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Abstract:
This paper was substantially revised in March 2003 to analyze WorldCom's fraud and bankruptcy and the FCC's February 20, 2003 decision its Triennial Review of mandatory unbundling. To date, policymakers and scholars have failed to recognize how those topics are interrelated.

The United States has spent seven years trying to deregulate telecommunications. We are not in the transition any longer. It is time to take stock. In this essay, I address three topics. The first, addressed in Part I, is the administrative cost of deregulation, which has grown substantially under the Telecommunications Act of 1996.

Part II addresses the consequences of the FCC's use of a competitor-welfare standard when formulating its policies for local competition, rather than a consumer-welfare standard. I evaluate the reported features of the FCC's decision in its Triennial Review. Press releases and statements concerning that decision suggest that the FCC may have finally embraced a consumer-welfare approach to mandatory unbundling at TELRIC prices. The haphazard administrative process surrounding the FCC's decision, however, increases the likelihood of reversal on appeal.

Beginning in Part III, I address at greater length the WorldCom fraud and bankruptcy. I offer an early assessment of the harm to the telecommunications industry from WorldCom's fraud and bankruptcy. I explain how WorldCom's misconduct caused collateral damage to other telecommunications firms, government, workers, and the capital markets. WorldCom's false Internet traffic reports and accounting fraud encouraged overinvestment in long-distance capacity and Internet backbone capacity. Because Internet traffic data are proprietary and WorldCom dominated Internet backbone services, and because WorldCom was subject to regulatory oversight, it was reasonable for rival carriers to believe WorldCom's misrepresentation of Internet traffic growth. Event study analysis suggests that the harm to rival carriers and telecommunications equipment manufacturers from WorldCom's restatement of earnings was $7.8 billion. WorldCom's false or fraudulent statements also supplied state and federal governments with incorrect information essential to the formulation of telecommunication policy. State and federal governments, courts, and regulatory commissions would thus be justified in applying extreme skepticism to future representations made by WorldCom.

Part IV explains how WorldCom's fraud and bankruptcy may have been intended to harm competition, and in the future may do so, by inducing exit (or forfeiture of market share) by the company's rivals. WorldCom repeatedly deceived investors, competitors, and regulators with false statements about its Internet traffic projections and financial performance. At a minimum, WorldCom's fraudulent or false statements may have raised rivals' costs by inducing inefficient investment in capacity or inefficient expenditures for customer acquisition and may have artificially reduced WorldCom's cost of capital and thus facilitated its long string of acquisitions.

During the prebankruptcy period, WorldCom's business strategy may have been designed to harm rival providers of Internet backbone or long-distance services. Because WorldCom's real costs were unknown, its pricing of Internet backbone services bore no relation to cost. Recoupment of losses was unnecessary as a condition for plausible predation by WorldCom because its management had other ways to profit personally. The coordinated actions of WorldCom's management, its investment bankers, and its auditors may have injured competition in the telecommunications industry.

Part V argues that the FCC has a unique obligation-distinct from the mandate of the bankruptcy court or the Securities and Exchange Commission-to investigate the effect of WorldCom's misconduct on the telecommunications industry. For WorldCom, Chapter 11 bankruptcy can be a means to distort competition in the long-distance and Internet backbone markets. Because Chapter 11 bankruptcy is not designed to eradicate anticompetitive business models or to establish policy for the telecommunications infrastructure, the FCC is uniquely empowered to defend the competitive process. After Chapter 11 reorganization, WorldCom's freedom from debt would enable the firm to underprice rivals that are as, or more, efficient than WorldCom. Economic efficiency would suffer because consumers would pay less than the true social cost required to supply the services offered by WorldCom. Moreover, the competitive advantage conferred upon WorldCom by the U.S. bankruptcy court's elimination of WorldCom's debt (in whole or in part) could constitute state aid in violation of Article 87 of the European Community Treaty.

In Part VI, I argue that WorldCom's exit from the market would not carry significant social costs. WorldCom's value as a going concern is dubious, and other carriers could readily absorb WorldCom's Internet and long-distance customers. The FCC should investigate the ramifications of WorldCom's fraud for telecommunications policy. The outcome of that investigation may include the finding that WorldCom is unqualified to hold its FCC licenses and authorizations. That legal conclusion would promptly, and properly, propel WorldCom toward liquidation.

Worldcom, regulation, FCC, triennial review

Abstract:
This paper presents a perspective on remedies in network industries that is informed by American and European experiences with antitrust law and sector-specific regulation. In the United States and the European Union, the topic of remedies in network industries cuts across antitrust law and sector-specific regulation, including telecommunications. The legal and economic understandings of a remedy are not always synonymous. In both legal systems, a remedy is the corrective measure that a court or an administrative agency orders following a finding that one or several companies had either engaged in an illegal abuse of market power (monopolization in the US and abuse of dominance in the EC) or are about to create market power (in the case of mergers). With the exception of merger control where remedies seek to prevent a situation from occurring, legal remedies are retrospective in their orientation. They seek to right some past wrong. They may do so through the payment of money (whether that is characterized as the payment of damages, fines, or something else). Or they may seek to do so through a mandated change in market structure (structural remedies), as in the case of divestiture, or in the imposition of affirmative or negative duties (behavioral remedies).

The economic meaning of a remedy emphasizes market failure. The market failure may result from the unchecked exercise of market power, or from the uncompensated generation of an external cost or benefit, or from an insufficiency of information with which to make efficient choices concerning consumption, production, or investment. Whereas lawyers think of a remedy as what to do after a finding of illegal conduct, economists think of a remedy as what to do after a finding of market failure. The two approaches overlap perfectly if legislators and courts make liability rules that are triggered only after a finding of market failure.

The difference between the legal and economic conceptions of remedy highlights another important distinction, namely, the difference between ex ante and ex post interventions in the market. Under the ex post approach, a remedy is imposed if and only if an illegal conduct is first proven. And it is the government or a private plaintiff that bears the burden of proving their case. This arrangement describes the operation of monopolization law under the US Sherman Act or the concept of abuse of a dominant position in the EU.

Ex ante remedies are generally imposed through sector-specific regulation, though such remedies may also be imposed on the basis of antitrust rules. This is, for instance, the case where remedies are imposed as a condition for clearance of a merger between telecommunications operators. In both the US and the EU, antitrust enforcement authorities have used merger control procedures as a way to extract significant concessions from the merging entities. As far as institutional design is concerned, remedies in network industries can thus come from two main sources: ex ante or ex post enforcement, and/or sector-specific regulation.

Against this background, this paper seeks to explore the issues of remedies and institutional design of regulation in a comparative manner by reference to US and EU law. Part 2 analyzes the US model and Part 3 the EU model. Part 4 contains a conclusion.

Section 2.1 provides illustrations of ex ante and ex post remedies in American telecommunications. As will be seen, the reliance on antitrust consent decrees makes the border between ex ante and ex post remedies thin as such decrees can be seen as an amalgam between the ex ante and the ex post approaches. Section 2.2 argues that, over the last two decades, antitrust law has evolved into another form of regulation as it now relies on numerous policy statements and guidelines that resemble the type of prospective rulings made by regulatory agencies. Section 2.3 outlines the risk that the approach followed by the FCC in its Local Competition Order and recently vindicated by the Supreme Court in the Verizon case could affect the development of antitrust-based remedies in network industries. Finally, Section 2.4 argues that, by attempting to impose the TELRIC model to US trading partners, the US Trade Representative has turned itself into a telecommunications regulator. We also argue that this process lacks legitimacy and could have an unintended boomerang effect on US telecommunications operators.

Twenty years ago, it was clearly the case that its embrace of economic analysis made antitrust law intellectually dominant over industry-specific regulation in the United States. The diffusion of ideas flowed from antitrust to the regulatory agencies. Then something happened, and the direction of policy innovation reversed. Today, American antitrust law and its notions of feasible remedies in network industries are influenced by the theories of market failure predicated on network effects.

So it is now natural to ask, How will the Supreme Court's 2002 Verizon decision on TELRIC pricing affect the development of antitrust law concerning Microsoft? The influence may prove to be substantial. There is an obvious relationship between an ex ante regulation requiring unbundling of network elements and an ex post antitrust rule penalizing the failure to offer a product or functionality on an unbundled basis. The latter is the antitrust doctrine concerning tying arrangements, which was so contentious in the Microsoft case. When read together, Verizon and Microsoft have potentially broad implications for antitrust remedies relating to bundling and unbundling of products having substantial sunk costs and network complementarities. In the intellectual property area, we can expect to see more monopoly-preservation tying cases, relying on David Sibley's theory of partial substitutes, employed in the Microsoft case. These cases will immerse the litigants and the courts in TELRIC-like questions of the pricing of the tying product on an unbundled basis.

Section 3.1 explores ex ante and ex post remedies in telecommunications in the European Union. As in the US, we will see that the border between ex ante and ex post remedies is thin and that some remedies appear as an amalgam between these two kinds of remedies. Section 3.2 argues that, as in the US, EC antitrust law has taken a regulatory tone with the multiplication of notices and guidelines, which resemble the prospective rulings made by regulatory agencies. Section 3.3 shows that antitrust concepts and principles play a central role in the new EC framework on electronic communications. Finally, Section 3.4 observes that, unlike the US Trade Representative, DG Trade does not behave like a telecommunications regulator. However, the enlargement process allows the EC to progressively expand the number of nations to which its regulatory principles in the area of telecommunications and in other network industries will apply.

There are several similarities in the approaches followed by the US and the EC in their remedial efforts. First, the US and the EC have relied on a combination of ex ante and ex post remedies to control market power in the telecommunications. Yet, both regimes have also developed hybrid remedies, which represent an amalgam between the ex ante and the ex post approaches. For instance, as illustrated by the MFJ, consent decrees have been used by the Antitrust Division as a way to regulate the telecommunications sector. In both US and EC, the remedies imposed as a condition for merger clearance often take the form of long lists of behavioural requirements, which can be hardly distinguished from prospective regulatory requirements. Although we agree that antitrust rules be used to maintain a competitive market structure, we question the use of antitrust remedies to reshape the telecommunications sector or achieve specific regulatory objectives. Very often, operators are under no position to negotiate, and the clearance process turns into a game of regulatory extortion.

Second, the growing amalgam between antitrust and regulation can also be illustrated by the increasing reliance by antitrust authorities on guidelines, policy statements, notices, and other tools containing abstract statements of the way these authorities plan to address anti-competitive conduct, which may arise in the future. In this context, they very much act like a bureaucracy adopting prospective rulings than as antitrust authorities deciding cases on the basis of past events. In the future, antitrust could be much less of a litigation practice, than a regulatory compliance exercise whereby adepts go through checklists of predetermined regulatory interpretations.

There are also significant differences between the US and EC regimes of remedies in telecommunications. First, regulatory remedies have generally been more intrusive in the US than in the EC. The combination of the 1996 Telecommunications Act and the FCC's implementing orders has produced an extremely dense regulatory framework regulating certain categories of operators' behaviours in the most excruciating detail. Although the EC regulatory framework adopted in the EC in the 1990s was also heavy-handed, the new regulatory framework has clear deregulatory features, as it relies on a market-by-market system of sunset clauses and allows regulation only when antitrust law remedies are not sufficient to address the identified market failure(s). The new EC regulatory framework no longer imposes remedies on predetermined categories of operators, but on operators holding SMP, this latter concept corresponding to the notion of dominance under EC competition law. The EC system seems thus better equipped to limit the imposition of ex ante remedies to circumstances where market failures can be identified. No other circumstance should warrant ex ante regulatory intervention.

Second, in recent years, antitrust rules have played a greater role in the EC than in the US in telecommunications. Although the US government has not initiated any major telecommunications antitrust lawsuit since the MFJ, the European Commission has launched proceedings to address a variety of anticompetitive behaviours in telecommunications. Moreover, although it is true that US antitrust increasingly takes a regulatory tone, antitrust principles have not much penetrated sector-specific regulation. On the contrary, there is a risk that regulatory models developed by the FCC (such as the controversial TELRIC pricing methodology) could influence the design of antitrust remedies in the future. By contrast, EC antitrust principles play a crucial role in the new regulatory framework on electronic communications: key regulatory decisions, such as market definition, identification of SMP operators, and the adoption of remedies must be adopted in conformity with antitrust principles. There is also a clear understanding in the EC that sector-specific regulation is to progressively give way to antitrust law.

antitrust, competition, regulation, telecommunications

Abstract:
In this Article, Professors Hausman and Sidak propose a consumer-welfare model for the mandatory unbundling of telecommunications networks. Their approach, responsive to both the Supreme Court's 1999 decision in AT&T Corp. v. Iowa Utilities Board and the Federal Communications Commission's Second Further Notice of Proposed Rulemaking later the same year, reconciles the necessary and impair standards of Statute 251(d)(2) of the Telecommunications Act with the economic analysis of antitrust law. The essential facilities doctrine in antitrust law provides four necessary, but not sufficient, conditions for finding impairment. The authors add a fifth condition, responsive to the explicit text of Statute 251(d)(2), which addresses whether an incumbent local exchange carrier could exercise market power over end-users by restricting competitors' access to a requested telecommunications network element in a particular geographical market. The authors also recommend that necessary be interpreted to mean that competition in end-user services would be impossible unless the requested element were unbundled at a cost-based regulated price. This heightened standard, they argue, will protect the economic incentives to create the intellectual property embodied in elements that are proprietary in nature. The authors' proposed interpretation of Statute 251(d)(2) focuses on the effectiveness of competition in the end-user services market, rather than on the ability of a particular competitor to earn profits. Thus, the test adopts consumer welfare, rather than competitor welfare, as its touchstone.

Abstract:
"Network neutrality" is the shorthand for a proposed regime of economic regulation for the Internet. Because of the trend to deliver traditional telecommunications services, as well as new forms of content and applications, by Internet protocol (IP), a regime of network neutrality regulation would displace or subordinate a substantial portion of existing telecommunications regulation. If the United States adopts network neutrality regulation, other industrialized nations probably will soon follow. As a result of their investment to create next-generation broadband networks, network operators have the ability to innovate inside the network by offering both senders and receivers of information greater bandwidth and prioritization of delivery. Network neutrality regulation would, among other things, prevent providers of broadband Internet access service (such as digital subscriber line (DSL) or cable modem service) from offering a guaranteed, expedited delivery speed in return for the payment of a fee. The practical effect of banning such differential pricing (called "access tiering" by its critics) would be to prevent the pricing of access to content or applications providers according to priority of delivery. To the extent that an advertiser of a good or service would be willing to contract with a network operator for advertising space on the network operator's affiliated content, another practical effect of network neutrality regulation would be to erect a barrier to vertical integration of network operators into advertising-based business models that could supplement or replace revenues earned from their existing usagebased business models. Moreover, by making end-users pay for the full cost of broadband access, network neutrality regulation would deny broadband access to the large number of consumers who would not be able to afford, or who would not have a willingness to pay for, what would otherwise be less expensive access. For example, Google is planning to offer broadband access to end-users for free in San Francisco by charging other content providers for advertising. This product offering is evidently predicated on the belief that many end-users demand discounted or free broadband access that is paid for by parties other than themselves. Proponents of network neutrality regulation argue that such restrictions on the pricing policies of network operators are necessary to preserve innovation on the edges of the network, as opposed to innovation within the network. However, recognizing that network congestion and real-time applications demand some differential pricing according to bandwidth or priority, proponents of network neutrality regulation would allow broadband Internet access providers to charge higher prices to end-users (but not content or applications providers) who consume more bandwidth or who seek priority delivery of certain traffic. Thus, the debate over network neutrality is essentially a debate over how best to finance the construction and maintenance of a broadband network in a two-sided market in which senders and receivers have additive demand for the delivery of a given piece of information - and hence additive willingness to pay. Well-established tools of Ramsey pricing from regulatory economics can shed light on whether network congestion and recovery of sunk investment in infrastructure are best addressed by charging providers of content and applications, broadband users, or both for expedited delivery. Apart from this pricing problem, an analytically simpler component of proposed network neutrality regulation would prohibit a network operator from denying its users access to certain websites and Internet applications, such as voice over Internet protocol (VoIP). Although some instances of blocking of VoIP have been reported, such conduct is not a serious risk to competition. To address this concern, I analyze whether market forces (that is, competition among access providers) and existing regulatory structures are sufficient to protect broadband users. I conclude that economic welfare would be maximized by allowing access providers to differentiate services vis-à-vis providers of content and applications in value-enhancing ways and by relying on existing legal regimes to protect consumers against the exercise of market power, should it exist.

A free download of the galley proofs of this paper is available through Oxford Journals at the Journal of Competition Law and Economics website.

net neutrality, network neutrality, DSL, broadband, VoIP, price discrimination, Internet

Abstract:
The Telecommunications Act of 1996 sets forth extensive provisions to unbundle the local telecommunications network to encourage the development of a competitive market for local telephone. It would seem to have been an unstated premise of those statutory provisions and the Federal Communications Commission (FCC) rules interpreting them that the task of unbundling is one that should take place in a technological vacuum. Although the Telecommunications Act of 1996 ostensibly removed artificial regulatory distinctions based on the particular technology employed to produce a communications service, the administrative rulemakings and federal court litigation that have dominated the first three years of experience under the new statute have focused on the traditional wireline access network and have seemingly ignored the fact that, over the same period, wireless telecommunications has rapidly matured as a substitute for wireline access. If regulators were to acknowledge that development, the entire exercise of wireline unbundling could become irrelevant.

Wireless local telephony already provides a substitute for wireline access. It is therefore highly pertinent for a symposium on interconnection, such as this one, to consider the FCC's policies that artificially constrain the market structure for wireless telecommunications services. The Supreme Court's 1999 decision in AT&T Corp. v. Iowa Utilities Board, reversed the FCC's unbundling rules for incumbent local exchange carriers to the extent that the agency failed to establish a reasonable standard for determining whether it is necessary to unbundle a particular element and whether the failure to unbundle that element would impair and entrant's ability to compete in the provision of local telecommunications services. In this Article, we propose a general framework for evaluating competition in wireless telecommunications. Although our analysis has immediate ramifications for wireless telecommunications policies-such as spectrum caps and mergers of wireless carriers-the same analysis can shed light on the question of whether, or for how long, it is necessary to mandate the unbundling of even the copper loop, which constitutes the element of the wireline network that is considered the least susceptible to duplication by competitors. If wireless is indeed an access substitute for wireline copper loops, and if wireless thus permits the competitive supply of bundled services that are satisfactory substitutes in consumers' minds for the typical bundle of services that consumers have until now demanded in conjunction with standard wireline access, then Congress, the FCC, the state public utilities commission, and the courts must ask: Is the great experiment of mandatory unbundling of telecommunications networks worth the candle?

That consequential question emerges from the analysis that we employ to study a seemingly narrower issue of wireless telecommunications policy. By regulation, the FCC has limited to 45MHz the amount of commercial mobile radio services (CMRS) spectrum that may be licensed to a single entity within a particular geographic area. As the Commission stated in its 1998 notice of proposed rulemaking (NPRM) concerning possible relaxation of the spectrum cap, a single entity may acquire attributable interests in the licenses of broadband Personal Communications Service (PCS), cellular, and Specialized Mobile Radio (SMR) services that cumulatively do not exceed 45 MHz of spectrum within the same geographic area. We formulate, in this Article, a decision rule that would assist the Commission in deciding whether or not to retain the spectrum cap and, thereafter, in evaluating competition in wireless telecommunications generally.

We employ decision-theoretic analysis to determine whether the expected costs of retaining the 45 MHz spectrum cap exceed the expected costs of removing it. The expected costs of removing the spectrum cap are negligible. The probability of either monopolization by a single firm or collusive pricing by a group of nationwide pricing plans and because capacity is a function of both spectrum and equipment. In contrast, the expected costs of retaining the spectrum cap are substantial as wireless services evolve from mobile voice to fixed voice and data applications. The probability that a single carrier would use more than 45MHz is nontrivial, because the growth in demand due to consumers' desire for bundled service offerings and the invasion of wireless carriers into fixed communications markets will together severely burden existing networks. In short, a cost-benefit analysis demonstrates that the spectrum cap should be abolished because the expected costs of retaining the spectrum cap vastly exceed the expected costs of removing it.

The application of decision-theoretic analysis to the issue of spectrum cap policy can easily be generalized to deal with a broad range of competitive policy issues in the wireless industry. We restate the decision rule in terms that can be applied to numerous wireless policy issues. For example, regulators may have to decide whether newly merged firms should be forced to divest themselves of wireless properties in overlap territories. The issue of divestiture is treated in similar fashion to the spectrum cap analysis. Not surprisingly, many of the same factors that influence the spectrum cap analysis resurface in the merger analysis.

In Part I of this Article, we explain our decision-theoretic rule for determining whether the spectrum cap should be retained. In Part II, we estimate the expected costs of removing the cap and describe the magnitude of those costs in qualitative terms. In Part III, we present the same analysis with respect to the expected costs of retaining the cap. In Part IV, we compare the expected costs of retaining and removing the spectrum cap. In Part V, we demonstrated the general applicability of our decision-theoretic approach to competitive policy in the wireless communications industry. We conclude by noting how the increasing substitutability of wireless and wireline services is blurring the definitions of relevant market in the telecommunications industry-a development that has direct implications for whether, and how much, to mandate unbundling of the incumbent wireline network.

Abstract:
United States v. Terminal Railroad Association, the essential facilities doctrine has been applied to a wide variety of business contexts - from football stadiums to the New York Stock Exchange. However, courts have also declined to extend the doctrine to a wide variety of situations.

