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Abstract:
Governments around the world are making or considering efforts to promote open-source software (typically produced by cooperatives of individuals) at the expense of proprietary software (generally sold by for-profit software developers). This article examines the economic basis for these kinds of government interventions in the market. It first provides some background on the software industry. The article discusses the industrial organization and performance of the proprietary software business and describes how the open-source movement produces and distributes software. It then surveys current government proposals and initiatives to support open-source software and examines whether there is a significant market failure that would justify such intervention in the software industry. The article concludes that the software industry has performed remarkably well over the past 20 years in the absence of government intervention. There is no evidence of any significant market failures in the provision of commercial software and no evidence that the establishment of policy preferences in favor of open-source software on the part of governments would increase consumer welfare.

software, open source, market failure, GPL, BSD, intellectual property, innovation, security, privacy, network effects, externalities

Abstract:
Governments around the world are making or considering efforts to promote open-source software (typically produced by cooperatives of individuals) at the expense of proprietary software (generally sold by for-profit software developers). This article examines the economic basis for these kinds of government interventions in the market. It first provides some background on the software industry. The article discusses the industrial organization and performance of the proprietary software business and describes how the open-source movement produces and distributes software. It then surveys current government proposals and initiatives to support open-source software and examines whether there is a significant market failure that would justify such intervention in the software industry. The article concludes that the software industry has performed remarkably well over the past 20 years in the absence of government intervention. There is no evidence of any significant market failures in the provision of commercial software and no evidence that the establishment of policy preferences in favor of open-source software on the part of governments would increase consumer welfare.

software, open source, market failure, GPL, BSD, intellectual property, innovation, security, privacy, network effects, externalities

Abstract:
Many diverse industries are populated by businesses that operate two-sided platforms. These businesses serve distinct groups of customers who need each other in some way, and the core business of the two-sided platform is to provide a common (real or virtual) meeting place and to facilitate interactions between members of the two distinct customer groups. Platforms play an important role throughout the economy by minimizing transactions costs between entities that can benefit from getting together. In these businesses, pricing and other strategies are strongly affected by the indirect network effects between the two sides of the platform. As a matter of theory, for example, profit-maximizing prices may entail below-cost pricing to one set of customers over the long run and, as a matter of fact, many two-sided platforms charge one side prices that are below marginal cost and are in some cases negative. These and other aspects of two-sided platforms affect almost all aspects of antitrust analysis - from market definition, to the analysis of cartels, single-firm conduct, and efficiencies. This paper provides a brief introduction to the economics of two-sided platforms and the implications for antitrust analysis.

antitrust, anitrust analysis, industrial organization, multi-sided platforms, two-sided markets, two-sided platforms

Abstract:
Two-sided platforms (2SPs) cater to two or more distinct groups of customers, facilitating value-creating interactions between them. The village market and the village matchmaker were 2SPs; eBay and Match.com are more recent examples. Other examples include payment card systems, magazines, shopping malls, and personal computer operating systems. Building on the seminal work of Rochet and Tirole (2003), a rapidly growing literature has illuminated the economic principles that apply to 2SPs generally. One key result is that 2SPs may find it profit-maximizing to charge prices for one customer group that are below marginal cost or even negative, and such skewed pricing pattern is prevalent, although not universal, in industries that appear to be based on 2SPs. Over the years, courts have also recognized that certain industries, notably payment card systems and newspapers, now understood to be based on 2SPs, are governed by unusual economic relationships. This chapter provides an introduction to the economics of 2SPs and its application to several competition policy issues.

Abstract:
This paper provides an introduction to the economics of two-sided platforms (2SPs) and its application to competition policy issues. 2SPs cater to two or more distinct groups of customers. Members of one customer group need members of the other group for a variety of reasons that we explore. The platform helps these customers get together in many ways and thereby creates value for these customers that they could not readily obtain without the coordination provided by the platform. The courts - with the help of economists and lawyers - have also recognized that certain industries, now understood as based on 2SPs, are governed by unusual economic relationships.

The indirect network effects between customer groups served by a single business are strong in many important industries. Businesses in these industries operate 2SPs. The economics of 2SPs provides insights into how these businesses and industries behave that are relevant for competition analysis including market definition, coordinated practices, and unilateral practices. The economic literature provides robust results - that is, ones that are not dependent on only fragile assumptions - that can assist in this analysis. These results include the consequences of interlinked demand between customer sides for prices; prices do not, contrary to the standard model, have a tight relationship with cost.

As with almost any application of economics to policy several cautions are prudent. First, many of the theoretical results in the literature to date are, like those in other areas of industrial organization, based on quite abstract models of how industries operate and special assumptions of demand and cost. Second, to date there has been little rigorous empirical research on 2SPs or competition among them. Third, the theoretical and empirical work to date suggests that how 2SP businesses work is highly dependent on the specific institutions and technologies of an industry. One must be careful generalizing.

Two-sided, platform, 2SP, interchange

Abstract:
"Two-sided" markets have two different groups of customers that businesses have to get on board to succeed - there is a "chicken-and-egg" problem that needs to be solved. These industries range from dating clubs (men and women), to video game consoles (game developers and users), to credit cards (cardholders and merchants), and to operating system software (application developers and users). They include some of the most important industries in the economy.

Two-sided firms behave in ways that seem surprising from the vantage point of traditional industries, but in ways that seem like plain common sense once one understands the business problems they must solve. Prices do not and prices cannot follow marginal costs in each side of the market. Price levels, price structures, and investment strategies must optimize output by harvesting the indirect network effects available on both sides. By doing so, businesses in two-sided industries get both sides on board and solve the chicken-and-egg problem. There is no basis for asking regulators or antitrust enforcers to steer clear of these industries or to spend extra effort on them. The antitrust analysis of these industries, however should heed the economic principles that govern pricing and investment decisions in these industries.

antitrust, market structure, chicken-and-egg, pricing strategy, network effect, monopoly

Abstract:
"Two-sided" markets have two different groups of customers that businesses have to get on board to succeed - there is a "chicken-and-egg" problem that needs to be solved. These industries range from dating clubs (men and women), to video game consoles (game developers and users), to credit cards (cardholders and merchants), and to operating system software (application developers and users). They include some of the most important industries in the economy.

Two-sided firms behave in ways that seem surprising from the vantage point of traditional industries, but in ways that seem like plain common sense once one understands the business problems they must solve. Prices do not and prices cannot follow marginal costs in each side of the market. Price levels, price structures, and investment strategies must optimize output by harvesting the indirect network effects available on both sides. By doing so, businesses in two-sided industries get both sides on board and solve the chicken-and-egg problem. There is no basis for asking regulators or antitrust enforcers to steer clear of these industries or to spend extra effort on them. The antitrust analysis of these industries, however should heed the economic principles that govern pricing and investment decisions in these industries.

antitrust, market structure, chicken-and-egg, pricing strategy, network effect, monopoly

Abstract:
Online advertising has grown rapidly and accounts for about 7% of US advertising spending. It is projected to increase sharply as more consumers spend time online on their personal computers and as additional devices such as mobile phones and televisions are connected to the web. This article describes how the online advertising industry works. The industry is populated by a number of multisided platforms that singly or in combination facilitate connecting advertisers to viewers. Search-based advertising platforms, the most well developed of these, has several interesting economic features that result from the combination of keyword bidding by advertisers and single-homing.

Online Advertising, Advertising, Network Effects

Abstract:
In the wake of a series of court cases extending patents to software, open-source software proponents have proposed a number of arguments for limiting or even eliminating software patents. In particular, they claim that the U.S. Patent and Trademark Office has done a poor job of reviewing software patent applications, resulting in obvious, trivial patents. They also maintain that software patents hinder the standards setting process so important for high-technology industries and that patents will to lead to intellectual property rights "thickets" that slow down or stop the innovative process in the software industry. We evaluate these claims, examining relevant empirical evidence where available. While it is clear that problems exist with the patent-granting process, they do not rise to the level of justifying a ban on software patents. Instead, other reasonable - and far less drastic - measures are available. The USPTO has already begun reforms that should improve its software patent review process. As for patent thickets, theory suggests they could form in the software industry, but empirical evidence suggests that in fact they have not formed. Moreover, tools such as patent pools and cross-licensing that increase innovation sharing are available to limit the development of thickets. While the academic literature is still debating the link between patents and innovation, patents have been show to have some positive effects, including increased venture capital funding for small firms. In the end, reform is far more attractive than abolition because it retains the good while minimizing the bad.

