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Abstract:
In May, 1998, the U.S. Department of Justice filed suit against the Microsoft Corporation claiming a number of violations of Sections 1 and 2 of the Sherman Act. The case was tried from October 19, 1998 through June 24, 1999. Judge Thomas Penfield Jackson ruled as to the findings of fact on November 5, 1999 and conclusions of law on April 3, 2000. As this paper is drafted, the remedy phase of the trial is about to begin. If the case does not settle, the appeals process will follow.

This paper presents perspective and commentary on the economic issues from the viewpoint of two economists who were active in the case. Fisher was one of the U.S. Government's economic witnesses at the trial, and this paper is based in part on his testimony. Rubinfeld was Deputy Assistant Attorney General (DAAG) for Economics in the Antitrust Division during much of the investigation, and DAAG and then consultant for the U.S. Government during the trial. Our roles as testifying expert and chief economist at the Antitrust Division, respectively, carry with them the advantage of seeing the issues from the inside as participants, and the disadvantage that one's perspective is inevitably affected by one's own viewpoint. Because our goal is to explicate the merits of the Government's case and to highlight important issues, we are hopeful that the advantages will outweigh any disadvantages. Most of what follows summarizes our views at the time of trial; subsections that contain retrospective commentary are starred.

Abstract:
This paper, written when Fisher was preparing for his testimony in Microsoft, discusses the circumstances in which monopoly "leveraging" makes sense as an anti-competitive act. Three cases are discussed and contrasted: The IBM case of the 1970's; the Computer Reservation System Cases of the 1980's; and the Microsoft case. Fisher was a principal economic witness in all of them, for the defense in IBM and for plaintiffs in the other two cases.

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:
Economists have long recognized that certainty of contract is essential to a healthy economy. Long-term forward contracts, in particular, help reduce financial risk. Those contracts can only accomplish that goal, however, if parties know the contracts will be enforced.

From an economic and policy standpoint, long-term energy contracts should be abrogated only in truly exceptional circumstances. The mere fact that a price seems too high in retrospect does not justify abrogating contracts voluntarily agreed to by sophisticated buyers and sellers. Nor do generalized claims of - market dysfunction - at the time the contract was formed.

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:
The "parallel behavior is enough" standard cannot assist the courts in distinguishing horizontal agreements to restrain trade from normal competition. It would very likely impose significant costs on the economy by distorting competitive incentives and encouraging meritless litigation designed mainly to induce financial settlements.

Twombly, Bell Atlantic, Bell Atlantic v Twombly, Amici Curiae, Sherman Section 1

Abstract:
This paper surveys the theoretical literature on aggregation of production functions. The objective is to make neoclassical economists aware of the insurmountable aggregation problems and their implications. We refer to both the Cambridge capital controversies and the aggregation conditions. The most salient results are summarized, and the problems that economists should be aware of from incorrect aggregation are discussed. The most important conclusion is that the conditions under which a well-behaved aggregate production function can be derived from micro production functions are so stringent that it is difficult to believe that actual economies satisfy them. Therefore, aggregate production functions do not have a sound theoretical foundation. For practical purposes this means that while generating GDP, for example, as the sum of the components of aggregate demand (or through the production or income sides of the economy) is correct, thinking of GDP as GDP=F(K,L), where K and L are aggregates of capital and labor, respectively, and F(*) is a well-defined neoclassical function, is most likely incorrect. Likewise, thinking of aggregate investment as a well-defined addition to 'capital' in production is also a mistake. The paper evaluates the standard reasons given by economists for continuing to use aggregate production functions in theoretical and applied work, and concludes that none of them provides a valid argument.

Abstract:
Economists testifying in antitrust cases often encounter the demand by attorneys and judges for “bright-line” tests - simple rules supposedly based on economic analysis. This paper argues that, although such tests can have their uses, they are very likely to lead to error without a clear understanding of the purposes of the tests and the economics behind them. Issues discussed include: market definition, market share, the role of profits, and, especially, anti-competitive conduct (including the Areeda-Turner) test for predatory pricing. Examples are drawn from actual court cases (mostly in the U.S.), in many of which the author was an expert witness. The best known of these was the U.S. case against Microsoft, but there are many others.

Abstract:
Fisher was the principal economic witness for the Antitrust Division in "U.S. v. Microsoft," and Savio was his chief private staff assistant. This paper broaches the question of how product integration in innovative industries should be evaluated when there are tying claims. Despite Microsoft's assertion to the contrary, the correct standard cannot be one that shelters actions with anticompetitive effects, no matter how large, as long as they are accompanied by "innovations" that bring any consumer benefits, no matter how small. Instead, this paper describes a simple and uniform approach that analyzes product design in the same way as other possibly anticompetitive conduct by asking whether the defendant firm would have engaged in the conduct in question regardless of the monopoly rents to be gained or protected by the conduct's effect on competition. This paper also describes how this approach was applied by both Fisher and Judge Jackson in "U.S. v. Microsoft."

Abstract:
Fisher was the principal economic witness for the Antitrust Division in Microsoft. This paper is a rebuttal piece to a paper by David S. Evans and Richard L. Schmalensee, the latter of whom was the principal economic witness for Microsoft. The paper points out that Microsoft did, in fact, harm consumers but beyond that, such harm is not and should not be a requisite for a finding of liability in an antitrust case. The antitrust laws are designed to protect competition, and competition is presumed to protect consumers.

Abstract:
This paper discusses the currently popular question of whether the antitrust laws and standard antitrust analysis apply or ought to apply to industries characterized by rapid innovation. It draws heavily on Microsoft and concludes that the answer is affirmative. Microsoft was not prosecuted because it was innovative (despite a public relations campaign to the contrary). It was prosecuted (and lost) because it undertook acts that had no profitable consequence save the protecting of Microsoft's monopoly power. Courts ought not to refuse to examine the anti-competitive consequences of actions associated with innovations. To do so would be to immunize anti-competitive behavior, no matter how serious the consequences, if wrapped in an innovation, no matter how trivial the benefits. That would be an open invitation to anti-competitive acts in innovative industries.

Abstract:
The Microsoft case has attracted more attention than perhaps any antitrust case in history - far more than the mammoth IBM case of the 1970's, with which it is sometimes compared. I was the chief economics witness for IBM in U.S. v. IBM and the chief economics witness for the United States in U.S. v. Microsoft.

I did not "switch sides". Even though both cases involved "bundling" and charges of "monopoly leveraging", the facts were different, and the principles of economic analysis led to different outcomes. In particular, Microsoft's actions did what IBM's could not have done -- excluded competitors by protecting an important barrier to entry into the market in which it held monopoly power.