The role and assessment of classical market power in joint venture analysis

Antitrust Law Journal

Volumn 66, Issue 3, 1998, Pages 651-699

  McFalls, Michael S ^a  

^a FEDERAL TRADE COMMISSION   (United States)

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EID: 18944384340     PISSN: 00036056     EISSN: None     Source Type: Journal    
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References (175)

1. See Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 26-27 (1984) (per se illegal tying requires market power in the tying product); Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284, 296 (1985) (expulsion of competitor from purchasing joint venture per se illegal if group possesses market power and access needed for effective competition).
2. George A. Hay, Market Power in Antitrust, 60 ANTITRUST L.J. 807, 808 (1992).
3. Jefferson Parish, 466 U.S. at 27 n.46; see also NCAA v. Board of Regents of the Univ. of Okla., 468 U.S. 85, 109 n.38 (1984); U.S. Department of Justice and Federal Trade Commission Horizontal Merger Guidelines (1992) § 0.1, reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,104 [hereinafter Merger Guidelines]. The agencies also have recognized that the possession or exercise of classical market power may affect innovation competition. See U.S. Department of Justice and Federal Trade Commission Guidelines for the Licensing of Intellectual Property (1995) §§ 2.2, 3.2.3 & 4.1.1, reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,132 [hereinafter Intellectual Property Guidelines].
4. 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).
5. Still other commentators contend that assessments of classical market power, by focusing on allocative efficiency, ignore the anticompetitive potential of other activities that prevent dynamic efficiencies achieved through innovation. See, e.g., Herbert Hovenkamp, Exclusive Joint Ventures and Antitrust Policy, 1995 COLUM. BUS. L. REV. 1 (firms that compete vigorously in the relevant market may exclude innovation that would enhance quality or force prices downward).
6. All subsequent references to "market power" therefore refer only to "classical" market power.
7. See Comment and Hearings on Joint Venture Project, 62 Fed. Reg. 22,945 (Apr. 28, 1997).
8. See Robert Pitofsky, Joint Ventures Under the Antitrust Laws: Some Reflections on the Significance of Penn-Olin, 82 HARV. L. REV. 1007, 1016 (1969) ("Probably the most serious difficulty associated with the law in this area stems from the sheer numbers of different types of joint ventures which may occur and the proliferation and complexity of relevant factors necessary to describe their competitive impact"). Among the relevant factors are: (1) the number of joint venturers; (2) potential competition in the relevant market; (3) the competitive relationship of the parents with each other and the joint venture; and (4) the market power of the parents and the venture. Id.
9. For purposes of this paper, "single-share analysis" will refer to aggregating the market shares of the joint venture's parents in the relevant markets into a single market share.
10. Jefferson Parish, 466 U.S. at 27 n.46; see also NCAA, 468 U.S. at 109 n.38.
11. Merger Guidelines § 0.1.
12. See Intellectual Property Guidelines § 2.2.
13. Hay, supra note 2, at 820; see also William L. Landes & Richard A. Posner, Market Power in Antitrust Cases, 94 HARV. L. REV. 937 (1981) (market power "refers to the ability of a firm (or a group of firms, acting jointly) to raise price above the competitive level without losing so many sales so rapidly that the price increase is unprofitable and must be rescinded"); Frank H. Easterbrook, The Limits of Antitrust, 63 TEX. L. REV. 1, 20 (1984) (market power is "the ability to raise prices significantly without losing so many sales that the increase is unprofitable").
14. Hay, supra note 2, at 820; see also William L. Landes & Richard A. Posner, Market Power in Antitrust Cases, 94 HARV. L. REV. 937 (1981) (market power "refers to the ability of a firm (or a group of firms, acting jointly) to raise price above the competitive level without losing so many sales so rapidly that the price increase is unprofitable and must be rescinded"); Frank H. Easterbrook, The Limits of Antitrust, 63 TEX. L. REV. 1, 20 (1984) (market power is "the ability to raise prices significantly without losing so many sales that the increase is unprofitable").
15. As Chief Judge Richard Posner has explained: Three firms having 90 percent of the market can raise prices with relatively little fear that the fringe of competitors will be able to defeat the attempt by expanding their own output to serve customers of the three large firms. An example will show why. To take away 10 percent of the customers of the three large firms in our hypothetical case, thus reducing those firms' aggregate market share from 90 percent to 81 percent, the fringe firms would have to increase their own output by 90 percent (from 10 to 19 percent of the market). This would take a while, surely, and would force up their costs, perhaps steeply - the fact that they are so small suggests that they would incur sharply rising costs in trying almost to double their output, and that it is this prospect which keeps them small. So the three large firms could collude to raise price (within limits of course) above the competitive level without incurring the additional transaction costs and risk of exposure that would result from trying to coordinate their actions with those of their competitors. United States v. Rockford Mem'l Corp., 898 F.2d 1278, 1283-84 (7th Cir. 1990).
16. This approach requires cautious application, as it may lead to errors under certain circumstances. If courts and agencies focus only on the ability to raise prices above current levels, they may infer that firms do not possess market power when, in fact, they may already be exercising it See, e.g., Mary L. Azcuenaga, Market Power as a Screen in Evaluating Horizontal Restraints, 60 ANTITRUST L.J. 935, 940 (1992) (focusing on current price levels may lead to inaccurate inferences when firms have already "pushed the price up to an artificially high level just below that of a good substitute"). Economists have labeled this the "Cellophane Fallacy," referring to the Supreme Court's misguided product market definition in United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377 (1956), where the Court expanded the relevant product market because it found that Du Pont could not raise prices profitably any further without losing sales to other wrapping materials. The Court's analysis was misguided because Du Pont may have already set a monopolistic profit-maximizing price in a narrower cellophane market. In other cases, courts and agencies must examine allegations that a firm has prevented others from entering or expanding in the relevant market. Though the firm may be unable to raise prices above current levels, it may engage in exclusionary conduct that prevents price from falling. See Thomas G. Krattenmaker et al., Monopoly Power and Market Power in Antitrust Law, 76 GEO. L.J. 241, 249-55 (1987).