Software patents, open source, intellectual property

Abstract:
We describe the main features of U.S. and E.C. tying law and consider their recent evolution. We then review the economic literature on tying and summarize its main implications for the analysis of tying cases: First, recent advances in economic theory unambiguously endorse a rule-of-reason approach to tying such as that adopted by the D.C. Circuit Court of Appeals in Microsoft III. Second, there is no economic basis for a per se prohibition of tying. And third, the modified per se rule adopted by the U.S. Supreme Court in Jefferson Parish does not accurately screen pro-competitive from anticompetitive tying. Drawing on the findings of the economic models developed by the Chicago and post-Chicago Schools, we conclude by proposing a three-step test to implement rigorously a rule-of-reason analysis to tying cases.

Abstract:
Tying the sale of products that could be sold separately is common in competitive markets - from left and right shoes, to the sports and living sections of daily newspapers, to cars and radios. This paper presents a cost-based theory for why tying occurs in competitive markets and uses this theory to examine bundling and tying in pain relievers and cold medicines, foreign electrical plug adapters, and mid-sized automobile sedans. It shows that product-specific scale economies are needed to understand tying but that these scale economies might be hard to detect even when they are present. We draw two principle conclusions for tying doctrine. First, per se condemnation in its various manifestations is wrong as a matter of economics. Neither the Jefferson-Parish test in the United States nor the Hilti/Tetra-Pak approach in the EU is capable of screening anti-competitive from pro-competitive tying. Second, if it is hard to establish efficiencies when practices could not arise for anticompetitive reasons, it might also be hard to establish the efficiencies required by the rule of reason or per se approaches. Both approaches are therefore likely to result in the frequent condemnation of efficient tying - that is a high rate of false convictions.

Abstract:
The recent article by Maurits Dolmans and Thomas Graf summarizes their views on the analytical framework adopted under EC tying law and applies this framework to the European Commission's March 2004 decision in Microsoft. We appreciate the opportunity this article provides for engaging in a healthy debate about sound approaches towards tying practices and for examining the permissible limits of product design by dominant firms. Both have significant ramifications for the development of the Common Market.

Abstract:
This essay surveys the economic literature on interchange fees and the debate over whether interchange should be regulated and, if so, how. We consider, first, the operation of unitary payment systems, like American Express, in the context of the recent economic literature on two-sided markets, in which businesses cater to two interdependent groups of customers. The main focus is on the determination of price structure. We then discuss the basic economics of multi-party payment systems and the role of interchange in the operation of such systems under some standard, though unrealistic, simplifying assumptions. The key point of this discussion is that the interchange fee is not an ordinary price; its most direct effect is on price structure, not price level.

We then examine the implications for privately determined interchange fees of some of the relevant market imperfections that have been discussed in the economic literature. While some studies suggest that privately determined interchange fees are inefficiently high, others point to fees being inefficiently low. Moreover, there is a consensus among economists that, as a matter of theory, it is not possible to arrive, except by happenstance, at the socially optimal interchange fee through any regulatory system that considers only costs. This distinguishes the market imperfections at issue here for multi-party systems from the more familiar area of public utility regulation, where setting price equal to marginal cost is theoretically ideal.

Next, we consider the issues facing policy makers. Since there is so much uncertainty about the relation between privately and socially optimal interchange fees, the outcome of a policy debate can depend critically on who bears the burden of proof under whatever set of institutions and laws the deliberation takes place. There is no apparent basis in today's economics - at a theoretical or empirical level - for concluding that it is generally possible to improve social welfare by a noticeable reduction in privately set interchange fees. Thus, if antitrust or other regulators had to show that such intervention would improve welfare, they could not do so. This, again, is quite unlike public utility regulation or many areas of antitrust including, in particular, ordinary cartels. By the same token, there is no basis in economics for concluding that the privately set interchange fee is just right. Thus, if card associations had to bear the burden of proof - for example, to obtain a comfort or clearance letter from authorities for engaging in presumptively illegal coordinated behavior - it would be difficult for them to demonstrate that they set socially optimal fees.

We take a pragmatic approach by suggesting two fact-based inquiries that we believe policymakers should undertake before intervening to affect interchange. First, policymakers should establish that there is a significant market failure that needs to be addressed. Second, policymakers should establish that it is possible to correct a serious market imperfection, assuming one exists, by whatever intervention they are considering (such as cost-based regulation of interchange fee levels) and thereby to increase social welfare significantly after taking into account other distortions that the intervention may create. We illustrate both of these points by examining the recent Australian experience.

Abstract:
The SSNIP test and Critical Loss Analysis are widely used tools for determining market definition in merger and sometimes other antitrust matters. However, the standard techniques used to test for a relevant antitrust market are incorrect when the firms in question operate two-sided platforms. When a two-sided platform raises price on one side of its business, it negatively impacts both sides iteratively. We show how Critical Loss Analysis can be extended to the case of two-sided platforms and drive formulas for its implementation. We perform comparative statics to show that the bias from the misuse of one-sided formulas in a two-sided setting can be large.

Abstract:
The European Court of First Instance (CFI) rejected Microsoft's grounds for annulling the Commission's Decision that the software maker had abused its dominant position in computer operating systems by refusing to supply certain protocols for interoperating with rivals' computers and by tying Windows Media Player to its Windows operating system. This article argues that the Court's judgment continues the form-based approach it has followed for four decades to abuse of dominance cases and is inconsistent with the Court's emphasis on coherent economic reasoning in merger clearance reviews, thereby reinforcing a divide between these two critical parts of European competition policy. The CFI's approach also continues its historical adherence to focusing on market structure and putting aside direct evidence of adverse effects on consumer welfare. In particular, the CFI did not embrace parts of the Commission's Decision against Microsoft that advocated an effects-based approach. At the same time the CFI's judgment expands the possibilities for finding an abuse of dominance by weakening key prongs of the Bronner/Magill/IMS exceptional circumstances test for refusal to supply and adopts a separate products test for tying that has illogical implications for many standard cases.

Microsoft, Sun Microsystems, European Commission, Antitrust, Article 82, Tying, Refusal to Supply

Abstract:
A multi-sided platform (MSP) serves as an intermediary for two or more groups of customers who are linked by indirect network effects. Recent research has found that MSPs are significant in many industries and that some standard economic results - such as the Lerner Index - do not apply to them, in material ways, without some significant modification to take linkages between the multiple sides into account. This article extends several key tools used for the analysis of mergers to situations in which one or more of the suppliers are MSPs. It shows that the application of traditional tools to mergers involving MSPs results in biases the direction of which depends on the particular tool being used and other conditions. It also extends these tools to the analysis of the merger of MSPs. The techniques are illustrated with an application to an acquisition by Google in the online advertising industry.

Abstract:
A multi-sided platform (MSP) serves as an intermediary for two or more groups of customers who are linked by indirect network effects. Recent research has found that MSPs are significant in many industries and that some standard economic results - such as the Lerner Index - do not apply to them, in material ways, without some significant modification to take linkages between the multiple sides into account. This article extends several key tools used for the analysis of mergers to situations in which one or more of the suppliers are MSPs. It shows that the application of traditional tools to mergers involving MSPs results in biases the direction of which depends on the particular tool being used and other conditions. It also extends these tools to the analysis of the merger of MSPs. The techniques are illustrated with an application to an acquisition by Google in the online advertising industry.

