Assessing the Effects of Antitrust Enforcement in the United States

1
Assessing the Effects of Antitrust Enforcement in
the United States

• Gregory J. Werden
• Senior Economic Counsel
• Antitrust Division
• U.S. Department of Justice
• Workshop on Measuring the
• Effects of Competition Law Enforcement
• October 19, 2007
• The views expressed herein are not purported
• to reflect those of the U.S. Department of Justice

2
Antitrust Enforcement Goals

• Antitrust enforcement in the United States is
  designed to
• deter conduct serving only to eliminate
  competition,
• prevent specific conduct likely to lessen
  competition,
• terminate conduct impairing the competitive
  process,
• remedy adverse effects from terminated conduct.

3
Unintended Consequences

• In striving to achieve its goals, antitrust
  enforcement seeks to avoid serious unintended
  consequences, in particular
• forestalling efficient conduct from which
  consumers would benefit directly, and
• undermining incentives to invest and take risks.

4
Assessing Antitrust Enforcement

• How well antitrust enforcement accomplishes its
  goals is a difficult question, and whether
  enforcement has significant unintended
  consequences is more difficult still.
• Hard empirical evidence permits some inferences
  about the effects of antitrust enforcement, but
  an objective assessment is not possible as to
  many of the important effects.

5
CartelEnforcement
6
US Cartel Enforcement Overview

• Since 1974, cartel activity has been prosecuted
  as a felony, with substantial penalties for
  companies and individuals.
• Since 2004, the maximum fine for a company has
  been 100 million and the maximum prison term has
  been 10 years.
• Fines greater than 100 million have been imposed
  under a federal law allowing criminal fines based
  on harm or gain.
• Overcharge damages are recoverable through civil
  actions.

7
USDOJ Cartel Enforcement

• During fiscal years 1997-2006, cartel enforcement
  by the US Department of Justice (USDOJ) resulted
  in
• fines on 196 companies totaling 3,343 million,
  and
• prison sentences for 156 individuals averaging
  426 days.
• The USDOJ gets about two applications per month
  from cartel participants offering to provide
  critical evidence in exchange for amnesty from
  prosecution.

8
Deterring Cartels

• The principal goal of antitrust enforcement
  against cartels is deterring their formation, but
  it is impossible to know exactly what deterrent
  effect enforcement actually has.
• Apparently successful cartels have formed despite
  active enforcement and substantial penalties.
• Game theory indicates that cartels often would
  not form even if cartel discipline could be
  maintained perfectly.
• Evidence on exempt export cartels suggests that
  successful cartels would be uncommon even absent
  enforcement.

9
Direct Cartel Enforcement Effects

• The one direct and immediate effect of cartel
  enforcement is terminating the specific cartels
  subject to enforcement.
• Much anecdotal evidence indicates that cartels
  typically are ongoing when the USDOJ begins an
  investigation.
• Cartel participants promptly terminate their
  illegal activities when they learn they are under
  investigation.

10
Estimating Harm from a Cartel

• A rough measure of a cartels harm is the total
  sales made by cartel participants while it
  operated multiplied by an estimate of the average
  price effect of cartels in general.
• This approximation omits the deadweight loss from
  reduced output as well as umbrella effects on the
  prices of close substitute products inside or
  outside the relevant market.

11
Studies of Cartel Price Effects

• Professor John Connor compiled 770 estimates of
  the average price effect over the lifespan of 395
  cartels.
• The median of the 770 estimates was 25.
• The median of the 395 low estimates was 16.

12
The Most Relevant Studies

• For the US, the most relevant studies are those
  few that
• apply the tools of modern economics to
• hard core cartels prosecuted as felonies in the
  US.
• Eight studies of bid rigging in procurement
  auctions found effects of at least 6 and as much
  as 32.
• Three studies of price fixing found effects of at
  least 11 and as much as 28.

13
Conclusion on Direct Effects

• Empirical evidence indicates that, on average,
  cartels raise prices more than 10, perhaps much
  more.
• How much enforcement shortens average cartel
  lifespan is unclear, but by one year is a
  plausible assumption.
• Thus, cartel enforcement by the USDOJ has been
  generating direct benefits to US customers of
  well over 1 billion per year even without
  accounting for deterrence effects.

