Dynamic analysis and the limits of antitrust institutions

Antitrust Law Journal

Volumn 78, Issue 1, 2012, Pages 1-21

  Ginsburg, Douglas H ^a,b   Wright, Joshua D ^c  

^a United States Court of Appeals ^*  (United States)

^b NEW YORK UNIVERSITY   (United States)

^c GEORGE MASON UNIVERSITY   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 84865532828     PISSN: 00036056     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (72)

1. See, e.g., J. Gregory Sidak & David F. Teece, Dynamic Competition in Antitrust Law, 5 J. Competition L. & Econ. 581, 602 (2009) (arguing that within the static framework "fierce competition associated with the introduction of new products, or new features, or new pricing approaches does not exist").
2. See, e.g., David S. Evans & Keith N. Hylton, The Lawful Acquisition and Exercise of Monopoly Power and Its Implications for the Objectives of Antitrust, Competition Pol'y Int'l, Autumn 2008, at 203, 240 ("[B]ecause of the tendency to focus on static welfare models at the expense of dynamic competition, the enhanced stature of economists in the federal enforcement agencies may ... not be sufficient to lead to a substantial improvement in the quality of enforcement decisions."); Sidak & Teece, supra note 1, at 585 (arguing that "using static analysis to address antitrust issues in a dynamic economy is unlikely to improve consumer welfare and ... a more dynamic analytical framework increases the likelihood of helping rather than hurting consumers").
3. For example, the recoupment test in Brooke Croup focuses upon dynamic considerations, that is, whether the firm will be able earn monopoly profits in the future. Brooke Grp. Ltd. V. Brown & Williamson Tobacco Corp., 509 U.S. 209, 224 (1993).
4. See, e.g., Bruce H. Kobayashi, The Law and Economics of Predatory Pricing, in Antitrust Law and Economics 116 (Keith N. Hylton ed., 2010)
5. Paul Milgrom & John Roberts, Preda-tion. Reputation, and Entry Deterrence, 27 J. Econ. Theory 280 (1982).
6. See, e.g., Dennis W. Carlton & Michael Waldman, The Strategic Use of Tying to Preserve and Create Market Power in Evolving Industries, 33 RAND J. Econ. 194 (2002);
7. Thomas G. Krattenmaker & Steven C. Salop, Anticompetitive Exclusion: Raising Rivals' Costs to Achieve Power over Price, 96 Yale L.J. 209 (1986);
8. Steven C. Salop & David T. Scheffman, Raising Rivals' Costs, 73 Am. Econ. Rev. 267 (1983);
9. Steven C. Salop, Strategic Entry Deterrence, 69 Am. Econ. Rev. 335 (1979).
10. Merger simulation models are but one recent example. See, e.g., Jonathan B. Baker, Merger Simulation in an Administrative Context, 77 Antitrust L.J. 451 (2011);
11. Oliver Budzinski & Isabel Ruhmer, Merger Simulation in Competition Policy: A Survey, 6 J. Competition L. & Econ. 277 (2010);
12. Gregory J. Werden & Luke M. Froeb, Unilateral Competitive Effects of Horizontal Mergers, in Handbook of Antitrust Economics 43 (Paolo Buccirossi ed., 2008). Dynamic oligopoly models also attempt to forecast competitive outcomes.
13. See, e.g., Patrick Bajari, C. Lanier Benkard & Jonathan Levin, Estimating Dynamic Models of Imperfect Competition, 75 Econometrica 1331 (2007);
14. Liran Einav & Jonathan Levin, Empirical Industrial Organization: A Progress Report, 24 J. Econ. Persp. 145 (2010).
15. For an argument in favor of incorporating these models into merger analysis, see Jay Ezrielev & Janusz A. Ordover, The 2010 Horizontal Merger Guidelines: A Static Compass in a Dynamic World?, Antitrust Source, Oct. 2010, at 1, http://www.americanbar.org/content/dam/aba/publishing/antitrust-source/ Octl0-Ezrielevl0- 21.authcheckdam.pdf.
16. See Joseph A. Schumpeter, Capitalism, Socialism, and Democracy 81-90 (1942).
17. See Kenneth J. Arrow, Economic Welfare and the Allocation of Resources for Invention, in The Rate and Direction of Inventive Activity: Economic and Social Factors 609 (Richard Nelson ed., 1962).
18. For an excellent survey of this literature, see Richard Gilbert, Looking for Mr. Schumpeter: Where Are We in the Competition-Innovation Debate?, in 6 Innovation Policy and the Economy 159 (Adam B. Jaffe et al. eds., 2006).
19. J.R. Hicks, Annual Survey of Economic Theory: The Theory of Monopoly, 3 Econometrica 1, 8 (1935).
