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Abstract:
This chapter surveys the legal and economic literatures on the antitrust analysis of tying arrangements and exclusive dealing contracts. We review the analytical framework applied under U.S. antitrust law to tying, bundling and exclusive dealing arrangements as well as the existing theoretical and empirical literatures.

antitrust, bundling, competitive harm, empirical evidence, exclusionary conduct, exclusive dealing, loyalty discounts, market power, monopolization, procompetitive efficiencies, tying

Abstract:
Category management refers generally to the process by which retailers select products to stock, display, promote, advertise, and price within a product category. Category management contracts involve a retailer designating a particular manufacturer as the “category captain”, who has influence over which products in a product category are stocked, as well as how they are displayed, promoted, and priced. Category management contracts have attracted antitrust scrutiny in recent years, exemplified by the Sixth Circuit’s recent decision in Conwood Co. v. United States Tobacco Co., which held that United States Tobacco’s abuse of its position as category captain, exclusionary arrangements, misleading statements and destruction of rivals’ products violated Section 2 of the Sherman Act. Conwood is an especially important candidate for detailed economic and legal analysis for two reasons. The first is that antitrust commentators have almost universally agreed that Conwood is an example of “cheap exclusion” or more generally, a monopolization enforcement action that belongs to an identifiable category of cases involving significant threats to competitive harm without plausible efficiency justifications. The second reason is that Conwood can be viewed as part of a broader trend toward increased scrutiny of distribution contracts that explicitly or implicitly restrict the display, promotion, or sale of rival products by retailers.

Our analysis of the facts in Conwood challenges the conventional wisdom that it is an example of “cheap exclusion” and concludes that competitive harm was unlikely. Further, we provide a pro- competitive justification for category management contracts delegating shelf space decisions to the manufacturer as a form of partial exclusive dealing contract which grant a manufacturer access to preferred shelf space but do not completely exclude rivals.

category management, exclusive dealing, vertical restraints, slotting allowances, antitrust

Abstract:
Modern legal scholars frequently and increasingly base their analyses on the assumption, grounded largely in the extensive experimental literature, that individuals are subject to a number of systematic behavioral biases. Within the legal literature, behavioral economic analysis has been relied upon to generate a significant number of proposals for paternalistic regulation. These proposals are frequently accompanied by claims that neoclassical economics is insufficiently flexible to deal with these empirical observations, and that behavioral law and economics is as a superior guide for policy analysis. These claims must ultimately be resolved empirically and turn on whether incorporating insights from behavioral economics improves our ability to explain the law, understand the behavior of economic agents, or predict the consequences of legal change. This paper focuses on the shared interest of both neoclassical and behavioral economists in empiricism and explanatory power. It asks whether behavioral economic analysis of law has increased our knowledge in an area of "consumer contracts." Specifically, the paper surveys the available empirical evidence to assess claims from the behavioral law and economics literature involving exploitation of consumer biases with credit cards, standard form contracts, and shelf space contracts. I find that the empirical studies of firm and consumer behavior in these examples do not support the claims that behavioral law and economics generates greater predictive power than conventional price theory.

systematic behavioral biases, behavioral law and economics, paternalism, consumer contracts, behavioral economic analysis, consumer bias, conventional price theory

Abstract:
Slotting fees, per unit time payments made by manufacturers to retailers for shelf space, have become increasingly prevalent in grocery retailing. Shelf space contracts are shown to be a consequence of the normal competitive process when retailer shelf space is promotional, in the sense that the shelf space induces profitable incremental manufacturer sales without drawing customers from competing stores. In these circumstances retailers do not have the incentive to provide the joint profit maximizing amount of shelf space. Manufacturers compensate retailers for promotional shelf space with a per unit time slotting fee when inter-retailer competition on the particular product makes compensation with a lower wholesale price a more costly way to generate equilibrium retailer shelf space rents. Our theory implies that slotting will be positively related to manufacturer incremental profit margins, a fact that explains both the growth and the incidence across products of slotting in grocery retailing.