Despite academic criticism, courts have never provided a coherent rationale for the limitations of the doctrine. The essential facilities doctrine can be seen as an equivalent to the economic concept of a natural monopoly, implying that the wisdom of judicial regulation in this area requires an assessment of the administrative complexity involved. Three conclusions follow: First, diversification restraints on the owners of essential facilities are inefficacious. Second, the doctrine should not be applied to intellectual property. Third, the doctrine is most likely to be useful when the monopoly facility is shared by numerous competitors, has excess capacity, and where the applicants seek access on the same terms as the incumbents. Finally, an examination of the government litigation against the Microsoft Corporation reveals that an injunctive remedy providing mandatory access to the Windows platform could run into two sorts of constitutional difficulties. First, a court would be forced to deal with a complex pricing problem to avoid a violation of the Takings Clause of the Fifth Amendment. Second, to the extent the Windows platform may be regarded as a forum for communication, mandatory access may lead to compelled speech, potentially violating the First Amendment.

facilidades esenciales, monopolio, propriedad intelectual, monopolista, Microsoft

Abstract:
Since United States v. Terminal Railroad Association, the essential facilities doctrine has been applied to a wide variety of business contexts-from football stadiums to the New York Stock Exchange. However, courts have also declined to extend the doctrine to a wide variety of situations. Despite academic criticism, courts have never provided a coherent rationale for the limitations of the doctrine. The essential facilities doctrine can be seen as an equivalent to the economic concept of a natural monopoly, implying that the wisdom of judicial regulation in this area requires an assessment of the administrative complexity involved. Three conclusions follow: First, diversification restraints on the owners of essential facilities are inefficacious. Second, the doctrine should not be applied to intellectual property. Third, the doctrine is most likely to be useful when the monopoly facility is shared by numerous competitors, has excess capacity, and where the applicants seek access on the same terms as the incumbents. Finally, an examination of the government litigation against the Microsoft Corporation reveals that an injunctive remedy providing mandatory access to the Windows platform could run into two sorts of constitutional difficulties. First, a court would be forced to deal with a complex pricing problem to avoid a violation of the Takings Clause of the Fifth Amendment. Second, to the extent the Windows platform may be regarded as a forum for communication, mandatory access may lead to compelled speech, potentially violating the First Amendment.

Abstract:
The United States has asymmetric regulation of the provision of broadband Internet access service. A cable television system operator is not regulated in its sale of cable modem service. In contrast, an incumbent local exchange carrier (ILEC) that offers digital subscriber line (DSL) service faces price regulation as well as the obligation to offer competitors the use of its broadband network on a wholesale (or, unbundled) basis so that they may offer, in the retail market, DSL services that compete with the ILEC's own retail offering to consumers.

The social costs of asymmetric regulation are by now familiar. Such regulation leads not to deregulation, but to an enduring managed competition far more complex to administer than traditional regulation of a monopoly service provider ever was. The alternative to asymmetric regulation is either symmetric regulation or symmetric freedom from regulation. Assuming that the latter alternative is preferred, what actual steps would be taken to abolish asymmetric regulation of ILEC provision of broadband Internet access?

The Federal Communications Commission (FCC) could remove asymmetric regulation that the agency itself previously imposed. The FCC could declare that broadband Internet access service is not a telecommunications service, subject to numerous regulations applicable to ILECs, but rather an information service, which is free of such regulations. Amid considerable controversy, the FCC invited public comment on such a reclassification in February 2002. Or the FCC could use its power under section 10 of the Communications Act to forbear from regulating ILEC provision of broadband Internet access.

A third, and more incremental, approach would be for the FCC to declare ILECs nondominant in the provision of advanced services, such as broadband Internet access. Non-dominant carriers are exempt from price-cap or rate-of-return regulation, as well as the obligation to file tariffs and to establish the reasonableness of those tariffs through the submission of cost data.

Much, if not all, of the economic analysis required to determine whether a carrier is nondominant also would be relevant to the FCC's decision whether to forbear from regulating a particular service or whether to reclassify the service in question as unregulated. Although the FCC did not receive its authority under section 10 to forbear from regulation until 1996, the agency has evaluated petitions for nondominance for a longer time and consequently has distilled a body of law on the subject.

In this Article, we evaluate the case against asymmetric regulation of broadband Internet access through the lens of the FCC's approach to deciding petitions for non-dominance. We examine the economic evidence relevant to whether ILECs are non-dominant in the provision of mass-market broadband services, the most familiar of which is DSL service. We use a nested-logit discrete-choice model to produce econometric estimates of the own-price elasticity of demand for DSL service and the cross-price elasticity of demand for cable modem service with respect to DSL service. Our findings suggest that demand for DSL service is price-elastic, that DSL and cable modems are in the same product market, and that DSL providers lack market power. The FCC would advance the public interest by ruling that the ILECs are non-dominant in the mass-market broadband services market.

Abstract:
Although competitive local exchange carriers (CLECs) collectively have gained considerable market share since the passage of the Telecommunications Act of 1996, many entrants into local telecommunications have stumbled or failed. Some argue that competitive local telephony will eventuate only if the incumbent local exchange carriers (ILECs) place their wholesale and retail operations in structurally separate subsidiaries. By mid-2001, several states began proceedings on mandatory structural separation, and influential members of Congress introduced legislation mandating structural separation.

In this Article, we analyze, and reject as unpersuasive, the putative benefits of mandatory structural separation. Such regulatory intervention is unnecessary to prevent discrimination against unaffiliated retailers of telecommunications services. Nor would mandatory structural separation lower wholesale discounts or increase the CLECs' market share. Plausible hypotheses for the CLECs' problems do not require the assumption of anticompetitive behavior by the ILECs.

Apart from producing no discernable benefits to consumers, mandatory structural separation would entail a substantial social cost in terms of forgone coordination of investment and production and forgone economies of scope. Moreover, mandatory structural separation would harm consumer welfare and reduce resources for investment by facilitating an anticompetitive strategy by the ILECs' largest rivals to raise the ILECs' costs of providing local telecommunications services. Policy makers should reject proposals for mandatory structural separation of the ILECs.

Abstract:
Whenever feasible, market power determinations should rest on competitive benchmark prices rather than the typical market concentration approach. Government regulators in many countries have issued guidelines on the evaluation of market power in the merger context and other areas that define relevant markets and calculate market shares - along with a summary measure of market concentration, usually the Hirschman-Herfindahl index (HHI). However, competition authorities recognize that high concentration measures are generally not a sufficient condition to infer market power. Use of other structural factors in a market often does not lead to any clearer conclusion. We show that prices that consumers pay for the product in question often offer a superior quantitative measurement that leads to a clearer conclusion than the HHI approach. Further, because prices form the basis for the evaluation of consumer welfare (consumers surplus), they also provide important information for competition authorities, whose goal is typically the protection of consumer welfare. To demonstrate our argument, we examine a decision by the Irish telecommunications regulator, ComReg, which used the EU competition guidelines and the HHI approach to determine that Ireland's two largest mobile providers, Vodafone and O2, had joint dominance and were exercising significant market power. We demonstrate how our benchmark prices approach is superior to the HHI approach. We thank the ABA for granting permission to post the article.

Abstract:
After nearly six years of telecommunications deregulation in the United States, centering on the Telecommunications Act of 1996, there is little to which regulatory officials in charge of such deregulation can point in terms of benefits in the form of lower prices or innovative services. It is critical that other nations recognize the American mistakes in telecommunications and strive to avoid repeating them. Regulation of telecommunications in the United States has been embodied in a regulatory contract between the private carrier and the regulatory authority, which in the first instance is a state public utilities commission (PUC) and in the second instance is the Federal Communications Commission (FCC). In this piece, MacAvoy and Sidak examine how American regulators have shaped the regulatory contract in a manner that sacrifices the economies of scale and scope by designing the regulatory contract to capture network externalities and to use supracompetitive returns on exclusive service provision to fund various politically favored goals. They warn of the perverse incentives that can arise from mandatory network unbundling at regulated prices, and they recommend that such unbundling be confined to essential facilities.

Abstract:
In this article, we examine the rationales offered by telecommunications regulators worldwide for pursuing mandatory unbundling. We begin by defining mandatory unbundling, with brief descriptions of different wholesale forms and different retail products. Next, we examine four major rationales for regulatory intervention of this kind: (1) competition in the form of lower prices and greater innovation in retail markets is desirable, (2) competition in retail markets cannot be achieved with mandatory unbundling, (3) mandatory unbundling enables future facilities-based investment (stepping-stone or ladder of investment hypothesis), and (4) competition in wholesale access markets is desirable. We proceed by testing empirically the major rationales in the United States, the United Kingdom, New Zealand, Canada, and Germany. For each case study, we review the mandatory unbundling experience with respect to retail pricing, investment, entry barriers, and wholesale competition. We review the lessons learned from the unbundling experience. We also identify which rationales were incorrect in theory and which rationales were correct in theory yet were not satisfied in practice. For the second category of rationales, we attempt to provide alternative explanations for the failure of mandatory unbundling to achieve its goals.

antitrust, regulation, telecommunications, competition, unbundling, access pricing, investment, infrastructure

Abstract:
State-owned enterprises (SOEs), also known as public enterprises, are owned by governments rather than by private investors. SOEs compete directly with private, profit-maximizing enterprises in many important markets. SOEs can have strong incentives to engage in anticompetitive activities that serve to expand the scale and scope of their operations. Competition law for SOEs, however, is a body of jurisprudence to which U.S. courts and legislators have made little direct contribution. In contrast, the European Commission's Deutsche Post decision in 2001 is an important step in the development of a competition law for SOEs. In this article, we develop a theoretical framework that explains why SOEs might engage in anticompetitive behavior. We propose a legal standard to analyze such behavior, and we argue that this standard should be more stringent than the legal standard applied to private firms.

We begin in Part II by examining the EC's decision in the Deutsche Post case. The EC correctly found that pricing below long-run average-incremental cost (LRAIC) is inappropriate for both profit-maximizing firms and SOEs. However, a higher price floor may be appropriate for SOEs. The arguments in Parts III through V explain why. Part II also reviews standard multiproduct cost concepts, including LRAIC.

Part III examines the objectives of an SOE and the prices it will set when it pursues the identified objectives and faces no pricing restriction other than the restrictions imposed by competition in non-reserved markets. We identify conditions under which an SOE will choose to set prices below marginal production costs, even though such prices generally are considered to be predatory, and thus anticompetitive. In addition, we discuss the methods that an SOE might employ to relax a binding prohibition against below-cost pricing. We examine an SOE's incentives to raise the costs of existing rivals and to erect barriers to keep potential rivals from entering relevant markets. Finally, we examine the implications of an SOE's being able to achieve cost advantages in a non-reserved market by virtue of its statutory monopoly in a reserved market. These advantages can result from economies of scope between the reserved market and the non-reserved market-economies of scope that the SOE's rivals are denied the opportunity to achieve.

Part IV explains why SOEs may have greater ability than private firms to act anticompetitively. This enhanced ability arises in part from the expanded powers and special privileges that often are extended to SOEs. These powers and privileges can help to ensure that an SOE, unlike its private competitors, does not need to recoup the costs of its anticompetitive behavior by subsequently raising prices in non-reserved markets.

Part V presents a framework for assessing the drawbacks to using the SOE's LRAIC as the standard for determining whether the SOE's prices in non-reserved markets are anticompetitive. Although this standard is appropriate for evaluating allegations of predatory pricing by private firms, we argue that it generally is not appropriate for SOEs. The price floor for an SOE typically should exceed the SOE's LRAIC. The extent to which the price floor should exceed the SOE's LRAIC depends upon a number of factors that we identify. We also explain why it is that, even though certain common benchmarks may constitute reasonable price floors in some circumstances, different price floors may be more appropriate in other circumstances. We articulate case-specific guidelines that explain the extent to which price floors should be raised above the SOE's LRAIC.

state owned enterprises, competition, competition law, antitrust, EU, public enterprise

Abstract:
This report examines mass-market broadband access and take-up, analyzing the current and prospective level of competition and drawing implications for public policy. The report was commissioned by The Brussels Round Table, a forum for leading European telecommunication operators and equipment manufacturers, including Alcatel, BT, Deutsche Telekom, Ericsson, France Telecom, Siemens, Telefonica de Espana, and Telecom Italia.

A distinction is drawn between 'facilities-based competition', where providers are using all (or some of) their own infrastructure, and 'access-based competition', where providers depend on access to someone else's network. Amongst EU Member States, there is a general consensus that infrastructure-based competition is desirable in telecommunications and has an important role in delivering innovations such as broadband. However, public statements from national regulatory authorities (NRAs) about the benefits of infrastructure competition have not always been matched by coherent regulatory policy designed to facilitate such competition. Broadband is a new service. Typically, new services are not subject to specific regulation, owing to the risk that this would discourage investment and stifle innovation. However, from its inception, the development of broadband access has been influenced by intervention from policy makers and regulators. This intervention includes local and national government initiatives to promote broadband, and ex-ante obligations on incumbent telecom operators to provide access to their networks.

While broadband penetration is widely portrayed as being disappointingly slow, penetration is actually quite fast relative to the adoption of comparable technologies - thus questioning the claim's use as a justification for public policy intervention. Given the prevalence of intervention to date, an equally valid response is to question the effectiveness of existing regulation. Both new entrants and incumbent operators are rational agents who inevitably respond to regulatory incentives; if broadband deployment in the EU has been too slow, regulatory policy is a key area where one should look for an explanation. The current approach of NRAs to broadband is heavily influenced by the existing regulatory framework for traditional telephony services, with its emphasis on access to the local loop. The appropriateness of this approach may be questioned, given that broadband is a new service that requires new infrastructure build (even if existing networks are used) and that it can and is delivered over many different types of platforms, including cable, satellite, fixed wireless and mobile.

Against this background, this report has a number of objectives: to highlight the extent to which there is currently competition between platforms in the provision of broadband access; to explore the potential for growth in platform competition (subject to a supportive policy environment) and likely market dynamics; to assess the relative effectiveness of platform competition and access-based entry in delivering benefits for customers and reducing the need for regulation; to assess the impact of public policy on incentives to invest in infrastructure and so on the future development of platform competition; and to develop conclusions about the appropriate public policy towards broadband.

The report's authors are Dan Maldoom and Richard Marsden of DotEcon, and Gregory Sidak and Hal Singer of Criterion Economics. The report was presented in Brussels on October 15, 2003 to the BRT conference "The Future of the European Telecommunications Industry," attended by member company CEOs, members of the European Parliament, Commissioner Erkki Liikanen, and other regulators from the European Commission.

telecommunications, regulation, broadband, international regulation

Abstract:
To date, most residential customers to the Internet have used dial-up modems with a top speed of about 56.6 kbps [kilobits per second]. In the past two years broadband access has become available via cable modems offered by the local unregulated cable provider and via digital subscriber lines (DSL) offered by the local regulated telephone company (the incumbent local exchange carrier [ILEC]) and competitors who resell DSL using the ILEC facilities. Cable modems and DSL offer access speeds about 10-30 times higher than dial-up access and are termed broadband Internet access. Although Federal Communication Commission (FCC) regulation required ILEC's to sell the use of their facilities to competitors at below-cost prices, no regulation of cable companies has occurred. This outcome is curious given that cable companies have a significantly greater incentive to distort competition as a result of their unregulated monopoly profits from their cable operations. This asymmetric regulation by the FCC has led to the open-access debate. The open-access debate involves the question about whether the cable providers should be required to provide access to competing broadband Internet service providers (ISP's) or whether cable providers can use exclusive contract with their affiliated ISP's.

Here, we consider the economic incentives and actions of the providers of broadband access with respect to limiting the usage of broadband access, including the potential competitive effects for cable television, a sector of the economy where, to date, system operators have been able to exercise significant market power. We answer the question of whether the price of narrowband Internet access constrains the price of broadband Internet access. We reject the hypothesis that the price of narrowband access does not affect the price of broadband access (transport) and ISP service is not rejected. Our finding is that lower narrowband access prices do not constrain the prices charged for broadband access.

Abstract:
The linkLine price squeeze case from the Ninth Circuit is the most important antitrust case that the Supreme Court could take during the Fall 2007 Term. Amici are professors and scholars in law and economics who have taught, or have conducted research on, antitrust law and the economics of industrial organization. They include William J. Baumol, Robert H. Bork, Robert W. Crandall, George Daly, Harold Demsetz, Jeffrey A. Eisenach, Kenneth G. Elzinga, Gerald Faulhaber, Franklin M. Fisher, Charles J. Goetz, Robert Hahn, Jerry A. Hausman, Thomas M. Jorde, Robert E. Litan, Paul W. MacAvoy, J. Gregory Sidak, Pablo T. Spiller, and Daniel F. Spulber.

We agree with the petitioners that the Ninth Circuit has generated an inescapable conflict among circuits, and that the Ninth Circuit's opinion below is incompatible with this Court's reasoning in Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004), Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., 127 S. Ct. 1069 (2007), and Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993). We agree with Judge Gould's dissent in linkLine that Trinko "takes the issues of wholesale pricing out of the case," such that the plaintiffs' only possible remaining theory of harm would be predatory pricing at the retail level - which the plaintiffs did not allege. linkLine Commc'ns Inc. v. Pac. Bell Tel. Co. d/b/a/ AT&T Cal., Inc., No. 05-56023, 2007 U.S. App. LEXIS 21719, at *28-29 (9th Cir. Sept. 11, 2007) (Gould, J., dissenting). We also agree with Judge Ginsburg's opinion for the D.C. Circuit in Covad Communications Co. v. Bell Atlantic Corp., 398 F.3d 666 (D.C. Cir. 2005), which in turn embraces the conclusion of the Areeda-Hovenkamp treatise that "'it makes no sense to prohibit a predatory price squeeze in circumstances where the integrated monopolist is free to refuse to deal.'" Id. at 673-74 (quoting 3A Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 767c3, at 129-30 (2d ed. 2002)). The existence of a rule like linkLine has a pervasive impact on business behavior that, at the margin, affects competition and consumers. This deleterious effect extends beyond the telecommunications industry to affect all firms that do business in the Ninth Circuit. These reasons justify granting certiorari in linkLine and reversing the Ninth Circuit's decision.

In our minds, an even larger reason than those described above makes it imperative that the Court take this case. The Ninth Circuit's decision in linkLine implicates the normative foundation of modern Sherman Act jurisprudence: that antitrust law exists to advance consumer welfare. We have three points to make.

First, any rule of price-squeeze liability that threatens liability based on the claim that the difference between a firm's upstream and downstream prices leaves downstream rivals insufficient margin substitutes a rule of competitor welfare for consumer welfare.

Second, properly understood, a price squeeze is a regulatory issue, which makes sense only as a rule of price regulation in an industry already subject to duties to deal and to control by institutionally competent regulators. Attempting to implement regulatory policy through section 2 of the Sherman Act is ill-advised, both because it makes no sense for courts to re-regulate deregulated or lightly regulated industries, and because courts lack the institutional competence to implement regulation.

Third, the Ninth Circuit's rule is of pressing concern precisely because it will deter efficiency-enhancing conduct and competitive pricing. Vertical integration and partial integration are ubiquitous, and firms need to be able to make decisions about such integration without the threat of liability. Vertically integrated firms likewise need to be free to cut retail prices (as long as the prices are not predatory) without concern for rivals - the point of Brooke Group. Moreover, the Ninth Circuit's standard is so vague and open-ended that it creates uncertainty and invites litigation; it also permits imposition of liability based on apparently subjective evaluation of disputed and hard-to-prove facts, which will lead to a substantial risk of false positives.

Abstract:
When a person uses the traditional wireline telephone network to call another person on his cell phone, the fixed network must transfer the call to the mobile network to which the recipient subscribes. The fixed network is said to have provided originating access for the call, and the mobile network is said to have provided terminating access. This paper provides an economic analysis of the regulation of fixed-to-mobile termination rates. Mobile party pays (MPP) creates better incentives than calling party pays (CPP) for mobile network operators to place downward pressure on termination rates. Cellular telephone use in the United States and Canada has continued to increase at a significant pace despite the MPP regime and now far exceeds mobile telephone use in countries with CPP regimes. Multiple factors, including substitution possibilities for the callers of mobile subscribers, constrain the market power of mobile operators under CPP regimes in setting mobile termination rates. It is unrealistic for regulators to attempt to set mobile rates, including termination rates, at marginal cost. If large fixed network costs and customer acquisition costs must be recovered from variable charges, then marginal-cost-based pricing is not feasible. Because of network externalities in mobile telecommunications, the value to callers of being able to reach mobile subscribers justifies mobile termination charges that exceed marginal cost. Moreover, mobile termination rates that exceed marginal cost (or its proxy, long-run average incremental cost) are consistent with Ramsey (quasi-efficient) pricing. To the extent that high termination rates are a problem in countries that have embraced CPP, it is because customers are poorly informed of the charges they pay for their terminating call. Consumer education would solve the potential market failure without the need to impose price regulation on otherwise competitive markets.

Abstract:
What is the proper legal standard for product integration involving software? Because software is subject to low marginal costs, network effects, and rapid technological innovation, the Supreme Court's existing antitrust rules on tying arrangements, which evolved from industries not possessing such characteristics, are inappropriate. In this Article, I ask why firms integrate software products. Next, I review the Supreme Court's tying decisions in Jefferson Parish and Eastman Kodak. I propose an approach to judging the lawfulness of product integration in technologically dynamic markets that supplements the Supreme Court's current standard with four additional steps in cases of tying of computer software. Thereafter, I examine the D.C. Circuit's approach to software integration, which arose from that court's 1998 interpretation, in Microsoft II, of an antitrust consent decree between the U.S. Department of Justice and Microsoft Corporation. I argue that the D.C. Circuit's rule has general applicability and should be recognized as the appropriate standard for software integration under antitrust law. I show how my approach imparts greater clarity to the D.C. Circuit's rule. I examine the competing product integration rule proposed in 2000 by Professor Lawrence Lessig as amicus curiae in the government's subsequent antitrust case against Microsoft, concerning the integration of Internet Explorer and Windows 98. My approach enables Professor Lessig's analysis to be reconciled with the D.C. Circuit's rule, but Professor Lessig's rule, on its own, would contain serious shortcomings. Thereafter, I evaluate Judge Thomas Penfield Jackson's April 2000 findings of law on the integration of Internet Explorer and Windows 98. I conclude that Judge Jackson's approach, in contrast to the D.C. Circuit's rule as refined by my approach, would harm consumers in the technologically dynamic market for computer software.

Abstract:
In this Article, we examine the neglected tradeoff between innovation and mandatory unbundling of telecommunications networks. Our analysis is prompted by the Supreme Court's 1999 decision in AT&T Corp. v. Iowa Utilities Board and by the Federal Communications Commission's Second Further Notice of Proposed Rulemaking released later the same year, which address which network elements in the local telecommunications network shall be subject to compulsory sharing among competitors at regulated cost-based rates. Economic analysis indicates that mandatory unbundling at prices computed on the basis of the total element long-run incremental cost of the various network elements belonging to an incumbent local exchange carrier will adversely affect the ILEC's incentives not only to upgrade or maintain existing facilities, but also to invest in new facilities. Mandatory unbundling at TELRIC prices will also encourage competitive local exchange carriers to deviate from the socially optimal level of investment and entry. Finally, the confluence of mandatory unbundling and other FCC policies aggravates the distortion of investment decisions.

