Innovation and the limits of antitrust

Journal of Competition Law and Economics

Volumn 6, Issue 1, 2010, Pages 153-202

  Manne, Geoffrey A ^a   Wright, Joshua D ^b  

^a LEWIS AND CLARK LAW SCHOOL   (United States)

^b GEORGE MASON UNIVERSITY   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 77955889813     PISSN: 17446414     EISSN: 17446422     Source Type: Journal    
DOI: 10.1093/joclec/nhp032     Document Type: Article

References (163)

1. See generally WILLIAM H. PAGE & JOHN E. LOPATKA, THE MICROSOFT CASE: ANTITRUST, HIGH TECHNOLOGY, AND CONSUMER WELFARE (Chicago Press 2007).
2. See, e.g., Steve Lohr, Google, Zen Master of Market, N.Y. TIMES, May 17, 2009, available at http://www.nytimes.com/2008/07/07/technology/07google.html?pagewanted=pr int; Steve Lohr & Miguel Helft, New Mood in Antitrust May Target Google, N.Y. TIMES, May 17, 2009, available at http://www.nytimes.com/2009/05/18/technology/companies/18antitrust.html
3. Steve Lohr & Miguel Helft, New Mood in Antitrust May Target Google, N.Y. TIMES, May 17, 2009, available at http://www.nytimes.com/2009/05/18/technology/companies/18antitrust.html
4. Daniel Lyons, They Might Be a Little Evil: Why Google Faces Antitrust Scrutiny, NEWSWEEK, May 23, 2009, available at http://www.newsweek.com/id/198855
5. Farhad Manjoo, The Case Against the Case Against Google - The Department of Justice Should Take a Hint from the Microsoft Suit: No More Antirust Actions Against Tech Companies, SLATE, July 28, 2009, available at http://www.slate.com/id/2223755
6. Declan McCullagh, In D.C. Antitrust Circles, How Google Became the Hunted, CNET NEWS, Sept. 9, 2008, available at http://news.cnet.com/8301-13578_3-10036948-38.html
7. Declan McCullagh, On Antitrust, Is Google the Next Microsoft, ZDNET NEWS, July 23, 2007, available at http://news.zdnet.com/2100-9588_22-152610.html
8. James Rowley, Antitrust Pick Varney Saw Google as New Microsoft, BLOOMBERG.COM, Feb. 17, 2009, available at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aG9B5.J3Bl1w
9. Posting of Erick Schonfeld to TechCrunch, http://www.techcrunch.com/ (May 11, 2009)
10. Fred Vogelstein, Why Is Obama's Top Antitrust Cop Gunning for Google?, WIRED, July 20, 2009, available at http://www.wired.com/techbiz/it/magazine/17-08/mf_googlopoly
11. WSJ Law Blog, http://blogs.wsj.com/law/ (May 8, 2009, 9:22 EST).
12. Christine Varney, Remarks Before the American Antitrust Institute (Feb. 11, 2008), available at http://www.antitrustinstitute.org/Archives/Varney.ashx.
13. See, e.g., Posting of Matthew Karnitschnig to Deal Journal, http://blogs.wsj.com/deals/2009/05/12/putting-the-anti-back-into-antitru st-enforcement/ (May 12, 2009, 16:21 EST)
14. Richard Epstein, A Giant Step Backward in Antitrust Law, FORBES, May 19, 2009, available at http://www.forbes.com/2009/05/18/christine-varney-antitrust-opinions-col umnists-law.html.
15. Pac. Bel. Tel. Co. v. linkLine Commc'ns, Inc., 129 S. Ct. 1109, 1113-14 (2009) ("Recognizing a price-squeeze claim where the defendant's retail price remains above cost would invite the precise harm we sought to avoid in Brooke Group: Firms might raise their retail prices or refrain from aggressive price competition to avoid potential antitrust liability" and finding it "most troubling [that] firms that seek to avoid price squeeze liability will have no safe harbor for their pricing practices.").
16. Robert W. Crandall & Clifford Winston, Does Antitrust Policy Improve Consumer Welfare? Assessing the Evidence, 17 J. ECON. PERSP. 3 (2003).
17. William H. Page & Seldon J. Childers, Measuring Compliance with Compulsory Licensing Remedies in the American Microsoft Case, 76 ANTITRUST L.J. 239 (2009)
18. William H. Page, Mandatory Contracting Remedies in the American and European Microsoft Cases, 75 ANTITRUST L.J. 787 (2008)
19. William H. Page & Seldon J. Childers, Software Development as an Antitrust Remedy: Lessons from the Enforcement of the Microsoft Communications Protocol Licensing Requirement, 14 MICH. TELECOMM. & TECH. L. REV. 77 (2008).
