University and a former Director of the FTC's |
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1 | Bureau of Economics. Steve Calkins, former General
| 2 | Counsel and a Professor at Wayne State. Einer Elhauge,
| 3 | who is a Professor at Harvard Law School, and I might
| 4 | add, I see the prop right there. Hold it up. The
| 5 | author, co-author, of the just released Foundation Press
| 6 | Case book, the first, I believe, to deal with the topic
| 7 | of multi-jurisdictional competition law.
| 8 | John Jacobson, a partner at the Wilson Sonsini
| 9 | firm and a member of the Antitrust Modernization
| 10 | Commission. Shifting over to this side, Bill Kolasky, a
| 11 | partner at WilmerHale and a former Deputy AAG in the
| 12 | Antitrust Division. Tom Krattenmaker, Of Counsel of the
| 13 | Wilson Sonsini firm, more recently; before that, a front
| 14 | office advisor at the FTC, and before that, a Professor
| 15 | with an illustrious career in academia. Jan McDavid,
| 16 | partner at Hogan & Hartson, and Bobby Willig, Professor
| 17 | of Economics and Public Policy at Princeton and, years
| 18 | ago, one of the Deputy AAGs in the Antitrust Division
| 19 | front office.
| 20 | DR. WILLIG: Not like decades. You didn't say
| 21 | MR. BLUMENTHAL: We were all young.
| 22 | With Bill Baer, down at the end, a partner at
| 23 | Okay, before we start, some housekeeping
| 24 | matters. Actually, I have to check my own. Cell
| 25 | phones, BlackBerries, other electronic devices, please |
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1 | turn them into vibrate or manner mode. While we are on
| 2 | cell phones, Steve Calkins has asked me to let you know
| 3 | that if he has to step out to take a call, it was
| 4 | because it was unavoidable. One of his classes is
| 5 | having its final exam right now in Michigan -- well, it
| 6 | starts in 25 minutes -- but in Michigan, and he is
| 7 | standing by for the sorts of emergencies that sometimes
| 8 | come up.
| 9 | MR. CALKINS: So, if my phone rings, that is bad
| 10 | news, and it means I blew it and need to grab a file and
| 11 | run away and answer a stupid question.
| 12 | DR. WILLIG: It means we are all posed a new
| 13 | question; namely, the one on your exam.
| 14 | MR. CALKINS: Right.
| 15 | MR. BLUMENTHAL: Speaking of emergencies,
| 16 | second, in case the building alarms go off, stay calm,
| 17 | follow instructions -- we do this at every one of
| 18 | these -- and if you must leave the building, you are
| 19 | supposed to exit from the New Jersey Avenue exit by the
| 20 | guard's desk out here. Please follow the stream of FTC
| 21 | staffers who are leaving the building to a gathering
| 22 | point and await further instruction and stay calm.
| 23 | Third, restrooms, outside the double doors,
| 24 | across the lobby, just follow the signs.
| 25 | Finally, we ask that you not make comments or |
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1 | ask questions during the session, but we are going to
| 2 | take a break around 2:45 or 3:00, and if people want to
| 3 | slip questions to the moderators, we will, if they are
| 4 | reasonable questions, find a way to work those in.
| 5 | Okay, with that, we will start the round table
| 6 | discussion, and the first question to the panel -- we
| 7 | can do this in reverse alphabetical order, we are going
| 8 | to start with Bobby Willig down at that end and work
| 9 | around -- but I want to start with the broad picture
| 10 | question, and I will ask it three different ways, and
| 11 | take whichever variation you want to use.
| 12 | What do you regard as the one or two issues that
| 13 | the agencies most urgently need to address in the
| 14 | Section 2 report, or if you prefer to think of it a
| 15 | slightly different way, what are the one or two things
| 16 | we ought to be trying to achieve in the report, or what
| 17 | do you regard as the one or two biggest problems in
| 18 | Section 2 doctrine as it stands today?
| 19 | If you don't want to do one or two, if you want
| 20 | to do three or four, that is okay, but let's just work
| 21 | around the horn with Bobby Willig, you first.
| 22 | DR. WILLIG: Well, thank you, thank you. You
| 23 | connect your commentary on my age to the difficulty of
| 24 | the question to be posed, somebody -- with the number of
| 25 | years behind me -- of course, you have been at the front |
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1 | the whole time, so...
| 2 | I have read through these 15 pages, the extant
| 3 | agenda as of at least yesterday, called "Questions for
| 4 | Hearing." There are many sections of these questions.
| 5 | The first section is called "General Standards." There
| 6 | follows many, many other sections about particular areas
| 7 | of conduct. Each of the sections, in essence, as I read
| 8 | them, poses the same question, and it is the fundamental
| 9 | question that makes these very exciting times for those
| 10 | who like to think about Section 2, competition, and firm
| 11 | conduct, and that is, what should our attitude be as an
| 12 | enforcement community, as a competition policy
| 13 | community? What should our overall philosophy be in
| 14 | considering the everyday legal and counseling issues
| 15 | that arise under Section 2?
| 16 | Is there a philosophy that should come out of
| 17 | academia that should generate particular standards for
| 18 | various contexts and various practices? Should there be
| 19 | one philosophy that actually itself applies in every
| 20 | context and to every set of practices? Or is it really
| 21 | hopeless and all we can do is blunder along in each
| 22 | separate context and make use of whatever experience we
| 23 | have, which differs from context to context, and use the
| 24 | accumulation of case law and footnotes and various
| 25 | economic articles and give up for another decade or so |
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1 | some sort of overall, coherent view of philosophy in
| 2 | forming standards, in forming particular lines of useful
| 3 | evidence?
| 4 | This to me is the big question of the day. It
| 5 | is an exciting question. It is really at its peak in
| 6 | terms of the span of time that I have spent in this
| 7 | profession right now, and around this horseshoe, and
| 8 | once again a few days from now, are the leading mouths,
| 9 | if not the leading minds, of the community, and if not
| 10 | us, who, and if not now, then when?
| 11 | What makes this worthwhile from my point of view
| 12 | is that, look, if we spend four hours and actually make
| 13 | some progress on it all -- and there is enough of a
| 14 | chance of that in my mind to have motivated the train
| 15 | trip -- it will be an even more exciting time as we can
| 16 | move forward from that kind of progress. So, I would
| 17 | hope that we can do that. I would hope we set ourselves
| 18 | to that task as a group. If we make any progress at all
| 19 | in that respect, I would hope that the organizers and
| 20 | the authors of the subsequent report highlight that and
| 21 | say it as clearly as possible -- within the bounds of
| 22 | politeness in any event -- because such a move by such a
| 23 | group will actually help enormously in terms of framing
| 24 | where we go in the journals and even where we go in case
| 25 | decision-making over the next decade. |
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1 | That would be my thoughts.
| 2 | MR. BLUMENTHAL: We will talk about general
| 3 | standards.
| 4 | Jan, same question.
| 5 | MS. McDAVID: Well, first of all, I want to
| 6 | applaud the agencies for doing this. These hearings and
| 7 | the AMC hearings and report have really provided a
| 8 | wonderful opportunity to consider the questions that
| 9 | have been vexing many of us in antitrust law for a very
| 10 | long time, and I think it has provided a terrific forum.
| 11 | The AMC report -- congratulations Jonathan and to the
| 12 | staff and to the other commissioners -- it is a
| 13 | wonderful piece of scholarship and provides a lot of
| 14 | useful guidance, and I hope this report will do the
| 15 | same.
| 16 | I would make two relatively simple pleas. The
| 17 | first would be practical advice. On a day-to-day basis,
| 18 | the issues governing Section 2 are applied by
| 19 | businesspeople, inside counsel, and outside counsel in a
| 20 | counseling setting, applying these standards to real
| 21 | life business questions as they arrive without the
| 22 | benefit of Dr. Willig and his colleagues and --
| 23 | DR. WILLIG: I am always ready to serve.
| 24 | MS. McDAVID: -- I know, but it is rarely
| 25 | practical here -- trying to determine whether there is |
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1 | or is not a price above average variable cost, or
| 2 | whatever measure of cost one might be thinking to apply.
| 3 | So, try to provide some practical guidance that can
| 4 | actually be used to provide horseback advice, which is
| 5 | what most of us do on a day-to-day basis. You can also
| 6 | do the deep thinking, but we need some guidance in that
| 7 | way.
| 8 | I would eschew the request for the Holy Grail.
| 9 | The question as to whether there is a single standard
| 10 | that should be applicable to all conduct under Section 2
| 11 | I think is probably an interesting intellectual
| 12 | exercise, but I would be very surprised if there is one.
| 13 | I do not think there is. Everything I have read
| 14 | recently leads me to think that it is very
| 15 | fact-specific, and that should not surprise us.
| 16 | Antitrust analysis is inherently very fact-specific and
| 17 | very dependent on the particular effects of the
| 18 | particular conduct at issue and the justifications for
| 19 | it, and so I would eschew the quest for the Holy Grail
| 20 | and a single standard.
| 21 | MR. BLUMENTHAL: Tom Krattenmaker?
| 22 | MR. KRATTENMAKER: Thanks, Bill.
| 23 | I agree with Jan, I think the hearings and the
| 24 | AMC have been terrific contributions to antitrust
| 25 | jurisprudence, and everybody should be congratulated for |
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1 | them. I have had the great good fortune in my life to
| 2 | spend a fair amount of time on the enforcement side and
| 3 | an even longer time on the academic side, and from the
| 4 | enforcement side, my recommendation to those of you
| 5 | writing the report, Bill, and your colleagues, is that
| 6 | you should follow the path of the article "Cheap
| 7 | Exclusion" in the 2005 Antitrust Law Journal, of which I
| 8 | am a very junior author. That article tries to explain,
| 9 | at least in terms of enforcement priorities, there is
| 10 | behavior out there that is relatively cheap to engage in
| 11 | and oftentimes, nevertheless, promises large and durable
| 12 | pockets of market power, and that is where enforcers
| 13 | ought to be looking, and I still believe that is the
| 14 | case.
| 15 | From my academic studies of Section 2, the
| 16 | conclusion I draw or drew and still do is that when you
| 17 | have got a Section 2 case, you begin with remedies; you
| 18 | do not end with remedies. I think the landscape is
| 19 | littered with Section 2 cases, that when they were all
| 20 | over, there was a victory, but it was completely
| 21 | pyrrhic. Sort of the best metaphor I have is that we
| 22 | were given 15 pages of very, very good questions for
| 23 | this session, and the last page was about remedies. The
| 24 | next time you do this, make the first page about
| 25 | remedies. Before you start to talk about Alcoa, tell me |
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1 | the remedy; before you start to talk about Aspen Ski,
| 2 | tell me the remedy; before you bring the Microsoft case,
| 3 | talk about what the remedy is. So, I would hope the
| 4 | report will focus on remedies a lot. That is
| 5 | substantively.
| 6 | In terms of what I think the report might
| 7 | achieve -- and as Bill knows, I have also had the chance
| 8 | to be Mr. Inside on this, because I had something to do
| 9 | with setting up some of these hearings in a different
| 10 | life -- I would like to see the report call for
| 11 | contributions from outside what I call the fraternity.
| 12 | There are a whole bunch of people in here that belong to
| 13 | the antitrust fraternity. One of the things I learned
| 14 | is -- and maybe it is, again, because I had another
| 15 | life -- is that we actually do not know everything that
| 16 | is relevant to antitrust. I will give you two examples.
| 17 | If you want to learn about immunities, you ought
| 18 | to go talk to somebody who does Constitutional law and
| 19 | public choice. You will be shocked if you think you
| 20 | know what Noerr Pennington is about if you go talk to
| 21 | somebody who only does First Amendment law. Find me a
| 22 | Noerr Pennington case that has the phrase "commercial
| 23 | speech doctrine" in it. Find me a Noerr case that says
| 24 | we are dealing here with a content-neutral statute that
| 25 | serves an important governmental interest and is |
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1 | entirely unrelated to the suppression of free
| 2 | expression. These phrases are littered throughout First
| 3 | Amendment jurisprudence, and they have never been tied
| 4 | in, because somehow Noerr became captured by the
| 5 | antitrust people and not by the First Amendment people.
| 6 | The second example, which I do not have as much
| 7 | familiarity with -- as you would probably guess, I used
| 8 | to be a First Amendment teacher -- is what about, as Jan
| 9 | referred to, people are confused to some extent.
| 10 | Section 2 law contains many vague admonitions and
| 11 | somewhat inconsistent admonitions. How does this affect
| 12 | business decision-making? I do not know the exact
| 13 | phrase, but there is something like behavioral
| 14 | psychologists, and they are out there in universities
| 15 | and they are in business schools, and you could ask
| 16 | people to come tell you about what difference it makes
| 17 | if you have trouble guessing exactly what the rule is.
| 18 | I really do not know what the outcome is going
| 19 | to be, because it is not my field, but instead of having
| 20 | somebody in here all the time telling us, "Our clients
| 21 | cannot possibly live under that rule of law," or as I
| 22 | now tell people, "My clients cannot possibly live under
| 23 | this vague standard," we have got people out there who
| 24 | might actually be able to address those questions.
| 25 | Finally, I hope that the first sentence of the |
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1 | report will be, "The fundamental purpose of the
| 2 | antitrust enforcement program at the antitrust agencies
| 3 | is to prevent firms from acquiring and exercising market
| 4 | power to the detriment of consumers." If you write that
| 5 | as your first sentence -- it is the second sentence of
| 6 | the "Cheap Exclusion" article -- I think you will get
| 7 | everything else right. I think your first legal point
| 8 | should be as follows: "Predatory pricing is not the
| 9 | only paradigm."
| 10 | Thank you.
| 11 | MR. BLUMENTHAL: Bill Kolasky, what are the one
| 12 | or two or four things we ought to address?
| 13 | MR. KOLASKY: First of all, I want to join Jan
| 14 | and Tom in complimenting the agencies in having these
| 15 | hearings. I think that it is very important and very
| 16 | useful, especially when the European Commission is going
| 17 | through a similar process on the other side of the
| 18 | Atlantic and has put out a very thoughtful discussion
| 19 | paper, which is I think both provocative and in some
| 20 | ways troubling, while still being reassuring in other
| 21 | ways.
| 22 | I would say three things very quickly. First, I
| 23 | think it is very important that the report focus on what
| 24 | the analytical framework for applying Section 2 ought to
| 25 | be, and I prefer to think about it in terms of an |
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1 | analytical framework rather than general standards.
| 2 | Because antitrust is highly fact-specific, I do not
| 3 | think you can have general standards. I think you need
| 4 | a sound analytical framework that you apply through our
| 5 | traditional common law means.
| 6 | I actually think that has worked quite well in
| 7 | the Section 2 area but that we have in some ways lost
| 8 | sight of the analytical framework that Chief Justice
| 9 | White first conceived way back in Standard Oil and
| 10 | applied to Section 2 as well as to Section 1, and that
| 11 | is the rule of reason, and I think that that is the
| 12 | framework that we should go back to applying under
| 13 | Section 2.
| 14 | Second, I think it is very important that we
| 15 | focus attention on what is happening on the other side
| 16 | of the Atlantic and that we continue to have a dialogue
| 17 | about how we should apply our antitrust and competition
| 18 | laws to unilateral conduct, and I think there are at
| 19 | least three areas that I would focus on there.
| 20 | The first and most general is the extent to
| 21 | which antitrust authorities -- I hesitate to call them
| 22 | regulators -- should intervene in the operation of
| 23 | markets and substitute their judgment for the judgment
| 24 | of markets. When I say that the European Commission's
| 25 | discussion paper is troubling in some respects, it is |
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1 | because, while the discussion is extremely
| 2 | sophisticated, it is very difficult to imagine how you
| 3 | would reach decisions, taking into account all of the
| 4 | factors that the discussion paper puts forward with
| 5 | respect to many types of unilateral conduct, and what
| 6 | that suggests, again, is, as with Section 1, we
| 7 | basically need a sound analytical framework and a set of
| 8 | presumptions that we then apply case by case.
| 9 | Second, I think we need to pay close attention
| 10 | to the whole issue of compulsory access to intellectual
| 11 | property, because that is the area in which
| 12 | decision-making by one competition authority can have
| 13 | the greatest spillover effects on other economies.
| 14 | Third, in that regard, I think we need to
| 15 | restore a greater role for the notion of international
| 16 | comity, the idea that one jurisdiction will defer to
| 17 | another jurisdiction which has more substantial and
| 18 | significant contacts with the conduct at issue.
| 19 | Then third and finally, I think that it would be
| 20 | very useful, in whatever reports come out of this
| 21 | hearing, for the report to address particular types of
| 22 | unilateral conduct on which the law is now most
| 23 | confused, and the one that springs to mind immediately
| 24 | is the whole subject of bundled discounts.
| 25 | I think it is a very difficult subject. It is |
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1 | certainly not one on which I would pretend to have the
| 2 | answers, but I think the law, after LePage's, is
| 3 | extremely confused in that area, making it very
| 4 | difficult for us to counsel our clients.
| 5 | MR. BLUMENTHAL: Jonathan?
| 6 | MR. JACOBSON: Bill, thanks.
| 7 | I agree largely with what all of the panelists
| 8 | have said so far, particularly Jan's comment on
| 9 | counseling and Bill's endorsement of it. I think
| 10 | counseling in the single-firm conduct area is extremely
| 11 | difficult. Clients want to obey the law. They want to
| 12 | be able to engage in activities that are not going to
| 13 | get them sued or investigated, and today, there are a
| 14 | couple of areas, in particular, where counseling is
| 15 | extremely difficult.
| 16 | One of them certainly is bundling. I do think
| 17 | some clarity in bundling is desirable. I am fond of the
| 18 | AMC's proposed test for bundling, which I do not think
| 19 | is intended by anyone as sort of a final measure on it
| 20 | but is sort of an interim measure until something better
| 21 | comes along, and I am sure we will discuss that in more
| 22 | detail today.
| 23 | The second area where counseling is extremely
| 24 | difficult is refusals to deal, and, in particular, how
| 25 | do you deal with a rival in the same market, the Aspen |
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1 | context; how do you deal with a rival in an adjacent
| 2 | market, Otter Tail and numerous other cases, AT&T; what
| 3 | is the standard for refusals to deal with customers and
| 4 | suppliers that impact horizontal competition in the
| 5 | defendant's market? There is no accepted standard for
| 6 | these areas. The issue arises constantly, and
| 7 | businesses are in dire need of some guidance on how to
| 8 | conduct their affairs in these areas.
| 9 | Then, just sort of going upwards to the larger
| 10 | issues, I do think it is critical that the report say
| 11 | something about the overall framework and the general
| 12 | standards, if any, for Section 2 jurisprudence. I think
| 13 | it is important that the agencies repudiate the no
| 14 | economic sense test as a general test applicable to all
| 15 | forms of conduct. I am sure we will talk about that
| 16 | later. No economic sense has its application in
| 17 | predatory pricing and in some refusals to deal, but it
| 18 | is not a general test, and I think a lot of time and
| 19 | attention is being spent on it when that time and
| 20 | attention would be better devoted to other areas.
| 21 | If we can start with an overall framework, as
| 22 | Bill mentioned, with the rule of reason as articulated
| 23 | in 1911, I think that would be a good place to start.
| 24 | MR. BLUMENTHAL: Einer?
| 25 | DR. ELHAUGE: I think the number one issue |
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1 | should be increasing clarity. I happened to last week
| 2 | be at a Federal Judicial Conference event, and four
| 3 | judges, when they were introduced to me and found out I
| 4 | was an antitrust professor, sua sponte, volunteered they
| 5 | had each had a recent antitrust case, and they had no
| 6 | idea what the antitrust law meant on their case. These
| 7 | were very smart people. They are doing the
| 8 | instructions. They do not even know what it means. So,
| 9 | it is not surprising that you have trouble counseling
| 10 | firms about what the antitrust law might mean.
| 11 | I think in order to achieve greater clarity, we
| 12 | actually need some more analytical clarity in separating
| 13 | out three questions relevant to this single standard
| 14 | issue. One is, what should the ultimate metric of
| 15 | social desirability be? On that, I actually think we do
| 16 | need one single standard, because we need to know what
| 17 | we are trying to maximize.
| 18 | The second question is, what set of rules and
| 19 | standards will, given the imprecision of rules and
| 20 | standards in application, best advance that ultimate
| 21 | metric of social desirability? And the two are not at
| 22 | all the same.
| 23 | So, for example, for driving, I think the
| 24 | ultimate metric is, we want everybody to drive the
| 25 | socially optimal speed, taking into account the |
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1 | advantages of speed and the safety risks. We do not say
| 2 | just maximize safety; otherwise, the speed limit would
| 3 | be zero, and our cars would stay in the garage all the
| 4 | time, right?
| 5 | So, we have some policy speed limit, but having
| 6 | decided that the optimal rule -- that that is what we
| 7 | are trying to maximize, we do not make the law, oh,
| 8 | drive the speed that maximizes total driver welfare,
| 9 | because nobody would know what that meant on a
| 10 | case-by-case basis. Instead, we have rules, set
| 11 | particular speed limits for particular areas, so there
| 12 | is a set of rules, they are over and under-inclusive,
| 13 | but they are designed, given the imprecision of
| 14 | application, to best achieve overall results of
| 15 | optimality.
| 16 | In some cases, we have a back-stop standard
| 17 | where if it is, in fact, icy -- you may or may not know
| 18 | this -- but you cannot drive the speed limit if it is
| 19 | very icy. Instead, there is a backup standard that
| 20 | says, you know, in bad conditions, then we fall back to
| 21 | a more general standard of driving safely.
| 22 | So, I think for antitrust, I guess the analogy
| 23 | would be, we evolve that metric, and I would say
| 24 | consumer welfare, given our history, one might argue for
| 25 | total welfare. |
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1 | Second, we need to have a set of rules that are
| 2 | designed to maximize that. Having a test that was, oh,
| 3 | just act in whatever way maximizes consumer welfare,
| 4 | will lead to no guidance and lots of error, but we could
| 5 | have specific rules for particular suites of antitrust,
| 6 | that is, a rule for predatory pricing, another rule for
| 7 | loyalty discounts, another for bundled discounts, et
| 8 | cetera, et cetera, and then have a backup standard for
| 9 | when none of those rules apply.
| 10 | My nominee is my own article, which is whether
| 11 | or not you are advancing monopoly efficiency or
| 12 | succeeding by depriving rivals of efficiency, and I
| 13 | share the skepticism about the profit sacrifice test.
| 14 | But anyway, I think we need to relegate it to separate
| 15 | out those three things, because they are analytically
| 16 | three very separate questions: Ultimate metric, rules
| 17 | that advance that metric generally, and backup
| 18 | standards.
| 19 | The second thing I think you need to emphasize
| 20 | in any report you write is to make sure that whatever
| 21 | rules we pick are clearly founded in economics. I would
| 22 | describe sort of the broad history of antitrust was we
| 23 | used to have silly, liberal rules based on formalisms.
| 24 | Economics critiqued those successfully, but it has led
| 25 | to a lot of open-ended standards, and there is a risk, |
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1 | unless we have pretty clear rules that are based in some
| 2 | serious economics, we will instead have silly formalisms
| 3 | of another kind, and I think there is a lot of sort of
| 4 | silly conservative rule formalisms also based on
| 5 | autonomy notions that have nothing to do with economics
| 6 | that are out there now. So, I think you can be
| 7 | rule-like, but be a functionalist and not be a
| 8 | formalist.
| 9 | MR. BLUMENTHAL: Steve?
| 10 | MR. CALKINS: My colleague Baker tells me that
| 11 | you emailed me this question this morning, but I was
| 12 | traveling and did not get it. Previously, I had
| 13 | received the 15 pages of detailed questions, and I do
| 14 | not read 15 pages of questions, so instead, I spent my
| 15 | time reading transcripts of these hearings, and it is
| 16 | really a treat. I mean, it is a genuine feast of
| 17 | people's views, and let me just toss out four things
| 18 | that caught my eye as I was reading the transcripts,
| 19 | and, frankly, I am hoping I can go find somebody who
| 20 | will commission me to write a little article with what
| 21 | you can learn from these, because it is really
| 22 | fascinating. It is a real treasure trove of materials.
| 23 | I have four things to mention.
| 24 | First, Ron Stern, General Electric: counseling
| 25 | in the world of Section 2, is very, very easy. The U.S. |
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1 | has a massive safe harbor. You do not need to think
| 2 | about antitrust so long as your market share is not over
| 3 | 50 percent, and maybe it has to be beyond that, and it
| 4 | is very easy for him to figure that out, and it is just
| 5 | not a problem counseling in the world of Section 2,
| 6 | contrast dramatically the very, very different standards
| 7 | in other parts of the world, where agencies care about
| 8 | firms that have market shares that are somewhere below
| 9 | 50 percent. That is where you have interesting,
| 10 | difficult counseling questions. In the U.S., things are
| 11 | very clear, very easy. There are big safe harbors. He
| 12 | would like to see more, but in general, we do not have a
| 13 | big problem in the vast majority of cases.
| 14 | Second, this was a terrific collection of
| 15 | distinguished economists, and one theme sang loud and
| 16 | clear throughout their testimony, and that is that we do
| 17 | not know very much. Again and again and again, people
| 18 | would say: we do not know this, we do not know that; it
| 19 | could be this, it could be that; it could be this way,
| 20 | could be that way; maybe it is going to lessen
| 21 | competition, maybe it won't; we have a lot of
| 22 | uncertainty, we are just beginning to learn this kind of
| 23 | thing. Of course, the interesting question then is:
| 24 | okay, if that is true, what do you do?