Abstract:
As part of the Modification of Final Judgment (MFJ) that implemented the divestiture of the Bell operating companies (BOCs) from AT&T on January 1, 1984, the BOCs were forbidden to carry telephone calls from one local access and transport area LATA) to another. Although the Telecommunications Act of 1996 superseded the MFJ, it retained the BOCs' interLATA prohibition and established, in section 271, a process - involving each state public utilities commission, the Federal Communications Commission (FCC), and the Department of Justice (DOJ), acting on a state-by-state basis - by which the BOCs could earn regulatory approval to enter the interLATA market within the regions in which they provide local exchange service. As of September 1, 2002, the BOCs had received section 271 authorizations to provide in-region interLATA service in fifteen states.

In this Article, we review the origin of section 271. We explain that the FCC and DOJ did not expect that BOC entry would lower prices for interLATA service. Next, we report an empirical analysis designed to estimate the effect that BOC entry has had in New York and Texas, two states where section 271 authorizations has been given. We have three major findings. First, we find that the average consumer received a savings of 8 to 11 percent on the monthly interLATA bill in the states where BOC entry occurred as compared to "control" states where BOC entry had not occurred. Second, we find that competitive local exchange carriers (CLECs) gained a substantial increase in cumulative share of the local exchange market in states where BOC entry occurred as compared to the control states. Third, we find that the average consumer experienced no significant change in her local bill in states where BOC entry into interLATA service occurred as compared to the control states. These empirical results suggest that BOC entry in New York and Texas has led to consumer benefits in terms of lower interLATA bills and greater effective choice for local exchange services in those states.

We explain how these empirical results are consistent with the economic theory of "double marginalization." Because this economic analysis is not part of the approach that the FCC and the DOJ take with respect to implementing section 271, it is not surprising that these two agencies did not expect price to fall after BOC entry into the interLATA market.

Reprinted from Antitrust Law Journal, vol. 70, no. 2, pp. 463-484 (2002), a publication of the American Bar Association Section of Antitrust Law.

Abstract:
In this article, we examine the open access debate in the context of cable services and broadband Internet services from an antitrust framework. Our analysis is prompted by the recent AT&T-MediaOne and AOL-Time Warner mergers, which raise issues concerning the impact of integrated cable content and Internet access to residential telecommunications. Economic analysis, demographic surveys and federal antitrust guidelines each indicate that the broadband Internet access market is distinct from the narrowband Internet access market. Emerging or competing technologies, such as satellite Internet services or digital subscriber lines, cannot discipline the broadband Internet access market over the relevant time horizons. Vertical integration increases the incentives and power of cable providers to discriminate against unaffiliated broadband content, thereby substantially decreasing consumer welfare. We conclude that the recent mergers of cable content and Internet access is the most current manifestation of the classic strategy of cable providers to control alternate channels of content distribution.

Abstract:
Since 1997, the U.S. government has attempted to use the World Trade Organization (WTO) agreement on telecommunications services as a vehicle for exporting American principles of telecommunications regulation to other nations. The United States took the position in 1997 that the WTO telecommunications agreement requires its signatory nations to follow the practices of the Federal Communications Commission (FCC) on telecommunications regulatory policy. Subsequently, the Office of the U.S. Trade Representative (USTR) has sought to influence, under the implicit threat of trade sanctions, Japan's domestic regulatory policy on the pricing of mandatory competitor access to the unbundled elements of the local network belonging to the operating companies of Nippon Telegraph and Telephone Corporation (NTT).

In this Article, we examine the substantive difficulties of engrafting the FCC's interconnection policy onto the telecommunications marketplace of another nation. For more than six years, many American experts on telecommunications policy have disagreed whether American consumers have benefited from the very FCC policies that the USTR would have Japanese regulators emulate. The USTR's initiative appears to ignore that the transition to cost-oriented rates for interconnection and retail telecommunications services has been a difficult and unfinished process in the United States; that the cost models used by the FCC to set interconnection prices have significant deficiencies; that actual interconnection prices both within and outside the United States diverge considerably from the estimates of the FCC's cost models; that variations across countries in the prices of inputs have a significant effect on the costs of interconnection; and that, with respect to depreciation in particular, regulators treat this cost differently -- and, from an economic perspective, more reasonably -- in Japan than in the United States. Such substantive economic considerations suggest why the FCC's policy in this area has generated continuous litigation, including two Supreme Court cases since 1996, and consequently is too unresolved at this point in the American experience for the United States to force on its trading partners.

Next, we ask whether the USTR has the detailed knowledge required to negotiate trade agreements on interconnection pricing. We question the propriety of using the USTR to influence the domestic regulatory policy of another country on a topic as complex as the efficient pricing of mandatory access to unbundled network elements. The USTR's power to formulate trade policy on this subject resides in officials who are unlikely to possess the economic expertise and resources necessary to evaluate the consumer-welfare implications of the policies that they would have Japan and other nations adopt. For these reasons, the USTR cannot credibly make the interconnection pricing policies of another nation a legitimate concern of U.S. trade policy.

Abstract:
The legal framework under which patent damages are calculated changed substantially after the Federal Circuit decided Grain Processing Corp. v. American Maize-Products Co. in 1999. Perhaps the most important question in the typical lost profits analysis is determining the fraction of the infringing sales that constitute lost sales to the patent holder. The answer to this question usually depends on the set of non-infringing substitute products to which the customers of the infringing product could have turned in the but-for world where the infringing product was not available to them. Before Grain Processing, the case law as a legal matter generally restricted the set of non-infringing substitute products to include only products that were actually sold in the marketplace. For example, an infringer could claim that it would have continued to sell a non-infringing product that it had actually been selling and that this product would have captured some of the infringing sales, which would tend to limit the patent holder's lost sales. However, the infringer could not claim that it would have developed and introduced some new non-infringing product in the but-for world and that this product would have captured some of the infringing sales. Grain Processing eased this restriction on the set of non-infringing substitutes available in the but-for world by allowing an infringer to claim that it would have offered a non-infringing product that, although not actually sold in the marketplace, was technically feasible at the time and could have been made commercially available relatively quickly. The Grain Processing decision then went further and concluded that, in the particular case at issue, the plaintiff was not entitled to lost profits because the infringer's non-infringing product would have been identical from the point of view of customers (though more costly to the infringer). Damages were therefore calculated on a reasonable royalty basis only. Although Grain Processing has generated much scholarly commentary, we are unaware of any article considering the factor that we see as the decision's most important economic ramification: the grant of a free option to the infringer. Although it is widely appreciated how Grain Processing has made it more difficult for patent holders to claim lost profits damages, it is less well understood how Grain Processing has affected the incentives of companies to risk litigation by using patented technology (without a license) rather than to avoid infringement by using an economically inferior non-infringing technology. Whether the patent is valid and infringed is not known until the litigation takes place. A patent only provides the patent holder with the right to sue for infringement. A court decides whether the patent is valid and infringed. We find that the grant of a free option is contrary to the basic framework of the patent system in the United States. If a firm chooses to risk litigation and use the patented technology, it retains the option to switch to the non-infringing technology if the patent is later found to be valid and infringed. Of course, it will be liable for damages for the period of infringement. If, on the other hand, the firm chooses to use the non-infringing technology, it will not have the opportunity to learn whether the patent is valid and infringed. Thus, by choosing the patented technology, the firm keeps its options open, although at the risk of having to pay damages once the uncertainty regarding validity and infringement is resolved. Grain Processing has the effect of substantially decreasing this risk by decreasing the size of the damages award. If the patent is found to be valid and infringed, the firm can argue under Grain Processing that it would have switched to the non-infringing technology in the but-for world, thereby effectively making the switch retroactively. Grain Processing thereby makes the option essentially free. By providing potential infringers with increased option value if they use the patented technology, Grain Processing reduces the deterrent effect of litigation and therefore encourages infringement. Consequently, it reduces the returns to research and development, and so also the incentives to innovate.

Patent, damages, Grain Processing, infringement, but-for, non-infringing, option, free option, real option, innovation, royalty, lost profits

Abstract:
The current wave of telecommunications reform stands to significantly affect the provision of video over telephone networks. Several states have enacted legislation to promote the provision of video services by competitors, including telephone companies, and federal legislation regarding video franchising is also under consideration. We examine whether, on legal or policy grounds, video services provided over a telephone network should be regulated as a traditional cable service or whether a different approach is warranted. We evaluate the history of cable regulation and the services that Congress envisioned to be regulated when it first drafted legislation establishing a regulatory framework for cable television services in 1984. We then examine numerous differences between video services delivered over a telephone network and those that Congress envisioned when regulating cable television service in 1984 and in subsequent years when it revised the Cable Act of 1984. Finally, we find that municipal franchise requirements for video services provided over telephone networks would reduce consumer welfare. We estimate that, upon ubiquitous deployment by telephone companies of fiber networks to provide video service, cable customers living in areas not yet overbuilt by a wireline distributor of multi-channel video programming would enjoy the benefits of lower prices of roughly $7.15 per month, or $85.80 per year. A five-year net present value of the annualized savings would be roughly $26.52 billion (assuming a five percent discount rate). To the extent that direct broadcast satellite operators respond to lower cable prices with price reductions of their own, the net present value of the welfare benefits from telephone company entry into the market for multi-channel video programming distribution would increase by roughly 50 percent, to nearly $40 billion. We estimate that, even without considering any welfare gains owing to higher quality, these consumer welfare gains from entry exceed the potential loss in franchise fee revenues to municipalities by a factor of nearly three to one.

video over telephone, cable franchise, municipal franchise, Cable Act

Abstract:
On February 19, 2007, Sirius Satellite Radio, Inc. (Sirius) and XM Satellite Radio, Inc. (XM) announced a "merger of equals" that would combine the only two U.S. satellite digital audio radio services (SDARS) providers into a single firm. In this report, I determine whether SDARS are a relevant product market for antitrust purposes, and I assess the unilateral pricing effects of the proposed merger in the relevant product market. I ascertain the relevant product market that would be affected by the proposed merger. I use a derivative of the Merger Guidelines test known as "critical elasticity" to determine whether a hypothetical monopoly provider of SDARS could profitably impose a small, nontransitory price increase. The outcome of that test implies that SDARS are a distinct product market. I explain how indecency standards legislated by Congress and interpreted by the FCC have generated a market segmentation between broadcast content and subscription-based content. I then review how the FCC, the Department of Justice, and the federal courts have assessed market definition in analogous subscriber-based programming markets.

Next, I assess market-based evidence on substitution possibilities to determine whether consumers perceive alternative audio services such as podcasts, mobile Internet radio, terrestrial-based advertiser-supported radio, and Hybrid Digital (HD) radio to be reasonably interchangeable with SDARS. I demonstrate that under the most reasonable product market definition, the proposed merger of XM and Sirius would be a merger to monopoly. Thus, under the most reasonable market definition, the Herfindahl-Hirschman Index (HHI) in every local radio market in the United States would be 10,000 if the merger were approved. Even under a more expansive (and thus ill-conceived) product market definition that included HD signals, the proposed merger would increase HHI by more than 4,000 points in all but five of the 299 local radio markets.

XM, Sirius, satellite radio, SDARS, merger, satellite

Abstract:
In this declaration, I evaluate the competitive consequences of EchoStar's proposed acquisition of Hughes Electronics, which markets its direct broadcast satellite service (DBS) service under the DirecTV brand name. Whether characterized as a merger to monopoly or as a merger to duopoly, the proposed merger would substantially injure competition. It would reduce competition in the sale of multichannel video programming distribution (MVPD) services to consumers by reducing the combined firm's incentive to compete on price and non-price terms.

In Part I of this declaration, I analyze the effect of the proposed merger on competition in the sale of multichannel video programming distribution services to consumers. I first present analysis of the pre-merger and post-merger concentration in the MVPD market. Using both Bertrand and Cournot models of oligopolistic interaction, as well as a model of perfect collusion, I then calculate the price increase and the loss in consumer welfare that would result from the proposed merger. My estimate of the annual welfare loss ranges from $691 million to $1.77 billion per year, depending on the characterization of the strategic pricing interaction among firms. Next, I show why the single national price that EchoStar and DirecTV propose, so as to mitigate the consumer harm from the proposed merger, would still result in a higher post-merger price. I present evidence that EchoStar's own antitrust analysis shows that the proposed merger would harm consumers. Finally, I critique arguments made by Professor Robert D. Willig, who has submitted expert economic testimony on behalf of EchoStar and DirecTV in support of their proposed merger.

In Part II, I analyze the effect of the proposed merger on one important aspect of non-price competition: the carriage of local broadcast stations. I show why the proposed merger would likely reduce the rate of growth in the number of DBS households with access to local broadcast stations.

In Part III, I review the claimed efficiencies from the proposed merger. I show that those efficiencies could be achieved without the merger. I also show the magnitude of the claimed reductions in marginal cost that would be necessary to offset the consumer harm that the proposed merger would cause.

I file this declaration in my individual capacity as a consultant to the National Association of Broadcasters and not on behalf of the American Enterprise Institute, which does not take institutional positions on specific regulatory, adjudicatory, or legislative proceedings.

Abstract:
The Telecommunications Act of 1996 sought to improve competition through facilities-based investment. Thomas Jorde, Gregory Sidak, and David Teece hypothesized in 1999 that mandatory unbundling at TELRIC (total element long-run incremental cost) prices would increase the equity costs of incumbent local exchange carriers (ILECs) and reduce their investment incentives by subjecting them to increased risk during economic recession. In particular, competitive local exchange carriers (CLECs) are more likely to lease unbundled network elements (UNEs) when demand for telecommunications services is weak, because low prices for those services cannot support the high sunk costs of facilities-based investment in the short-term. Alternatively, when demand for telecommunications services is strong, higher prices for those services will afford a CLEC additional revenue to build out its network. Because TELRIC prices are not compensatory in economic terms, ILEC returns will suffer in times of recession and improve during an expansion.

We empirically test the Jorde-Sidak-Teece hypothesis. We find that the ILECs' betas increased positively and statistically during the recession that began in March 2001. Consequently, their equity costs rose by between 0.4 percentage points and 4.1 percentage points, which reduced their incentives to invest in their own networks. This result is consistent with the Jorde-Sidak-Teece hypothesis.

Recent stock market events also appear consistent with the Jorde-Sidak-Teece hypothesis. On January 6, 2003, a front-page story in the Wall Street Journal speculated that the FCC would revise its rules on mandatory unbundling at TELRIC prices in a manner that would benefit the ILECs. Specifically, the report implied that CLECs would lose the opportunity to lease all network elements as an unbundled network element platform, better known as UNE-P. The report was significant because UNE-P had become an entry strategy for CLECs that rested on regulatory arbitrage: UNE-P is functionally equivalent to resale, yet it is more favorably priced for the CLECs than is resale. The practical effect of ending the pricing arbitrage created by UNE-P would be to force CLECs to pay resale prices or resort to an entire or partial facilities-based business model for providing local telephony. Put differently, UNE-P would not disappear; it would simply be priced by arms-length negotiation between ILECs and CLECs rather than by a regulatory commission.

The abnormal returns of telecommunications equipment manufacturers on January 6, 2003 are highly probative of whether mandatory unbundling at TELRIC prices - epitomized in its most extreme form by UNE-P - is thought by the capital markets to increase or decrease investment in the network infrastructure required for local telephony. We find that the positive returns for the telecommunications equipment manufacturers exceeded by approximately 5 percent the return that the market could explain. If mandatory unbundling of network elements at TELRIC prices actually encouraged investment in local telecommunications infrastructure, then the abnormal returns to the telecommunications equipment manufacturers would have been negative on January 6, 2003. Instead, the positive abnormal returns to JDS Uniphase, Lucent, Nortel, and Tellabs reflected an expectation of the capital markets that these firms would have increased net cash flows, which would result from greater (not lesser) sales of telecommunications equipment.

Abstract:
A price squeeze, or margin squeeze, is a theory of antitrust liability under section 2 of the Sherman Act that concerns a vertically integrated monopolist that sells its upstream bottleneck input to firms that compete with the monopolist's production of a downstream product sold to end users. At issue is the size of the margin between the monopolist's input price and its retail price. Recent antitrust price-squeeze cases have split the U.S. Courts of Appeals. The D.C. Circuit has concluded that, because a vertically integrated monopolist may refuse to provide its upstream inputs to its downstream competitors, it may raise the price of its upstream inputs without incurring antitrust liability. On the other hand, the Ninth Circuit's 2007 linkLine decision rejected such reasoning, notwithstanding Trinko. Predicated on Judge Learned Hand's opinion in Alcoa, linkLine subordinates the protection of consumers to the protection of competitors. It requires access-pricing analysis that more resembles the work of a public utilities commission than that of a federal judge in an antitrust case. Further, the antitrust laws are concerned with the competitive process, not its end results. The inability of a single firm to stay in business is irrelevant as a matter of antitrust law unless the behavior inducing that firm to exit the market also harms the competitive process. The Supreme Court should reverse linkLine and resolve the circuit split. It should revisit Alcoa and explain why alleging a price squeeze neither states a claim in American antitrust law nor justifies deviation from the principles announced in Brooke Group and Trinko.

K21, L12

Abstract:
A "price squeeze," or "margin squeeze," is a theory of antitrust liability under section 2 of the Sherman Act that concerns a vertically integrated monopolist that sells its upstream bottleneck input to firms that compete with the monopolist's production of a downstream product sold to end users. At issue is the size of the margin between the monopolist's input price and its retail price.

Recent antitrust price-squeeze cases have split the U.S. Courts of Appeals. The D.C. Circuit has concluded that, because a vertically integrated monopolist may refuse to provide its upstream inputs to its downstream competitors, it may raise the price of its upstream inputs without incurring antitrust liability. On the other hand, the Ninth Circuit's 2007 linkLine decision rejected such reasoning, notwithstanding Trinko. Predicated on Judge Learned Hand's opinion in Alcoa, linkLine subordinates the protection of consumers to the protection of competitors. It requires access-pricing analysis that more resembles the work of a public utilities commission than that of a federal judge in an antitrust case.

The price-squeeze theory of liability is incompatible with contemporary antitrust jurisprudence and economic analysis. A price squeeze by a firm lacking market power cannot possibly rise to the level of an antitrust violation because it has no chance of reducing consumer welfare. Further, the antitrust laws are concerned with the competitive process, not its end results. The inability of a single firm to stay in business is irrelevant as a matter of antitrust law unless the behavior inducing that firm to exit the market also harms the competitive process. The Supreme Court should reverse linkLine and resolve the circuit split. It should revisit Alcoa and explain why alleging a price squeeze neither states a claim in American antitrust law nor justifies deviation from the principles announced in Brooke Group and Trinko.

price squeeze, margin squeeze, linkLine, Trinko, Brooke Group, Alcoa, monopolization, section 2, bottleneck, access price, input price, antitrust

Abstract:
Can the standard merger analysis of the Department of Justice's and Federal Trade Commission's Horizontal Merger Guidelines accommodate mergers in high-technology industries? In its April 2007 report to Congress, the Antitrust Modernization Commission (AMC) answered that question in the affirmative. Still, some antitrust lawyers and economists advocate exceptions to the rules for particular transactions. In the proposed XM-Sirius merger, for example, proponents argue that the Merger Guidelines be relaxed to accommodate their transaction because satellite radio is a nascent, high-technology industry characterized by “dynamic demand.” We argue that the AMC correctly refrained from recommending high-tech exceptions for defining markets in merger proceedings. Merger proponents naturally seek to expand the relevant product market as much as possible. But if alternative products are included in the relevant market without a showing of significant cross-price elasticities-that is, without evidence of buyer substitution between the two products in response to a relative change in prices-then market definition is unbounded. The XM-Sirius merger also follows a recent trend of prosecutorial inaction in merger reviews. The Antitrust Division's use of a higher standard for intervention than the incipiency standard in Section 7 of the Clayton Act increases the risk of false negatives. Finally, the XM-Sirius merger exemplifies the use of preemptive offers of merger conditions by the merger parties to gain political favor and to allocate postmerger rents to influential third-party intervenors. The most significant preemptive concessions were XM's and Sirius's offer to freeze the monthly subscription price at the premerger monthly rate of $12.95 and to offer a variety of new tiered program packages that XM and Sirius characterized as “à-la-carte.” These offers presumably were intended to neutralize the traditional antitrust concerns that a merger among direct competitors leads to higher prices and to win the support of certain vital constituencies. To the contrary, we argue that the offer to freeze prices could reduce welfare and that the Federal Communications Commission and the Department of Justice lack the authority to create a rate-regulated monopoly for satellite radio. Furthermore, because the “à-la-carte” offering would not hold constant other nonprice factors, consumer surplus could fall.

Abstract:
Can the standard merger analysis of the Department of Justice's and Federal Trade Commission's Horizontal Merger Guidelines accommodate mergers in high-technology industries? In its April 2007 report to Congress, the Antitrust Modernization Commission (AMC) answered that question in the affirmative. Still, some antitrust lawyers and economists advocate exceptions to the rules for particular transactions.

In the proposed XM-Sirius merger, for example, proponents argue that the Merger Guidelines be relaxed to accommodate their transaction because satellite radio is a nascent, high-technology industry characterized by dynamic demand. We argue that the AMC correctly refrained from recommending high-tech exceptions for defining markets in merger proceedings. Merger proponents naturally seek to expand the relevant product market as much as possible. But if alternative products are included in the relevant market without a showing of significant cross-price elasticities - that is, without evidence of buyer substitution between the two products in response to a relative change in prices - then market definition is unbounded.

On March 24, 2008, the Antitrust Division announced that it would not challenge the merger because, in the agency's estimation, the evidence did not show that the merger would enable the parties to profitably increase prices to satellite radio customers. The Division's use of a higher standard for intervention than the incipiency standard in section 7 of the Clayton Act increases the risk of false negatives.

Finally, the XM-Sirius merger exemplifies the use of preemptive offers of merger conditions by the merger parties to gain political favor and to allocate post-merger rents to influential third-party interveners. The most significant preemptive concessions were XM's and Sirius's offer to freeze the monthly subscription price at the pre-merger monthly rate of $12.95 and to offer a variety of new tiered program packages that XM and Sirius characterized as à-la-carte. These offers presumably were intended to neutralize the traditional antitrust concerns that a merger among direct competitors leads to higher prices and to win the support of certain vital constituencies.