Slotting allowances, shelf space, vertical restraints, product placement

Abstract:
An unsettled area of antitrust law is the regulation of the competitive process for product distribution and promotion. Competition for distribution involves vertical contracting with respect to product placement, promotional activity, or the decision to carry a particular product. This process includes controversial practices recently subject to intense scrutiny such as slotting allowances, loyalty discounts, bundled rebates, category management and exclusive dealing. Antitrust law has designed rules for each of these practices independently, ignoring the economic relationships between these business practices. This paper examines those relationships by focusing on the economics of competition for distribution. Viewing these practices as part of the competitive process for distribution exposes an antitrust policy that systematically mishandles the regulation of these contracts. The article concludes by arguing in favor of per se legality for distribution contracts foreclosing less than 40% of the market and agreements less than one year in duration.

Antitrust, monopolization, category management, competition for distribution, exclusive dealing, shelf space, slotting allowances

Abstract:
The U.S Supreme Court issued four antitrust decisions this term (the most it has issued since the 1989-1990 term) and seven cases over the past two years. The antitrust activity level of the Roberts Court thus far has exceeded the single case average of the Court prior to the 2003-2004 term by a significant margin. What can be said of the Roberts Court's antitrust jurisprudence? This article examines the quartet of Supreme Court decisions issued during the 2006-2007 term in an attempt to identify and characterize the antitrust philosophy of the Roberts Court. I argue that the Roberts Court decisions embrace the Chicago School of antitrust analysis and predict that the antitrust jurisprudence of this Court will increasingly reflect this influence.

Chicago School, antitrust, Leegin, Twombly, Supreme Court, resale price maintenance, vertical restraints, Dr. Miles, Harvard School, stare decisis, Weyerhaeuser, predatory bidding

Abstract:
Periods of profound innovation and technological change invariably result in short run winners and losers. The rise of big box retailers like Wal-Mart, as well as the existence of large supermarket chains, has led competition authorities to focus anew on the issue of buyer power. Antitrust authorities in the United States have been investigating slotting fees and other retail practices, while UK and EU authorities have commenced a number of inquiries into the competitiveness of the supermarket grocery retail sector. Some in competition policy circles in the United States and Europe claim that there is something sufficiently special about market power on the buyer side of vertically related industries as to warrant special antitrust scrutiny or a separate analytical framework altogether. In this paper we outline both the relevant applicable law in the US and Europe, as well as the economics of buyer power. We conclude that while antitrust authorities must always be mindful of the facts and details of any potentially anticompetitive agreement, from an economic point of view, the case for treating buyer power differently from any other form of market power is unpersuasive. We compare U.S. and E.U. antitrust law, focusing our analysis on the adequacy of legal treatment of buyer power in the retail sector, and particularly, with respect to supermarkets.

buyer power, monopolization, monopsony, slotting allowances

Abstract:
There are a several forces pushing on the law and economics (L&E) movement from different directions. The authors exchanged perspectives on trends in economics, and in particular the increasing mathematical formalization of economics, and their implications for the future of L&E in legal scholarship. The authors discuss strengths and weaknesses of the modern L&E movement, speculate as to where L&E might be headed in the future, and how potential pitfalls might be avoided. The exchange between the authors took place at Truthonthemarket.com and the blog posts have been compiled into this essay.

detachment, econometrics, empirical, law and economics, mathematical formalizations, mathematization, Olin Foundation, scholarship, trends, truthonthemarket.com

Abstract:
In Credit Suisse v. Billing, the Court held that the securities law implicitly precludes the application of the antitrust laws to the conduct alleged in that case. The Court considered several factors, including the availability and competence of other laws to regulate unwanted behavior, and the potential that application of the antitrust laws would result in "unusually serious mistakes." This paper examines whether similar considerations suggest restraint when applying the antitrust laws to conduct that is normally regulated by state and other federal laws. In particular, we examine the use of the antitrust laws to regulate the problem of patent holdup of members of standard setting organizations. Although some have suggested that this conduct illustrates a gap in the current enforcement of the antitrust laws, our analysis finds that such conduct would be better evaluated under the federal patent laws and state contract laws.

