Principal Lecturers Professor Andrew I. Gavil Professor Steven C. Salop

1. The Antitrust Masters Course VABA Section of Antitrust LawPlenary Session SlidesSeptember 30, 2010Part I Principal Lecturers Professor Andrew I. Gavil Professor Steven C. Salop Williamsburg Lodge, Williamsburg, VA

2. Session Agenda • Introduction • Institutional Framework • First Principles • Core Concepts of Antitrust

3. Part I:Institutional Framework

4. Deterrence, Remediation & Compensation:A Complex Formula The “Organic” Competition Policy “System” Institutions & Rule of Law Procedural Rules Antitrust Injury and Standing Detection Penalties Remedies Decision Theory Economic Presumptions Costs of Error Costs of Administration Substantive Legal Rules Costs of Enforcement Deterrence Remediation Compensation

5. System Interdependence and Equilibrating Tendencies • The decision to comply with the law depends upon several basic considerations: • What is the statutory command -- an absolute prohibition or a reasonableness standard? • How likely are infringements to be detected? • If detected, will infringements be prosecuted? • If infringements are prosecuted, will adjudicatory tribunals find the defendants guilty of a violation? • If a finding of guilt is made, how will the violation be punished? • Calkins, Equilibrating Tendencies, 74 GEO. L.J. 1065 (1986)(discussed infra)

6. Formative Conditions: U.S. Competition Policy System • Open Texture of Statutes • Role of Courts & Congress • Central Role of Economic Analysis • Decentralized Enforcement and Policy Making • Intricate Remedial Scheme

7. Relevant Legislation United States • Sherman Act (1890) • Section 1 • Concerted action that restrains trade • Section 2 • monopolization • Clayton Act (1914) • Mergers & exclusivity • FTC Act (1914) • State Antitrust Laws • Sectoral Regulation of Competition European Union • Article 101 TFEU • Concerted action • Article 102 TFEU • Abuse of dominant position

8. Open Texture – Interpretive Discretion • Consciously Evolutionary Scheme • Especially true for Sherman Act 1 & 2 • Receptive to new learning • Unique role for economics • Central Role for Courts (esp. Supreme Court) • Interpretive Role • Normative Role • Master Calibrator – “Equilibrating Tendencies”

9. Decentralized Authority Federal State State Attorneys General Role of NAAG Task Force Private Actions Customers, Suppliers, Competitors Sectoral Regulators • Department of Justice • Federal Trade Commission • Sectoral Regulators • Private Actions • Customers, Suppliers, Competitors • Role of Collateral Government Bodies (e.g., PTO) • International • International Market for Legal Standards

10. The Role of Courts Public Enforcement • Interpret and apply the competition laws • Common law vs. civil systems • Institutional Check on Public Prosecutors • Follow procedures • Conclusions supported by evidence • Guidelines consistent with law Private Enforcement • Detection • Compensation • Deterrence • Facilitate remediation • Consistent with public purposes • Institutional check on: • Frivolous claims • Frivolous litigating

11. Stare Decisis & The Sherman Act • “But “[s]tare decisisis not an inexorable command.” In the area of antitrust law, there is a competing interest, well represented in this Court's decisions, in recognizing and adapting to changed circumstances and the lessons of accumulated experience. Thus, the general presumption that legislative changes should be left to Congress has less force with respect to the Sherman Act in light of the accepted view that Congress “expected the courts to give shape to the statute's broad mandate by drawing on common-law tradition.” As we have explained, the term “restraint of trade,” as used in § 1, also “invokes the common law itself, and not merely the static content that the common law had assigned to the term in 1890.” Accordingly, this Court has reconsidered its decisions construing the Sherman Act when the theoretical underpinnings of those decisions are called into serious question.” State Oil Co. v. Khan, 522 U.S. 3, 20-21 (1997). • Less so true for the Clayton & FTC Acts?