To the contrary, we argue that the offer to freeze prices could reduce welfare and that the Federal Communications Commission lacks the authority to create a rate-regulated monopoly for satellite radio. Furthermore, because the à-la-carte offering would not hold constant other non-price factors, consumer surplus could fall.

Abstract:
The competitive transformation of telecommunications and other network industries in the United States has caused governmental policy makers to be increasingly concerned with the fairness of the deregulatory process. This Essay offers a set of concrete guidelines that regulators of network industries should follow in removing regulatory controls: To achieve the productive and allocative benefits of competition and to ensure that the transition from regulation to competition is accomplished fairly, regulators should observe the principles of economic incentive, equal opportunity, and impartiality. Economic incentives allow incumbent firms to maintain their quality of service and innovation and investment, and allow them to recover stranded costs for past, present, and future regulatory obligations. Regulators can ensure equal opportunity by ensuring that regulation falls evenly on both competitive entrants and incumbents. Impartiality in increasing competition can be achieved by regulators refraining from market interventions that favor particular competitors. Only by treating incumbents and entrants symmetrically and resisting the temptation to manage competition will the regulators ensure that the deregulatory process in network industries will yield all of the benefits of market competition.

Abstract:
"Patent holdup" is described by its critics as occurring when a patent-holder uses a court's issuance of an injunction (or merely the threat of an injunction) to block an infringer's use of the patented invention unless the infringer, who has made sunk investments in expectation of using the patented invention, pays a royalty that is, from the infringer's perspective, excessively high. "Royalty stacking" is described by its critics as occurring when a product sold to end users incorporates many separate patented inputs, and the holder of the patent to one such input - an input lacking immediate substitutes - demands a high royalty from the manufacturer of the end product without regard to the effect that this royalty will have on the total amount of royalties that the manufacturer must pay to all holders of patented inputs and, consequently, the price that the manufacturer must charge end users. Professors Mark Lemley and Carl Shapiro argue that patent holdup and royalty stacking are serious problems, and that legislators or courts (if not both) should limit the circumstances in which a patent-holder may avail himself of the existing statutory right to enjoin the infringer's use of the patent - essentially only if the patent protects an input that represents a "significant" portion of the final value of the product.

I critique the Lemley-Shapiro model of patent law. I dispute its main finding that the threat of an injunction inflates royalty payments in many cases relative to a hypothetical benchmark royalty rate. The Lemley-Shapiro framework does not properly account for the relevant error costs associated with weakening the presumption of injunctive relief. In particular, Lemley and Shapiro fail to consider how removing the presumption of injunctive relief could decrease dynamic efficiency. Furthermore, even if their framework were correct, Lemley and Shapiro rely on biased parameters that preordain their result. This outcome follows for two reasons. First, because Lemley and Shapiro fail to account for the real option conferred on potential users of the patent when a patent-holder makes sunk investments in new technologies or products, their hypothetically reasonable royalty rate is biased downwards. Second, the Lemley-Shapiro model reaches its result not by deriving a general bargaining model, but by assigning all the bargaining power to the patent-holder and claiming a general result. Both factors bias Lemley's and Shapiro's results in favor of the infringing party.

Abstract:
We examine the competitive behavior of a public enterprise that does not seek solely to maximize its profit. We find that despite a reduced focus on profit, a public enterprise may have stronger incentives to pursue anticompetitive activities than does a private, profit-maximizing firm. These activities include setting prices below marginal cost, raising the operating costs of existing rivals, erecting entry barriers to preclude the operation of new competitors, and circumventing regulations designed to foster competition.

public enterprises, anticompetitive activities, barriers to entry, setting prices, marginal cost, anticompetitive behavior

Abstract:
Mr. Sidak and Professor Spulber extend here the analysis in Deregulatory Takings and Breach of the Regulatory Contract, published last year in this Review. They respond to comments and criticisms raised not only by Professors Baumol and Merrill, but also by Judge Williams and Professor Williamson in their Comments published last year. Sidak and Spulber begin by exploring the constitutional limitations on the government's ability to redefine the public purpose to which a regulated utility has dedicated its private property. Then, the authors examine whether the government has made givings that implicitly compensate the regulated firm for its diminution in value owing to the imposition of policies mandating network unbundling at regulated prices. Sidak and Spulber refine the limiting principles for the recovery of stranded costs that they articulated in their earlier article and show how those principles reconcile with the actual treatment of losses from deregulation in disparate industries. Next, they expose the economic fallacies in the notion of forward-looking costs as that term has been used by the Federal Communications Commission and state public utility commissions to set prices for mandatory network access under the Telecommunications Act of 1996. The authors analyze the Supreme Courts 1996 decision in United States v. Winstar Corp. and argue that the reasoning employed by seven Justices in that case comports not only with earlier decisions of the Court construing the regulatory contract with public utilities, but also with the contemporary economic analysis of why the regulatory contract is essential and efficient. Sidak and Spulber explain how transition bonds may solve the stranded cost conundrum in the telecommunications and electric power industries by permitting the securitization of stranded costs in a manner that restores investors' faith in the state's ability to make credible commitments. Finally, the authors examine the significance of the Eighth Circuit's 1997 decision in Iowa Utilities Board v. FCC for the debate over deregulatory takings and breach of the regulatory contract.

Abstract:
Local telephone companies have long been regulated as natural monopolies. However, technological innovation and the prospect of falling regulatory barriers to entry now expose some portions of the local exchange to competition from cable television systems, wireless telephony, and rival wireline systems. Nevertheless, it is probable that certain parts of local telephony will remain naturally monopolistic. In these cases the local exchange carrier must be permitted to sell necessary inputs to its competitors in the market for final telecommunications products at a price that reflects all its costs, including opportunity costs. This essay explains in nontechnical terms the derivation and logic of the efficient component-pricing rule, or ECPR. The authors' analysis applies to any network industry. Thus, it is useful in antitrust analysis of essential facilities and in regulatory analysis of transportation, energy transmission, pipelines, and mail delivery.

Abstract:
The benefits of competition among the long-distance interexchange carriers (IXCs) are not realized equally by all their customers. Despite the declines in rates under the discount plans, we document that basic message toll service (MTS) rates have been rising for several years. We show that poorer and less educated customers pay more than better educated and more affluent customers. We suspect that the reason for this correlation is that they are more apt to pay the MTS rates or other high rates, and we present some preliminary evidence that this tendency explains the correlation that we find. We also present evidence that the payment differences exist even after controlling for usage. These findings are significant because it seems likely to us that these two patterns (rising MTS rates and higher payments by the poor and the less educated) will each be ameliorated by the entry of the regional Bell operating companies (RBOCs) into long-distance markets - a state-by-state regulatory process that was nearly complete as of the beginning of 2004.

competition, regulation

Abstract:
Broadcast regulation can exploit sunk costs as a means of exerting control over the content of broadcast speech to compel favored speech and to suppress disfavored speech. One conspicuous FCC policy that manifests rent extraction is the newspaper-television cross-ownership prohibition. A rent-extraction model of broadcast regulation shows how such seemingly structural regulation can facilitate the government's influence over broadcast content and, indeed, why it is advantageous for the FCC consciously to embed methods of influencing broadcast content within regulations that are likely to be subjected to lessened degrees of judicial scrutiny.

Federal regulators since the early 1930s have sought to control broadcast content. With that experience as prologue, the FCC's sustained inability to provide a persuasive rationale for the newspaper-television cross-ownership rule invites the question whether the rule serves a function that is politically expedient, opaque, and durable but constitutionally illegitimate. Through economic analysis, one can hypothesize such a function.

Though ostensibly a structural regulation of the broadcast industry, the newspaper-television cross-ownership rule increases a broadcaster's vulnerability to political efforts to control content. The rule does so by raising the amount of the broadcaster's investment in his station that is at risk of loss if the FCC does not renew his license. Asset-specific investment by the broadcaster exposes him to the risk that the regulator can influence the broadcaster's content choices by threatening to terminate the revenue stream necessary to recover the portion of the cost of his asset-specific investment that remains undepreciated at the end of the current license term. The regulator's ability to block cost recovery of the broadcaster's undepreciated asset-specific investments thus can provide the lever for government control of broadcast content.

Extreme skepticism is therefore warranted when the FCC represents that the newspaper-television cross-ownership rule has no potential to infringe freedom of speech or of the press. This economic theory of censorship is consistent with the words and actions of several U.S. Senators in 1987 who sponsored legislation subsequently found by the D.C. Circuit to violate the First Amendment rights of Rupert Murdoch. The News America case from 1987 is evidence that enforcement of the rule by the FCC is susceptible to influence by those in government who wish to punish publishers and broadcasters who criticize powerful public officials.

censorship, regulation, media

Abstract:
The taxation of goods and services by a state is considered efficient when consumer welfare is maximized subject to the condition that the local government raises a specified amount of revenues. According to the Ramsey principle of optimal taxation of commodities, an efficient commodity tax induces little change in consumer behavior and does not fall on a good that is relatively important in the budgets of the poor. Therefore, the optimal commodity tax is one that consumers cannot easily avoid, a characteristic that leads to the conclusion that a particular tax's efficiency will be greater the more insensitive is consumer demand to the price of that good.

States are increasingly relying on the taxation of wireless services as a source of revenue. For example, the average wireless consumer in New York pays a 16 percent tax on his wireless bill, which is nearly double that of the average business tax in New York. In fact, the average state tax rate on wireless services exceeds the average state tax on general business services by 2.34 percentage points. States have not, however, analyzed consumer demand for wireless services to determine whether it is efficient to tax wireless services with such intensity.

In this paper, we estimate the own-price elasticity of demand for wireless service using a survey dataset of wireless consumption. Using data on wireless consumption between 1999 and 2001, we find that the own-price elasticity of demand for wireless services is between -1.12 and -1.29. With these elasticity estimates, we find that reducing the taxation of wireless services by one dollar would improve economic welfare by between $1.23 and $1.95. This empirical finding calls into question the wisdom of the high taxes that many states impose on wireless services.

Wireless, taxation, regulation, telecommunications

Abstract:
Current controversies over patent policy place standard-setting organizations (SSOs) on a collision course with antitrust law. Recent theoretical research conjectures that, in an SSO, patent owners can “hold up” patent users in the sense of demanding high royalties for a patented input after the SSO has adopted the patented technology as an industry standard and manufacturers within the SSO have incurred sunk costs to design end products that incorporate that standard. Consistent with this conjecture, actual SSOs have recently sought no-action letters from the Antitrust Division for a variety of amendments to SSO rules that would require or request, at the time a standard is under consideration, the ex ante disclosure by the patent owner of the maximum royalty that the patent owner would charge under the regime of fair, reasonable, and nondiscriminatory licensing. This price information — which is characterized as the “cost” of the patented input — would, under at least one recent SSO rule modification, be a permissible topic for potential users of the patent to discuss when deciding whether to select it in lieu of some alternative standard. This exchange of information among horizontal competitors would occur ostensibly because the cost of the patented technology had been characterized as simply one more technical attribute of the standard to be set, albeit an important technical attribute. The Antitrust Division and the Federal Trade Commission have jointly stated that such discussion, by prospective buyers who are competitors in the downstream market, of the price of a patented invention that might become part of an industry standard should be subject to antitrust scrutiny under the rule of reason rather than the rule of per se illegality. The rationale that the antitrust agencies offer for applying the rule of reason to such conduct is that such horizontal collaboration might avert patent holdup. The Antitrust Modernization Commission (AMC) similarly endorsed the view that rule-of-reason analysis is appropriate for ex ante discussion of royalty terms by competing buyers of patented technology. This rule-of-reason approach, however, is problematic because it conflicts with both the body of economic research on bidder collusion and with the antitrust jurisprudence on information exchange and facilitation of collusion. Put differently, because of their concern over the possibility of patent holdup, the U.S. antitrust agencies and the AMC in effect have indicated that they may be willing in at least some circumstances to forgo enforcement actions against practices that facilitate oligopsonistic collusion by encouraging the ex ante exchange of information among competitors concerning the price to be paid for a patented input as an implicit condition of those competitors’ endorsement of that particular patented technology for adoption in the industry standard. However, neither the proponents of these SSO policies nor the antitrust agencies and the AMC have offered any theoretical or empirical foundation for their implicit assumption that the expected social cost of patent holdup exceeds the expected social cost of oligopsonistic collusion. This conclusion does not change even if one conjectures that such collusion will benefit consumers by enabling licensees to pass through royalty reductions in their pricing of the downstream product incorporating the patented technology. Proper economic evaluation of the plausibility of the passthrough conjecture will require information about the calculation of royalty payments; the demand and supply elasticities facing the licensees; and the structure of any industries further downstream between the manufacturer and the final consumer. Consequently, the magnitude of this effect will likely be a matter of empirical dispute in every case. Moreover, such a justification for tolerating horizontal price fixing finds no support in antitrust jurisprudence. Given the analytical and factual uncertainty over whether patent holdup is a serious problem, it is foreseeable that antitrust questions of first impression will arise and affect a wide range of high-technology industries that rely on SSOs. However, there is no indication that scholars and policy makers have seriously considered whether oligopsonistic collusion in SSOs is a larger problem than patent holdup.

Abstract:
This paper analyzes the contribution of the computer and video gaming industry (“entertainment software”) to the U.S. economy. In 2005, revenues for entertainment software products and directly related accessories were $10.5 billion. By definition, every dollar spent on entertainment software in the United States contributes directly to the gross domestic product (GDP). In 2004, U.S. sales of entertainment software reached $8.2 billion; total world sales reached $25.4 billion. The cumulative average rate of entertainment software sales in the United States is expected to remain at 15 percent per year through 2010. GDP also increases with exports of U.S. video games to foreign countries. According to the annual reports of some U.S.-based video game software firms, these exports totaled $2.1 billion in 2004. Hence, the direct, immediately identifiable contribution of entertainment software to the nation's output exceeded $10.3 billion in 2004 and growing quickly. We analyze these contributions of the entertainment software industry in a section entitled “The Market for Entertainment Software as a Good.”

The direct contribution to the nation's output does not reflect the total contribution of the entertainment software industry. The purchase of video game triggers the purchase of a host of complementary products, and thus the sale of software contributes indirectly to the nation's output. We analyze these specific contributions of the entertainment software industry in a section entitled “The Stimulative Effect of Entertainment Software on Technological Innovation and Consumer Demand in Complementary Markets.” These complementary products can be placed in four categories: processors, content, devices, and broadband Internet access. By tracing the sales of these complementary products, we estimate that the direct sales of entertainment software stimulate additional purchases of roughly $6.1 billion each year in the United States. Some complementary sales, such as those of specialized gaming personal computers, can be claimed in their entirety. A portion of other sales, such as the sale of high definition televisions and broadband Internet access service, should also be allocated to the entertainment software industry. Not only does entertainment software trigger complementary sales, it triggers those complementary sales faster than they would otherwise occur. For example, but for the demand for video games, computer processing would not have developed as quickly. When one accounts for these complementary sales, the direct and indirect contribution of entertainment software to the nation's output exceeded $16.4 billion in 2004.

As impressive as this $16.4 billion is, the simple calculation of the direct contribution to GDP still understates the total economic contribution of the entertainment software industry because it does not consider two other important sources of economic value. First, the entertainment software industry invests significantly in specialized human capital and other specialized inputs, such as hardware and software, used to make a video game. The industry invests a large percentage of its sales into research and development (R&D) in an effort to generate even more innovative games for the next generation of players. Those investments in human capital and R&D create external benefits that are enjoyed by other sectors of the economy. We analyze these particular contributions of the entertainment software industry in a section entitled “The Demand for Inputs Used in the Production of Entertainment Software.” Second, video games find other applications, sometimes intentionally and other times by accident, in other industries throughout the economy. Although these “technological spillovers” are not captured in the GDP numbers, they represent a significant contribution to the overall economy because increases in productivity caused by advances in entertainment software translate into a higher standard of living in the future. We analyze these particular contributions of the entertainment software industry in a section entitled “Technological Transfers from the Entertainment Software Industry.”

Video Games, software

Abstract:
A recurring issue in the regulation of public utilities is whether the firm should be permitted to recover the cost of particular assets through its allowed rates. The traditional standards have been the backward-looking prudency test and the forward-looking used-and-useful test. Under the latter, the utility may recover the cost of a particular asset, including a competitive return on that capital, if the asset is actually used by the utility and is useful in providing service to consumers. The option value of excess capacity helps to explain the difference between foresight and hindsight models for the bearing of market risk in the regulated network industries. We provide an economic answer to the question, When is an investment beneficial? A utility's investment in seemingly excess capacity confers an immediate option on consumers, an option having substantial economic value. In that sense, excess capacity is a capital investment that not only is currently used by the utility, but also is currently useful to consumers. Excess capacity is a form of insurance for consumers to protect them when demand unexpectedly surges, supply unexpectedly collapses, or both occur simultaneously. But a regulator's view of whether the investment in a particular asset is used and useful is limited by her personal experience and the institutional memory of the regulatory body. To borrow from the language of statistics, that personal experience and institutional memory aids the regulator in making in-sample predictions of whether consumers will, over some relevant period of time, indeed exercise the option inherent in the utility's excess capacity. That experience, however, provides little if any guidance about out-of-sample market conditions, such as the California electricity crisis of 2000-01. Yet it is especially for such outlier events that insurance confers its greatest advantage on the insured-in this case, the very consumers whom public utility regulation exists to protect.

Abstract:
The September 2009 announcement that the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice have initiated a review of the Horizontal Merger Guidelines provides a formal process for redefining the proper role of dynamic competition in antitrust law.

How would competition policy be shaped if it were explicitly to favor Schumpeterian (dynamic) competition over neoclassical (static) competition? Schumpeterian competition is the kind of competition that is engendered by product and process innovation. Such competition does not merely bring price competition. It tends to overturn the existing order. A “neo-Schumpeterian” framework for antitrust analysis that favors dynamic competition over static competition would put less weight on market share and concentration in the assessment of market power and more weight on assessing potential competition and enterprise-level capabilities. By embedding recent developments in evolutionary economics, the behavioral theory of the firm, and strategic management into antitrust analysis, one can develop a more robust framework for antitrust economics. Such a framework is likely to ease remaining tensions between antitrust and intellectual property. It is also likely to reduce confidence in the standard tools of antitrust economics when the business environment manifests rapid technological change. It appears that the Antitrust Division of the U.S. Department of Justice has attempted to incorporate more dynamic analysis, but the result has been inconsistent across different mergers and different doctrinal areas of antitrust law. Moreover, a complicating factor in the transformation of the law is the fact that the federal courts have, by embracing the reasoning in the Merger Guidelines promulgated several decades ago by the Antitrust Division and the Federal Trade Commission, caused antitrust case law to ossify around a decidedly static view of antitrust. Put differently, in the years since 1980, the Division and the FTC have successfully persuaded the courts to adopt a more explicitly economic approach to merger analysis, yet one that has a static view of competition. The result is not a mere policy preference. It is law. To change that law to have a more dynamic view of competition will therefore require a sustained intellectual effort by the enforcement agencies (as well as by scholars and practitioners) that, once more, engages the courts to reexamine antitrust law, as they did in the late 1970s during the ascendancy of the Chicago School, when antitrust law became infused with its current, static understanding of competition. A necessary but not sufficient condition for that effort is a public process by which the Division and the FTC revisit and restate the Merger Guidelines in a manner that clarifies and defends the role of dynamic competition in antitrust analysis. We therefore applaud the announcement of the antitrust agencies in September 2009 to solicit public comment on the possibility of updating the Merger Guidelines. Assuming that the Division and the FTC decide to revise the existing Merger Guidelines, those revised guidelines (and useful complementary undertakings, such as generalized guidelines on market power and remedies) then will require leadership by the enforcement agencies to persuade the courts that antitrust doctrine should evolve accordingly. That neo-Schumpeterian process may take a decade or longer to accomplish, but it is a path that we believe the Roberts Court is willing to travel.

Abstract:
Around the world, regulators since 1996 have mandated that incumbent local exchange carriers (ILECs) offer competitors access to their network at regulated prices that reflect forward-looking cost. Regulated prices for unbundled network elements are based on total element long-run incremental cost (TELRIC), which in turn is calculated using engineering models that estimate the costs of a hypothetical carrier employing the most efficient telecommunications technology currently available and the lowest cost network configuration, given the existing location of the ILEC's actual wire centers. These cost models require detailed estimates of the equipment and installation prices of the numerous components that are used in a telecommunications network. When there is uncertainty about how these prices will change over the period for which costs and prices are required, the resulting cost estimates used for setting the regulated prices of unbundled network elements can be very inaccurate.

Similarly, when regulators in other jurisdictions are considering such rates as benchmarks, it is necessary to make adjustments to account for such large differences in critical input prices, so that the benchmark rates will be representative of the costs that actually will be incurred by efficient carriers offering unbundled elements in those jurisdictions. The precipitous rise in the price of copper since 2003 exemplifies this need to reevaluate the inputs used by regulators in their cost model, as well as the inferences drawn from those models. These increases differ from the type of constant annual expected input price growth (or decline) situation that some cost models used outside the United States have accommodated with tilted annuity methods. Rather than a gradual anticipated price increase, copper prices escalated rapidly and are likely to remain well above the levels that regulators used to set existing loop rates.

Accounting for such evidence would change the forward-looking costs of a hypothetically efficient ILEC network that one of the most prominent U.S. state regulatory commissions - the California Public Utilities Commission (CPUC) - established in 2006. Meanwhile, in 2007, the Commerce Commission in New Zealand has similarly employed a benchmarking methodology for the pricing of unbundled loops that fails to account for the increased price of copper. A global trend may be emerging among telecommunications regulators to ignore the input requirements of their own forward-looking cost models. Such a trend would be consistent with a version of regulatory opportunism in which regulators are forward-looking only when doing so produces lower regulated prices over time.

Abstract:
Fifteen scholars on auctions and telecommunications regulation urge the FCC to cancel bids made in, or permit winning bidders to opt out of, the reauction of the NextWave licenses in Auction 35.

For auctions to function efficiently, buyers and sellers must follow basic rules, including the rule that a seller deliver in a timely manner what the winning bidder has purchased. This rule has not been applied in Auction 35. The FCC auctioned something that it did not have - immediate access to the spectrum for the winning bidders. Thus, if the FCC forces the winning bidders to pay, they will sue the agency for forcing them to pay for something that they did not receive. Alternatively, their shareholders will sue the companies. Meanwhile, wireless carriers have invested in less efficient technologies to meet capacity needs.

