Business Testimony

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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
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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
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11
12
13
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25

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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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100

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

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101

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

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102

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

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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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