| 25 | Some would say what you do is you bring no |
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1 | lawsuits because you do not know enough, and so when in
| 2 | doubt, do not sue; and others would say, what you do is
| 3 | you create a bunch of rules of per se lawfulness because
| 4 | that is a way of making sure that lawsuits do not get
| 5 | brought; whereas others say, golly, if you do not know
| 6 | things, maybe you should hesitate before trying to lock
| 7 | in per se rules one way or the other when you do not
| 8 | know what the right answer is, and maybe you should
| 9 | hesitate before trying to solidify things exactly where
| 10 | they are today when we have so much uncertainty.
| 11 | Third, if I could get a penny for every time
| 12 | there was mention of the word "Microsoft" or "Dentsply"
| 13 | or "American Airlines" or "LePage's," I could retire
| 14 | right now. My children's college tuition would be taken
| 15 | care of. That is what comes through this. Every time
| 16 | you come to another commentator, he or she says, "Well,
| 17 | since LePage's, we have had 50 different articles
| 18 | exploring these issues;" or "since Microsoft, we have
| 19 | begun to learn about tying law and dominant firms using
| 20 | tying law" -- and so on and so forth.
| 21 | The thing that comes out is you stop and you
| 22 | say, my golly, put aside whether those were meritorious
| 23 | cases or whether they should have been brought or who
| 24 | should have won. Think how impoverished our antitrust
| 25 | law and economic learning would be had they not been |
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1 | brought! I mean, the positive externalities of one
| 2 | interesting, important monopoly case are really
| 3 | extraordinary, and I hope that one thing that comes
| 4 | through this report is to remind the Department of
| 5 | Justice that, you know, if once every administration or
| 6 | two you bring a monopoly case -- maybe it will be a good
| 7 | case, maybe it won't -- but at least it will stimulate
| 8 | all sorts of learning and scholarship, which may advance
| 9 | the dialogue.
| 10 | The last point was the very interesting lesson
| 11 | that came out of the monopoly power hearing where you
| 12 | had a number of people saying, golly, it is really hard
| 13 | to think about monopoly power, because let's go back and
| 14 | go back to the Department of Justice Guidelines, and how
| 15 | were we able to think about power issues there? We were
| 16 | able to think about power issues because we knew what
| 17 | our goal was. Our goal was to prevent a certain kind of
| 18 | merger, and having figured out our goal, we could then
| 19 | use that goal to think about the test that we would use
| 20 | for deciding whether the merger would result in an
| 21 | excessive increase in power.
| 22 | The problem with Section 2 law is that we do not
| 23 | have that nice, bright, widely-agreed-to goal that is
| 24 | motivating what enforcers are doing, and because we do
| 25 | not, it makes the measuring -- the determining -- of |
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1 | monopoly power much, much more difficult. So, I guess I
| 2 | would go back to Tom and say we need, in part, to have
| 3 | some lessons here about what we are about. Just in
| 4 | closing on that one, it seems to me critical to remind
| 5 | people that monopoly enforcement is not just about
| 6 | preventing the attaining of monopoly power; it is also
| 7 | about preventing the wrongful maintaining of monopoly
| 8 | power, and that is a message that ought to come through
| 9 | the report loud and clear.
| 10 | Thanks.
| 11 | MR. BLUMENTHAL: All right.
| 12 | DR. BAKER: Well, thank you.
| 13 | Let me begin by echoing many of my colleagues
| 14 | before in commending the agencies and the AMC and others
| 15 | who are doing similar work for systematically thinking
| 16 | about antitrust among the competition community. This
| 17 | is a great way of developing a basis for enforcement
| 18 | programs, for influencing how the courts think about
| 19 | things, and for giving Steve a treasure trove of
| 20 | testimony to work through.
| 21 | As to the report, I would recommend beginning by
| 22 | re-affirming that monopolization is a legitimate area of
| 23 | antitrust enforcement, that firms can harm competition
| 24 | through acts that permit them to achieve or maintain
| 25 | monopoly, and that exclusion can be as harmful as |
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1 | collusion. I imagine the report would likely go on and
| 2 | launch into some cautions, the sorts of things that many
| 3 | people also talk about, difficulties that arise in
| 4 | telling apart harmful conduct from procompetitive
| 5 | conduct; concerns about the motives of rivals when they
| 6 | complain about exclusion, and those are all legitimate,
| 7 | but I would start with a big endorsement of Section 2
| 8 | and its importance.
| 9 | I would also recommend that the report question
| 10 | an argument I sometimes hear, that when you consider
| 11 | false acquittals and false convictions, that that
| 12 | thinking should somehow suggest putting a thumb on the
| 13 | scales when analyzing monopolization in favor of
| 14 | defendants. The range of tests that are proposed I
| 15 | think of as the "thumb on the scales" tests -- profit
| 16 | sacrifice, no economic sense, disproportionate impact,
| 17 | things like that -- I think should be questioned and
| 18 | that the report should instead endorse a reasonableness
| 19 | approach, which I have heard some of my colleagues
| 20 | endorse also earlier on in the panel, either in an
| 21 | unstructured way, but potentially in the structured kind
| 22 | of way with shifting presumptions in the way that the
| 23 | Microsoft decision of the D.C. Circuit analyzed
| 24 | monopolization. I thought that was a sensible approach
| 25 | and would be an appropriate standard for the Commission |
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1 | and the Justice Department to endorse.
| 2 | Now, that does not mean you should stop there.
| 3 | I certainly understand the importance of counseling and
| 4 | practical guidance, not just for firms who want to stay
| 5 | within the antitrust laws, but also for Einer's judges
| 6 | who need to understand how to apply them in court, and
| 7 | it would certainly be appropriate for the agencies to
| 8 | propose various kinds of guide posts for implementing
| 9 | the general reasonableness standard in the form of
| 10 | presumptions, for example, in specific types of cases to
| 11 | get some of the benefits of bright line standards,
| 12 | either in settings where there is a reason to think harm
| 13 | is likely, or harm is not likely, or maybe there is no
| 14 | basis for intervention because there is no practical
| 15 | remedy. Those would all be good reasons to generate
| 16 | guide posts.
| 17 | We can go into the details of this later on as
| 18 | we get into cases, but I think that is the general
| 19 | framework that I would suggest approaching in the
| 20 | report.
| 21 | MR. BAER: Thanks, Bill. It is great to be
| 22 | considered a leading mouth, Bobby, and I thank you for
| 23 | that.
| 24 | One of the great benefits of going last, of
| 25 | course, is that most of the things that you might want |
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1 | to observe have already been articulated well by others,
| 2 | and so I will try and be very brief.
| 3 | I do think a report out of these hearings ought
| 4 | to indicate the agencies' belief in the value of Section
| 5 | 2 enforcement. A number of people have talked about
| 6 | that. I think there ought to be a priority given to
| 7 | articulating, as best we can -- and we cannot in all
| 8 | areas -- what the standards are that ought to be
| 9 | applied. I think we need to appreciate not only the
| 10 | point that Jan and others made that guidance to clients,
| 11 | for those of us who are in private practice, are
| 12 | important, but that guidance to enforcers and to judges
| 13 | and to private plaintiff lawyers is of great value, too.
| 14 | One of the most extraordinary benefits, I think,
| 15 | of the Merger Guidelines was the fact that it created
| 16 | common terminology, common ground, for enforcers and
| 17 | private parties to engage in understanding the key
| 18 | issues that needed to be addressed, and I think to the
| 19 | extent we can or this report can articulate comparable
| 20 | Section 2 standards, there is tremendous value to that.
| 21 | Specifically, I do think the confusion over
| 22 | bundled discounts is an area where the business
| 23 | community, the courts, are crying out for guidance, and
| 24 | having this report begin to advance that dialogue is
| 25 | important, but it has to be accompanied, I think, with a |
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1 | commitment to intervene and articulate the standard in
| 2 | courts in the hopes of expediting a refinement of what
| 3 | the law is on bundled discounts.
| 4 | Finally, I agree with Tom's point that thinking
| 5 | about remedy, not as the throw-away issue but as a
| 6 | front-end issue, do not go in without knowing this has a
| 7 | foreign policy implications, too, without knowing where
| 8 | it is you want to come out or where you think you
| 9 | realistically can come out is a key consideration in
| 10 | terms of Section 2 enforcement.
| 11 | MR. BLUMENTHAL: Well, thank you all. That is a
| 12 | lot to start, and as a moderator, it is almost the
| 13 | question of where do we go next.
| 14 | You know, there are a number of themes that come
| 15 | out of the nine sets of comments. Let me start with
| 16 | this one. A number of people have spoken about the
| 17 | importance of re-affirming Section 2 as a basis for
| 18 | enforcement. Does anyone want to take the opposite side
| 19 | of that and stand up for the proposition that we ought
| 20 | to be expressing caution about excessive enforcement in
| 21 | the area?
| 22 | If the answer is no, if that is the sense of the
| 23 | panel -- Steve?
| 24 | MR. CALKINS: Bill, it is hard to say file fewer
| 25 | cases than the Justice Department is filing, because I |
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1 | do not think the current Justice Department has filed a
| 2 | single case under Section 2. It is hard to say you want
| 3 | to cut back on that.
| 4 | MR. BLUMENTHAL: Although I will say, in
| 5 | fairness, that Dennis is not here yet, so we do not have
| 6 | the Justice representative up here to defend himself,
| 7 | and I do not carry around a list of Justice Section 2
| 8 | cases the way I do with FTC Section 2.
| 9 | MR. JACOBSON: That is because there are not
| 10 | any, and Dennis would say, "I just got there."
| 11 | MR. CALKINS: I mean, the question here is --
| 12 | private enforcement is what a lot of this is all about.
| 13 | I mean, even some of the people who say, "Let's be
| 14 | cautious, let's cut back, let's have bright rules or
| 15 | bright line rules about why defendants should win," will
| 16 | concede that, in the end, what they are talking about is
| 17 | private litigation. Indeed, I think it was Dan Crane in
| 18 | his session who specifically said that he would like to
| 19 | have a different rule for a government case than he
| 20 | would for a private case.
| 21 | So, when you are talking about enforcement,
| 22 | nobody could suggest that the Justice Department should
| 23 | file fewer suits. If people think there is too much
| 24 | litigation going on, they usually have in mind private
| 25 | enforcement, and, of course, that is controlled by the |
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1 | private litigants.
| 2 | MS. McDAVID: I would like to echo at least the
| 3 | implicit point Steve has made that there is a role for
| 4 | government enforcement in Section 2. That is something
| 5 | I have believed for a very long time. Let's remember
| 6 | that private cases often involve rivals who have axes to
| 7 | grind and may be fighting their battles in multiple
| 8 | fora, whereas the Antitrust Division and the Commission
| 9 | speak for the United States, and they speak for the
| 10 | consumers of the United States. So they do not bring
| 11 | those biases, and presumably can bring the kind of
| 12 | objectivity as to whether an appropriate case should or
| 13 | should not be brought that may be lacking in the private
| 14 | context. So, I think there is an important role for
| 15 | public enforcement of Section 2, in addition to having
| 16 | public advocacy with respect to Section 2.
| 17 | MR. JACOBSON: Bill, if I could just endorse
| 18 | what Steve and Jan and John, in particular, said
| 19 | earlier, that we would be hard-pressed to say that there
| 20 | should be less Section 2 enforcement than there is
| 21 | today, and I think if one goes back through history and
| 22 | looks at the conduct that has had long-term deleterious
| 23 | impacts on consumers, we will focus on single-firm
| 24 | conduct a good deal more than we will focus on
| 25 | collusion. |
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1 | Cartels are short-lived, there is cheating, they
| 2 | have no redeeming value, but the raw amount of harm that
| 3 | they inflict on consumers is a good deal less than the
| 4 | durable monopolies. One example that I go back to, and
| 5 | there are many others, but if you look at the motion
| 6 | picture patents case, you are looking at largely
| 7 | single-firm conduct based on the tying of the motion
| 8 | picture projector patent that messed up the motion
| 9 | picture industry for almost a century. I mean, it is
| 10 | still messed up today as a result the cartelization that
| 11 | was formed as a result of the tying arrangements
| 12 | associated with the Edison patent, and there are
| 13 | numerous examples, maybe not as dramatic as that, but
| 14 | the harm inflicted on the economy by unlawful
| 15 | monopolization is very, very severe and much
| 16 | longer-lasting than cartels.
| 17 | MR. BLUMENTHAL: We are going to come back to
| 18 | that, but, Tom, you had --
| 19 | MR. KRATTENMAKER: Well, yes, I will just
| 20 | congratulate Steve for having signed onto the
| 21 | Baer-Krattenmaker Doctrine, and the same kind of
| 22 | thought, if you think about remedies, that might shape a
| 23 | case you would bring, and also, at least -- forgive me
| 24 | if it is heresy, but if you think about a case and you
| 25 | say here is a Section 2 case, what is the end result |
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1 | going to be, somebody is going to pay treble damages to
| 2 | somebody else, and there is going to be no other change
| 3 | in the world, I have to wonder whether that is something
| 4 | that is a good use of social resources.
| 5 | So, whether you have the basis in this record
| 6 | for that kind of thing, I just do not know, Bill, but I
| 7 | do think that -- I think we have all seen -- and I do
| 8 | not know how many times I have wanted to ask somebody,
| 9 | you are proposing this standard, are you proposing this
| 10 | standard for the definition of monopoly, of a legal
| 11 | monopoly, or are you proposing this standard for the
| 12 | definition of illegal monopoly in a treble damages
| 13 | private action case? It is remarkable how often the
| 14 | explicit or implicit answer is it is only the latter
| 15 | that I have in mind.
| 16 | I do not know that it is the burden of these
| 17 | hearings, but I do not know that it is right that the
| 18 | law of monopolization ought to be driven by the rules of
| 19 | standing to bring private treble damage actions, and I
| 20 | am glad Steve put that -- let me say, that issue, I
| 21 | think, should be on the table. I won't say I am glad
| 22 | Steve put it on the table. Maybe he does not find it
| 23 | that way, so I will take responsibility for it.
| 24 | DR. WILLIG: But to go back to your question,
| 25 | Mr. Chair, do we see too many or too few cases and what |
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1 | are the dangers, how do they balance going forward, to
| 2 | me this comes back to the standards question, to the
| 3 | question of what are the standards that the enforcement
| 4 | decision has in our collective minds and stomachs about
| 5 | bringing public cases, and how do courts react, and what
| 6 | are the footnotes in the latest Supreme Court case?
| 7 | These are all extremely important, as we all know, for
| 8 | the flow of cases and for the flow of counseling
| 9 | instructions that shape business based on liabilities
| 10 | and expected trouble in litigation.
| 11 | All of this, at the end of the day, really does
| 12 | stem in ways that we can all appreciate from what is the
| 13 | general view, if there is a consensus, of what are the
| 14 | right standards to guide business conduct in specific
| 15 | areas unilaterally. I would like to put in my voice,
| 16 | once again, to say everything everyone has said is
| 17 | great, but, at the end of the day, we have got to get
| 18 | our standards straight, understand what the philosophy
| 19 | is, where we are coming from, and then what are the
| 20 | horseback implications, Jan, but you have got to start
| 21 | from a framework that makes sense, and, yes, makes sense
| 22 | economically as well as legally.
| 23 | DR. ELHAUGE: I was going to say, I agreed very
| 24 | much with the comments that Tom made, and I wanted to
| 25 | relate it to the issue of EC convergence, because often |
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1 | we say the EC has broader standards, but since there is
| 2 | very little private litigation, and thus, less of an
| 3 | over-deterrence problem, because almost every case is
| 4 | brought by a disinterested regulator who, in theory, has
| 5 | no interest in bringing it if he thinks it is desirable
| 6 | conduct, it actually makes sense for the EC to have
| 7 | broader standard than the U.S. has for the same sort of
| 8 | statute that is also enforceable with private actions.
| 9 | That same kind of logic may suggest that the
| 10 | standards that the Government applies to enforcement
| 11 | action should be broader than the standards we apply in
| 12 | private litigation. A little harder to do for the
| 13 | Department of Justice, because it is the same statute; a
| 14 | little easier to do with the FTC Act, as they could
| 15 | limit these broader rules of FTC Act Section 5, which is
| 16 | not enforceable by the private parties.
| 17 | MR. BLUMENTHAL: Although I suppose one could
| 18 | ask whether the absence of private cases ought to go to
| 19 | broader standards or simply a more active set of
| 20 | enforcement activities by the Government. In other
| 21 | words, it may be that we have the same set of standards
| 22 | but not necessarily the same bundle of government
| 23 | activity.
| 24 | DR. ELHAUGE: Right, but I think different
| 25 | standards are optimal, though. I do think, though, if, |
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1 | for example, you have some remedy -- if at the end you
| 2 | decide there is no equitable remedy, you might decide
| 3 | the only thing we can do is deter this conduct with
| 4 | treble damages, and so the Government may say this is
| 5 | very important, we just do not have treble damages in
| 6 | our arsenal of remedies, and that is why we leave it to
| 7 | private litigation.
| 8 | MR. BLUMENTHAL: Let's chase down that line for
| 9 | a second. Does anyone have any views on whether we
| 10 | ought to be looking at a different set of standards for
| 11 | government enforcement versus private damage cases?
| 12 | MR. JACOBSON: Well, I will take the contrary
| 13 | position. I believe one of the most important reasons
| 14 | for private enforcement law is government inactivity,
| 15 | and I think it is essential -- and I have said this
| 16 | publicly very recently in connection with the AMC -- it
| 17 | is important to have a robust private enforcement
| 18 | mechanism to make up for periods, as we are living
| 19 | through today, of under-enforcement by the Federal
| 20 | Government.
| 21 | Why is this not a problem in my judgment? It is
| 22 | because, at the end of the day, there is no remedy other
| 23 | than what the courts grant, and there is no
| 24 | self-enforcing private enforcement mechanism. You have
| 25 | to get a court, sometimes a jury, usually the district |
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1 | judge as well, finding the facts, and you have to get it
| 2 | through a court of appeals, and if you get through those
| 3 | hurdles and to get some relief, the private firm is
| 4 | going to have to have a very meritorious case, and if
| 5 | the private firm has a meritorious case and has been
| 6 | found to have standing and antitrust injury under the
| 7 | case law that has developed, I do not see why the
| 8 | substantive standard should be different than when the
| 9 | Federal Government sues.
| 10 | I do think Section 5 has a role to play in terms
| 11 | of experimentation by the FTC that is broader than
| 12 | Section 2, but fundamentally, I think private
| 13 | enforcement is a good thing, and we should not be
| 14 | embarrassed about it.
| 15 | DR. BAKER: I have a comment on the number of
| 16 | cases, private and government. I did a little research
| 17 | this morning, but it was not, you know, what you would
| 18 | like to do in going through the dockets in all the
| 19 | courts and actually count cases, but in terms of -- it
| 20 | might be useful to lay this out a little bit.
| 21 | The Government, since about 1977, has basically
| 22 | brought about one monopolization case a year, and during
| 23 | the past -- during the current administration, they have
| 24 | essentially been all at the FTC. The FTC is bringing
| 25 | cases at the rate that has been common for the |
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1 | Government since then. In the sixties and early
| 2 | seventies, it was about three times a year.
| 3 | Now, in private monopolization cases, what I
| 4 | learned was I went back and read -- looked at Steve
| 5 | Salop and Larry White's work on the Georgetown Treble
| 6 | Damages Study. They were looking at 1973 to 1983, and
| 7 | monopoly or monopolization was a primary allegation,
| 8 | they say, in only 3.7 percent of private antitrust
| 9 | complaints. That is what I found. It was a secondary
| 10 | allegation in another almost 9 percent, but a primary
| 11 | allegation in less than 4 percent of the cases.
| 12 | Now, I also happened to notice that predatory
| 13 | pricing was a primary allegation in about 3 percent of
| 14 | the cases, and you did not have to bring a predatory
| 15 | pricing case as a monopolization case, but it is
| 16 | possible that most -- and I just do not know this --
| 17 | that most of those cases were predatory pricing. This
| 18 | study was done before Matsushita and before Brooke
| 19 | Group, and so the predatory pricing cases have become
| 20 | much more difficult to bring.
| 21 | In addition, the antitrust injury requirements
| 22 | operate particularly on monopolization cases in private
| 23 | litigation, because they are often brought by
| 24 | competitors who then have to prove their antitrust
| 25 | injury. So, my suspicion, based on this limited |
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1 | analysis, is that there is not a plague of bad
| 2 | monopolization cases going on right now and that one
| 3 | could overstate the concern with what would happen if
| 4 | private litigation were somehow -- or what does happen
| 5 | in private litigation, and, therefore, overstate a need
| 6 | to have a different standard for private litigation than
| 7 | for the Government.
| 8 | MR. CALKINS: Well, I have to object. Although
| 9 | I love doing research, and I love having other people do
| 10 | research even better than doing it myself, the problem
| 11 | with looking at the Georgetown study to figure out how
| 12 | many private monopoly cases exist is that you have to
| 13 | remember that back in '73 to '83, there was a viable
| 14 | Section 1 private jurisprudence, and if you were a
| 15 | private party, you could bring a Section 1 case
| 16 | involving something other than cartels and expect to
| 17 | win.
| 18 | Gradually, over time, we have learned that under
| 19 | Section 1, the defendants always win -- that is an
| 20 | overstatement -- unless it is a cartel; just you rattle
| 21 | through it: you know, it is very, very hard to win an
| 22 | exclusive dealing case (Section 1), or a tying case
| 23 | (Section 1), or any kind of Section 1 case. And what
| 24 | has happened? The answer is that innovative private
| 25 | plaintiffs' lawyers are not stupid. They have learned |
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1 | that if you want to survive summary judgment or a motion
| 2 | to dismiss, the thing to do is to not bring a case
| 3 | unless you either can allege some kind of thing that is
| 4 | like a cartel or something that you can say with a
| 5 | straight face is a Section 2 case.
| 6 | So, what might have been a Section 1 case back
| 7 | during the Georgetown study era might very well, today,
| 8 | be a Section 2 case. It might not. I am not saying
| 9 | there are lots of private Section 2 cases. I am just
| 10 | saying that you have to be careful before drawing a
| 11 | conclusion from how many there were to how many there
| 12 | are today.
| 13 | DR. BAKER: Fair enough, but you still have to
| 14 | prove monopoly power under Section 2, which you do not
| 15 | have to prove in Section 1.
| 16 | MR. CALKINS: Well, and on that one, I am going
| 17 | to flip back to your should we use Section 5 kind of
| 18 | thing and might ever there be an appropriate situation
| 19 | where the Federal Trade Commission maybe should prevail
| 20 | in a Section 5 case, whereas it might be hard for a
| 21 | private party to prevail in a private treble damages
| 22 | case. I cannot say that I am ready to sit down and
| 23 | write a different legal standard, right, but in most of
| 24 | these cases, it is really about a story. It is not
| 25 | usually a single act. It is usually a story of what the |
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1 | defendant has done that has allegedly lessened
| 2 | competition.
| 3 | As a practical matter, a whole lot of these
| 4 | cases are won by defendants getting summary judgment for
| 5 | failure to show sufficiently high market share. Might
| 6 | there sometime be a situation where, we might decide
| 7 | that the Government, in a Section 5 case, should be able
| 8 | to intervene and prevent some pernicious activity even
| 9 | if, you know, maybe there is more of a debate about
| 10 | market power or maybe the market share is only 60
| 11 | percent and not the 70 percent maybe that circuits seems
| 12 | to require in a private case?
| 13 | Well, I would certainly want at least to leave
| 14 | that question open and think about it -- not as a matter
| 15 | of a different standard, as such, but maybe as applied.
| 16 | There may well be a time when there is a role for
| 17 | Section 5 here.
| 18 | DR. ELHAUGE: In my earlier comment, I was not
| 19 | trying to suggest that private litigation, we need to
| 20 | clamp down on it more now. Instead, I was making a
| 21 | quite different point, that current Section 2 law, it
| 22 | seems to me, is already constrained by the fear of
| 23 | over-deterrence because of private litigation, and if we
| 24 | decouple the standards, then the Government could be
| 25 | freer to choose broader standards, because it may be the |
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1 | case that the open-ended contextual standard, when
| 2 | applied by a disinterested regulator, makes sense, but
| 3 | if I were working for the Department of Justice, I would
| 4 | hesitate to establish that as the law through a case
| 5 | when I know every private party will be able to operate
| 6 | under the same standard. If you decouple them, then you
| 7 | may find, instead, a different standard would instead
| 8 | make sense.
| 9 | DR. WILLIG: Does this go back to the questions
| 10 | of remedies that some of the panelists have put in the
| 11 | forefront? When I saw the remedy page of the 15, I just
| 12 | scribbled notes that said it is the last page, it is a
| 13 | throw-away, because we all know -- but I really do not
| 14 | know, this is a question for the practitioners -- but I
| 15 | would suggest that we all know that the real force
| 16 | behind counseling and behind your clients paying
| 17 | attention to your counseling is not the fear of remedies
| 18 | imposed by the Government or even by a private court,
| 19 | but instead, the massive treble damages in all the
| 20 | follow-on cases. Isn't that the real force that leads
| 21 | up to deterrence if we had clear and sensible standards?