The FCC has said that its current policy toward Auction 35 seeks to "protect the integrity" of the spectrum auction process. The opposite is already occurring. The FCC increases uncertainty in the wireless market if it holds carriers accountable for winning bids for licenses that the agency cannot deliver. Bidders will discount their future bids accordingly, and auction revenues will fall. That outcome does not benefit consumers, taxpayers, workers, or shareholders.

Abstract:
Few phrases in public policy have become so overused so quickly as the information highway. Although it is unclear to many what that superhighway is or will be, this uncertainty has not prevented proposals to regulate the superhighway from being made. In this Article, we examine the economic principles that should govern competition and regulatory policies concerning the development and operation of the information superhighway.

In Part II of this Article, we discuss the evolution of technology for interactive broadband networks. While Part II analyzes the production (or supply) side of interactive broadband networks, Part III examines the demand side and asks: What is the likely market for interactive broadband services? In Part IV, we explain the economic principles for open entry and efficient, subsidy-free pricing that are now widely accepted for regulating network industries.

In Part V, we analyze regulatory policies intended to prevent incumbent, regulated firms (such as local exchange carriers) from cross-subsidizing their deployment and operation of interactive broadband services to the detriment of equally efficient rivals - and, eventually, consumers. In Part VI, we examine whether new interactive broadband services should be regulated.

In Part VII, our discussion turns to the Canadian telecommunications market because of our familiarity with certain policies raised there recently in a major regulatory proceeding. In Part VIII, we examine whether the Canadian cable television industry should be protected from competition while it upgrades its network to provide interactive broadband services, including services that would compete with the voice and data services of local exchange carriers.

Abstract:
A recent phenomenon in competition policy is the acquisition of a private firm by an enterprise that is either wholly owned by government or in the midst of privatization. Such an acquisition poses the question of how public ownership may alter the incentives of a firm to engage in anticompetitive conduct. It also prompts one to examine the process by which such altered incentives revert, as the level of government ownership declines, to the same incentives that face purely private firms. Using Deutsche Telekom's acquisition of VoiceStream Wireless as a case study, this Article presents the economic questions relevant to evaluating the competitive consequences of acquisitions by partially privatized firms. It predicts gains or losses to various constituencies of producer groups. It then analyzes bond ratings and weighted-average costs of capital to determine whether such data are consistent with the hypothesis, advanced by parties opposed to such foreign investment, that partially privatized acquirers benefit from government subsidization of their credit.

Abstract:
In December 2002, President Bush established the Presidential Commission on the United States Postal Service for the purpose of proposing how government provision of mail delivery services might be reformed or transformed. The Commission reported in July 2003 that the Postal Service should not be privatized but rather should remain a public entity that would increasingly be run like a commercial enterprise. In 2004, however, the Supreme Court moved the Postal Service farther away from being a true commercial enterprise when it held in the Flamingo Industries case that the agency is immune from antitrust law. In this article, we argue that the Postal Service already operates like a commercialized governmental enterprise and that pursuing that path even further would increase rather than decrease the problems faced by the U.S. postal sector. Although we support privatization, that option may not be politically feasible. Consequently, we examine how postal reform might proceed incrementally in the form of an improved government agency. That approach would entail two broad principles for postal reform. The first is to define the Postal Service's mission in terms of remedying conditions of market failure. That goal encompasses universal service, quality of service, and reasonableness of rates. The second broad principle is to avoid competitive distortions through the pricing and product offerings of the Postal Service. This principle entails avoiding government production in markets that are or can be served satisfactorily by private firms, as well as avoiding discrimination among mailers and among competitors in secondary markets. We then present specific recommendations that would advance these two broad goals if the Postal Service remains an agency of the federal government. Those recommendations encompass costing, universal service, rate design and mail classification, the postal monopoly, and market entry and exit — as well as legislative reversal of Flamingo Industries.

Abstract:
Antitrust law currently lacks a unified theory of liability and damages. The Supreme Court's acceptance of consumer welfare as the goal of antitrust law underscores a growing judicial inclination to construe antitrust liability rules to encourage efficient production and efficient resource allocation. As the Court reconstructs the law of antitrust liability, it should also revise the law of antitrust damages by defining the rights created by those damage measures to accomplish specific economic goals.

Part I analyzes the consumer's economic injury from exploitative behavior and shows that, prevailing contrary opinion notwithstanding, the Clayton Act does not unambiguously establish a consumer right to be free from such injury. Because the prevailing interpretation may cause allocative inefficiency, Part I proposes a countervailing producer's right and a corresponding damage rule. Part II analyzes the kind of injury that competitors suffer from expansionary behavior. It criticizes the competitor's right suggested by the current damage rule and proposes an alternative right and damage rule that would improve social welfare by enhancing productive efficiency. Part III proposes implementing the economic rights suggested in Parts I and II through a judicial test for calculating antitrust damages that would restrict the availability of such damages.

Abstract:
In April 2004, the World Trade Organization (WTO) assumed a new role as a highly specialized, global regulator of domestic telecommunications policy. In response to a complaint filed by the United States, a WTO arbitration panel found that Mexico had violated its commitments under the Annex on Telecommunications to the General Agreement on Trade in Services (GATS) by failing, among other things, to ensure that Telmex, Mexico's largest supplier of basic telecommunications services, provide interconnection to U.S. telecommunications carriers at international settlement rates that were cost-oriented. The WTO panel deemed long-run average-incremental cost (LRAIC) to be the appropriate cost standard for setting settlement rates. Mexico thus became obliged to change its domestic telecommunications regulations or face trade sanctions.

The decision is the first WTO arbitration to deal solely with trade in services under GATS. This article shows that both the U.S. complaint against Mexico and the WTO decision misunderstood or ignored critical economic facts and principles. Both conflated international settlement rates and domestic interconnection pricing, and both failed to recognize the factors that would justify Mexico's permitting Telmex to charge a settlement rate exceeding LRAIC. Moreover, the U.S. government failed to understand that U.S. long-distance carriers were not passing reductions in Mexico's international settlement rate on to their U.S. customers. Finally, both the U.S. government and the WTO incorrectly defined the relevant market and incorrectly evaluated market power.

The relevant economic question should have been whether Telmex had market power in point-to-point international telecommunications services between the United States and Mexico. The WTO decision reveals a startling low level of economic sophistication in its analysis of inescapably economic questions. Given the high level of economic sophistication that is now standard in competition law and sector-specific regulation around the world, the WTO has made a poor start in its implementation of the GATS arbitration process.

Telecommunications, trade, world trade organization, WTO, settlement rates, USTR, interconnection, Telmex, resale, LRAIC

Abstract:
Competitors proposing to merge sometimes propose price regulation in a consent decree as a condition of receiving merger approval. Antitrust enforcement agencies in the United States have been reluctant to use such price-regulating decrees, as they suffer from practical problems in implementation. It is less recognized, however, that the use of consent decrees to regulate post-merger prices may be unlawful. Such decrees exceed the scope of antitrust law and blur the distinction between the legislative power to regulate prices and the executive power to enforce the antitrust laws. Despite the willingness of merging parties to accept price regulation in consent decrees, economic and constitutional considerations counsel against antitrust enforcement agencies adopting this practice.

Abstract:
Competitors proposing to merge sometimes propose price regulation in a consent decree as a condition of receiving merger approval. Antitrust enforcement agencies in the United States have been reluctant to use such price-regulating decrees, as they suffer from practical problems in implementation. It is less recognized, however, that the use of consent decrees to regulate post-merger prices may be unlawful. Such decrees exceed the scope of antitrust law and blur the distinction between the legislative power to regulate prices and the executive power to enforce the antitrust laws. Despite the willingness of merging parties to accept price regulation in consent decrees, economic and constitutional considerations counsel against antitrust enforcement agencies adopting this practice.

Abstract:
In this piece, we respond to comments on our earlier essay on access pricing in telecommunications on the efficient component-pricing rule (ECPR) that appeared in the Winter, 1994 issue of the Yale Journal on Regulation. We are in essential agreement with the comments of Professor Alfred Kahn and Dr. William Taylor, and we are unconvinced by Dr. William Tye's criticisms of the ECPR. We also comment on the decision of the Judicial Committee of the Privy Council of the House of Lords, which embraced the ECPR as a principle consistent with New Zealand antitrust law. We conclude with some remarks about the likelihood that other courts and regulators, particularly those in the United States, will adopt the ECPR.

Abstract:
In the debate over network neutrality, the real issue of consequence is how owners of broadband access networks will shift their business models away from a subscriber-funded model to a model that relies more on advertising. That clash with the other players in the market is the heart of the network neutrality controversy.

network neutrality

Abstract:
Through the end of the twentieth century, the most critical regulatory issue facing electric utilities was stranded costs, which can be defined as those costs that the utilities were permitted to recover through their rates but whose recovery may have been impeded or prevented by the advent of competition in the industry. These costs represent expenditures incurred by a utility in the past in meeting its obligation to serve all customers within the area in which it held an exclusive franchise, granted to it under the traditional regulatory regime. The article explores whether entry of competitors who were not burdened by these stranded costs could have prevented incumbent utilities from recovering their costs. In this article, we explain why it generally benefits consumers for stranded costs to be recovered as part of the price of service. In part I of this article we discuss the efficiency justifications, and in part II the equity justifications, for recovery of stranded costs. In part III, we briefly discuss the takings implications of stranded costs. In part IV, we discuss a utility's duty to mitigate stranded costs.

Abstract:
This Article evaluates the regulatory treatment of windfall proceeds from a utility's purchase and subsequent sale of important assets. For service to be sustained, regulatory treatment of proceeds from all jurisdictional activities is such that expected returns to equity investment will equal the equity costs of capital. But over time, a utility's actual net revenues vary from expected net revenues, and that variation may be positive or negative. Economic efficiency requires that the regulator allocate these variations to the investor: Given symmetric treatment of unexpected profit and loss outcomes, the risks that the investor bears under the regulatory contract are properly compensated. The shareholder should receive any gain, as a result of a change in market conditions, including changes in technology that increase the demand for the utility's service or render its capital stock more productive. The exception is that the ratepayer should receive any gain that the utility experiences as a result of a change in regulatory conditions. On the utility's sale of an asset that has been used to provide regulated services, and that has appreciated in value, the utility's shareholders should receive the proceeds from the asset's sale. This rule, which follows from efficiency theory, is evident in the reported decisions by courts and regulatory commissions in the United States. In short, the jurisprudence on the allocation of windfall proceeds from a utility's sale of assets advances economic efficiency.

Windfall Gains, Stranded Costs, Regulatory Impact

Abstract:
Payola is the practice of making undisclosed payments or other inducements to radio (or television) broadcast personnel in consideration for the inclusion of material in radio (or television) programming. The origin and economic function of payola were first analyzed in 1979 by Professor Ronald Coase.

He argued three fundamental propositions. First, every time a radio station plays a song, it in effect advertises a specific product (namely, a phonograph record) that a record company has for sale. Payola is a price mechanism for efficiently allocating this scarce but otherwise unpriced on-the-air advertising of popular music. There is no reason to believe that a record company that dispenses payola will spend its finite advertising resources promoting bad music rather than good music. Second, long before the commercial development of radio, a similar pricing system was commonplace in the United States with respect to the inclusion of songs in live performances by popular singers and musicians. At that time, the implicit advertisement was for sheet music sold by music publishers. Third, since at least the 1890s, movements to prohibit payola have been used as competitive weapons by record and music publishing firms. Those firms have acted, sometimes in concert, not only to reduce their own advertising costs, but also to restrict advertising alternatives by which new entrants could expose to the public their sound recordings and copyrighted compositions.

Apart from expressing indignation over payola, Senator Gore's remarks suggest that the transaction costs of using payola as a price mechanism for allocating scarce on-the-air exposure to pop music increased between the time that Professor Coase published his article in 1979 and the advent of the new payola. In this Article, we examine how such a degradation in transactional efficiency could have occurred.

In Part I, we analyze the law and economics of record promotion. We show why it was difficult for a record company to specify and monitor contractual performance by independent promoters, and how this difficulty enabled independent promoters to act opportunistically vis-a-vis the record company. In Part II, we analyze the new payola scandal of 1986, which we argue resulted from transactional inefficiency in the contractual relationship between record companies and contractors for record promotion, inefficiency that manifested itself in opportunistic behavior by independent promoters.

In Part III, we argue that the major record companies did not counteract this opportunism through vertical integration into radio broadcasting because FCC regulation effectively blocked such integration, thus causing the desired efficiency outcomes to be approximated more inexpensively through the advent of music video broadcasting and the growth of syndicated radio programming. Finally, in Part IV we propose that payola be deregulated in a manner that would eliminate the inefficiencies of opportunistic behavior by independent promoters while preserving certain efficiencies that they may have created. Specifically, we propose that the FCC amend its sponsorship identification rules so as to require the disclosure of certain information that would enable the market for hit records to function more like an organized exchange.

Abstract:
The terrorist attacks of September 11, 2001, will change how we read the Constitution, and they will diminish the value of the elegant abstraction of a famous court decision like Youngstown Sheet & Tube Co. v. Sawyer. That new perspective will change far more than national security and separation of powers. Our understanding of the religion clauses, of the role of governors, of ethnic discrimination, and of what constitutes a compelling governmental interest are likely to change or may have already changed.

The opinions of the Supreme Court are not the only sources of wisdom about reading the Constitution. Empiricism rests upon experience. In contrast, innocence is a priori reasoning untested by empiricism. Measured by the standard of wisdom bought with experience, the abstract erudition of Supreme Court decisions, including Youngstown, is unimpressive. For the thousands murdered at the World Trade Center and the Pentagon, the orations in Youngstown about the separation of powers rang hollow: These victims lost not only liberty, but life. The carnage of September 11th will transform a new generation of Americans as much as Pearl Harbor transformed an earlier one.

September 11th was an intense, common experience that informed us about the balance between individual liberty and collective security. To believe in the existence of evil is no longer to be regarded as superstitious, antiquarian, or fanatical. September 11th reminds us that the text of the Constitution is replete with references to war, because the same Framers who devised the separation of powers and later wrote the Bill of Rights also saw the need to be vigilant in a dangerous world. It is an exaggeration to say that everything is different now. The words of the Constitution have not changed since September 11th. It has always been the case that the first duty that Article II, section 2 imposes on the President is to be Commander-in-Chief. What has changed, through experience, is our collective understanding of why the government's highest obligation under the Constitution is to defend its citizens.

With the collective experience of September 11th, we can now see, after years of self-indulgence masquerading as virtue, that liberty and security are more than abstractions to be manipulated in elegantly written Supreme Court opinions. A world of danger cannot be dismissed with pretty words. Youngstown is a poorly reasoned decision on both takings and separation-of-powers grounds. Was President Truman's seizure of the steel mills a legislative act, or was it a military act taken pursuant to his powers as Commander-in-Chief, in the defense of the free world in America's first open conflict of World War III? Justice Black's opinion for the Court so thoroughly denigrates the latter possibility that it runs the risk of overstating the case about the boundaries of presidential power in matters that genuinely do threaten national security, let alone matters that jeopardize the security of the entire free world. Read in this way, Youngstown is a power grab by the Court and Congress.

Youngstown has an unstated premise that the threat to liberty from foreign aggression is less than the threat to liberty when the President claims expansive powers to defend the nation from such aggression. September 11th was an awakening, an epiphany, to the empirical fact - not the abstract notion - that America had underestimated the danger of deadly aggression on its soil. The collective experience of witnessing thousands of American civilians slaughtered on American soil by foreign terrorists on September 11, 2001, is far more important to reading the Constitution today than is a case that has been portrayed as the backlash to the legally clumsy attempt, by a famously unpopular President, to invoke national security as the justification for seizing steel mills during a labor dispute in 1952, an election year in which control of the White House subsequently shifted from one party to the other.

So what guidance could we expect to glean from Youngstown after September 11, 2001, if President Bush were temporarily to conscript private property in the name of winning the war on terrorism? Not much, most likely. A modern replay of Youngstown during the war on terrorism would likely have a different result. September 11th is the page of history to Youngstown's volume of logic.

Abstract:
In this expert declaration, filed on behalf of the Consumer Coalition for Competition in Satellite Radio (C3SR), I analyze the application for authority to transfer control filed on March 20, 2007 by XM Radio, Inc., and Sirius Satellite Radio, Inc. ("Merger Application"). I also critique two reports submitted on behalf of XM and Sirius in support of their proposed merger: one by Professor Thomas W. Hazlett and another by Dr. Harold Furchtgott-Roth.

XM's and Sirius' use of the term "audio entertainment" - the product market in which XM and Sirius allegedly compete against terrestrial radio, mobile Internet radio, MP3 players, BlackBerries, and DVDs - is unprecedented in an antitrust context. My survey of antitrust and regulatory case law reveals that the phrase has never been used by an antitrust or regulatory authority in a way that is synonymous with the merging parties' usage of the term. XM and Sirius present no empirical evidence that those alternative audio entertainment devices constrain the pricing of satellite digital audio radio services (SDARS), which is the relevant antitrust inquiry. I also analyze new survey data of SDARS subscribers, which suggest that SDARS subscribers do not perceive terrestrial radio to be a close substitute for satellite radio.

The proposed merger of XM and Sirius would generate monopoly rent through higher subscription fees. It would create a monopoly provider of SDARS, which would operate completely free from the threat of entry by virtue of the fact that the FCC has no more spectrum to allocate for SDARS entrants. The FCC and the Department of Justice are being asked to confer upon XM and Sirius the power to charge monopoly prices for SDARS, and to excuse the two companies from the anticompetitive consequences of that merger on SDARS consumers because the merged company is willing to share a portion of its newly created monopoly rent with select political constituencies in the form of (incorrectly characterized) "merger-related benefits" - such as à-la-carte pricing. Other "merger-related" benefits include (1) locking in the existing monthly price at $12.95 for a fixed duration, (2) offering to bundle both the XM and Sirius packages for something less than twice the current price of one of them, (3) offering "rear-seat video," and (4) offering inter-operability. None of these offerings is merger-related, and none would offset the adverse merger effects.

In addition to higher prices for SDARS subscribers, the proposed merger would lead to more commercials for SDARS subscribers, which would further reduce consumer welfare. By eliminating an alternate, (largely) commercial-free SDARS provider, the proposed merger would allow the merged firm to inject commercials into their lineups without fear of customer churn. Indeed, the chief executive officer of Sirius told analysts that XM and Sirius would aggressively enter advertising markets if the merger were approved. Based on a stylized example, I estimate that the consumer harm from an additional five minutes of commercials per hour on the merged firms' lineup would likely exceed $1 billion per year.

Next, I explain that the FCC lacks authority to create a rate-regulated monopoly for SDARS, which the merging parties propose as a condition of merger approval. If the FCC attempts to regulate the prices of the merged XM and Sirius, it will necessarily be setting rates for the future - a legislative act that far exceeds the FCC's authority under current law. Therefore, the FCC would be acting unlawfully if it were to approve the Merger Application on the condition that price regulation be imposed as a matter of administrative fiat. Never, to my knowledge, has the FCC permitted an industry to consolidate into a rate-regulated monopoly when the market structure currently is unregulated and supports two competitors.

Finally, I explain why XM's and Sirius' argument that the opposition of National Association of Broadcasters (NAB) to the merger is proof that the merger is procompetitive is incorrect as a matter of logic, erroneous as a matter of economic analysis, and irrelevant as a matter of antitrust law. That argument underscores the merging parties' failure to acknowledge the complex nature of competition between SDARS (a subscription-funded service) and terrestrial broadcast radio (an advertiser-funded service) in what economists call a "two-sided market." By opposing the proposed merger, broadcasters are understandably concerned that a combined XM-Sirius would divert advertising dollars away from radio stations. Broadcasters fear that some advertisers (as opposed to consumers) perceive SDARS audiences and terrestrial broadcast radio audiences to be close substitutes for purposes of disseminating advertising messages. The merger proponents attempt to use factors concerning the market for radio advertising as a means to draw inferences about consumer perceptions of product substitutability on the other side of this two-sided market. But the fact that two suppliers (potentially) compete in the market for radio advertising does not imply anything about whether SDARS consumers perceive terrestrial broadcast radio to be reasonably interchangeable for SDARS.

For these reasons, XM and Sirius fail to carry their burden of proving that the proposed merger would advance the public interest. To the contrary, it is clear that the proposed merger would reduce competition and harm the public interest. The FCC should therefore deny the application for transfer of control.

Abstract:
Financial economists generally believe that the demand for a specific publicly traded stock is virtually perfectly price-elastic. This proposition has significant implications for many rules of corporate law that concern the correct value of the corporation. In a Yale Law Journal article, Professor Lynn Stout argues that the demand curve for the common stock of a publicly traded corporation is downward-sloping. She claims that a critical assumption underlying the capital asset pricing model (CAPM) is that investors have homogeneous expectations about a stock's value, and that this assumption implies that the CAPM will predict each stock to have infinitely (perfectly) price-elastic demand.

In Part I of this Article, we show that Stout's claim of less-than-infinite price elasticity does not advance her thesis that the market price of a security is an unreliable and unfair measure of value. Infinite price elasticity of a firm's stock is not implied by either the CAPM or the efficient capital market hypothesis (ECMH). The new-information hypothesis of stock price changes offers a more plausible explanation for events that Stout claims are more readily explained by price pressure resulting from less than infinitely elastic demand. In Part II, we explain why the appraisal remedy, and the stock market exception to it, are wealth-maximizing features of corporate law that enhance the liquidity of ownership and control of the publicly traded corporation. We further explain that Stout's appraisal rule, which would ignore market value even for publicly traded corporations, is flawed in theory and unworkable in practice. If adopted, Stout's rule would diminish the liquidity (and hence the value) of corporate ownership and control, make management's performance of its fiduciary duty in unsolicited corporate control transactions nonfalsifiable and, thus, diminish shareholder wealth.

Abstract:
Although the Department of Justice and the Federal Trade Commission (FTC) review proposed mergers, in mergers involving communications businesses the Federal Communications Commission (FCC) decides whether it would serve the public interest for the acquired firm to transfer its operating licenses to the acquiring firm. This public-interest discretion has become problematic because the FCC has repeatedly set conditions for merger approval that satisfy private pressure groups with economic or social agendas, yet are irrelevant to defending consumers from the consequences of increased market power.