17. This approach requires cautious application, as it may lead to errors under certain circumstances. If courts and agencies focus only on the ability to raise prices above current levels, they may infer that firms do not possess market power when, in fact, they may already be exercising it See, e.g., Mary L. Azcuenaga, Market Power as a Screen in Evaluating Horizontal Restraints, 60 ANTITRUST L.J. 935, 940 (1992) (focusing on current price levels may lead to inaccurate inferences when firms have already "pushed the price up to an artificially high level just below that of a good substitute"). Economists have labeled this the "Cellophane Fallacy," referring to the Supreme Court's misguided product market definition in United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377 (1956), where the Court expanded the relevant product market because it found that Du Pont could not raise prices profitably any further without losing sales to other wrapping materials. The Court's analysis was misguided because Du Pont may have already set a monopolistic profit-maximizing price in a narrower cellophane market. In other cases, courts and agencies must examine allegations that a firm has prevented others from entering or expanding in the relevant market. Though the firm may be unable to raise prices above current levels, it may engage in exclusionary conduct that prevents price from falling. See Thomas G. Krattenmaker et al., Monopoly Power and Market Power in Antitrust Law, 76 GEO. L.J. 241, 249-55 (1987).
18. See Joel I. Klein, Acting Assistant Attorney General, Antitrust Div'n, U.S. Dep't of Justice, A Stepwise Approach to Antitrust Review of Horizontal Agreements, Address Before ABA Section of Antitrust Law 12 (Nov. 7, 1996) ("[W]e require some form of market power to satisfy ourselves that the anticompetitive impact will be enduring rather than transitory.").
19. Temporal questions arise in a broader context as well. Some commentators have suggested that antitrust policy should focus on long-term competitive effects; others have contended that short-run analysis is appropriate. Compare Joseph F. Brodley, Post-Chicago Economics and Workable Legal Policy, 63 ANTITRUST L.J. 683, 686-87 (1995) (contending that the analysis should take a longer-run view of potential price increases in the relevant market as conduct that may not result in immediate price increases may nevertheless result in later exercises of market power), with Richard S. Markovits, The Limits to Simplifying Antitrust: A Reply to Professor Easterbrook, 63 TEX. L. REV. 41, 83 (1984) ("If one examines changes in defendant's market share over a five or even a two-year period, it will be extremely difficult to distinguish the impact of the practice from the impact of other factors that may influence a seller's market share."). See also Easterbrook, supra note 13, at 18 (courts should examine competitive effects of a restraint over a five-year period to determine whether the defendants have gained or exercised market power). 18 Landes and Posner argue that § 7 of the Clayton Act and § 2 of the Sherman Act require long-run analysis to determine whether the transaction or conduct at issue will result in significant market power. Under § 1, "a shorter run perspective seems appropriate, but rarely would the social costs of very short-run supracompetitive pricing be great enough to justify computing an elasticity of demand or supply for a period of less than a year from the date of the challenged conduct or transaction." Landes & Posner, supra note 13, at 959. This may say more about the complexity and cost of economic analysis under their approach than the likelihood of significant anticompetitive effects.
20. Temporal questions arise in a broader context as well. Some commentators have suggested that antitrust policy should focus on long-term competitive effects; others have contended that short-run analysis is appropriate. Compare Joseph F. Brodley, Post-Chicago Economics and Workable Legal Policy, 63 ANTITRUST L.J. 683, 686-87 (1995) (contending that the analysis should take a longer-run view of potential price increases in the relevant market as conduct that may not result in immediate price increases may nevertheless result in later exercises of market power), with Richard S. Markovits, The Limits to Simplifying Antitrust: A Reply to Professor Easterbrook, 63 TEX. L. REV. 41, 83 (1984) ("If one examines changes in defendant's market share over a five or even a two-year period, it will be extremely difficult to distinguish the impact of the practice from the impact of other factors that may influence a seller's market share."). See also Easterbrook, supra note 13, at 18 (courts should examine competitive effects of a restraint over a five-year period to determine whether the defendants have gained or exercised market power). 18 Landes and Posner argue that § 7 of the Clayton Act and § 2 of the Sherman Act require long-run analysis to determine whether the transaction or conduct at issue will result in significant market power. Under § 1, "a shorter run perspective seems appropriate, but rarely would the social costs of very short-run supracompetitive pricing be great enough to justify computing an elasticity of demand or supply for a period of less than a year from the date of the challenged conduct or transaction." Landes & Posner, supra note 13, at 959. This may say more about the complexity and cost of economic analysis under their approach than the likelihood of significant anticompetitive effects.
21. Hovenkamp, supra note 5, at 80-81 (asserting that the temporal standards for market power in the 1992 Merger Guidelines "are policy judgments, not the result of pure theory").
22. When there is evidence of actual anticompetitive effects, courts will dispense with a more detailed inquiry into market power. As the Supreme Court has explained: Since the purpose of the inquiries into market definition and market power is to determine whether an arrangement has the potential for genuine adverse effects on competition, "proof of actual detrimental effects, such as a reduction of output," can obviate the need for an inquiry into market power, which is "but a surrogate for detrimental effects." FTC v. Indiana Fed'n of Dentists, 476 U.S. 450, 460-61 (1986) (quoting PHILLIP E. AREEDA, ANTITRUST LAW ¶ 1511, at 429 (1986)). See also California Dental Ass'n (CDA), 5 Trade Reg. Rep. (CCH) ¶¶ 23,778, 23,792 (1996); Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 477 (1992) ("It is clearly reasonable to infer that Kodak has market power to raise prices and drive out competition in the aftermarkets, since respondents offer direct evidence that Kodak did so.").