| 22 | And if that's right, maybe we can leave the remedies
| 23 | page at the back of the stack instead of at the front.
| 24 | MR. BLUMENTHAL: Does anyone have any comments
| 25 | on that? |
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1 | MR. JACOBSON: I think that is absolutely right.
| 2 | DR. WILLIG: No further questions.
| 3 | MR. BLUMENTHAL: I want to come back to the
| 4 | standards question in a minute, but first, let me do a
| 5 | little bit more just to make sure we are all grounded on
| 6 | the too much or too little dimension.
| 7 | A couple of people have expressed the view that
| 8 | exclusion is as big a problem as collusion. Somebody
| 9 | said it is a bigger problem than collusion can be. I
| 10 | know of at least a few speeches from the enforcement
| 11 | agencies in this decade that express a contrary view.
| 12 | So, I thought I would just, again, go around the horn
| 13 | and get a sense as to do people share that sense, that
| 14 | exclusion -- you know, not in theory, but as an
| 15 | empirical matter, as a practical matter, in terms of
| 16 | effects on the economy -- is likely to be as big a
| 17 | problem as collusion?
| 18 | MR. KOLASKY: I will take a first stab at that
| 19 | since I have been fairly quiet.
| 20 | I actually think that collusion is still a more
| 21 | serious problem than exclusion, and if you look at the
| 22 | kinds of multi-national cartels that we have seen over
| 23 | the last 10 to 20 years, oh, you know, starting with
| 24 | vitamins and lysene and continuing through air cargo and
| 25 | some of the other cartels that we have seen recently, it |
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1 | is very clear that we still have very large-scale cartel
| 2 | activity going on, which is taking huge amounts of money
| 3 | away from consumers.
| 4 | The whole area of exclusion, as we are going to
| 5 | be talking about when we start talking about the
| 6 | analytical framework, it is much more difficult, I
| 7 | think, to determine whether a firm has acquired and
| 8 | maintained a "dominant market position" through greater
| 9 | efficiency and aggressive competition as opposed to
| 10 | through exclusion.
| 11 | So, you know, I think naked cartel behavior
| 12 | still should be the number one enforcement priority of
| 13 | our agencies, but I do think that the agencies have been
| 14 | paying too little attention to Section 2 and looking for
| 15 | exclusion cases, and when they do conduct investigations
| 16 | or bring the complaints, not prosecuting them as quickly
| 17 | and efficiently as they need to.
| 18 | You know, I think one of the things which
| 19 | distinguish the Microsoft era, if you will, is if you
| 20 | look back at the Section 2 cases that the Justice
| 21 | Department brought during the late 1990s, the Microsoft
| 22 | case, the American Airlines case, the Dentsply case, all
| 23 | of those cases were tried relatively quickly, and we
| 24 | ended up with court of appeals decisions in a matter of
| 25 | just a few years. I think it is very important in terms |
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1 | of the development of the law that we prosecute
| 2 | monopolization cases vigorously, not just often.
| 3 | MR. BAER: Just to follow on Bill's point, and I
| 4 | agree with it, I mean, I do not know whether cartel
| 5 | misconduct creates more consumer injury than Section 2
| 6 | misconduct, but I do know that detecting cartel conduct
| 7 | and being confident that you are dealing with a real
| 8 | problem that is producing consumer injury is easier than
| 9 | where we are today with Section 2, with evolving
| 10 | standards, and more uncertainty, and more of a risk that
| 11 | you actually will be penalizing successful single-firm
| 12 | conduct. So, it is just a harder question for me to
| 13 | answer than it is with regard to cartel.
| 14 | MR. BLUMENTHAL: Tom?
| 15 | MR. KRATTENMAKER: Bill Kolasky is certainly
| 16 | right I am sure about the harm from collusion, and the
| 17 | international stuff is really quite powerful. I do not
| 18 | think your question can be answered, Bill, and the
| 19 | reason for it is there just are incommensurate things
| 20 | here. When you say "exclusion," you probably do not
| 21 | mean, for example, the massive amount of exclusion that
| 22 | takes place because of government-controlled spectrum in
| 23 | communications industries; you do not mean the massive
| 24 | amount of consumer harm that is inflicted by entry
| 25 | requirements in the various professions or simple jobs |
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1 | like being a barber or a beautician. So, we do not have
| 2 | a way of measuring these kinds of -- that is why I
| 3 | suggested, you know, a focus on them, and if you know
| 4 | anything about remedies, if you think about immunities,
| 5 | then you are thinking about exclusion.
| 6 | So, I mean, it is a fair question to ask, but I
| 7 | think the right answer is, gee, you really cannot
| 8 | measure those things, because we have a sense of what we
| 9 | mean by collusion that harms consumer welfare, so the
| 10 | definition of collusion is that kind of cooperative
| 11 | activity among competitors that does not have some
| 12 | consumer welfare justification, but when we say
| 13 | exclusion, different people hear different things.
| 14 | MR. BLUMENTHAL: And you are right, for purposes
| 15 | of my question, I was excluding all sorts of
| 16 | anticompetitive effects --
| 17 | MR. KRATTENMAKER: No pun intended, you were
| 18 | excluding all the other --
| 19 | MR. BLUMENTHAL: -- including government
| 20 | exclusionary conduct, also government collusion type
| 21 | mandated --
| 22 | MR. KRATTENMAKER: And I am not sure that it
| 23 | makes any sense to weigh those two things.
| 24 | DR. BAKER: I just want to add to the
| 25 | uncertainty rather than subtract from it. I am |
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1 | wondering whether if we were thinking about harms to
| 2 | innovation rather than harms to price, whether we
| 3 | wouldn't be more concerned about exclusion. I am not
| 4 | sure, but we might. We have this general view, I think,
| 5 | that it is unlikely that firms collude in research.
| 6 | DR. ELHAUGE: I think it likely dependent on the
| 7 | industry. In some industries, like cement, it seems
| 8 | collusion is clearly a bigger problem. Other industries
| 9 | where patents allow initial grants of monopoly power,
| 10 | you know, medical devices, drugs, new technology, they
| 11 | are more likely to have monopolists, because they do not
| 12 | need to collude with anybody, so they are more likely to
| 13 | engage in exclusionary conduct, and, of course, the
| 14 | whole thing is endogenous.
| 15 | If you responded to the present-day sentiments,
| 16 | we are not going to enforce unless there is exclusion,
| 17 | then that is what you will see a lot more of. So, I am
| 18 | not sure that this question really helps you to frame a
| 19 | report.
| 20 | MR. JACOBSON: Let me just clarify what I was
| 21 | saying. I am not saying that exclusion by a
| 22 | substantial, durable, economic monopoly is more
| 23 | prevalent than cartels. I do not think anyone has an
| 24 | empirical basis to say yes or no to that. What I am
| 25 | saying is that a given economic monopoly that is durable |
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1 | and long-lasting can inflict as much or greater harm
| 2 | than a cartel.
| 3 | Now, I would say that vitamins and lysene were
| 4 | particularly extraordinary cases in the audacity of the
| 5 | conduct and the degree of consumer harm they inflicted.
| 6 | I would compare that -- and I think Bill Baer can vouch
| 7 | for this -- you know, we are being told that, you know,
| 8 | DRAM was a massive cartel. I can tell you that DRAM has
| 9 | generated a lot of fines, but to compare it against
| 10 | vitamins, would be demonstrating a gross ignorance of
| 11 | the facts.
| 12 | DR. WILLIG: If we are talking about enforcement
| 13 | priorities rather than what would be a lovely academic
| 14 | study to somehow trace out consumer harm from various
| 15 | categories -- that has never really been done and I can
| 16 | see why -- but clearly it is enforcement priorities that
| 17 | are most important in terms of what we might say that
| 18 | would be of use at this point, and I totally agree with
| 19 | those of us who have said that very, very hard
| 20 | enforcement against collusion is certainly socially
| 21 | appropriate, not only because you catch some huge
| 22 | miscreants occasionally and create some of the morasses
| 23 | that may or may not be socially appropriate, as in
| 24 | semiconductors, but to lay out a clear competitive code
| 25 | of conduct for the entire economy, and the best way to |
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1 | do that is to have the big clear cases and criminal
| 2 | penalties and huge fines that we teach in our classrooms
| 3 | and just infuse the business sector with an
| 4 | understanding of what that code of conduct is, is of
| 5 | primary importance here and abroad, to be sure.
| 6 | If only we had such clarity of purpose and of
| 7 | discernment in the exclusion area. What I would say in
| 8 | this same tone is that where we do find instances of
| 9 | clear exclusion, where it really does matter -- and I
| 10 | believe there are such instances in many different
| 11 | industries, I cannot tell you the prevalence, but one
| 12 | sees instances recurrently -- that if we had the right
| 13 | standards and could promulgate them and teach them by
| 14 | bringing the right cases and making a big show of them,
| 15 | the economy would be in better shape as a result.
| 16 | It is a secondary priority compared to the
| 17 | competitive code of conduct, anticollusion, but a very
| 18 | important one nevertheless, and it falls to us to say
| 19 | this today and to say what the standards ought to be
| 20 | behind such red letter cases.
| 21 | MR. BLUMENTHAL: The last of the scoping
| 22 | questions that I have based on the introductory remarks,
| 23 | I think it was Steve Calkins who attributed to one of
| 24 | the in-house practitioners the observation that dealing
| 25 | with Section 2 in the United States is quite easy and |
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1 | that there are enough safe harbors that it is not a real
| 2 | problem, and I certainly know of one former practitioner
| 3 | who practiced about 25 years before entering government
| 4 | service who used to say to his clients that when it
| 5 | comes to Section 2, that is a success problem. You
| 6 | really do not need to worry about it. It is kind of a
| 7 | lightning strike, and every so often, every so often, a
| 8 | bolt will come out of the blue, but generally, just go
| 9 | ahead with the single-firm conduct of the type that you
| 10 | want, and we will deal with it later.
| 11 | Other than in the bundled discount area, which I
| 12 | think a few people have cited, does anyone have concerns
| 13 | about over-deterrence from ambiguity in current Section
| 14 | 2 standards?
| 15 | MR. JACOBSON: I think some of the refusal to
| 16 | deal area, because it lacks clarity, does cause a number
| 17 | of businesses to stop engaging in conduct that would be
| 18 | procompetitive or beneficial. I think refusals to deal
| 19 | are not as acute a problem as bundling, because you have
| 20 | LePages out there, which just says there is no standard
| 21 | at all, but I do think additional clarity is highly
| 22 | desirable.
| 23 | MR. CALKINS: Bill, even on bundling -- just to
| 24 | make the GE point again -- bundling law is completely
| 25 | clear, transparent, and the defendant always wins so |
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1 | long as you do not have a market share that is not
| 2 | comfortably well above 50 percent. So even though it
| 3 | would be nice if there were more clarity, let's not
| 4 | exaggerate the extent of the problem. This is a
| 5 | nonissue for the vast majority of American firms.
| 6 | DR. ELHAUGE: I agree with that, actually,
| 7 | because you do not have to be a monopolist to have a
| 8 | Clayton Act Section 3 case or a Sherman Act Section 1
| 9 | case with an agreement to abide by the bundling
| 10 | condition, so I do not see why that --
| 11 | MR. CALKINS: I review every case that is handed
| 12 | down, and plaintiffs win almost no Clayton Act Section 3
| 13 | cases. You know, plaintiffs are not out there winning
| 14 | bundling cases without alleging Section 2. Heck, they
| 15 | are rarely winning bundling cases as it is, and the
| 16 | reason LePage's is such a big deal is because nobody had
| 17 | ever won a case before -- that is an exaggeration --
| 18 | but --
| 19 | MR. JACOBSON: Well, Steve, in fairness, there
| 20 | are a lot of differentiated products where you do not
| 21 | know where the market definition fight is going to come
| 22 | out, and you have to be concerned in terms of day-to-day
| 23 | counseling, and you have products like pharmaceuticals,
| 24 | each of which, arguably, has a monopoly in its product
| 25 | line, and you have to be concerned about counseling |
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1 | those companies as well. So, I would not say it is a
| 2 | zero.
| 3 | MR. CALKINS: I am not going to say it is a
| 4 | zero, and I will concede there is ambiguity there, and
| 5 | clarity would certainly be a good thing -- but I just do
| 6 | not want to exaggerate the extent of the problem.
| 7 | MR. BLUMENTHAL: If it is okay with the group,
| 8 | let's turn to general standards.
| 9 | MR. JACOBSON: Oh, no.
| 10 | MR. BLUMENTHAL: Well, you know, I couldn't help
| 11 | but notice that three or maybe four of you unilaterally
| 12 | took a swipe at no economic sense and profit sacrifice,
| 13 | and I guess my question is whether anyone is going to
| 14 | stand up for the opposite side and say, yeah, those are
| 15 | appropriate tests, at least for some purposes.
| 16 | Jan?
| 17 | MS. McDAVID: Well, as someone who does not
| 18 | think there is a single standard, I do think profit is a
| 19 | sacrifice appropriate test, but I do not think it is THE
| 20 | appropriate test. Based on the briefing in the Trinko
| 21 | case and the Trinko decision. I think is it is
| 22 | sufficient but not necessary in some circumstances.
| 23 | There are a range of other tests that may be more
| 24 | appropriate depending on the particular type of conduct
| 25 | and effect involved. So, I think the profit sacrifice |
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1 | test is a very useful paradigm, and it really is what we
| 2 | are talking about in predatory pricing, and now, it
| 3 | turns out, also in predatory purchasing, but it is not
| 4 | the only test.
| 5 | MR. BLUMENTHAL: Well, I know others have things
| 6 | to say, but let me just sort of step back to the
| 7 | logically prior question of single standard versus
| 8 | multiple standards that might track to, say, type of
| 9 | conduct. Where are all of you on that?
| 10 | Bill?
| 11 | MR. JACOBSON: Can I give a first crack at that?
| 12 | I think Bill Kolasky in his opening remarks hit it right
| 13 | on the head. You need an overall concept of what it is
| 14 | that your objective is, and --
| 15 | MR. BLUMENTHAL: Several people said that.
| 16 | MR. JACOBSON: -- you know, whether it be
| 17 | consumer welfare or total welfare or a rule of reason
| 18 | context -- mine would be consumer welfare in the rule of
| 19 | reason context -- I think you need to have, at the very
| 20 | apex, an idea of what your goal is.
| 21 | It is when you get past that to the next level
| 22 | of analysis, is there a test, where I think -- I think
| 23 | the consensus today is that there cannot be a single
| 24 | test for all aspects of conduct, because, for example,
| 25 | to take predatory pricing, we want to single out that |
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1 | behavior as being particularly hard for plaintiffs to
| 2 | attack, because it is price competition by definition.
| 3 | If we want to single it out for special treatment, that
| 4 | very concept precludes applying the same standard to
| 5 | other aspects of conduct that are not so uniformly
| 6 | beneficial to consumers.
| 7 | MR. BLUMENTHAL: Bill?
| 8 | MR. KOLASKY: Just to follow up on that, the
| 9 | reason I think that the rule of reason framework that
| 10 | derives from Chief Justice White's opinion in Standard
| 11 | Oil is the right framework is that it allows you to
| 12 | undertake what Justice Souter called in California
| 13 | Dental an inquiry meet for the case, and the point is
| 14 | that what you ought to look at first is the alleged
| 15 | anticompetitive harm, the alleged exclusionary conduct,
| 16 | and how serious is the anticompetitive effect.
| 17 | The more serious the anticompetitive effect, the
| 18 | more closely you want to scrutinize the justifications
| 19 | that are proffered by the defendant for that conduct.
| 20 | So, if you have something in which the exclusionary
| 21 | effect is, at worst, mild, you are going to then give a
| 22 | great deal of deference to the judgment of even a
| 23 | monopolist to undertake the particular conduct in
| 24 | question, and you are not going to look that closely at
| 25 | whether there might have been less restrictive ways to |
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1 | accomplish the same legitimate objectives.
| 2 | On the other hand, if the exclusionary effect is
| 3 | very severe and serious, then you are going to subject
| 4 | it to a much closer, much more detailed scrutiny, and I
| 5 | cannot remember which one of the panelists on the other
| 6 | side noted the importance of looking beyond antitrust,
| 7 | but I think that is a very important point. When I was
| 8 | preparing for the hearings here last summer, I was
| 9 | working with a summer associate from Harvard who had
| 10 | just taken Constitutional law, and she was reminding me
| 11 | that under both the First Amendment and equal protection
| 12 | balancing test, the degree of scrutiny depends on the
| 13 | nature of the restriction, and it struck me, well, that
| 14 | is exactly right. That is how it should be and how it
| 15 | is under Section 1 rule of reason analysis, and why
| 16 | shouldn't it be the same under Section 2?
| 17 | The other point is, you know, I think one of the
| 18 | things that we have really learned over the last 20
| 19 | years is the importance of looking at the purposes and
| 20 | effects of the conduct as opposed to simply trying to
| 21 | label it, and that is particularly important here, I
| 22 | think, because some of the conduct that you talk about
| 23 | in Section 2 cases -- bundling, tying, exclusive
| 24 | dealing -- can also be a violation of Section 1, and it
| 25 | is by no means clear to me why the standards applied and |
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1 | the analytical framework applied to that conduct should
| 2 | be different under Section 2 than it is under Section 1.
| 3 | Under Section 1, using our common law approach
| 4 | over the last 100 years, we have evolved a set of
| 5 | presumptions, a set of virtual safe harbors, so that now
| 6 | the case law on exclusive dealing under Section 1 is
| 7 | pretty clear that if the percent of the market that is
| 8 | foreclosed is less than 40 percent, it is very unlikely
| 9 | that the plaintiff is going to be able to prevail, and,
| 10 | you know, why should the standard be any different under
| 11 | Section 2?
| 12 | MR. BLUMENTHAL: Bill, when you speak in favor
| 13 | of the Standard Oil rule of reason test --
| 14 | MR. KOLASKY: Yes.
| 15 | MR. BLUMENTHAL: -- are you distinguishing that
| 16 | from the D.C. Circuit Microsoft standard?
| 17 | MR. KOLASKY: Only slightly. You know, I think
| 18 | the D.C. Circuit rule of reason standard that they set
| 19 | forth in Microsoft or the framework they set forth is
| 20 | exactly the right one. It is a little bit confusing,
| 21 | because they talk about a four-part test, and I tend to
| 22 | think of the rule of reason as basically being a
| 23 | three-part test. The plaintiff initially has the burden
| 24 | of showing anticompetitive effect. If they succeed at
| 25 | that, the burden shifts to the defendant to proffer some |
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1 | justifications for it. If the defendant does so, then
| 2 | the plaintiff gets another shot to show that there were
| 3 | other less restrictive ways to achieve that. Then, at
| 4 | the end of the day, the Court may have to balance.
| 5 | But, in fact, when you look at the decisions,
| 6 | the courts never reach that final balancing stage,
| 7 | because they obviate the need for that by adjusting the
| 8 | degree of scrutiny that they engage in with respect to
| 9 | steps two and three, depending on how strong a showing
| 10 | the plaintiff makes in step one, an inquiry meet for the
| 11 | case, and I think that is the sound analytical approach.
| 12 | MR. BLUMENTHAL: Leaving aside the relationship
| 13 | between Section 1 and Section 2, which I think raises
| 14 | some other issues that we will get into if we have time,
| 15 | just focusing on the application of the rule of reason
| 16 | to Section 2, if I hear you right, it sounds as if your
| 17 | view would be that that ought to be used as an
| 18 | overarching standard, where the variations by type of
| 19 | conduct would come in the application of the rule of
| 20 | reason, but the standard itself is the same.
| 21 | MR. KOLASKY: That is right, and, in fact, I
| 22 | think that is implicit in the standard that the courts
| 23 | have articulated under Section 2 where they talk about
| 24 | whether or not the conduct is "unnecessarily
| 25 | exclusionary." How do you determine whether it is |
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1 | unnecessarily exclusionary without basically going
| 2 | through that three-part rule of reason analysis?
| 3 | MR. BLUMENTHAL: What do the other panelists
| 4 | think of that?
| 5 | MR. JACOBSON: Well, I have spoken before, but I
| 6 | am going to be brief on this. I do not mean to
| 7 | interrupt.
| 8 | I have a couple of articles out there on
| 9 | exclusive dealing that state exactly what Bill said, so
| 10 | let me agree with that. I do view that, though, as a
| 11 | test rather than an overall standard. I view consumer
| 12 | welfare as the standard and then rule of reason as the
| 13 | presumptive way of getting there, with some special
| 14 | rules like predatory pricing that would be outside of
| 15 | this same framework, but fundamentally, I think that
| 16 | articulation that Bill gave is dead on for the vast
| 17 | majority of cases.
| 18 | MR. BLUMENTHAL: Let me just ask this: If I
| 19 | hear you right, a rule of reason test, calling it a
| 20 | test, would be something that could be applied
| 21 | regardless of whether consumer welfare or total welfare
| 22 | or something else was the standard, just that the detail
| 23 | of the application might vary?
| 24 | MR. JACOBSON: Correct.
| 25 | MR. BLUMENTHAL: Okay. Does anybody disagree |
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1 | with all of that?
| 2 | DR. WILLIG: Well, I disagree with this
| 3 | articulation of the rule of reason as being antithetical
| 4 | to or even separate from the idea of the no economic
| 5 | sense test or the test for sacrifice, and let me say the
| 6 | obvious and get your reactions to it.
| 7 | In the articulations of the no economic sense
| 8 | test or the sacrifice test, the first legs of the test
| 9 | are whether there is anticompetitive effect, and, of
| 10 | course, in the history of Section 2 jurisprudence -- I
| 11 | am no scholar of this -- but I am told that in the bad
| 12 | old days, folks were not really careful about actually
| 13 | seeing first whether there was an anticompetitive
| 14 | effect, and, indeed, making sure, before proceeding to
| 15 | the tougher part of the analytics, that, indeed, there
| 16 | is a causal relationship shown between the challenged
| 17 | conduct and the alleged anticompetitive effect.
| 18 | So, I think it is appropriate to break down that
| 19 | first stage -- and maybe that is conventional, maybe it
| 20 | is not, from the case law, you will tell me -- to break
| 21 | it down into is there competition at stake here in a
| 22 | relevant market, and then second of all, is that
| 23 | possible harm to competition or the maintenance of the
| 24 | absence of competition, does it flow causally from the
| 25 | challenged conduct? If we can all agree on that, that |
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1 | is actually progress, I think, but that is the way I
| 2 | understand it.
| 3 | Then, the way I see the schematic, if the
| 4 | answers to those questions are there may very well be
| 5 | room for concern here, competition is at stake, and it
| 6 | does flow from the conduct, the next question is, well,
| 7 | what is this conduct? Is this conduct really part of
| 8 | competition that is happening in these circumstances to
| 9 | be knocking out valuable and scarce competitors? That
| 10 | is one way to ask the question, is it a reasonable
| 11 | practice or is there a social rationale for it?
| 12 | Another way to ask the question is whether
| 13 | competitors would be doing this absent the impact on
| 14 | competition, knocking rivals out, and is there economic
| 15 | sense to it? These are all different ways to say, at
| 16 | the end of the day, whether there is something
| 17 | inherently efficient about the practice in its context.
| 18 | MR. BLUMENTHAL: Okay, let me make sure I
| 19 | understand what I think you are saying, but I am not
| 20 | sure. I mean, you live in a world of topology and Zajac
| 21 | geometry and things like that where doughnuts can get
| 22 | reshaped into coffee cups and the like.
| 23 | DR. WILLIG: Right. It beats stare decisis and
| 24 | Latin stuff.
| 25 | MR. BLUMENTHAL: Perhaps. |
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1 | Is the proposition that if you just run the
| 2 | right transformation program, the rule of reason and the
| 3 | no economic sense test map into one and the same thing?
| 4 | DR. WILLIG: Well, I think that is something for
| 5 | us to explore. That is not a position that I come into
| 6 | today holding, but it is worth pushing it to see where
| 7 | it breaks down, if it does. So, after seeing that there
| 8 | is anticompetitive effect of the conduct, the next step,
| 9 | we all agree, is examining the conduct to see whether
| 10 | there is a rationale for it in some sense, and now,
| 11 | where do we depart? It is the weighing step, I would
| 12 | imagine.
| 13 | MR. CALKINS: Well, everybody (I suspect) would
| 14 | agree that the no economic sense question is a really
| 15 | good question to ask. I frankly think that Greg
| 16 | Werden -- sitting right there -- and his co-authors have
| 17 | greatly enriched the dialogue. They have provided a lot
| 18 | of help to counselors, because you can turn to a
| 19 | businessperson and ask why he or she is doing this and,
| 20 | you know, you have a question to think about -- does
| 21 | this make economic sense apart from injuring
| 22 | competition -- and it is a wonderfully important
| 23 | question that very often will answer the question as to
| 24 | how concerned are we about what is going on here.