Securities, law, antitrust, restraint, regulation, patents, holdup, standard

Abstract:
In Credit Suisse v. Billing, the Court held that the securities law implicitly precludes the application of the antitrust laws to the conduct alleged in that case. The Court considered several factors, including the availability and competence of other laws to regulate unwanted behavior, and the potential that application of the antitrust laws would result in unusually serious mistakes. This paper examines whether similar considerations suggest restraint when applying the antitrust laws to conduct that is normally regulated by state and other federal laws. In particular, we examine the use of the antitrust laws to regulate the problem of patent hold up of members of standard setting organizations. While some have suggested that this conduct illustrates a gap in the current enforcement of the antitrust laws, our analysis finds that such conduct would be better evaluated under the federal patent laws and state contract laws.

antitrust, federalism, opportunism, patent holdup, preemption, royalty stacking, standard setting

Abstract:
Professor Goldberg vigorously attacks the merits of the Commission's "Three Tenors" decision, emphasizing its misplaced reliance on the issue of whether the challenged restraint resides within the boundaries of the firm. Professor Muris defends the Commission's analysis, which was adopted in large part by the D.C. Circuit on appeal, and argues that Professor Goldberg's call for a market power screen for all horizontal restraints ignores the legal costs of rulemaking. I take a third view of the debate. While conceding that the per se rule is properly applied to truly "naked restraints," I argue that the restraint at issue does not fall into this category and that the Commission's analysis relies on an inappropriately narrow view of the ancillary restraints doctrine. In particular, the Commission's analysis explicitly relies on the fact that the restraint occurred after the formation of the joint venture and displays unwarranted hostility towards PolyGram's free-rider defense. Neither antitrust law nor the economic realities of the joint venture support these two features of the Commission's decision, the latter of which was also adopted by the D.C. Circuit. In any event, the facts of the Three Tenors do not support the Commission's conclusion that the moratorium agreement was not ancillary to the joint venture.

horizontal restraints, ancillary restraints, joint ventures, three tenors, rule of reason

Abstract:
Modern antitrust litigation sometimes involves complex expert economic and econometric analysis. While this boom in the demand for economic analysis and expert testimony has clearly improved the welfare of economists - and schools offering basic economic training to judges - the law and economics literature is silent on the empirical effects of economic complexity or judges' economic training on decision-making in antitrust litigation. We use a unique data set on antitrust litigation in federal district and administrative courts during 1996-2006 to examine whether economic complexity impacts decisions in antitrust cases, and thereby provide a novel test of the frequently asserted hypothesis that antitrust analysis has become too complex for generalist judges. We also examine the impact of one institutional response to economic complexity: basic economic training by judges. We find that decisions involving the evaluation of complex economic evidence are significantly more likely to be appealed, and decisions of judges trained in basic economics are significantly less likely to be appealed than are decisions by their untrained counterparts. Our results are robust to a variety of controls, including the type of case, the appellate circuit in which the case is litigated, level of judicial experience with antitrust claims, judicial quality, and the political party of the judge. Our tentative conclusion, based on a revealed preference argument that views a party's appeal decision as an indication that the initial court got the economics wrong, is that there is support for the hypothesis that some antitrust cases are too complicated for generalist judges.

ABA Task Force, battle of the experts, Bork, competition law, Daubert, econometrics, expert witness, FTC, George Mason University Law and Economics Center, Mandel, political economy, Posner, Sherman Act