23. Of course, some conduct is so anticompetitive that courts and agencies declare it per se unlawful without engaging in a detailed economic analysis of actual effects, market power, or efficiency justifications.
24. See, e.g., Bhan v. NME Hospitals, 929 F.2d 1404, 1413 n.10 (9th Cir. 1991) (rule of reason requires plaintiffs to demonstrate "whether the defendant has the power to do what it allegedly wants to do - that is whether the defendant can actually influence the market"); Polk Bros. v. Forest City Enters., 776 F.2d 185, 191 (7th Cir. 1985) ("Unless the firms have the power to raise price by curtailing output, their agreement is unlikely to harm consumers, and it makes sense to understand their cooperation as benign or beneficial.").
25. See U.S. Department of Justice and Federal Trade Commission Revision to the Horizontal Merger Guidelines (Apr. 8, 1997) (efficiencies will almost never justify mergers to monopoly); see also NCAA, 468 U.S. at 114 ("If the NCAA's television plan produced procompetitive efficiencies, the plan would increase output and reduce the price of televised games. The district court's findings [to the contrary] undermine petitioner's position.").
26. Other proxies include price discrimination and accounting-based measures of profitability. See Merger Guidelines § 1.12 (describing product market definition in presence of price discrimination); Joe S. Bain, The Profit Rate as a Measure of Monopoly Power, 55 Q.J. OF ECON. 271 (1941).
27. HERBERT HOVENKAMP, FEDERAL ANTITRUST POLICY § 3.1a (1994).
28. Kenneth Elzinga contends that when firms have high fixed costs relative to sales, the Lerner Index could approach 1 even in industries with low barriers to entry. See Kenneth Elzinga, Unmasking Monopoly: Four Types of Economic Evidence, in FEDERAL ANTITRUST POLICY ECONOMICS AND ANTITRUST POLICY 11, 27 (Robert J. Lamer & James W. Meehan, Jr. eds., 1989); see also Jonathan B. Baker, Review of Economics and Antitrust Policy, 33 ANTITRUST BULL. 919, 926 n.28 (1989).
29. Kenneth Elzinga contends that when firms have high fixed costs relative to sales, the Lerner Index could approach 1 even in industries with low barriers to entry. See Kenneth Elzinga, Unmasking Monopoly: Four Types of Economic Evidence, in FEDERAL ANTITRUST POLICY ECONOMICS AND ANTITRUST POLICY 11, 27 (Robert J. Lamer & James W. Meehan, Jr. eds., 1989); see also Jonathan B. Baker, Review of Economics and Antitrust Policy, 33 ANTITRUST BULL. 919, 926 n.28 (1989).
30. See Landes & Posner, supra note 13, at 939-43; Hay, supra note 2, at 825 (noting that accounting methods are too imprecise to determine whether market power exists under price-cost analysis); HOVENKAMP, supra note 25, § 3.1.
31. Hovenkamp, supra note 5, at 80 (The Lerner Index "ignores essential questions concerning the time period over which market power is exercised. For example, it avoids inquiry into changes in demand or product design, and the impact that these changes may have on a firm's market position.").
32. Id. at 86-87 (in cases involving the exclusion of an innovative product, "when one considers the market in movement, firms have incentives to exclude that (a) do not depend on their short-run, or present, ability to set prices at monopoly levels, and that (b) generate social costs, or deadweight losses analogous to those caused by traditional monopoly or collusion.").
33. The agencies have recognized an analogous issue in the intellectual property context: If a patent or other form of intellectual property does confer market power, that market power does not by itself offend the antitrust laws. As with any other tangible or intangible asset that enables its owner to obtain supracompetitive profits, market power (or even a monopoly) that is solely "a consequence of a superior product, business acumen, or historic accident" does not violate the antitrust laws. Intellectual Property Guidelines § 2.2 (quoting United States v. Grinnell Corp., 384 U.S. 563, 571 (1966)).
34. Hay, supra note 2, at 814-15.
35. Id. at 815.
36. Baker and Bresnahan pioneered the development of empirical techniques for estimating "own-demand" curves in the 1980s. See Jonathan B. Baker & Timothy Bresnahan, Estimating the Residual Demand Curve Facing a Single Firm, 6 INT'L J. INDUS. ORG. 283 (1988). They also have identified some of the complexities of using their techniques in defining relevant markets. See Jonathan B. Baker & Timothy Bresnahan, Empirical Methods of Identifying and Measuring Market Power, 62 ANTITRUST L.J. 3, 9 (1992).
37. Baker and Bresnahan pioneered the development of empirical techniques for estimating "own-demand" curves in the 1980s. See Jonathan B. Baker & Timothy Bresnahan, Estimating the Residual Demand Curve Facing a Single Firm, 6 INT'L J. INDUS. ORG. 283 (1988). They also have identified some of the complexities of using their techniques in defining relevant markets. See Jonathan B. Baker & Timothy Bresnahan, Empirical Methods of Identifying and Measuring Market Power, 62 ANTITRUST L.J. 3, 9 (1992).
38. Market-demand elasticities, which measure the willingness of consumers to purchase alternative products at varying price levels, are commonly used to define product and geographic markets.
39. Landes & Posner, supra note 13, at 946.
40. Hay, supra note 2, at 815-16.
41. Id. at 816. Hay contends that Areeda and Turner reach the same result by concluding that no harm arises when a superior firm acquires market power through its business acumen. Id. at n.38.
42. See id. at 822.
43. See id. at 823.
44. See id. at 821.
45. HOVENKAMP, supra note 25, § 3.1b.
46. Landes & Posner, supra note 13, at 947-49; see also Jonathan B. Baker, Product Differentiation Through Space and Time: Some Antitrust Policy Issues, 42 ANTITRUST BULL. 177, 183 (1997).