| 25 | I think the question is, is it, as Jan says, the |
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1 | only question? Is it THE question? Is it always going
| 2 | to be the question? I suspect that the reluctance you
| 3 | are hearing around this table is that people may be
| 4 | reluctant to sign onto it as THE question, as such, but
| 5 | I am guessing that many of us -- certainly I think it is
| 6 | an important, interesting question in many cases. I
| 7 | think, frankly, it helps -- if you want to buy into a
| 8 | Microsoft balancing or call it a pre-Microsoft
| 9 | balancing, in the process of that balancing or that
| 10 | staggered series of questions, you would often be
| 11 | thinking about the no economic sense question as part of
| 12 | the analysis.
| 13 | DR. ELHAUGE: I actually strongly disagree with
| 14 | this claim. I think the no economic sense test makes no
| 15 | economic sense. It seems to me it comes in two flavors.
| 16 | One is wrong, the other flavor is conclusory and
| 17 | obfuscatory. The wrong one is the one that actually
| 18 | makes no value judgments about where the profits come
| 19 | from. It just asks, is it profitable to exclude your
| 20 | rivals, without asking whether it is anticompetitive
| 21 | exclusion or not.
| 22 | The trouble with that is there is all kinds of
| 23 | desirable conduct that excludes rivals and requires
| 24 | short-term profit sacrifice, like innovating to create
| 25 | patents. There is also all kinds of anticompetitive |
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1 | exclusions that require no profit sacrificing, like a
| 2 | lot of bundled pricing in the short run. So, that
| 3 | version doesn't work I think is the problem.
| 4 | The other version used to save it is to say,
| 5 | well, we only need to ask the question of whether
| 6 | excluding the profits that were gained through
| 7 | anticompetitive exclusion, would it be profitable, but
| 8 | that presupposes we know whether the exclusion was
| 9 | anticompetitive or not, and if we knew that, we would
| 10 | know how to resolve the whole case. So, I think it ends
| 11 | up begging the normative question about how to judge the
| 12 | conduct and burying what looks like a mathematical
| 13 | question about profit, and thus, obscures the question
| 14 | we have to ask, which is, is this conduct that excludes
| 15 | rivals actually anticompetitive or not?
| 16 | MR. KOLASKY: Two quick points: One, I agree
| 17 | that focusing on profit sacrifice and whether the
| 18 | conduct makes economic sense is one of the questions
| 19 | that we ought to ask. From the standpoint of the
| 20 | counselor, it is a very useful question to ask your
| 21 | clients.
| 22 | The two things that concern me about that test
| 23 | as opposed to the type of structured rule of reason
| 24 | framework that, you know, several of us have outlined,
| 25 | is first, at least the articles I have read do not |
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1 | explicitly acknowledge that the degree of scrutiny needs
| 2 | to depend on the nature of the alleged exclusionary
| 3 | conduct and how anticompetitive it is in the sense of
| 4 | how likely to harm consumer welfare.
| 5 | The second problem I have is that it focuses, in
| 6 | my mind, too much attention on whether the conduct makes
| 7 | sense from the standpoint of the alleged monopolist as
| 8 | opposed to what is its effect on the consumer, does it
| 9 | make sense from the consumer's perspective?
| 10 | If you look back at the Aspen Ski case, one of
| 11 | the key things that jumps out at you in that case is
| 12 | that, assuming the facts are as the Court recited them,
| 13 | the conduct that Aspen was engaging in was degrading the
| 14 | quality of its product, making it less attractive for
| 15 | consumers, and costing it consumer good will, clearly
| 16 | not something that you would engage in unless you had
| 17 | some very strong reason for doing so.
| 18 | Now, the record, at least as I read it, is
| 19 | silent on whether or not there was a short-term profit
| 20 | gain from the standpoint of the Aspen Ski Co. from
| 21 | engaging in that conduct. The revenues they may have
| 22 | gained by having skiers ski their three mountains
| 23 | instead of Highlands may well have exceeded the revenues
| 24 | they lost because fewer skiers came to the Aspen area if
| 25 | they could only ski three mountains instead of four. |
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1 | The record is silent on that, but I do not think that is
| 2 | the important question.
| 3 | To me, the important question is, you know, was
| 4 | this a monopolist, assuming he was a monopolist, who was
| 5 | degrading the quality of its product, and was the effect
| 6 | of that to exclude its only rival? If those are the
| 7 | facts, then that is a pretty strong monopolization case.
| 8 | MR. BLUMENTHAL: Tom, you are wearing that
| 9 | bright yellow "Cheap Exclusion" button. Where are you
| 10 | on this issue?
| 11 | MR. KRATTENMAKER: Which issue?
| 12 | MR. BLUMENTHAL: Whether there is an easy
| 13 | transformation between a rule of reason standard and the
| 14 | no economic sense standard. I mean, the reason I point
| 15 | to you in looking at "Cheap Exclusion" is it seems to me
| 16 | that that is the easiest candidate to disprove the
| 17 | symmetry.
| 18 | MR. KRATTENMAKER: I think it depends on the
| 19 | level of generality with which you are speaking. I
| 20 | liked Einer's speed limit stuff. If you are speaking at
| 21 | a level of generality of could you map a profit
| 22 | sacrifice test onto a general welfare standard, yes, you
| 23 | could, but you shouldn't, and the reason you shouldn't I
| 24 | thought was well said by Einer.
| 25 | If you are saying that we should have a kind of |
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1 | a Microsoft approach, a general approach, a multipart
| 2 | test for all kinds of monopoly cases, could you just map
| 3 | profit sacrifice onto that? No, I do not think so,
| 4 | because I think that you can map that onto predatory
| 5 | pricing, but I do not think you can map it onto what we
| 6 | have called a couple of times in here naked exclusion,
| 7 | or the extreme Steve Salop and I once called something,
| 8 | stark naked exclusion.
| 9 | For the reasons that Bill Kolasky expressed, I
| 10 | do not think that kind of behavior gets subjected to a
| 11 | profit sacrifice test. So, if I understood your
| 12 | question, Bill, no, I do not think it could be mapped.
| 13 | MR. JACOBSON: Bill, could I raise just a couple
| 14 | more things?
| 15 | MR. BLUMENTHAL: Please.
| 16 | MR. JACOBSON: First, if the no economic sense
| 17 | or profit sacrifice test is being applied by Greg
| 18 | Werden, Bobby Willig, and Doug Melamed, I think we will
| 19 | get the right result that almost everyone here will
| 20 | agree on most of the time, but the problem is that it is
| 21 | a very, very difficult test to administer. Its
| 22 | proponents say that it is an easier test to administer
| 23 | than the rule of reason. I couldn't disagree more with
| 24 | that. I think it is extremely difficult, and depending
| 25 | on the type of conduct, it is unintelligible. |
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1 | I go back to the example I used, which is
| 2 | exclusive dealing. Exclusive dealing, in the
| 3 | traditional case, you have an exclusive deal with a
| 4 | dealer to get dealer focus, to have the dealer focus on
| 5 | your products, to distribute them more effectively, and
| 6 | not to be distracted by distributing other products as
| 7 | well. Well, that is a procompetitive effect, but why is
| 8 | it procompetitive? It is procompetitive precisely
| 9 | because you were excluding others from access to that
| 10 | dealer.
| 11 | So, the test in that, you know, very recurring
| 12 | context is circular, and you can only apply it
| 13 | accurately if you go to Bobby Willig, Greg Werden, or
| 14 | Doug Melamed and, you know, that is a scarce resource,
| 15 | even collectively.
| 16 | DR. WILLIG: Well, since the scarce resource is
| 17 | represented here, Greg?
| 18 | No, let's talk about exclusive dealing.
| 19 | Hypothetically, you have got a manufacturer. The
| 20 | manufacturer is big in its own space. It would love to
| 21 | have some dealers really focused on its product line.
| 22 | It is costly to it to expand the domain of the dealers
| 23 | who are exclusive, because to sign up a big store and
| 24 | say, just handle my line, you are going to have to give
| 25 | that dealer a really good deal; otherwise, the dealer is |
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1 | going to say, no way, I want five different brands, that
| 2 | is what my customers like. It is costly to buy
| 3 | exclusives. It is good to have some, but from the point
| 4 | of view of your ordinary bottom line, it is costly to
| 5 | have too many. Now, where is that line? Business
| 6 | people worry about this all the time, as you know, and
| 7 | they reach their own judgments.
| 8 | Now, if I were a manufacturer and I was trying
| 9 | to monopolize my product space and I had some shot at
| 10 | doing that, I would very gladly overspend on a raft of
| 11 | exclusives to tie up the market, foreclose my product
| 12 | rival from the distribution she needs to get adequate
| 13 | scale economies, and I could monopolize the world this
| 14 | way, but you know what, I would be sacrificing profit by
| 15 | the no economic sense test or the sacrifice test,
| 16 | because I would be overspending on these relationships
| 17 | for a purpose -- a profitable purpose, but an
| 18 | anticompetitively profitable purpose -- namely, knocking
| 19 | my rival out of the product market, so its brand goes
| 20 | away, and it cannot come back tomorrow and bother me
| 21 | anymore.
| 22 | MR. JACOBSON: But why should liability turn on
| 23 | whether you did the math right? Why shouldn't liability
| 24 | turn on whether the effects of the exclusion are
| 25 | outweighed by the procompetitive aspects of the |
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1 | exclusive dealing?
| 2 | DR. WILLIG: Well, the first step is to notice
| 3 | that you are monopolizing, and in the hypothetical, you
| 4 | are, otherwise, it is not an issue, but the next step
| 5 | is, is there something good about this kind of set of
| 6 | relationships and does it have to go this far? Under
| 7 | your version of rule of reason, I do not know who is
| 8 | going to sit back and make that judgment, but under the
| 9 | no economic sense test, the benchmark is what would a
| 10 | competitor do if the life's blood of one's competing
| 11 | brand name were not at stake, what would be a sensible
| 12 | business decision about the extent of exclusivity to
| 13 | purchase from your dealer?
| 14 | MR. JACOBSON: No, it depends on how you do the
| 15 | math, how you calculate the cost, what variable costs
| 16 | you include, what nonvariable costs you include, how you
| 17 | expense the expenditure in terms of exclusivity. It
| 18 | reduces to math something that is one step removed from
| 19 | the analysis of whether there is an impact on
| 20 | competition or not, and that is the problem with the
| 21 | test.
| 22 | DR. WILLIG: Well, I think it would be very
| 23 | interesting to actually apply that same sort of
| 24 | recognition of the practical difficulties to the stomach
| 25 | test of what is too much in the way of purchased |
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1 | exclusivity for the sake of consumers, to weigh it
| 2 | against the impact on the product market. How do you do
| 3 | that weighing?
| 4 | MR. BLUMENTHAL: I think a related question to
| 5 | the group as a whole, try this proposition: No economic
| 6 | sense is more administerable than a rule of reason test.
| 7 | Agree or disagree?
| 8 | MR. KRATTENMAKER: To what kind of case? Like
| 9 | an above cost price cut that drives out rivals who are
| 10 | not quite as efficient?
| 11 | MS. McDAVID: Across the board?
| 12 | MR. KRATTENMAKER: Or an exclusive dealing case
| 13 | or a false advertising case?
| 14 | MR. BLUMENTHAL: I offer it as an
| 15 | across-the-board statement --
| 16 | MR. KRATTENMAKER: Nobody agrees to that.
| 17 | Nobody would treat the no economic sense test as an
| 18 | across-the-board statement. If you destroy your rivals
| 19 | by false advertising in a market where you were going to
| 20 | be advertising anyway, because nobody can survive
| 21 | without advertising, you just decide to put it "not" in
| 22 | the ad, nobody can argue that there is a profit
| 23 | sacrifice involved in there in any way other than
| 24 | perhaps John Jacobson's point, as applied by sensible
| 25 | people. Willig, Werden, and Melamed, they will figure |
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1 | it out.
| 2 | MR. BLUMENTHAL: That may be a perfectly good
| 3 | argument for why it is the wrong test, but just in terms
| 4 | of administerability.
| 5 | MR. KRATTENMAKER: I have never heard anybody
| 6 | argue that you should apply a profit sacrifice test in
| 7 | an above cost price point.
| 8 | MR. KOLASKY: Two quick points: One is that
| 9 | nobody's arguing I think that you should take any of
| 10 | these tests, whether it is the no economic sense test or
| 11 | the rule of reason, and apply it in a vacuum. You start
| 12 | out with the fact that we do have a hundred years of
| 13 | case law from which you can derive certain presumptions
| 14 | and even rules in some cases, and so you start with that
| 15 | framework, and you are using this rule of reason
| 16 | framework to decide the cases that are not decided by
| 17 | that set of presumptions and rules that have evolved
| 18 | over a hundred years of jurisprudence.
| 19 | Second, in terms of balancing, the way I always
| 20 | think of it, and one of the questions I put to my
| 21 | clients, is you are not balancing in a vacuum either or
| 22 | thinking about, you know, two pans and which one weighs
| 23 | more. The question you are asking is, what is the
| 24 | likely net effect on output and on consumer welfare? Is
| 25 | this conduct that, net-net, is likely to increase |
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1 | output, increase competition and increase output, or is
| 2 | it conduct that is likely to raise prices and restrict
| 3 | output? That is how you balance.
| 4 | MR. JACOBSON: Ditto.
| 5 | DR. ELHAUGE: I agree as well. I think it is
| 6 | much less administerable. In fact, I think you have to
| 7 | do the rule of reason output in order to do the profit
| 8 | sacrifice test correctly, because you have to figure out
| 9 | first whether the conduct was anticompetitive in order
| 10 | to apply it. The other problem I guess is it makes the
| 11 | case about the virtue of the defendant rather than about
| 12 | the effects of their conduct in a certain way, and that,
| 13 | it seems to me, is to obscure the utility of rule of
| 14 | reason.
| 15 | Maybe the only place where I would differ, it
| 16 | seems to me the rule of reason is a good way to start to
| 17 | develop more precise rules. Its utility, as you do it a
| 18 | lot of times, it is the backup standard, but hopefully
| 19 | it will lead to more and more clear rules as we apply
| 20 | it.
| 21 | DR. WILLIG: Let's talk for a minute about the
| 22 | over/under cost pricing, because I think that is a good
| 23 | example, and the way I like to look at that example is
| 24 | to say that, yeah, if we had all the information in the
| 25 | world, the firm did and counsel did and the agency and |
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1 | the court did, it might make sense to say that there is
| 2 | above-cost predation, that there are price cuts above
| 3 | cost that might really be aimed at just knocking off
| 4 | competitors, and when those competitors are knocked off,
| 5 | it is not good for the market, it is not good for
| 6 | consumers, and protecting that sort of pricing would not
| 7 | be useful.
| 8 | But we all agree as a community that the kind of
| 9 | information necessary to make that call is so impossible
| 10 | to imagine happening, and asking our assistant to make
| 11 | those case decisions based on five years of Ph.D.
| 12 | analysis of elasticities on which nobody will agree even
| 13 | after five years, that in view of the importance of the
| 14 | right to drop prices and in view of the importance of
| 15 | not getting every pricing case tied up in court
| 16 | inconclusively for a decade, it makes a lot of sense to
| 17 | make a rule of thumb, as Areeda Turner suggested, and
| 18 | for that carry forward as the horseback rule of the day
| 19 | in the area of predatory pricing.
| 20 | I think it is conceivable that we develop such
| 21 | rules of thumb in other areas of conduct as well,
| 22 | stemming from consumer welfare, understanding that
| 23 | competitive practices are generally good ones, which is
| 24 | the no economic sense/sacrifice test, but driving toward
| 25 | rough and ready understanding of what we are going to |
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1 | allow and where concerns will be raised in an everyday
| 2 | practical context.
| 3 | DR. BAKER: I want to say a couple things about
| 4 | this. If the profit sacrifice or no economic sense test
| 5 | differs from the reasonableness analysis, it is doing so
| 6 | in order, as I said before, to put a thumb on the scales
| 7 | in favor of defendants. Now, maybe there are some areas
| 8 | where you worry very particularly about chilling
| 9 | legitimate conduct, and predatory pricing may be one,
| 10 | and there may be others, but it certainly does not make
| 11 | any sense to do that across the board.
| 12 | That is, in effect, what the profit sacrifice or
| 13 | no economic sense tests do if they matter, and if they
| 14 | do not matter, then we do not need them, and they also
| 15 | have the disadvantage that Einer emphasized, that you
| 16 | take your eye off the ball. You are not focusing
| 17 | anymore on the harm to competition. You are focusing
| 18 | on -- he had a very nice word -- the defendant's virtue.
| 19 | I like that.
| 20 | In any case, in terms of your administrability
| 21 | point, even the price-cost test that we are so used
| 22 | to -- and it is hard to think what else we would do in
| 23 | the predatory pricing area -- has tremendous problems
| 24 | with administrability. I mean, if you are going to use
| 25 | some fact to create a presumption, which is, in effect, |
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1 | what we are doing with a price below cost, you want it
| 2 | to be something that is easy to observe and something
| 3 | that is related to the harm, and, again, cannot be
| 4 | easily manipulated, and at least on the first two
| 5 | categories, cost is not a very good -- price-cost is not
| 6 | a very good measure.
| 7 | I mean, it can often be impractical to observe
| 8 | costs, particularly for multi-product firms, or when the
| 9 | key decisions involve things like capacity addition or
| 10 | expansion or entry. You know, this was the problem --
| 11 | rather than incremental production, which is the problem
| 12 | in American Airlines, and it is not at all clear that
| 13 | that below-cost pricing itself is a good signal of
| 14 | anything.
| 15 | I mean, whenever you have a case with a price
| 16 | that is below whatever the measure of cost is that we
| 17 | permit the case to go forward, the defense is going to
| 18 | have a good story about why the conduct is efficient,
| 19 | and a lot of those stories might well be good. There
| 20 | are all sorts of reasons that prices could appear to be
| 21 | below cost, and that could be okay, but, you know -- I
| 22 | mean, it could be accounting problems in how you are
| 23 | recording the investments and R&D and advertising,
| 24 | making costs look -- or depreciation, making costs look
| 25 | high, and it could be that the actual prices -- the |
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1 | price is low relative to whatever the measure is because
| 2 | the firms are making all sorts of investments in market
| 3 | share or to induce people to try the product,
| 4 | replacement sales, after-market sales, or, or create
| 5 | scale economies or learning. There are all sorts of
| 6 | good reasons that firms might price below costs, and it
| 7 | still could be okay.
| 8 | But by the same token, it could be above costs
| 9 | and still -- and that does not necessarily mean
| 10 | procompetitive, and Bobby just gave an example, I guess,
| 11 | or at least alluded to the fact that there are examples
| 12 | in the economics literature, and on top of that, there
| 13 | is the difficulty in administering this price-cost test.
| 14 | You know, you are arguing about defendant's cost
| 15 | accounting, not about exclusion and harm to competition.
| 16 | So, I mean, I am not sure we have any practical
| 17 | alternative but to use the price-cost test in these
| 18 | cases, but I am very troubled by it on administrability
| 19 | grounds, and the same problems of administrability that
| 20 | come up here are going to come up in any kind of analog
| 21 | that generalizes the idea of below cost pricing to a
| 22 | broader profit sacrifice or no economic sense test.
| 23 | DR. WILLIG: How does rule of reason solve those
| 24 | problems?
| 25 | MR. JACOBSON: Because it looks at the net |
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1 | effect on price and output, which is what the answer
| 2 | should be and the question should be from the outset.
| 3 | That is how it solves those problems. It goes directly
| 4 | to the point that you really care about. Why would you
| 5 | take a circuitous shortcut that is so difficult to
| 6 | administer that you will trip up on the way to get
| 7 | there, rather than just asking the question you really
| 8 | care about? That is why.
| 9 | MR. KOLASKY: And also, the rule of reason test
| 10 | allows you to take into account in doing your analysis
| 11 | and applying the test the administerability issues and
| 12 | the remedy issues. You know, if you look back at some
| 13 | of the early articles by Don Turner in the fifties and
| 14 | sixties about the rule of reason, that was part of what
| 15 | he argued needed to be part of the application of the
| 16 | rule of reason.
| 17 | MR. BLUMENTHAL: Let me ask a couple of
| 18 | questions about the application of the rule of reason in
| 19 | this context, and, you know, I do not know that the
| 20 | answer would be materially different from the answers
| 21 | you would give me in a Section 1 context, so it may be
| 22 | that your answer is, well, it is all the same as we are
| 23 | used to, but let me at least try to focus it here.
| 24 | The first proposition, I take it that the bottom
| 25 | line, we are trying to balance procompetitive effect |
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1 | against anticompetitive effect of a particular product,
| 2 | okay?
| 3 | MR. JACOBSON: In the sense that Bill was
| 4 | talking about.
| 5 | MR. CALKINS: I do not think that is it.
| 6 | MR. BLUMENTHAL: Okay.
| 7 | MR. CALKINS: Indeed, you go back to Bill
| 8 | Kolasky -- he says you do not balance until you get to
| 9 | the last step, and you never get to the last step, and
| 10 | so it is not really a balancing, five of these and four
| 11 | of those; rather, it is simply a sequence of questions
| 12 | like, the Joel Klein step-wise approach to the rule of
| 13 | reason and all these other different things. But it is
| 14 | not really a story about two scales to balance.
| 15 | MR. BLUMENTHAL: I will adopt that. Whether we
| 16 | deal with it as a series of screens and steps or whether
| 17 | ultimately we get to the balance or not, what I really
| 18 | wanted to tee up was the question, how does one deal
| 19 | with uncertainty in measuring the effect?
| 20 | Bill, in describing the application of the test,
| 21 | spoke repeatedly about the likelihood, and recognizing
| 22 | there is some significant uncertainty in what those
| 23 | likelihoods are going to be, how do you factor that in?
| 24 | Let me just say, I am raising that to tee up what is
| 25 | really the ultimate question I wanted to raise, which is |
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1 | whether the assessment of those likelihoods, the sort of
| 2 | discounts you would apply, how you would think about
| 3 | false positives and false negatives, should that vary by
| 4 | the type of conduct we are dealing with, or is that
| 5 | something that itself can be applied to the general
| 6 | standard? How should we think about that?
| 7 | MR. KRATTENMAKER: I will start and say, if I
| 8 | heard you right -- and it would be my fault if I
| 9 | didn't -- you said how do we assess or measure the
| 10 | effect --
| 11 | MR. BLUMENTHAL: How do we deal with the
| 12 | uncertainty?
| 13 | MR. KRATTENMAKER: With the uncertainty, excuse
| 14 | me, not the effect, and this is not the whole answer,
| 15 | but I think part of it is.
| 16 | Unlike Steve Calkins, I have never tried to read
| 17 | all the cases, but from the ones I have read, what I
| 18 | would like to suggest is that one of the ways you try to
| 19 | deal with some of the uncertainty -- it goes back to
| 20 | Einer's thing about the judges all said this stuff just
| 21 | does not mean anything to me, and I am sorry, I do not
| 22 | know what your reaction was, Einer, but mine was, it is
| 23 | really not all that unclear.
| 24 | So, I think you deal in part with the
| 25 | uncertainty by defining carefully what it is that you |
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1 | are worried about. It is things like defining what you
| 2 | mean by a market and defining what you mean by things
| 3 | like market power and deciding whether you mean
| 4 | transitory or durable market power. In other words, the
| 5 | first way you deal with uncertainty, I think, is to try
| 6 | to decide what is it you are trying to be certain about,
| 7 | and it has been my observation from looking at cases or
| 8 | proposed cases that people might talk about here at the
| 9 | Commission or in private practice, that oftentimes there
| 10 | has not been a careful assessment of what we are talking
| 11 | about.
| 12 | It is one thing to say consumer welfare. It is
| 13 | another thing to take it to another level to say let's
| 14 | be careful what we mean by consumer welfare, what are
| 15 | the elements of diminution to consumer welfare, and what
| 16 | do you need to know about to measure that. So, that is
| 17 | a partial response to your question. I think you deal
| 18 | with some of the level of uncertainty, and I think it
| 19 | has a practical application, you know, also in the sense
| 20 | that you might not find so many kind of screwy appearing
| 21 | cases if people had focused on things like is there a
| 22 | market here? Is there a market on which somebody could
| 23 | exercise market power? Is there some chance that this
| 24 | firm gained or is acquiring or is maintaining market
| 25 | power as a result of this conduct? |
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1 | Is that responsive to your question, in part? I
| 2 | will settle for in part.
| 3 | MR. CALKINS: Bill, you are saying let's go talk
| 4 | about competitive effect and -- and I think that the
| 5 | true answer is that it is often very hard. You look at
| 6 | Dentsply, right? Dentsply had exclusive dealing
| 7 | arrangements, and then you sit around and you ask,
| 8 | competitive effect? You say, well, these other firms
| 9 | did not do very well; and the defendant says, sure,
| 10 | because they were incompetent; and it is a very
| 11 | difficult process.
| 12 | It is not like -- there will be times when a
| 13 | firm with monopoly power sees a rival coming along the
| 14 | path, adopts some practice that is specifically designed
| 15 | to exclude, and you can see how that works out. You can
| 16 | conclude that the practice does not have any legitimate
| 17 | justification, and you can feel pretty comfortable. But
| 18 | there can be lots of times where competitive effect
| 19 | is --
| 20 | MR. KRATTENMAKER: That case will never be
| 21 | reported in any reporter, because it will not get
| 22 | anywhere. No, it is just a matter of probabilities, I
| 23 | mean, with anything in life.
| 24 | MR. CALKINS: This is not easy.
