Edited for publication.
Wednesday, August 16, 2023
Ian Simmons: Hello, everyone. My name is Ian Simmons and I’m a Co-Chair of the O’Melveny & Myers’ Antitrust Group. We are pleased to present to the readership of Antitrust, a panel discussion that originally took place on March 30th of 2023, at the ABA Antitrust Law Section Annual Spring Meeting. The panel was entitled “Trying a Sherman Act Section 2 Case: Best Practices.” The panel was well received and the ABA Antitrust Magazine asked the panelists if they could replicate the discussion.
It is my distinct privilege to introduce the panelists here today. I will start with Bonny Sweeney. Bonny should be well-known to the readership. She is Senior Litigation Counsel at the U.S. Department of Justice’s Antitrust Division. Bonny joined the Justice Department’s antitrust trial team just over a year ago, in July of 2022. She was previously a Partner in the San Francisco office of Hausfeld. Bonny is a truly accomplished antitrust trial lawyer. She has represented clients in some of the most significant antitrust cases in the United States over the past twenty years. She served as a co-lead counsel on behalf of a class of merchants in In re Payment Card Interchange Fee and Merchant Antitrust Litigation, Eastern District of New York, a sprawling litigation against the world’s largest credit card companies. Bonny is currently a member of the trial team for the Department of Justice in a very significant case in the District of Massachusetts where the government challenged the alliance between JetBlue and American Airlines. The court in that case rules for the government, and the matter is currently on appeal.
It is also my distinct privilege to introduce our second panelist, Doug Melamed. Doug, it is I think no overstatement to say, is a legend in antitrust law. He served at Stanford Law School as Professor of the Practice of Law from 2014 until 2022 and has been Scholar in Residence at Stanford since then. From 2009–2014, Doug served as Senior Vice President and General Counsel at Intel Corporation where he was responsible for overseeing Intel’s Legal and Government Affairs and Corporate Affairs departments. Prior to joining Intel in 2009, Doug was for many years a Partner in the D.C. Office of Wilmer Hale, a global law firm that we are all familiar with. He made his mark on antitrust cases, such as In re Rambus and several others. Significantly, from 1996–2001, Doug served in the U.S. Department of Justice’s Antitrust Division as Acting Assistant Attorney General, and before that, as Principal Deputy Assistant Attorney General. Doug had a significant imprint and influence in the last significant DOJ monopolization case to be tried, United States v. Microsoft.
Our third panelist is Christopher Yoo. Christopher is the John H. Chestnut Professor of Law, Communication, and Computer & Information Science, and is the Founding Director of the Center for Technology, Innovation, and Competition at the University of Pennsylvania Carey Law School. Christopher has emerged as one of the world’s leading authorities on law and technology, and he is one of the most widely cited scholars on administrative and regulatory law as well as Intellectual Property law. He has authored five books and over 100 scholarly works. His major research projects include investigating innovative ways to connect more people to the internet, engaging in a comparative law analysis of antitrust law/competition law in China, Europe, and the United States, and analyzing the technical determinants of optimal interoperability in high-technology industries. Before entering academia, Christopher served as law clerk to Justice Anthony Kennedy in the United States Supreme Court and prior to that, to Judge A. Raymond Randolph in the U.S. Court of Appeals for the D.C. Circuit. So, welcome, Christopher.
Our fourth and final panelist is John Roberti. John is a Partner at Cohen & Gresser here in Washington, D.C. He has been practicing twenty-nine years in antitrust litigation advising clients on a wide variety of antitrust issues, monopolization issues, cartel issues, and he is an alumnus of the Federal Trade Commission where he tried monopolization cases. John is regularly recognized as a leading antitrust lawyer by Chambers, The Legal 500, Who’s Who in Competition, Benchmark Litigation, and as a rising litigation star. The “rising,” I’ll say just in jest, I assume was from several years ago. John is also very, very active in the ABA Section of Antitrust Law, and he is currently the Technology Officer for the Section.
Welcome, Bonny, Doug, Christopher, and John.
Before I put the first question, which will start with Doug, I just want to make a couple of preliminary observations.
The Assistant Attorney General at the Antitrust Division has said that “We are in a one-in-a-century inflection point in terms of the reach of corporate power,” and he has admitted that the Antitrust Division is “claiming a mandate to update and adapt our antitrust enforcement to address new market realities.”
FTC Chairwoman Lina Khan, likewise told reporters that her agency would no longer invest in drawn-out settlement negotiations with parties seeking merger clearances or resolving dominance cases, but would instead focus resources on litigating those cases.
