Antitrust Law and Economics, Volume 21

504 Pages·2004·2.72 MB·English

by  John B Kirkwood

CONTENTS
LISTOFCONTRIBUTORS vii
PREFACE ix
CONSUMERS,ECONOMICS,ANDANTITRUST
JohnB.Kirkwood 1
TITANAGONISTES:THEWEALTHEFFECTSOFTHE
STANDARDOIL(N.J.)CASE
MichaelReksulak,WilliamF.ShughartII,RobertD.
TollisonandAtinBasuchoudhary 63
SUCCESSFULMONOPOLIZATIONTHROUGHPREDATION:
THENATIONALCASHREGISTERCOMPANY
KennethBrevoortandHowardP.Marvel 85
THEMORTONANDINTERNATIONALSALTCASES:
DISCOUNTSONSALESOFTABLESALT
JohnL.Peterman 127
INJUNCTIVERELIEFINSHERMANACT
MONOPOLIZATIONCASES
RobertW.CrandallandKennethG.Elzinga 277
UNITEDSHOEMACHINERYREVISITED
RogerD.BlairandJillBoylstonHerndon 345
ANECONOMICJUSTIFICATIONFORAPRICESTANDARD
INMERGERPOLICY:THEMERGEROFSUPERIOR
PROPANEANDICGPROPANE
RichardO.ZerbeJr.andSunnyKnott 409
v
vi
VERTICALMERGERSANDMARKETFORECLOSURE
WilliamS.ComanorandPatrickRey 445
THECOMPETITIVE-NEIGHBORSAPPROACHTO
ANALYZINGDIFFERENTIATEDPRODUCTMERGERS
PaulA.Johnson,JamesLevinsohnandRichardS.Higgins 459
SETTLINGTHECONTROVERSYOVERPATENT
SETTLEMENTS:PAYMENTSBYTHEPATENTHOLDER
SHOULDBEPERSEILLEGAL
CristoferLefflerandKeithLeffler 475
PREFACE
As readers have noticed, the last several volumes of Research in Law and
Economics have consisted of special issue volumes. This will continue. This
volume is one of the best. Jack Kirkwood put this volume together with modest
assistance from me. I believe this is an outstanding volume and expect to meet
thehighstandardsethereinfuturevolumes.
RichardO.Zerbe,Jr.
Editor
ix
CONSUMERS, ECONOMICS,
AND ANTITRUST
John B. Kirkwood
ABSTRACT
This is the first paper in a volume devoted exclusively to antitrust law and
economics.Itsummarizestheotherpapersandaddressestwoissues.First,
after showing that the federal courts generally view consumer welfare as
the ultimate goal of antitrust law, it asks what they mean by that term. It
concludes that recent decisions appear more likely to equate consumer
welfare with the well-being of consumers in the relevant market than with
economicefficiency.Second,itaskswhetherabuyermustpossessmonopsony
powertoinduceapricediscriminationthatisnotcostjustified.Itconcludes
that a buyer can often obtain an unjustified concession simply by wielding
bargainingpower,buttheresultingconcessionmayfrequently–thoughnot
always–improveconsumerwelfare.
INTRODUCTION
Antitrust is finding its bearings. After decades of debate about its aims and
methods,antitrustlawhaslargelyadoptedasinglegoalandasinglemethodology.
Today, most courts and commentators agree that the ultimate purpose of the
antitruststatutesisnottoprotectrivalsbuttobenefitconsumers.1Itisalsowidely
acceptedthatthemostusefultoolfordeterminingwhetherconsumershavebeen
helpedorharmediseconomicanalysis.2
AntitrustLawandEconomics
ResearchinLawandEconomics,Volume21,1–62
Copyright©2004byElsevierLtd.
Allrightsofreproductioninanyformreserved
ISSN:0193-5895/doi:10.1016/S0193-5895(04)21001-6
1
2 JOHNB.KIRKWOOD
Within this consensus, however, disagreements remain. While there is little
doubt that the overarching goal of antitrust is consumer welfare, there is a
significant split over the definition of the term.3 One view holds that consumer
welfare should mean economic efficiency. Under this view, the ultimate goal
of antitrust law is not simply, or even primarily, to protect consumers, but to
enhance the efficiency of the economy – that is, to increase the total economic
value that society derives from its limited resources. Since total value includes
value realized by producers as well as value obtained by consumers, under this
definitionitispossiblefor“consumerwelfare”toincreaseeventhoughconsumers
are harmed. The goal of efficiency analysis is to maximize the total “wealth” of
society,regardlessofhowitisdistributed.