20. See Joshua D. Wright, Antitrust, Multidimensional Competition, and Innovation: Do We Have an Antitrust-Relevant Theory of Competition Now?, in Competition Policy and Patent Law Under Uncertainty 228, 241 (Geoffrey A. Manne & Joshua D. Wright eds., 2011).
21. See id. at 250; see also Richard J. Gilbert, Competition and Innovation, in 1 ABA Section op Antitrust Law, Issues in Competition Law and Policy 577, 583 (W. Dale Collins ed., 2008) ("[E]conomic 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.").
22. There appears to be consensus on this point. See Wesley M. Cohen & Richard C. Levin, Empirical Studies of Innovation and Market Structure, in 2 Handbook of Industrial Organization 1059 (Richard L. Schmalensee & Robert D. Willig eds., 1989);
23. Michael L. Katz & Howard A. Shelanski, Mergers and Innovation, 74 Antitrust L.J. 1, 22 (2007) ("[T]he literature addressing how market structure affects innovation (and vice versa) in the end reveals an ambiguous relationship in which factors unrelated to competition play an important role."); Sidak & Teece, supra note 1, at 588 ("[D]espite 50 years of research, economists do not appear to have found much evidence that market concentration has a statistically significant impact on innovation.").
24. see also David J. Teece, Dynamic Capabilities and Strategic Management: Organizing for Innovation and Growth (2009).
25. Verizon Commc'ns Inc. V. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 407 (2004).
26. A court may well be skeptical of claims that product design decisions are sufficiently likely to generate anticompetitive effects to warrant per se condemnation. The D.C. Circuit ruled per se condemnation of tying a software program to a software platform inappropriate because per se treatment is justified only by accumulated experience, which is lacking in high-tech product markets. United States V. Microsoft Corp., 253 F.3d 34, 92-93 (D.C. Cir. 2001). The Supreme Court has expressed a similar reluctance to condemn horizontal restraints involving new products or business practices for fear of chilling innovation and reducing dynamic benefits.
27. See Geoffrey A. Manne & Joshua D. Wright, Innovation and the Limits of Antitrust, 6 J. Competition L. & Econ. 153, 194 nn.l 16-21 (2010) (collecting cases).
28. Brooke Grp. Ltd. V. Brown & Williamson Tobacco Corp., 509 U.S. 209, 224 (1993).
29. C. Scott Hemphill, The Role of Recoupment in Predatory Pricing Analyses, 53 Stan. L. Rev. 1581, 1607-08 (2001);
30. Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law \ 1821 (3d ed. 2011).
31. See sources cited supra note 8. This analysis also arises in the merger context. For example, an agency might approve a merger conditional upon the imposition of a conduct remedy, such as prohibiting the merged entity from entering into exclusive contracts in order to preserve rivals' access to an input. The economic basis for imposing such a remedy is the prediction that the post-merger firm will have the incentive and ability to exclude rivals and deter entry. See U.S. Dep't of Justice, Antitrust Div., Antitrust Division Policy Guide to Merger Remedies 17 (June 2011) ("In these types of situations, it may be appropriate to impose limits on the merged entity's ability to enter into restrictive or exclusive contracts."), available at http://www. justice.gov/atr/public/guidelines/272350.pdf.
32. See, e.g., Complaint at 5, Intel Corp., FTC Docket No. 9341, 2010 WL 4542454 (Nov. 2, 2010), available at http://www.FTC.gov/os/adjpro/d9341/ 091216intelcmpt.pdf ("The loss of price and innovation competition in the relevant markets will continue to have an adverse effect on competition and hence consumers. Absent the remedy provided herein, Intel will continue to maintain or even enhance its market power, consumers will have fewer choices, prices will be higher than they would be in competitive markets, and quality and innovation will be diminished.").
33. U.S. Dep't of Justice & Fed. Trade Comm'n, Horizontal Merger Guidelines § 10 (2010), available at http://justice.gov/atr/public/ guidelines/hmg-2010.pdf [hereinafter 2010 Merger Guidelines]
