PUBLIC POLICY TOWARD ABUSE OF FIRM DOMINANCE Outline Public - - PowerPoint PPT Presentation

PUBLIC POLICY TOWARD ABUSE OF FIRM DOMINANCE

Outline

• Public policy: false positives and false negatives
• Cases

Outline

• Public policy: false positives and false negatives
• Cases

Basic trade-off: Type I and Type II errors

• Errors in decision making can be classified as

− False positive: competitive practice labeled anti-competitive − False negative: anti-competitive practice labeled competitive

• Trade-off increasingly difficult as we move down the list:

− Horizontal agreements − Mergers − Dominant position (e.g., exclusion)

Observable conditions and economic effects Horizontal agreements

• Price fixing
• Common standard

Anti-competitive Pro-competitive

Observable conditions and economic effects Aggressive pricing

• Below cost pricing
• Quantity discounts

Anti-competitive Pro-competitive

Exercise: pro-competitive or anticompetitive?

• Below cost pricing
• Bundling, quantity forcing, etc
• Exclusive contracts
• Pay for delay

Beware of false positives (dominant firm)

• Competitive justification frequently correct
• Preemptive effect on firm’s competitive strategies
• The extreme statistics phenomenon

− Multiple jurisdictions with global impact − Jurisdiction balance expected costs from false positives, negatives − Binding decision is toughest − In expected terms, it will likely be a false positive

US and EU on predatory pricing

U.S. E.U. Market dominance Necessary condition Necessary condition Price test p<AVC necessary condition p<AAC per se illegal p>LRAIC OK (?) Recoupment Reasonable prospect Not necessary Intent Talk is cheap Helpful in proof Key quote

Predatory pricing schemes are rarely tried, and even more rarely successful A dominant undertaking has no interest in applying such prices except that of eliminating competitors

AVC: Average Variable Cost. AAC: Average Avoidable Cost. LRAIC: Long Run Average Incremental Cost. Quotes from Justice L. Powell on Matsushita, 1986; and European Court of Justice on AKZO.

Competition policy and football

The competition authority must be like a good referee: easy enough to let the game flow but not too easy to the point

• f letting the game become a mess.

Outline

• Public policy: false positives and false negatives
• Cases

Microsoft

• What is the idea of the “fee for processor” strategy?
• What was the thrust of the DOJ 1998 case against

Microsoft?

• What arguments would you present against and in

favor of Microsoft?

• Would you answer be different in 2004 than 2014?

AMD vs Intel

• Intel offers rebates to customers (PC manufacturers)

who agree to limit purchases from AMD

• Compaq’s CEO Michael Capellas tells AMD (in 2000)

“I had a gun to my head” and had to stop buying AMD chips

• AMD engages in a global litigation strategy

− files complaint with competition authorities in EU, Korea, Japan − files lawsuit in US for discovery of certain Intel docs − files lawsuit in US re Intel’s practices (2004)

• Various government initiated cases: Japan; Korea; EU

DG Comp (2004); and NY AG (2009)

AMD vs Intel

• US Supreme Court approves legal strategy of suing

abroad and pursuing discovery at home

• Japan and Korea competition authorities fine Intel in

the $ millions

• Intel and AMD settle US dispute in 2009:

− Intel to pay AMD $1.25 billion and abide by a long list

• f prohibitions;

− AMD to drop its litigation efforts worldwide (suits and complaints)

• DG Comp fines Intel e1.06 ($1.44 billion at the time)

EU court to rule June 12 on Intel appeal

AMD vs Intel: takeaways

• Global antitrust

− Suing in parallel fronts across the world − Choosing more favorable jurisdiciton − Spillovers across cases

• No “double jeopardy” protection
• Rule of reason implies legal uncertainty

It’s as easy to find legal certainty in this case as it is for scientists to discover the Higgs boson — Intel lawyer Nicholas Green

Solvay and Actavis

• Solvay receives 2003 patent for brand-name drug,

Androgel (low testosterone levels).

• Actavis files 2003 patent for generic modeled after

Androgel.

• Solvay sues Actavis for patent infringement under

“paragraph IV” litigation (Hatch-Waxman Act)

• Actavis enters a reverse payment settlement agreement

with Solvay (2006), whereby Actavis

− keeps its generic drug off the market (for a “specified number of years”) − agrees “to promote Androgel to doctors” − receives monetary compensation

Solvay and Actavis

• In 2013, US Supreme Court rules 5-3 that FTC cannot

be prevented from bringing antitrust action against defendants

• Stopped short of declaring pay-for-delay illegal
• Previously Supreme Court had refused to hear similar

cases and FTC had lost

Solvay and Actavis: takeways

• Relation (and possibly conflict) between patent law

and antitrust law

Spirit Airlines vs Northwest Airlines

• What are the case facts regarding pricing?
• What are the points of factual disagreement?
• What are the legal standards for predation?
• How would you have advised Spirit Airlines?

Spirit Airlines

50 100 150 200 250 300 Jan 1995 Jan 1996 Jan 1997 Jan 1998 $ Detroit-Boston Northwest Airlines Spirit Airlines

Spirit Airlines: takeaways

• In theory, we agree; in practice we don’t
• US standards to prove predation are very high