Former Deputy Assistant Attorney General Richard Powers made waves when he announced that the Antitrust Division would not shy away from bringing criminal monopolization cases in the right circumstances.
These policymakers are not limiting their ambitions to just filing more cases. Instead, today’s antitrust enforcers aim to expand the ambit of antitrust concern beyond the criteria that dominated jurisprudence over the last half century—price, output, and quality. The new guard contends that a myopic focus on those criteria and the consumer welfare standard they embody is not only inconsistent with statutory and case law origins, but that it also gave rise to decades of underenforcement, an inordinate concern with ‘false positives,’ a legal and economic quagmire in the case law, and a systemic neglect of competitive dimensions that resist measurement or quantification. Antitrust law enforcement has to adapt, the enforcers say, to remedy the sins of the past and to ward off the insidious competitive problems of the future.
Let me start, if I could, with Professor Melamed. It is hard to look at the news these days without seeing stories about monopolization cases. We have three cases relating to Google that will be tried within the next several months; we have cases against Meta; there are cases against Tesla, private cases. Doug, why are we seeing this renewed interest in monopolization antitrust litigation?
Douglas Melamed: I think it is really a confluence of a number of factors. There is a broad populist sentiment in general in the society on both the right and the left which distrusts concentration of power of almost any type. There is increasing awareness of and dissatisfaction with unequal distribution of wealth and economic power. There is an increasingly widespread view supported by some academic research that antitrust enforcement has been too lax over the past twenty or forty years, depending on how you look at it. And there is a particular unease, I think, about the large digital platforms, which are consumer-facing and increasingly important to almost everyone’s lives and are seen as mysterious black boxes that implicate privacy and, on the right, concerns about censorship; and those concerns have been exacerbated by the recent concerns about artificial intelligence.
There are a number of features of the platforms that I think are important and not talked about a lot. The digital platforms are now the dominant sources of communications and media. U.S. antitrust law, going back to the 1930s, has I think been especially aggressive in applying antitrust laws to the then-dominant communications and media platforms, whether they were the motion picture theaters, the broadcast television networks, cable television, or now the internet. I think all those factors, and perhaps others as well, come together to create a moment when attention is focused on big institutions and perceived economic power.
Ian Simmons: Bonny, would you like to speak to this question of why we are seeing this proliferation of monopolization cases and an apparent confluence of concern for dominance both on the right, such as from Senators Hawley and Cruz, and on the left, such as from Senators Warren and Klobuchar? Would you like to address that and pick up on anything Doug said?
Bonny Sweeney: Yes, thank you.
I would just like to start by saying that the views I express do not purport to reflect those of the U.S. Department of Justice and do not indicate what the Department would do in any particular situation.
I would agree with Doug that a whole confluence of factors has led to this increased interest in the enforcement of the antitrust laws at the private level, at the state level, and at the federal level. I think it is in response, in part, to underenforcement of the antitrust laws over the past thirty years; and certainly, as Doug pointed out, there is a concern about the power of very large digital platform firms. But, it is not just the large digital platform firms that are subject to increasing antitrust scrutiny. We see increased antitrust enforcement all over the economy, and it is a welcome development.
Ian Simmons: Christopher, Jon Baker’s book, The Antitrust Paradigm—just picking up on something Bonny mentioned—talks about the ubiquity and prevalence of market power in many sectors of the American economy. Do you agree with that observation; and does that, just picking up on the idea of why monopolization litigation is now de rigueur, explain why are we seeing so much of it? Do you think there is indeed a market power problem that may be at the root of this?
Christopher Yoo: There are many ways to frame why antitrust is receiving much more attention right now.
One way is to frame it in terms of market power. Another way is to frame it in terms of innovation. Increasingly, instead of focusing exclusively on static efficiency issues—such as output, quantity, price, and quality—which reallocate existing resources to reach the production possibility frontier, antitrust law is being asked to promote dynamic efficiency by promoting the development to push that frontier out. To date, however, the tools we have developed have been better suited to evaluate static efficiency than to evaluate dynamic efficiency.
A lot of this can be tied, for example, to the debates that happened in the 1950s, 1960s, and 1970s, where we moved away from the structure-conduct-performance paradigm, under which we viewed size as inherently suspicious, in favor of an effects analysis. At that time, we confronted numerous proposals to return to the structuralist paradigm, as evidenced by the Neal Commission, the Areeda and Hovenkamp no-fault monopolization proposals, Philip Hart’s proposed Industrial Reorganization Acts, and President Carter’s National Commission for the Review of Antitrust Law and Procedures. All of these efforts proposed reevaluating whether we should make persistent monopoly power or persistent market size a basis for liability even absent some form of exclusionary conduct.
