The Obama Administration and Section Two of the Sherman Act

Abstract

During the administration of President George W. Bush, the Antitrust Division was not enthusiastic about use of §2 of the Sherman Act to pursue anticompetitive single-firm conduct. Indeed, its most prominent contribution on the issue was the Antitrust Division’s §2 Report, which the Obama Antitrust Division withdrew only eight months after it was issued. This withdrawal was entirely in keeping with candidate Obama’s repeated promises to reinvigorate antitrust enforcement.

This essay analyzes the current state of antitrust and makes recommendations concerning structures and practices where increased §2 enforcement is warranted and those where it is not. Wise use of enforcement dollars suggests greater enforcement in areas where private enforcement is unlikely to be effective.

The migration of tying and exclusive dealing law toward greater use of §2 is an important development trend that ought to be encouraged. However, this essay disputes the view that tying arrangements imposed by dominant firms are inherently harmful to consumers and should be pursued more aggressively. These arguments are mistaken about the type of price discrimination that variable proportion tying arrangements involve, and as a consequence exaggerate their potential for harm. On the other hand, some room for expansion of the §2 law of refusal to deal is appropriate, at least in narrowly defined circumstances involving networks. In such cases something that is formally a refusal to deal operates more like a tying arrangement.

The law of exclusionary pricing has become somewhat too lenient. The recoupment requirement in predatory pricing cases should be abandoned if prices are clearly below average variable cost or short run marginal cost. However, it does not seem appropriate to jettison cost-based pricing rules, even for loyalty discounts, bundled discounts and other discounting practices. At the same time, some adjustment of cost tests is appropriate for “leveraged” discounts, which are situations in which a dominant firm blends the discount over one grouping of sales in which it faces little competition and another grouping that is more competitive, causing competitive harm in the latter group.

Finally, this essay argues for increased antitrust enforcement against anticompetitive restraints on innovation, an area in which private enforcement is likely to falter because of antitrust’s strict causation and injury requirements.

Keywords: Obama, antitrust, tying arrangements, bundled discounts, patents, refusal to deal, networks, enforcement, intellectual property

JEL Classification: A12, D02, D42, K00, K20, K21, K23