Abstract:
Software platforms are a critical component of the computer systems, underpinning leading-edge products ranging from third-generation mobile phones to video games. After describing some key economic features of computer systems and software platforms, the paper presents case studies of personal computers, video games, personal digital assistants, smart mobile phones, and digital content devices. It then compares several economic aspects of these businesses including their industry evolution, pricing structures, and degrees of integration.

software platforms, hardware platforms, network effects, bundling, multi-sided markets

Abstract:
Two-sided platform businesses serve distinct groups of customers and need each other in some way. They provide these customers a real or virtual meeting place, and they facilitate the interactions between members of these customer groups. They essentially act as intermediaries between the two groups and create efficiencies by lowering transactions costs and reducing duplication costs. Many significant industries are populated by businesses based on two-sided platforms. These include many traditional businesses, such as shopping malls, and most Internet-based businesses, such as social networks. Several economic conclusions that are relevant for antitrust analysis follow from the fact that these platforms are maximizing profits based on interlinked demand from the two sides. Prices on one side may be below marginal cost and possibly negative in long-run equilibrium. Many two-sided platforms in practice subsidize one side and earn profits on the other. Moreover, the standard result that the percent markup of price over marginal cost is inversely related to the elasticity of demand does not hold for either customer group. Antitrust analysis, tools, and techniques require modification when two-sided platforms account for a significant portion of supply. Failure to account for the consequences of interlinked demand between the two sides can lead antitrust analysis into serious error.

multi-sided platforms, two-sided platforms, two-sided markets, market definition, antitrust, merger analysis, antitrust analysis

Abstract:
Multi-sided platform markets have two or more different groups of customers that businesses have to get and keep on board to succeed. These industries range from dating clubs (men and women), to video game consoles (game developers and users), to payment cards (cardholders and merchants), to operating system software (application developers and users). They include some of the most important industries in the economy. A survey of businesses in these industries shows that multi-sided platform businesses devise entry strategies to get multiple sides of the market on board and devise pricing, product, and other competitive strategies to keep multiple customer groups on a common platform that internalizes externalities across members of these groups.

Abstract:
There appears to be universal agreement that antitrust policy should "protect competition, not competitors" and that consumer welfare is the fundamental standard for evaluating competitive effects. There is considerable debate, however, about how to implement those principles in practice when evaluating rule-of-reason antitrust claims under the Sherman Act. The choice of an appropriate consumer harm necessarily involves a tradeoff between the risk of being so lenient that firms think they can get away with anticompetitive behavior and the risk of being so strict that the courts condemn practices that help consumers and thereby stifle the very competitive process the antitrust laws seek to protect. There is no way to eliminate both risks, and the courts and ultimately society need to choose how to minimize the expected costs of the inevitable errors.

The Clinton Administration, in cases brought against Intel, Microsoft, and Visa/MasterCard, asked the courts to use a consumer harm standard that relied on an inference of harm to consumers from harm to competitors. In the two cases that went to trial and for which there is a complete record U.S. v. Microsoft and U.S. v. Visa U.S.A. et al. the district court accepted this approach. We explore two important issues in inferring consumer harm from competitor harm. The first is what preconditions must hold for it to be valid to make this inference. We show in this paper that courts in both Microsoft and Visa did not require Clinton Administration antitrust enforcers to establish critical preconditions. The second important issue is whether a showing of substantial harm to consumers should be required for liability. The courts can reduce errors by requiring evidence that the challenged practices have caused, or are likely to cause, substantial harm to consumers. The Microsoft and Visa cases both demonstrate that this is a realistic evidentiary hurdle that could have been required of the plaintiffs. There were many studies plaintiffs could have done to demonstrate significant effects on consumers if in fact there were such effects.

Consumer Harm, Welfare, Antitrust, Competition, Microsoft, Visa

Abstract:
Credit cards are used by every segment of our society, from college students to retirees, from the unemployed to hopeful entrepreneurs, from some of the poorest households to the wealthiest, and across all race, sex, and ethnic groups. This study documents the growth in credit cards as a method of paying for and financing purchases in the United States, and the diffusion of credit cards through almost all segments of the American public. Using data collected by the Federal Reserve Board in its Survey of Consumer Finances, this paper focuses on the period from 1970 (four years after the introduction of what are now Visa and MasterCard) to 2001 (the most recent year for which the Survey of Consumer Finance data are available).

About 73 percent of all households had at least one credit card in 2001, up from 16 percent in 1970. And households use these cards more than they used to: the average household that had at least one credit card charged $720 a month in 2001 compared with $136 in 1970 (both in 2002 dollars). Households also use credit cards more as a source of financing. Between 1970 and 2001, there was an eight-fold increase in the dollar value of credit-card debt held by the average U.S. household. Credit cards have displaced store cards and installment loans as a source of financing.

Credit cards have become increasingly available and are used more by most segments of society. Disadvantaged groups, in particular, have experienced high growth in credit card access and use. For example, in 1970, 2 percent of all low-income households owned credit cards. By 2001, more than one third did. In fact, by 2001 credit cards on average accounted for over 45 percent of low-income households' non-mortgage debt. Another traditionally disadvantaged group, single women, has also gained increased access to credit through credit cards. More than 60 percent of all single women without children have credit cards, while over 50 percent of single women with children own cards - and most carry balances on those cards.

Over the last thirty years, virtually all demographic groups have increased their ownership and use of credit cards. Credit cards have become an indispensable means for Americans and consumers worldwide to make safe, convenient payment transactions. More importantly, credit cards have helped households to obtain credit that, certainly for the less wealthy, may not have been available otherwise.

Abstract:
This essay describes an approach for designing antitrust rules for assessing whether firms have engaged in anticompetitive unilateral practices that is based in part on the error-cost framework pioneered by Judge Easterbrook. We focus particularly on the role of economic theory and evidence in forming presumptions about the likelihood that unilateral business practices reduce welfare and on the implications of this role for the kinds of research that economists need to conduct concerning unilateral business practices. We then apply this approach to tying. Our approach towards designing legal rules proceeds in two steps. First, economic theory and empirical evidence are used to formulate explicitly a set of presumptions regarding the cost and likelihood of errors resulting from condemning welfare-increasing business practices or condoning welfare-reducing ones. Second, based on those presumptions, a legal rule that minimizes the cost of errors is selected. We will refer to this as a neo-Chicago approach, since it accepts the fundamental tenet of Chicago thinking that legal rules and legal outcomes can and should be assessed based on their efficiency properties, while also incorporating the learning of the Chicago and post-Chicago literatures in designing these rules.

Abstract:
This Essay describes an approach for designing antitrust rules for assessing whether firms have engaged in anticompetitive unilateral practices that is based in part on the error-cost framework pioneered by Judge Easterbrook. We focus particularly on the role of economic theory and evidence in forming presumptions about the likelihood that unilateral business practices reduce welfare and on the implications of this role for the kinds of research that economists need to conduct concerning unilateral business practices. We then apply this approach to tying.

Our approach towards designing legal rules proceeds in two steps. First, economic theory and empirical evidence are used to formulate explicitly a set of presumptions regarding the cost and likelihood of errors resulting from condemning welfare-increasing business practices or condoning welfare-reducing ones. Second, based on those presumptions, a legal rule that minimizes the cost of errors is selected. We will refer to this as a neo-Chicago approach, since it accepts the fundamental tenet of Chicago thinking that legal rules and legal outcomes can and should be assessed based on their efficiency properties, while also incorporating the learning of the Chicago and post-Chicago literatures in designing these rules.

Chicago School, post-Chicago, unilateral business practices, antitrust, error costs, tying

Abstract:
There is a wide and growing consensus among antitrust scholars and practitioners in favor of a rule-of-reason approach to the assessment of tying by dominant firms. However, a rule-of-reason analysis may or may not produce socially optimal outcomes depending on how it is conducted in practice. A rule-of-reason test that places the same weight on factual evidence as on theoretical speculation is bound to cause as much harm as a rule that considers tying per se illegal: many socially beneficial ties will be found illegal. This paper discusses how to best implement a rule-of-reason approach. We consider two alternatives, a simple balancing test and a structured test, and conclude in favor of the structured test, as it is less likely to lead to costly mistakes.

