The FTC and the law of monopolization

Antitrust Law Journal

Volumn 67, Issue 3, 2000, Pages 693-723

  Muris, Timothy J ^a  

^a NONE

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EID: 0034419306     PISSN: 00036056     EISSN: None     Source Type: Journal    
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References (118)

1. See United States v. IBM, No. 69 Civ. 200 (S.D.N.Y. filed Jan. 17, 1969); United States v. Microsoft, 1998-2 Trade Cas. (CCH) ¶ 72,261 (D.D.C. 1998). A few cases also scrutinize contractual relations between firms and their customers or suppliers. Although much less prominent in the 1980s and 1990s than in previous decades, such cases can involve practices that harm consumers.
2. See Summit Tech., Inc., FTC Docket No. 9286 (filed Mar. 24, 1998) (VISX); Federal Trade Commission, Background Concerning FTC's Action Against Intel (June 8, 1998), reprinted in FTC: WATCH, June 29, 1998, at 3 [hereinafter FTC Backgrounder]; Robert Pitofsky, Chairman, Federal Trade Commission, Remarks Before The Federalist Society, 1998 National Lawyers Convention (Nov. 14, 1998) (unedited transcript at 201-03, on file with author); Jonathan B. Baker, Promoting Innovation Competition Through the Aspen/Kodak Rule, 7 GEO. MASON L. REV. 495 (1999); see also infra note 17.
3. Although the full Commission has not adjudicated the issue, a majority of the current Commissioners appears to endorse the new position. First, the FTC recently voted to issue the two monopolization complaints that raise the issue of the appropriate legal standard, as well as to accept a consent agreement in one of them. See VISX; Intel Corp., FTC Docket No. 9288 (June 8, 1998). (The author consulted with Intel regarding the issues in this case.) Moreover, Chairman Pitofsky, whose views command majority support, generally endorsed the non-anticompetitive effect rule, without discussing ongoing FTC litigation, in unpublished remarks on November 14, 1998 in Washington, D.C., before The Federalist Society. See supra note 2. Accordingly, I refer to the rule as that of the FTC, not just the staff. At a minimum, the rule appears to represent the opinion of the FTC leadership.
4. See VISX, Complaint Counsel's Memorandum in Support of Petitions of Third-Party Laser Manufacturers to Quash Respondent VISX's Subpoenas Duces Tecum (Sept. 10, 1998) [hereinafter Complaint Counsel's Memorandum in VISX]. 5 United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966).
5. See, e.g., 3 PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW ¶ 651c, at 78 (rev. ed. 1996).
6. Complaint Counsel's Memorandum in VISX, supra note 4, at 2.
7. See id. at 3 (citing American Tobacco Co. v. United States, 328 U.S. 781, 810 (1946), and Lorain Journal Co. v. United States, 342 U.S. 143, 153 (1951)). Only in a later pleading did FTC staff point to specific "hornbook law" that it interpreted as supporting the claim that proof of anticompetitive effect is not a required element of monopolization claims. See Complaint Counsel's Reply Memorandum in Support of Petitions of Third Party Laser Manufacturers to Quash Respondent VISX's Subpoenas Duces Tecum at 7-8 (Sept. 21, 1998) (citing 3 AREEDA & HOVENKAMP, supra note 6, ¶¶ 706f, 653b and 651).
8. See FTC Backgrounder, supra note 2.
9. See Baker, supra note 2, at 503.
10. 3 AREEDA & HOVENKAMP, supra note 6, ¶ 651c, at 78.
11. See Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 464 (1992); NCAA v. Board of Regents, 468 U.S. 85, 109 n.38 (1984); United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 389 (1956). See also DENNIS W. CARLTON & JEFFREY M. PERLOFF, MODERN INDUSTRIAL ORGANIZATION 137 (2d ed. 1994).
12. See, e.g., Rebel Oil Co. v. Atlantic Richfield Co., 51 F.3d 1421, 1441 (9th Cir. 1995); Reazin v. Blue Cross & Blue Shield, 899 F.2d 951, 967-68 (10th Cir. 1990); A.A. Poultry Farms v. Rose Acre Farms, 881 F.2d 1396, 1403 (7th Cir. 1989).
13. 3 AREEDA & HOVENKAMP, supra note 6, ¶ 650c, at 69.