Congress and the courts have never took that step, primarily because when you take innovation into account, pure size is ambiguous. Size can be the result of anticompetitive acts. It can also be the result of successful competition on the merits.
One of the reasons Congress never enacted the legislative changes that were proposed in the 1970s was because of the concern that it would reduce firms incentive to innovate by penalizing firms that innovated too well.
And so, we end up in a familiar place in antitrust law, which is that when confronted with ambiguous conduct, we look for filters that separate out the conduct that is anticompetitive and deserving of antitrust sanction from the kind of procompetitive conduct that antitrust is looking to encourage.
My hope is that we will keep working on more sophisticated understandings, evidentiary requirements, and questions of proof that will successfully separate the wheat from the chaff in ways that allow us to curb the problems without sacrificing the benefits of innovation.
Ian Simmons: Very interesting, Christopher. If I could just quickly follow up—I want to bring John into the conversation slightly shifting gears to private litigation—Christopher, an interesting and intriguing notion about the antitrust community being besotted perhaps with market shares or size.
The D.C. Circuit in the Microsoft case—and it’s incredible that now it’s twenty-two years ago we had the last significant Department of Justice published opinion in a monopolization trial on the merits—the D.C. Circuit there said: “Once a product or standard achieves wide acceptance, it becomes more or less entrenched. Competition in such industries is ‘for the field’ rather than ‘within the field,’” and it cites Harold Demsetz [Why Regulate Utilities?, 11 J.L. & Econ. 55, 57 & n.7 (1968)].
Do you believe the ubiquity of the “winner take all” phenomenon is at the root of the Section 2 enforcement agenda and why we are seeing perhaps a coalescence of the left and the right. Is this something that is empirical or is this just fodder for conferences?
Christopher Yoo: I think that concerns about winner-take-all markets are often overstated. Many things that look extremely threatening in the here and now in retrospect end up not being perhaps as concerning as we thought.
For example, I started teaching law around the time of the AOL/Time Warner merger, which at the time was widely regarded as the end of history, when it was really just the end of $240 billion in Time Warner shareholder value. AOL looked like this behemoth that was unstoppable, and they were just basically sold for a song. In considerably less than a generation, they were a shadow of their former self.
When you think about even Facebook, if we were talking about them even just a few short years ago, we would perhaps be expressing stronger concerns about their market position than we do now, as we would also with, say, Twitter.
We can also cite other examples pointing in the other direction. Courts once assumed that MySpace was a monopoly. When Susan Crawford wrote her book, Captive Audience, in 2013, she speculated whether Netflix would still exist by the time the reader was reading her book. Such pessimism seems strange now that Netflix has turned out to be such an obvious success, but at the time Netflix was transitioning from mail to online distribution, nothing was certain. And even now, it is facing much stronger competition from other streaming platforms.
In short, I think it can be a mistake to be too focused on the here and now. Instead, we should make sure to take the long view with the understanding that things can change rather rapidly.
But, at the same time, I think there is a wonderful question about whether the nature of competition has changed. People often talk about network effects as if they inevitably lead to “winner take all” markets. We often forget that when multihoming is possible, you are not choosing only one network; you can actually participate in multiple ones. It is thus a mistake to equate network effects with ‘winner-take-all’ markets,” and we learn that features like multihoming and gateways between networks can actually cause those things not to happen. Indeed, there is a variety of other proprietary solutions and aspects of private ordering that can dissipate a lot of those problems.
At the same time, ever since Joseph Schumpeter talked about the “gales of creative destruction,” economists have considered whether certain industries, particularly high-tech industries, will not see multiple actors competing within a market for customers but, rather, a succession of monopolists that will dominate a market of time because of scale economies or some other market feature.
I have always been inspired by a chapter that Tim Bresnahan wrote before he became Deputy Assistant Attorney General and chief economist during the Microsoft case, in which he said that network effects made it inevitable that there would be a large operating system monopolist, whether its name was Microsoft or not. When that is the case, you will see two forms of competition: one is the different dominant players of the time trying to take over each other’s territory by rearranging the vertical chain or production, the other is the kind of competition you mention, Ian, the Schumpeterian idea of the next big dominant invention that allows another player to displace one of those levels.
If so, antitrust law can either increase the level of incremental innovation or accelerate the arrival of the next big change. His reaction was that market seemed to be doing just fine in promoting incremental innovation, and he was skeptical of the government’s ability to predict what the next big thing would be in order to bring it about faster before it was already settled, at which point the government would simply be jumping on a bandwagon that was already moving.