20. Daniel F. Spulber, Unlocking Technology: Antitrust and Innovation, 4 J. COMPETITION L. & ECON. 915 (2008).
21. See, e.g., Carl Shapiro, Exclusivity in Network Industries, 7 GEO. MASON L. REV. 673, 674-75 (1999).
22. This conflation of activity level with success has come from a number of sources, including President Obama. See Barack Obama, Senator, Statement to the American Antitrust Institute (Nov. 5, 2009), available at http://www.antitrustinstitute.org/archives/files/aai-%20Presidential%20c ampaign%20-%20Obama%209-07_092720071759.pdf (promising to "reinvigorating antitrust enforcement" and asserting that the activity level of enforcement during the Bush administration caused negative consequences for consumers).
23. Frank H. Easterbrook, The Limits of Antitrust, 63 TEX. L. REV. 1 (1984).
24. J. Thomas Rosch, Thoughts on the Withdrawal of the Section 2 Report, available at http://ftc.gov/speeches/rosch/090625roschibareport.pdf.
25. Table 1 originally appears in David S. Evans & Jorge Padilla, Neo-Chicago Approach to Unilateral Practices, 72 U. CHI. L. REV. 73 (2005).
26. There are really two separate points here. The first is the inevitability of errors with decision by legal rule generally. See Easterbrook, supra note 14, at 14-15 (reiterating that "[O]ne cannot have the savings of decision by rule without accepting the costs of mistakes"). The second point is that the likelihood of antitrust error depends crucially on the development of economic science to produce techniques and methods by which we can successfully identify conduct that harms consumers.
27. See also Frank H. Easterbrook, Workable Antitrust Policy, 84 MICH. L. REV. 1696 (1986).
28. This is a point most often attributed to then Judge Breyer's well-known admonition that antitrust rules "must be administratively workable and therefore cannot always take account of every complex economic circumstance or qualification." Town of Concord v. Boston Edison Co., 915 F.2d 17, 22 (1st Cir. 1990). But the Chicago School of antitrust has traditionally shared with Breyer's Harvard School a preference for using economics to generate simple and administrable rules rather than overly sophisticated economic tests.
29. See Joshua D. Wright, The Roberts Court and the Chicago School of Antitrust: The 2006 Term and Beyond, 3 COMPETITION POL'Y INT'L 25, 27 (2007)
30. William Kovacic, The Intellectual DNA of Modern U.S. Competition Law for Dominant Firm Conduct: The Chicago/Harvard Double Helix, 2007 COLUM. BUS. L. REV. 1, 32-35 (2007).
31. See generally Joshua D. Wright, Overshot the Mark? A Simple Explanation of the Chicago School's Influence on Antitrust, 5 COMPETITION POL'Y INT'L 179 (2009)
32. Keith N. Hylton & Michael Salinger, Tying Law and Policy: A Decision Theoretic Approach, 69 ANTITRUST L.J. 469 (2001)
33. C. Frederick Beckner, III & Steven C. Salop, Decision Theory and Antitrust Rules, 67 ANTITRUST L.J. 41 (1999).
34. See generally James C. Cooper, Luke M. Froeb, Dan O'Brien & Michael G. Vita, Vertical Antitrust Policy as a Problem of Inference, 23 INT'L J. INDUS. ORG. 639 (2005).
35. See also Keith N. Hylton, The Law and Economics of Monopolization Standards, in ANTITRUST LAW AND ECONOMICS (2009).
36. Multiple academics review the existing theory and evidence on vertical restraints and single-firm conduct more generally and uniformly conclude that the practices at issue are generally procompetitive and that antitrust rules should "slant" toward requiring plaintiffs to demonstrate clear anticompetitive effect before condemning finding violations.
37. Francine Lafontaine & Margaret Slade, Exclusive Contracts and Vertical Restraints: Empirical Evidence and Public Policy, in HANDBOOK OF ANTITRUST ECONOMICS (Paolo Buccirossi ed., 2008)
38. Daniel P. O'Brien, The Antitrust Treatment of Vertical Restraints, in REPORT: THE PROS AND CONS OF VERTICAL RESTRAINTS 40 (2008), available at http://www.konkurrensverket.se/upload/Filer/Trycksaker/Rapporter/Pros &Cons/rap_pros_and_cons_vertical_restraints.pdf.
39. Obviously, this choice of loss function need not be a "mistake" unless compared with a regime where the loss function is measured exclusively by total or consumer welfare. Quite the contrary, the decision to incorporate non-economic arguments is generally deliberate. For example, Cooper et al. explore the possibility that concerns with market integration in the European Union and a higher tolerance for Type 1 error deriving from a less generous system of private rights of action explain divergent treatment of vertical restraints between the EU and the United States.