Theprincipalalternativeviewholdsthatconsumerwelfareshouldreferexclu-
sivelytothewelfareofconsumers–thosewhopurchasetheproductsorservices
soldintherelevantmarket.4 Underthisview,theultimatepurposeofantitrustis
to protect consumers from exploitation. More precisely, antitrust should prevent
firmsfromusingpracticesthatincreasetheirmarketpower–theirpowertocharge
prices above the competitive level – unless such conduct would, on balance,
benefitconsumersintherelevantmarket.Moresimply,thegoalofantitrustisto
ensure,wheneverpossible,thatconsumerspaycompetitivepricesfortheproducts
and services they purchase.5 This view of consumer welfare is also limited: it
takesnoaccountofresourcesavingsorotherefficienciesthatbenefittheoverall
economybutdonotimprovethewell-beingofconsumersintherelevantmarket.
The second element of the antitrust consensus – the role of economics – also
generatesdisagreements.Whilefewwouldquestiontheimportanceofeconomics
incontemporaryantitrustanalysis,therearefrequentdebatesabouttheeconomic
impactofspecificpractices.AsCarltonandPerloffobserve(2000,p.605):
Evenifoneacceptsthepropositionthatthegoaloftheantitrustlawsistopromoteefficiency,
economistsoftenhavedifficultydeterminingwhichpracticesresultininefficientbehavior.
Theapplicationofeconomicstoantitrustlawis,inshort,aworkinprogress.
Thisvolumeprovidesaforumfortheeconomicresearchneededtocontinuethat
progress.Itcontainstenpapersdevotedexclusivelytoantitrustlawandeconomics.
InPartIofthispaper,Idescribethenineotherpapersinthisvolume,summarizing
theirapproaches,theirconclusions,andtheirsignificanceforthedevelopmentof
antitrust. In Part II, I address the debate over the meaning of consumer welfare,
an issue that potentially affects all areas of antitrust but has particular impact
onmergeranalysis.InPartIII,Iexamineanissuethatisraisedbutnotresolved
by one of the papers; namely, whether a buyer needs to have monopsony power
in order to induce a price discrimination that is not cost justified – the core of
a Robinson-Patman violation. After answering that question, I assess whether
Consumers,Economics,andAntitrust 3
non-cost-justified discrimination induced by a large buyer is likely to hurt or
improveconsumerwelfare.
PartI–TheEconomicResearchPapers
Written by some of the most distinguished scholars in antitrust today, the nine
economic research papers in this volume reflect the consensus described above.
They uniformly assume that the goal of antitrust is consumer welfare and that
economicanalysisisavitaltoolinachievingthatgoal.Inaddition,theyhelpto
resolvedebatesthatsurroundeachelement.
Several papers shed light on the meaning of consumer welfare. One paper
advances the debate by exploring a new measure of efficiency that assigns a
value to preventing consumer exploitation. Another focuses almost entirely
on consumer prices, rather than technical efficiency, in assessing the welfare
implicationsof10monopolizationorders.
Allninepapersevaluatetheeconomicimpactofspecificpractices.Indoingso,
thepaperslooktothepastaswellasthefuture.Fiveofthearticlesevaluateolder
antitrustcasestodeterminewhetherthedecisionsreached,thereliefordered,or
both, enhanced consumer welfare. The verdicts are striking. After extensive re-
viewsoftheevidence,theauthorsconcludethathardlyanycasehelpedconsumers
oreconomicefficiency,andsomehurtboth.Outofthe14antitrustcasesexamined,
onlyoneseemstohavehadapositiveimpact.Inthatcase,BrevoortandMarvel
concludethatadominantfirmbuiltandmaintaineditspositionthroughnon-price
predation,andtheorderenteredagainstthefirmmostlikelypromotednewentry.
