The Strategic Abuse Of The Antitrust Laws

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Slide 1

The Strategic Abuse
of the
Antitrust Laws

R. Preston McAfee
Dec 6, 2006

Slide 2

  • Official registrar of .com and .net
  • Sep 2003: redirects mistyped addresses to its own advertising site (
  • ISPs object, ask ICANN to stop.
  • VeriSign sued, contending ICANN’s decision was an illegal conspiracy
  • Judge: so deficient not to merit a trial

Slide 3

The VeriSign Plot Thickens
  • Popular Enterprises buys expired domains and redirects them to its own advertising site
  • Popular sued alleging the existence of violated the antitrust laws
  • Suit is continuing

Slide 4

  • Examples
  • Purposes
  • Incentives to sue
  • Government as strategic player

Slide 5

Colorado Chiropractic Council
  • Sent 30 hospitals requests for privileges
    • Threat of lawsuit
  • Nine did not admit CCCN
  • These hospitals sued for restraint of trade
  • Judge: “Completely without merit…completely lacking substance as the basis of an antitrust claim.”

Slide 6

Next Generation Realty
  • Entrant in Iowa real estateEntrant in Iowa real estate
  • Sought commission--sharing from incumbent Iowa Realty
    • But Next Gen itself did not share
  • Iowa Realty refused as not reciprocal
  • Next Gen filed antitrust suit
  • Iowa Supreme Court: “without merit”

Slide 7

Private Action
  • Outnumber government suits nine to one
  • Both Sherman Act (1890, sec 7) and Clayton Act (1914, sec 4) permit private antitrust suits
    • Treble damages
  • Canada’s 1889 Combines Investigation Acts didn’t permit private litigation until 1976
    • Single damages
    • Rare

Slide 8

General Idea
  • Incentives for private antitrust litigation are not guided by consumer welfare
  • What are the motives of firms engaged in private antitrust litigation?
  • How can law be used strategically?
  • How can the antitrust laws be crafted to minimize damage?

Slide 9

Strategic Use
  • Antitrust can be used to
    • Harass
    • Harm
    • Extort
  • Harassment and harm can be used to induce cooperation
    • Often cheaper to sue than to defend
  • Extortion reduces returns to investment

Slide 10

Reasons for Private Litigation
  • Extort funds from a successful rival
    • Walmart vs MC, Visa,
    • Microsoft
  • Change the terms of the contract
    • Texaco & price discrimination
  • Punish non--cooperative behavior

Slide 11

Reasons for Private Litigation
  • Respond to an existing lawsuit
  • Prevent a hostile takeover
    • Service Corp v. Loewen
  • Discourage the entry of a rival
    • Utah Pie
  • Prevent a successful firm from competing vigorously
    • ISOs

Slide 12

Prevent Vigorous Competition: Digital v. Intel
  • Digital Alpha versus Intel Pentium
  • Market dominance of Pentium
  • Digital threatened litigation, labeling Intel a monopoly
  • FTC starts inquiry
  • Intel purchases Digital facilities, provides advantageous terms for Pentium

Slide 13

Who Profits?
  • Actions can be either
    • pro--competitive (cost reducing) or
    • anti--competitive (rival’s cost raising)
  • Examine incentive to sue in an economic model

Slide 11

Main Result
  • Gain from preventing a pro--competitive action is larger than preventing an anti--competitive actions if
    • Firm has a smaller share
    • Market is dispersed
  • Loss from pro--competitive rival action is increasing in number of firms
  • Loss from anti--competitive action is decreasing in number of firms

Slide 11

  • Antitrust laws often distorted to reduce competition
    • Very undesirable side effect
  • Outright ban on private antitrust litigation would solve that problem
    • At cost of stopping some legitimate suits
    • Encouraging more anti--competitive behavior

Slide 11

Conclusion, Continued
  • Alternative models may provide best of both worlds
  • Agency “gate--keeper” for private litigation
  • Agency amicus curiae for private litigation
  • Private financial support for agency litigation
  • Decoupling damages and awards
  • Providing experts to courts to reduce uncertainty

Updated June 25, 2015

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