So, it is an interesting question to me that someone as empirically based and enforcement-friendly as Tim Bresnahan, having served as the government’s expert, took very seriously the idea that this type of competition may emerge in the new economy.
More fundamentally, your question raises a great point: just because something could happen, doesn’t say much about the likelihood that it is happening or will happen. As a result, antitrust must make sure to employ terms of proof and evaluation that make sure that the alleged anticompetitive outcome is actually happening, the type of competition we are in, and how should we incorporate that into antitrust law. I would say that we have a lot more questions than answers at this point in that area.
Ian Simmons: Having more questions than answers seems to be an occupational hazard with antitrust.
A fascinating point you make about multihoming is not synonymous necessarily with lock-in, but perhaps we can return to that.
Let me bring John into the conversation, and then I would invite Doug and Bonny to weigh in on anything that has been said to date. John, how if at all, has the government’s renewed interest in antitrust affected private actions either in quantity or quality?
John Roberti: It’s a really good question. I take issue slightly with how we are characterizing the government’s interest in monopolization. We talked about forty years of underenforcement, and that has been a mantra. We hit the low point with the decision in the Trinko case, which is actually a narrow holding that is being interpreted as a sweeping rule because of its extensive dicta that muses on when a refusal to deal with a competitor is actionable.
The true bottom point for enforcement came with the issuance of the DOJ’s Section 2 Report in 2008, which was rapidly withdrawn when the Obama Administration took office. This signaled a policy change and a willingness to view Section 2 more broadly. The government was interested in monopolization cases during the Obama Administration and the Trump Administration for that matter; it’s just—going back to the title of the panel—trying those cases became very, very difficult. So the renewed interest of the government isn’t really a renewed interest in monopolization; it’s a renewed interest in trying the cases. That’s why you bring in people like Bonny Sweeney here to try cases, right?
Having the government show the courage to try a monopolization case encourages the private bar to do it as well, and in many ways the private bar has been out ahead of the government in bringing monopolization cases and thinking about these issues.
So I’m not sure there is necessarily a cause and effect between the government’s recent cases and the cases being brought by the private bar. I think there has been a recognition among enforcers for years that the monopolization standards have been too narrow. I think to the extent that this is a new government revelation it has to do with the fact that this is a new set of enforcers who just, for whatever reason, aren’t nearly as timid about losing cases.
Ian Simmons: Fascinating.
Before I slightly shift gears a little bit to go to a doctrinal question, Doug or Bonny, do you want to react to any of the comments thus far?
Douglas Melamed: I completely agree with John and with the agencies, and even going back to some of the folks in the Trump Administration—that litigation of government cases is better than settlements with conduct remedies and even in many cases structural remedies, for lots of reasons.
The most important one—I certainly felt this way during the Microsoft case—is that the government can deal with only the tip of the iceberg. The antitrust laws apply to almost all commercial conduct that affects interstate commerce, so the real contribution of the Justice Department is not to get an injunction against Firm X or Firm Y; it is to establish good legal principles that, armed with the private bar and treble damages, can be effective deterrents going forward.
Ian, I would like to comment briefly on Christopher’s comments about innovation and network effects.
First of all, yes, when you focus on innovation rather than the static welfare effects of avoiding deadweight loss, you are getting into more complicated economics. It’s almost certainly true that the prospect of monopoly power ex post can be an ex-ante incentive to investments in innovation, but I don’t think one can conclude from the economic literature that possession of monopoly power promotes innovation. There is some support in Schumpeter and more recent work that size promotes innovation, both because it gives the potential innovator scale and because it increases the ability of the innovator to appropriate the fruits of its innovation if intellectual property and other protections are not sufficient for that purpose; but that is different from market power.
More broadly, Christopher was talking about network effects and dynamic welfare as opposed to static welfare. In effect, as I understand it, he was talking about a broader and somewhat different notion of economic welfare. I would like to make two comments about that.
First, I think the current debate is not really about economic welfare. I think the current debate is about whether economic welfare or something else, some more Jeffersonian vision, should be driving antitrust.
My second comment concerns the question whether antitrust should promote competition for the market or in the market. Antitrust law is not industrial planning. It rests on the contrary premise that competition and the market should determine the direction of the economy. So antitrust law is limited to prohibiting bad conduct that harms competition, and the question is, “What is bad conduct?” It seems to me that bad conduct is conduct that without some justification interferes with market forces that would, among other things, let the market decide when and where competition for the market is a superior investment rather than competition in the market.
