Antitrust Treatment of Exclusionary Conduct in Network Markets

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Antitrust Treatment of Exclusionary Conduct in
Network Markets
2
General Standards
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Overview of Statutes

• Sherman Section 1
• Makes illegal every contract, combination or
  conspiracy in restraint of trade
• Courts have limited it to unreasonable restraints
  
• Sherman Section 2 specifies two offenses that can
  be committed by a firm acting unilaterally
• Monopolization
• Attempted Monopolization
• Clayton Section 3 covers exclusive dealing and
  tying.
• More stringent than the Sherman Section 1,
  particularly for exclusive dealing.
• Robinson-Patman covers price discrimination.
• Slightly weaker standard of proof required than
  under Sherman Section 2. Brooke Group at 222.

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Monopoly power is necessary for monopolization.

• Absent monopoly power, there is a belief that the
  market will sort things out on its own.
• Defining Market Power
• The power to control prices or exclude
  competition.
• Not the economists definition lots of market
  power.
• Finding Monopoly Power
• Typically inferred from high share of a relevant
  market
• May be inferred from a suppliers conduct or
  performance (e.g., profitably set prices above
  competitive level)
• Other market characteristics can also affect the
  analysis (e.g., low entry barriers)

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Schumpeterian competition challenges antitrust.

• Dramatic innovation may lead to sweeping changes
  in market positions and industry structure.
• Predicting future market outcomes can be
  difficult.
• Raises important issues about the interpretation
  of current market positions and actions.
• Market structure may be a series of temporary
  monopolies.
• Antitrust opponents focus on temporary.
• Are hopes of competition misguided?
• Competition within the market
• Competition for the market

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Were all Schumpeterians now.

• The government and Microsoft appeared to agree
  about the potential for dramatic change in the
  software industry.
• The governments concern was that Microsoft was
  attempting to make its monopoly persist through
  exclusionary and predatory tactics.
• Might have been a particularly important time
  because of the importance of generations and
  paradigm shifts.
• Microsofts claimed it was competing in the face
  of huge forces of change in the industry.

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Anticompetitive conduct is also necessary.

• Monopoly power alone is not an offense.
• To safeguard the incentive to innovate, the
  possession of monopoly power will not be found
  unlawful unless it is accompanied by an element
  of anticompetitive conduct. Trinko

8
Exercising market power in pricing is generally
legal.

• The mere possession of monopoly power, and the
  concomitant charging of monopoly prices, is not
  only not unlawful it is an important element of
  the free-market system. Trinko
• The Robinson-Patman Act condemns price
  discrimination only to the extent that it
  threatens to injure competition. Brooke Group
  at 209.

9
Antitrust concern is with harm to competition,
not competitors.

• Pro-consumer, efficient actions often harm
  rivals.
• The challenge for an antitrust court lies in
  stating a general rule for distinguishing between
  exclusionary acts, which reduce social welfare,
  and competitive acts, which increase it.
  Microsoft at 26.

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General Test for Exclusion

• DOJ view in Trinko conduct is not exclusionary
  or predatory unless it would make no economic
  sense for the defendant but for its tendency to
  eliminate or lessen competition.
• Similar views stated in academic literature and
  many court decisions.
• Thus, exlcusionary comprehends at the most
  behavior that not only (1) tends to impair the
  opportunities of rivals, but also (2) either does
  not further competition on the merits or does so
  in an unnecessarily restrictive way. Aspen
  Skiing at 605 n.32., quoting Areeda and Turner.

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Predatory Pricing
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Schematic of Predation
Offer high value to consumers today to weaken
ability of rivals to offer consumers value in the
future
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Predatory Pricing

• General Standard
• Pricing that involves short-run losses that would
  make no business sense but for the long-term
  private benefits of eliminating or weakening a
  rival.
• Brooke Group Two-prong Test
• Price below some appropriate measure of cost
• Probable recoupment

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Brooke Group Prong One

• First, a plaintiff must prove that the prices
  complained of are below an appropriate measure of
  its rival's costs. Brooke Group, 222.
• Rationales
• Concern with chilling price competition.
• Some courts interpret below-cost pricing as
  indicative of a lack a legitimate business
  rationale.
• Some courts believe this is an equally efficient
  rival test.

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Brooke Group Prong Two

• a demonstration that the competitor had a
  reasonable prospect, or, under 2 of the Sherman
  Act, a dangerous probability, of recouping its
  investment in below-cost prices.
• Rationales
• Reality checkmaybe.
• Consumer welfare standardno.

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Network Effects Complicate the Analysis of
Predatory Pricing

• Network effects increase likelihood of recoupment
  and thus predation.
• However,
• Network effects also create legitimate
  incentives to set low prices
• With two-sided markets, looking at just one side
  of the market can be misleading (similar issue
  with American Airlines) and
• Networks markets are inherently dynamic, which
  creates risks for static policies.

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Refusal to Deal
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Refusal to Deal

• Strong presumption of legality
• the act does not restrict the long recognized
  right of a trader or manufacturer engaged in
  entirely private business, freely to exercise his
  own independent discretion as to parties with
  whom he will deal. Colgate at 307.
• But
• The high value that we have placed on the right
  to refuse to deal with other firms does not mean
  that the right in unqualified. Aspen Ski at
  601.
• In fact, the quotation from Colgate starts with
  In the absence of any purpose to create or
  maintain a monopoly, Colgate at 307.