40. See also Alden F. Abbott & Joshua D. Wright, Antitrust Analysis of Tying Arrangements and Exclusive Dealing, in ANTITRUST LAW AND ECONOMICS (Keith N. Hylton ed., 2009) (summarizing the literature and empirical evidence on exclusive dealing contracts).
41. See generally Michael R. Baye & Joshua D. Wright, Is Antitrust Too Complicated for Generalist Judges? The Impact of Economic Complexity and Judicial Training on Appeals (George Mason Univ. Sch. of Law, Working Paper, Aug. 21, 2009), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1319888 (finding a statistically significant tendency for economically trained judges to perform better in simple antitrust cases, but not those involving sophisticated economic evidence).
42. Joshua Wright, Commissioner Rosch, Rhetoric, and the Relationship Between Economics and Antitrust, TRUTH ON THE MARKET (June 12, 2009, 11:55 AM), http://www.truthonthemarket.com/2009/06/12/commissioner-rosch-rhetoric-a nd-the-relationship-between-economics-and-antitrust/
43. Indeed, one of the most powerful implications of the error-cost framework is one that creates some tension for economically minded antitrust scholars. The implication is that a movement toward sophisticated rule-of-reason standards that attempt to determine fully the competitive effects of a given practice on a case-by-case basis with modern economic tools, a movement many antitrust economists support, is likely to increase error costs if sufficient attention is not paid to the administrability of the tests.
44. U.S. DEP'T OF JUSTICE, COMPETITION AND MONOPOLY: SINGLE-FIRM CONDUCT UNDER SECTION 2 OF THE SHERMAN ACT viii (2008), available at http://www.usdoj.gov/atr/public/reports/236681.pdf (internal citations omitted).
45. See, e.g., Stacey L. Dogan & Mark A. Lemley, Antitrust Law and Regulatory Gaming, 87 TEX. L. REV. 685 (2009).
46. Ronald Coase, Industrial Organization: A Proposal for Research, in POLICY ISSUES AND RESEARCH OPPORTUNITIES IN INDUSTRIAL ORGANIZATION (Victor R. Fuchs ed., 1972). For more modern critiques of the industrial organization literature in the same vein
47. see Timothy J. Muris, Economics and Antitrust, 5 GEO. MASON. L. REV. 303 (1997)
48. Bruce H. Kobayashi, Game Theory and Antitrust: A Post Mortem, 5 GEO. MASON L. REV. 411 (1997) (reviewing critiques of the IO literature)
49. See Alan Meese, Market Failure and Non-Standard Contracting: How the Ghost of Perfect Competition Still Haunts Antitrust, 1 J. COMPETITION L. & ECON. 21 (2005)
50. Harold Demsetz, How Many Cheers for Antitrust's 100 Years? 30 ECON. INQ. 207 (1992).
51. ANTITRUST MODERNIZATION COMMISSION, REPORT AND RECOMMENDATIONS 32 (2007) (recommending that "in industries where innovation, intellectual property, and technological change are central features... antitrust enforcers should carefully consider market dynamics in assessing competitive effects....").
52. See, e.g., Joshua D. Wright, Antitrust, Multi-Dimensional Competition, and Innovation: Do We Have An Antitrust Relevant Theory of Competition Now?, in REGULATING INNOVATION: COMPETITION POLICY AND PATENT LAW UNDER UNCERTAINTY (Geoffrey A. Manne & Joshua D. Wright eds., Cambridge Univ. Press, forthcoming 2010)
53. see generally Geoffrey A. Manne & Joshua D. Wright in id. ch. 1, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1462489.
54. Antitrust Modernization Commission, Report and Recommendations 38 (2007).
55. accord Richard J. Gilbert, Competition and Innovation, in 1 ISSUES IN COMPETITION LAW AND POLICY 577, 583 (W. Dale Collins ed., 2008) ("economic theory does not provide unambiguous support either for the view that market power generally threatens innovation by lowering the return to innovative efforts nor the Schumpeterian view that concentrated markets generally promote innovation.").
56. It should be noted that Gilbert takes from this mixed record the implication that presumptions that product market competition increases innovation should be applied under certain conditions and that generally, case-by-case fact-specific analysis is appropriate. This is in line with the general view of economists that rule-of-reason analysis is best suited for situations where competing theories render predictions on consumer welfare indeterminate. We do not agree for reasons discussed in Parts III and IV. The primary point is that where economic science generates indeterminate predictions, asking judges to resolve the debate requires an unrealistic degree of economic literacy. An alternative approach, and the one advocated in The Limits of Antitrust, is to harness existing economic knowledge into simple presumptions that can reduce error rates. We note in passing, moreover, that to the extent that we are correct about the relationship between antitrust enforcement and error costs, the empirical failure of the Schumpeterian hypothesis may be a consequence of a long history of antitrust enforcement decisions that account insufficiently for the benefits of monopoly to innovation.