14. Id. ¶ 651c, at 77.
15. Id.
16. Both Chairman Pitofsky, in his Federalist Society remarks, supra note 2, and the former Director of the Bureau of Competition, William Baer, in a speech on November 12, 1998, quote "the clear and genuine" passage as well as the "significant contribution" language quoted in the text accompanying note 11 above. William J. Baer, Antitrust Enforcement and High Technology Markets, Speech Before ABA Sections of Business Law, Litigation, and Tort and Insurance Practice (Nov. 12, 1998) 〈http://www.ftc.gov/speeches/other/ ipat6.htm〉. In responding to Commissioner Swindle's refusal to accept the Intel consent agreement because of lack of anticompetitive impact, the Commission majority also cited this passage. Statement of Chairman Pitofsky and Commissioners Anthony and Thompson, Intel Corp., FTC Docket No. 9288 (Aug. 6, 1999). In practice, however, the agency does not require a searching inquiry into whether the acts in question explicitly have made the necessary "significant contribution" to monopoly to support finding liability under § 2. Thus, in VISX, complaint counsel opposed the defendant's efforts to demonstrate the lack of casual connection between the challenged practices and the preservation of monopoly. See supra notes 7-8 and infra notes 93-96 and accompanying text. In Intel, discussed below at text accompanying notes 97-103, the complaint alleged that "the natural and probable effect" of Intel's actions was to retard innovation. See Intel Corp., FTC Docket No. 9288, Complaint ¶¶ 14, 39 (June 8, 1998). If the effect is "natural and probable," then it need not be further demonstrated. Moreover, the complaint counsel's pretrial brief appeared willing to infer anticompetitive effect from harm to competitors. See, e.g., Complaint Counsel's Pretrial Brief (Feb. 25, 1999), at 7 (discussing how injury to competition is presumed to follow from certain conduct); id. (quoting Walker v. U-Haul Co. of Miss., 747 F.2d 1011, 1013 (5th Cir. 1984) (§ 2 "does not explicitly require a plaintiff to prove an injury to competition"); id. at 46 (Intel's "exclusion of these competitors therefore manifests an anticompetitive effect"). In his remarks at the Antitrust Section's 1999 Spring Meeting, Chairman Pitofsky offered yet another interpretation of the governing rule for § 2: "A monopolist cannot coerce or induce customers or competitors to bend to its will by using its monopoly power, if it is reasonably likely that [the] course of conduct will injure competition and the monopolist does not have a good business reason for its conduct." Roundtable Conference with Enforcement Officials, 67 ANTITRUST L.J. 453, 457 (1999). Although stated as a rule requiring competitive impact, the issue is, again, what the Commission requires in practice. Moreover, I agree with Ronald Davis that this "formulation employs language that seems to mix economics with ethics." Ronald W. Davis, The FTC Intel Case: What Are the Limitations on "Throwing Your Weight Around" Using Intellectual Property Rights?, ANTITRUST, Summer 1999, at 47, 51.
17. American Tobacco Co. v. United States, 328 U.S. 781 (1946).
18. Id. at 809.
19. The leading treatise correctly notes that actual exclusion as defined in the case was "thus . . . held unnecessary." 3 AREEDA & HOVENKAMP, supra note 6, ¶ 612, at 29.
20. Lorain Journal Co. v. United States, 342 U.S. 143 (1951).
21. Id. at 153.
22. Id. 24 Id. (quoting Swift Co. v. United States, 196 U.S. 375, 396 (1905)).
23. Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985).
24. Id. at 605.
25. Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451 (1992).
26. Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447 (1993).
27. See id. at 459.
28. See id. at 458.
29. Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993).
30. Id. at 225. For recent circuit court discussions of this principle, see Data Gen. Corp. v. Grumman Sys. Support Corp., 36 F.3d 1147, 1182 (1st Cir. 1994); Wigod v. Chicago Mercantile Exch., 981 F.2d 1510, 1520 (7th Cir. 1992); Town of Concord v. Boston Edison Co., 915 F.2d 17, 21 (1st Cir. 1990). The FTC Backgrounder cites Otter Tail Power Co. v. United States, 410 U.S. 366 (1973), as additional support for its rule. FTC Backgrounder, supra note 2, at 7. In Otter Tail the defendant was a monopolist of electric transmission lines, as well as a generator of power which, under franchise arrangements with municipalities, distributed the electricity to consumers. When some municipalities chose to operate their own distribution facilities, Otter Tail refused to supply power. The Court ruled against the defendant in an opinion that the Areeda and Hovenkamp treatise calls not "adequately elaborated." 3 AREEDA & HOVENKAMP, supra note 6, ¶ 787cl, at 287. The FTC Backgrounder paper states that the municipalities that were the injured party only sought to replace the defendant's monopoly with monopolies of their own, implying that there was no injury to competition. Injury may have existed, however, in that the defendant may have been effectively regulated as a wholesaler, but not as a retailer. If so, then vertical integration would have allowed it to charge the monopoly price that wholesale regulation denied it. See id. at 288. Of course, each municipality's distribution system is itself a natural monopoly, but Areeda and Hovenkamp note, "presumably the municipality would operate its system in the interests of its citizens." Id. Moreover, the potential of the municipalities to operate their own systems would allow them to negotiate lower rates from the defendant. See Harold Demsetz, Why Regulate Utilities?, 11 J.L. & ECON. 55 (1968).
31. NYNEX Corp. v. Discon, Inc., 119 S. Ct. 493 (1998).
32. See id. at 498-99.
33. See id. at 499.
34. Id. at 500. One might ask whether the ETC should have to prove less than a private plaintiff. Of course, the government need not show injury to specific firms to obtain standing. The government, however, must show overall harm to the market, just as private plaintiffs must show that any injury to competitors also harms competition.