12. Judicial Tools for Calibration • Burdens… • of Pleading (motions to dismiss) • of Production (summary judgment) • of Proof (merits decisions) • Other Discretionary Actions • Standing and antitrust injury • Scope of discovery • Admissibility of evidence (especially experts) • Class certification

13. Factors Influencing Court’s Tendency to “Recalibrate” • Perceptions of: • Error likelihood and costs • Competition enforcement vs. regulation • Severity of penalties/remedies • Competency of tribunals • Operation of the litigation system • Especially discovery and class actions • Motives of Plaintiffs

14. Some U.S. Case Examples of Equilibration • Twombly (burden of pleading) • Matsushita (burden of production) • Monsanto/Sharp/Leegin (burden of proof) • Brunswick (antitrust injury) • Associated General Contractors (standing) • Illinois Brick (indirect purchaser standing) • Daubert & FRE 702 (expert witnesses) • Amchem & Hydrogen Peroxide (class certification)

15. Possible Remedies for Violations Criminal • Imprisonment • Fines (corporate and individual) • Asset forfeitures • Injunctive relief Civil • Damages • Double, treble or more • Injunctive relief • Structural • Behavioral • Attorneys fees • Disgorgement

16. The Regulation-Antitrust Continuum • What is the optimal mix of Antitrust Enforcement and Agency Regulation? • Substitutes • Comprehensive regulation and no antitrust • Deregulation and reliance solely on antitrust • Complements • Violation of regulation = presumptive antitrust violation • (Inverse Trinko-Credit Suisse) • Mixed Model • Partial regulation or deregulation with reliance on antitrust for de- or unregulated portions

17. Regulation & Antitrust: Respective Roles Are regulation and competition substitutes or complements for policing the acquisition and exercise of market power? • If Complements… (Traditional U.S. View) • Antitrust enforcement by public and private enforcers can complement agency regulation • Exploit comparative advantages of each • Antitrust ≠ public utility regulation • Greater potential for conflict • Greater uncertainty for the regulated • Agencies and the regulated may be more attentive to competition concerns • If Substitutes… (Emerging View Today) • Broad agency mandates can displace antitrust • Courts will defer to agencies • Limited Role for antitrust enforcement • No institutional check on capture • Regulation can jump-start competition and then rely on antitrust

18. Part II:First Principles

19. First Principles: Anticompetitive Effects • Nat’l Soc’y of Prof’l Eng’rs v. U.S., 435 U.S. 679, 688 (1978): • “[Section 1 of the Sherman Act] focuses directly on the challenged restraint’s impact on competitive conditions.” • FTC v. Indiana Fed’n of Dentists, 476 U.S. 447, 460-61 (1986) (quoting 7 Phillip Areeda, Antitrust Law 429 (1986)): • “Since the purpose of the inquiries into market definition and market power is to determine whether an arrangement has the potential for genuine adverse effects on competition, “proof of actual detrimental effects, such as a reduction of output,” can obviate the need for an inquiry into market power, which is but a “surrogate for detrimental effects.”

20. First Principles and Market Definition • 2010 HMGs Section 4: • “The measurement of market shares and market concentration is not an end in itself, but is useful to the extent it illuminates the merger’s likely competitive effects.” • Salop, First Principles, 68 Antitrust L.J. 187, 188 (2000): • “Market power and market definition, therefore, should not be analyzed in a vacuum or in a threshold test divorced from the conduct and allegations about its effects.”

21. Defining “Market Power” • “Market power is the ability to raise prices above those that would be charged in a competitive market.” • Supreme Court in NCAA n.38 (1984) • “A merger enhances market power if it is likely to encourage one or more firms to raise price, reduce output, diminish innovation, or otherwise harm customers as a result of diminished competitive constraints or incentives.” • Horizontal Merger Guidelines at 2 (Aug. 2010)

22. Antitrust’s First Principles • Coordination can facilitate productivity and efficiency, but also create or enhance market power • Need to develop standards for differentiating “good” (cooperation) from “bad” (collusion) • Competition yields winners and losers • Need to develop standards for differentiating between “good” (superiority) and “bad” (exclusion) • Antitrust analysis must focus on conduct’s impact on competitive conditions • Market power and efficiency • Antitrust standards must themselves be subject to economic analysis • Decision Theory: If harms are likely and benefits are not, or harms are unlikely and benefits are… • then a full factual analysis is both unnecessary and error prone • Taking into account reasonably available and reliable data

23. Comparing the Effects of Collusive and Exclusionary Conduct Collusive • Examples: price fixing, division of markets • Directly Limits Output of Firms Acting in Concert • Exercise of Collective Market Power Exclusionary • Examples: exclusive dealing, raising rivals’ costs • Directly Limits Output of Rival(s) • Exercise of Single Firm or Collective Market Power Collusive and Exclusionary Effects May Occur Together or Separately