57. See, e.g., Jerry Hausman, Valuation of New Goods Under Perfect and Imperfect Competition, in THE ECONOMICS OF NEW GOODS 209-67 (Bresnahan & Gordon eds., 1997) (discussing the consumer welfare gains from new product introductions and product line extensions).
58. OLIVER E. WILLIAMSON, MARKETS AND HIERARCHIES, ANALYSIS AND ANTITRUST IMPLICATIONS: A STUDY IN THE ECONOMICS OF INTERNAL ORGANIZATION (1975).
59. See generally JEAN TIROLE, THE THEORY OF INDUSTRIAL ORGANIZATION (1988)
60. see also Comments from Timothy J. Muris, Antitrust Law, Economics, and Bundled Discounts (July 15, 2005), available at http://govinfo.library.unt.edu/amc/commission_hearings/pdf/Muris.pdf ("In the same way that a visitor from Mars who reads only the mathematical 10 literature could mistakenly conclude that the U.S. economy is rife with monopoly power, it would be a mistake to infer that the growing volume of theoretical papers examining bundling or bundled rebates as an exclusionary device implies that there is any growing or significant danger from the anticompetitive use of bundling.").
61. Armen Alchian, Uncertainty, Evolution, and Economic Theory, 58 J. POL. ECON. 211, 212 (1950).
62. Charles I. Jones & John C. Williams, Measuring the Social Return to R&D, 113 Q.J. ECON. 1119 (1998) (estimating that the social return to R&D investment far exceeds the private return, meaning existing incentives for innovation are already lower than optimal).
63. Richard A. Posner, Antitrust in the New Economy, 68 ANTITRUST L.J. 925, 927 (2001).
64. David J. Teece, Favoring Dynamic over Static Competition: Implications for Antitrust Analysis and Policy (forthcoming 2009).
65. In addition to a general insensitivity to the facts and market conditions of the particular cases in which these theorems are to be applied, as noted above, the literature is particularly insensitive to the institutional and political economy limitations of enforcers and courts.
66. Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 273 (2d., Cir. 1979) (citations omitted).
67. Including language evidencing a concern for the substantial risk and cost of false positives created by uncertain or overly complex application of the antitrust laws. Id. at 282. ("But it is difficult to comprehend how a major corporation, accustomed though it is to making business decisions with antitrust considerations in mind, could possess the omniscience to anticipate all the instances in which a jury might one day in the future retrospectively conclude that predisclosure was warranted.").
68. See Vrinda Kadiyali, Eastman Kodak in the Photographic Film Industry: Picture Imperfect?, in MARKET DOMINANCE: HOW FIRMS GAIN, HOLD OR LOSE IT AND THE IMPACT ON ECONOMIC PERFORMANCE 89, 100 (David Rosenbaum ed., 1998).
69. It is worth noting that Kodak's share of the camera market was less consistently under pressure during this period, with a significant bump attributable to its introduction of the Pocket 110 camera at issue in the case. Also notable, however, is that its most significant decline (seven percentage points) in camera market share came from competitors in this very market, only about one year after the introduction of the Pocket 110.
70. The lower court's decision is made only more troubling by the fact that Kodak did offer advance disclosure of its innovation (for a fee)-but apparently the two months of advance notice given to Berkey were insufficient.
71. Federico Etro, Competition Policy: Toward a New Approach, 2 EUR. COMPETITION J 29, 30-31 (2006).
72. Harold Demsetz, Why Regulate Utilities?, 11 J.L. & ECON. 55 (1968).
73. Such theories abound. See, e.g., Janusz Ordover & Garth Saloner, Predation, Monopolization and Antitrust, in HANDBOOK OF INDUSTRIAL ORGANIZATION 538 (Schmalensee & Willig eds., 1989).
74. Mandatory dealing Verizon Comm'ns., Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 408 (2005) ("Requires antitrust courts to act as central planners, identifying the proper price, quantity, and other terms of dealing-a role for which they are ill-suited.").
75. For a comprehensive assessment of the problem of mandatory access and the essential facilities doctrine as an antitrust remedy and theory, see Abbott B. Lipsky, Jr. & J. Gregory Sidak, Essential Facilities, 51 STAN. L. REV. 1187 (1999).
76. Berkey Photo, 603 F.2d at 281.
77. United States v. U.S. Gypsum Co., 438 U.S. 422, 436 n.13 (1978) and citing Sargent-Welch Scientific Co., 567 F.2d at 712.