These papers provide strong evidence for the proposition that many older
antitrustcasesdidnotproduceadiscernibleimprovementinconsumerwelfareand
somemayhaveactuallyharmedconsumers.Significantly,the13casesreviewed
inthisvolumewerealldecidedbefore1965.Inthatperiod,consumerwelfarewas
notthegenerallyacceptedgoalofantitrustlawandeconomicanalysishadneither
the importance nor the sophistication it has today. It was not until 1977 that the
SylvaniaCourtelevatedtheimportanceofeconomicanalysisbyinsistingthatper
secondemnationofacategoryofpracticesmustreston“demonstrableeconomic
effect.”6Twoyearslater,theCourtdeclared–forthefirsttime–thattheSherman
Actwasa“consumerwelfareprescription.”7 Academiccommentaryalsoshifted
in the late 1970s. From 1976 to 1978, Posner, Bork and Areeda each published
seminaltreatisesarguingthatantitrustlawshouldbedominatedbyasinglegoal
(consumerwelfare)andasinglemethodology(economicanalysis).8 Giventhese
developments,itisnotsurprisingthatKwokaandWhite(1989)contendthatan
“antitrustrevolution”beganinthemid-1970s.
4 JOHNB.KIRKWOOD
By chronicling the shortcomings of earlier decisions, the historical papers
provide further support for the antitrust revolution. Moreover, the findings and
insights in these papers should make it easier for future antitrust courts to reach
decisions that improve consumer welfare. For example, Crandall and Elzinga’s
paperonreliefinmonopolizationcasesidentifiesnumerousobstaclestoeffective
antitrust relief, serving as a caution to modern-day enforcement. The Peterman
paper similarly identifies ways in which Robinson-Patman enforcement may
harm consumers. In Part III, I suggest several ways in which enforcement may
promoteconsumerwelfare.
Thefourremainingpapersinthisvolumeapplyeconomicanalysistocontem-
poraryissues.ThefirstpaperanalyzesarecentCanadianmergerthatwasapproved
bytheCanadianCompetitionTribunallargelybecauseitwouldincreaseeconomic
efficiency.Applyingthetraditionalmeasureofefficiency,theTribunalcalculated
that the merger’s cost savings would outweigh its adverse impact on prices.
Zerbe and Knott critique this measure because it gives no weight to consumer
exploitation–tothetransferofwealthfromconsumerstoproducers.Tocorrect
forthis,theauthorsutilizeanewmeasureofefficiencythattakeswealthtransfers
intoaccountsolongaspeoplewouldbewillingtopaytoavoidthem.Usingthis
measure,theauthorsconcludethatthemergermayhavereducedefficiency.
The final three papers apply economic analysis to several perennial antitrust
issues:theimpactofverticalforeclosure,mergersofdifferentiatedproducts,and
misuseofpatents.Thefirstpaperexplainsanewwayinwhichverticalforeclosure
can enhance the market power of an upstream supplier. The second refines an
innovative technique for identifying substitutes among a set of differentiated
productsandexplainshowthetechniquecanimprovemergeranalysis.Thefinal
paper confronts an especially contentious policy issue – the treatment of patent
settlements in which the patent holder pays the challenger to exit the market.
Relyingonbotheconomicanalysisandbasicprinciplesofpatentlaw,Lefflerand
Lefflerarguethatsuchsettlementsshouldbeperseillegal.
Theseninepaperssuggestthatantitrustisontherighttrack–thataconsumer
oriented,economicallydrivenapproachtoantitrustlawisappropriate.Theyalso
underscoretheimportanceofeconomicresearchinimplementingthisapproach.
PartII–TheMeaningofConsumerWelfare
Whilemosteconomistsandcourtsagreethattheultimategoalofantitrustiscon-
sumer welfare, there is less agreement on the meaning of the term. Though the
issue underlies most of antitrust law and is critical to the efficiency defense in
mergercases,thecourtsrarelyaddressitexplicitly.