| 25 | MR. KRATTENMAKER: We do not -- |
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1 | DR. ELHAUGE: I guess on your question on
| 2 | whether with some things we would be more worried about
| 3 | false positives than others, I think the answer is yes,
| 4 | and it is conduct that is unavoidable, particularly
| 5 | every firm has price, the price it buys things at, the
| 6 | price it sells things at, and decides who to sell it to.
| 7 | So, those seem the three activities that we most worry
| 8 | about over-deterrence, because we are concerned that we
| 9 | are going to make prices -- cause people to elevate
| 10 | prices to avoid antitrust liability or deal with
| 11 | everybody no matter how inefficient it is to do so.
| 12 | Conduct that is more avoidable, we have somewhat
| 13 | less concern about that. So, you do not have to
| 14 | condition your price on excluding rivals. You do not
| 15 | have to have agreements for exclusive dealing or tying
| 16 | agreements. So, it seems to me that more the conduct
| 17 | is, in fact, conduct that every firm does not have to
| 18 | engage in, the less we have concern, we worry about the
| 19 | false positives.
| 20 | MR. BAER: I would also say that, you know, if
| 21 | you look at the false positive/false negative continuum,
| 22 | we would all probably agree that, you know, you are
| 23 | willing to tolerate some false negatives on competitor
| 24 | collaboration, because it is more often likely to be
| 25 | problematic, on balance. Most people would probably, |
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1 | you know, be more worried about over-deterrence on
| 2 | horizontal mergers, but you might be willing to tolerate
| 3 | coming a little bit on the over-deterring side of the
| 4 | line, and so then you get into the Section 2 area.
| 5 | Well, I mean, one area where I would be less
| 6 | willing to tolerate a lot of false positives is areas
| 7 | where the net result of the conduct is that prices are a
| 8 | lot lower, and you would want to be very, very careful
| 9 | before you adopted a rule that would deter a whole lot
| 10 | of that conduct. You would want to be able, whether you
| 11 | were doing a rule of reason balancing test or what, to
| 12 | make sure you had a fairly confident sense that the net
| 13 | effect of allowing that conduct to continue would
| 14 | dramatically change the market and lock it up for the
| 15 | dominant firm for the foreseeable future.
| 16 | So, you know, for one, at least I would probably
| 17 | be less willing to accept over-deterrence there, because
| 18 | I think consumers more likely than not are going to
| 19 | benefit from the conduct.
| 20 | MR. JACOBSON: Let me add, though, I think the
| 21 | problem is larger in the eyes of the enforcement
| 22 | community than it is in the real world. Number one, in
| 23 | litigation, defendants usually get summary judgment even
| 24 | in rule of reason cases. Either the plaintiff has not
| 25 | defined the market properly or the competitive effects |
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1 | that they prove impacted only themselves rather than the
| 2 | market as a whole. The myth that if you are in a rule
| 3 | of reason case, it almost always goes to the jury, is a
| 4 | myth. So, I think in a litigation context, it is
| 5 | overblown.
| 6 | It is more of a problem in the counseling
| 7 | context, but even in the counseling context, my
| 8 | experience is if the question you pose to the
| 9 | businessperson is, do you think this is going to raise
| 10 | prices in the marketplace, the businesspeople get that
| 11 | and can at least as often as not guide their businesses
| 12 | accordingly, and even when that is not true, I think you
| 13 | go back to what Brandeis said in the hearings on the
| 14 | Clayton Act before he was on the Bench, which is that if
| 15 | you want me to tell you how close can I get to the line
| 16 | without tipping over it, no, I cannot do that, but if
| 17 | you want me to tell you what I can do that is safe, yes,
| 18 | that I can do, and I think that is the case here.
| 19 | MR. KOLASKY: Well, to follow up on that, I love
| 20 | the reference back to Brandeis, because we all should
| 21 | remember that Brandeis was one of the most vocal critics
| 22 | of the Standard Oil decision, because he thought the
| 23 | rule of reason did not provide efficient counsel or
| 24 | guidance to business, and the result was, of course, he
| 25 | lobbied for the Clayton Act, and I am not sure that any |
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1 | of us think the Clayton Act did a particularly better
| 2 | job than the rule of reason has, but the more serious
| 3 | point is that, following up on John's comments and
| 4 | Bill's, competitor collaborations are increasingly and
| 5 | extremely common in today's economy where companies are
| 6 | very often not pure rivals but are also suppliers to one
| 7 | another, and I, at least, find that I have many more
| 8 | counseling questions involving competitor collaborations
| 9 | than I do single-firm conduct, and, you know, we have
| 10 | confidence that the courts are going to be able to apply
| 11 | the rule of reason in competitive collaboration cases,
| 12 | notwithstanding the kind of uncertainty, Bill, that you
| 13 | have referred to, which is every bit as present there as
| 14 | it is in single-firm conduct cases.
| 15 | So, you know, why do we think they will do any
| 16 | worse job resolving the uncertainty in Section 2 cases,
| 17 | where they have the guidance of the Supreme Court from
| 18 | Trinko, that they have to take account of the potential
| 19 | chilling effect of false positives, than they do in
| 20 | Section 1 cases?
| 21 | MS. McDAVID: Well, and Jonathan's statement
| 22 | suggests that the false positive risk is somewhat more
| 23 | ephemeral than is widely bandied about.
| 24 | MR. BLUMENTHAL: Is that a shared view?
| 25 | DR. ELHAUGE: Is what a shared view? |
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1 | MR. BLUMENTHAL: That false positive risk is
| 2 | more ephemeral than is commonly put forward.
| 3 | MR. JACOBSON: Yes.
| 4 | MR. KRATTENMAKER: Yes.
| 5 | MR. BLUMENTHAL: It looks to me like the group
| 6 | is a little bit tuckered out, and we probably ought to
| 7 | do a recharge. Why don't we --
| 8 | MR. KRATTENMAKER: Does that mean you didn't
| 9 | like the answer?
| 10 | DR. BAKER: A new panel for the next session.
| 11 | MR. BLUMENTHAL: I do see the relief pitcher has
| 12 | arrived back there. Why don't we break for 10 or 12
| 13 | minutes and come on back, and we will pick up on
| 14 | monopoly power or something like that.
| 15 | (A brief recess was taken.)
| 16 | MR. BLUMENTHAL: If I could ask everybody to
| 17 | take their seats, we are going to resume, and let me
| 18 | turn the floor over to the emcee for the rest of the
| 19 | afternoon, Dennis Carlton.
| 20 | MR. CARLTON: Okay, it is a pleasure to be here
| 21 | and to be the moderator for such a distinguished panel.
| 22 | I came in at the tail end of the last session where I
| 23 | heard Bill say that everyone was tired and you should
| 24 | take a break, and then he also told me that we, out of
| 25 | the 15 pages of questions, we have gotten through two |
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1 | pages, so --
| 2 | MS. McDAVID: I thought we were still on page 1.
| 3 | MR. CARLTON: -- so, I will do my --
| 4 | DR. BAKER: With occasional peeks at the very
| 5 | end.
| 6 | MR. CARLTON: I will do my best, and to make
| 7 | sure we get everybody's views, if we could sort of try
| 8 | and maybe have two or three people talk about each topic
| 9 | for a few minutes so we can cover a lot of topics, but
| 10 | what I will do so that nobody feels they missed an
| 11 | opportunity to say something that they really want to
| 12 | say, at the very end, probably around 4:30, what I am
| 13 | going to do is try and wrap up, and what I am going to
| 14 | do is ask each one of you to pose the question you wish
| 15 | either Bill or I had asked you, and then you can answer
| 16 | it for a few minutes, just so we get your views on
| 17 | probably what you think is the most important issue in
| 18 | these hearings.
| 19 | So, let me start off with a question -- and I
| 20 | apologize, I do not know if we have asked you one of
| 21 | these questions -- but it is this, it is the following:
| 22 | In Section 2 cases, we have treble damages. We know
| 23 | from the economic theory of damages that multiplication
| 24 | is appropriate when you have difficulty detecting. Is
| 25 | it people's views that we should change the multiple in |
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1 | Section 2 cases, at least some Section 2 cases, and, in
| 2 | particular, if, for example, there is an overt act that
| 3 | everybody can see, is it people's views that we should
| 4 | have only single damages?
| 5 | So, anyone want to pick up on that? Yes.
| 6 | DR. ELHAUGE: I do not think so. I think you
| 7 | are right, detection is sort of the main thing, but
| 8 | there is also adjudication costs or likelihood of
| 9 | adjudication, but in addition, there is the fact that we
| 10 | have treble damages, not necessarily treble the entire
| 11 | consumer harm, so usually the overcharge is treble that
| 12 | the defendant pays, not all of -- you do not get a
| 13 | measure of the foregone sales, and that is a big part of
| 14 | the loss. Prejudgment interest usually is not
| 15 | available, and given how long these cases last, that is
| 16 | a big factor.
| 17 | I think Easterbrook once did some study showing
| 18 | that when you took this into account, it went from at
| 19 | least from treble to double, and you might get down to
| 20 | single, too, if you also take into account the fact that
| 21 | if you raise market prices, you may raise them for other
| 22 | people. So, we think of it as treble damages and tend
| 23 | to ally quickly that that means treble of the total harm
| 24 | created, and that is not necessarily the case.
| 25 | MR. CARLTON: But to a large degree, it would |
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1 | suggest a different multiple between covert and overt;
| 2 | whether it is one to three is a different question.
| 3 | DR. ELHAUGE: Yes, I think that is right, but I
| 4 | think it is not just detection. It is detection times
| 5 | the odds of actually successful -- successfully
| 6 | adjudicate -- in some cases it may be very obvious to
| 7 | see, but nobody would bother to bring a case against it,
| 8 | because it is too hard to get a class action, say, and
| 9 | nobody else has standing, simple cases like that.
| 10 | MR. CARLTON: Anyone else? Bobby?
| 11 | DR. WILLIG: Yeah, I think we began to speak
| 12 | earlier about another role for treble and multiplying
| 13 | other than the difficulties of detection, and that is
| 14 | deterrence, deterrence of the act which has been found
| 15 | to be bad for the economy, and in the Section 2 context,
| 16 | where remedies are sometimes very difficult to think of
| 17 | in advance, and even if we can think of them, very hard
| 18 | to hold the liable firm to after the fact. We have
| 19 | examples of that phenomena all the time.
| 20 | Deterrence is a better remedy for the entire
| 21 | context, treble, as well as other institutions, like the
| 22 | private case follow-ons, for example, and the follow-ons
| 23 | to the follow-ons, help to deter, and if we have good
| 24 | standards -- and we seem to disagree about what they
| 25 | are -- but if we had good standards, that would be a |
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1 | good thing, to deter those practices about which
| 2 | liability would be found.
| 3 | MS. McDAVID: Well, and I think Einer's point
| 4 | about the absence of prejudgment interest is also well
| 5 | taken. These cases, after all, tend to be the Jarndyce
| 6 | v. Jarndyce of the antitrust world, and as a
| 7 | consequence, if you would apply interest for the
| 8 | duration of the harm to the point of final judgment, who
| 9 | knows how they would come out.
| 10 | MR. KRATTENMAKER: I am having a little trouble
| 11 | following the conversation, because I am assuming we are
| 12 | starting from the baseline that in almost all other
| 13 | areas of the law, we do not have treble damages.
| 14 | MR. CARLTON: Well --
| 15 | MR. KRATTENMAKER: I am trying to figure out
| 16 | what made it special.
| 17 | DR. ELHAUGE: Well, we have punitive damages for
| 18 | a lot of torts. We have treble damages for RICO
| 19 | violations. So, there is a lot of -- I mean, sometimes
| 20 | there is a conscious effort to bring down the punitive
| 21 | damages to some multiple, but that is a standard
| 22 | deterrence mode.
| 23 | MR. KRATTENMAKER: Well, I mean, I just -- if we
| 24 | are talking about ordinary tort, contract, property,
| 25 | landlord-tenant law, whatever, we do not start from the |
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1 | proposition that you owe three times damages. Dennis
| 2 | started by saying that the literature would teach that
| 3 | this is an unusual thing to do, that would generally be
| 4 | tied to the -- something about the facts of the case,
| 5 | not the kind of law involved.
| 6 | MR. CARLTON: Yes. If you focus on
| 7 | deterrence -- no, you are absolutely right. If you
| 8 | focus on deterrence, you know, taking what Einer said on
| 9 | lost consumer surplus --
| 10 | MR. KRATTENMAKER: Right, I think antitrust is
| 11 | important, but why is it more important to deter
| 12 | violations of the antitrust laws than of the securities
| 13 | laws or the labor laws or the National Security Act? I
| 14 | am not sure I know.
| 15 | MR. JACOBSON: Well, let me, first of all,
| 16 | incorporate by reference the AMC report on this in my
| 17 | current statement and --
| 18 | MS. McDAVID: All 400 pages?
| 19 | MR. JACOBSON: Yes.
| 20 | MR. CALKINS: Including Dennis' footnote
| 21 | dissent?
| 22 | MR. JACOBSON: No. So, Dennis knows my views on
| 23 | this, and I will just be very brief, which is that the
| 24 | treble damages are there for the principal reason of
| 25 | inducing private enforcement of the antitrust laws. |
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1 | That is, in part, a deterrence factor, but it is, in
| 2 | part, getting private individuals, given that the
| 3 | Government has limited resources and in recent years
| 4 | limited inkling to enforce Section 2, to undertake the
| 5 | enormous effort of putting together an antitrust case at
| 6 | great risk in a world where standing rules, very
| 7 | appropriately, are designed to tightly cabin the number
| 8 | of private litigants that can proceed, in which, you
| 9 | know, summary judgment, there is a different standard in
| 10 | antitrust, and, again, I think it is a good thing, but I
| 11 | think to compensate from that, to have the law enforced,
| 12 | you absolutely have to have private enforcement, and you
| 13 | do not have private enforcement of antitrust without
| 14 | treble damages.
| 15 | MS. McDAVID: I think the European experience
| 16 | right now, with the study that they are doing on private
| 17 | enforcement, takes you to that question. Private
| 18 | enforcement is hypothetically available in Europe, but
| 19 | given the absence of a whole series of mechanisms, one
| 20 | of which is the absence of treble damages or some
| 21 | multiplier, means that there just is not any private
| 22 | enforcement.
| 23 | MR. CARLTON: Yes, although what is interesting
| 24 | about most of the responses is they are talking about
| 25 | the cost of bringing an antitrust action and also |
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1 | talking about the incentive to bring one, which I think
| 2 | is completely appropriate, but what has always struck me
| 3 | as a bit odd is that the literature, the economic
| 4 | literature, although those points are certainly
| 5 | recognized, it is the detection probability that is most
| 6 | often used to justify a multiple. These other things
| 7 | are understood, and it does not mean you cannot build a
| 8 | model that includes them, but it does suggest that
| 9 | unless -- the costs of bringing the lawsuit is the
| 10 | hurdle rather than the gain or the harm the action
| 11 | creates.
| 12 | You would think that there should be different
| 13 | multiples depending upon the detection probability, and
| 14 | whether it is one, one and a half, two, or overt and a
| 15 | different multiple for covert, I do not know, but it did
| 16 | strike me -- and John made reference to the AMC
| 17 | hearings -- it did strike me as odd that I was so much
| 18 | in the minority that these multiples should depend on
| 19 | the type of act.
| 20 | MR. CALKINS: Once you start fine tuning it,
| 21 | though, you have to reduce the multiple when it is
| 22 | following onto a successful government prosecution, and
| 23 | then you have to reduce it by perhaps a different amount
| 24 | if there is a report in the newspaper that there is a
| 25 | government investigation -- and, you know, could we |
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1 | construct a world wherein you did it differently and you
| 2 | took into account various interests, and would we have a
| 3 | different set of legal rules? Yes. Would it be better
| 4 | in some ways? Perhaps. It ain't going to happen.
| 5 | MR. CARLTON: Yeah, I think it may not happen.
| 6 | I think it overstates the case to state it should be so
| 7 | finely graded. I mean, two multiples is better than
| 8 | one, and I would be happy with two. I do not need an
| 9 | infinite number, but --
| 10 | DR. ELHAUGE: I was going to say, I think there
| 11 | is a distinction between detection of the conduct and
| 12 | detection of whether it has anticompetitive effects,
| 13 | because there is some conduct that cartels, in many you
| 14 | have to detect whether it occurs, and this may create a
| 15 | detection problem, but for monopolist conduct, it is
| 16 | often overt in the sense you mean, but the fact that you
| 17 | know the conduct occurred does not mean you know whether
| 18 | it is anticompetitive, and you may not know until you
| 19 | incur all the costs of discovery and --
| 20 | MR. CARLTON: Yes, that is actually a good
| 21 | point. Now, Bobby raised something about remedies, so I
| 22 | guess one question is, what are your views on whether
| 23 | the Government should bring a Section 2 case unless, in
| 24 | advance, it can figure out what the remedy is? Should
| 25 | the Government have the right to fine people, which I |
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1 | think it does not in a Section 2 case, or should it say,
| 2 | "I cannot figure out a remedy, so let them keep doing
| 3 | it"?
| 4 | DR. WILLIG: That makes it real cheap for the
| 5 | follow-on cases, and that provides the deterrent in the
| 6 | first place. Once the law is clear, the public case can
| 7 | accomplish that.
| 8 | MR. CARLTON: Right. So, private remedies
| 9 | following on a government case finding liability -- in
| 10 | which there is liability found, even if the Government
| 11 | cannot articulate a remedy.
| 12 | DR. WILLIG: And then creating a good precedent
| 13 | and a clear precedent for subsequent behavior.
| 14 | DR. ELHAUGE: Plus the Government might possibly
| 15 | be able to get disgorgement of profits as an equitable
| 16 | measure.
| 17 | MS. McDAVID: But I think that as a practical
| 18 | matter, the agencies do try to think through the
| 19 | question of remedy in terms of determining whether to
| 20 | exercise the prosecutorial discretion and invest
| 21 | resources in this particular case, because perhaps there
| 22 | are better places to spend it if they cannot accomplish
| 23 | anything at the other end. Teeing up a private lawsuit
| 24 | is probably not on the list of agency priorities.
| 25 | MR. CALKINS: Just to be a little contrary, I |
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1 | cannot picture a good government enforcer saying that I
| 2 | think this is illegal, and I cannot think of any good
| 3 | thing to do about it, but I am going to sue and just
| 4 | hope to win and have the judge say, "You win, thanks
| 5 | very much, go away." I would assume that at the end of
| 6 | the day, the Government is going to ask for some remedy,
| 7 | and I would think that as a matter of good government,
| 8 | the Government ought to think in advance about what that
| 9 | remedy is, and if you cannot look in the mirror and say
| 10 | that if you win, the world will be a better place
| 11 | because of something that is going to happen in this
| 12 | lawsuit -- well, then, you probably should not be
| 13 | bringing that lawsuit.
| 14 | MR. CARLTON: I guess the hard question that you
| 15 | raise is, let's suppose in the context of an individual
| 16 | case, whatever remedy you can conceive of would not make
| 17 | things better but would actually make things worse. On
| 18 | the other hand, it would set a precedent for deterrence,
| 19 | which was what Bobby was talking about earlier. Then it
| 20 | seems to me a more difficult question, and I suspect
| 21 | most people would be unlikely to impose a remedy that
| 22 | makes things worse in a particular case would be my
| 23 | hunch.
| 24 | MR. BAER: Although they might end up with a
| 25 | remedy that, you know, that that is an effort to do |
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1 | something, and really, at the end of the game, from the
| 2 | point of the view of the agency enforcement's objective,
| 3 | is to establish the precedent. If you look at what the
| 4 | FTC has just concluded in its Rambus standard-setting
| 5 | case, you know, they went through an elaborate focus on
| 6 | whether the conduct at the end of the day constituted
| 7 | illegal conduct under Section 2 and concluded it did,
| 8 | wrote a very strong, forceful opinion, and then found
| 9 | itself tied in total knots about what to do with regard
| 10 | to remedy.
| 11 | They ended up allowing a limited royalty to be
| 12 | collected, but only on sales that occur from the date of
| 13 | the entry of the order, and 90-95 percent of the
| 14 | products have already been sold. So, Rambus really, at
| 15 | the end of the day, has gotten a slap on the wrist. It
| 16 | is going to be allowed on future sales to collect a very
| 17 | small royalty, but it is going to be able to go to court
| 18 | and collect all the back royalties it claims it is owed,
| 19 | which is billions of dollars, and, you know, you
| 20 | could -- that, to me, was a mistake. Obviously I was
| 21 | involved in the case and have some strong views on it,
| 22 | but at the same time, you could make the argument, which
| 23 | is I think your point, Dennis, is at the end of the day,
| 24 | in terms of a standard of conduct that will cause people
| 25 | to behave perhaps better in the course of |
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1 | standard-setting organizations, there is a marker laid
| 2 | down there which may have some general deterrence,
| 3 | although if, in fact, at the end of the day, you would
| 4 | be allowed to keep your overcharges, maybe you do not
| 5 | think twice about it.
| 6 | MR. JACOBSON: Dennis, I think if the only
| 7 | remedy you can think of would harm consumers, then there
| 8 | is something wrong with the liability case. So, I think
| 9 | if you are facing that scenario, I think you need to
| 10 | take another look at the liability case and see whether
| 11 | there is really a case to be brought.
| 12 | MR. CARLTON: Well, it is a little tricky
| 13 | between a monopolization case when a monopoly has not
| 14 | been established and a person is being snuffed out. If
| 15 | you could have stopped it earlier, it would have helped
| 16 | consumers, but now you cannot. They are guilty of
| 17 | monopolization. What are you going to do? I mean, that
| 18 | was what I had in mind.
| 19 | The benefit, I think, you know, the Rambus case
| 20 | is a good example where you are hopefully setting
| 21 | precedent to prevent future harms from occurring or you
| 22 | forgo a remedy in a particular case.
| 23 | MR. JACOBSON: It would depend what the conduct
| 24 | was in that case, but normally -- my firm represents
| 25 | Rambus, so I will not comment on Bill's point on that |
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1 | case -- but normally you would think about, you know,
| 2 | royalties in cases of intellectual property-related
| 3 | violation. I thought the Judge Jackson remedy in
| 4 | Microsoft was a sound remedy. I think the main
| 5 | beneficiaries of that, candidly, would have been the
| 6 | shareholders of Microsoft. Obviously management thought
| 7 | differently, but I think it is an unusual Section 2 case
| 8 | that has a strong liability basis that yields no
| 9 | productive remedy.
| 10 | MR. CARLTON: Let me turn to some specific
| 11 | topics, and one I wanted to turn to was exclusive
| 12 | dealing, and I want to use exclusive dealing to pose a
| 13 | question.
| 14 | Under a rule of reason analysis, we often say we
| 15 | weigh the procompetitive effects against the
| 16 | anticompetitive effects and then come to a decision, and
| 17 | I am wondering if that is an accurate characterization
| 18 | of not what is said, but what is done, and whether a
| 19 | weighing of procompetitive benefits verse
| 20 | anticompetitive harm really ever gets done in these
| 21 | Section 2 cases or whether we do something a bit
| 22 | different, which is try and figure it out and then say
| 23 | there are no benefits, there are only costs, you cannot
| 24 | do it; or the reverse, there are only benefits, there
| 25 | are no costs, so you can do it. |
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1 | MS. McDAVID: Well, we talked about it in terms
| 2 | of burden-shifting at the very beginning of the program,
| 3 | and in the sense of the Microsoft Court of Appeals
| 4 | opinion.
| 5 | MR. KRATTENMAKER: No court has ever written an
| 6 | opinion saying, now that it is all over, we find that
| 7 | there are these harms and these efficiencies and we are
| 8 | now going to weigh them and we are going to choose
| 9 | between the two.
| 10 | MR. CARLTON: Yes, that is my sense.
| 11 | MR. KRATTENMAKER: Bill explained -- well, Bill
| 12 | can say it better than I can -- they changed the earlier
| 13 | step analysis to avoid that.
| 14 | MR. KOLASKY: The point we were making earlier
| 15 | was that you have basically a step-wise analysis. I
| 16 | disagreed with the way that Joel Klein defined the
| 17 | steps, but the term is exactly right. The rule of
| 18 | reason involves a step-wise analysis where you first
| 19 | look at how serious are the anticompetitive harms, what
| 20 | are the procompetitive justifications, are they
| 21 | credible, and if they are, the plaintiff then has the
| 22 | burden of trying to show that the defendant could have
| 23 | achieved those same objectives in a less anticompetitive
| 24 | manner, but the real key is that the degree of scrutiny
| 25 | that you apply according to the strength of the showing, |
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1 | so that you have what Justice Souter called an inquiry
| 2 | meet for the case. The stronger the showing of
| 3 | anticompetitive harm, the more closely you are going to
| 4 | scrutinize the procompetitive justifications that are
| 5 | offered.
| 6 | MR. CARLTON: Yeah.
| 7 | MR. KRATTENMAKER: And the more likely you are
| 8 | to have found some other way to have done it, find some
| 9 | less restrictive alternative, and that is why they avoid
| 10 | that ultimate fourth question or how they avoid it,
| 11 | overtly balancing.