Abstract:
Slotting contracts involve manufacturer payments to retailers for shelf space. Slotting contracts are an important part of the competitive process in many product markets. While slotting contracts have been the subject of congressional hearings, agency investigations, antitrust litigation, and scholarly debate, very little is known about their competitive consequences. This article analyzes military commissary sales before and after a natural experiment in which commissaries ceased to accept slotting payments. This natural experiment provides a rare opportunity to directly observe the crucial policy counterfactual: would a prohibition on slotting contracts increase consumer welfare? This analysis measures the impact of slotting, at both the product and category levels, on prices, output, and product variety. The results are inconsistent with anticompetitive theories of slotting contracts. Slotting contracts are primarily associated with brand-shifting of sales within a product category, but not increases in category level prices or a reduction in category output or variety. To the extent that slotting contract revenue is passed on to consumers in competitive retail markets, an assumption generally warranted in the grocery retail industry, the results imply that slotting contract competition is likely to benefit consumers.

slotting allowances, vertical restraints, natural experiment, shelf space, exclusive dealing

Abstract:
The Roberts Court's reign at the United States Supreme Court is only in its nascent stages. Already, however, its antitrust activity level has far exceeded the Court's single case average prior to the 2003-04 Term by a significant margin. The recent flurry of antitrust activity and the likely significance the Roberts Court will have on the development of antitrust jurisprudence warrants some reflection and analysis. I argue that the Roberts Court decisions embrace the Chicago School of antitrust analysis, Transaction Cost Economics, and insights from comparative institutional analysis gleaned from New Institutional Economics. Despite the rise of Post-Chicago Economics in economics departments and elite journals, the substance of the Roberts Court's antitrust jurisprudence suggests a significant amount of skepticism is appropriate concerning any prediction of the demise of the Chicago School or Transaction Cost Economics in antitrust in the coming years.

antitrust, Chicago School, New Institutional Economics, Roberts Court, Supreme Court, TCE, Transaction Cost Economics

Abstract:
This comment is a response to Professor Fleischer's analysis of the MasterCard IPO prepared for the Harvard Negotiation Law Review symposium. Professor Fleischer's analysis of the MasterCard IPO suggests that the adoption of this particular deal structure was driven not by transactions costs, but branding considerations and antitrust exposure. Fleischer identifies two features of the MasterCard IPO as particularly responsive to both branding and potential antitrust liability: (1) the reverse dual-class voting structure and (2) the charitable foundation. Fleischer correctly points out the proposed structure would reduce potential antitrust exposure by decreasing the merchant banks' control over pricing decisions and highlights an important and underappreciated relationship between antitrust rules and corporate structure. This comment supplements Fleischer's analysis of the antitrust implications of MasterCard's new governance structure. Part I summarizes the antitrust environment facing the cooperative networks serving MasterCard and Visa. Part II considers the antitrust implications of MasterCard's new organizational structure and Part III concludes with some thoughts regarding what the MasterCard IPO tells us about the role of lawyer in dealmaking.

MasterCard, single entity, Copperweld

Abstract:
On October 5, 2007, a group of antitrust scholars convened on Chicago's Near North Side to discuss monopolization law. In the course of their freewheeling but fascinating conversation, a number of broad themes emerged. Those themes can best be understood in contrast to a body of antitrust scholarship that was born six miles to the south, at the University of Chicago. Most notably, the North Side discussants demonstrate a hearty confidence in the antitrust enterprise - a confidence that is not shared by Chicago School scholars, who generally advocate a more modest antitrust. As scholars who are more sympathetic to Chicago School views, we are somewhat skeptical. While we applaud many the of the insights and inquiries raised during the conversation, and certainly this sort of discussion in general, our task in this article is to draft a critical analysis of the October 5 conversation. In particular, we critique the North Side discussants' vision of a big antitrust that would place equal emphasis on Sections 1 and 2 of the Sherman Act and would expand private enforcement of Section 2.