Abstract:
Firms may be able to create new and improved products as a result of merging. These "demand-side efficiencies" should be considered by competition authorities in considering whether to allow a merger. Unlike reductions in costs that merged firms may not pass on to consumers, new and better products necessarily make consumers better off. Moreover, the value of demand-side efficiencies can be quite large, as recent studies of improved products ranging from toilet paper to minivans has demonstrated. Of course, competition authorities should seek evidence that mergers will facilitate new and improved products and weigh these benefits against increased prices and other costs the merger may create. A review of European Union merger cases shows that the Commission needs to consider demand-side efficiencies, and provides further caution against making efficiencies an "offence" rather than a "defence."

demand-side efficiencies, mergers and acquisitions, welfare, competition, antitrust, network effects, European Union, European Commission, Microsoft

Abstract:
Firms may be able to create new and improved products as a result of merging. These "demand-side efficiencies" should be considered by competition authorities in considering whether to allow a merger. Unlike reductions in costs that merged firms may not pass on to consumers, new and better products necessarily make consumers better off. Moreover, the value of demand-side efficiencies can be quite large, as recent studies of improved products ranging from toilet paper to minivans has demonstrated. Of course, competition authorities should seek evidence that mergers will facilitate new and improved products and weigh these benefits against increased prices and other costs the merger may create. A review of European Union merger cases shows that the Commission needs to consider demand-side efficiencies, and provides further caution against making efficiencies an "offence" rather than a "defence."

demand-side efficiencies, mergers and acquisitions, welfare, competition, antitrust, network effects, European Union, European Commission, Microsoft

Abstract:
U.S. v. Microsoft and the related state suit filed in 1998 appear finally to have concluded. In a unanimous en banc decision issued in late June 2004, the D.C. Circuit Court of Appeals rejected challenges to the remedies approved by the District Court in November 2002. The wave of follow-on private antitrust suits filed against Microsoft also appears to be subsiding. In this paper we review the remedies imposed in the United States, in terms of both their relationship to the violations found and their impact on consumer welfare. We conclude that the remedies addressed the violations ultimately found by the Court of Appeals (which were a subset of those found by the original district court and an even smaller subset of the violations alleged, both in court and in public discourse) and went beyond them in important ways. Thus, for those who believe that the courts were right in finding that some of Microsoft's actions harmed competition, the constraints placed on its behavior and the active, ongoing oversight by the Court and the plaintiffs provide useful protection against a recurrence of such harm. For those who believe that Microsoft should not have been found liable because of insufficient evidence of harm to consumers, the remedies may be unnecessary, but they avoided the serious potential damage to consumer welfare that was likely to accompany the main alternative proposals. The remedies actually imposed appear to have struck a reasonable balance between protecting consumers against the types of actions found illegal and harming consumers by unnecessarily restricting Microsoft's ability to compete.

Abstract:
U.S. v. Microsoft and the related state suit filed in 1998 appear to have concluded. In a unanimous en banc decision issued in late June 2004, the D.C. Circuit Court of Appeals rejected challenges to the remedies specified in a settlement reached in late 2001 and approved by the District Court in November 2002. The wave of dozens of follow-on private antitrust suits filed against Microsoft also appears to be subsiding, following many settlements and some dismissals. Related issues, however, continue to be the focus of competition agencies outside the United States, including the European Union and Korea. In this paper we review the remedies imposed in the United States, in terms of both their relationship to the violations found and their impact on consumer welfare. We conclude that the remedies addressed the violations ultimately found by the Court of Appeals (which were a subset of those found by the original district court and an even smaller subset of the violations alleged, both in court and in public discourse) and went beyond them in important ways. Thus, for those who believe that the courts were right in finding that some of Microsoft's actions harmed competition, the constraints placed on its behavior and the active, ongoing oversight by the Court and the plaintiffs provide useful protection against a recurrence of such harm. For those who believe that Microsoft should not have been found liable, because of insufficient evidence of harm to consumers, the remedies may be unnecessary, but they avoided the serious potential damage to consumer welfare that was likely to accompany the structural remedy imposed by the original district court and the more extreme restrictions on conduct later proposed by some of the state plaintiffs. The remedies imposed appear to have struck a reasonable balance between protecting consumers against the types of actions found illegal, on the one hand, and, on the other hand, avoiding excessive restrictions that would harm consumers by restricting Microsoft's ability to compete in pro-competitive ways.

Abstract:
The Reserve Bank of Australia reduced interchange fees by almost half thereby eliminating a significant source of revenue to issuers of credit cards. The purpose of this intervention was to align the prices of using various payment instruments with their social costs and thus reduce the use of cards, which the RBA viewed as a socially less efficient payment method than cash, checks, and PIN debit cards. The short-run result of this regulatory intervention has been the following: (1) Bank issuers have increased the fixed prices for cards and thereby recovered between 30 and 40 percent of the loss of interchange fee revenue; this fraction is likely to increase over time as cards renew and new solicitations go out. Bank issuers have not changed the per-transaction fees for cards much. (2) Merchants experienced a very small reduction in their costs. Both theory and limited empirical evidence suggest that the highly concentrated merchant sector in Australia has captured the reduction in interchange fees as profits and has not passed it on in the form of lower consumer prices. (3) The per-transaction price at the point of sale has not changed significantly. Merchants have not generally availed themselves of their right to surcharge card transactions and the per-transaction price faced by consumers from their card issuers has not changed much. Holding the number of cards fixed, the regulatory intervention has not altered prices in a way that could achieve the intent of the intervention. (4) There is relatively little evidence thus far that the intervention has in fact affected the volume of card transactions in Australia as intended by the regulation. (5) In the short-run, the effect of the regulation has been to transfer significant profits to the Australian merchant sector with that transfer being borne partly by bank issuers and partly by cardholders. (6) Since proprietary systems such as American Express were not subject to the pricing regulations and since American Express can enter into deals with banks to issue cards, banks have shifted volume from the regulated association systems to the unregulated proprietary systems.

Two-sided markets, payment systems, credit cards, interchange fee, surcharging

Abstract:
This paper addresses the analysis of market definition when the parties involved in an antitrust or merger analysis include one or more two-sided platforms. We discuss how standard market definition measures such as SSNIP tests, diversion ratios, and conditional logit demand analyses have to be modified to account for the unique characteristics of two-sided platforms. We also review how market definition of two- sided platforms was treated in recent US and EC case law.

multi-sided platforms, two-sided platforms, two-sided markets, market definition, antitrust analysis, merger analysis

Abstract:
This article is about a type of business that connects distinct groups of customers on a "multi-sided platform." Such businesses have been around for millennia. But their economic importance has increased with the Internet revolution. Many significant web-based businesses such as eBay, Facebook, and Google are multi-sided. Multi-sided platform businesses must account for the fact that each type of customers they attract values more of the other type of customers. Buyers value many sellers and sellers many buyers, for example, on Internet auction sites. That interdependence has significant implications for the economic behavior of these businesses (they often break even or lose money on customers on one side) and for how competition authorities and regulators should analyze them (market definition must account for the linkages between the multiple customer groups). Multi-sided platforms tend to engage in complex business practices. The challenge for policymakers is distinguishing anticompetitive from complicated but benign behavior. This paper is based on the Beesley Lecture, sponsored by the London Business School and the Institute for Economic Affairs, which I was invited to deliver on 26 October 2007 in London.

Multi-Sided Platforms, Competition Policy, Internet Economy, Web-Based Platforms

Abstract:
The antitrust laws of the United States have, from their inception, allowed firms to acquire significant market power, to charge prices that reflect that market power, and to enjoy supra-competitive returns. This article shows that this policy, which was established by the U.S. Congress and affirmed repeatedly by the U.S. courts, reflects a tradeoff between the dynamic benefits that society realizes from allowing firms to secure significant rewards, including monopoly profits, from making risky investments and engaging in innovation; and the static costs that society incurs when firms with significant market power raise price and curtail output. That tradeoff results in antitrust laws that allow competition in the market and for the market, even if that rivalry results in a single firm emerging as a monopoly, but that prevent firms from engaging in practices that go out of bounds. The antitrust laws ultimately regulate the "boundaries" of the "game of competition." Three implications follow. First, the antitrust laws and intellectual property laws are based on similar policy tradeoffs between static and dynamic effects. Second, the antitrust rules have, all along, been based on this tradeoff and not on the effects of business practices on static consumer welfare in relevant antitrust markets. Third, one unintended consequence of the increased role of economics in antitrust analysis is to overemphasize static considerations which the almost the sole focus of the economics literature that courts and competition authorities consider.

Antitust law, monopoly power, competition

Abstract:
This paper examines the evolution of the use of economics in EC competition policy matters and the reforms in the use of economics that occurred in the latter part of EC Competition Commissioner Mario Monti's term (1999-2004). Under his predecessors, the use of economics had been steadily increasing for many years. The revolutionary reforms under Commissioner Monti were triggered when the Court of First Instance (CFI) voided, in quick succession, three merger prohibitions adopted by the European Commission. The CFI criticized the Commission for relying on unverified economic theories. The reforms rapidly had an impact on merger analysis at the Commission. It is unclear, however, whether the Commission will embrace the use of sound economic analysis for abuse of dominance inquiries in the absence of a clear mandate from the EC courts to do so.