78. Geoffrey A. Manne & E. Marcellus Williamson, Hot Docs vs. Cold Economics: The Use and Misuse of Business Documents in Antitrust Enforcement and Adjudication, 47 ARIZ. L. REV. 609, 647-48 (2005). Harold Demsetz makes a related point in the context of predatory pricing: "A price cut to obtain new customers imposes as much harm on rivals as a price cut whose objective is to harm them."
79. Harold Demsetz, Barriers to Entry, 72 AM. ECON. REV. 47, 54 (1982). It is hard to know what value evidence of intent could have where a claim depends on proof of injury and injury is as likely a result of anticompetitive as procompetitive intent.
80. A.A. Poultry Farms, Inc. v. Rose Acre Farms, Inc., 881 F.2d 1396, 1402 (7th Cir. 1989) (emphasis in original).
81. 7 PHILLIP AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW 1506 (2001) (citing various cases therein).
82. Although this section focuses on the U.S. Microsoft case, the relevant cites for the relevant decisions from both the U.S. and the EU are: United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001)
83. Case COMP/C-3/37.792 Microsoft, Commission Decision of 24 March 2004, available at http://europa.eu.int/comm/competition/antitrust/cases/decisions/37792/en .pdf [hereinafter EC Decision]
84. European Commission v. Microsoft Corp., Judgment of the Court of First Instance (Grand Chamber), Case T-201/04. Sept. 17, 2007, available at http://curia.europa.eu/jurisp/cgibin/form.pl?lang=EN&Submit=Recherch er$docrequire=alldocs&numaff=T-201/04&datefs=&datefe= &nomusuel=&domaine=&mots=&resmax=100 [hereinafter CFI Decision].
85. William Page and John Lopatka have done yeomen's work in discussing the Microsoft cases.
86. See also Daniel F. Spulber, Competition Policy and the Incentive to Innovate: The Dynamic Effects of Microsoft v. Commission, 25 YALE J. ON REG. 101 (2008).
87. Compare Stan J. Liebowitz & Stephen E. Margolis, Network Externality: An Uncommon Tragedy, 8 J. ECON. PERSP. 133 (1994)
88. Carl Shapiro, Exclusivity in Network Industries, 7 GEO. MASON L. REV. 673 (1999).
89. See also George L. Priest, Rethinking Antitrust in an Age of Network Industries, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1031166.
90. Michael L. Katz & Carl Shapiro, Systems Competition and Network Effects, 8 J. ECON. PERSP. 93 (1994).
91. United States v. Microsoft Corp., 253 F.3d 34, 55 (D.C. Cir. 2001).
92. The district court was not quite so circumspect.
93. Wired Magazine, Posts (Jan. 2007), available at http://www.wired.com/wired/archive/15.01/posts.html?pg=6.
94. This diminution is especially ironic given that it is based at least in part on the court's assessment that Microsoft's long-term, dynamic concerns about entry were too remote, even though the applicable structural literature is entirely concerned with long-term, dynamic efficiency effects.
95. Stan J. Liebowitz & Stephen E. Margolis, Network Effects, THE NEW PALGRAVE'S DICTIONARY OF ECONOMICS AND THE LAW (1998).
96. See generally THE ECONOMICS OF NEW GOODS 209 (Timothy F. Bresnahan & Robert J. Gordon eds., 1997)
97. Daniel F. Spulber, Consumer Coordination in the Small and in the Large: Implications for Antitrust in Markets with Network Effects, 4 J. COMPETITION L. & ECON. 207, 209 (2008).
98. Even Judge Posner falls into this trap in his discussion of the Standard Fashion case (Standard Fashion Co. v. Magrane-Houston Co., 258 U.S. 346 (1922)) in Antitrust in the New Economy. There, Judge Posner suggests that Standard Fashion's exclusive dealing contracts may have been problematic because of economies of scale in distribution-the desire on the part of consumers (and thus retailers) to have a complete line of clothing available to choose from at a single store. Judge Posner makes the analogy to network effects explicit, arguing that "the network corresponds to the full-line retail store" and that Standard Fashion could use exclusive dealing with the local dry-goods monopolist retailer to deter the entry of rivals. However, the Standard Fashion as New Economy exclusion story does not hold up to scrutiny.
99. See Benjamin Klein, Exclusive Dealing as Competition on the Merits, 12 J. GEO. MASON L. REV. 119, 146-52 (2003). First, Standard Fashion's product line did not appear, in fact, to be essential to retailers. Second, the contracts were only two years in duration and thus unlikely to deter entry for a period of time significant enough to prevent substitution. Third, as Klein explains, Standard Fashion's exclusive dealing contract was likely an attempt to align promotional incentives between Standard Fashion and its retailers.