Consumers,Economics,andAntitrust 5
Robert Bork is the chief proponent of the view that consumer welfare should
meaneconomicefficiency.Inaclassicpaper(1966)andapopularbook(1978),
Borkarguedthatthe“wholetaskofantitrustcanbesummedupastheefforttoim-
proveallocativeefficiencywithoutimpairingproductiveefficiencysogreatlyasto
produceeithernogainoranetlossinconsumerwelfare”(1978,p.91).Headded:
“Thesetwotypesofefficiencymakeuptheoverallefficiencythatdeterminesthe
levelofoursociety’swealth,orconsumerwelfare”(ibid.emphasisadded).
Bork’s definition of consumer welfare adopts the traditional measure of
economic efficiency.9 Under this standard, a practice that reduces costs will
increaseconsumerwelfareevenifitraisespricessolongasthegainstoproducers
(from the lower costs and higher prices) exceed the losses to consumers (from
thehigherprices).10 Thisdefinitionofconsumerwelfare,inshort,focusesonthe
economyasawholeratherthanonconsumers.11
Bork’s principal opponent is Professor Robert Lande. In 1978, when Bork’s
book began to create a stir, Lande was a staff attorney in the policy office of
the Bureau of Competition of the Federal Trade Commission (FTC). As head
ofthatoffice,Iaskedhimtoprepareanindependentanalysisofthegoalsofthe
antitrust laws, based on a fresh reading of the legislative histories. His findings
andsupportinganalysisweresoacute–andrevolutionary–thattheHastingsLaw
Journalpublishedarevisedversionofhispaper(Lande,1982),anditbecameone
ofthemostcitedpieceseverpublishedbythatperiodical.12
Lande concluded that in passing the antitrust laws, Congress was interested,
asBorkcontended,infurtheringeconomicefficiency.Itwasalsoconcernedwith
varioussocialandpoliticalgoals.Butitsdominantobjectivewasneithereconomic
efficiencynoranysocialorpoliticalvalue.Instead,accordingtoLande,Congress
wanted above all to prevent firms from exploiting consumers. To put it more
precisely,Congress’soverarchinggoalwastostopfirmsfromusingunfairtactics
to acquire or preserve market power and thereby force consumers to pay higher
prices. As Lande wrote recently, the “overriding concern was that consumers
shouldnothavetopaypricesabovethecompetitivelevel”(1999,pp.961–962).13
Inconcept,Lande’sinterpretationofconsumerwelfarecontrastssharplywith
Bork’s.WhileBorkfocusesoneconomicefficiency,Landefocusesprimarilyon
prices in the relevant market. Lande illustrates the difference by describing how
his approach would alter “the fundamental question asked in merger analysis.”
Landestates(1999,p.962):
Insteadofasking,“isthemergerlikelytobeefficient,”[myapproachwouldask],“isthemerger
likelytoleadtohigherconsumerprices?”14
Lande’s interpretation of congressional intent has been highly influential
in certain arenas. His original article has been cited in at least 285 other law
6 JOHNB.KIRKWOOD
review articles15 and has garnered considerable support among law professors.
EvenJudgeandformerprofessorFrankEasterbrook,closelyassociatedwiththe
economicallyorientedChicagoSchool,appearstohavetakenLande’ssideinthis
dispute(1986,pp.1702–1703):
Thechoice[Congress]sawwasbetweenleavingconsumersatthemercyoftrustsandautho-
rizingthejudgestoprotectconsumers.Howeveryouslicethelegislativehistory,thedominant
themeistheprotectionofconsumersfromovercharges.16
According to Lande’s recent paper (1999, pp. 963–966), 25 antitrust professors,
virtually all lawyers and many leading figures in the field (e.g. Philip Areeda),
haveendorsedhisconstruction.