Abstract:
Using George Stigler's rules of intellectual engagement as a guide, and applying an evidence-based approach, this essay is a critical review of former Federal Trade Commission Chairman Robert Pitofsky's How the Chicago School Overshot the Mark: The Effect of Conservative Economic Analysis on U.S. Antitrust, a collection of essays devoted to challenging the Chicago School's approach to antitrust in favor of a commitment to Post-Chicago policies. Overshot the Mark is an important book and one that will be cited as intellectual support for a new and "reinvigorated" antitrust enforcement regime based on Post-Chicago economics. Its claims about the Chicago School's stranglehold on modern antitrust, despite the existence of a perceived superior economic model in the Post-Chicago literature, are provocative. The central task of this review is to evaluate the book's underlying premise that Post-Chicago economics literature provides better explanatory power than the "status quo" embodied in existing theory and evidence supporting Chicago School theory. I will conclude that the premise is mistaken. The simplest explanation of the Chicago School's continued influence of U.S. antitrust policy -- that its models provide superior explanatory power and policy relevance -- cannot be rejected and is consistent with the available evidence.

Bain, Bork, competition, Demsetz, Director, Easterbrook, error/cost, exclusive dealing, game theory, plausibility test, Posner, RPM, resale price maintenance, Sherman Act, Stigler, Wall

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:
In November 2008, the Federal Trade Commission petitioned the Supreme Court to review the D.C. Circuit's decision in FTC v. Rambus. That decision reversed the Commission's finding that Rambus knowingly failed to disclose a patent to a standard setting organization and, in so doing, acquired monopoly power in violation of Section 2 of the Sherman Act. In February 2009, the Supreme Court denied the Commission's petition. This article examines some deficiencies in the Commission's arguments, concluding ultimately that the Supreme Court was correct to deny review. Moreover, the article suggests that the patent holdup problem, and ex post opportunism generally, is more effectively handled by contract and patent law. Because parties cannot contract around heavy mandatory antitrust remedies, contract and patent law offer superior substantive doctrine designed to distinguish good faith contractual modifications from bad faith holdup, thereby minimizing the social welfare reducing decision errors.

anticompetitive, Broadcom v. Qualcomm, deceptive act, level of causation, memory chip developer, monopolization, NYNEX, RAND commitment

Abstract:
This Chapter, forthcoming in the ABA Handbook on the Antitrust Aspects of Standards Setting (2010) provides an analytical overview of the antitrust issues involving intellectual property and standard setting including, but not limited to, patent holdup, royalty stacking, refusals to license, and patent pools.

bundling, competition policy, disclosure rules, Essential Facilities Doctrine, innovation, licensing obligations, market power, monopsony power, network effects, property rights, Qualcomm, Rambus, SSOs, standard setting organizations, transactional costs

Abstract:
This chapter in the book PIONEERS OF LAW AND ECONOMICS explores the contributions of Benjamin Klein to law and economics. I explore the intellectual foundations of Klein's pioneering analysis of the hold-up problem, the theory of the firm, vertical restraints, franchising, and the role of contract terms in facilitating self-enforcement of contractual relationships. I also discuss the significant influence of Klein's work on antitrust law, as well as its implications for contract interpretation. Klein's pioneering work over the past 30 years has not only provided us with a much greater understanding of contractual arrangements, but also a model for law and economics scholars and economists interested in explaining real world phenomenon rather than merely producing blackboard insights.

antitrust, asset specificity, contract interpretation, contract theory, franchising, hold-up, industrial organization, theory of the firm, vertical restraints

Abstract:
This paper offers an opportunity to reflect on Frank Easterbrook’s seminal work on the Limits of Antitrust and to discuss its particular relevance to the problem of antitrust enforcement in the face of innovation. The error-cost framework in antitrust originates with Easterbrook’s analysis, itself built on twin premises: first, that false positives are more costly than false negatives because self-correction mechanisms mitigate the latter but not the former, and second, that errors of both types are inevitable because distinguishing pro-competitive conduct from anti-competitive conduct is an inherently difficult task in a single-firm context.

While economists have applied this framework fruitfully to several business practices that have attracted antitrust scrutiny, our goal in this paper is to harness the power of this framework to take an Easterbrookian, error-cost minimizing approach to antitrust intervention in markets where innovation is a critical part of the competitive landscape. While much has been said about the relationship between innovation and antitrust, often in the way of broad pronouncements that innovation either renders antitrust essential to economic growth or entirely unnecessary, the error-cost framework allows for greater precision in policy prescriptions and a more nuanced approach. Some of the implications are well understood in the current body of literature and others have been frequently ignored or remain entirely unrecognized.