Abstract:
The courts have adopted implicitly and explicitly economic premises in developing rules towards business practices under the competition laws in the United States and the European Community. Courts in both jurisdictions hold the view that monopoly is not bad in and of itself because it can promote long-run innovation and investment. They have sought to determine, subject to relevant legislation, rules that can assess whether practices are harmful to competition generally or in particular factual circumstances. In some cases, these premises become modified over time as the result of economic learning; in other cases these premises do not have close counterparts in academic economics. This article describes the economics that seems to underlie competition law; it draws contrasts and comparisons between the US and Europe. It also explores ways in which economists, authorities, and the courts can better question, and bring evidence to bear, on these economic premises.

Abstract:
We apply and extend the cost-based approach to bundling and tying under competition developed in Evans and Salinger (2004a) to over-the-counter pain relievers and cold medicines. We document that consumers pay much less for tablets with multiple ingredients than they would to buy tablets with each ingredient separately. We then decompose the sources of these savings into marginal cost savings and a component that reflects fixed costs of product offerings. The analysis both documents substantial economies of bundling and illustrates the sort of cost analysis that is necessary for understanding tying.

Abstract:
We incorporate marginal cost savings from bundling, fixed costs of product
offerings, and variation in customer preferences into a model of bundling and tying. To focus on cost effects, we assume perfectly contestable markets and analyze sustainable product offerings. Pure bundling can arise either because few people demand only one component or because, with high fixed costs, a single product is the efficient way to satisfy customers with diverse tastes. Two cases - sinus headache tablets and a package of four foreign plug adapters - illustrate the distinctions identified by the model.

Tying, Bundling, Contestable Markets

Abstract:
The U.S. Department of the Treasury has submitted the Consumer Financial Protection Agency Act of 2009 to Congress for the purpose of overhauling consumer financial regulation. This study has examined the likely effect of the Act on the availability of credit to American consumers. To do so we have examined the legislation in detail to assess how it would alter current consumer protection regulation, reviewed the rationales provided for the new legislation by those who designed its key features, considered why consumers borrow money and benefit from doing so, and reviewed the factors behind the expansion of credit availability over the last thirty years. Based on our analysis we have concluded that the CFPA Act of 2009 would make it harder and more expensive for consumers to borrow. Under plausible yet conservative assumptions the CFPA would:

• increase the interest rates consumers pay by at least 160 basis points; • reduce consumer borrowing by at least 2.1 percent; and, • reduce the net new jobs created in the economy by 4.3 percent.

By reducing borrowing the Act would also reduce consumer spending that further drives job creation and economic growth. In addition to restricting the availability of credit over the long term, the CFPA Act of 2009 would also slow the recovery from the deep recession the economy is now in by reducing borrowing, spending, and business formation.

The financial crisis has surfaced a number of serious consumer financial protection problems that were not dealt with adequately by federal regulators. Rather than proposing expeditious and practical reforms that can deal with those problems, the Treasury Department has put forward a proposal that would disrupt current regulatory agency efforts to deal with these issues.

This paper focuses on the CFPA Act that the Administration introduced in July 2009. House Finance Committee Chairman Frank has proposed changes to this Act which the Treasury Secretary Geithner appears to be willing to accept. However, given that these changes could be reversed or other changes could be made as the legislation works its way through Congress, we focus on the Administration’s original bill rather than a moving target. Chairman Frank’s proposed changes do not significantly alter any of our conclusions.

adverse selection, asymmetric information, automatic underwriting, color-blind, consumer credit, credit worthy, FICO, financial crisis, liquidity constraint, moral hazard, mortgages, overdraft protection, risk analysis, securitization, subprime, supernanny

Abstract:
Paying with plastic has become a way of life for most consumers and merchants in the United States - as well as in many other nations around the world. Today, most Americans carry several payment cards in their wallets and most merchants accept many different brands of cards for payments.

An intensely competitive industry services two sides of the market in the United States - consumers who wish to pay with plastic and merchants who are willing to be paid with plastic. A crucial element in the development of this industry was the emergence of the cooperative associations Visa and MasterCard.

Both Visa and MasterCard represent a unique blend of competition and cooperation. Member banks cooperate in a few key areas that generate efficiencies for consumers and merchants - such as sharing the operation of the vast computer networks that now enable transactions to be completed in a few seconds. Members compete in every other dimension - interest rates, fees, service and innovative offerings.

This paper tells the story of Visa and MasterCard - how they injected competition into the fledgling payment card industry and how the explosive growth that followed benefited American consumers and merchants alike.

Abstract:
Three major technological trends will lead to a significant transformation of the payments industry: the development of online advertising technologies that will increasingly rely on transaction data, the movement of payment innovation from the existing jerry-rigged linkages of hardware and software to cloud-based computing, and the proliferation of mobile telephones and other handheld devices that are connected to the Internet. Innovation will result from the integration of these new technologies and will transform the payment and shopping experience in ways that promise to bring enormous benefits to consumers and businesses.

Payment industry, technology, e-commerce

Abstract:
The European Commission's rejection of the GE/Honeywell merger in July 2001, a deal that the United States Department of Justice had already approved, highlights the dangers that multinational companies face as antitrust laws proliferate around the globe. Although American and European regulators generally agree on enforcement actions, the GE/Honeywell case revealed some important differences in substantive and procedural approaches to antitrust enforcement. U.S. antitrust laws are enforced in the courts, where the burden generally falls to the enforcement agencies (or other plaintiffs) to demonstrate anti-competitive harm. U.S. courts have espoused several core principles that guide antitrust enforcement in the United States. First, the sole purpose of antitrust laws is to protect consumers. Second, antitrust laws should not be used to protect businesses from competition. Third, unfettered competition generally benefits consumers even when a single firm captures most or all of the market. In Europe, by contrast, the Commission acts as prosecutor, judge, and jury. The process gives greater voice to competitors and limits the ability of companies to respond to allegations presented by their rivals. In addition, the Commission, which employs fewer economists than its counterparts in the U.S., has embraced economic theories such as "conglomerate effects" that protect competitors at the expense of consumers. As multilateral discussions about international competition policy commence, the United States should bare in mind two points. First, the conflicts between the United States and Europe over antitrust enforcement are not about the protection of national interests. Second, the European Commission has generally been a progressive force in the EU. However, as the Commission becomes a more aggressive regulator, more disputes along the lines of GE/Honeywell are likely to occur, and the United States must continue to emphasize the core principles of antitrust policy.

Abstract:
Federal and state governments, sometimes armed with new legislation, have been increasingly aggressive in pursuing criminal charges against corporations and their executives. While corporate fraud can impose significant costs of the economy when left unchecked, the evidence shows that market mechanisms discipline much bad behavior while the criminalization of corporate behavior, coupled with bringing highly complex cases before juries that can neither understand the issues nor their instructions, imposes significant costs on the economy by deterring socially efficient risk-taking behavior by corporations and their executives. Criminal prosecution companies and their executives for corporate wrongdoings should be limited to clear cases of fraud and jury trials should be limited to the extent this is constitutionally permissible.

Corporate Fraud, White Collar Crimes, Error Costs, Complexity

Abstract:
This article summarizes the theory on the optimal design of antitrust rules and discusses the application of such theory in different jurisdictional settings. It establishes the proposition that divergence is the norm for antitrust rules. This paper argues that the quest for convergence is quixotic and the disdain when another jurisdiction has a different rule than one's own is uncalled for. Along the way it considers two beacons of divergence that appeared on either side of the Atlantic at the end of 2008 - the US Department of Justice's report on unilateral conduct and the European Commission's enforcement guidelines on abusive exclusionary conduct.

Abstract:
Online advertising accounts for almost 9 percent of all advertising in the United States. This share is expected to increase as more media is consumed over the internet and as more advertisers shift spending to online technologies. The expansion of internet-based advertising is transforming the advertising business by providing more efficient methods of matching advertisers and consumers and is transforming the media business by providing a source of revenue for online media firms that compete with traditional media firms. The precipitous decline of the newspaper industry is one manifestation of the symbiotic relationship between online content and online advertising. Online-advertising is provided by a series of interlocking multi-sided platforms (also known as two-sided markets) that facilitate the matching of advertisers and consumers. These intermediaries increasingly make use of detailed individual data, predictive methods, and matching algorithms to create more efficient matches between consumers and advertisers. Some of their methods raise public policy issues that require balancing providing consumers more valuable advertising against the possible loss of valuable privacy.