100. See Benjamin Klein & Kevin M. Murphy, Vertical Restraints as Contract Enforcement Mechanisms, 31 J.L. & ECON. 265 (1988) (explaining vertical restraints as mechanisms to solve this pervasive incentive conflict over promotional services and induce retailer performance)
101. Benjamin Klein & Joshua D. Wright, The Economics of Slotting Contracts, 50 J.L. & ECON 473 (2007) (applying this framework to explain supermarket slotting contracts for premium shelf space as a form of promotion). But even absent procompetitive justification, the claim of foreclosure is a tenuous one. First, at some price, consumers would willingly visit multiple stores to collect their wardrobes if the cost of doing so were less than the monopoly overcharge they would have to pay to buy from Standard Fashion's complete line at its exclusive retailers; network effects have their limits. Second and more important, for how long would Standard Fashion's clothing remain in fashion? Fashion is, in fact, notoriously fleeting and even dominant brands and designs find themselves quickly displaced as tastes change. The appropriate trade-off in this, as in all cases, is whether the cost of monopoly over its duration without intervention outweighs the cost of enforcement plus the savings from (potentially) curtailing anticompetitive conduct more quickly than it would end without intervention. The fact that the conduct had clear procompetitive justification (having nothing to do with network effects) makes this minimal calculation all the more essential.
102. At the same time, the list could be even more inclusive (and is not meant to be exhaustive). For example, Intel has encountered antitrust problems arising from its pricing practices-practices which are sophisticated and interesting, but not particularly innovative; we declined to treat Intel as a business innovation case. But, of course, Intel is in a dramatically innovative industry. It is, in fact, the New Economy character of its business-particularly the problem of recouping the extraordinarily high fixed costs of product innovation given low marginal costs-that leads Intel to engage in its controversial contracting practices. In this way, Intel presents a typical product innovation case.
103. Product innovations, of course, are not themselves limited to the New Economy; however, it is only New Economy products, characterized by network effects or employing far-reaching restrictions on the use of intellectual property, that seem to draw antitrust scrutiny.
104. From Von's to Schwinn to the Chicago School: Interview with Judge Richard Posner, Seventh Circuit Court of Appeals, ANTITRUST 4-5 (Spring 1992).
105. See also Richard A. Posner, ANTITRUST LAW 127 (2d ed. 2001) ("the fatal flaw in the government's case was to ignore the easy and rapidity of entry into the retail grocery industry").
106. See also Joshua D. Wright, Von's Grocery and the Concentration-Price Relationship in Grocery Retail, 48 UCLA L. REV. 743 (2001) (providing empirical evidence that the retail grocery industry examined in Vons was highly competitive and that, even at modern concentration levels, there was no positive correlation between market concentration and price).
107. Carl Kaysen &Donald Turner,Antitrust Policy: An Economic and Legal Analysis 110 (1959).
108. White House Task Force Report on Antitrust Policy, 2 ANTITRUST L. & ECON. REV. 11, 14-15, 65-76 (1968-69).
109. 386 U.S. 568 (1967).
110. 384 U.S. 546 (1966).
111. 370 U.S. 294 (1962).
112. William E. Kovacic & Carl Shapiro, Antitrust Policy: A Century of Legal and Economic Thinking, 14 J. ECON. PERSP. 43, 52 (2000).
113. See also William E. Kovacic, The Influence of Economics on Antitrust Law, 30 J. ECON. INQ. 294, 295-96 (1992) (describing features of U.S. competition policy system that give economists major role in shaping antitrust rules).
114. United States v. Von's Grocery Co., 384 U.S. 270, 281 (1966) (Stewart, J., dissenting).
115. Timothy J. Muris, Improving the Economic Foundations of Competition Policy, 12 GEO. MASON L. REV. 1 (2003).
116. Harold Demsetz, Two Systems of Belief About Monopoly, in INDUSTRIAL CONCENTRATION: THE NEW LEARNING 164 (Harvey J. Goldschmid et al. eds., 1974).
117. See also YALE BROZEN, CONCENTRATION, MERGERS, AND PUBLIC POLICY (1982).
118. 220 U.S. 373 (1911).
119. See William Breit, Resale Price Maintenance: What Do Economists Know and When Did They Know It?, J. INST. & THEOR. ECON. 147 (1991) (claiming that Alfred Marshall's Principles of Economics was the first product distributed under an RPM scheme in the United States).
120. 220 U.S. at 400.
121. 551 U.S. 877 (2007).
122. For a proposed structural rule-of-reason approach consistent with an error cost approach, see Thomas A. Lambert, Dr. Miles is Dead. Now What? Structuring a Rule of Reason for Minimum Resale Price Maintenance, 50 WM. & MARY L. REV. 1937 (2009).