35. I previously have discussed the § 1 issue at length, most recently in The Federal Trade Commission and the Rule of Reason: In Defense of Massachusetts Board, 66 ANTITRUST L.J. 773 (1998).
36. See Richard A. Posner, An Economic Approach to Legal Procedure and Judicial Administration, 2 J. LEGAL STUD. 99 (1973); Issac Ehrlich & Richard A. Posner, An Economic Analysis of Rule Making, 3 J. LEGAL STUD. 257 (1974).
37. See Muris, supra note 37, at 776 n.8 and accompanying text.
38. Even with price fixing, the per se rule has some complications. In its modern formulation, the rule condemns not all price fixing, but only "naked" price fixing. Thus, the defendant can argue that its practice has a valid efficiency justification. As I have argued elsewhere, to escape per se condemnation, the defendant must show that the purported efficiency is more than just plausible, but it need not quantify the amount of efficiency. See id. at 778-79. Because the conduct is not literally per se illegal, some call analysis of efficiency a "quick look" application of the rule of reason. See generally California Dental Ass'n v. FTC, 119 S. Ct. 1604 (1999).
39. Moreover in VISX, the complaint counsel sought to prohibit the defendant from presenting evidence that no anticompetitive effect (i.e., causal connection) should in fact be found. See supra notes 7-8. A rule that truncated the finding of the requisite causal connection, but allowed the defendant to rebut the inference, would itself have a significant impact on § 2 litigation. Such a rule would effectively shift the burden of persuasion on the causal connection issue to the defendant.
40. If the existence of an efficiency justification were easier to demonstrate than anticompetitive effect, this would favor truncation. Although one can envision cases in which this is the case, there is no reason why it will be always, or even usually, true. As the cases discussed in Part IV reveal, proof of justification may sometimes be difficult, while proof of anticompetitive effect may sometimes be relatively easy. Intel reveals the apparent difficulty of the justification issue. As discussed infra notes 57 and 102, Intel's justifications seem clear, at least regarding intellectual property (also raised by Kodak on remand) and the fact that some competitors it allegedly excluded sued Intel. Nevertheless, the FTC rejected these justifications, in part, because it believed they did not explain Intel's motive. See Complaint Counsel's Pretrial Brief (Feb. 25, 1999), at 46-49. To say the least, determining motive is rarely simple. Regarding proof of anticompetitive effect, the facts of Aspen Skiing, Alcoa, and United Shoe, discussed in Part IV infra, reveal that such effect was very unlikely in those cases. In any event, as the rest of the paragraph accompanying this note indicates, we do not know, a priori, whether the conduct at issue is usually anticompetitive.
41. See Baker, supra note 2.
42. See, e.g., FTC v. Superior Ct. Trial Lawyers Ass'n, 493 U.S. 411, 432-33 (1990); FTC v. Indiana Fed'n of Dentists, 476 U.S. 447, 458-59 (1986); Broadcast Music, Inc. v. CBS, 441 U.S. 1, 9-10 (1979).
43. See Intel Corp., FTC Docket No. 9288 (filed June 8, 1998); see also Baker, supra note 2.
44. See, e.g., David Balto & Robert Pitofsky, Antitrust and High-Tech Industries: The New Challenge, 43 ANTITRUST BULL. 583 (1998); Baker, supra note 2, at 516.
45. Although there is no single precise definition of relational contracts, the term refers to situations in which parties have a long-term "relation" without having a long-term contract that covers the variety of possible issues that may arise. See Charles J. Goetz & Robert E. Scott, Principles of Relational Contracts, 67 VA. L. REV. 1089, 1091 (1981): A contract is relational to the extent that the parties are incapable of reducing important terms of the arrangement to well-defined obligations. Such definitive obligations may be impractical because of inability to identify uncertain future conditions or because of inability to characterize complex adaptations adequately even when the contingencies themselves can be identified in advance. . . . [L]ong-term contracts are more likely than short-term agreements to fit this conceptualization, but temporal extension per se is not the defining characterization. Typically, the parties recognize their mutual dependence and will adjust the relationship to maximize their joint benefit even if, under contract law, one party could change the relationship more to its favor. Opportunistic behavior refers, in part, to the "hold up" problems discussed in this section. See Timothy J. Muris, Opportunistic Behavior and the Law of Contracts, 65 MINN. L. REV. 521 (1981). For recent discussions of both concepts, see John P. Esser, Institutionalize Industry: The Changing Forms of Contract, 21 L. & Soc. INQUIRY 593 (1996); Claire Moore Dickerson, Cycles and Pendulums: Good Faith, Norms, and the Commons, 54 WASH. & LEE L. REV. 399 (1997); Benjamin Klein, Contracts and Incentives: The Role of Contract Terms in Assuring Performance, in CONTRACT ECONOMICS (Lars Werin & Hans Wijkander eds., 1992).