| 12 | MR. JACOBSON: Well, and just to close that off
| 13 | and to restate what Bill said earlier, the ultimate
| 14 | inquiry into net effect on competition, is the net
| 15 | effect of this practice going to increase or decrease
| 16 | output -- in particular, are prices, quality-adjusted,
| 17 | going to go up or not -- that that is where the
| 18 | balancing takes place in determining whether there is an
| 19 | output restriction or not. If there is no output
| 20 | restriction, there is no ephemeral balancing to be done.
| 21 | MR. CALKINS: The problem I have with this is
| 22 | that it sounds nice, and I do not have any trouble with
| 23 | any of it, but I am not sure that is what really
| 24 | happens. I mean, take exclusive dealing, right? There
| 25 | are a whole series of cases where a judge says, ah-ha, |
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1 | here is a contract -- it is a short-term contract -- it
| 2 | is less than a year, and, therefore, I conclude that it
| 3 | is procompetitive, and I am done.
| 4 | One of the things that I like about the Dentsply
| 5 | case is that the Government won that case even though
| 6 | those contracts were terminable, as I recall, either on
| 7 | notice or in a short period of time, and the judge was
| 8 | able to say, no, harm can be lessened if reality is that
| 9 | those dealers are not about to give up dealing with
| 10 | Dentsply, and so even though it is terminable on short
| 11 | notice, an exclusive dealing clause can harm
| 12 | competition.
| 13 | So, although we can sit here and talk about --
| 14 | you know, it is nice, look at this and look at this --
| 15 | the hard part often is not really that. It is how do
| 16 | you decide whether this particular arrangement is
| 17 | lessening competition or likely to lessen competition,
| 18 | and it becomes all too easy for people, I think, to go
| 19 | off the track one way or the other in trying to sort
| 20 | that out.
| 21 | MR. KOLASKY: I guess the point is -- I mean,
| 22 | you are absolutely right, the Court did the right thing
| 23 | to look at whether the exclusives in that case had
| 24 | teeth -- sorry.
| 25 | MR. CALKINS: The question was whether they were |
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1 | "edentulous."
| 2 | MR. KOLASKY: Yes. But the point is -- and
| 3 | actually, exclusive dealing is a perfect model for this,
| 4 | I think -- you know, the courts over the years have
| 5 | basically evolved a presumption, developed a
| 6 | presumption, that if you have short-term contracts that
| 7 | are terminable in less than a year, they are unlikely to
| 8 | have a durable anticompetitive effect.
| 9 | On the other hand, it is a rebuttable
| 10 | presumption. It is not a conclusive presumption. So,
| 11 | the plaintiff has the opportunity, as the Justice
| 12 | Department did in Dentsply, of showing that,
| 13 | notwithstanding that the exclusives are nominally
| 14 | terminable, as a practical matter, the distributors have
| 15 | to carry Dentsply teeth or dentures, and, therefore, the
| 16 | exclusives have it.
| 17 | MR. CARLTON: I wanted to follow up on the point
| 18 | about the length of the contract and the notion that the
| 19 | distributorship contracts are terminable at will.
| 20 | Courts have often placed a reliance on that when, what
| 21 | is interesting, is, if anything, the economics
| 22 | literature, especially the recent economics literature,
| 23 | has gone in a completely opposite direction, saying it
| 24 | is not a long-term tie-up of the dealerships that is the
| 25 | issue; it is the simultaneous incentives created by the |
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1 | large market power that the incumbent has, and in light
| 2 | of that, those incentives make everybody want to deal
| 3 | with him. That is the exclusion.
| 4 | I am wondering, from your comments, can we infer
| 5 | that the courts are relaxing their view about that
| 6 | presumption, that duration is key, or is that still
| 7 | going to remain?
| 8 | MR. JACOBSON: Dennis, let me take a quick shot
| 9 | at that. The one-year presumption starts with the
| 10 | remedy in motion picture advertising back 50 years ago,
| 11 | over 50 years ago, and it is from that that courts later
| 12 | extrapolated a one-year presumption in these cases.
| 13 | Now, what is important to recognize is that the
| 14 | law developed when exclusive dealing arrangements were
| 15 | subject to attack under much smaller market shares than
| 16 | you have today. So, when you are dealing with a firm
| 17 | with a 15 percent market share, then you are really
| 18 | going to want to insist much harder on longer term
| 19 | exclusives.
| 20 | Now that the law has evolved to require much
| 21 | more significant market shares of the defendant and much
| 22 | more significant foreclosure in the real world, then the
| 23 | duration issue has less importance and less centrality
| 24 | than it used to have, and it has been informed, I
| 25 | believe, by the economic advances that focus more on the |
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1 | incentives than, rather, on the specific terms of the
| 2 | contract.
| 3 | DR. WILLIG: From the point of view of those
| 4 | incentives, the question is whether the economics that
| 5 | says the degree of scale economies is all important for
| 6 | judging the competitive consequences of the scope of the
| 7 | exclusivity, has that made its way into the courtroom
| 8 | yet?
| 9 | MR. JACOBSON: Has it made its way into the
| 10 | courtroom? Yes. Has it made its way into Federal
| 11 | Supplement and F.3d?
| 12 | MS. McDAVID: Or Antitrust Law Developments?
| 13 | MR. JACOBSON: Well, it has made its way into
| 14 | Antitrust Law Developments, but no, the cases have not
| 15 | really caught up with it.
| 16 | DR. ELHAUGE: On this point, I agree with you
| 17 | totally about the economic literature. It does not
| 18 | really suggest terminability should matter, because that
| 19 | was suggested, for some reason, the economic incentives
| 20 | to enter into these agreements are different from ones
| 21 | to not terminate, but I think I disagree that the law is
| 22 | clear. I mean, there are some lower court cases that
| 23 | have cited treatise to this effect, but, in fact, the
| 24 | Supreme Court authority is pretty clear.
| 25 | There are a number of Supreme Court cases, |
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1 | including the FTC Brown Shoe case, after motion
| 2 | pictures, that said, you know, it did not matter, and
| 3 | that case was voluntarily terminable at any time. The
| 4 | motion pictures case was actually just about the
| 5 | remedy -- clearly they took a remedy in that particular
| 6 | case. So, we kind of have an area where somehow
| 7 | everybody forgot about the old Supreme Court authority.
| 8 | There is some recent appellate authority that
| 9 | just sort of lobbed onto this nice presumption, but this
| 10 | is one of those examples I think that I was talking
| 11 | about earlier of a silly formalism that is not really
| 12 | well based in economics, before you came here, that we
| 13 | need to avoid. Unless we can base it in some sound
| 14 | economic theory, it shouldn't be limiting the
| 15 | application of antitrust law.
| 16 | MR. JACOBSON: Let me just add, though, that the
| 17 | silly court of appeals decisions start off with Dick
| 18 | Posner in Roland Machinery, for what it is worth.
| 19 | MR. KOLASKY: I also want to come back to a
| 20 | theme that we started out talking about, and that is the
| 21 | importance of needing some presumptions, at least, so
| 22 | that we can counsel our clients and that companies have
| 23 | a better sense of how to shape their -- structure their
| 24 | conduct. So, the real question is, even if the
| 25 | economics literature has evolved this new way of |
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1 | thinking about exclusive dealing arrangements that are
| 2 | terminable at will, are we sufficiently confident with
| 3 | that that we want to abandon what is a relatively
| 4 | administrable presumption, that in the real world has
| 5 | helped a great deal, I think, in helping clients figure
| 6 | out how to structure their exclusive dealing
| 7 | arrangements so that they are less obviously
| 8 | anticompetitive.
| 9 | DR. ELHAUGE: I am just not sure they are less
| 10 | anticompetitive just because they are terminable. I
| 11 | think it is a misguided presumption. It may give
| 12 | defense false hope and lead them into liability that
| 13 | they could well be advised to avoid.
| 14 | MS. McDAVID: Well, the temporal nature of an
| 15 | exclusive dealing arrangement is just part of the
| 16 | overall foreclosure analysis, and I think when the
| 17 | courts began to grapple with the temporality issue, it
| 18 | was part of the move away from Standard Stations, where
| 19 | we had this de minimus foreclosure being held unlawful,
| 20 | when, in fact, if they had focused on the fact that
| 21 | everyone was doing the same kind of practice, they might
| 22 | have gotten to illegality. But it really is about the
| 23 | extent of foreclosure, and duration is part of that.
| 24 | MR. CARLTON: Yes, although it seems like there
| 25 | are really two separate forces going on. One is if I |
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1 | have a long-term contract with all of the distributors
| 2 | and there is no entry, I am really the monopolist of
| 3 | distribution, and no one else can get in unless I charge
| 4 | them a monopoly price, and it is hard to keep them out.
| 5 | An alternative mechanism is simply there are economies
| 6 | of scale in distribution, and I do not have any
| 7 | long-term contracts, but I am the big guy on the block,
| 8 | and everybody has to use me, and I have a contractual
| 9 | term that forces people to choose between me and my
| 10 | rival, and they always choose me.
| 11 | So, let me turn to a question about refusals to
| 12 | deal, and I am curious whether there is anyone on the
| 13 | panel who thinks that the Essential Facilities Doctrine
| 14 | should be a doctrine that ultimately the Supreme Court
| 15 | endorses, or should we just get rid of it? And I guess
| 16 | related to that is whether sort of the decision in
| 17 | Trinko, which I think pretty well establishes that
| 18 | rivals have no duty to deal with other rivals except in
| 19 | rare exceptions. Even there, I think the Court is
| 20 | wrong, but I am curious what other people think.
| 21 | So, one, do people think the Essential
| 22 | Facilities Doctrine really should disappear forever from
| 23 | now, and two, whether they think that the Trinko
| 24 | standard is the right standard as I have interpreted it?
| 25 | MR. JACOBSON: As you know, I have great |
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1 | difficulties with the Trinko case, so let me start
| 2 | first. I think most would agree, and I certainly would
| 3 | agree, that the Essential Facilities Doctrine as an
| 4 | independent basis of liability does not belong. I do
| 5 | think in determining whether there has been an attempt
| 6 | to monopolize an adjacent market, that the inquiries
| 7 | that you make in an essential facilities analysis are
| 8 | relevant and appropriate, and one area where I think the
| 9 | law and the enforcement, particularly of late, has been
| 10 | lax is in cavalierly accepting the single monopoly
| 11 | profit assumption as dispositive in adjacent market
| 12 | cases.
| 13 | Although it was correct to throw out the Berkey
| 14 | Photo Doctrine, that an attempt to gain a competitive
| 15 | advantage in a second market could be a basis for
| 16 | liability, I do think there is a problem, depending on
| 17 | the nature of the conduct, with using monopoly power in
| 18 | one market to monopolize a second market. The Essential
| 19 | Facilities Doctrine, one of the inquiries that it makes
| 20 | is one way of approaching that.
| 21 | I do not think Trinko really articulates a
| 22 | standard. I do think that in the context of refusals to
| 23 | deal in the same market with a rival, the Aspen context,
| 24 | that there has to be, you know, a very, very, very
| 25 | narrow stroke, if any, of liability, but I think in the |
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1 | adjacent market context, we are talking about a much
| 2 | different problem.
| 3 | DR. ELHAUGE: To me I think the answer depends
| 4 | on what we think Trinko means, and other than it is at
| 5 | or near Aspen, maybe beyond or before, I am not even
| 6 | sure, I am not exactly sure. If we read it to mean that
| 7 | discrimination among outsiders on the basis of rivalry,
| 8 | that is, you sell to some outsiders voluntarily but not
| 9 | to rivals, if that is a necessary condition, then I
| 10 | agree with Trinko and think that the Essential
| 11 | Facilities Doctrine is mistaken because it does not
| 12 | incorporate that requirement.
| 13 | But if you think that the key part is the other
| 14 | part of Trinko that emphasizes termination of rivals and
| 15 | that was emphasized in Aspen, that actually, it seems to
| 16 | me, is a misbegotten notion. It's like confusing tenure
| 17 | for law professors. It seems to me that essentiality is
| 18 | actually a better test than whether I once dealt with
| 19 | them and have now terminated them, because after all, in
| 20 | Aspen Ski, it was not essential -- the mountain still
| 21 | remained in the market. So, it is not clear to me why
| 22 | we wouldn't be asking if the Essential Facilities
| 23 | Doctrine is narrower than the Aspen doctrine.
| 24 | MR. CARLTON: Do people regard the Essential
| 25 | Facilities Doctrine as an alternative to regulation and |
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1 | that, therefore, it should be preserved, or do they
| 2 | think that that is a dangerous route to go down in which
| 3 | you have judges, in a sense, determining the terms on
| 4 | which one rival deals with another?
| 5 | DR. WILLIG: I would agree with John that this
| 6 | is all properly viewed under a good analysis under
| 7 | Section 2, that the kinds of fact patterns that arise
| 8 | and the old standards of essential facilities are fact
| 9 | patterns that should be analyzed under appropriate use
| 10 | of essential facilities, and that might come out either
| 11 | way depending upon the fine-grain details of the case.
| 12 | I think there are lots of conceivable instances
| 13 | where we do not want to see traditional public utility
| 14 | style regulation applied to a bottleneck, because it is
| 15 | not pervasive enough, it is not long-lived enough, but
| 16 | where nevertheless there may be antitrust issues, and so
| 17 | I am thoroughly agreeing with John, strange though it
| 18 | feels to agree with learned counsel.
| 19 | MR. JACOBSON: I made economic sense for once.
| 20 | DR. WILLIG: But do not sacrifice on my part.
| 21 | DR. BAKER: I think I am more or less in the
| 22 | same place. It seems to me the question about you want
| 23 | to preserve any role for the Essential Facilities
| 24 | Doctrine has to do with whether -- a policy question
| 25 | about whether you want to use the antitrust laws in |
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1 | certain kinds of natural monopoly settings rather than
| 2 | creating a commission, and there are pros and cons about
| 3 | that, and the modern trend is to not to do that, but,
| 4 | you could think about it.
| 5 | I mean, I do not think I have anything to say
| 6 | other than spotting it as a policy question, although on
| 7 | the question of refusals to deal generally, it seems to
| 8 | me that with rivals, that Aspen is still the law, and
| 9 | that Trinko reaffirms it, maybe at the outer limits, but
| 10 | it is still the law, and if you have a termination of a
| 11 | rival and it harms competition, I think there was a
| 12 | pretextual justification in -- as was in Dentsply, too,
| 13 | for -- so, there was no good business justification for
| 14 | doing it. It is a perfectly legitimate basis for
| 15 | inferring harm to competition if a monopolist excludes a
| 16 | rival without a good justification.
| 17 | MR. KOLASKY: I would just add, I think my view
| 18 | may be at the extreme end of this discussion, is after
| 19 | Trinko, the essential facilities RIP, rest in peace, and
| 20 | I do not think there really is anything left of the
| 21 | Essential Facilities Doctrine, and I hope that it will
| 22 | ultimately be interred, but I do think that the small
| 23 | window that the Supreme Court left open in Trinko for
| 24 | finding a refusal to deal with rivals to be a violation
| 25 | of Section 2 is an important one, and I think that the |
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1 | key thing is the element that the Supreme Court
| 2 | mentioned there and that John alluded to, and that is
| 3 | the element of discrimination, that, you know, the
| 4 | refusal to sell to rivals on the same terms that you are
| 5 | selling to the public generally, and one of the reasons
| 6 | why that is so important is that that then gives you an
| 7 | administrable remedy.
| 8 | The big concern I have with the Essential
| 9 | Facilities Doctrine or any kind of refusal to deal as a
| 10 | basis for a Section 2 violation is, you know, how does
| 11 | the court enforce the terms of access without becoming a
| 12 | regulator? And that is not a role I think we want the
| 13 | antitrust courts to play, but so long as you have the
| 14 | discrimination element present, as it was in Aspen, then
| 15 | a court could impose a compulsory duty to deal.
| 16 | MS. McDAVID: Absent some preservation of some
| 17 | duty to deal, depending on the circumstances, then we
| 18 | are throwing ourselves into a regulatory regime and all
| 19 | the things that go with it, including capture. The
| 20 | preference for regulation was one of the things about
| 21 | the Trinko decision that puzzles me, frankly, given all
| 22 | we have learned about regulation and the fact that we
| 23 | all thought we were moving to a deregulated world in
| 24 | which markets worked.
| 25 | MR. CARLTON: I guess the real question is, do |
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1 | you think there could be a market solution when you have
| 2 | to have access when there is a claim that a rival has
| 3 | been deprived of it? And I take Bill's point to be
| 4 | sometimes that may be easy to do in some fact patterns,
| 5 | but there are clearly other fact patterns where I think
| 6 | that would be quite difficult, and I am worried about
| 7 | precisely the choice you described, which is having a
| 8 | judge, who may not have any expertise, trying to
| 9 | regulate an industry versus a regulatory authority,
| 10 | which also has its own costs.
| 11 | MS. McDAVID: Perhaps it takes us back to the
| 12 | question of what is the appropriate remedy and whether,
| 13 | in a circumstance like that, a structural remedy avoids
| 14 | the need for getting into the question of the royalty.
| 15 | DR. ELHAUGE: I think it also goes to the
| 16 | elements, because I think Bill is exactly right. If it
| 17 | is a discriminatory element, then you can foresee what
| 18 | the application is going to be, and I think it can be
| 19 | administered by randomly selected judges and juries.
| 20 | The problem is if it is just a refusal outright,
| 21 | somebody has set the price who is supposed to have done
| 22 | that, and in constructing the refusal, charging too high
| 23 | a price, when does that really count as a refusal, and
| 24 | people have to be careful, what is a judge or jury going
| 25 | to say ten years later, they are not going to know what |
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1 | to do, that is I think a powerful argument for limiting
| 2 | the Essential Facilities Doctrine, a nondiscriminatory
| 3 | one, the two cases of where there really is a regulator
| 4 | available to tell you prospectively what these actors
| 5 | are supposed to do.
| 6 | DR. WILLIG: That is not the way I read that
| 7 | part of Trinko, Dennis. I am intrigued by your reading.
| 8 | I thought the court was stating that the regulation
| 9 | exists, the agency exists, the regulation explicitly
| 10 | covers the terms of such pricing, and the issue is
| 11 | whether to impose antitrust on that rather than to make
| 12 | it an initial choice between those two modes in
| 13 | regulating the market.
| 14 | MR. CARLTON: Yes, I think that is exactly
| 15 | right. So, just to be clear, the question I was posing
| 16 | is, in an unregulated industry, if there is a challenge
| 17 | based on essential facilities, do we feel comfortable in
| 18 | having the judge issue a remedy in which he has to say
| 19 | what the transaction terms are? That makes me nervous,
| 20 | and that is why I do not like it as a method. I think
| 21 | the fact pattern that Bill talked about can get you
| 22 | around it sometimes, but in the large majority of cases,
| 23 | we might not see these outside offers.
| 24 | MR. BAER: Even in the AT&T case, it was the
| 25 | best of worlds, it was the worst of worlds, right? The |
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1 | divestiture, the clean remedy basically introduced a
| 2 | structural mode to things, but Judge Harold Green spent
| 3 | a hell of a lot of time regulating, and some would say
| 4 | maybe not doing the best job in the world of that. I
| 5 | mean, it was an impossible job, and once he got the
| 6 | structural part done, I mean, he really had no choice
| 7 | but to stick with it, and that was tough.
| 8 | MR. KOLASKY: And what a great job the FCC did
| 9 | after they took over the job.
| 10 | MR. BAER: Right, good point.
| 11 | MR. CARLTON: Yeah, let's go to a different
| 12 | topic now on predatory bidding, and let's talk a little
| 13 | bit about the Weyerhaeuser case or at least how I read
| 14 | that, which I generally like what the Court said, but I
| 15 | was a little worried that in discussing predatory
| 16 | bidding or, in general, discussing monopsony, I get the
| 17 | feeling sometimes when I read decisions or even
| 18 | sometimes the legal literature or the economics
| 19 | literature, that there is a confusion between monopsony
| 20 | and monopoly, and there is a failure to recognize that
| 21 | you can monopsonize the input market but have no effect
| 22 | on output prices.
| 23 | Now, if that were the case, does anyone have
| 24 | misgivings about any of the language in Weyerhaeuser,
| 25 | that someone could interpret what they are saying as, |
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1 | well, there is an output effect, so, therefore, that is
| 2 | what I am basing my decision on? In other words, in the
| 3 | absence of an output effect, would you be happy with
| 4 | condemning monopsony is the question.
| 5 | MR. JACOBSON: Well, output. As you and I have
| 6 | discussed, it is not monopsony unless you have an upward
| 7 | sloping supply curve, and the result of the exercise of
| 8 | monopsony power is to restrict the quantity that is
| 9 | purchased in the market. What Weyerhaeuser does not
| 10 | recognize, although I do not think he could write the
| 11 | opinion differently, is that the differences between
| 12 | monopsony and monopoly relate importantly to the
| 13 | incentives to engage in monopsonistic behavior, because
| 14 | a firm that has very little or no market power in the
| 15 | output market, as did Weyerhaeuser, is going to have
| 16 | mixed incentives when it comes to monopsonizing an input
| 17 | market, because the degree to which they restrict the
| 18 | quantity of logs purchased is correspondingly going to
| 19 | impair their ability to profit in the output market.
| 20 | So, what Thomas' opinion misses -- and I think
| 21 | it is a very good opinion and this issue was not raised
| 22 | so it was unnecessary to decide it -- but I think later
| 23 | cases, to the extent there are any, are going to have to
| 24 | focus on whether this conduct, which may be ambiguous,
| 25 | is likely to harm consumers given that the incentives of |
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1 | the monopsonist may be altered in a way that would not
| 2 | be true in a selling case.
| 3 | DR. ELHAUGE: I actually think this is -- I
| 4 | thought the court did address this in footnote 2, that
| 5 | it was quite clear that they understood this was not a
| 6 | case likely to affect output. This was just likely to
| 7 | affect the upstream market, but I do not think that is a
| 8 | problem. That is, if there is a monopsony in some
| 9 | upstream local market, it is a lot like the Manfeld
| 10 | case, which also was buyer cartel with the same kind of
| 11 | upstream local market/downstream national market case.
| 12 | The only effect on national output could be
| 13 | negative. It might have no effect or a negative effect
| 14 | by reducing output from that particular region with a
| 15 | subcompetitive price. So, there is no possible positive
| 16 | effect on consumer welfare that one might think should
| 17 | counterveil the negative effect on the upstream sellers
| 18 | of lumber or the rice growers in Manfeld.
| 19 | So, it seems to me, you know, antitrust law,
| 20 | although consumer welfare trumps other interests, if
| 21 | consumer welfare is not, in fact, being enhanced by some
| 22 | conduct, but it is anticompetitive and it is harming
| 23 | somebody else, they have always recognized the ability
| 24 | to protect those other groups of producers.
| 25 | MR. CARLTON: Do you think the recognition that |
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1 | monopsony power is a problem by itself is actually an
| 2 | example that shows that it is not a consumer welfare
| 3 | standard that we really have in all cases and that --
| 4 | DR. ELHAUGE: No, no, I think it --
| 5 | MR. CARLTON: -- that it suggests that it could
| 6 | be properly viewed as a total welfare standard
| 7 | sometimes?
| 8 | DR. ELHAUGE: No, I think they have always been
| 9 | clear that they are interested in harm to anybody. I
| 10 | think that it is just if there are benefits to consumers
| 11 | and harm to competitors, then it is about, you know,
| 12 | consumer welfare and not competitors, but, you know, not
| 13 | only Manfeld in this case, but boycotts with no
| 14 | particular -- just boycott one particular firm out of
| 15 | thousands, in Clorz, they have always been pretty clear,
| 16 | it seems to me, that if there is no actual benefit to
| 17 | consumer welfare, we are willing to use the antitrust
| 18 | laws to protect other people from anticompetitive harms.
| 19 | MR. CARLTON: Okay, all right.
| 20 | DR. WILLIG: Are workers consumers?
| 21 | MR. CARLTON: I do not think under the standard
| 22 | interpretation of people who want to use the consumer
| 23 | welfare standard. I think they view it as buyers, and,
| 24 | therefore, if you are on the demand curve, it counts,
| 25 | but if you are on the supply curve, it does not count. |
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1 | DR. WILLIG: Even if you are a person?
| 2 | MR. CARLTON: Even if you are a person, and even
| 3 | if buyers and sellers are not technically people but
| 4 | they are both firms owned by people, even the same
| 5 | people. So, it depends on whether you are up or down, I
| 6 | guess.
| 7 | DR. WILLIG: That means you hang out with
| 8 | lawyers too much.
| 9 | MR. CALKINS: Dennis, the debates on this -- you
| 10 | have been a part of the debates forever. I have never
| 11 | actually understood -- and a quick clarification: I
| 12 | missed the question because the phone rang, and it was
| 13 | not a problem with my exam. It was just my daughter
| 14 | wanting free advice.
| 15 | MS. McDAVID: An antitrust problem?
| 16 | MR. CALKINS: Ah, no.
| 17 | MR. CARLTON: She is taking the final exam right
| 18 | now.
| 19 | MR. CALKINS: I have never understood exactly
| 20 | why there is such a big problem here. Imagine a cartel
| 21 | that fixes the price that they are paying to suppliers.