Advertising, Online Advertising

Abstract:
Antitrust has grown explosively in the last quarter century. As of the end of 2004, 102 countries - from Albania to Zimbabwe - had national competition laws on their books. Together, these countries account for more than 85 percent of the world’s population. Many of these countries, including China and India, have been strengthening those laws and their enforcement. More than three fifths of the countries with antitrust laws today did not have any laws on the books before 1990, and many of those that did had ineffectual ones. Antitrust spread rapidly as country after country started relying more on markets, rather than central planning and government enterprise, to spur economic growth. Countries that embraced markets soon adopted the same sort of rules for regulating the game of competition that the United States had put in place in 1890 to rein in the excesses of laissez faire capitalism.

This chapter provides a brief overview of the global antitrust enterprise as it stands at the beginning of 2009. The remainder of the volume takes deep dives into diverse jurisdictions.

antitrust law, international law, global competition policy

Abstract:
Offering expert testimony that is a hair's breadth away from nutty is no longer sufficient to secure class certification according to an emerging consensus across the circuit courts. The court must also get into any merits issues that are relevant to the class issues. As a practical matter credible expert testimony will prove more important going forward in all types of class certification for both plaintiffs and defendants. This note summarizes the consensus that is emerging and describes the sorts of analyses that will prove critical in seeking or opposing the certification of a particular class.

class certification, economic evidence, statistical evidence, Rule 23, expert testimony

Abstract:
What choices should you offer your customers and which ones shouldn't you? The answer to this question has profound consequences for business strategy, product design, marketing, and pricing, not to mention product adoption. Designing products and architecting product lines are the most difficult, expensive, and vital decisions that your business will make. They determine a significant part of your development, manufacturing, and distribution costs and most, if not all, of your sales to consumers. Yet, aside from glib anecdotes and vague "lessons learned," existing management literature provides little guidance to managers and entrepreneurs. Product-offering architecture (POA) fills that void. This management concept is based on field research on product offerings, business models, and pricing in diverse industries and draws on theoretical work on bundling, versioning, and other aspects of product architecture. POA provides a unified framework for making informed decisions about consumer choice and optimal product design. The POA principles set forth here help enable companies to increase long-run profits, identify product innovations, and avoid disruptive competition. Product-offering architecture provides a framework and set of principles for assisting businesses in achieving that proper balance. Armed with both POA and the knowledge about your customers, your markets and the costs of your product, your business can design products and product lines that maximize its profits and provide customers with just the right amount of choice.

Product Offering, Bundling, Product Architecture

Abstract:
U.S. antitrust law has made enormous strides in the last twenty years towards becoming intellectually coherent and based on sound economic analysis. Economic analysis now has a preeminent place in evaluating and bringing cases, among enforcement agencies and in the courts. There is no serious debate that unilateral practices should be subjected to a per se test rather than a rule of reason analysis. Likewise, there is no debate among economists or legal scholars that tying should be removed from the genus of unilateral practices and placed in its own leper colony.

The time has therefore come to abandon the per se label and refocus the inquiry on the adverse economic effects, and the potential economic benefits, that the tie may have. The law of tie-ins will thus be brought into accord with the law applicable to all other allegedly anticompetitive economic arrangements, except those few horizontal or quasi-horizontal restraints that can be said to have no economic justification whatsoever. This change will rationalize rather than abandon tie - in doctrine as it is already applied. Modern antitrust analysis does not support the per se condemnation of tying or the Jefferson Parish test. Neither should modern antitrust law.

Abstract:
Competition in many important industries centers on investment in intellectual property. Firms engage in dynamic, Schumpeterian competition for the market, through sequential winner-take-all races to produce drastic innovations, rather than through static price/output competition in the market. Sound antitrust economic analysis of such industries requires explicit consideration of dynamic competition. Most leading firms in these dynamically competitive industries have considerable short-run market power, for instance, but ignoring their vulnerability to drastic innovation may yield misleading conclusions. Similarly, conventional tests for predation cannot discriminate between practices that increase or decrease consumer welfare in winner-take-all industries. Finally, innovation in dynamically competitive industries often involves enhancing feature sets; there is no sound economic basis for treating such enhancements as per se illegal ties.

Abstract:
Competition in many important industries centers on investment in intellectual property. Firms engage in dynamic, Schumpeterian competition for the market, through sequential winner-take-all races to produce drastic innovations, rather than through static price/output competition in the market. Sound antitrust economic analysis of such industries requires explicit consideration of dynamic competition. Most leading firms in these dynamically competitive industries have considerable short-run market power, for instance, but ignoring their vulnerability to drastic innovation may yield misleading conclusions. Similarly, conventional tests for predation cannot discriminate between practices that increase or decrease consumer welfare in winner-take-all industries. Finally, innovation in dynamically competitive industries often involves enhancing feature sets; there is no sound economic basis for treating such enhancements as per se illegal ties.

Abstract:
In Bell Atlantic v. Twombly the Supreme Court clarified what plaintiffs must plead for their complaints to pass muster. It retired the Conley rule that a court should not dismiss a complaint unless "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." The new rule is based on whether the complaint states a set of facts that, assuming their truth, makes it "plausible" that the plaintiff has a claim which would entitle her to relief. Although Twombly involved an antitrust conspiracy claim, most commentators agree that it modified general pleading standards for all cases. Lower courts have cited Twombly more than 10,000 times in a wide range of cases since it came down in May 2007. These cases involve a wide area of claims including the full gamut of antitrust cases. Defendants now routinely seek to dismiss complaints on the grounds that they do not state a plausible claim. This note explores what sorts of economic and statistical evidence help establish that a claim is plausible and what do not.

Twombly, Bell Atlantic, Bell Atlantic v Twombly, Conley, plausible claim, pleading standards, economical evidence, statistical evidence

Abstract:
In this paper, the authors trace the evolution of the literature on terrorism insurance from its beginnings in the post-World War II era through to the present debate over international terrorist events in the new millennium. As part of that review, they examine the efficacy of programs undertaken in various countries - including TRIA in the United States. Finally, the authors evaluate the likely efficacy of recommendations made by academics and policymakers for new ways of dealing with terrorism insurance.

Insurance, Terrorism, Regulation, TRIA

Abstract:
Platform businesses add value by facilitating interactions between customers who are attracted at least in part by network externalities. Platform businesses with low switching costs have become more important with the rise of the internet. This essay explores the sources of the initial critical mass constraint that new, potentially viable businesses of this sort generally seem to face. For two-sided platforms, we show that this constraint is two-dimensional and depends on the nature of network effects and the distribution of customer tastes. Depending on the dynamics of adjustment to equilibrium, it may pose a chicken-and-egg problem.

Platform businesses, two-sided platforms, critical mass

Abstract:
We apply and extend the cost-based approach to bundling and tying under competition developed in Evans and Salinger (2004) to over-the-counter pain relievers and cold medicines. We document that consumers pay much less for tablets with multiple ingredients than they would if they bought tablets with each ingredient separately. We then decompose the sources of these savings into marginal cost savings and a component that reflects fixed costs of product offerings. The analysis both documents substantial economies of bundling and illustrates the sort of cost analysis that is necessary for understanding tying.