47. Landes & Posner, supra note 13, at 949.
48. In the 1984 Horizontal Merger Guidelines, the Department of Justice observed that the HHI reflects the distribution of market shares in the relevant market and the relative importance of larger firms "in any collusive interaction." U.S. Department of Justice Horizontal Merger Guidelines (1984) § 3.1, reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,103.
49. Merger Guidelines § 1.51.
50. Specifically, "[w]here the post-merger HHI exceeds 1800, it will be presumed that mergers producing an increase of more than 100 points are likely to create or enhance market power or facilitate its exercise." Id. Other HHI ranges are identified as those that "potentially raise significant competitive concerns depending on the factors set forth in Sections 2-5 of the Guidelines." Id.
51. Id. Among the factors that the agencies examine in §§ 2-5 are whether the transaction will facilitate greater coordination among firms in the post-merger market, whether the merging parties would find it profitable to raise their own prices through unilateral output reduction, whether entry by new firms will be timely, likely, and sufficient to defeat or deter unilateral or coordinated price increases, and whether the transaction will produce efficiencies that will be passed on to consumers.
52. In this form of collaboration members do not make independent decisions about the price or level of joint venture output. Even if parties continue to compete against each other outside of the venture, they may agree not to compete on price or output within the joint venture. Conversely, parties that cannot or do not compete against each other outside of the collaboration may still compete on price and output within the joint venture.
53. Steven Salop has labeled these three types of rivalry "insider competition." Steven C. Salop, When and How Is It Proper for Competitors to Collude, in OSSERVATORIO GIORDANO ELL'AMORE SUI RAPPORTI TRA DIRITTO ED ECONOMICA DEL CENTRO NAZIONALE DI PREVENZIONE E DIFESA SOCIALE, THE VALUE OF COMPETITION 218, 225 (1992).
54. As discussed above, "single-share analysis" means that the venture and its members are assigned a single market share in analyzing the market power of the collaboration. If the HHI is used to analyze the formation of a joint venture, the "single-share" approach treats the collaboration as a merger between the members in markets affected by the venture.
55. Circumstances in which one or more forms of insider competition remain and are not eliminated are discussed in Part VI infra.
56. Especially because such ventures may dissolve and cause the members to return to individual competition, the analysis may require an examination of matters like spillover effects and collateral agreements. A discussion of those issues is beyond the scope of this article, however.
57. 704 F. Supp. 1409 (W.D. Mich. 1989).
58. Id. at 1412.
59. Id. at 1414.
60. See id. at 1417 n.4.
61. Id. at 1419.
62. See id.
63. Id. at 1425.
64. See id. at 1425-26.
65. Id. at 1427.
66. For other cases applying § 7 to joint ventures that eliminated price and output competition among the parents in the joint venture market, see FTC v. Warner Communications, Inc., 742 F.2d 1156, 1159 (9th Cir. 1984) (preliminary injunction against exclusive joint venture between two of the top six distributors of prerecorded music that might facilitate tacit collusion); FTC v. Harbour Group Invs., L.P., 1990-2 Trade Cas. (CCH) ¶ 69,247 (D.D.C. 1990) (enjoining exclusive joint venture between the only two competitors in the relevant market); Union Carbide Corp. v. Montell, N.V., 944 F. Supp. 1119 (S.D.N.Y. 1996) (denying motion to dismiss § 7 claim against formation of joint venture between polypropylene in heavily concentrated market). For a less restrictive view of exclusive joint ventures between actual competitors, see The Treasurer, Inc. v. Philadelphia Nat'l Bank, 1988-1 Trade Cas. (CCH) ¶ 67,943 (D.NJ.) (permitting exclusive ATM network to acquire assets of direct competitor), aff'd mem., 853 F.2d 921 (3d Cir. 1988), discussed infra at 692-93*.
67. Cf. United States v. Engelhard Corp., 1997-1 Trade Cas. (CCH) ¶ 71,7.73 (M.D. Ga.) (refusing to enjoin the formation of a joint venture between incumbent and new entrant under §7 where the government failed to define proper product market), aff'd, 126 F.3d 1302 (11th Cir. 1997).
68. See Joseph Kattan, Antitrust Analysis of Technology Joint Ventures: Allocative Efficiency and the Rewards of Innovation, 61 ANTITRUST L.J. 937, 947 (1993): In the context of potential competition, the analysis follows the same structural paths but asks whether the removal of a potential entrant will either diminish existing constraints on incumbent firms' ability to price supracompetitively (perceived potential competition) or eliminate future entry that may undercut incumbents' existing ability to price supracompetitively (actual potential competition).
69. 378 U.S. 158 (1964).
70. Although both had considered independent entry, management from both companies had rejected that possibility in the years preceding the joint venture. Id. at 166-67. Thus, neither company participated in the market prior to forming Penn-Olin.
71. Id. at 174.
72. Id.
73. Id. at 174-75.
74. Id. at 175.
75. On remand, the district court concluded that neither firm was reasonably likely to have entered the market independently and dismissed the government's complaint. See United States v. Penn-Olin Chem. Co., 246 F. Supp. 917, 928 (D. Del. 1965), aff'd per curiam by an equally divided Court, 389 U.S. 308 (1967).
76. 657 F.2d 971 (8th Cir. 1981).
77. Id. at 980.
78. See id. at 981.
79. 792 F.2d 210 (D.C. Cir. 1986).
80. Id. at 217.
81. See id. at 220. In conducting the HHI analysis, the court assumed that Atlas's restrictions would effectively preclude all independent operations by its agents, i.e., that the rules prevented members from competing with each other or the venture through non-Atlas operations.
82. See id.
83. Id. at. 230 n.11.
84. Id. at 230.
85. Id. at 220 ("We do not mean to suggest that if the HHI were higher and within one of the more concentrated categories, the arrangement would necessarily be illegal.").