A current example of this phenomenon is the proposed merger of XM and Sirius, the only two satellite radio companies holding FCC licenses for radio spectrum. The firms have an incentive to accept costly new regulation-for example, a requirement that the combined systems set aside channels for educational programming or offer programming on an à-la-carte basis-as the price of merger approval. Such concessions, however, are not relevant to the antitrust laws, where the concern is whether the merger will create monopoly power. Redistributing income to influential political constituencies does nothing to answer the question of whether the merger will harm consumers, who form the constituency that should matter most to the FCC.

Congress should remove the FCC's power to impose conduct remedies as a condition of approving a merger. Alternatively, Congress should require that the Tunney Act apply to conduct remedies imposed by the FCC in mergers, such that a federal district court would independently review whether merger conditions adequately addressed the specific harm to competition that the FCC alleged in the merger order.

Abstract:
In this declaration to the Federal Communications Commission (FCC), I give my expert opinion on the report submitted by Professor Steven C. Salop, Dr. Steven R. Brenner, Dr. Lorenzo Coppi, and Dr. Serge X. Morisi of CRA International on behalf of XM and Sirius in support of their proposed merger ("CRA Report"). I conclude that the CRA Report is deficient in the area of market definition because it fails to offer any direct demand-side evidence that alternative audio services constrain the price of satellite digital audio radio services (SDARS). The best inference that CRA can offer consists of alleged supply-side responses among providers of alternative audio entertainment services. But as the Merger Guidelines make clear, supply substitution generally - and supply substitution that occurs in different industries in response to non-price factors in particular - cannot inform market definition.

This report is organized as follows. Part I analyzes CRA's argument that SDARS customers perceive alternative "audio entertainment" devices to be close substitutes to SDARS. The vast majority of CRA's inferences are based on supply-side information, which is barred by the Merger Guidelines when defining product markets, except in rare cases in which decisions by sellers can serve as a proxy for how buyers would react to a relative change in prices. The fact that entrepreneurs may be designing new audio devices in their garages does not inform the ultimate question of whether, over the next two years, SDARS customers would substitute away from SDARS to another audio device in response to a relative change in prices. CRA tries to pass off this potential supply-side information as a proxy for evidence of demand responses among SDARS subscribers to price changes. The scant demand-side evidence presented by CRA also fails to inform the relevant question of substitution away from SDARS in response to a relative change in prices. SDARS customers activate or deactivate their subscriptions for specific reasons, none of which is a change in the relative price of SDARS to some alternative audio device.

Part II reviews CRA's critique of my declarations in this proceeding. Having reviewed the logic and the information that CRA presents in support of these claims, I conclude that none of them is correct. In its critique, CRA reveals some fundamental misunderstandings of the application of the Merger Guidelines. For example, according to CRA, the relevant switching costs are not those of existing SDARS customers, but instead the switching costs of potential SDARS customers. There can be no doubt that the cross-price elasticity of demand of potential SDARS customers is more sensitive than that of existing SDARS customers. But the only class of customers whose elasticity matters for defining the relevant product market under the Merger Guidelines is existing SDARS customers.

Part III analyzes CRA's novel and wholly theoretical concept called "dynamic demand," which is explained in a seven-page appendix filled with six equations. Because SDARS providers face this so-called "dynamic demand," CRA argues that the traditional small-but-significant-and-nontransitory increase in price (SSNIP) test for market definition must be altered to account for long-run profit considerations. Despite its extensive experience in merger cases, CRA fails to cite a single instance in which a court or an agency altered the SSNIP test in this way. Indeed, in the last six high-profile mergers reviewed by the FCC, the SSNIP test was applied without any alterations. CRA also relies on the concept of "dynamic demand spillover" to salvage an unprecedented efficiency justification that is not cognizable under the Merger Guidelines, including the erroneous claim that the proposed merger of XM and Sirius would accelerate investment in interoperable radios (which XM and Sirius say will not be available for years, even with the merger). However, as explained below, it is not consistent to argue on the one hand that the other types of audio entertainment compete with SDARS, but on the other that the merger solves the problem of "dynamic demand spillover."

Finally, I show that CRA failed to prove the erroneous claim that the á la carte offerings that XM and Sirius have proposed are merger-specific efficiencies. So long as they are not merger-specific, any alleged benefits associated with á la carte offerings cannot offset the demonstrated consumer welfare losses from higher prices or more commercials or both. Moreover, the public statement jointly made by XM and Sirius that they will not provide satellite radio channels on an á la carte basis unless the Commission approves the merger is a breathtaking admission of critical antitrust significance: It is a price-fixing agreement between horizontal competitors. It is an agreement not to compete over the pricing and unbundling of currently bundled content. Rarely do price-fixing cases contain such conclusive evidence of a meeting of the minds between two competitors to refrain from competing with one another. Such price fixing is a per se violation of section 1 of the Sherman Act. It is no defense to price-fixing among two currently separate competitors that they are in the process of seeking government approval of a proposed merger to monopoly.

This expert report is filed in my individual capacity as a consultant to the Consumer Coalition for Competition in Satellite Radio and not on behalf of the Georgetown University Law Center, which does not take institutional positions on specific regulatory, adjudicatory, or legislative proceedings.

Abstract:
Over the past century, as the regulatory state steadily expanded its reach, courts frequently addressed claims that regulatory actions amounted to an unconstitutional taking. Recently, however, legislation in the telecommunications and electric power industries have brought deregulatory concerns to the fore.

In this landmark Article, Mr. Sidak and Professor Spulber present the first detailed analysis of the interaction between the Takings Clause, deregulation, network pricing, and contract law. In the typical case of regulated industries, firms and their investors agree to bear considerable incumbent burdens in exchange for a regulated rate of return. Sidak and Spulber first demonstrate that this arrangement represents a regulatory contract and find that recent deregulatory measures constitute breach. The authors then argue that, whether or not a regulatory contract in fact exists, recent mandatory unbundling in the electric power industry and open-access regulation in the telecommunications field effectuate a taking without just compensation. Finally, relying on concepts such as investment-backed expectations and the efficient component-pricing rule, the authors not only demonstrate that damages would be equivalent under either contract or takings theory, but also warn that governments could face enormous liability for their deregulatory measures.

Abstract:
The transition from peace to war and back again fundamentally alters many legal relationships, whether they are privately ordered through contract or publicly ordered through statutes, common law doctrines, treaties, or even the Constitution. As one would expect from the Vietnam War experience, lawsuits filed by parties, ranging from insurance companies to conscientious objectors, may turn on the question of whether a war may have been lawfully authorized by Congress in the absence of a formal declaration of war.

In Part I of this Article, I begin by documenting what is perhaps obvious - that Congress did not declare war against Iraq on January 12, 1991. I agree with Professor Harold Hongju Koh of Yale Law School and his colleagues (whom I call the Koh Signatories), and I disagree with President George H.W. Bush's lawyers in the Department of Justice, that it is a justiciable political question for a federal court to determine whether armed conflict of a certain level or ferocity constitutes war for purposes of the War Clause of the Constitution. To commence warfare on the scale witnessed against Iraq, the President needed to receive a formal declaration of war. He did not. Although there is a category of warfare that the President may initiate without a prior declaration of war, the Persian Gulf War was too mammoth to be characterized as a police action. And although there are cases - poorly reasoned in my view - establishing that Congress may authorize limited war, the Persian Gulf War from its very inception did not fit within this category. Although politically significant, Congress's joint resolutions of January 12, 1991 was a legal nullity, a merely precatory or hortatory gesture. By failing to declare war against Iraq, Congress produced an anomaly in our representative democracy: The Persian Gulf War lacked constitutional legitimacy despite its overwhelming support among the American electorate. Why is Congress more willing to let the country go to war than to declare war? How can the evils of permitting America to wage war be any less that the evils of formally declaring war?

In Part II, I argue that, in the interest of enhancing political accountability, Congress should authorize war only through formal declaration. Congress should not be able to implicitly authorize the initiation of war merely by appropriating funds for war purposes. A declaration of war fulfills Congress's representative function because it is more immediately visible to the electorate, less susceptible to ambiguity and disagreement once it is made, and thus more conducive to effective monitoring of the performance of political actors. Further, no legal significance should attach to a joint resolution that members of Congress have represented to be tantamount to a declaration of war. Congress should have a duty to declare war if it favors war and believes that the level of hostilities envisioned requires the President to receive prior congressional authority. It is my purpose in Part II to show that insights into the economics of organization shed light on the genius of the Framers, and counsel us to maintain strict formality in the separation of government functions relating to the decision to go to war.

In Part III, I examine the formality of the declaration of war against Japan on December 8, 1941. I show how this brief congressional resolution substantially exceeded the degree of formality required by the letter of the Constitution. The declaration reflected a different, and in my view a superior, conception of the process for the authorization of war than one finds either in the actions of President Bush and Congress in the Iraq crisis or in the recommendations of the Koh Signatories or Professor Stephen L. Carter of Yale Law School.

In Part IV, I examine the proposals of Professor Carter and of the Koh Signatories. Although I concede that the prosecution of war could be regulated through either Professor Carter's proposal to use the appropriations process, or through the Koh Signatories' proposal to use the equitable powers of the judiciary to enjoin the President, the degree of political accountability that would correspond to these arrangements would be inferior to that which would accrue under a formal declaration of war. In addition, in Part IV and throughout this Article, I use the circumstances of the Persian Gulf War as an opportunity to assess and to critique the growing body of work on the war powers by Professor John Hart Ely. Although I agree with many of Professor Ely's premises regarding political accountability, I disagree with most of his major conclusions regarding what the Constitution requires, or should require, in matters of war.

Abstract:
Proponents of network neutrality regulation have ignored the essential cost and demand characteristics of telecommunications networks. Few industries studied by economists have received such intensive theoretical and empirical analysis as telecommunications. Today, regulators understand very well how the unique cost characteristics and demand characteristics of telecommunications networks affect market outcomes and the efficacy of regulatory intervention. Network neutrality obligations are incompatible with what we know about the economics of telecommunications. To understand the harm that such regulation would pose to economic welfare, Congress needs to appreciate six salient economic features of telecommunications networks: sunk investment, economies of scale, common costs (economies of scope), differential pricing (Ramsey pricing), joint demand (two-sided markets), and congestion. These six economic considerations underscore why Congress should not frustrate the ability of a telecommunications network operator to recover the sunk costs of its broadband network in the manner that least distorts consumer choices. The enactment of network neutrality obligations would reduce consumer welfare by forcing end users to pay more for broadband Internet access or to forgo the service. At the same time, such obligations would not produce benefits in terms of preventing anticompetitive behavior: A telecommunications carrier already lacks the incentive to block a consumer's access to lawful content, because content and carriage are complementary goods, not substitute goods. A telecommunications carrier also lacks the incentive to degrade the quality of packets for VoIP services, because that degradation would be quickly detected and could trigger litigation. Finally, the overarching reason why anticompetitive behavior of any sort is implausible is that competition will constrain the market power of any given carrier. In most geographic markets, four or more separate firms will supply broadband Internet access. Congress faces many important questions as it revises the Communications Act, but the imposition of "net neutrality" obligations is not one of them.

Abstract:
Mail delivery is one of the few economic activities that has avoided the wave of deregulation and privatization that has swept network industries over the last few decades. This Article examines several questions regarding the business activities of Canada Post Corporation in a competitive environment. What should be the appropriate mandate of Canada Post? If Canada Post is a natural monopoly, what form of regulation best serves Canadian consumers? If Canada Post's delivery of letter mail is not a natural monopoly, what basis exists for retaining Canada Post's current statutory monopoly? What potential exists for Canada Post to abuse its statutory monopoly-and other statutory privileges and immunities-to compete unfairly against efficient private suppliers of postal services?

Part I of this Article outlines the regulatory and institutional setting in which Canada Post operates, including the nature and extent of Canada Post's legal monopoly. Part II demonstrates why technological justifications for the postal monopoly are no longer valid. Part III establishes that public provisions of the full range of postal services is no longer needed. Part IV explains how postal pricing and regulation can cause competitive problems for private firms because of incorrect measurement and misallocation of attributable costs and because of the potential to misuse Ramsey pricing principles. Part V presents four options that are available to the Canadian Parliament for addressing the problem of protecting efficient competition from the postal monopoly.

Abstract:
Through its antitrust enforcement system, society allocates resources to deter anticompetitive behavior. Antitrust enforcement is costly because prosecutors and judges mischaracterize some competitive or efficiency-enhancing behavior as horizontal collusion. In this early application of the Polinsky-Shavell argument about the tradeoff between the probability and magnitude of fines, this essay argues that, given prosecutorial and judicial error, society will not optimally allocate its antitrust enforcement resources by threatening price fixers with exorbitant economic penalties that have only a minimal probability of being enforced.

Abstract:
This paper argues that a cable operator with sufficient market power in the downstream multi-channel video programming distribution (MVPD) market can deny access to unaffiliated programmers, resulting in an upstream programming rival's exit or impaired dynamic efficiency. Further, market dominance by cable operators may harm consumers of video programming through higher prices and less choice in the downstream MVPD market. The reason is that as unaffiliated video programming becomes affiliated programming, the latter is then withheld from rival MVPDs. This analysis is then applied to the recent acquisition of Adelphia by Comcast and Time Warner.

Vertical foreclosure, video programming markets, cable operators, multi-channel video programming distribution, unaffiliated video programming, Adelphia, Comcast, TimeWarner

Abstract:
A trade secret is proprietary but unpatented information that confers a competitive advantage on its owner. If someone impermissibly uses a trade secret, the owner of the secret is entitled to a remedy that may include, in addition to damages, an injunction that forbids the unauthorized user from manufacturing a product that employs the owner’s secret. Courts disagree, however, over whether such an injunction should continue after the trade secret becomes public knowledge—for example, through a patent application or marketing. Even when courts agree that the injunction should continue after the trade secret becomes public, they still disagree over whether the injunction should be perpetual or limited in duration. This article uses real option theory within a Schumpeterian framework of innovation and competition to clarify the conflict regarding the proper duration of an injunction to remedy the unauthorized use of trade secrets. The optimal duration of such an injunction should be proportional to the option value implicit in the unauthorized use of the trade secret, which in turn will increase with the extent of sunk costs associated with the trade secret and the level of risk associated with innovative activity in the relevant market. Furthermore, the unauthorized use of a secret process differs in economic effect from the unauthorized use of a secret product design, yet courts have failed to discern this distinction when fashioning injunctive relief in trade secret cases. The three conflicting common law rules, as well as the default rule under the Uniform Trade Secrets Act, all are flawed on economic grounds. However, because the option value of unauthorized use of a trade secret would be difficult for litigants to calculate and judges to evaluate in a given case, a reasonable proxy is the imposition of a perpetual injunction. Such an injunction would induce the innovator and unauthorized user to enter post-trial licensing negotiations under circumstances in which the unauthorized user had no bargaining power. As a consequence, the innovator would license the trade secret at its full opportunity cost, which would incorporate his best estimate of the option value associated with the unauthorized user’s knowledge and exploitation of the secret before its public disclosure.

Trade secrets, injunction, remedies, real option, involuntary exchange, Schumpeter, innovation, misappropriation, opportunity cost

Abstract:
We examine empirically the proposition that mandatory unbundling is the key to increasing broadband penetration in Mexico. We begin by reviewing the empirical economic literature on the relationship between mandatory unbundling and two measures of economic performance: (1) broadband penetration and (2) investment by entrants and incumbent network owners. We explain why a policy that aims to maximize broadband penetration might be inconsistent with maximizing static and dynamic efficiency. Next, we present new empirical results on the effect of mandatory unbundling on investment by entrants and incumbents. We find that, despite the best efforts of the regulators, no EU country has experienced the promised transition from resale to bitstream to local loop unbundling (LLU). Countries with strong unbundling policies, such as those in the EU, have much lower incumbent network investment than countries that have much less aggressive wholesale unbundling policies, such as Canada and the United States. We conclude with alternative policy recommendations for stimulating broadband penetration in Mexico. Because access to computers is the binding constraint on broadband penetration - only 20 percent of homes own a computer - we propose that Mexico subsidize the price of computers to stimulate broadband adoption.

Broadband Penetration, Unbundling

Abstract:
In this article we evaluate the economic and legal implications of allowing ISPs to avoid paying for interstate access by taking advantage of the FCC's access-charge exemption for enhanced service providers (ESPs). We agree with the FCC's conclusion that the dramatic growth of Internet usage and Internet services create significant benefits for the economy and the American people. We discuss, however, that the ESP exemption creates traffic jams at the on-ramps to the information superhighway- what we call a cyberjam.

In Part II, we examine the role that competitive prices play in influencing supply and demand in the market for access to Internet services over the PSTN. In Part III, we examine the economics of network congestion. In Part IV, we examine the pricing of access to ISPs over the PSTN. In Part V, we consider property rights issues associated with the costs of the FCC's tentative conclusion to continue the temporary ESP exemption. In Part VI, we argue that is unlawful for the FCC to order incumbent LECs to continue subsidizing ISPs through the perpetuation of the currently temporary ESP exemption from interstate access charges, or through any other artifice.

Abstract:
Over the past century, as the regulatory state steadily expanded its reach, courts frequently addressed claims that regulatory actions amounted to an unconstitutional taking. Recently, however, legislation in the telecommunications and electric power industries have brought deregulatory concerns to the fore.

In this landmark Article, Mr. Sidak and Professor Spulber present the first detailed analysis of the interaction between the Takings Clause, deregulation, network pricing, and contract law. In the typical case of regulated industries, firms and their investors agree to bear considerable incumbent burdens in exchange for a regulated rate of return. Sidak and Spulber first demonstrate that this arrangement represents a regulatory contract and find that recent deregulatory measures constitute breach. The authors then argue that, whether or not a regulatory contract in fact exists, recent mandatory unbundling in the electric power industry and open-access regulation in the telecommunications field effectuate a taking without just compensation. Finally, relying on concepts such as investment-backed expectations and the efficient component-pricing rule, the authors not only demonstrate that damages would be equivalent under either contract or takings theory, but also warn that governments could face enormous liability for their deregulatory measures.

Abstract:
This declaration comments on network advantages that the U.S. Postal Service derives in competitive markets as a result of its statutory monopolies and other special privileges. The declaration, filed at the request of UPS, responds to the notice requesting information and comment, United States Postal Service Study, Project No. P071200, 72 Federal Register 23,822 (May 1, 2007), which the Federal Trade Commission issued pursuant to the Postal Accountability and Enhancement Act (PAEA), Pub. L. 109-435, 120 Stat. 3201 (2006).

State-owned enterprises (SOEs) such as the Postal Service have stronger incentives than profit-maximizing firms to use their networks to pursue activities that are harmful to competition and consumers, even though SOEs may be less concerned with generating profit. In particular, the Postal Service has heightened incentives to discount costs in the pursuit of an expanded operating scale, particularly when setting prices in competitive markets. In fact, the Postal Service may find it optimal to set prices below marginal costs.

The Postal Service has been granted a unique statutory monopoly, created when Congress chose, through the Private Express Statutes and the mailbox access restrictions, to establish and perpetuate a public enterprise with monopoly power. Owing to this statutory monopoly, the Postal Service enjoys a significant network advantage due to uniquely available economies of scale and scope. This competitive advantage may further encourage and enable the Postal Service to price competitive products below rivals' costs.

In particular, if significant economies of scope exist in the production of Postal Service products, combined with economies of scale, the Postal Service will be able produce competitive products at a price less than the competitive stand-alone cost. Consequently, the Postal Service will be able to exploit cost complementarities that exist between market-dominant and competitive markets. Moreover, the anticompetitive concerns raised by network advantage are of particular relevance to postal markets: Numerous empirical studies (spanning various time periods, datasets, methodologies, and countries) have concluded that postal operations exhibit significant economies of scope.

Network advantage, as measured by the difference between stand-alone cost and incremental cost, is a useful benchmark for gauging the extent to which Postal Service enjoys an advantage that is unavailable to its competitors. All else equal, the larger this difference is, the greater the benefit the Postal Service enjoys relative to competitive rivals. In the case of the Postal Service, attributable cost can serve as a reliable proxy for incremental cost. Thus, an appropriate proxy for network advantage is simply the difference between stand-alone cost and attributable cost.

To the extent that the Postal Service passes on cost savings derived from network advantage in the form of lower prices for competitive products, consumers of these products will benefit, at least in the short run. Hence, there may exist a tendency for regulators and policymakers to disregard or minimize the consequences of the Postal Service's network advantage. Therefore, it bears emphasis that lower prices are not always better, particularly if price falls below marginal cost. In addition, low prices for competitive products may come at the expense of higher prices for market-dominant products. Such a pricing structure would effectively penalize the designated beneficiaries of the Postal Service's core mandate.

Congress chose not to repeal the Postal Service's statutory monopolies. That decision, however, does not imply that the Postal Service should be given carte blanche to use its resulting network advantage in competitive markets to harm captive consumers and efficient competitors.

Abstract:
Optional or self-selecting tariffs allow customers to choose between an established tariff and an alternative outlay schedule. The possibility of making the vendor and at least one consumer better off, without making any other consumer worse off, makes optional tariffs appealing to both economists and regulators. In economic terms, the introduction of optional tariffs makes possible a Pareto improvement in the allocation of resources. Unfortunately, the presumed desirability of such tariffs depends crucially on assumptions that may not be fulfilled in the case of a state-owned enterprise - in particular, profit-seeking behavior on the part of the monopoly vendor and independence of consumer demand functions. In this Article, we analyze the economic implications and potential consequences, in general, of introducing negotiated rate and service terms available to a sole user into a pre-existing regulatory regime of uniform tariff rates and conditions of service. We identify the conditions under which it is economically desirable to introduce declining-block rates or other rate structures that discriminate among users of the affected services, with or without any basis in identifiable cost differences. We address the specific economic implications and potential consequences of introducing negotiated rate and service terms available to a sole user where the affected service is provided under a monopoly established by federal statute, taking into account that such negotiated arrangements may include preferential pricing terms; that access to the negotiated terms may be limited to a small number of users for administrative or other reasons; and that competition may exist among users of the affected service or services. Finally, we identify and describe regulatory measures that might be taken to accommodate potential concerns regarding the impact of such negotiated rate and service arrangements on fairness in regulation and competition. We conclude that it is not possible to derive sweeping propositions about the efficiency of optional tariff offerings. Instead, the welfare effects of such pricing plans must be evaluated empirically on an individual basis. Our analysis has practical significance for pricing policies in network industries, particularly those industries served by state-owned enterprises that enjoy statutory monopolies.