Abstract:
Web-based businesses are increasingly the subject of antitrust concerns. Plaintiffs in the United States have sued eBay for tying its online payments service to its transaction service. Multiple jurisdictions in the European Community have claimed that Apple has violated the competition laws by limiting the ability of its music player to play music from competing music stores and limiting the ability of competing music players to play music purchased from its music stores. During 2007, although the U.S. Federal Trade Commission decided not to block Google's acquisition of DoubleClick after a lengthy investigation, it expressed its intent to "closely watch these markets" involved in online advertising. The web economy poses two major challenges to competition authorities. The law and economics for analyzing the multi-sided platforms that dominate the internet sector is not well developed. At the same time the web-economy is evolving very rapidly and in ways that are sure to result in antitrust complaints and investigations. Competition authorities and courts will need to exercise great care in balancing the protection of consumers from anticompetitive behavior against causing harm from interfering in complex businesses that are both rapidly moving and not fully understood.

antitrust, web-based businesses, internet economy, web-based economy, multi-sided platforms

Abstract:
Entrepreneurs who start multi-sided platforms must secure enough customers on both sides, and in the right proportions, to provide enough value to either group of customers and to achieve sustainable growth. In particular, these entrepreneurs must secure "critical mass" to ignite the growth of their platforms; the failure to achieve "critical mass" quickly results in the implosion of the platform. There are a number of strategies available to entrepreneurs to reach critical mass. For example, the "zig-zag" strategy involves successive accretions of customers on both sides to build up the value to both. The relevant strategies depend in large part on whether the nature of the platform requires securing participation by both platform sides at launch (e.g. dating venues), whether it is possible to acquire one side before approaching the other side (e.g. search engines), and whether it is necessary to make pre-commitments to one side to induce them to make investments (e.g. video games).

multi-sided platforms, catalysts, start-ups, critical mass, chicken-and-egg

Abstract:
The Jefferson-Parish test for whether a tying arrangement violates the antitrust law should be abandoned. It should be replaced with a rule of reason analysis that examines whether there are adverse economic effects that outweigh potential economic benefits. There is widespread support in the modern antitrust and economics literature for adopting a rule of reason approach to tying and virtually no support for treating tying as per se unlawful by firms with market power. Analyzing tying under a rule of reason would help complete the economic rationalization of antitrust law that started with Sylvania and under which per se treatment has been narrowed mainly to hard-core cartel behavior that has no pro-competitive benefits. Such a rule of reason analysis should be structured to screen out cases in which there is no plausible basis for believing that tying could have an adverse effect on long-run consumer welfare and should require plaintiffs to demonstrate rather than assume adverse effects from tying.

The Supreme Court should take the next opportunity to heed the advice Justice O'Connor and three other Justices offered more than twenty years ago regarding tying doctrine: "The time has therefore come to abandon the "per se" label and refocus the inquiry on the adverse economic effects, and the potential economic benefits, that the tie may have. The enforcement agencies should support the effort to overrule Jefferson Parish and subject tying to the rule of reason. This would give the Supreme Court additional confidence in ending the per se treatment of tying which it has supported, despite profound reservations, because of longstanding judicial and legislative hostility towards tying. This paper explains the basis in modern economics and antitrust analysis for overruling Jefferson Parish.

Tying, Antitrust, Rule of Reason, Jefferson Parish

Abstract:
An aggressive effort to use antitrust law to regulate the economy took place almost unnoticed in the final four years of the Clinton presidency. Highlighted by federal charges and assertions made in antitrust actions against Microsoft, Intel, American Airlines, Visa, and MasterCard, the government appeared to assume that successful companies engaging in aggressive business practices were guilty of antitrust violations unless they proved themselves innocent. The government also took the position that business practices could be unlawful even if there was no specific evidence that the practices harmed consumers.

Given that perspective, federal enforcement agencies under Clinton sought the restructuring and ongoing court-administered regulation of several critical industries. The new Bush administration, which inherits many still-open Clinton antitrust suits, must now weigh the virtues of policy continuity against the possibility that the courts will defer to a level of agency intervention that runs counter to Bush's business philosophy.

Abstract:
The prosecution of corporate fraud has garnered increasing attention in recent years. When guilt is certain, justice is easy. But prosecutors make mistakes in bringing cases - sometimes through carelessness, other times through zealotry - and judges and juries err in finding guilt. We argue that the balance struck by the prosecutorial and judicial system has tipped too far toward pursuing criminal indictments against companies and their executives. The result is harm to the general public, whose members depend on a dynamic, competitive economy for their welfare.

corporate crime, corporate fraud, litigation, outcomes, judicial history, prosecution, risk-taking behavoir, civil litigation, corporate governance, regulation

Abstract:
As part of its overhaul of financial services regulation the Obama Administration has proposed stronger protection of consumers of financial products and services. The Consumer Financial Protection Agency Act of 2009 (CFPA Act), which the Administration submitted to the U.S. Congress on June 30, 2009, would result in a sweeping overhaul of consumer financial protection. The CFPA Act would create a Consumer Financial Protection Agency (CFPA) which would assume the responsibility for enforcing most existing consumer financial protection laws from other federal banking regulators as well as the Federal Trade Commission. The CFPA would have significant additional powers to regulate consumer financial products, mandate disclosures, and require covered businesses to offer consumers "plain vanilla" products that the CFPA would design. The legislation would limit federal preemption of nationally chartered financial institutions by allowing states and localities to have stronger restrictions than those adopted by the CFPA and would add a new prohibition against "abusive" practices while allowing new interpretations of existing liability for unfair and deceptive practices. This article details how the CFPA Act would change consumer financial regulation, explores the policy rationale for these changes, and examines how the legislation, if enacted in its current form, would affect providers and consumers of financial products and services.

behavioral economics, borrowing, consumer protection, credit cards, Elizabeth Warren, FDIC, Federal Reserve Board, financial crisis, Michael Barr, National Credit Union Administration, Office of the Comptroller of the Currency, Office of Thrift Supervision, Oren Bar-Gill, Truth-in-Lending Act

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:
The Consumer Financial Protection Agency Act (“CFPA Act”), introduced by the U.S. Department of the Treasury in June 2009, proposes sweeping regulation of consumer lending and borrowing. As we showed in “The Effect of the CFPA on Consumer Credit” (hereinafter “Evans and Wright (2009)”):

The CFPA Act creates massive litigation exposure for lenders facing (a) potential lawsuits from state and municipal governments for violating more stringent financial protection regulations that those entities can adopt pursuant to the CFPA Act; and (b) litigation under the CFPA Act’s new and undefined standards for engaging in unfair, deceptive, abusive, or unreasonable practices.

The new Agency would impose significant costs on lenders who would be required to: (a) offer to consumers on a preferred basis plain-vanilla products designed by the Agency either before offering their own products or at the same time; (b) seek prior regulatory approval for new lending products which could be defined as minor variations on existing products; (c) face the risk of having lending products banned altogether; and (d) have to comply with various other rules and regulations.

This note responds to a recent paper by Professor Adam Levitin offered in response to Evans and Wright (2009). As a prefatory matter, his paper is filled with various ad hominem attacks which we will ignore. Instead, we focus on the substance of the issues in contention. Professor Levitin’s basic substantive objection is that he disagrees with our estimates that the Treasury Department’s bill would increase interest rates by at least 160 basis points and reduce net job creation by 4.3 percent under plausible assumptions. Professor Levitin’s criticisms are misguided and we stand by those numbers as lower bounds on the effect of the Treasury’s CFPA Act on the economy. We also note that Professor Levitin has disputed virtually none of our findings that the CFPA Act would impose high costs on lenders and ultimately result in denying borrowers choice.

We think it is impossible to read the CFPA Act without concluding that lenders will face higher costs as a result of, among other things, dealing with the new Agency, being forced to offer products designed by a governmental body rather than themselves, coordinating the sale and distribution of financial products across regulatory regimes varying across the fifty states, and facing the increased possibility of fines and litigation under a novel and ambiguous “abusive” practices standard. While we believe there is a debate to be had on the costs and benefits of the CFPA Act, it is difficult to fathom a claim that this particular Act will not impose significant costs on lenders and that those costs will not be passed on to borrowers. Sound public policy should be based on a careful analysis of the costs and benefits of the various proposals. We do not believe Professor Levitin has made a constructive contribution to that deliberation but encourage him and others to do so as Congress considers the CFPA Act of 2009.

consumer protection, FTC, Federal Trade Commission, financial crisis, financial regulation, IBBEA, Interstate Banking and Branch Efficiency Act, liquidity constraint, mortgage, small business, subprime, supernanny, Truth in Lending Act

Abstract:
European competition laws condemn as 'exploitative abuses' the pricing policies of dominant firms that may result in a direct loss of consumer welfare. Article 82(a) of the EC Treaty, for example, expressly states that imposing 'unfair' prices on consumers by dominant suppliers constitutes an abuse. Several firms have been found to abuse their dominant positions by charging excessive prices in cases brought by the European Commission and the competition authorities of several Member States. Those cases show that the assessment of excessive pricing is subject to substantial conceptual and practical difficulties, and that any policy that seeks to detect and prohibit excessive prices is likely to yield incorrect predictions in numerous instances. In this Paper, we evaluate the pros and cons of alternative legal standards towards excessive pricing by explicitly considering the likelihood of false convictions/acquittals and the costs associated with those errors. We find that the legal standard that maximizes long-term consumer welfare given the information typically available to regulators would involve no ex post intervention on the pricing decisions of dominant firms. A possible exception to this general rule is discussed.