Ian Simmons: Good thoughts Doug, thank you. Christopher, you have your hand up. Please proceed.
Christopher Yoo: There is a theoretical literature suggesting that firms with market dominance may be more innovative, exemplified by Gilbert and Newbery’s work on rent dissipation incentives.
There is also a very large empirical literature on the subject. You mentioned market size—that’s really the Arrow versus Schumpeter debate where Arrow says smaller firms are more innovative and Schumpeter says larger ones are more innovative.
But there is actually empirical literature that measures that not only in size but in terms of market share. The relationship between market concentration and innovation has been called the second most heavily studied question in industrial organization, and I think every survey that I have read has really said, “This literature is inconclusive”—not inconclusive because you don’t get results, but rather inconclusive because you get too many results. The relationship is not a simple one between both size and innovation and concentration and innovation, and there are disputes over how you measure innovativeness; but there are usually some other factors brought in, and we haven’t really settled out what they are.
But the one thing that I think you are hinting at, Doug, which I think is important too, is even when you take innovation seriously, we have to think of it as a tradeoff. Bill Baumol has said that the fact the long-run benefits from dynamic efficiency amortize over time makes them inherently more important.
I think a more balanced approach would really treat innovation as a tradeoff that tolerates short-run static efficiency losses in order to obtain long-run dynamic efficiency gains, as is often talked about in patent law. This tradeoff must be calibrated properly to make sure consumers benefit. It is not always going to go on the side of static efficiency, and it is not always going to go to the side of dynamic efficiency. We have to figure out a framework to bring both sides together.
Doug’s comment about there being no benefit right now from market power is reminiscent of the debate over the no-fault monopolization proposal that Areeda and Turner advanced in the 1970s. The problem is that firms decide whether to invest in innovation long before they know what the outcomes are. So, the real question from an innovation standpoint is: What would penalizing a firm simply for holding monopoly power do to the incentives to innovate ex ante when people are undertaking the investments and are forecasting their expected returns. If firms can be penalized simply for being large, even innocent firms will necessarily have to adjust their prediction by what possible antitrust liability they might face if they are too successful at competing on the merits. This penalty on innovation is one of the reasons antitrust law has never adopted no-fault monopolization and why monopolization has always included an exclusionary conduct element to make sure that liability attaches only when a firm does something to obtain or to maintain a monopoly beyond what would normally be determined competition on the merits to serve as a filter to separate procompetitive from anticompetitive outcomes.
Ian Simmons: I want to come back to all of this—innovation, how do we measure it; injury; and exclusionary conduct, how do we define it—and we’ll be coming to that in just a minute.
But before we progress, I want to ask Bonny: Doug alluded to the debate about the objectives of antitrust and he mentioned the consumer welfare standard. Tell us what is the consumer welfare standard and is it the appropriate standard?
Bonny Sweeney: We have been talking about underenforcement of the antitrust laws over the past thirty to forty years, and part of that has to be attributed to the rise of the consumer welfare standard as it was popularized by Judge Bork in The Antitrust Paradox in 1978.
Remember that the consumer welfare standard has never been adopted by the U.S. Supreme Court—it has been mentioned by it—but, the Court has never embraced it. Nevertheless, this standard has been used by lower courts to justify a narrow view of antitrust enforcement that is focused on short-term price and output effects. I think that has helped lead to underenforcement.
This focus on short-term price effects on consumers ignores other benefits of competition—such as innovation, quality, and variety—and it also tends to leave out certain groups, like the groups who purchase inputs for their products—workers, farmers, and small suppliers, for example.
There is a recent example of this in the Ninth Circuit. In a case called PLS.com, the district court dismissed a lawsuit by one competitor against another competitor on the ground that the plaintiff had not adequately alleged antitrust injury because it had not alleged direct harm to the “ultimate consumers.” Although the competitor alleged that it was injured by the anticompetitive conduct (in addition to alleging harm to competition), the court held that was not enough.”
The Ninth Circuit reversed. The Department of Justice submitted an amicus brief in that case. The Ninth Circuit held that a business that uses a product as an input to create another product is a consumer of that input for antitrust purposes.
This decision illustrates how the consumer welfare standard has been, perhaps, misunderstood, and certainly construed in a way that is very limiting in antitrust enforcement.
Widespread recognition of the shortcomings of the consumer welfare standard is one of the reasons why we are seeing greater enforcement across the board in antitrust.
Ian Simmons: John, do you agree with Bonny that is perhaps at the root of what I think you identified as chronic underenforcement over the past several decades of Section 2? Do you think the consumer welfare standard has been one way or another at the root of that?