Abstract:
In this declaration, I critique two reports submitted to the Federal Communications Commission in July 2007 on behalf of XM and Sirius in support of their proposed merger: one by Professor Thomas W. Hazlett and another by Dr. Harold Furchtgott-Roth. I have previously addressed some aspects of both reports in my supplemental declaration, which can be downloaded from the Social Science Research Network.

The reports of Professor Hazlett and Dr. Furchtgott-Roth fail to provide evidence that informs the relevant product market definition for this proceeding - namely, whether satellite digital audio radio services (SDARS) customers perceive alternative audio entertainment sources (including MP3 players, Internet radio, and terrestrial radio) as being sufficiently close substitutes such that a hypothetical monopoly provider of SDARS could not profitably increase prices. More importantly, both experts appear to reject the current antitrust paradigm for analyzing mergers. In its place, they offer novel theories for merger review. Even if XM's and Sirius's experts are correct about radically redesigning the framework for antitrust analysis of horizontal mergers, it is not appropriate for the FCC to announce some alternative merger guidelines without a proper rulemaking simply because doing so would suit the current merger proponents.

I begin in Part I with a critique of Professor Hazlett's report. Professor Hazlett mischaracterizes which party bears the burden of proof in this merger proceeding, claiming that the burden falls on both merger opponents and regulatory agencies. I demonstrate that by focusing on quality-adjusted prices, Professor Hazlett ignores the merged firm's ability to increase commercials. Professor Hazlett also omits mentioning that SDARS customers would be required to subscribe to a new, more expensive package to receive any increase in quality according to his concept of a quality improvement.

Next, I analyze Professor Hazlett's novel tests for product market definition. According to Professor Hazlett, a product market can exist only if the market value of all suppliers of the service exceeds the present value of funds invested. In a later section of his report, Professor Hazlett suggests another novel test for market definition, which considers the relative market value of terrestrial broadcasting properties to satellite radio operators. I demonstrate why these and other novel antitrust theories offered by Professor Hazlett are incorrect and should not be used. Finally, I respond to Professor Hazlett's criticisms of my original declaration.

In Part II, I critique Dr. Furchtgott-Roth's report. Dr. Furchtgott-Roth seeks to extend the standard two-year window for entry analysis in merger cases so that nascent services like mobile Internet radio can have time to develop. That approach is not consistent with existing merger law. Dr. Furchtgott-Roth also repeats Professor Robert Willig's argument in the DirecTV-EchoStar proposed merger - that XM and Sirius do not compete against one another, yet each does compete against terrestrial radio and other services. I argue that this interpretation of the extent of existing competition between XM and Sirius is not plausible.

Finally, in Part III, I perform an event-study analysis to test XM's and Sirius's hypothesis that the proposed merger would expand output and decrease prices (the "procompetitive hypothesis"). I examine the abnormal returns of satellite equipment manufacturers around the day on which the proposed merger of XM and Sirius was announced. I find that the market perceived the announcement of the proposed merger between XM and Sirius as "bad news" for satellite equipment manufacturers, which implies that the proposed merger would result in higher prices for SDARS customers.

Abstract:
Constitutional scholars cite three Supreme Court decisions arising from the undeclared Quasi War with France in 1798-1800 as support for the proposition that Congress may authorize war of any magnitude, and that, except in case of sudden or imminent attack on the United States, this congressional authority displaces any right of the President to use military force of even modest magnitude without prior congressional authorization. The textual hook claimed by these scholars for so reading Bas v. Tingy, Talbot v. Seeman, and Little v. Bareme is the phrase in Article I, section 8 of the Constitution that immediately follows the grant to Congress of the power To declare War - namely, the power to grant Letters of Marque and Reprisal, and make Rules concerning Captures on Land and Water. These additional words, it is argued, enable Congress to regulate the President's ability to use military force in a manner short of full-scale war. This prevailing interpretation of the Quasi War cases is incorrect and has special significance because the U.S. Court of Appeals for the District of Columbia Circuit gave it credence in 2000 in the war powers case Campbell v. Clinton and because one or more of the cases continues to be cited in litigation concerning the current war on terror.

Declaration of war, marque, reprisal, capture, prize, Quasi War, Bas, Talbot, Bareme

Abstract:
The landmark Microsoft case raises challenging questions concerning antitrust remedies. In this Article, we propose a framework for assessing the costs and benefits of different remedies, particularly divestiture, in monopolization cases involving network industries. Our approach can assist a court or enforcement agency not only in analyzing the welfare effects of divestiture, but also in choosing more generally among alternative kinds of remedies. The framework would, for example, apply to a court's choice between damages and injunctive remedies or between behavioral injunctions and structural injunctions. After developing our framework, we apply it to the divestiture proposals made by the government and others in the Microsoft case. We argue that those proposals leave open important questions that must be answered before divestiture can be shown to be either the best remedial alternative or to create likely net gains in economic welfare.

Abstract:
We favor revision of the Horizontal Merger Guidelines. Our preliminary comments in this essay are based on a work in progress that we provisionally entitle, “Favoring Dynamic Competition over Static Competition.” The eventual paper will address, in greater detail than we can explore here, how government enforcement agencies and courts would apply a more explicitly dynamic model of competition to merger analysis. We pose the following question: How must competition policy evolve if it is explicitly to favor Schumpeterian (dynamic) competition over neoclassical (static) competition? Of course, one also could ask that question with respect to intellectual property law and sector-specific regulation of network industries. We intend to do so in our eventual paper.

Abstract:
The linkLine price squeeze case pending in the Supreme Court for the Fall 2008 Term is one of the most significant antitrust cases on monopolization law that the Court has taken in years. Amici are professors and scholars in law and economics who have taught, or have conducted research on, antitrust law and the economics of industrial organization. They are William J. Baumol, Robert H. Bork, Robert W. Crandall, George Daly, Harold Demsetz, Jeffrey A. Eisenach, Kenneth G. Elzinga, Richard A. Epstein, Gerald Faulhaber, Franklin M. Fisher, Charles J. Goetz, Robert Hahn, Jerry A. Hausman, Keith N. Hylton, Thomas M. Jorde, Robert E. Litan, Paul W. MacAvoy, Sam Peltzman, J. Gregory Sidak, Pablo T. Spiller, and Daniel F. Spulber.

We agree with the petitioners that the Ninth Circuit has generated an inescapable conflict among circuits, and that its opinion is incompatible with the Supreme Court's decisions in Trinko, Weyerhaeuser, and Brooke Group. We agree with Judge Gould's dissent from the Ninth Circuit's decision in linkLine that Trinko "takes the issues of wholesale pricing out of the case," such that the plaintiffs' only possible remaining theory of harm would be predatory pricing at the retail level - which the plaintiffs did not allege. We also agree with Judge Ginsburg's opinion for the D.C. Circuit in Covad Communications Co. v. Bell Atlantic Corp., which in turn embraces the conclusion of the Areeda-Hovenkamp treatise that "it makes no sense to prohibit a predatory price squeeze in circumstances where the integrated monopolist is free to refuse to deal." The existence of a rule like linkLine has a pervasive impact on business behavior that, at the margin, affects competition and consumers. This deleterious effect extends beyond the telecommunications industry to affect all firms that do business in the Ninth Circuit. These reasons justify reversing the Ninth Circuit's decision.

In our minds, an even larger reason than those described above makes it imperative that the Court reverse this decision. The Ninth Circuit's decision in linkLine implicates the normative foundation of modern Sherman Act jurisprudence: that antitrust law exists to advance consumer welfare. We have three points to make.

First, any rule of price-squeeze liability that threatens liability based on the claim that the difference between a firm's upstream and downstream prices leaves downstream rivals insufficient margin substitutes a rule of competitor welfare for consumer welfare.

Second, properly understood, a price squeeze is a regulatory issue, which makes sense only as a rule of price regulation in an industry already subject to duties to deal and to control by institutionally competent regulators. Attempting to implement regulatory policy through section 2 of the Sherman Act is ill-advised, both because it makes no sense for courts to re-regulate deregulated or lightly regulated industries, and because courts lack the institutional competence to implement regulation.

Third, the Ninth Circuit's rule is of pressing concern precisely because it will deter efficiency-enhancing conduct and competitive pricing. Vertical integration and partial integration are ubiquitous, and firms need to be able to make decisions about such integration without the threat of liability. Vertically integrated firms likewise need to be free to cut retail prices (as long as the prices are not predatory) without concern for rivals - the point of Brooke Group. Moreover, the Ninth Circuit's standard is so vague and open-ended that it creates uncertainty and invites litigation; it also permits imposition of liability based on apparently subjective evaluation of disputed and hard-to-prove facts, which will lead to a substantial risk of false positives.

Abstract:
This article, originally published in 1992 in the aftermath of the Persian Gulf War, has renewed relevance in light of the September 11, 2001 terrorist attacks on the World Trade Center and the Pentagon, and the Justice Department's subsequent detention of more than 1,000 persons, many of them aliens, suspected of having ties to terrorist organizations.

Declaring war is a valuable constitutional ritual. Its formality increases the political and moral accountability of political actors to the electorate for their decision to use military force to achieve the foreign policy objectives of the United States. Further, it makes the threat to use military force more credible in the eyes of other nations because it is difficult, legally as well as politically, for Congress to rescind a declaration of war if the President insists on continuing to prosecute the war. To these two arguments, which I have made before, this Essay adds a third: a formal declaration of war forces Congress to acknowledge publicly, and to accept, that one cost of waging war is that individual liberty in the United States might have to suffer if the nation is to triumph or even merely survive.

In Part I of this Essay, I summarize my view of how constitutional formality, including that embodied in a declaration of war, serves individual liberty by discouraging unaccountable political decisions. In Part II, I analyze the Alien Enemy Act of 1798, a harsh statute designed to combat spying and sabotage during wartime by empowering the President, during a declared war, to order summarily the arrest, internment, and removal of enemy aliens. I ask four questions: What triggers the Act's delegation of extraordinary powers to the President? What is their scope? What terminates the delegation? What is the scope of judicial review? I show that there is no significant legal constraint on the President's exercise of these extraordinary powers save the prerequisite of a formal declaration of war.

In Part III, I examine whether the harshness of the Act counsels Congress not to use a formal declaration of war to authorize the President to wage war. This antipathy towards formal declarations of war, however, really argues for repealing or amending laws like the Alien Enemy Act, not for eschewing the formality (to say nothing of the candor and moral responsibility) of declaring war when we wage war. I suggest that a declaration of war, more than any purported functional equivalent, serves to acknowledge candidly and collectively that the price of employing military force might be a substantial, and in some respects even permanent, loss of civil and economic liberties.

Abstract:
A routine defensive tactic of targets of hostile tender offers is to seek a preliminary injunction under section 16 of the Clayton Act on the ground that the offeror's acquisition of the target's stock would effect a merger violating section 7 of the Act. The litigation costs that an antitrust injunction imposes on an offeror seems unlikely to exceed the offeror's risk-adjusted expected benefit from the takeover. In this Article, I discuss several reasons why the possibility of delay tendes to discourage a potential offeror from ever making a tender offer. Part II of this Article presents an economic framework for evaluating the costs and benefits of issuing antitrust preliminary injunctions in hostile tender offers. Using this framework, part II concludes that it is unlikely that issuing such an injunction ever would enhance social welfare and that a court therefore never should grant one, even when the tender offer would merge the corporate control of two competitors. Consequently, part III advocates that Congress deny targets of hostile tender offers standing to sue for preliminary injunctions under section 6
of the Clayton Act. Part IV shows how this economic prescription can be reconciled with exisiting law.

Abstract:
M2Z Networks, Inc. and its consulting economist, Professor Simon Wilkie, have asked the Federal Communications Commission (FCC), when allocating the third block of the Advanced Wireless Services (AWS) spectrum, to abandon the agency's established auction process and instead award that spectrum directly to M2Z. They argue that the FCC should embrace M2Z's business plan because, relative to some alternative use of the spectrum that would emerge from an unrestricted auction, M2Z's plan would generate significant benefits for broadband consumers. These putative benefits include (1) providing a basic, "free" mobile broadband service to new subscribers, and (2) reducing the price of broadband for existing subscribers. If, contrary to M2Z's proposal, the FCC does auction the AWS-3 spectrum, M2Z urges the FCC to impose requirements on the winning bidder that mirror M2Z's business plan. This paper analyzes the benefits and costs of M2Z's proposal by comparing it with an allocation based on an unrestricted auction of spectrum rights. We find that M2Z's proposal would likely cause substantial economic losses in both static and dynamic economic efficiency.

Abstract:
For a decade or more, American constitutional discourse has emitted a detectable odor of bigotry toward Roman Catholics who embrace the papal encyclicals of Pope John Paul II. The reason is the Supreme Court's politically dominant role on questions of abortion. An unconstitutional litmus test may be emerging against Roman Catholics who obey the Pope's encyclicals and against those of other faiths who similarly oppose abortion as a matter of religious belief. The acrimony over abortion has obscured the relevance of the Religious Test Clause of the Constitution to the nomination and confirmation of Supreme Court Justices. It is both intractable and improper for senators to question a judicial nominee about either the tenets of his religious sect or the intensity of his religious devotion. As a practical matter, however, this prohibition is easily evaded, and no judicially enforceable public sanction or private remedy appears to exist. Unless the Senate is prepared to punish such misconduct - a highly doubtful proposition - the Constitution's explicit textual prohibition against religious tests for officeholders will be gutted in the name of advancing a more politically popular constitutional right that is not found in the text of the Constitution.

Abstract:
Soon after the passage of the Sherman Act, the Supreme Court determined that horizontal minimum price fixing was so inherently injurious to consumer welfare that it should be illegal per se. Horizontal collusion has since become a major focus of federal antitrust enforcement. Through the use of criminal and civil sanctions the Department of Justice (DOJ) has sought not only to remedy specific instances of price fixing, but also to achieve general deterrence of potential price fixing.

This paper is the first systematic attempt to estimate the impact of antitrust enforcement on horizontal minimum price fixing. We develop a simple theoretical model of the collusive pricing decision and then, using data on the bread industry, assess empirically the deterrent effect of public and private antitrust enforcement on the decision to collude. We show that a cartel's optimal price is likely to be neither the competitive price nor the price that the cartel would see in the absence of antitrust enforcement but rather an intermediate price that depends on the levels of antitrust enforcement efforts and penalties. Our empirical results reveal that increasing antitrust enforcement in the presence of a credible threat of large damage awards has the deterrent effect of reducing markups in the bread industry.

Abstract:
We examine the consumer-welfare implications of Google's project to scan a large proportion of the world's books into digital form and to make these works accessible to consumers through Google Book Search (GBS). In response to a class action alleging copyright infringement, Google has agreed to a settlement with the plaintiffs, which include the Authors Guild and the Association of American Publishers. A federal district court must approve the settlement for it to take effect. Various individuals and organizations have advocated modification or rejection of the settlement, based in part on concerns regarding Google's claimed ability to exercise market power. The Antitrust Division has confirmed that it is investigating the settlement. We address concerns of Professor Randal Picker and others, especially concerns over the increased access to “orphan books,” which are books that retain their copyright but for which the copyright holders are unknown or cannot be found. The increased accessibility of orphan books under GBS involves the creation of a new product, which entails large gains in consumer welfare. We consider it unlikely that Google could exercise market power over orphan books. We consider it remote that the static efficiency losses claimed by critics of the settlement could outweigh the consumer welfare gains from the creation of a valuable new service for expanding access to orphan books. We therefore conclude that neither antitrust intervention nor price regulation of access to orphan books under GBS would be justified on economic grounds.

K20, K21, L40, L41, L50, O34

Abstract:
We examine the consumer-welfare implications of Google’s project to scan a large proportion of the world’s books into digital form and to make these works accessible to consumers through Google Book Search (GBS). In response to a class action alleging copyright infringement, Google has agreed to a settlement with the plaintiffs, which include the Authors Guild and the Association of American Publishers. A federal district court must approve the settlement for it to take effect. Various individuals and organizations have advocated modification or rejection of the settlement, based in part on concerns regarding Google’s claimed ability to exercise market power. The Antitrust Division has confirmed that it is investigating the settlement. We address concerns of Professor Randal Picker and others, especially concerns over the increased access to 'orphan books,' which are books that retain their copyright but for which the copyright holders are unknown or cannot be found. The increased accessibility of orphan books under GBS involves the creation of a new product, which entails large gains in consumer welfare. We consider it unlikely that Google could exercise market power over orphan books. We consider it remote that the static efficiency losses claimed by critics of the settlement could outweigh the consumer welfare gains from the creation of a valuable new service for expanding access to orphan books. We therefore conclude that neither antitrust intervention nor price regulation of access to orphan books under GBS would be justified on economic grounds.

Abstract:
During the Reagan administration, Congress discovered that it could intimidate the executive branch by uttering again and again the same seven words, provided, that no funds shall be spent.... This limitation, attached to numerous appropriations bills, enabled Congress, under the guise of protecting the public fisc, to frustrate the President's ability to perform his duties and exercise his prerogatives under the Constitution.

The predicate for this encroachment by Congress on the Presidency lies in the appropriations clause: No Money shall be drawn from the Treasury but in Consequence of Appropriations made by Law.... Despite the importance of enabling public officials to spend money or incur debts in the name of the federal government, this provision in the Constitution is one of the least scrutinized. In an article entitled Congress' Power of the Purse, Professor Kate Stith of Yale Law School argues that the Constitution prohibits the expenditure of any public money without legislative authorization. This proposition, which she calls the Principle of Appropriations Control, is an elaboration on a theory of the appropriations clause espoused during the Iran-Contra hearings and in myriad appropriations laws. This theory encompasses far more than fiscal responsibility; it envisions the appropriations power as an omnipresent legislative veto on presidential action, thereby fostering what Professor Stith calls [t]he genius of regulating executive branch activities by limitations on appropriations....

Professor Stith's theory of the appropriations power is flawed for a number of reasons. Part I of this Article examines the text and history of the appropriations clause and shows that the text of this clause is more ambiguous than commonly believed and that historical support for reading the clause to be a legislative veto on presidential action is dubious at best. Part II argues, in direct contrast to Professor Stith's theory, that the President, without violating the Constitution or statutory laws, may obligate the Treasury, provided that Congress has failed to appropriate the minimum amount necessary for him to perform the duties and exercise the prerogatives given him by Article II of the Constitution. Part III then examines the limiting principles that constrain the President's implied power to spend public funds under this theory. And Part IV demonstrates how Congress has tried to use the appropriations power to impose unconstitutional conditions on the President's performance of his constitutional duties and exercise of his prerogatives.

Part V argues that Professor Stith reads the appropriations clause so broadly that it would replace the unitary Executive with a plural one, thereby swallowing the principle of the separation of powers. Part VI examines the exception with which Professor Stith proposes to cure the absence of a limiting principle in her Principle of Appropriations Control. She argues that necessity might justify the President spending public funds in the absence of appropriations. However, I argue that a justification of necessity might make lawless spending by the President more likely to occur.

In conclusion, I argue that the fundamental principle animating the Constitution - the separation of powers - dictates a unitary Executive, and that a unitary Executive cannot tolerate congressional encroachments that, under the pretext of guarding the public purse, deny the President the funds necessary to perform the duties and exercise the prerogatives conferred on him by Article II.

Abstract:
The U.S. telecommunications industry has collapsed. As I write this essay, Global Crossing is bankrupt, WorldCom is near bankruptcy, and Qwest may have narrowly avoided it. AOL TimeWarner has lost tens of billions of dollars of shareholder value since its merger, and AT&T continues to divest businesses after having spent more than $100 billion to buy cable television companies that by 2002 it hoped to sell for half their purchase price. Wireless carriers and equipment manufacturers have lost three-quarters of a trillion dollars in market capitalization between January 2001 and June 2002.

By the summer of 2002, some in Washington indelicately asked, "Does the Federal Communications Commission bear some responsibility for this debacle?" Despite the revelation of accounting fraud at WorldCom and investigations being made of other carriers, it is not sufficient to dismiss the collapse as the result of simple corruption, or in the amorphous jargon of business journalists, "speculative excess." Joseph Schumpeter's famous phrase "creative destruction" is mouthed with greater frequency than insight. Yet, it is incorrect to attribute the collapse to the inevitable workings of the invisible hand of the marketplace. The FCC's hand has been all too visible, explicitly influencing the expectations upon which speculation, and investment, rest.

Two areas of regulatory policy show how the FCC can distort efficient outcomes. One is the FCC's complex and contentious policies for the mandatory unbundling of local exchange networks. The second is the FCC's mishandling of Auction 35, the spectrum auction for wireless telephony frequencies that has become frozen in seemingly endless litigation.

Abstract:
Monitoring costs are reduced, and political accountability enhanced, by prohibiting bargains that alter the Constitution's formal allocation of rights of decision among political actors. One might describe this proposition as the Inverse Coase Theorem. This framework is used to examine the purpose served by the constitutional formality inherent in a declaration of war.

Abstract:
The State of the Union and Recommendation Clauses of Article II, Section 3 provide that the President shall from time to time give to the Congress Information of the State of the Union, and recommend to their consideration such Measures as he shall judge necessary and expedient. Those thirty-one words envision the President as an active participant in the embryonic stages of the making of laws. Eight separate principles animate the President's legislative responsibilities before the presentment process. The State of the Union Clause imposes an executive duty on the President. That duty must be discharged periodically. The President's assessment of the State of the Union must be publicized to Congress, and thus to the nation. The publication of the President's assessment conveys information to Congress - information uniquely gleaned from the President's perspective in his various roles as Commander-in-Chief, chief law enforcer, negotiator with foreign powers, and the like - that shall aid the legislature in public deliberation on matters that may justify the enactment of legislation because of their national importance. The Recommendation Clause also imposes an executive duty on the President. His recommendations respect the equal dignity of Congress and thus embody the anti-royalty sentiment that ignited the American Revolution and subsequently stripped the trappings of monarchy away from the new chief executive. Through his recommendations to Congress, the President speaks collectively for the People as they petition Government for a redress of grievances, and thus his recommendations embody popular sovereignty. The President tailors his recommendations so that their natural implication is the enactment of new legislation, rather then some other action that Congress might undertake. Finally, the President shall have executive discretion to recommend measures of his choosing. When the State of the Union and Recommendation Clauses are seen to have this textual and analytical subtlety, they reveal the sophistication of the Framer's design that the President, through his institutionally unique ability to acquire and analyze information valuable to the leadership of the Republic, would have more to contribute to the making of laws than merely to sign off on their creation by another branch. Far from making the President a cipher in the legislative process, the Constitution created a Legislator-in-Chief.