34. 903 F.2d 659 (9th Cir. 1990).
35. For a critique of the Ninth Circuit opinion in Syufy, see Jonathan B. Baker, The Problem with Baker Hughes and Syufy: On the Role of Entry in Merger Analysis, 65 Antitrust L.J. 353 (1997).
36. Syufy, 903 F.2d at 667.
37. 743 F.2d 976 (2d Cir. 1984).
38. 970 F. Supp. 1066 (D.D.C. 1997).
39. see also FTC V. Cardinal Health, Inc., 12 F. Supp. 2d 34, 54-58 (D.D.C. 1998). Similar predictive entry analysis is routinely extended beyond the merger context.
40. See, e.g.. Rebel Oil Co. V. Atl. Richfield Co., 51 F.3d 1421 (9th Cir. 1995) (predatory pricing).
41. Malcolm B. Coate, Theory Meets Practice: Barriers to Entry in Merger Analysis, 4 Rev. L. & Econ. 183, 208 (2008) ("While theorists might prefer to advance broad generalizations on sunk costs blocking entry, the Guidelines' technique requires facts.").
42. See, e.g., Dennis W. Carlton & Ken Heyer, Extraction vs. Extension: The Basis for Formulating Antitrust Policy Towards Single-Firm Conduct, Competition Pol'y Int'l, Autumn 2008, at 285, 302
43. Richard Gilbert, Holding Innovation to an Antitrust Standard, Competition Pol'y Int'l, Spring 2007, at 47;
44. A. Douglas Melamed, Exclusionary Conduct Under the Antitrust Laws: Balancing, Sacrifice, and Refusals to Deal, 20 Berkeley Tech. L.J. 1247, 1267 (2005) ("In refusal to deal cases, a balancing test would have the additional complication of requiring calculation of the costs to innovation incentives and dynamic efficiency of a duty to deal under the circumstances. A test that required such a calculation would plainly not be administrable by courts or firms.").
45. Michael L. Katz & Howard A. Shelanski, "Schumpeterian" Competition and Antitrust Policy in High-Tech Markets, 14 Competition 47 (2005).
46. See, e.g., FTC V. H.J. Heinz Co., 246 F.3d 708, 722-23 (D.C. Cir. 2001) (rejecting as speculative an efficiency justification that a proposed merger would facilitate innovation sufficient to overcome the FTC's prima facie demonstration of likely anticompetitive effects).
47. See, e.g., Thomas J. DiLorenzo & Jack C. High, Antitrust and Competition, Historically Considered, 26 Econ. Inquiry 423 (1988). Evans and Hylton describe the Sherman Act's presumption that naked cartel activity is not justified by the possibility that the cartel's monopoly profits will induce greater dynamic benefits as a judgment that "seems right to us but is not based on rigorous economic theory or empirical work." Evans & Hylton, supra note 2, at 220 n.67.
48. Genzyme Corp./Novazyme Pharms., Inc., FTC File No. 021-0026 (Jan. 13, 2004).
49. Statement of Commissioner Timothy J. Muris, Chairman, Fed. Trade Comm'n, at 7, Genzyme CorpVNovazyme Pharms., Inc., FTC File No. 021-0026 (Jan. 13, 2004), available at http://www.FTC.gov/os/2004/01/murisgenzymestmt.pdf;
50. Fed. Trade Comm'n, Anticipating the 2 1st Century: Competition Policy in the New High-Tech, Global Marketplace ch. 7 (1996), available at http://www.FTC.gov/opp/global/report/gc-vl.pdf.
51. See U.S. Dep't of Justice & Fed. Trade Comm'n, Antitrust Guidelines for the Licensing of Intellectual Property § 3.2.3 (1995), available at http://www.justice.gov/atr/public/guidelines/ 0558.pdf.
52. sec also Matsushita Idee. Indus. Co. V. Zenith Radio Corp.. 475 U.S. 574, 58X- 8° (l')86) ("Any agreement to price below the competitive level requires the conspirators to forgo profits that tree competition would offer them. The forgone profits may be considered an investment in ihe future, lor the investment to be rational, the conspirators must have a reasonable expectation of recovering, in Ihe form of later monopoly profits, more than Ihe losses Mil'- fered.... Absent some assurance that the hoped-for monopoly will materialize, and that it can be sustained for a significant period of time, '[t]he predator must make a substantial investment with no assurance that it will pay off.'
53. For this reason, there is a consensus among commentators that predatory pricing schemes are rarely tried, and even more rarely successful." (quoting Frank H. Easterbrook, Predatory Strategies and Counterstrategies, 48 U. Chi. L. Rev. 263, 268 (1981))).
54. Reiter V. Sonotone Corp., 442 U.S. 330, 343 (1979)