46. See Bengt Holmström & John Roberts, The Boundaries of the Firm Revisited, 12 J. ECON. PERSP. 73 (1998).
47. See id. at 85-86.
48. Eastman Kodak Co. v. Image Technical Servs. Inc., 504 U.S. 451 (1992).
49. The "hold-up" issues in Kodak are analyzed in Benjamin Klein, Market Power in Antitrust: Economic Analysis After Kodak, 3 SUP. CT. ECON. REV. 43 (1993); Benjamin Klein, Market Power in Franchise Cases in the Wake of Kodak: Applying Post- Contract Hold-Up Analysis to Vertical Relationships, 67 ANTITRUST L.J. 283 (1999); Warren S. Grimes, Market Definition in Franchise Antitrust Claims: Relational Market Power and the Franchisor's Conflict of Interest, 67 ANTITRUST L.J. 243 (1999); see also Carl Shapiro, Aftermarkets and Consumer Welfare: Making Sense of Kodak, 63 ANTITRUST L.J. 483 (1995), and sources cited therein, id. at 483 n.2.
50. Moreover, buyers could not be harmed unless they made specific investments allowing the seller to engage in a "hold-up." Further, as discussed in the remainder of the paragraph accompanying this note, protection against opportunism, either through contract law or some other mechanism, must have been inadequate. Finally, it is important to note that the hold-up problem is distinct from pre-contractual monopoly, as the text next discusses.
51. In general, price adjustments may not perfectly deter opportunism. For example, consider the problem of employees working at less than full capacity, often called shirking. Even if an employer could hire more employees at lower wages to solve the problem of employee shirking, a greater quantity of lower-quality labor at a low price may not perfectly substitute for a smaller quantity of more expensive, higher-quality labor. In the Kodak example, the lower equipment price would, as Klein notes, distort the relative prices of equipment and aftermarket services, leading customers inefficiently to economize on service. See Klein, supra note 51, at 51. Additional contract terms to avoid the potential hold-up include a long-term service agreement or a "most favored purchase" clause on equipments sales that would prevent discriminatory pricing against old purchasers. Finally, a common way to avoid a hold-up problem is to contract with parties who possess sufficiently strong reputations for fair dealing that they have more to lose than gain by a hold-up policy. See id. at 50, 51; Muris, supra note 47, at 527. Reliance on reputation may make the arrangement look "one-sided," misleading observers to conclude that the contracts are "unfair." See discussion infra Part IV.A.3.
52. See Steven C. Salop, Kodak as Post-Chicago Law and Economics, ANTITRUST & BUS. LITIG. BULL., Nov. 1993, at 2.
53. See Klein, supra note 51, at 62; see also Shapiro, supra note 51 (criticizing Kodak and citing the extensive literature the case has spawned).
54. I assume that the change violated no explicit Kodak-ISO or Kodak-buyer contractual provision. If it had, then the plaintiff would have a prima facie case of liability; Kodak would then have had to justify its breach.
55. Such an argument would have made it likely that the motion for summary judgment Kodak sought would have been denied because the hold-up issue presents questions of fact. On remand, the ISOs prevailed, and the court did not discuss the points discussed in the text. See Image Technical Servs. Inc. v. Eastman Kodak Co., 125 F.3d 1195 (9th Cir. 1997), cert. denied, 118 S. Ct. 1560 (1998). Kodak did make some strong arguments, and Professor Hovenkamp has severely criticized the Ninth Circuit for rejecting them. See Herbert Hovenkamp, Antitrust Remedies for Intellectual Property Bottlenecks, Presented at the European University Institute's 1998 EU Competition Policy Workshop: Competition Policy in Communications Network Markets (Nov. 13-14, 1998) (preliminary draft on file with author). Most notably, Kodak argued that its numerous patents and copyrights covering many of its high volume copier parts provided a legitimate business justification for its alleged exclusionary conduct. See Image Technical, 125 F.3d at 1214. As Hovenkamp has observed, "[t]he whole point of the intellectual property grant is to create a right not to share the article, process, or expression protected by it, and the courts have consistently recognized that right." Hovenkamp, supra, at 2 (citing, inter alia, Cygnus Therapeutics Sys. v. ALZA Corporation, 92 F.3d 1153, 1160 (Fed. Cir. 1996) (patentee "under no obligation to license"); Genentech v. Eli Lilly & Co., 998 F.2d 931, 949 (Fed. Cir. 1993) (same)); see also Intergraph Corp. v. Intel Corp., No. 98-1308, 1999 U.S. App. LEXIS 29199, at *48 (Fed. Cir. Nov. 5, 1999) (intellectual property owner permitted to refuse to license absent evidence of anticompetitive intent or harm); Miller Insituform, Inc. v. Insituform of N. Am., Inc., 830 F.2d 606, 609 (6th Cir. 1987); SCM Corporation v. Xerox Corp., 645 F.2d 1195, 1204 (2d Cir. 1981); cf. Data Gen. Corp. v. Grumman Sys. Support Corp., 36 F.3d 1147, 1186, 1187 (1st Cir. 1994) (unilateral refusals to license patented inventions never violate the antitrust laws and desire to exclude others from a copyrighted work is a presumptively valid business justification). In spite of these precedents, the Ninth Circuit crafted a rule under which a patentee may be subjected to antitrust liability for a unilateral refusal to license if the fact finder were to determine that its subjective intent was to exclude competitors rather than protect its intellectual property rights. See 125 F.3d at 1218-19. The Ninth Circuit's rule is contrary not only to case precedent but also to express language in the Patent Act, which provides that "[n]o patent owner . . . shall be . . . deemed guilty of misuse or illegal extension of the patent right by reason of his having . . . refused to license or use any rights to the patent." 35 U.S.C. § 271 (d) (4) (1994). Hovenkamp has predicted that the Ninth Circuit's rule, if widely adopted, would be "incapable of administration" and likely to "create a litigation nightmare." Hovenkamp, supra, at 3, 5.