24. Case Study: JTC Petroleum Asphalt Producers Step 4 Step 3 X Asphalt Applicators Step 2 JTC Step 1 X Step 1: Applicators collude to fix prices Step 2: JTC refuses to join the conspiracy Step 3: Applicators compensate producers to RTD with JTC Step 4: Producers exclude JTC Step 5: Applicators maintain supra-competitive prices to consumers Step 5 Consumers (Local Gov’ts)

25. What are Procompetitive Effects? • “Efficiencies” • Lower costs • New and/or superior products or services • Innovation • Improving market incentives • Correcting market imperfections (e.g. free riding) • Consequences • Lower prices or lower quality-adjusted prices • Diminished incentives to coordinate with rivals

26. Antitrust as a Consumer Welfare Prescription • Aggregate vs. Consumer welfare • Congress designed the Sherman Act as a “consumer welfare prescription.” Reiter v. Sonotone (1979), quoting R. Bork, The Antitrust Paradox 66 (1978). • But what do we mean by “consumer welfare”? • Beyond Pure Price Effects • Innovation, Quality, Variety • Efficiencies • Why do they matter? How can we integrate them into the decision-making process?

27. The Williamson Diagram

28. Understanding and Evaluating Pricing Incentives and Effects • Upward and downward price pressure • Which incentive will win? • Which effect is greater? • How large is the DPP? • What are the constraints on UPP? • How should the conflicting pressures be balanced? • Consumer welfare approach • Aggregate welfare approach

29. Part III:Core Concepts of Antitrust

30. Categories to Concepts Traditional Perspectives • Categorization was Critical: • Horizontal vs. vertical • Per se vs. Rule of Reason • Intrabrand vs. Interbrand • Price vs. Non-Price Modern Perspectives • First Principles – Focus on Anticompetitive Effects and Justifications • Collusive vs. exclusionary effects • Conduct that facilitates acquisition or maintenance of market power • Protect efficiencies

31. The Core Economic Concepts of Antitrust Analysis • Anticompetitive Effects • reduced output/supra-competitive prices • reduced quality or service (effectively a higher price) • reduced innovation • diminished buyer choice • Harm to suppliers [“monopsony power”] • Procompetitive Effects (Efficiencies) • output expansion/lower costs • improved quality or service • enhanced innovation • enhance competitive incentives (e.g., eliminate free-riding) • Market Power (Used to Infer Anticompetitive Effects) • Circumstantial Evidence • define relevant market • calculate market shares • evaluate barriers to entry (ability of rivals and/or new entrants to expand output in response to price increases) • infer market power from high market shares and barriers to entry • infer market power from margins and diversion ratios • Direct Evidence • Actual anticompetitive effects • Lack of constraining influences (“residual” demand elasticity) • price/cost margin • Natural experiments • Conduct irrational absent market power Source: Gavil, Kovacic & Baker, at 205 (2d ed. 2008)(Figure 2-8).

32. Role of Decision Theory • Economic device for formulating legal rules • False positives & false negatives • Incidence & impact • Over- & under-deterrence • Direct costs of administration • Case by case vs. presumptions

33. Decision Theory and Priors • How will application of decision theory be influenced by perceptions of… • Competency of courts and enforcers? • Self-correcting nature of markets and likely value of interventions? • The private litigation system, especially costs of discovery and class actions? • Relative efficacy of antitrust enforcement and regulation?

34. Traditional Legal Distinctions • Traditional triggers for burdens & presumptions: • Concerted vs. Unilateral Conduct • Horizontal vs. Vertical Agreements • Naked restraint vs. integration • Price vs. Non-price conduct • Exclusive vs. Non-exclusive • High vs. low market share • How useful as these “categories” in a First Principles framework?

35. The Continuing Challenge • How do we effectively integrate law and economics in antitrust? • What should be the role of economics? • What “School” of economics should be followed? • How often will the choice of “School” matter? i.e. will it likely affect the outcome of analysis? • Are enforcers and courts capable of using economics effectively? If not, then what? • How do we differentiate economics from political economy?

36. Day 1, Part I – The End