| 22 | Assume that I have declared I care about consumers and
| 23 | only consumers -- I am not a total welfare person -- I
| 24 | would have thought that I could easily say that, of
| 25 | course, when I said that, I meant I care about the |
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1 | people who are buying from a cartel, and if the cartel
| 2 | is fixing the prices that they are paying to suppliers,
| 3 | I just treat those folks as the equivalent of consumers
| 4 | for the purpose of discussion. Of course, I always
| 5 | meant to protect them equally. So, I do not have to
| 6 | change any adherence to a consumer welfare standard to
| 7 | accommodate a buyer cartel.
| 8 | MR. CARLTON: But if you want to define the
| 9 | suppliers of the input as consumers, you are absolutely
| 10 | correct, but I think that that really proves the point,
| 11 | that the logical consistency is you really do need
| 12 | something like a total welfare standard; otherwise, you
| 13 | get -- you have to have either an exception or you have
| 14 | to explain it in some other way.
| 15 | What I have always found peculiar about this,
| 16 | really two things: One, that the cost-benefit analysis
| 17 | in other parts of economics as it is applied, it is
| 18 | standard to use total surplus for evaluating the welfare
| 19 | of certain projects, but two, that despite that and
| 20 | despite my view, which is it should be total welfare and
| 21 | total surplus, which I do think is more in line with
| 22 | what the economics profession would say, if you go
| 23 | around the world, that is not the typical standard they
| 24 | have, with the exception of Canada and New Zealand,
| 25 | which do consider total welfare. Most of the world does |
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1 | follow what we do.
| 2 | MR. KOLASKY: I guess I have one -- like Steve,
| 3 | I have a question about this, because clearly this is a
| 4 | subject that is the topic of a lot of debate in
| 5 | connection with merger enforcement policy and how we
| 6 | should consider efficiencies, and there seem to be
| 7 | differences of view among jurisdictions, but if you look
| 8 | at our case law, of course, it is hard for me to think
| 9 | of any case in which a court has ever really focused on
| 10 | this distinction between consumer welfare and total
| 11 | welfare, and then the further question is, even if they
| 12 | did focus on it, in what areas would our Section 2 law,
| 13 | since that is what we are talking about, be any
| 14 | different, applying a total welfare standard rather than
| 15 | a consumer welfare standard?
| 16 | MR. CALKINS: Let me give you one question --
| 17 | and I do not know the answer to this, but I was thinking
| 18 | about it while I was reading all those transcripts.
| 19 | What if we have somebody that is a monopolist, and it is
| 20 | engaging in a -- it is clearly a monopolist, we all
| 21 | agree it is a monopolist, it has been a monopolist for a
| 22 | long term, and it is charging monopoly prices that are
| 23 | way above whatever one would say is a competitive price
| 24 | -- and is engaging in a practice that Bobby Willig has
| 25 | come in and testified under oath does no good for the |
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1 | people buying its product at all, but increases its
| 2 | profits.
| 3 | Could you imagine that you might ever say that,
| 4 | golly, if we were looking at a merger that was going to
| 5 | save the two firms lots of money, we would approve it
| 6 | just based upon that figure, that some of it would
| 7 | eventually end up in consumers' hands and we are not
| 8 | going to worry about it too much, so we will go with
| 9 | total welfare under our merger analysis, figuring that
| 10 | it will all shake out in the end -- but maybe we
| 11 | wouldn't be quite so eager in approving a monopoly
| 12 | situation where we really thought this was not doing
| 13 | consumers any good at all? And I was just wondering
| 14 | whether you might ever come up with more enthusiasm for
| 15 | total welfare in a merger context than you would in some
| 16 | monopoly context, and I do not know the answer. I was
| 17 | just wondering about it.
| 18 | DR. ELHAUGE: First of all, I agree with your
| 19 | earlier comments, but then I disagreed with you twice
| 20 | before, that I think you can go with a total welfare of
| 21 | the victims to be consistent with your approach, that
| 22 | is, the upstream producers or the consumers, but not
| 23 | necessarily those who are doing the cartel or the
| 24 | anticompetitive conduct. Their welfare does not have to
| 25 | be included in the calculus. |
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1 | There is a case, Superior Propane, in Canada,
| 2 | that did do the total welfare analysis and did find the
| 3 | efficiencies outweighed the anticompetitive effects on
| 4 | consumers. Now, they had to exclude all the
| 5 | non-Canadian consumers to do this, which actually makes
| 6 | an interesting question of political economy. There is
| 7 | a global market when you have got multiple
| 8 | jurisdictions.
| 9 | One nice thing about a consumer welfare standard
| 10 | is that every jurisdiction, to an extent, in just
| 11 | imposing remedies has a sense to just protect its
| 12 | consumers and not overdo antitrust law or underdo
| 13 | antitrust law, but if you thought the right standard was
| 14 | total welfare, then a lot would turn on whether the
| 15 | producers are in your country and the consumers
| 16 | elsewhere. So, it might make it much harder to
| 17 | coordinate jurisdiction.
| 18 | You could simply, in other words, rely on
| 19 | whoever the consuming nations in enforcing the antitrust
| 20 | law and figure that the producing agencies will just
| 21 | unreinforce it, but we do not have to worry about that
| 22 | because somebody else is protecting consumers.
| 23 | MR. CARLTON: And also, when you take into
| 24 | account total welfare, you are correct that the
| 25 | countries that do try and look at foreign ownership, for |
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1 | example, who owns stock in the company, and that can be
| 2 | quite complicated, as well as who is consuming it. What
| 3 | is interesting, what I have always found interesting, is
| 4 | that New Zealand is one of these countries that uses
| 5 | total surplus, and one of the justifications they give
| 6 | is that they rely on international trade, and,
| 7 | therefore, I am very concerned about having efficient
| 8 | firms, and, therefore, they want to give a lot of weight
| 9 | in having efficient firms who can engage in
| 10 | international trade, even if domestically prices might
| 11 | rise.
| 12 | But the place -- I mean, I agree with Bill that
| 13 | there is not a big -- probably in most cases, there
| 14 | wouldn't be a huge bit of -- a huge difference whether
| 15 | you used total surplus or consumer surplus, that I think
| 16 | is right, but the one place where it does apply a lot or
| 17 | could has to do with fixed costs and R&D, and I think
| 18 | those may become more important in the future, and I
| 19 | think if you only are focusing on price effects to
| 20 | consumers in the short run, you tend to overestimate the
| 21 | importance of marginal cost savings relative to what I
| 22 | will call a fixed cost savings, but it is a recurring
| 23 | fixed cost savings that in the long run really is a
| 24 | variable cost.
| 25 | DR. BAKER: There is another place which cuts |
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1 | the other way, because we are talking about exclusion
| 2 | cases with monopolization. So suppose you had a
| 3 | practice that excluded rivals and the firm lowered its
| 4 | costs and maybe lowered its price a little bit?
| 5 | Consumers seem to benefit, but under a total welfare
| 6 | standard, you would have to take into account the lost
| 7 | profits to the rivals, the producer surplus to them, and
| 8 | you might end up deciding that the practice harms the
| 9 | competition under your total welfare standard.
| 10 | So, just the way you want to ask the consumer
| 11 | welfare folks how they can get to objecting to
| 12 | monopsony, the question for the total welfare defender
| 13 | is how you cannot avoid attacking exclusion in that
| 14 | circumstance.
| 15 | MS. McDAVID: Exclusion may also matter in the
| 16 | context of innovation. If someone refuses to deal in a
| 17 | way that precludes innovation, you may be able to reach
| 18 | that best with a total welfare standard.
| 19 | DR. ELHAUGE: I would also think you could
| 20 | always convert a gain in total welfare to a gain in
| 21 | consumer welfare if you really had to, because if you
| 22 | had a big fixed cost savings, it is not clear why you do
| 23 | not just fund some consumer trust that pays consumers
| 24 | every time you sell or do something like that and make
| 25 | sure that the consumers benefit on balance. |
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1 | MR. JACOBSON: There is no answer to this harm
| 2 | to competitors. Competitors are part of the total
| 3 | welfare analysis. So, you could have a practice that
| 4 | lowers prices to consumers, but if it hurts competitors
| 5 | more, it violates the total welfare standard, and that
| 6 | is just -- you know, no one believes that. So, you have
| 7 | to make ad hoc exceptions to the total welfare standard
| 8 | that you do not have to do under the consumer welfare
| 9 | standard, so people are really applying consumer
| 10 | welfare. They just do not want to admit it.
| 11 | MR. CARLTON: That I don't think is true,
| 12 | because the examples John gave about sort of rivals and
| 13 | the harm to rivals, which depends on whether -- their
| 14 | efficiency relative to the incumbent firm, it really has
| 15 | to do with what is called in a cost-benefit analysis
| 16 | sort of second best analysis or what happens in other
| 17 | markets or what happens to output in which price does
| 18 | not equal marginal cost. As far as I know, no one has
| 19 | ever advocated that we should look in a -- you know, in
| 20 | doing cost-benefit analysis in antitrust at ancillary
| 21 | effects in unrelated -- in related markets. Let me give
| 22 | you an example.
| 23 | If there were a merger of tennis racket
| 24 | producers, so the output of tennis rackets went down
| 25 | because they are going to raise price, that might have |
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1 | an effect on the tennis ball market. As far as I know,
| 2 | no one on this panel would suggest that if we had a
| 3 | Section 2 case involving tennis rackets, we should also
| 4 | look at tennis balls and, you know, if there is less
| 5 | tennis balls sold, maybe people go to fewer health clubs
| 6 | to play tennis.
| 7 | I mean, I think you have to -- even if your
| 8 | objective is to maximize total welfare, that the process
| 9 | by which you do it may well be you should ignore
| 10 | secondary market considerations. I think that is just
| 11 | a -- sort of a logical point about how you pursue the
| 12 | process of figuring out how to maximize total welfare,
| 13 | but I think -- I did want to say something about what I
| 14 | understood about -- isn't there more money basically
| 15 | because it is efficient? And in New Zealand, they
| 16 | actually have some -- there is no simple solution to
| 17 | this problem, but they actually have pursued ideas like
| 18 | maybe I should make a company a mutual and give
| 19 | consumers shares in the company, and they have tried to
| 20 | pursue some of these other remedies that in the United
| 21 | States we have not actually looked at.
| 22 | MR. JACOBSON: But, Dennis, why is effect on
| 23 | competitors in the same market a second order effect?
| 24 | It does not seem to be.
| 25 | MR. CARLTON: It is second order -- second order |
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1 | is probably a poor choice of terms, actually first
| 2 | order. You have a first order effect any time an action
| 3 | in one market -- the output of one firm affects the
| 4 | output of other firms and the output of those other
| 5 | firms is not being sold at marginal cost. That happens
| 6 | all the time, and if you started taking account of it,
| 7 | my hunch is it would lead to a very unwieldy analysis.
| 8 | MR. JACOBSON: Which is why you should use a
| 9 | consumer welfare standard.
| 10 | MR. CARLTON: No, consumer welfare, you have the
| 11 | same effects on consumer welfare, the same -- the
| 12 | problem persists no matter what the standard is.
| 13 | DR. WILLIG: There is another way to think about
| 14 | it. There are horrible examples that we economists
| 15 | cannot get around, for example, of markets full of
| 16 | differentiated products, they compete with each other,
| 17 | they are not priced to marginal cost because there are
| 18 | brand-specific fixed costs, and where the horrible fact
| 19 | is that there can be and generally often is excess entry
| 20 | in an open marketplace, where that last firm or the last
| 21 | three firms to want to go into the market, in fact,
| 22 | benefit the consumers of those products, they cover
| 23 | their costs, but they divert so much profitability from
| 24 | their rivals that the total social welfare impact is
| 25 | negative from open entry in such market. |
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1 | It is not generally true in a branded market,
| 2 | but it is generally true in a Cournot market. There are
| 3 | firms with that effect, as economists know, and does
| 4 | that mean that we embrace entry barriers or we embrace
| 5 | predation as somehow bringing us a welfare superior
| 6 | answer? No, we do not, and as Greg is fond of saying,
| 7 | that is why in some sense we do not really adhere to a
| 8 | welfare standard, we adhere to a competition standard
| 9 | under the general belief, which is somewhat -- how
| 10 | should I put it -- religious for some of us or maybe a
| 11 | generalization that we think is far more true than not
| 12 | true, even though there are counter-examples, and that
| 13 | is really the standard that antitrust uses, is follow
| 14 | procompetitive enforcement decisions and case law
| 15 | standards, not social welfare or consumer welfare,
| 16 | except inasmuch as they usually go along with
| 17 | competition.
| 18 | MR. CARLTON: Yes, let me just -- I would phrase
| 19 | that slightly differently, but the process of
| 20 | competition is the process we think ultimately, given
| 21 | our limited abilities to adjudicate matters, that will
| 22 | lead to highest total welfare.
| 23 | DR. WILLIG: Right.
| 24 | MR. CARLTON: I mean, that is my sense, and I
| 25 | actually think the lawyers figured that out before the |
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1 | economists. They are much more concerned about process
| 2 | than -- economists sometimes were over -- in my view are
| 3 | over-confident they can get every case right, so they do
| 4 | not really -- these error costs are low, but once you
| 5 | realize --
| 6 | DR. ELHAUGE: If you really believed that, you
| 7 | would be breaking up monopolies right and left because
| 8 | we would have more process of competition.
| 9 | MR. CARLTON: Yes, absolutely. That is why if
| 10 | you go back to the fifties and you look at the
| 11 | literature, it would turn your hair less gray or more
| 12 | gray.
| 13 | MR. KOLASKY: But also shifting to some of the
| 14 | transatlantic dialogue that we have had over the years,
| 15 | the danger in going down that road is you run into the
| 16 | argument that we used to hear over in Europe and now
| 17 | occasionally hear, how can you protect competition
| 18 | without protecting competitors? And I do not think we
| 19 | want to go there.
| 20 | MR. CALKINS: One of the interesting debates
| 21 | that came up back in the hearings that I read was a
| 22 | disagreement about whether or not we should be sad that
| 23 | there has been a long-term durable monopoly -- with I
| 24 | think Professor Feldman saying that that is something we
| 25 | are sad about (not condemn it by itself, but we would be |
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1 | sad about it) whereas I think it was David Evans, who
| 2 | came back and said, no, I have got no troubles with a
| 3 | long-term monopoly so long as it is an efficient
| 4 | monopolist. It was interesting simply to see a
| 5 | disagreement as to whether when we get up in the
| 6 | morning, we are unhappy or not with a long-term
| 7 | monopoly, which goes back to the welfare we are
| 8 | concerned about.
| 9 | MR. CARLTON: Let me actually follow up a little
| 10 | bit on that in contrasting Europe to the United States
| 11 | on Section 2-like cases. I think it is fair to say they
| 12 | think we are not as aggressive as they are and that they
| 13 | have proper enforcement standards, although I think the
| 14 | differences are narrowing between us and them, but our
| 15 | enforcement of Section 2 or our willingness to enforce
| 16 | Section 2 depends upon sort of trading off an aggressive
| 17 | policy where we think we will be stopping -- where the
| 18 | benefits would be stopping competitive harms, but the
| 19 | costs are chilling competition, and let's suppose
| 20 | someone poses to you the question, what justifies or on
| 21 | what basis do you think the less aggressive policy of
| 22 | the United States is justified by the empirical evidence
| 23 | and what empirical evidence is there about basically
| 24 | type one and type two errors on Section 2 cases?
| 25 | MR. KOLASKY: Let me take a first cut at this, |
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1 | because I have been thinking about this a fair amount of
| 2 | late, and I have a new theory which I am going to throw
| 3 | out into the discussion, and that is a new way of
| 4 | looking at ours as more of a market-based approach, and
| 5 | that is one of the reasons why our courts, I think, are
| 6 | more liberal in terms of how they apply Section 2; that
| 7 | is, they are less likely to find conduct violates
| 8 | Section 2 because they are very concerned about the
| 9 | risks of false positives, and those false positives
| 10 | derive from our judicial system, our treble damages,
| 11 | class actions, one-way fee shifting, jury trials.
| 12 | But I would suggest that what that means is that
| 13 | our antitrust laws may, in fact, be more self-enforcing
| 14 | in the sense that companies are more likely to want to
| 15 | not get too close to the line and risk being found
| 16 | guilty of violating our antitrust laws because of all of
| 17 | those consequences, whereas the European approach --
| 18 | again, going back to its heritage -- is much more
| 19 | status. They are much more willing to have the
| 20 | administrative authorities decide whether conduct is or
| 21 | is not anticompetitive, and they do not want to have in
| 22 | their legal system all of these features that we have
| 23 | that causes ours to be more of a market-based system.
| 24 | DR. ELHAUGE: So, two things: One, I am not
| 25 | sure about the premise that the EC is more aggressive. |
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1 | On some things, it is a little bit more aggressive, but
| 2 | actually, when I was writing this book, I was surprised
| 3 | at how similar a lot of these things are. In some
| 4 | respects, they are actually less aggressive. They have
| 5 | more safe harbors, a smaller percentage of foreclosure.
| 6 | They do not have the attempted monopolization law. So,
| 7 | even though they are dominant-central with the monopoly
| 8 | power standards, on balance it is not clear that that is
| 9 | much more aggressive.
| 10 | But the other thing I would add, which I said in
| 11 | the earlier panel, is because there is no private
| 12 | litigation, there is less concern about over-deterrence
| 13 | there, and it makes sense to actually have somewhat
| 14 | broader law in a lot of areas, because it is only really
| 15 | being enforced by disinterested government regulators,
| 16 | whereas here, if you are enforcing -- I think the
| 17 | current state of our law, in part, the fact is every
| 18 | judge writing a Section 2 opinion is thinking about the
| 19 | private treble damages litigant and not a world where
| 20 | everything is an agency enforcement.
| 21 | MR. CALKINS: This is something that -- I mean,
| 22 | I have been writing about this forever, the
| 23 | equilibrating tendencies I call them -- and let me just
| 24 | put in a good word for the private enforcement system.
| 25 | The one great thing about the U.S. system for private |
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1 | enforcement is that we have laws, and one cannot bring
| 2 | an action and establish some rule of law without knowing
| 3 | that a private party may then invoke this in front of a
| 4 | court and win some kind of a judgment.
| 5 | A downside of a European model is that it -- or
| 6 | any regulatory model, and, indeed, part of the U.S.
| 7 | merger system now to some extent -- is that it opens up
| 8 | the regulators and the system to accusations that
| 9 | decisions are being made not based upon consumer welfare
| 10 | or total welfare, but rather, favoritism for the home
| 11 | team, and that is a very unhappy place for antitrust to
| 12 | find itself.
| 13 | I think one of the great fears about the
| 14 | emerging economies and their use of antitrust is that
| 15 | maybe they will not really be using antitrust for
| 16 | anybody's welfare other than the welfare of the home
| 17 | team, and one of the reasons why it is good to have
| 18 | standards, principles, things to which people can point,
| 19 | is because it gives you some grounding and some comfort
| 20 | that decisions are being made on some basis other than
| 21 | favoritism, and that is really a terribly important
| 22 | value to try to achieve.
| 23 | MR. CARLTON: There was something Bill said I
| 24 | wanted to follow up on. There is certainly a history of
| 25 | intervening in Europe and regulating, and one of the |
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1 | things we know from our experience in the United States
| 2 | is that when regulators get involved, sometimes price
| 3 | discrimination becomes something they become quite
| 4 | concerned about, either they do not like it or they
| 5 | encourage it because of cross-subsidies, but one or the
| 6 | other sometimes, and in particular, in the United
| 7 | States, it is not an -- putting Robinson-Patman to one
| 8 | side, price discrimination by itself need not be an
| 9 | antitrust violation.
| 10 | In Europe, there seems to me to be a much
| 11 | greater sensitivity towards price discrimination, and I
| 12 | think in certain aspects of transactions, they bar price
| 13 | discrimination, and I am wondering whether anyone has
| 14 | any thoughts on what would account for that.
| 15 | MR. KOLASKY: Well, is not part of that the
| 16 | nature of Article 82, which is talking about abuse of
| 17 | dominance rather than monopolization, and so there still
| 18 | is a remnant that worries about exploitative abuses, not
| 19 | just exclusionary abuses, and, you know, I think the
| 20 | other thing which we have to be conscious of is that
| 21 | while all of us would like to forget that the
| 22 | Robinson-Patman Act exists -- and I certainly endorse
| 23 | the AMC's recommendation that it cease to exist -- the
| 24 | fact of the matter is that historically, there was a
| 25 | fair amount of enforcement under the Robinson-Patman Act |
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1 | that has dropped off considerably in the last decade or
| 2 | so, but we have our own dirty laundry here.
| 3 | DR. BAKER: Also, in Europe, they have had a
| 4 | long-standing concern right from the inception with
| 5 | price differences across nations -- across borders.
| 6 | MS. McDAVID: Across borders.
| 7 | DR. BAKER: -- across borders, and their whole
| 8 | effort has been to create a national market to get rid
| 9 | of those differences, and so those kind of price
| 10 | differences have always been --
| 11 | MR. CARLTON: That is a legislative solution
| 12 | rather than a market solution that gets rid of
| 13 | artificial transaction costs. That is what is peculiar.
| 14 | In other words, in the United States, our view is, I
| 15 | think, that price discrimination should not be an
| 16 | antitrust violation. In Europe, I think there is much
| 17 | less of that view.
| 18 | MR. JACOBSON: Well, because of the common
| 19 | market, the point that John is making, it is historical,
| 20 | it is engrained in the whole structure of the European
| 21 | Union. Here, I think it is very clear that price
| 22 | discrimination does not violate Section 2, and who is
| 23 | the last plaintiff that won a case under the
| 24 | Robinson-Patman Act? One has to have a better memory
| 25 | than me to remember who that was. |
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1 | MR. CARLTON: Let me turn to one final topic
| 2 | before I turn it over to you guys to ask questions of
| 3 | yourselves. I wanted to talk about tying and bundling,
| 4 | and I will try and keep the time -- I will cut off the
| 5 | discussion, so everybody knows we have five to ten
| 6 | minutes.
| 7 | One of the things I find interesting in
| 8 | discussions about bundling and tying is they are put in
| 9 | separate categories, especially in the legal literature.
| 10 | I think that is not really true in the economics
| 11 | literature, they are treated as a very similar
| 12 | phenomenon, and one of the questions I had was in the
| 13 | tests for bundling, one common test, sometimes called
| 14 | the Ortho test, the AMC outlines a test that is very
| 15 | similar, and it always follows, you look basically to
| 16 | see whether the product that is sold separately, suppose
| 17 | is product A, you look at its price, you look at the
| 18 | packaged price of A and B, and then you look at the
| 19 | incremental revenue you get from selling the package,
| 20 | and you compare it to the marginal cost of B, and if
| 21 | that is positive, that is sort of price above marginal
| 22 | cost. So, that is the analogy, and that is fine.
| 23 | In the AMC report, there were two other
| 24 | components to the test, but I just want to stop on the
| 25 | first component, that first component, which seems to |
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1 | have relatively widespread agreement. I think in the
| 2 | AMC, everybody voted for it, though I have a dissenting
| 3 | statement but an explanation of what more they should
| 4 | have voted for. There is this analogy to predation. I
| 5 | mean, that is clearly what price versus marginal cost is
| 6 | doing, yet in the economics literature, when you look at
| 7 | strategic behavior, although we understand predation,
| 8 | most of the stories in which you get an anticompetitive
| 9 | harm from tying or exclusive dealing or whatever it is
| 10 | has to do with scale economies, and that is a different
| 11 | theory than predation. Predation theory, we understand.
| 12 | Scale economies, we also understand.
| 13 | I am just curious, do people have the view that
| 14 | the bundling theory, at least in the legal literature or
| 15 | the economics/legal literature, is really talking about
| 16 | what economists call mixed bundling, and it is really
| 17 | focusing only on the predation part of the story and it
| 18 | is missing the usual -- not usual, but the other parts
| 19 | of the story that we usually relate to tying? Is
| 20 | that --
| 21 | DR. ELHAUGE: I think they are missing. I agree
| 22 | with you completely on what the economic literature
| 23 | shows, and I think there is a lot of tendency to get
| 24 | beguiled by the word "discounts." Actually, all we know
| 25 | is there is a price difference that is conditioned. We |
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1 | do not know anything about any discount from any but-for
| 2 | price. The noncompliant price is higher than the
| 3 | compliant price, that is all. There is a difference.
| 4 | We could call it -- if we called it disloyalty
| 5 | penalties, we would have a very different flavor to this
| 6 | doctrine.
| 7 | But I think it is also -- I mean, it is a
| 8 | predation thing, and I think it has the odd element as a
| 9 | result of focusing, again, more on the virtue of the --
| 10 | before I talked earlier about not focusing on the virtue
| 11 | of the defendant but on the effects. Here they are
| 12 | focusing on the virtue of the rival, whether the rival
| 13 | is equally efficient, as if that is a good proxy for
| 14 | anticompetitive effects, whereas a less efficient rival
| 15 | may well restrain a monopolist to price below a monopoly
| 16 | price, and if you actually have this economy of scale
| 17 | denial, you are raising your costs, and this test has
| 18 | the odd feature of allowing you to bootstrap yourself
| 19 | into a defense. It assumes away the very
| 20 | anticompetitive effect of interest by assuming the rival
| 21 | is equally efficient when the whole point of the conduct
| 22 | may have been to make them less efficient.
| 23 | MR. CARLTON: Anyone else?
