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Hearings On Single-Firm Conduct: Remedies In Section 2 Cases

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Slide 1

NERA Economic Consulting logo

      Department of Justice/
     Federal Trade Commission
Image of two men looking at each other thru binoculars superimposed over images of a chess game and mathematical equations

Hearings on Single-Firm Conduct:
Remedies in Section 2 Cases

Dr. Andrew S. Joskow

Senior Vice President

March 28, 2007

How Markets Work - SM

Slide 2
      Section 2 Injunction Relief: Can We
     Learn Anything from the Merger
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  • Injunctive Relief – Structural vs. Behavioral
  • Policy towards remedies well developed in merger context
    • Antitrust Division Policy Guide to Merger Remedies (October 2004)
  • What is different about Section 2 Cases?

Slide 3
      Prohibiting Unlawful Conduct is
     Easy… Not Really
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  • Restore competition through divestiture or “break up”
    • Possible insurmountable organization design problems – mistakes cannot be remedied.
  • Prohibit unlawful Exclusive Dealing Contracts.
    • Could be easy to prohibit contractually, but what about practices that mimic exclusive dealing?
  • Prohibit the tie.
    • Again could be easy, but mistake may risk loss of substantial integration efficiencies.
  • Prohibit the predatory pricing?
    • Remedy itself could easily be anticompetitive.
  • Cease and desist orders; revision of relationships between customers or competitors.

Slide 4
      Merger RemediesNERA's logo superimposed over image of two men above
  • Single Goal: not to enhance competition, but to restore competition.
  • Structural remedy strongly preferred.
  • Preserves Efficiencies.

         “… restoring competition is the only appropriate
    goal with respect to crafting merger remedies.”

–Antitrust Division Policy Guide to Merger Remedies
(October 2004)

Slide 5
      Structural Remedy In Mergers
     Preferred, Conduct Remedy
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  • Preference for structural remedy is stated in terms of problems with conduct remedies:
    • Direct Costs of Monitoring.
    • Indirect Coasts of efforts to evade the spirit of a decree, while not violating its letter.
    • Could constrain procompetitivebehavior.
    • Constrains firms from responding efficiently to changing market conditions.

Slide 6
      Positive case for Structural
     Remedy in Mergers
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  • Mergers are about changing structure –removing competition between rivals.
  • Competition that leads to lower prices, improved quality, and more innovation is lost.
  • For example, remedies such as price protection cannot reproduce the multiple dimensions over which competition occurs.
    • Benefits of competition not restored; remedy can be easy to evade, and evasion hard to monitor.

Slide 7
      Positive case for Structural
     Remedy in Mergers (Cont.)
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  • One purpose of HSR is to allow assets to be divested before the “eggs are scrambled.”
  • Preference is for an existing business entity, already well-defined that has both the ability, and incentive to compete.

Slide 8
      There has been a “Market” TestNERA's logo superimposed over image of two men above
  • The organizational design has already been done in may cases.
  • The ability of the assets to compete may have been tested in the pre-merger world.
  • Even so, FTC divestiture study (1999) found significant problems.
    • Divestitures of ongoing business were more successful.

Slide 9
      Removing Existing Monopoly
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  • In a single firm conduct case, the conduct often arises from the existing monopoly power.
  • Thus, relief could change the firm’s structure, such that it no longer has the future ability and incentive to restrain competition.
    • Tied to conduct at issue in the case.
  • Does that mean looking for a “But For” market structure?

Slide 10
      Appropriate Divisional Lines
     May Not Exist
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  • Single firm not necessarily drawn neatly in a way that could satisfy a horizontal divestiture.
    • Necessary assets, including intellectual property, to create an immediate going concern where none existed before is a substantial hurdle. Risk of failure appears higher than in a merger case.
    • Rare cases of horizontal separate operating entities that would allow a divestiture of “hard” assets (Exception: Standard Oil, American Tobacco).
    • Rejected in United Shoe Machinery, later in Microsoft.

Slide 11
      Goal in Some Cases Could be to Create
     Conditions that Change Incentives through
     Vertical Divestiture
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  • Vertical Divestitures possibly less costly?
  • AT&T (1984) was broken up along operating company lines.
    • Even with structural relief required, substantial ongoing monitoring BOC lines of business and interconnection.
  • Microsoft – not obvious that Operating System and Applications could be split along clear operating unit lines without huge losses in efficiencies.
    • Ongoing monitoring of interaction between divested entities would be required.

Slide 12
      Will the Predicted Market
     Structure Emerge?
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  • Assumes that the market would create the hoped for new structure that theory would predict.
  • But the market could have easily returned to its existing through acquisition and internal innovation – ultimately the result of network effects.
  • No practical experience (unlike in mergers) regarding what assets are needed to compete effectively.

Slide 13
      Cost/Benefit Balance:
     Section 2 vs. Mergers
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  • Benefits of structural remedy is high in merger context –a market already exists.
  • Costs are likely to be low as divestiture can often be accomplished while permitting efficiencies. Where efficiencies cannot be retained with divestitures, case for divestiture may be weaker.
  • Absent any experience with competition benefits of divestiture are more uncertain in the case of monopoly.
    • Competitive process is not necessarily enhanced if market could easily revert to monopoly.
  • If “But For” market structure is sought, can be difficult to determine appropriate competitive structure.
  • Costs could be high in terms of undoing efficiencies derived from a firm’s internal structure.
  • May still require ongoing monitoring.

Slide 14
      Behavioral Remedies in
     Section 2
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  • Biggest problem is recurrence through evasion.
  • Exclusive dealing, tying, bundled discounts, etc. can be prohibited broadly.
  • Focuses on the effect of entry as a less costly remedy.
  • Broad prohibitions may favor rivals (imposing efficiency costs), but cost seems lower relative to uncertain results of divestiture.
    • Favors the competitive process at lower cost by facilitating entry.
    • US vs. Dentsply–prohibition on exclusive contracts.
  • Post-remedy incentives are clear – benefits potentially excluded rivals through enhancing ability to compete.

Slide 15
      Caveat: Predatory PricingNERA's logo superimposed over image of two men above
  • US vs. American Airlines: An irremediable violation?
  • Prohibition on lowering prices seems anticompetitive.
  • Limiting magnitude of price cuts, or require price cuts to be maintained for a certain period, or limit capacity expansions after market entry.
  • Break up the airline? Not clear that hub competition would survive for any length of time.
    • Network effects again.
  • Fines may be the only remaining remedy.
  • If there is no remedy, is there a case?

Slide 16
      ConclusionNERA's logo superimposed over image of two men above
  • Merger remedies guides point to structural remedies as a preferred outcome.
  • The case for divestiture remedies weaker in Section 2 Cases.
  • Incidence of the divestiture remedy has been very limited.
Updated June 25, 2015

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