55. (quoting Robert H. Bork, The Antitrust Paradox 66 (1978)).
56. See Michael L. Katz & Howard A. Shelanski, Merger Policy and Innovation: Must Enforcement Change to Account for Technological Change?, in 5 Innovation Policy and the Economy 109, 153 (Adam B. Jaffe et al. eds., 2005).
57. See Timothy J. Muris, Improving the Economic Foundations of Competition Policy, 12 Geo. Mason L. Rev. 1, 17 (2003) (discussing Benjamin Klein's use of case studies as "especially illuminating" because they tied industry-specific facts to the industrial organization economic framework);
58. see also Joshua D. Wright, Benjamin Klein's Contributions to Law and Economics, in Pioneers of Law and Economics 87 (Lloyd R. Cohen & Joshua D. Wright eds., 2009).
59. Michael R. Baye & Joshua D. Wright, Is Antitrust Too Complicated for Generalist Judges? The Impact of Economic Complexity and Judicial Training on Appeals, 54 J.L. & Econ. 1 (2011).
60. Richard A. Posner, The Law and Economics of the Economic Expert Witness, J. Econ. Persp., Spring 1999, at 91, 96.
61. See, e.g., FTC V. Ind. Fed'n of Dentists, 476 U.S. 447, 454 (1986) ("[0]ur review [of the final order by the FTC] is governed by 15 U.S.C. § 45(c), which provides that '[the] findings of the Commission as to the facts, if supported by evidence, shall be conclusive.'... [A]s under the essentially identical 'substantial evidence' standard for review of agency factfinding, the court must accept the Commission's findings of fact if they are supported by 'such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.'
62. Universal Camera Corp. V. NLRB, 340 U.S. 474, 477 (1951)");
63. Toys "R" Us, Inc. V. FTC, 221 F.3d 928, 935 (7th Cir. 2000) ("Our only function is to determine whether the Commission's analysis of the probable effects of these acquisitions on hospital competition in Chattanooga is so implausible, so feebly supported by the record, that it flunks even the deferential test of substantial evidence.
64. Hospital Corp. of America V. F.T.C., 807 F.2d 1381, 1385 (7th Cir. 1986).");
65. Case T-201/04, Microsoft V. Comm'n, 2007 E.C.R. 11-3601,1 87 (Community Courts' "review of complex economic appraisals made by the [European] Commission is necessarily limited to checking whether the relevant rules on procedure and on stating reasons have been complied with, whether the facts have been accurately stated and whether there has been any manifest error of assessment or a misuse of powers.").
66. See, e.g., Consol. Edison Co. of New York V. NLRB, 305 U.S. 197, 229 (1938) ("Substantial evidence is more than a mere scintilla. It means such relevant evidence as a reasonable mind might accept as adequate to support a conclusion."). Accordingly, substantial evidence "must do more man create a suspicion of the existence of the fact to be established .... [I]t must be enough to justify, if the trial were to a jury, a refusal to direct a verdict when the conclusion sought to be drawn from it is one of fact for the jury."
67. NLRB V. Columbian Enameling & Stamping Co., 306 U.S. 292, 300 (1939).
68. To assess the competitive significance of a restraint of trade, we were told in Board of Trade of Chicago V. United Stales, 246 U.S. 231, 238 (1918), a court must "consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable. The history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, [and] the purpose or end sought to be attained, are all relevant facts."
69. Frank H. Easterbrook, The Limits of Antitrust, 63 Tex. L. Rev. 1, 12 (1984).
70. See Katz & Shelanski, supra note 15, at 68 (discussing Roche Holding Ltd., 113 F.T.C. 1086 (1990)
71. Modified, 1996 WL 116250 (Jan. 16, 1996)), where the FTC challenged such a merger because it "found strong evidence to support its predictions that... the relevant product market would develop" from R&D then underway at each firm and that both would be important competitors in that market);
72. United States V. Marine Bancorporation, Inc., 418 U.S. 602, 638 (1974) (concluding "the Government has offered an unpersuasive case on the first precondition of the question reserved in Falstaff - that feasible alternative methods of entry in fact existed").