56. The franchise setting is analogous to Kodak, in that the franchisor can be said to have a monopoly of its own franchise system and the possibility of a hold-up of franchisees exists. In fact, following Kodak, there has been a revival of franchise antitrust litigation, as detailed in a recent Symposium in this Journal. Symposium: The Law of Vertical Restraints in Franchise Cases and Summary Adjudication, 67 ANTITRUST L.J. 201 (1999).
57. See J. Howard Beales III & Timothy J. Muris, The Foundations of Franchise Regulation: Issues and Evidence, 2 J. CORP. FIN. 157, 159 (1995), and sources cited therein.
58. The franchisor could also pay the franchisee a premium that the franchisee will lose if terminated. One attribute that the franchisor is less likely to be able to rely on than the franchisee is reputation. Because at least some franchisors tend to be large, with considerable experience, franchisees can investigate and rely on that reputation. Franchisees who have no similar track record will not have such a reputation upon which the franchisor can rely. An additional problem is that franchisor cheating is more likely to become known than the cheating of any one franchisee.
59. See Beales & Muris, supra note 59, at 162; Muris, supra note 47, at 578-79.
60. See James A. Brickley et al., The Economic Effects of Franchise Termination Laws, 34 J.L. & ECON. 101 (1991); J. Howard Beales & Timothy J. Muris, The Inefficiency of State Regulation of Franchise Contracts (working paper, on file with author).
61. See sources cited supra note 62.
62. See, e.g., Paul H. Rubin, The Theory of the Firm and the Structure of the Franchise Contract, 21 J.L. & ECON. 223 (1978); Benjamin Klein et al., Vertical Integration, Appropriable Rents, and the Competitive Contracting Process, 21 J.L. & ECON. 297 (1978); Benjamin Klein & Kevin M. Murphy, Vertical Restraints as Contract Enforcement Mechanisms, 31 J.L. & ECON. 265 (1988).
63. See sources cited supra note 62. Although these state laws are designed to protect supposedly vulnerable franchisees, they ignore the reality of the franchising process. As demonstrated by a 1984 FTC survey, most actual and potential franchisees obtain outside assistance before signing a contract, usually from lawyers. Most had relevant business experience, and most thought they have received sufficient information prior to the contract. Most franchisees had sought other opportunities, frequently meeting with one or more other franchisors, and the overwhelming majority of franchisees were content with the relationship. In addition, 82% of the franchisees had attended or graduated from college, and they had annual incomes well in excess of the national average. These data are discussed at greater length in Beales & Muris, supra note 59, at 163.
64. Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985).
65. Id. at 587-89.
66. Id. at 589.
67. Id. at 593.
68. See Aspen Highlands Skiing Corp. v. Aspen Skiing Co., 738 F.2d 1509 (10th Cir. 1984), aff'd, 472 U.S. 585 (1985).
69. 472 U.S. at 605 (citing ROBERT H. BORK, THE ANTITRUST PARADOX: A POLICY AT WAR WITH ITSELF 138 (1978)); see also id. at 610-11 (footnotes omitted): [The record] comfortably supports an inference that [Ski Co.] made a deliberate effort to discourage its customers from doing business with its smaller rival. . . . [T]he evidence supports an inference that Ski Co, was not motivated by efficiency concerns and that it was willing to sacrifice short-run benefits and consumer goodwill in exchange for a perceived long-run impact on its smaller rival.
70. Id. at 605.
71. See e.g., 3 AREEDA & HOVENKAMP, supra note 6, ¶ 533g.
72. See Frank H. Easterbrook, On Identifying Exclusionary Conduct, 61 NOTRE DAME L. REV. 972, 975-76 (1986).
73. This explanation has been suggested by CHARLES J. GOETZ & FRED S. MCCHESNEY, ANTITRUST LAW: INTERPRETATION AND IMPLEMENTATION 23 (1998).