John Roberti: Yes. I take Bonny’s last point to be really important, which is it’s not just the consumer welfare standard; it’s the very, very narrow view of what is consumer welfare.
Imagine a vertically integrated healthcare company that drives its downstream competitors, say community pharmacies, out of business by under-reimbursing them. In a way, that is good for consumers because consumers are paying lower prices, but the consumers also lose the quality that might come with being able to go to somebody who is going to spend time with them and talk to them about their medication as opposed to getting their medication in the mail.
I think the narrow view of the consumer welfare standard is that a lot of defendants would suggest is “Tough luck if we lose the community pharmacies, that’s okay, because we’ll have lower prices.”
I think that view is incorrect as a matter of law. As a practical matter, however, if you want to see additional antitrust enforcement, you cannot be slavish to short-term price and output effects.
Ian Simmons: Let me try to merge my first line of questions to the panelists, and whoever wants to go first can go first on this. With the increased interest in monopolization cases and consumer welfare—we want low prices, lots of products, and good quality—we see the antitrust cases against the high-technology firms, and many of their products are free to use—Meta’s products; or Google search, I don’t pay Google to type on that search bar. What is the competition problem, monopolization problem, with industries with free products?
Douglas Melamed: The Microsoft case was about efforts taken by Microsoft to undermine the competing Netscape browser. Both that browser and Microsoft’s browser were free—at least free in the sense that that term is normally used, meaning distributed to consumers with a zero or nominal dollar price.
Of course nothing is free. Google is not free—I give them time, attention, and data. So in one sense it is misleading to talk about free goods.
But the larger reason that “free” is not a safe harbor is the idea that, if there is not a price effect, it is not an antitrust problem rests on a fundamental misunderstanding of antitrust law. It’s a misunderstanding that informs much of the criticism of the consumer welfare standard.
Bork brilliantly named it the consumer welfare standard, but it was never a consumer welfare standard. What the consumer welfare standard means in antitrust law is economic welfare. It means that antitrust law is about prohibiting conduct that impairs competition and thereby impairs economic welfare.
I think that’s a good standard and that we should not depart it. The attack on it—based on the idea that it’s all about price, and all about the short term—is nonsense.
Antitrust law is—and should be—concerned about anticompetitive conduct that increases or maintains market power, because it is market power that by definition means harm to the competitive process and that enables firms to take actions that are inconsistent with economic welfare. And we are concerned about free products, just as we are concerned about costly products, because, as Microsoft teaches, anticompetitive conduct aimed at free products can lead to an increase in market power.
John Roberti: I just want to underscore what Doug said about the consumer welfare standard. That is 100 percent right. If you are trying a monopolization case, the last thing you want to do is come in and say, “I want to blow up the standard. I want to do something entirely different.”
For the most part, what plaintiffs and what the government are really trying to do is to get back to the true meaning of the consumer welfare standard, which I think Doug articulated very well: it’s overall economic welfare; it’s not just short-term price effects and output effects.
Christopher Yoo: I agree with Bonny and John that the consumer welfare standard should be about economic welfare broadly conceived.
As Doug mentioned, there is a broader discussion that wants to move beyond economic criteria to take into account a broad range of nonecomonic factors.
I find it telling that many people who want to see more vigorous antitrust enforcement still support the consumer welfare standard and reject bringing in noneconomic considerations.What I find fascinating is that we can broaden antitrust enforcement within the economic paradigm by looking at more than just whether prices are too high. John, your example of the pharmacies is an excellent one. You also see in labor monopsony cases, in which employers use their market power to underpay labor. This creates economic inefficiency along the vertical chain of production even though it leads to lower end prices for consumers. I would say that even orthodox antitrust law is well positioned to find harms that cannot always be measured in terms of lower prices.
Antitrust law can look to other indicators. Consider, for example, the Third Circuit’s Uber case, which upheld the dismissal of taxi companies’ attempted monopolization claim. Rather than looking at prices, the court based its decision in part on whether the total number of vehicles offering rides went up or down.
So, the fact that taxi drivers found themselves squeezed was simply the result of a different business model that increased the level of competition and created net economic benefits that we can measure.
Ian Simmons: All right.
Christopher Yoo: A quick thought to go back to what you were saying, Ian, is that a lot of people seem to regard markets with zero prices as an unprecedented problem that antitrust does not know how to address.