86. Although concurring in the court's ruling, Judge Wald attacked a market-power safe harbor as inconsistent with Supreme Court precedent. According to Judge Wald, "nothing in BMI, NCAA, or Pacific Stationer/ supports the panel's new per se rule of legality." Id. at 230 (Wald, J., concurring). Instead, Judge Wald found it preferable "to proceed with a pragmatic, albeit nonarithmetic and even untidy rule of reason analysis, than to adopt a market power test as the exclusive filtering-out-device for all potential violators who do not command a significant market share. Under any analysis, market power is an important consideration; I am not yet willing to say it is the only one." Id. at 231-32.
87. See, e.g., Retina Assocs., P.A. v. Southern Baptist Hosp. of Fla., Inc., 1997-1 Trade Gas. (CCH) ¶ 71.722 (11th Cir. 1997) (adopting district court's opinion granting summary judgment to ophthalmology collaboration that controlled only 15% of referrals in the relevant market); Hudson's Bay Co. Fur Sales v. American Legend Coop., 651 F. Supp. 619, 835-36 (D.N.J. 1986); Hassan v. Independent Practice Assocs., 698 F. Supp. 679, 695-96 (E.D. Mich. 1988).
88. See, e.g., Metro Indus. v. Sammi Corp., 82 F.3d 839 (9th Cir.) (affirming summary judgment for exclusive marketing joint venture where plaintiff failed to offer sufficient evidence of market power or actual anticompetitive effects), cert. denied, 117 S. Ct. 181 (1996); R.C. Dick Geothermal Corp. v. Thermogenics, Inc., 890 F.2d 139, 151-52 (9th Cir. 1989) (en banc) (no actual anticompetitive effect of joint activities on price or output); Wilk v. AMA, 895 F.2d 352, 360-62 (7th Cir. 1990) (finding actual anticompetitive effects flowing from rules and conduct that impeded consumer's free choice and raised the costs of competing providers).
89. See, e.g., General Leaseways, Inc. v. National Truck Leasing Ass'n, 744 F.2d 588, 596 (7th Cir. 1984) (affirming preliminary injunction against enforcement of joint venture exclusivity requirements where plaintiff offered evidence of high entry barriers and greater profits in local markets with fewer competitors).
90. See, e.g., NCAA, 485 U.S. at 105 n.29 (exclusive joint venture's joint marketing of college football telecasts resulted in fewer games on television); Key Enters, of Del., Inc. v. Venice Hosp., 919 F.2d 1550, 160 n.7 (11th Cir. 1990) (though exclusive venture reduced HHI in relevant market from 5708 to 4780, it resulted in actual anticompetitive effects), vacated and reh'g granted, 979 F.2d 806 (1992), appeal dismissed, 9 F.3d 893 (1993).
91. See, e.g., Sewell Plastics, Inc. v. Coca-Cola Co., 720 F. Supp. 1196, 1213 (W.D.N.C. 1989) (granting summary judgment to exclusive input production joint venture possessing 40% of relevant market where collaboration had reduced prices in the input market), aff'd per curiam, 912 F.2d 463 (4th Cir. 1990); Belcher Oil Co. v. Florida Fuels, Inc., 1991-1 Trade Cas. (CCH) ¶ 69,375 (S.D. Fla. 1991) (granting summary judgment for exclusive collective buying arrangement that ensured survival of new entrant in upstream market).
92. Steven Salop has termed this "outsider competition," referring to competition from firms that do not belong to the joint venture. Salop, supra note 49, at 225.
93. As discussed supra, Salop has labeled these three forms of rivalry "insider competition," referring to competition from firms that participate in the venture. See id.
94. Salop points out that "[a]s long as outsiders have the ability and willingness to compete using the old technology, the venture cannot price above the initial level because the venture would be undersold by the outsiders." Id. at 225-26.
95. As Salop has observed, when "membership in the cooperative venture does not eliminate the ability of insiders to continue to compete using the old technology, then the potential for competition by insiders using that old technology also will prevent price from using above [the initial level]." Id. at 226.
96. In the context of input production joint ventures, competition between members in the downstream market may not prevent the partners from charging themselves high transfer prices for inputs and realizing supracompetitive profits through the joint venture See Dennis W. Carlton & Steven C. Salop, You Keep on Knocking But You Can't Come In: Evaluating Restrictions on Access to Input Joint Ventures, 9 HARV. J.L. & TECH 319, 334 & n.34 (1996); Carl Shapiro & Robert D. Willig, On the Antitrust Treatment of Production Joint Ventures, 4 J. ECON. PERSPS. 113, 116 (1990).
97. In the context of input production joint ventures, competition between members in the downstream market may not prevent the partners from charging themselves high transfer prices for inputs and realizing supracompetitive profits through the joint venture See Dennis W. Carlton & Steven C. Salop, You Keep on Knocking But You Can't Come In: Evaluating Restrictions on Access to Input Joint Ventures, 9 HARV. J.L. & TECH 319, 334 & n.34 (1996); Carl Shapiro & Robert D. Willig, On the Antitrust Treatment of Production Joint Ventures, 4 J. ECON. PERSPS. 113, 116 (1990).
98. If there are few physical and financial obstacles to increasing joint venture production, collaborators may be able to exercise greater independent control over the level of output that they can secure from the joint venture. This is especially true when the marginal cost of joint venture production approaches zero, as is often the case with intellectual property. In manufacturing ventures, by contrast, a facility's capacity places a ceiling on the level of output that venture members can obtain through the collaboration.
99. See Salop, supra note 49, at 237 n.10; Shapiro & Willig, supra note 97, at 117.
100. Salop, supra note 49, at 231 (venturers may need to avoid competing within the venture "especially where cooperative activities are characterized by severely increasing returns to scale in the sense of high fixed costs and low marginal costs"); Shapiro & Willing, supra note 97, at 117 (if &intra-venture competition does not permit parents to recoup the fixed costs of the venture, requiring it may cause the venture to collapse&).