Abstract:
On the basis on anecdotes centered on the alleged circuitous routing of checks, researchers focusing on the pre-Fed check-clearing system have usually argued that it was inefficient. In this paper we study a 1910 check remittance register from the State National Bank of Bloomington, Illinois - we dissect the way the bank forwarded checks to various destinations for clearing and collection. We find that the bank followed an orderly process of check remittance according to which checks tended to move in the right direction. This casts doubts on the alleged pervasiveness of cycling and circuitous routing of an extreme nature in the pre-Fed check-clearing process.

Monetary systems, Pre-Fed check-clearing system, 19th-century US banking system, exchange charges, the shortest-path problem

Abstract:
When Mark Fasciano and Ari Kahn started their software company, FatWire, in 1996, each of them contributed $20,000 from their credit cards to pay for the equipment and services that the company needed. In 2001, the company was named to Deloitte and Touche’s Fast 50 list of rapidly growing technology firms in New York. Today the company generates $10 million in annual sales, and its newest clients include Crown Media, Hallmark Channel, Bank of America, Andersen Windows and Aventis Behring. Business successes like these have helped the U.S. economy grow. Small businesses provide most workers with their first jobs and initial on-the-job training in basic skills and employ more than half of the private work force.

Stories like FatWire’s abound. Financing a business is difficult, and entrepreneurs tend to resort to credit cards for financing when other loan sources are scarce. Personal credit cards provide an increasingly large pool of capital for small business startups. Credit cards did not even exist in their current form before 1966. They have grown explosively since the end of the 1981-1983 recession. According to data from the Survey of Consumer Finances (SCF), which is discussed in more detail below, the amount of credit card financing available to the American public was $1.5 trillion in 2001. That pool of credit was just as available to people to start their own businesses as it was to buy stereo equipment. Indeed, $298 billion of credit card financing was available to households headed by someone who had their own business in 2001. And, of course, credit cards have continued to grow since 2001 so that the amount of credit card financing available to consumers in general and small business owners in particular is even larger today.

Of course, stories of credit cards helping people to start successful businesses do not show that credit cards are an important source of financing any more than stories of successful businesses started in garages show that having a garage is key to business prosperity. This paper examines the role of credit cards in financing small businesses using two sources of data. The SCF provides general information on the use of credit cards by small business owners from 1970-2001. The 1998 Survey of Small Business Finance (SSBF) provides detailed information on the use of credit cards by small businesses in that year. Together, these data sources provide a broad and deep understanding of how small businesses use credit cards.

small businesses, credit cards lending, economics of lending, self-employed

Abstract:
What standards should the courts use to determine whether or not to certify the class proposed by the plaintiffs? The answer to this question has ramifications for many areas of the law in which class actions have become an oft-used method for pursuing claims against alleged wrongdoers, including mass torts, securities, employment discrimination, and antitrust. This Article discusses two related aspects of the class-certification standard that determine where that standard lies on the strictness spectrum. One concerns whether evidence that bears on the merits of the claims should be walled off from the analysis of the class certification questions. The other deals with whether the courts should weigh expert evidence on the class certification requirements.

class certification, standards, strict standards, claims on the merit, expert evidence

Abstract:
A multisided platform (MSP) serves as an intermediary for two or more groups of customers who are linked by indirect network effects. Recent research has found that MSPs are significant in many industries and that some standard economic results-such as the Lerner Index-do not apply to them, in material ways, without some significant modification to take linkages between the multiple sides into account. This article extends several key tools used for the analysis of mergers to situations in which one or more of the suppliers are MSPs. It shows that the application of traditional tools to mergers involving MSPs results in biases, the direction of which depends on the particular tool being used and other conditions. It also extends these tools to the analysis of the merger of MSPs. The techniques are illustrated with an application to an acquisition involving the multisided online advertising industry.

Abstract:
The United States Supreme Court, in its 1974 decision, Eisen v. Carlisle & Jacquelin, held that judges should not conduct a preliminary inquiry into the merits of a suit as part of the decision whether to certify a class. The federal courts ever since have struggled to honor Eisen's bar while still conducting a credible certification analysis - a task complicated by the fact that merits-related factors are often relevant to Rule 23 requirements. The result is a muddled body of case law in which courts tend to certify generously and avoid inquiring into the merits of substantive issues even when those issues are crucial to the certification analysis. This approach creates high social costs by inviting frivolous and weak class action suits.

This article argues that the Eisen rule should be abolished. Trial judges should assess competing evidence, not just allegations, and evaluate case strength, whenever the specific requirements of Rule 23 call for an inquiry into merits-related factors. For example, a party relying on a substantive issue to show commonality or predominance should have to demonstrate a significant likelihood of success on the issue. The article goes further and recommends that judges always conduct a preliminary inquiry into the merits before certifying a class, whether or not merits-related factors are directly relevant to a specific requirement of Rule 23.

The article first reviews the history of the Eisen rule and surveys the state of current law, before turning to a policy analysis of the rule's effects. The policy discussion criticizes the traditional arguments and then offers a systematic evaluation of error and process costs. Error costs must be evaluated in light of the extremely high probability of post-certification settlement. Eisen's liberal approach creates a substantial risk of erroneous certification grants that cannot be corrected later when a case settles. This risk coupled with the high likelihood of settlement invites frivolous and weak class action suits. The result is a serious error cost problem with regard to certification grants. At the same time, requiring a merits review at the certification stage increases the risk of erroneous certification denials. But for several reasons this risk is not likely to increase dramatically, and the associated costs are not likely to be large. The net result therefore supports a merits inquiry, and this conclusion remains valid even after process costs are added to the policy mix.

class action, class certification, error costs, economics of litigation

Abstract:
U.S. v. Microsoft was mainly about the "browser war" between Microsoft and Netscape. From late 1995 to June 2000, when the court issued its final judgment, Microsoft's Web browser (IE) went from being the choice of less than 10 percent of Web users to about 70 percent, while Netscape Navigator fell from about 80 percent to under 30 percent. The government alleged that Microsoft accomplished this shift by anticompetitive actions, including tying its browser to its dominant operating system and various predatory and exclusionary acts. At times the government appeared to brand virtually of Microsoft's actions - including its large investment in improved quality and its "zero price" - as anticompetitive. According to the government, Microsoft feared that Navigator (and Sun's Java) would attract application developers, thus lowering the "applications barrier to entry" that protects Microsoft's monopoly in the "market" for operating systems for Intel-compatible PCs.

The economic analysis presented by the government was internally inconsistent, based on unsound economic theory, and conflicted with the facts. The government refused to acknowledge that the relevant antitrust market was software platforms - not operating systems narrowly defined - even though its case was mainly about Microsoft's efforts to ensure that Windows would remain the leading platform. That conceptual error forced the government to depend on a series of economic arguments whose logic hinged on software platforms not being a relevant market. In analyzing predation, the government did not acknowledge that platform competition gave Microsoft legitimate reasons to invest in the development and distribution of IE. In analyzing tying, the government refused to accept that Web-browsing capabilities logically belong in software platforms, even though all platform vendors, including IBM and Apple, also have included browsers.

In the end, the court found a relatively narrow set of actions to be anticompetitive, but nonetheless concluded that Microsoft had caused substantial harm to competition in violation of the Sherman Act. But there was no evidence in the record that the subset of actions found unlawful had a material effect on Netscape, let alone on consumers or competition. For example, it was not unlawful for Microsoft to invest $100 million per year in improving IE or to integrate it into Windows without separate charge. The tie occurred only when Microsoft refused to allow computer vendors to disable access to IE. But there was no evidence of significant demand for a browser-disabled operating system. Similarly, it was legal to get AOL to agree to use IE components in the access software distributed to all its members, but not to limit the ability of AOL and other service providers to give copies of Navigator to members who asked for it. But there was no evidence that the restrictions in practice limited AOL's distribution of Navigator or that AOL had an interest in promoting alternative browsers.