My very first article was written about broadcast television, which, like much of the modern Internet was entirely an advertising-supported business. The fact that consumers paid zero prices did not stop enforcement officials from bringing antitrust cases based on monopsony power against advertisers and monopsony power against program suppliers. These cases show conventional antitrust techniques are well equipped to handle zero-price markets. We just need to recover the literature and precedents on these issues.
Ian Simmons: Fascinating. Of course, to the consumer turning on the television broadcast, it was free, at least in pre-cable days, over-the-air.
Our panel is called “Litigating Best Practices for Trying a Section 2 Case,” so I want to move a little bit from the stratosphere. As the readership knows, there are few areas of antitrust law more conceptual than Sherman Act Section 2—that’s why I love it, it’s highly conceptual—and yet the concepts have to persuade someone wearing black robes or a jury of six or twelve.
I want to move to really a core issue, a vortex, in trying Sherman Act Section 2 cases, which is the issue of exclusionary conduct, a fascinating body of law, and a fascinating area to discuss.
But there are few areas of Sherman Act Section 2 law that I find more vexing. How do you distinguish lawful exclusion which results from competition on the merits from conduct that you are going to label “exclusionary?”
I want to start with Doug on that. What is exclusionary conduct and what is the guidance? How do I know where that line is drawn?
Douglas Melamed: I think everyone has a different way of putting it. Mine is an inference that I have drawn from what I see in the cases, the statute, the legislative history, and so forth. It’s this: all antitrust violations—and this is certainly true of Section 2—have at their core two elements:
The creation or increase of market power compared to the but-for world. That means that, in order to be exclusionary conduct, conduct has to do something to weaken the discipline of rivals. In an exclusionary conduct case, we are not talking about agreeing with the rivals; we are talking about, in effect, imposing on them circumstances that undermine their ability to be a discipline on the defendant and therefore enables the defendant to have more market power than it otherwise would have. That is the first element.
The second element is that the conduct must be anticompetitive, not just exclusionary. When Apple built the iPhone, it drove Motorola and Nokia out of the mobile phone business. That was exclusionary conduct, I suppose, but it certainly wasn’t anticompetitive conduct.
I don’t know what anticompetitive means, but I think I know what procompetitive means, or at least can infer that from what cases teach us and what economics teaches us. Procompetitive conduct is conduct that improves or is likely to improve product quality or reduces or is likely to reduce costs or above-cost prices. And by the way, the first two of those benefits could be by reason of innovation or something else, like investing more money in quality control at the plant. So, if you have conduct that excludes someone and doesn’t have the prospect of providing any of those three benefits, it is anticompetitive conduct.
Ian Simmons: So anticompetitive in your mind is what is left behind once you go through those three filters; is that a fair statement?
Douglas Melamed: Yes.
Ian Simmons: Let me ask if there are any comments on Doug’s definition of exclusionary from the panelists.
Christopher Yoo: I really like Doug’s proposal because it requires both an increase in market power and no prospect of improving quality, production, and cost. I think that is an extremely useful way of thinking about exclusionary conduct.
It reminds me that the late Clayton Christensen of the Harvard Business School pointed out that modern innovation is often business model innovation rather than a new invention or new scientific development.
What Doug’s definition underscores is that changes are often just a better way of doing business, and we are seeing that more and more in the tech platforms. I take Doug’s test to allow that if someone does an improvement in quality or cost—and I think the iPhone example is an excellent one—that is not going to be a sufficient claim even if it has the effect of weakening their rivals and even if it allows the innovating firm to charge extremely high margins and achieve an extremely strong market position. Any harm to rivals achieved by a revolutionary improvement in quality wouldn’t satisfy Doug’s test.
The concern I have about some of the cases, particularly the ones I see in Europe, is an inordinate focus on evidence of harm to rivals without undertaking the kind of inquiry that Doug is putting in.
Ian Simmons: But let me press on that a bit. Maybe Doug, Bonny, or John want to react to this. On the cost element, whose cost structure are we talking about? Are we living in a world with “winner take all” or are we competing for the field but we are not competing for a slice of the field, and the big firm has a lower cost structure and the new entrant has a higher cost structure, and the big firm does something vis-à-vis the lower new entrant firm with a higher cost structure, whose cost structure—I know the “equally efficient competitor” logic, but how does that map on to how we think about cost structure? Whose cost structure is relevant here? The new entrant by definition does not have the scale of the big one, and so if it is being predated, so to speak, in a way that forces it to exit, is that a problem?
Douglas Melamed: Let me take a stab. I think the one complication to what I said is that some kinds of conduct—and inventing the iPhone is probably this—hurt rivals only by shifting demand.