14
Controversy I

• Academic analyses suggest prices do not return to
  pre cartel levels because pricing coordination
  continues or an incentive to reduce penalties
  keeps prices up, but . . .
• The apparent pattern of prices may not be real.
• Cartels almost never involve differentiated
  products, yet the incentive argument requires
  differentiated products.
• The most relevant estimates of cartel price
  effects did not compare cartel prices to pre
  cartel levels.

15
Controversy II

• A study of the USDOJs cartel cases from 1973-83
  found no decline in prices following indictments,
  but . . .
• The date of indictments is not the point at which
  prices decline because cartel activity terminates
  much earlier.
• The price data relied upon by the study likely
  failed to reflect the effects of the cartels on
  prices.

16
Horizontal MergerEnforcement
17
US Merger Enforcement Overview

• Merger enforcement in the US is done by both the
  USDOJ and the Federal Trade Commission (FTC), and
  large mergers are subject to pre consummation
  review by these agencies.
• During fiscal years 1997-2006, the USDOJ and FTC
• were officially notified of 27,510 transactions,
  and
• objected to 499 transactions, including many not
  notified.

18
Preventing Anticompetitive Mergers

• The USDOJ and FTC challenge proposed mergers that
  they conclude would substantially lessen
  competition.
• Proposed mergers challenged by the agencies only
  rarely are consummated over agency objections.
• Prior review of proposed mergers deters even the
  proposal of the most obviously anticompetitive
  mergers.

19
USDOJ Merger Enforcement

• Statistics on merger enforcement by the USDOJ
  during fiscal years 1997-2006
• 1,928 merger investigations were opened,
• 263 transaction were opposed in some manner,
• 152 were abandoned or voluntarily restructured,
• 111 were challenged in court,
• 7 complaints were contested in court, and
• 3 transactions were allowed by the courts to
  proceed.

20
Price Effects of Opposed Mergers

• The actual prices effects have been measured for
  just two mergers opposed prior to consummation by
  USDOJ or FTC.
• Both were 1980s airline mergers, and two studies
  found that one increased prices significantly but
  the other did not.
• Another study found that two related 1970s
  mergers had increased prices significantly before
  an FTC challenge.

21
Price Effects of Other Mergers

• Broad academic studies of the effects of many
  mergers have not focused on their price effects
  and have included few significant horizontal
  mergers.
• A small number of studies of specific horizontal
  mergers not opposed by the US agencies found that
  most of those studied resulted in price
  increases.
• Optimal enforcement likely would allow many
  mergers that turn out to be significantly
  anticompetitive.

22
US Petroleum Mergers 1997-2000

• Mergers in the US petroleum industry have
  generated both agency criticism and interesting
  empirical research.
• A study by an arm of the Congress estimated that
  5 of 7 mergers raised gasoline prices by small
  amounts.
• The studys regressions explained only about 20
  of the variation in prices, and bias from omitted
  variables could account for the estimated price
  increases.
• An analysis by the FTC staff showed that the
  estimates for many of the mergers were sensitive
  to assumptions made.

23
Assessing Merger Enforcement

• The sparse empirical evidence indicates that
  horizontal merger enforcement can generate
  substantial benefits.
• The evidence does not indicate how well the
  agencies sift through proposed mergers or whether
  greater benefits would flow from increasing or
  decreasing enforcement.
• Simple merger simulations based on strong
  assumptions can produce estimates of the benefits
  from merger challenges.

24
Controversy I

• A study of US merger enforcement during 1984-96
  suggested that the agencies did a poor job of
  identifying anticompetitive mergers, but . . .
• The study has serious shortcomings.
• Most importantly, the data used were so
  aggregated that the effects of mergers could not
  have been detected.

25
Controversy II

• Analysis of stock price movements has been used
  to assess the wisdom of enforcement actions
  against mergers, but . . .
• The instant analysis of uninformed investors is
  not more accurate than the painstaking work of
  enforcement agencies with access to confidential
  documents and data.
• Unilateral anticompetitive effects need not
  generate positive returns for the merging firms
  and their rivals.

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Exclusionary ConductEnforcement
27
US Enforcement Overview

• Courts in the US generally are quite skeptical of
  claims that single firm conduct is exclusionary.
• Enforcement actions by the USDOJ and FTC against
  single firm exclusionary conduct are infrequent.
• Private actions by competitors alleging they are
  being excluded are more common but are rarely
  successful.