101. The agencies have recognized that insider competition may not occur even when partners have the contractual right to compete against each other and their venture. See U.S. Department of Justice and Federal Trade Commission Statements of Antitrust Enforcement Policy in Health Care (1996), reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,153 [hereinafter Health Care Statements]. In the context of physician network joint ventures, the agencies look for evidence that physicians continue to compete outside of the venture, either individually or as part of other collaborations. Among the factors that the agencies examine are whether: (1) viable competing networks exist with sufficient physician participation; (2) member physicians are actually willing to contract with other plans or networks; (3) member physicians earn significant revenue through contracting with other plans or networks; (4) the formation of the network has led or will lead to significant "departicipation" in other plans or networks; or (5) members have coordinated pricing through their participation in other plans or networks. Set id. Statement 8.A.3.
102. Members also could attempt to manufacture inputs, but that could entail significantly higher costs than purchasing inputs from existing competitors of the joint venture.
103. This does not mean that the venture necessarily would be procompetitive. If the parents would have created new capacity independently, the formation of the venture may reduce the level of independent output that would have existed if the joint venture had not been formed. Similar competitive concerns arise when the venture imposes collective control over new capacity that one of the parents had created before the formation of the venture. See, e.g., Yamaha, 657 F.2d at 980-81. 104 If the parties only combine unutilized capacity, members may remain able to manufacture the same level of independent output that existed before the venture, although their incentive to do so will be affected by the extent of competition between the new and old product lines. 105 See Pitofsky, supra note 8, at 1012 (the incentive to compete against the venture increases as the number of joint venture owners increases); Thomas A. Piraino.Jr., Beyond Per Se, Rule of Reason or Merger Analysis: A New Antitrust Standard for Joint Ventures, 76 MINN. L. REV. 1, 65 (1991) ("Regardless of whether they have entered into an express noncompetition agreement, the partners to a joint venture will have a natural inclination to avoid competing with the joint venture. Direct competition is contrary to the partners' interest because it reduces the profits of their own affiliate.").
104. See Edmund W. Kitch, The Antitrust Economics of Joint Ventures, 54 ANTITRUST L.J. 957, 962 (1987).
105. See Timothy F. Bresnahan & Steven C. Salop, Quantifying the Competitive Effects of Production Joint Ventures, 4 INT'L J. INDUS. ORG. 155, 156 (1986). According to Bresnahan and Salop, joint venture partners have "a private incentive to structure the joint venture agreement in a way that removes the discretion of the joint venture management over these competitive instruments and replaces discretion with either control by the parents or with a formula that determines prices and outputs." Id.
106. See Robert J. Reynolds & Bruce R. Snapp, The Competitive Effects of Partial Equity Interests and Joint Ventures, 4 INT'L J. INDUS. ORG. 141 (1986).
107. Bresnahan & Salop, supra note 107.
108. See id. at 166. In this scenario, the participation of the parents is limited to a silent financial interest in the venture.
109. Id. at 161.
110. See id. at 167.
111. Id. at 160.
112. See id. at 167.
113. See id.
114. Bresnahan and Salop also modify HHI analysis to reflect "competitor-based" transfer pricing arrangements within the joint venture, but get less precise results. Id. at 161-66. As Bresnahan and Salop explain, "[c]omparing schemes with competitor-based escalator clauses depends on the price details of the escalators." Id. at 168.
115. Piraino, supra note 105, at 37 (advocating that the agencies approve more joint ventures that are limited in scope and duration).
116. See, e.g., Joseph F. Brodley, Joint Ventures and Antitrust Policy, 95 HARV. L. REV. 1523, 1547 (1982) (suggesting that limitations upon the duration and scope of the venture will ensure that the parents retain the incentive to compete in the relevant market).
117. See Kattan, supra note 64: Joint ventures therefore may serve as conduits for coordinating the participants' market behavior or for exchanging competitively sensitive information. The potential for such adverse spillover effects may be limited, however, if venture participants lack sufficient market shares in markets in which they compete to create, enhance or facilitate the exercise of market power. Id. at 949; see also Brodley, supra note 118, at 1561 (discussing spillover in input joint ventures); Pitofsky, supra note 8, at 1033-34.
118. 441 U.S. 1 (1979).
119. See id. at 21-24
120. Id. at 22-23.
121. Id. at 23-24.
122. See id.
123. But see Salop, supra note 49, at 234 (In BMI "insider competition thus could constrain the power of the collective and prevent prices from rising above the level that would be achieved in the absence of cooperation" (emphasis added)).
124. It is important to remember, however, that other forms of insider competition may be relevant in assessing a venture's market power: The Court did not discuss the degree of competition between the two major collectives, ASCAP and BMI, nor how the intensity of competition might increase if there were a larger number of smaller collectives. Had they analyzed this issue, the Court would have found it necessary to balance the likely increase in competition if there were more collectives against the potential loss of efficiency benefits if the market structure were altered in this way. Id.
125. Indeed, this is precisely what the Second Circuit concluded when BMI was remanded: "[I]f the opportunity [to purchase individual licenses] is fully available, and if copyright owners retain unimpaired independence to set a competitive price for individual licenses to a licensee willing to deal with them, the blanket license in not a restraint of trade." CBS, Inc. v. ASCAP, 620 F.2d 930, 936 (2d Cir. 1980); see also Buffalo Broad., Inc. v. ASCAP, 744 F.2d 917, 933 (2d Cir. 1984).
126. See Robert Pitofsky, A Framework for Antitrust Analysis of Joint Ventures, 74 GEO. L.J. 1605, 1619 (1985) (BMI effectively involved the creation of a new facility by contract).
127. 507 F. Supp. 412 (S.D.N.Y. 1980), aff'd mem., 659 F.2d 1063 (2d Cir. 1981).