But other kinds of conduct can hurt rivals by raising the rivals’ costs. Suppose Apple in order to build the iPhone goes out and buys up a bunch of raw materials—not predatorily; it needs them to build a better product or to reduce its costs and thus it prices and uses all of the raw material—and in so doing it increases the price that its rivals face when they buy needed raw materials. Or suppose Apple enters into exclusive dealing arrangements, or something like that, that both provide those benefits and increase its rivals’ costs. And suppose further that the conduct in question can be shown to really be necessary to achieve the benefits I assumed.
Then you have the question: What do you do when you are not shifting demand but you are both increasing your rivals’ costs and creating a real benefit? What does the antitrust law do?
The courts tend to punt on this. Often courts say things like “balance” harms and benefits, but no one knows what that means. One way that courts have tried to resolve that question is by saying: “Well, if the conduct would not disadvantage someone equally efficient, we are not going to worry about it. So if you engage in some complicated pricing scheme or loyalty discount or whatever pricing strategy, we are not going to worry about that unless it would exclude an equally efficient rival.”
I understand why courts say that because it enables the economists to draw little graphs and come to easy answers, and that might be a good enough reason. But I am not sure that, as a theoretical matter, that is a very sound place to draw the line precisely because of the reason you suggested in your question, Ian. What if the little guy has really built a better product and with time could grow to be more efficient than the incumbent, but it is nipped in the bud before it has an opportunity to achieve that because it does not have enough scale to stay in business in the face of conduct that would exclude rivals that are less efficient than the defendant. I don’t think we should be indifferent to the plight of that little guy.
But that question really doesn’t change the basic framing of what we are thinking about here when we ask, “What is procompetitive conduct and what is anticompetitive conduct?”
Ian Simmons: Well said, Doug.
Christopher Yoo: What I find fascinating is that the possibility that a less efficient rival may provide competitive benefits even if it is less efficient. This is an underappreciated corollary to Oliver Williamson’s famous efficiency defense, in which he said that reductions in costs may create welfare benefits sufficient to offset any welfare losses created by the potential rise in price from the lessening of rivalry.
There is a limited amount of writing pointing out that the flip side must also be true, that is the welfare benefits from the additional rivalry more than offset the welfare losses resulting from the fact that the competitor may be less efficient. In this manner, an effects analysis would take the less-efficient rivals as they are while taking into account the net benefits of price competition and netting out the countervailing effects. If we are going to take seriously this notion of efficiency, it should work both ways. It can’t be a one-way ratchet.
And we also have to bear in mind that the whole literature on product differentiation tells us how smaller rivals could survive even when they face cost disadvantages by pursuing what I think of as the boutique solution, in which small providers who have lower volumes and worse cost structures can survive by selling a narrow range of goods tailored to the preferences of a small group of consumers, and then charge them more for giving them exactly what they want. This allows firms to tap into a source of welfare that is often underappreciated in the price/quantity space, which is the benefits of providing consumers with products that are a better fit with what they want.
Ian Simmons: Let me shift gears, and maybe I could start with Christopher on this one, and I want to keep us on target. Christopher, on this whole idea of exclusionary conduct we are seeing a debate play out in some of the various cases that are pending now—and we have seen it in cases that have been submitted, and courts come out different ways on this—involving the so-called “monopoly broth” theory. In other words, a plaintiff is alleging there are five pieces of conduct that the monopolist did that are exclusionary; and defendants like to say, “Antitrust is a tort and the plaintiff is not showing a causal flow from each individual act; it is aggregating them all, it is doing monopoly broth, and the plaintiff is being very imprecise on the causal flow from any subset of the five elements of conduct.” What’s your view on this monopoly broth debate?
Christopher Yoo: I think that the monopoly broth theory can be implemented in a manner consistent with the idea of an effects analysis where you look at the overall impact on the conduct. The two watch-outs are: (1) some conduct is per se legal; for example, innovating in your product and unilateral refusals to deal. If so, adding them into a broth should not add anything.
But what bothers me more is when the broth consists of conduct that is completely ambiguous, any case must be based on a coherent theory about how the combination of harms actually hurts competition. Otherwise, parties can hand wave at a lot of conduct that does not sound very good to a jury. We all know that business involves a lot of conduct that is not very attractive in the cold light of day, but is consistent with competition on the merits.
To avoid this type of guilt by association, plaintiffs should be required to put forward a coherent theory and evidence of how the different types of conduct combine to harm consumers and to propose remedies that address those problems if we are going to prevent the monopoly broth approach from just being an excuse for sweeping in a bunch of bad monopolization cases that couldn’t live up to their burden of proof.