Steven C. Salop Presentation

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Page 1

Anticompetitive Overbuying

Steven C. Salop
Georgetown University Law Center
CRA International

FTC Hearings
June 21, 2006

Page 2

Anticompetitive Exclusion

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

Page 3

Anticompetitive Overbuying

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

Page 4

Antitrust Evaluation: Predatory Overbuyinig

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

Page 5

Antitrust Evaluation: RRC Overbuying

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

Page 6

Economic Welfare Standards

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

Page 7

Innovation Incentives

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

  • Consumer welfare standard supports greater overallinnovation incentives
    • TW std allows dominant firm to destroy higher cost rivals thatwould innovate, thereby reducing innovation
    • TW std allows mergers that eliminate competition, leadingmerged firm to have less incentive to innovate
    • These harms likely are larger than any efficiency benefits from allowing mergers or exclusionary conduct that modestlyreduce costs, while leading to higher prices to consumers
  • Thus, using the consumer welfare std leads to higher long-run total welfare, plus higher long-run consumer welfare.
Updated June 25, 2015

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