28
Unique Assessment Difficulties

• Most potentially exclusionary conduct also can be
  efficient, and actual effects can be too subtle
  to be easily identified.
• When conduct is clearly exclusionary, its actual
  marketplace impact still can be rather unclear.
• Predatory conduct confers immediate short term
  benefits that must be accounted for along with
  long term harm.
• The impact of remedies for exclusionary conduct
  are more important than the impact of the conduct.

29
Chilling Static Competition

• Conduct is predatory if it involves an
  investment in future monopoly power by offering
  customers a bargain that is too good and thereby
  makes it impossible for rivals to compete.
• Predatory conduct can be quite difficult to
  distinguish from legitimate competition on the
  merits.
• Enforcement against predatory conduct, thus,
  could chill the very conduct antitrust
  enforcement is designed to protect.

30
Chilling Dynamic Competition

• Dynamic competition through innovation generates
  enormous consumer benefits.
• Innovation is very risky, however, and large
  rewards from success are necessary to attract
  investment.
• Monopoly pricing for a time is necessary to reap
  the rewards that provide the incentive for
  investment.
• Enforcement that promotes static price
  competition ultimately may harm consumers more
  than help them.

31
Assessing Remedies

• Remedies in exclusionary conduct cases fail to
  achieve consumer benefits if the effects of
  exclusionary conduct are irreversible or the
  remedies are too narrowly focused.
• Remedies in exclusionary conduct cases can harm
  consumers if they are overbroad and thereby
  undermine the ability or incentive to undertake
  desirable conduct.
• Remedies typically can be usefully assessed only
  through careful study well after the fact.

32
Controversy

• Some commentators have argued that a successful
  remedy should reduce prices within a fairly short
  time, but . . .
• But the remedy in an exclusionary conduct case
  normally is intended only to safeguard the
  competitive process.
• A dominant competitor might appear no less
  dominant if the remedy worked precisely as
  intended.

33
Conclusion

• Hard evidence is lacking on the effects of
  potentially exclusionary conduct and on the
  effects of remedies for it.
• Careful cases studies would be useful but are
  quite difficult.
• Thus, prior beliefs have a major impact on any
  assessment of enforcement against exclusionary
  conduct.

34
Consumer Savings Estimates Reported by the USDOJ
35
GRPA

• The Government Performance and Results Act
  requires US government agencies to establish
  performance indicators and indicate the actual
  program performance achieved compared with the
  performance goals.
• In compliance, the USDOJ annually reports
  consumer savings from criminal antitrust
  enforcement, merger enforcement, and nonmerger
  civil antitrust enforcement.

36
Enforcement Categories

• Criminal antitrust enforcement by the USDOJ is
  limited to hard core cartel activity.
• Merger enforcement by the USDOJ nearly always
  involves horizontal mergers.
• Nonmerger civil antitrust enforcement by the
  USDOJ relates to single competitor exclusionary
  conduct, vertical restraints, and especially
  agreements among competitors other than hard core
  cartels or mergers.

37
Successful Enforcement Efforts

• The USDOJ generates a savings estimate for almost
  every antitrust enforcement effort considered to
  be successful.
• Criminal enforcement is successful when one
  cartel participant enters a guilty plea or is
  convicted after trial.
• Civil enforcement is successful when a voluntary
  change in conduct occurs without court action, a
  consent decree is filed, or court judgment is
  entered in a contested case.

38
Criminal Enforcement

• For a cartel operating a year or more, the
  estimated consumer savings normally is 10 of the
  annual sales in the relevant market.
• For a cartel operating less than a year, the
  estimated consumer savings normally is 10 of the
  total sales in the relevant market over the life
  of the cartel.
• Information uncovered in criminal investigations
  normally cannot be used to estimate the consumer
  savings.

39
Merger Enforcement

• Simple merger simulation, driven by market
  shares, is used to estimate consumer savings from
  merger enforcement.
• The simulation generally employs the Cournot
  model with linear demand and constant marginal
  cost.
• The Cournot model sometimes is used even if it
  does not fit the industry or the competitive
  effects theory of the case.

40
Nonmerger Civil Enforcement

• The estimated consumer savings from successful
  nonmerger civil enforcement normally is 1 of the
  annual sales in the relevant markets.
• The estimated consumer savings from nonmerger
  civil enforcement generally accounts for a tiny
  fraction of the total from all three categories.