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Su casa es mi casaThe Essential Facilities
Doctrine

• Supreme Court has never recognized essential
  facilities doctrine.
• Especially not for unilateral conduct by an
  unregulated supplier.
• But some circuits do.
• Rivals granted access if that access is essential
  to their being able to compete.

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The economics of mandatory access are complex.

• Effects on original investors incentives
• Reduced rewards to innovation
• Effects on follow-on investors incentives
• Reduced for substitute facilities
• Increased for complementary facilities
• Team problem with complements.
• Its all about the money.
• Focusing solely on total denial or exclusion is
  too limitedlook at the price.
• Getting the price right can be very hard

21
Aspen Skiing had some very striking features.

• Aspen Skiing is at or near the outer boundary of
  2 liability. The Court there found significance
  in the defendant s decision to cease
  participation in a cooperative venture. See
  id.,at 608,610 611.The unilateral termination of
  a voluntary (and thus presumably profitable )
  course of dealing suggested a willingness to
  forsake short-term profits to achieve an
  anticompetitive end. Ibid. Trinko
• Similarly,the defendant s unwillingness to
  renew the ticket even if compensated at retail
  price revealed a distinctly anticompetitive
  bent. Trinko

22
Exclusive Contracts
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Exclusive Contracts

• High threshold for attacking if a single supplier
  (e.g., not U.S. v. Visa USA et al.)
• Must involve foreclosure from a significant
  percentage of a relevant market. Tampa Electric.

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Tying Bundling
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The Ins and Outs of Tying

• Tie In Condition sale of A on purchase of B.
• Tie Out Condition sale of A on not purchasing B
  from a rival.
• Tying out is more problematical
• With IP, MC 0 and bundling can be efficient.

26
Tying is per se illegal if the rule of reason
shows it is harmful.

• Elements to a per se tying violation
• (1) the tying and tied goods are two separate
  products
• (2) the defendant has market power in the tying
  product market
• (3) the defendant affords consumers no choice but
  to purchase the tied product from it and
• (4) the tying arrangement forecloses a
  substantial volume not share of commerce.
• Microsoft at 70 citing Eastman Kodak Co. v. ITS
  and Jefferson Parish.

27
Is there an exception for Microsoft?

• We hold that the rule of reason, rather than per
  se analysis, should govern the legality of tying
  arrangements involving platform software
  products. Microsoft at 69.
• Microsoft Court cites
• physical integration
• benefits to makers of complementary products, and
• rapid technological progress.

28
Monopoly Leveraging

• Second Circuit condemned behavior that merely
  gave rise to a competitive advantage in a
  second market.
• This approach would very likely harm consumers
  and overall efficiency by denying firms the
  ability to take advantage of economies of scope.
• Supreme Court arguably struck this down in
  Spectrum Sports.
• Monopolization is required. Leveraging is not a
  separate antitrust offense.
• Big issue in the European Union

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Specific Practices in U.S. v. Microsoft
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Allegedly Bad Behavior

• Tying (Bundling) Predation
• Integration of IE with Windows 95 and later
  versions made incremental cost of IE equal 0.
• Paid Apple to adopt IE.
• Government way to protect OS monopoly by
  blocking two-stage entry of Navigator platform
• Microsoft same product and, if not, efficient
  distribution

31
Allegedly Bad Behavior continued

•  Polluting Java
• Developed a version of Java that fully ran only
  on Windows.
• Government polluting to destroy standard.
• Microsoft optimizing to the benefit of
  consumers.

32
Allegedly Bad Behavior continued

• OSP and ISP contracts that rewarded them for not
  offering competing browsers
• Agreements with PC OEMs that IE icon had to stay
  and could not be outdone
• ICPs were rewarded for promoting IE and making
  their content work better with IE than other
  browsers

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An Outsiders View ofU.S. v. Microsoft

• Microsofts ISP, OSP, and OEM contracts harmed
  consumers in both the short and long runs. The
  net effects of the ICP contracts are not clear.
• Giving IE away for free and bundling it with
  Windows benefited consumers in the short run, but
  reduced the likelihood that Netscape/Java would
  emerge as a long-run platform competitor.
• Microsofts Java efforts may have benefited
  consumers in the short run, but probably lowered
  the likelihood that platform competition would
  emerge in the long run.

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The Microsoft Function
Issue
Issue
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Conclusion
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Summary

• Possessing a monopoly and exercising monopoly
  power is not a legal offense in the United
  States.
• Courts focus on actions that extend or enhance
  monopoly power through unfair or anticompetitive
  means.
• Critical distinction between harm to a competitor
  and harm to competition.
• Market power or dominance is a first-stage test
  necessary but not sufficient.
• Burden primarily falls on the plaintiff.
• Defendant sometimes has to offer a legitimate
  business reason as a defense.

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Summary continued

• General test for exclusion behavior would not
  have been profitable but for the anticompetitive
  benefits it generated.
• Predatory pricing Brooke Group two-prong test
• Refusal to deal Strong presumption of legality
  absent clear intent
• Exclusive Contracts High threshold for attacking
  if a single supplier
• Tying per se illegal if rule of reason finds
  that its bad