74. The high bargaining costs could raise prices to consumers, but these costs result from the conduct of both parties; they cannot be attributed solely to the defendant. In any event, merger eliminates these costs, illustrating that the problem is not one of traditional monopoly power.
75. See, e.g., Thomas G. Krattenmaker & Steven C. Salop, Anticompetitive Exclusion: Raising Rivals' Costs to Achieve Power Over Price, 96 YALE L.J. 209 (1986). For a recent discussion of the limitations of RRC, see Malcolm B. Coate & Andrew M. Kleit, Exclusion, Collusion or Confusion? The Underpinnings of Raising Rivals' Costs, 16 RES. L. & ECON. 73 (1994).
76. It is worth noting that Krattenmaker and Salop require both exclusion and demonstration of anticompetitive effect: A firm that raises its rivals' costs has not necessarily gained anything. It may have harmed one or more of its competitors, but has it harmed competition? Competition is harmed only if the firm purchasing the exclusionary right can, as a result, raise its price above the competitive level. Krattenmaker & Salop, supra note 77, at 242. Thus, they require injury to both competitors and competition.
77. United States v. Terminal R.R. Ass'n, 224 U.S. 383 (1912).
78. See Krattenmaker & Salop, supra note 77, at 234.
79. See David Reiffen & Andrew N. Kleit, Terminal Railroad Revisited: Foreclosure of an Essential Facility or Simple Horizontal Monopoly?, 33 J.L. & ECON. 419 (1990).
80. The mergers included ferry companies that competed with the bridges by ferrying railroad cars across the Mississippi River. Krattenmaker and Salop suggested other problems, including that the Terminal Association was used as a cartel ringmaster to discipline firms if they broke railroad cartel agreements in other parts of the country. Reiffen and Kleit, however, found nothing in the record of the case to support this assertion. See id. at 436 n.68.
81. See United States v. Aluminum Co. of Am., 148 F.2d 416 (2d Cir. 1945).
82. In Judge Hand's words, "nothing compelled [Alcoa] to keep doubling and redoubling its capacity before others entered the field. . . . We can think of no more effective exclusion than progressively to embrace each new opportunity as it opened. . . ." Id. at 431. By this reasoning, Alcoa should have restricted output, therefore raising price, and encouraging entry. Although the Supreme Court endorsed Hand's opinion in American Tobacco Co. v. United States, 328 U.S. 781, 813-14 (1946), modern antitrust analysis is largely critical of Hand's reasoning. For representative criticism, see 3 AREEDA & HOVENKAMP, supra note 6, ¶ 611.
83. Krattenmaker and Salop argued that their analysis differs from that of the old "foreclosure" theory, which was conceptually flawed because it did not adequately explain how foreclosure of supply can raise rivals' costs and lead to anticompetitive price increases. Krattenmaker & Salop, supra note 77, at 231-34. According to the authors, the defendant may deny its competitors not just units of an input that it uses, but also units that it does not need. In Alcoa this allegedly occurred by paying suppliers not to sell to the competitors, that is, by purchasing a "naked exclusionary right." Id. at 236. Thus, under this theory, a firm that otherwise lacks power to raise price can, through vertical arrangements, increase input costs to its competitors, leading to a price increase and higher profits. As note 118 infra discusses, economists understand that vertical arrangements can harm competition under limited conditions. See also Curtis M. Grimm et al., Foreclosure of Railroad Markets: A Test of Chicago Leverage Theory, 35 J.L. & ECON. 295 (1992).
84. See John E. Lopatka & Paul E. Godek, Another Look at Alcoa: Raising Rivals' Costs Does Not Improve the View, 35 J.L. & ECON. 311 (1992).
85. Id. at 319.
86. United States v. United Shoe Mach. Corp., 110 F. Supp. 295 (D. Mass. 1953), aff'd per curiam, 347 U.S. 521 (1954).
87. See Scott E. Masten & Edward A. Snyder, United States versus United Shoe Machinery Corporation: On the Merits, 36 J.L. & ECON. 33 (1993).
88. Although United Shoe was the dominant firm, only about one-half of its machines were available on a lease-only basis. Thus, contrary to the government's assertions, sale was a real alternative. See id. at 51.
89. Lorain Journal Co. v. United States, 342 U.S. 143 (1951).
90. See John E. Lopatka & Andrew N. Kleit, The Mystery of Lorain Journal and the Quest for Foreclosure in Antitrust, 73 TEX. L. REV. 1255, 1278-80 (1995). Even those authors, however, were uncertain about the Journal's motivation, and whether the practice was anticompetitive. See id. at 1305-06.
91. Summit Tech., Inc., FTC Docket No. 9286, Complaint ¶ 29 (filed Mar. 24, 1998), dismissed, VISX, Inc., Initial Decision (filed May 27, 1999), appeal filed (Aug. 12, 1999).