123. James C. Cooper, Luke M. Froeb, Dan O'Brien & Michael G. Vita, Vertical Antitrust Policy as a Problem of Inference, 23 INT'L. J. INDUS. ORG. 639 (2005).
124. Francine Lafontaine & Margaret Slade, Empirical Assessment of Exclusive Contracts, in HANDBOOK OF ANTITRUST ECONOMICS (Paolo Buccirossi ed., 2008).
125. Daniel P. O'Brien, The Antitrust Treatment of Vertical Restraints: Beyond the Possibility Theorems, in REPORT: THE PROS AND CONS OF VERTICAL RESTRAINTS 40, 80 (Konkurrensverket, Swedish Competition Authority, 2008), available at http://www.konkurrensverket.se/upload/Filer/Trycksaker/Rapporter/Pros &Cons/rap_pros_and_cons_vertical_restraints.pdf.
126. See Brief of Amici Curiae Economists in Support of Petitioner at 16, Leegin Creative Leather Prods. v. PSKS, Inc, 127 S. Ct. 2705 (No. 06-480), 2007 WL 173681.
127. Leegin Creative Leather Prods. v. PSKS, Inc., 127 S. Ct. 2705 (2007).
128. Benjamin Klein & Kevin M. Murphy, Vertical Restraints as Contract Enforcement Mechanisms, 31 J.L. & ECON. 265 (1988).
129. See also Benjamin Klein & Joshua D. Wright, The Economics of Slotting Contracts, 50 J.L. & ECON 473 (2007).
130. White Motor Co. v. United States, 372 U.S. 253, 261 (1963) ("This is the first case involving a territorial restriction in a vertical arrangement; and we know too little of the actual impact of both that restriction and the one respecting customers to reach a conclusion on the bare bones of the documentary evidence before us.").
131. Arizona v. Maricopa County Med. Soc., 457 U.S. 332, 351 n.19 (1982) (citing White and referring to the "the established position that a new per se rule is not justified until the judiciary obtains considerable rule-of-reason experience with the particular type of restraint challenged")
132. Broad. Music, Inc. v. CBS, 441 U.S. 1, 9 (1979) ("it is only after considerable experience with certain business relationships that courts classify them as per se violations" and going on to say that "We have never examined a practice like this one before; indeed, the Court of Appeals recognized that "[i]n dealing with performing rights in the music industry we confront conditions both in copyright law and in antitrust law which are sui generis. And though there has been rather intensive antitrust scrutiny of ASCAP and its blanket licenses, that experience hardly counsels that we should outlaw the blanket license as a per se restraint of trade.").
133. United States v. Topco Assocs., Inc., 405 U.S. 596, 607-08, 92 S.Ct. 1126, 1133-34, 31 L.Ed.2d 515 (1972) ("It is only after considerable experience with certain business relationships that courts classify them as per se violations of the Sherman Act.").
134. Bd. of Regents of Univ. of Okla. v. NCAA, 707 F.2d 1147, 1166 (1984).
135. "While every 'business relationship' will in some sense have unique features, some represent entire, novel categories of dealings. As we shall explain, the arrangement before us is an example of the latter, offering the first up-close look at the technological integration of added functionality into software that serves as a platform for third-party applications. There being no close parallel in prior antitrust cases, simplistic application of per se tying rules carries a serious risk of harm. Accordingly, we vacate the District Court's finding of a per se tying violation and remand the case. Plaintiffs may on remand pursue their tying claim under the rule of reason." United States v. Microsoft Corp., 253 F.3d 34, 87 (2001).
136. Hovenkamp, Janis and Lemley have proposed the use of intent evidence in this context, as a way of identifying problematic product introductions. See HERBERT HOVENKAMP, MARK D. JANIS & MARK A. LEMLEY, 1 IP AND ANTITRUST (2005 Supp.) § 12.4. We note, however, that a weaker form of our proposal might require proof of anticompetitive intent before assigning liability in product introduction cases.
137. See Ronald A. Cass & Keith N. Hylton, Antitrust Intent, 74 S. CAL. L. REV. 657 (2001). Far more problematic is the approach taken in the U.S. Microsoft case, which shifted the burden of demonstrating procompetitive justification for product design decisions to the defendants. See United States v. Microsoft Corp., 203 F.3d at 64-67.
138. Note that this was one of the issues in the interminable IBM case, but, of course, distinguishing between "predatory" product innovations and real innovations is an intractable problem, and the case was, after 13 years, dropped.
139. We exclude naked horizontal restraints because, as discussed, the per se rule is appropriate in instances where economic and empirical learning suggests that a business practice has a high likelihood of producing anticompetitive effects. The prophylactic language of the Clayton Act requires that we exclude non-consummated horizontal mergers.