Abstract:
In the United States, the topic of remedies in network industries cuts across antitrust law and sector-specific regulation, including telecommunications. The legal and economic understandings of a "remedy" are not synonymous in American usage. In law, a remedy is the corrective measure that a court orders following a finding of liability. With the exception of interlocutory relief, such as preliminary injunctions or temporary restraining orders (which might apply to a proposed merger, for example), legal remedies are retrospective in their orientation. They seek to right some past wrong. They may do so through the payment of money (whether that is characterized as the payment of damages, fines, disgorgement, or something else). Or they may seek to do so through a mandated change in market structure, as in the case of divestiture, or in the imposition of affirmative or negative duties, as in the case of "behavioral" injunctions. United States v. Microsoft Corp. presented the tradeoff between these various remedial alternatives.

Industry-specific regulation, such as regulation of the telecommunications industry by the Federal Communications Commission (FCC), is an alternative to reliance on liability rules. Therefore, it is not obvious what a "remedy" is in a traditional regulated network industry - at least if we are employing the standard American meaning of a legal remedy.

In contrast to these legal connotations of a remedy, the economic meaning of a remedy emphasizes market failure. The market failure may result from the unchecked exercise of market power, or from the uncompensated generation of an external cost or benefit, or from an insufficiency of information with which to make efficient choices concerning consumption, production, or investment. Whereas lawyers think of a remedy as what to do after a finding of liability, economists think of a remedy as what to do after a finding of market failure. The two approaches overlap perfectly if legislators and courts make liability rules that are triggered only after a finding of market failure. Of course, if legislators and courts actually did so, the Journal of Law & Economics would be a very slim volume that would have ceased publication years ago.

Abstract:
This Essay examines how the evolutionary theory of law would yield a different reading of the Constitution from that which currently flows from the prevailing, imperative theory of law. The evolutionary view of law, most closely associated with the writings of Friedrich Hayek, builds upon objective knowledge. Under that view, the legitimacy of law rests on its resemblance to truth in an epistemological sense, and the role of judges in constitutional adjudication resembles the discovery of objective knowledge. Today, however, the Supreme Court and constitutional scholars do not merely eschew an evolutionary view of law that builds upon objective knowledge. Rather, they construct doctrines and models of constitutional interpretation that are nonfalsifiable. Nonfalsifiable rationales for constitutional decisions tend to increase the size of the state, which derivatively increases the power and prestige of the Supreme Court, the lower courts, and the legal clerisy in which law professors rank highly. This Essay considers how the role of the Judiciary would change if judicial review were predicated on objective knowledge. If laws based on demonstrably false premises would be struck down as unconstitutional, individual liberty would likely increase relative to the state.

Abstract:
One of the first orders of business for the 104th Congress was to introduce bills and proposed constitutional amendments that give the President a line-item veto. During the first two weeks of January 1995, proposed constitutional amendments were introduced by Senators Brown, Thurmond and Simon. Meanwhile, Senator Dole introduced S. 4, the Legislative Line Item Veto Act of 1995. In this Essay I first present two arguments why if Congress wants the President to have a line-item veto, a constitutional amendment is superior to a statute as a means of conferring that power on the Executive. I then explain how other constitutional provisions would implicitly limit the President's power under a line-item veto amendment.

Abstract:
This essay, written three years before the enactment of the Telecommunications Act of 1996, is a reminder of how little has been accomplished in deregulating telecommunications. In 1993, I erroneously predicted that American telecommunications regulation was about to collapse like the walls of Jericho. The industries that we are accustomed to calling telephony, broadcasting, cable television, and mobile communications have acquired, and for the time being retain, their distinct identities principally because regulatory walls have segmented the market and limited the ability of firms to expand beyond their industry's designated territory. This regulatory segmentation cannot endure. It has become cliche to say that disparate technologies are converging in the sense that they permit us to transmit a particular message, whether it is a voice or a stream of data or a video image, by any one of several different means.

Whatever the original purposes of federal telecommunications regulation in 1934, 1927, and earlier, we must now ask some searching questions: Does federal telecommunications regulation impede competition; indeed, has that become its principal (if unstated) function? Does regulation impair the access of American consumers to new communications technologies? Does it inhibit the dissemination of ideas and information through the electronic media? Does the current licensing regime for electromagnetic spectrum fail to allocate that resource to its most productive uses? If telecommunications regulation is producing any of these deleterious effects, what are the costs and what can and should be done? These questions have such large implications for American economic performance and social welfare that their scope is routinely measured in tens of billions of dollars.

Abstract:
The paper addresses the question of pricing access to the network facilities of an incumbent firm after deregulation. Network access pricing continues to be regulated in such industries as telecommunications, railroads, electric power and natural gas. We emphasize that access prices should be set such that they should satisfy an individual rationality condition for the incumbent firm so that access is granted voluntarily. We examine the effects of the voluntary access condition on incentives for entry and show that properly chosen access prices provide incentives for efficient entry using several alternative competition models: Bertrand-Nash, Cournot-Nash and Chamberlin competition with differentiated products.

Abstract:
Since 1975, when the debate over monopolistic predation began to boil in courts and universities, most discussion has focused on predatory pricing. And although the allegation of predatory innovation arose in some well-known litigation involving Kodak and IBM, lawyers and economists have produced little credible work explaining how this phenomenon can occur, let alone how it should be identified and remedied if deemed to threaten consumer welfare. This is not surprising: A legal rule defining predatory innovation-if there is to be any rule-is even more problematic to articulate than the optimal predatory pricing rule, for it must balance public policies discouraging monopolistic predation against not only those policies encouraging aggressive competition but also those encouraging innovation.

Now, just when the predation kettle appeared to be simmering again on the back burner, Professors Ordover and Willig have argued that even genuine innovations-new products that in some ways are superior to existing products in the eyes of both engineers and consumers-are in some circumstances anticompetitive. To deal with this perceived antitrust problem, Ordover and Willig propose a model of predatory marketing of product innovations that is flawed in theory and unworkable in practice.

Both the existing law on predatory innovation and the Ordover-Willig model are primarily concerned with the problem of predatory systems rivalry through technological tie-ins. Part I describes first the phenomenon of systems rivalry and then the circumstances under which Ordover and Willig believe it may give rise to an antitrust problem. Parts II and III argue that the Ordover-Willig model overlooks many of the efficiency-enhancing characteristics of technological tie-ins. Many of the points raised have been made by earlier commentators with respect to contractual tie-ins. One major weakness of the Ordover-Willig model is that, by failing to explore the economic similarities between contractual and technological tie-ins, it overlooks the efficiency-enhancing characteristics common to both.

Part II argues that Ordover and Willig have underestimated the importance of price discrimination as a motive for systems rivalry, and that they have overlooked the beneficial consequences of a price discrimination strategy. Part III discusses other socially desirable characteristics of technological tie-ins, and argues that the Ordover-Willig model fails to consider how the decision to invest in innovation is constrained by legal and economic factors that limit an innovator's ability to exclude others from free-riding on his creation of new information. Part IV discusses various possible antitrust standards for technological tie-ins, and concludes that a rule of per se legality is at least preferable to any rule of reason yet proposed, and probably the socially optimal rule for predatory innovation.

Abstract:
Antitakeover laws reduce the possibility of competition in the market for corporate control and thereby deny shareholders a significant opportunity to lower the cost of specifying and monitoring managerial performance. However, state legislatures evidently think that antitakeover laws generate benefits or else they would not enact them, as Indiana did in 1986. Empirical evidence suggests that Indiana's law - and laws patterned after it - would harm certain parties. By impeding the market for control of Indiana corporations, Indiana's antitakeover statute would be expected to reduce the wealth of shareholders of Indiana corporations. This diminution in wealth occurs because a corporation's shares are more valuable when the possibility exists that a rival team of managers might take control and manage the corporation's assets more profitably. Although Indiana is free to subsidize one in-state constituency at the expense of another, it is not free to effect the subsidy at the expense of out-of-state parties. The Supreme Court has long interpreted the “dormant” or “negative” commerce clause of the Constitution to limit a state's power to regulate or impede interstate commerce. In Pike v. Bruce Church, the Court expressed this inferred limitation on interstate exploitation in terms of an explicit cost-benefit balancing test: “Where the statute regulates evenhandedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits.”

The doctrine of the dormant commerce clause is necessary in a federal system of representative government. State regulations sometimes harm other jurisdictions. For some of these externalities the causal link between state action and extrajurisdictional harm is subtle, either because the victims are diffuse and physically distant from the source of the harm or because the harm is first transmitted into a common pool, such as an organized market or exchange. Externalities from state antitakeover statutes are particularly troublesome in this respect.

In 1982, the Supreme Court held in Edgar v. MITE Corp. that an Illinois statute that directly regulated corporate takeovers violated the dormant commerce clause. Some states subsequently enacted “second generation” antitakeover statutes, which purport to regulate only a corporation's structure and the rights of its shareholders - both traditional issues of state law. When one of these statutes was challenged, the Court reversed course, holding in 1987 in CTS Corp. v. Dynamics Corp. of America that Indiana's second generation antitakeover statute did not violate the dormant commerce clause. Although the CTS majority never explicitly said that it was using the Pike test to balance out-of-state costs against in-state benefits, it nevertheless concluded that, “to the limited extent that the Act affects interstate commerce, this is justified by the State's interests in defining the attributes of shares in its corporations and in protecting shareholders.”

Much scholarly criticism of CTS has focused on Justice Scalia's argument in his concurrence that the Court should not even undertake the balancing analysis articulated in Pike. Our focus is different. We do not dispute the Court's selection of constitutional doctrine; rather, we dispute the credibility of its application of that doctrine to Indiana's antitakeover legislation. We examine the costs and benefits of the Indiana antitakeover statute and conclude that a neutral application of the Pike test in CTS should have produced a very different result as a matter of constitutional law. Furthermore, we believe that our study demonstrates that Pike balancing is empirically possible in corporate control cases, even if it is used only prescriptively as the justification for a simpler formulation of the applicable legal rule.

In Part I we theorize that the anonymity of shareholders, which second generation antitakeover statutes like Indiana's diminish, is an efficient attribute of the corporate form that increases shareholder wealth by enhancing liquidity and thereby facilitating corporate control transactions. In Part II we test empirically whether Indiana's antitakeover statute increased or decreased the wealth of shareholders of Indiana corporations. We find that the statute cost those shareholders $2.41 billion in market value, which is about 6% of a portfolio that would have been worth $43.11 billion without the statute. Because only a small percentage of the shareholders of Indiana corporations resides in Indiana, almost all of this loss befell shareholders residing in other states, creating an interstate externality of vast proportions. In Part III we argue that it is highly unlikely as an empirical matter that the local benefits of the Indiana statute “clearly” exceeded the costs imposed on nonresidents, as Pike supposedly requires. Thus, if Pike is still valid precedent (despite being neglected by the majority in CTS and repudiated by Justice Scalia in his concurrence), our empirical evidence supports the conclusion that, as a matter of constitutional law, CTS was wrong in holding that Indiana's statute does not violate the dormant commerce clause. This result raises new doubt about the constitutionality of other antitakeover statutes.

Abstract:
In this review essay of Fred S. McChesney's book, Money for Nothing: Politicians, Rent Extraction, and Political Extortion, I use McChesney's theory of rent extraction to address the rapacious use of the police power. McChesney's central argument is that, to make accurate predictions of the actions of legislators and regulators, one must model those actors as self-interested parties who maximize their personal welfare by extracting from private citizens a protion of the wealth that those government officials forbear from expropriating altogether.

In Part I of this Essay, I discuss McChesney's theory of rent extraction, note one disagreement that I have with his analysis, and suggest possible answers to several engimas that he identifies. Part II applies McChesney's model of rent extraction to one current debate concerning the structure of government: the statutory line-item veto. Part III provides a glimpse of the potentially profound implication of McChesney's analysis for judicial review.

Abstract:
Article II, section 3 of the Constitution provides that the President shall from time to time give to the Congress Information of the State of the Union, and recommend to their Consideration such Measures as he shall judge necessary and expedient. The practical significance of the first part of the recommendation clause is evident every January, when the President addresses Congress. It also forms the basis for congressional demands for information from the President, which sometimes ignite controversies over executive privilege. But the second part of the recommendation clause, although an obscure provision, has great significance for federal lawmaking.

During the Reagan presidency, Congress frequently inserted into appropriations bills specific riders prohibiting the Executive Branch or an independent regulatory agency from advocating or even studying a change in a particular policy. For example, Congress prohibited the Executive from using appropriated monies to study or propose selling the Bonneville Power Administration or the Department of Energy's uranium enrichment facilities and it prohibited the Office of Management and Budget (OMB) from expanding any funds to review agricultural marketing orders. On another occasion, without amending the Sherman Act, Congress prohibited the expenditure of appropriated funds on any activity, the purpose of which is to overturn or alter the per se prohibition on resale price maintenance in effect under Federal antitrust laws. The rider, which was enacted after the Department of Justice had filed its amicus brief in Monsanto Co. v Spray-Rite Service Corp, prevented Assistant Attorney General William F. Baxter from advocating in oral argument that the Supreme Court should adopt the rule of reason; the rider also prohibited the Antitrust Division from drafting legislation to extend the rule of reasons to resale price maintenance.

I call such appropriations riders muzzling laws. More precisely, I define a muzzling law to be any legislation that impairs the Executive's ability to deploy resources to study or advocate a change in the federal government's policies on a particular issue. Muzzling laws lack the predictability of legal boilerplate. They differ in the scope of the forbidden subject matter, in the specificity with which they identify the constrained Executive Branch officers, and in the degree to which they prohibit the use of funds appropriated under other appropriations law. Despite these differences, all muzzling law implicate, and many violate, the principle of separation of powers. When Congress prohibits the President from studying or advocating a change in policy, it impairs the President's ability to perform his constitutional duty to inform Congress and make recommendations for its consideration.

Part I of this Article examines the meaning of the recommendation clause. Part II argues that limiting principles for the clause cannot arise from Congress' appropriations power. Part III offers an economic rational that accounts for the prevalence of muzzling laws. Part IV argues that muzzling laws violate the recommendation clause. Part V discusses the applicability of the recommendation clause to independent regulatory agencies. Finally, Part VI speculates about judicial review of a recommendation clause challenge to a muzzling law.

Abstract:
On February 15, 1997, seventy countries working within the framework of the World Trade Organization agreed on a multilateral reduction of regulatory barrier to competition in international telecommunications services. The signatory nations to the WTO agreement, representing markets generating 95 percent of the $600 billion in global telecommunications revenue, are now legally bound to open their telephone markets to competition. Within months, however, the Federal Communications Commission injected controversy into the new multilateral arrangement by proposing to dictate the prices that other nations may allow their domestic telephone companies to charge to international long-distance carriers for terminating incoming calls from the United States. Those charges for terminating access, know as settlement rates, involve billions of dollars annually and are set pursuant to an international regime that is one of the more arcane niches in the foreboding sprawl of telecommunications regulation.

Our focus in this paper is not on such matters of jurisdiction and international comity, but rather U.S. domestic economic policy. As a matter of regulatory economics, the FCC's settlement rates order harms the very U.S. consumers that it purports to protect. In that sense, the order cannot be said to be in the public interest. It is true, as the FCC said, that the agency need not rely on multilateral efforts alone to lower prices for U.S. consumers making international calls. But there is a superior alternative to the FCC's policy of bilateral reciprocity. To achieve lower prices for U.S. consumers making international calls, the FCC should adopt a unilateral policy of opening U.S. outbound markets to entry by foreign carriers before proceeding to require foreign countries to place their domestic rate structure for terminating access services under FCC jurisdiction.

WTO, World Trade Organization, Settlement Rates

Abstract:
Until 1996, local telephone markets had been treated as natural monopolies and thus subject to regulation. The Telecommunications Act of 1996 (the "Act") seeks to introduce competition into these markets. One method the Act adopts to stimulate such competition is to mandate that incumbent local exchange carriers (LECs) provide access to their unbundled network, such as loops and switches. In August of 1996, the Federal Communications Commission (FCC) issued its First Report and Order, which established a pricing rule for UNEs. The FCC's pricing rule sets the price for a UNE at its total element long-run incremental cost (TELRIC) plus a reasonable share of the incumbent LEC's forward-looking common costs. We propose a pricing methodology to implement that rule based on a combination of what we call the market-determined efficient component-pricing rule (M-ECPR) and competitively neutral end-user charges. We assert that using the M-ECPR to price UNE access is more faithful to the language and intent of the Act than is the approach adopted by the FCC. We also maintain that the FCC misunderstood the efficient component-pricing rule when the agency rejected it as a basis of pricing UNEs.

After outlining our proposal for pricing UNEs, we argue that the FCC's pricing rule is problematic because it prevents the incumbent LEC from recovering its total costs by denying any recovery of the LEC's historical costs and ensuring that it will not fully recover its forward-looking costs. We then respond to criticisms of the M-ECPR by various economists and refute the assertions that the principal authors of the original efficient component-pricing rule rejected the M-ECPR in favor of TELRIC pricing for UNEs. We conclude by warning that the FCC's pricing rule would discourage investment in local telecommunications networks and may eventually drive LECs into bankruptcy.

Abstract:
The line-item veto and the signing statement have received much attention in recent years as a means of controlling federal spending. The reasoning is that if the president has this power he could reject individual lines of spending in large appropriations bills, just as Jefferson Davis was permitted to do under the constitution of the Confederacy. But the campaign to create a line-item veto for the president, either by statute or by constitutional amendment, has been about as successful as the Confederacy itself. Repeatedly since the Civil War, American presidents have asked for this power; it has never been granted. The last attempt was made by President Bush in 1990.

The line-item-veto debate is exhausted. A more profitable line of inquiry is to examine other less sweeping, but more constitutionally sound, means of achieving the results of a line-item veto. Three - the subject veto, constitutional excision, and the presidential-shield veto - offer more promise than the line-item veto for a president seeking greater participation in the making of our laws.

In a largely unnoticed but certainly consequential move, President Bush has repeatedly claimed power of constitutional excision. His bold action will no doubt precipitate a test case, an opportunity for us to rethink the Framers' intended scope of the veto power.

Veto, Line-item veto, Presidential Powers

Abstract:
In an earlier article, we presented a case study of local loop unbundling (LLU) in the Republic of Ireland in 2001. We explained how the predecessor regulatory body to the Irish Commission for Communications Regulation (Comreg) could select the least arbitrary interim access rate. This article is an epilogue to the unfolding LLU experiment in Ireland. We assess the approach advocated by the Industry Advisory Group (IAG), which was appointed by Comreg to resolve the access-pricing dispute between the incumbent, eircom, and the regulator. The IAG does not provide factual support for its assertions that the low digital subscriber line (DSL) penetration and subscription rates in Ireland result from market failure - that is, that eircom is restricting supply of DSL service. Nor does the IAG provide factual support for its presumption that DSL service represents a distinct product market under standard tools for competitive analysis. Assuming, counterfactually, that the factual basis for such regulatory intervention exists, we articulate the problem confronting Comreg: to estimate the ratio of a variable for which Comreg believes it has very good information (eircom's long-run average incremental cost, or "LRAIC"). The IAG's solution cannot inform Comreg of this relationship. The IAG suggests that, after arbitrarily excluding the three countries with the highest LRAICs, eircom should make its unbundled loops available at a price within the range of the remaining LRAICs in the truncated sample. A more principled approach would be to estimate the ratio of historical costs to LRAIC from other countries and then to apply that ratio to eircom's historical costs. Alternatively, one would estimate in a regression model the relationship between LRAIC and the economic and demographic factors that influence LRAIC.

Abstract:
In this review of John Lott's book, Are Predatory Commitments Credible?: Who Should the Courts Believe?, we find that Lott is more successful in pointing out the likelihood of predatory pricing by public enterprises than in proving that predatory pricing by private enterprises does not occur. In Part I of this Review, we critique Lott's theoretical and empirical attempts to show that predatory pricing by private firms is implausible. We review the theoretical arguments regarding the plausibility of predation by private firms, we critique Lott's empirical research on the credibility of predatory commitments by private firms, and finally we assess Lott's theoretical analysis of the effects of allowing would-be victims of predation to benefit directly from their privileged knowledge of a predator's intended activities. In Part II, we assess Lott's theoretical and empirical analyses of predatory pricing by public enterprises. In Part III, we present, as a proposed research agenda for scholars in law and economics, important unanswered questions that extend Lott's research on predatory pricing by public enterprises.

Abstract:
The 1916 Antidumping Act is an ambiguous statute with virtually no legislative history. This article analyzes the Act from an economic perspective, arguing that Congress probably intended not to shield American industries from foreign competition by proscribing international price discrimination, but to protect American consumer by proscribing only international predatory pricing. Yet the social costs of any such attempt to protect consumers are likely to exceed the social benefits. Congress should, the article concludes, repeal the Act. As a second-best alternative, courts should adopt an approach that would reduce the probability that litigation under the Act will impair consumer welfare.

Abstract:
During a period of substantial regulatory change, as in the case of network unbundling in telecommunications, regulators often face the challenge of setting interim rates for services. How, in the face of inherently imperfect information and the need to proceed according to what is invariably an expeditious plan of deregulation or industry restructuring, can the regulator select an interim rate that is the least arbitrary? In this Article, we answer that questions using, as a case study, local loop unbundling (LLU) in the Republic of Ireland in 2001. We analyze the interim prices set by the Office of the Director of Telecommunications Regulation (ODTR) for access by competitors to the local network of the incumbent carrier, eircom. The ODTR's interim prices are based on a simple average of the prices in ten European Union countries for the same service. That methodology is flawed because, with minimal effort, the regulator could have used publicly available data to produce a considerably less arbitrary interim rate. A simple average does not produce good in-sample predictions when the sample variance is large relative to the sample mean - as is the case with the prices of unbundled loops in the EU countries. Using a simple multiple regression model, we find that the ODTR's methodology ignores relevant information, such as population, wage rate, population density, and the degree of urbanization, which, in a sample of the fifty U.S. states and ten European countries, explains roughly 25 percent of the cross-sectional variation in unbundled loop prices over and above that which can be explained by the sample mean alone. The regression model would produce an interim rate that is 42 percent higher than the rate set by the ODTR. Finally, we observe that interim rates that impose artificially low pricing of unbundled network elements will discourage facilities-based investment, to the long-run detriment of consumers.

telecommunications, unbundling, Ireland