128. See id. at 420.
129. See id. at 429-30.
130. The court reasoned that "the circumstances in the instant case include already existing markets - a market for the product that Premiere proposes to sell and a highly competitive market for the product that the movie company venturers propose to reserve solely to Premiere." Id. at 430.
131. "It is true that, as to the defendants and pay television program distribution. Premiere is a new venture. The heart of that venture, however, is the fifty or so new, never-before-shown-on-television motion pictures that the defendants annually distribute and would, otherwise, be selling to the existing market." Id.
132. Id. at 431.
133. Id.
134. Id. at 432 n.49.
135. Even when vertically integrated joint ventures permit members to buy or sell to their rivals, members may have the incentive to cease competing against each other outside of it See United States v. Primestar Partners, 1994-1 Trade Cas. (CCH) ¶ 70,652 (S.D.N.Y. 1994) (consent decree prohibiting vertically integrated cable operators from using direct broadcast satellite (DBS) joint venture to deny programming to competing DBS providers).
136. 103 F.T.C. 374 (1984).
137. Id. at 383.
138. Id. at 384-85. The safeguards included prohibitions on exchanging information that was not related to the operation of the venture.
139. When courts and agencies are evaluating conduct that has occurred in the past, they will often have direct evidence of whether the parents have continued to compete outside of the venture. But even when parents have continued to compete outside of the venture, it still may be appropriate to assign the venture and the collaborators a single market share. See Addamax Corp. v. Open Software Found., Inc., 888 F. Supp. 274 (D. Mass. 1995) (although aggregating market shares is usually improper when collaborators continue competing against each other and their venture, specific circumstances raised genuine issue of material fact as to whether single market share was appropriate).
140. 468 U.S. at 108.
141. See id. at 101.
142. See id. at 111-15.
143. Id. at 114-15.
144. Id. at 115-14.
145. See also Chicago Prof'l Sports Ltd. Partnership v. NBA, 961 F.2d 667 (7th Cir. 1992) (affirming preliminary injunction against NBA rule reducing the number of games that teams could independently market to "superstations").
146. 36 F.3d 958 (10th Cir. 1994) (Visa II).
147. See SCFG ILC, Inc. v. VISA U.S.A., Inc., 819 F. Supp. 956 (D. Utah 1991) (Visa I).
148. Visa II, 36 F.3d at 967-68.
149. Thus, in assessing Visa's market power, the Tenth Circuit focused on how "intrajoint venture" competition limited any market power that Visa might have had. A separate question would be how the challenged rule affected "inter-joint venture" competition - that is, competition among credit card systems. Such issues are discussed in the next section.
150. United States v. Alcan Aluminum, 605 F. Supp. 619 (W.D. Ky. 1985).
151. 468 U.S. at 114 n.54.
152. 986 F.2d 589 (1st Cir. 1993).
153. Id. at 593.
154. Id. at 595.
155. Id. at 595-97.
156. Id. at 596.
157. 1988-1 Trade Cas. (CCH) ¶ 67,943 (D.N.J.), aff'd mem., 853 F.2d 921 (3d Cir. 1988).
158. See id. at 57,795.
159. Id. at 57,803.
160. See New York v. Visa U.S.A., Inc., 1990-1 Trade Cas. (CCH) ¶ 69,106 (S.D.N.Y. 1990) (prohibiting overlapping membership in Visa and MasterCard debit card networks to facilitate intersystem competition); Worthen Bank & Trust v. National Bank Americard, Inc., 485 F.2d 119 (8th Cir. 1973) (holding that restrictions on membership in competing joint ventures were not per se illegal because restrictions could increase intersystem competition and prevent a de facto merger between credit card networks); Visa I, 819 F. Supp. at 997 (acknowledging that admitting Discover Card owner to Visa network would reduce competition at the network level, but "not so substantially as to rise to the level of a Section 7 violation"); see also National Bank of Can. v. Interbank Card Ass'n, 507 F. Supp. 1113, 1123 (S.D.N.Y.) (upholding prohibition on overlapping membership that protected network's investments in the creation of a new product and lasted only eight years), aff'd on other grounds, 666 F.2d 6 (2d Cir. 1981).
161. The agencies have recognized that conventional merger analysis, while appropriate for some ventures, should not be applied to collaborations if insider competition is likely to occur. As Joseph Rattan explains: [A]lthough the antitrust enforcement agencies analyze joint ventures as mergers, they have been more lenient toward joint ventures and have permitted some joint ventures to proceed in circumstances in which they had or would have challenged a merger of the same parties. This more permissive approach is grounded in the belief that restrictions on the scope and duration of joint ventures tend to limit the effects of joint ventures vis-a-vis mergers of the same firms. Unlike mergers, joint ventures may often maintain the participants' status as independent competitors outside the framework of the collaborative effort. Kattan, supra note 64, at 947.
162. The Department of Justice embraced this assumption for its analysis of anticompetitive effects in the joint venture market in its 1988 Antitrust Enforcement Guidelines for International Operations. In analyzing the potential anticompetitive effects of joint ventures, DOJ would first examine "with respect to each market the level of and increase in concentration that would result if the parties merged. If, based on market concentration, the Department would not challenge a merger of the joint venture participants in a relevant market, then the Department concludes without detailed examination of other factors that the joint venture and its individual restraints would not likely have any anticompetitive effects in that market. . . ." U.S. Department of Justice Antitrust Enforcement Guidelines for International Operations (1988) § 3.42, reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,109 [hereinafter 1988 International Guidelines]. The Guidelines also considered competitive effects outside of the joint venture market Id. § 3.43. The 1988 International Guidelines were withdrawn in 1995. See also infra part VII.