92. Walker Process Equip., Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172 (1965).
93. See Complaint Counsel's Memorandum in VISX, supra note 4, at 1.
94. Brunswick Corp. v. Riegel Textile Corp., 752 F.2d 261, 265 (7th Cir. 1984).
95. Intel Corp., FTC Docket No. 9288 (filed June 8, 1998).
96. The three customers were DEC, Compaq, and Intergraph. See Complaint ¶¶ 15-37. Each asserted intellectual property claims that resulted in patent infringement litigation against Intel. In response to each claim, Intel exercised its right under nondisclosure agreements to stop supplying these customers with advance trade secrets and patented and copyrighted engineering samples of next-generation products. Intel, however, continued to supply these customers with its current products and related technical information. Intel settled its disputes with Compaq and DEC by entering into cross-licensing arrangements and paying substantial monetary compensation. Intergraph, in contrast, refused to negotiate a value-for-value settlement and instead has pursued its patent infringement claims against Intel, seeking billions in damages and an injunction to halt Intel's microprocessor sales. See Intergraph Corp. v. Intel Corp., 3 F. Supp. 2d 1255 (N.D. Ala. 1998), vacated, No. 98-1308, 1999 U.S. App. LEXIS 29199 (Fed. Cir. Nov. 5, 1999).
97. See FTC Complaint ¶¶ 14, 39.
98. See Intel Corporation's Trial Brief (Feb. 25, 1999), at 20 (identifying fourteen competitors in the general-purpose microprocessor market).
99. See id. at 28-29.
100. Even if Intel had been allowed to pursue evidence of lack of harm, a rule allowing the Commission to infer harm would change the nature of Section 2 litigation. See supra note 41. In rejecting suits by Intel's customers as a justification for Intel's refusal to supply information, the FTC appears to have ignored the implication of the relational contracts literature discussed supra Part IV.A. In developing new applications for Intel's microprocessors, and in sharing highly sensitive information, a close working relationship is essential. Lawsuits seeking to enjoin Intel sales are hardly conducive to such a relationship. One of the customers even purchased full-page advertisements in major national newspapers, accusing Intel of willfully stealing its technology. See, e.g., Advertisement for Digital Equip. Corp., WASH. POST, May 14, 1997, at D18. Moreover, Intel claimed that employees of that company subjected Intel engineers who interacted with them to a hostile environment, making cooperation impossible. They also engaged in conduct designed to gather evidence to help with litigation against Intel rather than to facilitate the transfer of information. See Intel Corporation's Trial Brief at 44. It is difficult to believe that anyone could consider such an environment conducive to success in the sensitive discussions that existed before the lawsuits. The existence of such atmospherics has led to case law holding that "the bringing of a lawsuit by the customer may provide a sound business reason for the manufacturer to terminate their relations." House of Materials, Inc. v. Simplicity Pattern Co., 298 F.2d 867, 871 (2d Cir. 1962). The defendant could legally terminate the contract even if "the sole motivation . . . was its desire to retaliate for the treble damage action brought against it." Id. at 869. For further judicial recognition of this right to terminate previous relationships upon lawsuits filed against a party, see H.L. Hayden Co. v. Siemens Med. Sys., 879 F.2d 1005, 1022 (2d Cir. 1989); Zoslaw v. MCA Distrib. Corp., 693 F.2d 870, 889-90 (9th Cir. 1982).
101. See FTC Press Release, FTC Accepts Settlement of Charges Against Intel (Mar. 17, 1999) 〈http://www.ftc.gov/opa/1999/9903/intelcom.htm〉. The consent decree provides guidelines to Intel for the resolution of intellectual property disputes with its customers: if an intellectual property dispute arises and the customer chooses not to seek to enjoin the sale of Intel microprocessors, Intel must continue to provide certain limited advance product information and samples.
102. Robert Pitofsky, Balancing Act on Big Business, WASH. POST, Feb. 9, 1998, at A19. Chairman Pitofsky's recent article with David Balto also reveals his concern with the anticompetitive implications of network effects. See Balto & Pitofsky, supra note 46. For example, this article relies on the strong version of the network effects story discussed in this Part as a justification for heightened antitrust security. See, e.g., id. at 593 ("But network externalities may also result in the persistent dominance of an older network even when newer and cheaper technologies enter the market."); id. at 589 (discussing the QWERTY keyboard as an example of alleged lock-in, without referencing the contrary research, discussed below, by Stan Liebowitz and Stephen Margolis, e.g., Path Dependence, Lock-In, and History, 11 J.L. ECON. & ORG. 205 (1995); Policy and Path Dependence: From QWERTY to Windows 95, REGULATION, No. 3, 1995, at 33; and The Fable of the Keys, 33 J.L. & ECON. 1 (1990)). Jonathan Baker also discusses the importance of network effects for his truncation rule. See Baker, supra note 2, at 516.