Both product and business innovations involve novel practices, and such practices generally result in monopoly explanations from the economics profession followed by hostility from the courts (though sometimes in reverse order) and then a subsequent, more nuanced economic understanding of the business practice usually recognizing its pro-competitive virtues. This sequence and outcome is exactly what one might expect in a world where economists’ career incentives skew in favor of generating models that demonstrate inefficiencies and debunk the Chicago School status quo, while defendants engaged in business practices that have evolved over time through trial and error have a difficult time articulating a justification that fits one of a court’s checklist of acceptable answers. From an error-cost perspective, the critical point is that antitrust scrutiny of innovation and innovative business practices is likely to be biased in the direction of assigning higher likelihood that a given practice is anticompetitive than the subsequent literature and evidence will ultimately suggest is reasonable or accurate.

Given recent activities in the antitrust enforcement landscape - identifying innovating firms in high-tech markets as likely antitrust targets combined with recent discussions of error costs from leading enforcers, at the Section 2 Hearings and elsewhere - we hope to begin a more rigorous discussion of the relationships between innovation, antitrust error, and optimal liability rules that goes beyond merely selecting economic models that fit regulator’s prior beliefs.

We begin by discussing some principles for application of the error cost framework in the innovation context in Part II before discussing the historical relationship between antitrust error and innovation in Part III. Part IV concludes by challenging the conventional wisdom that the error cost approach implies that the rule of reason should apply to most forms of business conduct rather than per se rules. While we agree that per se rules should not apply to cases involving product or business innovation, broadly defined, we argue that the error cost approach should not require generalist judges to evaluate state of the art economic theory and evidence on a case by case basis. Instead, we favor an approach that is consistent with the spirit of Easterbrook’s original analysis, identifying simple filters aiming to harness the best existing economic knowledge to design simple rules that minimize error costs. We conclude with five such proposals for simple rules based on existing economic theory, empirical evidence, and acknowledgment of the institutional biases toward false positives discussed above.

Christine Varney, Concentration/Price Relationship, Decision Theory, FTC, Federal Trade Commission, Google, Justice Department, Law and Economics, Linux, Microsoft, Monopolization, Network Effects, RPM, Uncertainty

Abstract:
This essay is the introduction to a forthcoming volume entitled, Regulating Innovation: Competition Policy and Patent Law Under Uncertainty (Cambridge U. Press 2009 forthcoming).

In addition to introducing all of the papers in the volume, this essay introduces the organizing themes of the volume. Innovation is critical to economic growth. While it is well understood that legal institutions play an important role in fostering an environment conducive to innovation and its commercialization, much less is known about the optimal design of specific institutions. Regulatory design decisions, and in particular competition policy and intellectual property regimes, can have profoundly positive or negative consequences for economic growth and welfare. However, the ratio of what is known to unknown with respect to the relationship between innovation, competition, and regulatory policy is staggeringly low. In addition to this uncertainty concerning the relationships between regulation, innovation, and economic growth, the process of innovation itself is not well understood.

The regulation of innovation and the optimal design of legal institutions in this environment of uncertainty are two of the most important policy challenges of the 21st century. Any legal regime must attempt to assess the tradeoffs associated with rules that will affect incentives to innovate, allocative efficiency, competition, and freedom of economic actors to commercialize the fruits of their innovative labors and foster economic growth. Unfortunately, as this essay describes, our tools for assessing these tradeoffs are limited.

Any coherent regulatory framework must take account of the low level of empirical knowledge surrounding the complex relationship between regulation - both through competition policy and patent law - and innovation, and the corresponding uncertainty caused by this absence of knowledge. The relationship between regulation and innovation has posed a significant challenge to antitrust economists at least since Schumpeter’s suggestion that dynamic competition would result in “creative destruction,” leading to a competitive process where one monopolist would replace another sequentially as new entrants developed a superior product.