| 24 | DR. WILLIG: Yes, I agree with you, Dennis, that
| 25 | the literature, when it comes to foreclosure of various |
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1 | kinds, including price predation, is really all about
| 2 | scale economies, either volumetrically at one point in
| 3 | time or scale economies or scope across time -- if we
| 4 | can't sell it today, we are not going to be around
| 5 | tomorrow -- which is what recoupment is all about, and
| 6 | the idea of the bundling, the Ortho test, with all of
| 7 | the complications that I understand the Commission has
| 8 | now come to grips with, which I hope is great, has to do
| 9 | with using this kind of bundling to close off parts of
| 10 | some element of the market to your rival.
| 11 | What makes economic sense and what is consistent
| 12 | with the literature is that the purpose might be to
| 13 | limit the quantity that that rival can sell, thereby
| 14 | drive up the average cost curve, and make it less able
| 15 | to compete with the perpetrator in other parts of the
| 16 | market, a noncoincident market, another segment of
| 17 | consumers, another state, or later on in time. So, in
| 18 | that sense, under that theory, it is very related to
| 19 | predatory pricing and very appropriate to look at the
| 20 | incremental price against the incremental cost as the
| 21 | standard.
| 22 | MR. KOLASKY: I guess what I would say on
| 23 | this -- and, again, I said at the outset, I do not
| 24 | pretend to be an expert on bundling -- but from the
| 25 | literature I have read, this seems to be an area in |
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1 | which the literature itself is still, I think, quite
| 2 | confused, and the case law is very underdeveloped, and
| 3 | so I cannot think of another area that more cries out
| 4 | for an article in the nature of the Areeda Turner
| 5 | article on predatory pricing that lays out an
| 6 | administerable standard or poses an administerable
| 7 | standard, following which there can be several years of
| 8 | debate in the law review and economic literature, and
| 9 | then finally the courts will settle on something.
| 10 | MR. CALKINS: But that is the problem for this
| 11 | project and this report. I mean, right now, with
| 12 | bundling, I think Einer is correct, in that people have
| 13 | basically looked at this and said, ah-ha, it results in
| 14 | a lower price, we like lower prices, and so let's
| 15 | analogize it to the predatory pricing standards with a
| 16 | twist, and then they say because bundling is very common
| 17 | and very good thing and so is allegedly predatory
| 18 | pricing -- and on you go.
| 19 | Then you get nervous, because bundling is not as
| 20 | good as low pricing, because you can come up with ways
| 21 | that it can harm competition, and so you get a little
| 22 | bit nervous about whether or not you ought to adopt a
| 23 | standard that you know is under-inclusive, that we
| 24 | adopted deliberately because we wanted to protect
| 25 | something that is the ultimate value -- one of the |
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1 | ultimate values -- low prices, and maybe these values
| 2 | are not quite so ultimate.
| 3 | We are working our way through it, and the
| 4 | flourishing of literature in this area has been
| 5 | immensely helpful and immensely interesting, and the
| 6 | problem for you folks who have to deal with this is are
| 7 | you ready to say, ah-ha, we now are prepared to be the
| 8 | Areeda Turner and to declare a standard that exactly
| 9 | balances it and will enshrine the correct answer for all
| 10 | time -- or is this something whereby we need a little
| 11 | more work before we are ready to do that?
| 12 | MR. CARLTON: Okay, why don't we start going
| 13 | around, and we will start with Bill. So, as I said at
| 14 | the outset of this panel, I think it would be useful if
| 15 | each one of you could, you know, pose a question that
| 16 | you think is the most important one that has not yet
| 17 | been posed or if you want to reiterate or elaborate on a
| 18 | point.
| 19 | MR. BAER: Well, a question that comes to mind,
| 20 | having sat unusually quietly through a lot of this, is
| 21 | the extent to which the Section 2 behaviors we are
| 22 | talking about is the prevalence of those behaviors, and
| 23 | we haven't really talked about that. We have talked
| 24 | about, you know, bundled discounts, we just finished
| 25 | talking about that, and concerns with how you |
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1 | appropriately analyze them, refusals to deal.
| 2 | I mean, the extent to which, as a counselor, I
| 3 | deal with Section 2-type issues, I deal with them, but I
| 4 | deal with them less than collaborative issues and ones
| 5 | you run afoul of, and what I am trying to get a handle
| 6 | out of in this discussion is at the end of the day how
| 7 | important resolving a lot of these issues is in the
| 8 | scheme of things, and is Section 2 monopolistic,
| 9 | anticompetitive conduct a sufficiently small part about
| 10 | what we worry about in the economy that we shouldn't
| 11 | overdo our analysis and our attention to it?
| 12 | I do not know the answer to that question based
| 13 | on -- I haven't read all the transcripts, although there
| 14 | have been summaries of all the prior hearings, and the
| 15 | discussion here today. So, that is the question I have.
| 16 | DR. BAKER: I have a brief comment about a
| 17 | proposition that did not really come up today but could
| 18 | have, and that has to do with the question of whether
| 19 | the market will cure all these monopolization problems
| 20 | on its own. My comment has to do with thinking about
| 21 | some of the recent cases, the government cases, which I
| 22 | know a little better than the private cases. But it
| 23 | seems to me if you accept that -- if you accept the
| 24 | allegations that were made by the Government or the
| 25 | facts as found by the courts that the market power in |
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1 | the cases that I am thinking of was all essentially
| 2 | durable and would not have eroded absent government
| 3 | action. I am thinking about UNOCAL and Rambus, where
| 4 | the allegations were deceit in the adoption of a
| 5 | standard that conferred market power a firm, and on
| 6 | Biovale and BristolMyers Squibb, the FTC cases where
| 7 | there was fraud on, again, obtaining regulatory
| 8 | protection against new competition, and then some of the
| 9 | government -- the Justice Department cases, Dentsply, at
| 10 | least we think we understand this naked exclusion
| 11 | equilibrium where it is durable absent government
| 12 | action, and Microsoft, the facts as found by the court,
| 13 | it seems to me that the market power in operating
| 14 | systems is not forever but durable in an important sense
| 15 | for antitrust law.
| 16 | So, I think that the argument sometimes made
| 17 | that we can just sit back and ignore monopolization
| 18 | because market power disappears on its own is -- does
| 19 | not seem to be true in the cases where the enforcement
| 20 | is.
| 21 | MR. CALKINS: I would ask: what else do you see
| 22 | in the hearings that you thought was interesting and has
| 23 | not been mentioned -- and I would rattle off five very
| 24 | quick things.
| 25 | First, on Jon Baker's point, Mike Scherer |
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1 | talking about the lasting harm done by U.S. Steel in
| 2 | sort of stultifying the steel industry for a long
| 3 | time -- the example of the long-term harm to come out.
| 4 | Beyond that, it was interesting that sometimes people in
| 5 | testifying forget that they are talking about monopoly
| 6 | cases, so that in terms of bundling, one of the
| 7 | witnesses was saying one of the great things about
| 8 | bundling is it could help to undo a situation of
| 9 | conscious perilism in an oligopoly. Well, that is not
| 10 | really relevant if we are suing a firm that is a
| 11 | monopoly -- if it has gotten an 80 percent share -- and
| 12 | so sometimes the people testifying forgot that they are
| 13 | talking about standards for judging a monopolist. I
| 14 | thought that was something that ought to be remembered.
| 15 | There did not seem to be a lot of joinder and
| 16 | agreement on exactly what is a legitimate business
| 17 | justification. Some people say -- they seem to be
| 18 | thinking that any time a monopolist could say it is
| 19 | going to increase the monopolist's revenues, that is
| 20 | legitimate business justification, that is what they are
| 21 | supposed to do when they get up in the morning. The
| 22 | problem with that, of course, is that would justify
| 23 | bombing your rivals' plants, because that would improve
| 24 | your revenues, improve your profits and things -- and so
| 25 | I would suggest that the legitimate business |
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1 | justification probably ought to be keyed to something
| 2 | that is going to be benefiting a consumer at some point
| 3 | in the future, and that is something that is a very
| 4 | important part of the case law and something that is
| 5 | very underdeveloped.
| 6 | Third, Dan Rubinfeld had an interesting
| 7 | discussion talking about the applications barrier to
| 8 | entry in the Microsoft case, saying that when that case
| 9 | began, nobody talked about the applications barrier to
| 10 | entry, and they spent a whole lot of that case trying to
| 11 | persuade the judge that there was such a thing, and I am
| 12 | going to try to remember that every time that somebody
| 13 | says that a plaintiff should lose unless it can prove
| 14 | entry barriers, and I am going to try to remind myself
| 15 | that, golly, you know, maybe it is not so easy all the
| 16 | time to prove entry barriers. So, before I say a
| 17 | defendant should win summary judgment because the
| 18 | plaintiff has not proven entry barriers, I am going to
| 19 | try to remind myself that sometimes it is hard to think
| 20 | through entry -- and you know this very well -- but
| 21 | entry is very difficult, and so I think we ought to
| 22 | worry about entry more than we do.
| 23 | And I guess last, in terms of candor, the
| 24 | observation that I liked best was the comment from the
| 25 | representative of the Chamber of Commerce who conceded, |
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1 | without much cross examination, that, in truth, we do
| 2 | not really value or care about convergence. What we are
| 3 | interested in is convergence to standards that we like,
| 4 | and convergence is not really a value at all, and I
| 5 | think that the next time someone writes a paragraph
| 6 | about convergence, you should stop and think, do people
| 7 | really value convergence, or do they just want standards
| 8 | they do not like to be changed into standards they do
| 9 | like -- which goes back to Bobby's point, which is that
| 10 | this is all about trying to figure out good standards.
| 11 | DR. ELHAUGE: So, the first question I would ask
| 12 | is, we have been talking a lot about the rule of reason,
| 13 | is there any role in Section 2 for an abbreviated rule
| 14 | of reason analysis in cases where the defendant cannot
| 15 | come forward with any plausible procompetitive
| 16 | justification? So, we tend to critique a lot the
| 17 | Europeans for their loyalty discount rule, for example,
| 18 | as a kind of per se rule, but actually, all these
| 19 | opinions are cases where they say the defendant failed
| 20 | to come forward with any procompetitive justification at
| 21 | all. So, you might think, just like we do it for
| 22 | Section 1, we would say, well, maybe there is something
| 23 | anticompetitive, I do not really know, and I have got
| 24 | nothing on the positive side of the ledger, so why don't
| 25 | I condemn those kind of cases? |
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1 | But also, we might also have some -- this goes
| 2 | to the other question whether there is some meaningful
| 3 | review to be done at the motion to dismiss stage. So,
| 4 | now everything tends to be motion for summary judgment.
| 5 | We could apply this for the California Dental analysis
| 6 | where first the plaintiff has the burden of proving some
| 7 | plausible anticompetitive theory, then the defendant has
| 8 | the burden of proving some procompetitive theory, and
| 9 | those could be done at the motion of dismiss with regard
| 10 | to the facts, and then we wait for summary judgment.
| 11 | The second question was to answer the question
| 12 | which was raised and we never got to, but is there any
| 13 | reason to be more worried about false positives than
| 14 | false negatives? And actually, I think in a global
| 15 | economy, there is, or global markets there is, for this
| 16 | reason: If you imagine every regulator in a global
| 17 | market is optimizing over-deterrence and
| 18 | under-deterrence, and sometimes they make mistakes, the
| 19 | problem is since the most aggressive regulator wins in
| 20 | the sense that they make the difference.
| 21 | Over-deterrence dominates more on global markets,
| 22 | because whenever -- if they each make the over -- if any
| 23 | one of them makes the over-deterrence error, then we
| 24 | would have over-deterrence, where it sort of takes both
| 25 | of them to make the under-deterrence error. So, that |
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1 | may mean that in global markets there is some reason to
| 2 | think that the standards should be more tighter and more
| 3 | concerned about over-deterrence.
| 4 | MR. JACOBSON: The question I would ask is what
| 5 | is with this AMC standard for bundling and why is there
| 6 | this Dennis Carlton footnote? So, I cannot answer the
| 7 | second, but I think I can answer the first.
| 8 | Bundling has aspects of different types of
| 9 | behavior, but it is really its own category. It has
| 10 | aspects of predatory pricing because bundling, by
| 11 | definition, involves some price reduction. It is
| 12 | something that customers frequently seek out and expect.
| 13 | They say, if I am buying two for one, I need to pay less
| 14 | if I was buying one, and so it is a common form of
| 15 | discounting, so that you cannot rule out a predatory
| 16 | pricing issue.
| 17 | It has aspects of tying because you are
| 18 | combining the sale of different products, and there is
| 19 | some compulsion from the bundle that induces the
| 20 | purchase of the second, more competitive product. It is
| 21 | different, though, than tying, because there is no
| 22 | coercion, as such, in a bundling case. It has aspects
| 23 | of exclusive dealing because, at least in the extreme,
| 24 | one effect of a bundled price arrangement is to induce
| 25 | exclusive or quasi-exclusive dealing by the customer. |
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1 | So, it has aspects of all these behaviors.
| 2 | It is also, when you think of the bundling, as
| 3 | such, as just a pricing decision, it is a type of
| 4 | conduct that may enhance competition but has few
| 5 | cost-saving efficiencies. There may be some transaction
| 6 | cost savings, there typically will be, and there may be
| 7 | in some cases some shipping cost savings, but you do not
| 8 | get the level of efficiencies that you would see in the
| 9 | typical exclusive dealing arrangements or in most tying
| 10 | arrangements. So, it is a practice that defies easy
| 11 | categorization.
| 12 | Now, the default rule that, you know, I have
| 13 | gone on at length today in saying should apply in
| 14 | Section 2 cases is the structured rule of reason
| 15 | analysis that we have from the Microsoft case. The
| 16 | reason the AMC has a standard that has that as the third
| 17 | part, as the back-stop, but we have two safe harbors
| 18 | because bundling is so prevalent, because in most cases
| 19 | it is simply a price reduction, and because we do want
| 20 | to err at least a bit on the side of not discouraging
| 21 | procompetitive pricing behavior.
| 22 | So, the first safe harbor is basically the Ortho
| 23 | test. It is the test that says if you take the total
| 24 | discount applied for the entire bundle and you subtract
| 25 | that from the revenues that you would normally sell for |
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1 | the competitive product on a stand-alone basis, if that
| 2 | attributed price is above the incremental cost, we are
| 3 | basically thinking variable costs here, then that
| 4 | pricing practice cannot exclude -- not necessarily the
| 5 | plaintiff, but it cannot exclude a hypothetical equally
| 6 | efficient competitor, and so on that basis, we are going
| 7 | to say that that is a safe harbor. If the plaintiff
| 8 | cannot show that the pricing is below attributed price
| 9 | costs on that basis, that the defendant wins.
| 10 | We have a second safe harbor that is not
| 11 | particularly safe that is a recoupment safe harbor.
| 12 | Now, one can do a recoupment safe harbor in a number of
| 13 | different ways. The AMC did it to determine whether the
| 14 | defendant is going to likely recover the "lost profits"
| 15 | from the calculation of below-cost pricing on the basis
| 16 | I described. Whether those profits are going to be
| 17 | recovered at all -- and, of course, in most bundling
| 18 | contexts, recoupment can be simultaneous, and it
| 19 | typically is, because the total bundled price typically
| 20 | exceeds the total bundled costs. So on that basis, if
| 21 | recoupment is simultaneous, the recoupment safe harbor
| 22 | does not apply. It is there, it is there largely I
| 23 | think because Commissioner Birchfield said, well, we
| 24 | need to have something that sounds like Brooke, so we
| 25 | wanted to have something with a price-cost test as well |
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1 | as a recoupment element. So, it is there, but I
| 2 | wouldn't pay an awful lot of attention to it.
| 3 | But then at the end, we have the basic test of
| 4 | the rule of reason. Is the net effect of this practice
| 5 | going to be to harm competition and to restrict output
| 6 | and raise prices to consumers? And it may not be the
| 7 | perfect test that endures as long as Areeda and Turner,
| 8 | I mean, that has been pretty impressive, you know, 32
| 9 | years since 1975, but I think it is by far the best
| 10 | available today. Certainly none of the alternative
| 11 | tests that people have come up with come close to this
| 12 | one in terms of administerability, intelligibility,
| 13 | ability to counsel clients, and part of the good news is
| 14 | that just a few weeks ago, the 9th Circuit called for
| 15 | amicus briefs in a bundling case where the jury was
| 16 | instructed under LePages. The case is called Peace
| 17 | Health, and a number of amicus briefs were submitted,
| 18 | and Deborah Valentine and I submitted one articulating
| 19 | the AMC standard, so we will see what shakes out of
| 20 | that.
| 21 | But one thing I hope in terms of the agencies is
| 22 | when that case reaches the petition for certiorari
| 23 | stage, which it will, that the agencies, you know, get a
| 24 | sufficient act together to file a brief with the Supreme
| 25 | Court articulating some standard, hopefully the AMC |
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1 | standard, for both.
| 2 | MR. CARLTON: Okay, thank you. If anyone wants
| 3 | to read my footnote, you are welcome to. I will just
| 4 | say one thing. I won't explain the footnote, because we
| 5 | do not have much time. When you teach bundling in
| 6 | economics, and if you look at the economics literature,
| 7 | it is called mixed bundling, because you are offering
| 8 | product A and product A and B together and then maybe
| 9 | product B, and the economics literature is pretty well
| 10 | developed, you know, many years ago, I think starting in
| 11 | the seventies, in which they describe mixed bundling as
| 12 | a way to price-discriminate. It had nothing to do with
| 13 | harming competition, bettering your ability to charge a
| 14 | high price because your competitor is harmed. Pure
| 15 | price discrimination.
| 16 | Failure to appreciate that will mean that you
| 17 | will see people failing the Ortho test, the first prong
| 18 | that John described, even though they are doing nothing
| 19 | that harms competition. So, that was -- that is the
| 20 | short version, and you can read the long version in the
| 21 | report as to why I think there needs to be something
| 22 | more expansive.
| 23 | In any case, Bill.
| 24 | MR. KOLASKY: I will be very brief. I have a
| 25 | question to which I do not have an answer, and it is the |
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1 | very important subject that we did not get a chance to
| 2 | discuss today, and that is monopoly power.
| 3 | All of us know that market share is a relatively
| 4 | poor surrogate for market power, and all of us know that
| 5 | it is exceedingly difficult to define markets in
| 6 | monopoly cases. We have a very good test, the
| 7 | hypothetical monopolist test, to use in mergers, because
| 8 | there we have a base price, the pre-merger price, from
| 9 | which to work, and we do not have that in monopolization
| 10 | cases generally.
| 11 | So, my question really is, especially in
| 12 | high-tech markets, markets characterized by intellectual
| 13 | property in which recurring innovation is important and,
| 14 | therefore, you have recurring fixed costs, so that it is
| 15 | inevitable that prices are going to have to be well
| 16 | above marginal cost, how are the courts to define
| 17 | substantial and durable market power sufficient to
| 18 | create a monopoly?
| 19 | MR. KRATTENMAKER: I guess I want to say the
| 20 | first three questions I would have asked myself have
| 21 | already been asked, so I won't answer them, and I think
| 22 | we have done such a terrific job of posing a lot of good
| 23 | questions that there are not a lot left, so with that
| 24 | qualification, if I were to ask myself or if you were to
| 25 | ask me what has not been asked, I would say when you |
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1 | look at the law of Section 2, what do you see that we
| 2 | haven't talked about?
| 3 | I would say when I look at Section 2, I see it
| 4 | encrusted with a lot of barnacles, a whole bunch of
| 5 | immunities, areas to which Section 2 does not apply at
| 6 | all, for example, so-called petitioning the Government
| 7 | or so-called state action, a whole bunch of exemptions,
| 8 | a whole bunch of activity at the federal level where
| 9 | comparable monopoly is not only tolerated, but it is
| 10 | fostered, and so I would ask myself the question, if we
| 11 | are having a series of hearings or writing a report
| 12 | about Section 2, can we leave out what I might call the
| 13 | ghosts in the room or the barnacles on the back of
| 14 | Section 2 that protect and sometimes foster monopoly in
| 15 | ways that are entirely lawful under the parameters of
| 16 | the rest of the discussion we have had today?
| 17 | MS. McDAVID: One issue we haven't talked about
| 18 | at all today, and I do not honestly know the answer to
| 19 | it either, is in a framework that applies the rule of
| 20 | reason to Section 2 cases, what is the role of what
| 21 | someone might loosely call intent or might be called
| 22 | contemporaneous business evidence of why a practice was
| 23 | engaged in. We all understand the risk that it can be
| 24 | misconstrued, and that is why we have tended to play it
| 25 | down. But we look at ex post justifications in figuring |
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1 | out what the efficiencies are, shouldn't we also be
| 2 | informed to some extent about the prior explanations as
| 3 | to why the practice was being proposed, and is that an
| 4 | appropriate part of this analysis? Today, I think we
| 5 | exclude intent in the predatory pricing arena almost
| 6 | entirely, but I am not certain that is appropriate in
| 7 | all section 2 cases.
| 8 | DR. WILLIG: Thank you. I would like to throw
| 9 | out two things, one very short, because we spent a lot
| 10 | of time on it already, and that is the idea of the test
| 11 | or is there an overarching philosophy. To bring it back
| 12 | to some comments we were sharing on consumer welfare,
| 13 | total welfare, or competitive process, I think
| 14 | competitive process is really what our ability to
| 15 | analyze is about, and I will just put out as a
| 16 | proposition that the no economic sense test, the
| 17 | sacrifice test, are about protecting conduct that is
| 18 | part of the competitive process. We can all go home and
| 19 | think about it.
| 20 | On monopolization, market power, I would love it
| 21 | if the report would come out and say that this is no
| 22 | longer viewed as a paradox that in any way should slow
| 23 | down our ability to do Section 2 analysis. The
| 24 | Cellophane Fallacy was a fallacy, but it is not a
| 25 | paradox. We know the way out of that fallacy, and it is |
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1 | real simple. It is just staying somewhat clear-headed
| 2 | about what is the issue, and just in case we do not all
| 3 | agree on it yet, I think we probably do, but let me do a
| 4 | two-minute version of it.
| 5 | We have got a firm, the defendant, it has got
| 6 | some nice market position, it puts out a practice that
| 7 | is a killer practice. The practice takes out some
| 8 | competitors, and yeah, later on we will talk about
| 9 | whether it was a valid practice or not in some sense,
| 10 | but first let's talk about just the precondition. Is
| 11 | there a monopoly power issue?
| 12 | I would like to emphasize the way to analyze
| 13 | that is to focus on the situation before the killer
| 14 | practice, we have got the victims of the practice, and
| 15 | we have got other possible sources of competition
| 16 | disciplining the defendant, and the issue that we can
| 17 | resolve using regular monopolist 5 percent test kinds of
| 18 | mind-sets is to ask before the killer practice went into
| 19 | effect, how important in the firmament of competitive
| 20 | forces were those who were the victims of the practice
| 21 | i.e., what is their share?
| 22 | We can do that in the ordinary sort of measuring
| 23 | system. We can ask what was the share of the defendant
| 24 | in that market and what is the increment to its market
| 25 | power viewed through the regular lens, i.e., what was |
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1 | the share of the competitors who were being slain? How
| 2 | many others are there who are also sources of
| 3 | competitive discipline? These are share-based kinds of
| 4 | questions. We can put entry into it. We can use
| 5 | uncommitted and committed -- actually, we can use the
| 6 | whole paraphernalia from the Guidelines, as long as we
| 7 | remember to do it pre-kill.
| 8 | Now, maybe it is five years later and the kill
| 9 | is over, but mentally, we can go back to before the kill
| 10 | and still ask those questions, and there is a relevant
| 11 | market that's pertinent for this analysis. I would love
| 12 | it if the report would say, there is no more Cellophane
| 13 | paradox, there never really was, we just weren't being
| 14 | very clear-eyed about it.
| 15 | MR. CARLTON: On that note, unless there are any
| 16 | questions from the audience, I would like to say two
| 17 | things. One, I have already mentioned a disclaimer,
| 18 | that my views, if I expressed any today, are mine alone,
| 19 | not those of the Department of Justice, and also, I want
| 20 | to thank this very splendid panel. It's rare to have
| 21 | such talent in one room, and I am grateful to all of you
| 22 | for taking the time to give us your views. Thank you
| 23 | very much.
| 24 | (Applause.)
| 25 | (Whereupon, at 4:57 p.m., the hearing was |
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1 | concluded.)
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1 | C E R T I F I C A T I O N O F R E P O R T E R
| 2 | DOCKET/FILE NUMBER: P062106
| 3 | CASE TITLE: SECTION 2 HEARING
| 4 | DATE: MAY 1, 2007
| 5 |
| 6 | I HEREBY CERTIFY that the transcript contained
| 7 | herein is a full and accurate transcript of the notes
| 8 | taken by me at the hearing on the above cause before the
| 9 | FEDERAL TRADE COMMISSION to the best of my knowledge and
| 10 | belief.
| 11 |
| 12 | DATED: 5/3/2007
| 13 |
| 14 |
| 15 |
| 16 | SUSANNE BERGLING, RMR-CLR
| 17 |
| 18 | C E R T I F I C A T I O N O F P R O O F R E A D E R
| 19 |
| 20 | I HEREBY CERTIFY that I proofread the transcript
| 21 | for accuracy in spelling, hyphenation, punctuation and
| 22 | format.
| 23 |
| 24 |
| 25 | DIANE QUADE |
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