163. See Shapiro & Willig, supra note 97, at 127-28 ("Any genuine joint venture should almost surely be allowed if the participants would be permitted to merge, and this would almost surely be the outcome of a rule of reason analysis."); Richard Schmalensee, Agreements Between Competitors, in ANTITRUST, INNOVATION, AND COOPERATION 112 (Thomas M. Jorde & David J. Teece eds., 1992) (regardless of intent or efficiencies, if a merger would be legal, the joint venture must be legal); Martin B. Louis, Restraints Ancillary to Joint Ventures and Licensing Agreements: DoSealy and Topco Logically Survive Sylvania and Broadcast Music?, 66 VA. L. REV. 879, 905 (1980) ("A court, therefore, should not deny to a lawful joint selling agency a useful restraint that an equivalent merger among the competitors could lawfully impose within the merged entity.").
164. See Shapiro & Willig, supra note 97, at 127-28 ("Any genuine joint venture should almost surely be allowed if the participants would be permitted to merge, and this would almost surely be the outcome of a rule of reason analysis."); Richard Schmalensee, Agreements Between Competitors, in ANTITRUST, INNOVATION, AND COOPERATION 112 (Thomas M. Jorde & David J. Teece eds., 1992) (regardless of intent or efficiencies, if a merger would be legal, the joint venture must be legal); Martin B. Louis, Restraints Ancillary to Joint Ventures and Licensing Agreements: DoSealy and Topco Logically Survive Sylvania and Broadcast Music?, 66 VA. L. REV. 879, 905 (1980) ("A court, therefore, should not deny to a lawful joint selling agency a useful restraint that an equivalent merger among the competitors could lawfully impose within the merged entity.").
165. See, e.g., Schmalensee, supra note 165, at 113 ("Since partial integration by contract is generally reversible, it would be appropriate to require plaintiff to prove more substantial market power than would be necessary in a merger case."); cf. Kitch, supra note 106, at 961 n.10 ("As a matter of theory it is not clear that the 'cut off' - necessarily a rough number - should be the same for mergers and joint ventures . . . . I would argue that for all joint ventures except those relating to the current marketing and sale of products, the 'cut off' should be higher because the threat to competition is less.").
166. In the Health Care Statements, the agencies incorporate insider competition into safety zones for integrated physician network joint ventures. Physician networks enjoy a safety zone if they employ fewer than 30% of the physicians in each relevant specialty and if physicians continue to compete against the venture (either individually or as part of another venture). If, on the other hand, physicians do not continue to compete outside of the network, the market share safety zone decreases to 20%. Health Care Statement 8.
167. In Visa I the district court rejected Visa's argument that HHI analysis proved Discover's compulsory admission to Visa would result in anticompetitive effects. Because Visa and Discover would continue to compete outside of the venture, Discover's admission "would not constitute a complete merger of the two entities. At best, it could be called a partial or hybrid merger. Under such circumstances, the court finds that the HHI analysis is not particularly useful in determining the probability of anticompetitive effects." 819 F. Supp. at 994 n.47.
168. The 1988 International Guidelines seemed to acknowledge that the likelihood and impact of insider competition will depend on the facts. Although the Guidelines noted that insider competition could significantly reduce the potential for anticompetitive effects, they did not describe how it would be evaluated in specific cases.
169. See, e.g., Easterbrook, supra note 13, at 20-21 (advocating market power screen to structure rule of reason inquiry because "firms that lack market power cannot injure competition no matter how hard they try"); Piraino, supra note 105, at 41-42 (market power threshold for integrated marketing joint ventures and unintegrated buying joint ventures should be 35%, while other forms of integrated joint ventures should be legal absent evidence of anticompetitive intent); Thomas M. Jorde & David J. Teece, Rule of Reason Analysis of Horizontal Arrangements: Agreements Designed to Advance Innovation and Commercialize Technology, 61 ANTITRUST L.J. 579, 607 (1993) (safe harbors for innovative joint ventures with less than 20%-25% of redefined relevant market); cf. Azcuenaga, supra note 15, at 944 (noting that market power screen, whether fine or coarse, would reduce the danger of indiscriminate application of the "quick look" rule of reason).
170. The agencies already have created market share safe harbors for certain collaborations in the health care and intellectual property contexts. See Health Care Statement 7.A (collective buying arrangements with less than 35% of purchases in relevant market for product comprising less than 20% of overall costs); id. 8.A (exclusive physician networks comprising fewer than 20% of physicians in relevant specialty; nonexclusive networks with fewer than 30% of physicians in relevant specialty); Intellectual Property Guidelines § 4.3 (less than 20% of each relevant market).
171. See, e.g., Easterbrook, supra note 13, at 21 ("When the collaborators possess no market power, either their cooperation is beneficial, in which event it will flourish, or it is not, in which event it will the as rivals take the sales. When the collaborators have no market power, monopoly cannot be their objective, and we must consider the more likely possibility that the arrangements create efficiency.").
172. See, e.g., Hay, supra note 2, at 811 n.21 ("A related question is whether proof of actual anticompetitive effect can substitute for a showing of market power. . . . The approach carries risks because it can subvert the whole point of using a market power screen, i.e., to avoid a detailed examination of the conduct").
173. See, e.g., Palmer v. BRG of Ga., Inc., 498 U.S. 46 (1990) (per curiam); FTC v. Superior Ct. Trial Lawyers' Ass'n, 493 U.S. 411 (1990).
174. NCAA, 468 U.S. at 110 n.42 ("where the anticompetitive effects of conduct can be ascertained through means short of extensive market analysis, and where no countervailing competitive virtues are evident, a lengthy analysis of market power is not necessary"); see also Indiana Federation of Dentists, 476 U.S. at 460-61.
175. See Piraino, supra note 105, at 25 (noting difficulty of calculating market shares of joint venture at the time of formation); Brodley, supra note 118, at 1542 ("In assessing the market power of the joint venture, a court cannot use the market share/entry barriers test, because the joint venture will have no market share at the time of its formation.").