Interfering in this dynamic process for the sake of static efficiency gains is perilous, but, of course, not impossible. But regulators and policy makers must take (more) seriously the condition of fundamental uncertainty in which they act, and the significant costs of their inevitable errors before justifying interventions on grounds of promoting competition or facilitating innovation.

This essay and the chapters in this book, approach this critical set of problems from an economic perspective, relying on the tools of microeconomics, quantitative analysis, and comparative institutional analysis to explore and begin to provide answers to the myriad challenges facing policymakers. The strength of this analysis - often described as the New Institutional Economic approach - is in its recognition that understanding economic performance requires not only economic modeling of narrow behavior, but also an understanding of that behavior in its legal, economic, social, and political institutional context.

The essay includes a table of contents for the book.

Alchian, Bilski, Coase, Demsetz, hold-up, Joskow, Klein, North, royalty stacking, SSOs, Schumpeter, standard setting organizations, technology, Williamson

Abstract:
The Supreme Court's opinion in Illinois Tool Works Inc. v. Independent Ink, Inc. rejecting the presumption of market power in antitrust tying cases is unequivocally good for consumers and eminently sensible. The presumption is at odds with the longstanding consensus among antitrust scholars, Congress, and the antitrust agencies that patents do not confer antitrust monopoly power. While Justice Stevens' opinion should be applauded for taking an important step towards aligning a perplexing and muddled tying jurisprudence with economic sense and empirical reality, that attempt is both undeniably successful and incomplete because the Court fails to adopt the economic reasoning supporting its holding. A burgeoning economic literature demonstrates that a patent right merely confers to the seller the power to exclude perfect substitutes, a sufficient condition for price discrimination, and a power shared by virtually all firms in competitive markets across our modern economy. Unfortunately, both antitrust law and scholars sometimes conflate this power with the ability to influence market conditions which is the focus of modern consumer-welfare focused antitrust enforcement. This confusion is costly because it deters competitive price discrimination, which despite widely perpetuated economic myths, is not generally associated with consumer welfare losses and may benefit all consumers. While antitrust law has come a long way in terms of economic sophistication, the persistent association of anticompetitive inferences with an inherently competitive practice is evidence that it has not yet fully incorporated fundamental lessons from the economic literature.

price discrimination, antitrust, market power, patents, Independent Ink

Abstract:
Harold Demsetz once claimed that 'economics has no antitrust relevant theory of competition.' Demsetz offered this provocative statement as an introduction to an economic concept with critical implications for the antitrust enterprise: the multi-dimensional nature of competition. Competition does not take place upon a single margin, such as price competition, but several dimensions that are often inversely correlated such that a liability rule deterring one form of competition will result in more of another. This insight has important implications for the current policy debate concerning how to design antitrust liability standards for conduct involving both static product market competition and dynamic innovative activity. The primary purpose of this essay is to revisit Demsetz’s broader challenge to antitrust regulation in the context of the frequently discussed tradeoffs between innovation and price competition. I summarize recent developments in our knowledge of the relationship between competition and innovation, highlighting the deficiencies that significantly constrain antitrust enforcers’ abilities to confidently calculate inevitable welfare tradeoffs. I conclude by discussing policy implications that follow from these limitations.

Antitrust Modernization Committee, Baker, Gilbert, Katz, Merger Guidelines, Muris, patent, Rapp, Schumpeter, Shelanski, Sherman Act, Sunshine, uncertainty

Abstract:
At the recent Section 2 hearings focused on the antitrust analysis of exclusive dealing contracts, a sensible consensus view emerged that a necessary condition for anticompetitive harm in an exclusive dealing or de facto exclusive contract is that the contract deprives rivals of the opportunity to compete. These contracts, including market-share discounts and “loyalty discounts,” can harm competition when they deprive rivals of an entrenched firm from accessing distribution sufficient to achieve a minimum efficient scale. The recently-withdrawn Section 2 Report reflects this consensus. This article discusses the strengths and weaknesses of the Section 2 Report approach to exclusive dealing and loyalty discounts.