103. For an introduction to the concept and its policy implications, see the Symposium in 8 J. ECON. PERSP. (1994).
104. To be "superior" in any meaningful sense, the superiority must be known. By analogy, if an unknown scientist woke up one night with a solution to a major problem and promptly died before he could tell anyone, the scientist would justifiably remain unknown and the problem unsolved.
105. For example, to name but a few of the better-known firms, Frito-Lay in salty snack foods, 3M in transparent tape and self-stick removable notes, and Kraft in processed cheese. In these industries, the dominant firms sell differentiated products. The presence of different consumer preferences may lead to dominance with network effects short of monopoly. See, e.g., JEAN TIROLE, THE THEORY OF INDUSTRIAL ORGANIZATION 160 (1993). The phenomenon of "natural" monopoly, in which an industry will only support one firm, was also well-known before the literature on network effects began.
106. At least up to a point. Congestion can decrease the value of a network, as when the number attempting to make phone calls exceeds the capacity available.
107. See Paul David, Clio and the Economics of QWERTY, 75 AM. ECON. REV. 332 (1985); see also Lotus Dev. Corp. v. Borland Int'l, Inc., 49 F.3d 807, 819-20 (1st Cir. 1995) (Boudin, J., concurring), aff'd by an equally divided Court, 516 U.S. 233 (1996).
108. See Liebowitz & Margolis, The Fable of the Keys, supra note 104, at 8-15.
109. See David S. Evans & Richard Schmalensee, A Guide to the Antitrust Economics of Networks, ANTITRUST, Spring 1996, at 36, 37 n.7.
110. See W. Brian Arthur, Positive Feedbacks in the Economy, SCI. AM., Feb. 1990, at 92.
111. For a detailed discussion, see Liebowitz & Margolis, Path Dependence, Lock-In, and History, supra note 104, at 208-09, 218-22. The evidence on picture quality was mixed. Even if Beta was superior on the quality dimension, consumers could value more highly the dimension of VHS's superiority, recording length. The dominance of smaller tapes in hand-held cameras may provide indirect evidence of Beta's superiority. Although the issue has not been the subject of the attention devoted to QWERTY and to BETA-VHS, one crucial difference exists between tape size for cameras and for use in renting movies or taping off of a television: the smaller tape size allows for smaller cameras easier to handle than are the larger cameras necessary for the larger tape size.
112. Liebowitz and Margolis present this evidence in Causes and Consequences of Market Leadership in Application Software, Conference Paper Presented at Competition and Innovation in the Personal Computer Industry (Apr. 24, 1999) (copy on file with author). The authors determined quality based on magazine reviews, particularly those that provided head-to-head product comparisons. Spreadsheets and word processors are especially important because they are the foundation of "office suites" that account for about one-half of Microsoft's revenue. Microsoft's superiority does not shield it from all antitrust violations. It does provide evidence against the strong network effect argument.
113. This is not to argue that all externalities from network effects will be internalized. The possibility of nonoptimal levels of investment remains. For example, we may have too few users of a new technology. This is a standard problem in economics, one that was recognized long before discussion of network effects. Whether government intervention can improve matters depends upon the relative costs and benefits of alternative actions. See Carl Dahlman, The Problem of Externality, 22 J.L. & ECON. 141 (1979).
114. See Neil Gross et al., Let's Talk!, BUS. WK., Feb. 23, 1998, at 60.
115. Liebowitz & Margolis, Policy and Path Dependence: From QWERTY to Windows 95, supra note 104, at 41. Network effects can also be relevant as they influence entry conditions. Even theory, however, has mixed implications regarding this issue. Thus, Farrell and Saloner argue that network effects might enhance the speed of change. See Joseph Farrell & Garth Saloner, Standardization, Compatibility, and Innovation, 16 RAND J. ECON. 70 (1985). Empirically, Liebowitz and Margolis, supra note 114, find very rapid market share changes in the products they analyze.
116. See Michael D. Whinston, Tying, Foreclosure & Exclusion, 80 AM. ECON. REV. 837 (1990). Even so-called Chicago economists long suspected possible problems. For example, decades ago, Ward S. Bowman, Jr., Tying Arrangements and the Leverage Problem, 67 YALE L.J. 19 (1957), and Lester G. Telser, Why Should Manufacturers Want Fair Trade?, 3 J.L. & ECON. 86, (1960), noted the benefits of tying and vertical price fixing, respectively, but acknowledged their potential anticompetitive effect in special cases. Aaron Director and Edward H. Levi, Law and the Future: Trade Regulation, 51 Nw. U. L. REV. 281 (1956), discussed what is now called RRC and the theory's severe limitations. Moreover, because dominant firms may be involved in setting industry standards, the standard-setting process warrants close scrutiny. See, e.g., Balto & Pitofsky, supra note 46.
117. See AMERCO, [1983-1987 Transfer Binder] Trade Reg. Rep. (CCH) ¶ 22,434 (FTC Feb. 26, 1987).
118. See United States v. AT&T, 552 F. Supp. 131 (D.D.C. 1982), aff'd, 460 U.S. 1001 (1983).