The United State Department of Justice and the FTC have also adopted
Lande’s view in their important Horizontal Merger Guidelines (1992, revised
1997), almost without reservation. In the latest revisions, the Guidelines state
that efficiencies cannot save an otherwise anticompetitive merger unless the
efficiencies are sufficient to prevent an adverse impact on consumers.17 Thus, if
thegovernmentcanshowthatamergerwouldcauseasignificantpriceincreasein
theabsenceofanycostsavings,themergingpartiescannotjustifythetransaction
by demonstrating cost savings unless they can show that these cost reductions
wouldalterthemergedfirm’spricingcalculusandcauseittorefrainfromaprice
increase.Bymakingtheimpactonconsumersintherelevantmarketthelitmustest
ofalikelymergerchallenge–andvirtuallyignoringimpactonproducercostsand
economicefficiencyasindependentvalues–thefederalagencieshaveessentially
embracedLande’sandrejectedBork’sdefinitionofconsumerwelfare.18
AlthoughLande’sinterpretationofCongressionalintenthasswayedmanylaw
professorsaswellasthefederalenforcementagencies,ithasmadelessheadway
among courts and economists. As of 1999, Lande could cite only three federal
court decisions that referenced his revolutionary article, none more recently
than 1988. Similarly, his list of professorial endorsements included only three
economists.19 Why so little support in the courts and economics departments?
HasBork’sviewconqueredwhereitcounts–amongthejudiciary?
PartIIexaminesrecentfederaldecisionsandconcludesthattheyhavenotpicked
BorkoverLande.Tothecontrary,whilethecourtshavenotsettledonadefinition
of consumer welfare, they seem more concerned with preventing consumer
exploitation than promoting economic efficiency. Indeed, in the one area where
thetwoscholars’viewsplainlyconflict–theefficienciesdefenseinmergercases
–thecourtshave,withoutcitingLande’sanalysis,overwhelminglyadoptedit.
In contrast, the economics papers in this volume, to the extent they define
welfare, almost always equate it with economic efficiency. Several papers,
however,displayaheightenedsensitivitytotheimpactofapracticeororderon
Consumers,Economics,andAntitrust 7
consumersintherelevantmarket.Intwoofthesepapers,thisaddedattentiondoes
notaltertheultimateresult:whethertheauthorsfocusoneconomicefficiencyor
consumerexploitation,theirconclusionsarethesame.Inthethirdpaper,though,
theauthorsapplyanewmeasureofefficiency–ameasurethatassignsavalueto
preventingconsumerexploitation–andconcludethatitcouldchangethewelfare
evaluationofarecentmerger.
PartIII–BuyerPower,ConsumerWelfareandtheRobinson-PatmanAct
Theantitrustlawthatisleastlikelytopromoteconsumerwelfare,whetherviewed
aseconomicefficiencyortheabsenceofconsumerexploitation,istheRobinson-
PatmanAct.ThisDepression-erastatuteprohibitssellers,incertaininstances,from
favoringsomeoftheircustomerswithpriceorpromotionalconcessionsthatthey
do not extend to competing customers. Of all the antitrust laws, the Robinson-
PatmanActisthemostunabashedinitsfavoritismofsmallbusiness.
In Morton Salt – one of the earliest and most important cases decided under
theAct–theSupremeCourtdeclaredthatthestatute’sgoalwastopreventlarge
buyersfromgaininganadvantageovertheirsmallerrivals:
ThelegislativehistoryoftheRobinson-PatmanActmakesitabundantlyclearthatCongress
consideredittobeanevilthatalargebuyercouldsecureacompetitiveadvantageoverasmall
buyersolelybecauseofthelargebuyer’squantitypurchasingability.20
This concern for “competitive advantage,” rather than consumer impact or
economic efficiency, led the Court to adopt what is called the “Morton Salt
inference,” which essentially allows judges to infer competitive injury from a
substantialandsustainedpricedifferential.
More recently, as the purpose and approach of antitrust law has shifted,
both the Morton Salt inference and the Act itself have been heavily criticized
as protectionist of small business, anticompetitive and ultimately harmful to
consumers.Asaresult,federalandstateantitrustauthoritieshavelargelystopped
enforcingtheAct,thoughprivateenforcementcontinues.
In his landmark analysis of Morton Salt, published in this volume, John
Peterman concludes, based on the evidence in the record, that the inference of
competitiveinjurywasunjustifiedinthatcase.Hisfindingsindicatethatthesalt
manufacturers’ discounts were procompetitive and enhanced consumer welfare.
Like so many other critiques of the Act, his paper raises the question whether
Robinson-Patmanenforcementcaneverbenefitconsumers.
In Part III, I examine that issue by focusing on the core elements of a
secondary-lineRobinson-Patmanviolation.21Despiteitsshortcomings(bothreal