antitrust, consumer, David Evans, entrant, entry, exclusion, free ride, Heide, monopolist, predation, retailers

Abstract:
This essay reviews Michael Carrier’s analysis of antitrust and standard setting in his new book: Innovation for the 21st Century: Harnessing the Power of Intellectual Property and Antitrust Law. While Innovation for the 21st Century offers a balanced and informative summary on patent holdup, we find that Carrier’s treatment of antitrust and standard setting avoids too many of the critical policy questions. One critical and emerging issue in this area, and one Professor Carrier largely ignores, is the use of Section 5 of the FTC Act to govern the standard setting process, as in In re N-Data. We explore and highlight some of the critical legal and economic issues associated the use of Section 5 in the patent holdup context, the standard courts should apply to this conduct under Section 2 of the Sherman Act, and the fundamental issue of whether innovation and economic growth would be better served by relying on contract and patent law rather than antitrust. We conclude that it is highly unlikely that optimal regulation of standard setting activity includes the creation of perpetual contractual commitments backed by the threat of antitrust and state consumer protection remedies, without rigorous economic proof of substantial consumer injury that cannot be reasonably avoided. In our view, the current state of affairs described herein presents a critical threat to standard setting activity and innovation.

copyright, deceptive conduct, Dell, discovery, Federal Trade Commission, invention, monopolization, monopsony, Rambus, SSO, Unocal

Abstract:
The creation of a new Consumer Financial Protection Agency (“CFPA”) is a very bad idea and should be rejected. The proposal is not salvageable and cannot be improved in substance or in form. The foundational premise of the CFPA is that a failure of consumer protection, and specifically irrational consumer behavior in lending markets, was a meaningful cause of the financial crisis and that the CFPA would have or could have averted the crisis or lessened its effects. To the contrary, there is no evidence that consumer ignorance or irrationality was a substantial cause of the crisis or that the existence of a CFPA could have prevented the problems that occurred. The CFPA is likely to do more harm than good for consumers. In this article, we highlight three fundamentally problematic truths about the CFPA: (1) The CFPA is premised on a flawed understanding of the financial crisis, (2) the CFPA will have significant unintended consequences, including but not limited to reducing competition, consumer choice, and availability of credit to consumers for productive uses; and (3) the CFPA creates a powerful bureaucracy with undefined scope, risking expensive and wasteful regulatory overlap at both the federal and state levels without any evidence of its own expertise in the core areas it is designed to regulate.

Barack Obama, behavioral economics, credit cards, Elizabeth Warren, Federal Trade Commission, Financial Regulatory Reform, Michael Barr, new paternalism, Oren Bar-Gill, plain vanilla, regulation, White Paper

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 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:
In this short essay we take on some of the common claims surrounding the law and economics of the backdating of options. Most of these claims are rooted in the basic argument that backdating options amounts to concealment of compensation. While we agree that backdating may have amounted to a technical rule violation in some cases, there is actually no concealment and, in fact, backdated options are fully disclosed when granted, and their value incorporated into stock price. We also challenge a few other myths surrounding the practice of backdating options.

Executive Compensation, Stock Options, Backdating, Taxation of Compensation, Securities Regulation

Abstract:
In Credit Suisse v. Billing, the Court held that the securities law implicitly precludes the application of the antitrust laws to the conduct alleged in that case. The Court considered several factors, including the availability and competence of other laws to regulate unwanted behavior, and the potential that application of the antitrust laws would result in “unusually serious mistakes.” This paper examines whether similar considerations suggest restraint when applying the antitrust laws to conduct that is normally regulated by state and other federal laws. In particular, we examine the use of the antitrust laws to regulate the problem of patent holdup of members of standard setting organizations. Although some have suggested that this conduct illustrates a gap in the current enforcement of the antitrust laws, our analysis finds that such conduct would be better evaluated under the federal patent laws and state contract laws.