140. See Dennis W. Carlton, A General Analysis of Exclusionary Conduct and Refusal to Deal-Why Aspen and Kodak Are Misguided, 68 ANTITRUST L.J. 659, 675 (2001) ("efficiencies are hard to measure, and the benefit of the doubt should go to defendants, not to plaintiffs; otherwise, the continued generation of the large efficiency benefits responsible for raising our standard of living will be jeopardized").
141. See, e.g., Peter G. Bryant & E. Woodrow Eckard, Jr., Price Fixing: The Probability of Detection of Getting Caught, 73 REV. OF ECON. & STAT. 531 (1991)
142. see also Nathan H. Miller, Strategic Leniency and Cartel Enforcement, 99 AM. ECON. REV. 750 (2009).
143. Separate statement of Dennis Carlton, Antitrust Modernization Committee Report and Recommendations 399-400 ("I favor a reduction in the multiple to single damages when the actions are overt (e.g., exclusive dealing)").
144. See Phillip Areeda & Donald F. Turner, Predatory Pricing and Practices Under Section 2 of the Sherman Act, 88 HARV. L. REV. 697 (1975)
145. Phillip Areeda, Predatory Pricing, 49 ANTITRUST L.J. 897, 899-90 (1981) (proposing that courts "refuse to consider intent, unless the party relying upon it gives the tribunal reason to believe that his evidence is unusually probative"). Areeda himself saw the problem outside of the predatory pricing context.
146. See Phillip Areeda, Monopolization, Mergers, and Markets: A Century Past and Future, 75 CAL. L. REV. 959, 963-65 (1987) (discussing problems with the use of intent evidence in monopolization cases). Many others, including Frank Easterbrook, have also noted the problem and suggested limitations like the one we propose here.
147. LePage's Inc. v. 3M, 324 F.3d 141, 159-63 (3d Cir. 2003).
148. Frank H. Easterbrook, On Identifying Exclusionary Conduct, 61 NOTRE DAME L. REV. 972, 973 (1986).
149. Verizon Comm. Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004).
150. U.S. DEP'T OF JUSTICE, COMPETITION AND MONOPOLY: SINGLE-FIRM CONDUCT UNDER SECTION 2 OF THE SHERMAN ACT 129 (2008), available at http://www.justice.gov/atr/public/reports/236681.pdf.
151. See also U.S. DEP'T OF JUSTICE & FED. TRADE COMM'N, ANTITRUST ENFORCEMENT AND INTELLECTUAL PROPERTY RIGHTS: PROMOTING INNOVATION AND PROTECTING COMPETITION 23-24 (2007), available at http://www.usdoj.gov/atr/public/hearings/ip/222655.pdf (concluding that "liability for mere unilateral refusals to license will not play a meaningful part in the interface between patent rights and antitrust protections")
152. Richard A. Posner, ANTITRUST LAW 243-44 (Univ. of Chicago Press 1976) (noting that "it cannot be sound antitrust law that, when Congress refuses or omits to regulate some aspect of a natural monopolist's behavior, the antitrust court will step in and, by decree, supply the missing regulatory regime").
153. P. E. Areeda, Essential Facilities: An Epithet in Need of Limiting Principles, 58 ANTITRUST L. J. 841 (1989).
154. D. W. Carlton, A General Analysis of Exclusionary Conduct and Refusal to Deal-Why Aspen and Kodak Are Misguided, 68 ANTITRUST L. J. 659 (2001).
155. R. J. Gilbert, Holding Innovation to an Antitrust Standard, 3 COMP. POL'Y. INT'L. 3 (2007).
156. S. J. Liebowitz, Competition, Innovation, and the Microsoft Monopoly: Antitrust in the Digital Marketplace (Eisenach, J.A. & Lenard, T.M. eds., 1999).
157. S. J. Liebowitz & Stephen E. Margolis, The Fable of the Keys, 30 J.L. & ECON. 1 (1990).
158. S. J. Liebowitz & Stephen E. Margolis, Network Externality: An Uncommon Tragedy, 8 J. ECON. PERSP. 133 (1994).
159. S. J. Liebowitz & Stephen E. Margolis, Path Dependence, Lock-in, and History, 11 C 205 (1995).
160. A. B. Lipsky, Jr. & Gregory Sidak, Essential Facilities, 51 STAN. L. REV. 1187 (1999).
161. J. Schumpeter, Capitalism, Socialism and Democracy (1st ed. 1942).
162. D. F. Spulber, Competition Policy and the Incentive to Innovate: The Dynamic Effects of Microsoft v. Commission, 25 YALE J. ON REG. 101 (2008).
163. D. F. Spulber, Consumer Coordination in the Small and in the Large: Implications for Antitrust in Markets with Network Effects, 4 J. COMPETITION L. & ECON. 207 (2008).