EVENTS

Date:	Thursday, May 12, 2005
Time:	11:15 AM -- 1:00 PM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

May 2005

Antitrust Policy and Vertical Restraints

On May 12, the AEI-Brookings Joint Center for Regulatory Studies hosted a conference on antitrust policy and the economics and law of vertical restraints, focusing on theoretical and empirical work indicating that the costs of vertical restraints often outweigh their benefits. Luke Froeb of the Federal Trade Commission discussed the failures of theory in formulating efficient policy and presented empirical evidence on the effects of vertical restraints. David Evans of the Law and Economics Consulting Group explained the need for a better test to determine if tying is anticompetitive. Michael Waldman of Cornell University described the economics of tying in durable goods markets.

 

Luke Froeb
Federal Trade Commission

Luke Froeb argued that when government limits the ability of firms to contract vertically, consumer welfare declines. For example, gasoline divorcement laws preventing refiners from owning gas stations increased the price of gasoline by three cents per gallon. Laws in the United Kingdom making it illegal for pubs to affiliate with brewers increased the price of beer. Mr. Froeb also illustrated the proliferation of antitrust laws worldwide over the past century. While theory may suggest that this increase in regulation yields positive outcomes, Mr. Froeb demonstrated that the opposite is true. He emphasized that vertical restraints imposed by government are particularly problematic when the United States exports its antitrust laws to developing countries, which, according to Froeb, lays the “microfoundations of poverty” in these countries.  

David Evans
Law and Economics Consulting Group

David Evans described the tying test that the Supreme Court formulated in the 1983 Jefferson Parish decision. Mr. Evans explained that this is a test for determining whether certain tying practices should be deemed anticompetitive. The first part of the test determines whether the products suspected of being tied are indeed “separate products.” If they are, then the next step of the test examines whether the business has market power in the “tying product” (the product consumers must take to get the “tied product”) and whether the tying affects a substantial portion of interstate commerce. If it does, then the tying is considered unlawful. He explained that courts use the Jefferson Parish tying test as their main decision framework for tying cases.

Mr. Evans then argued that the test should be modified to presume that tying is legal and competitive except when the firm holds inordinate market power. Mr. Evans illustrated this point with examples from both the U.S and Europe: the Jefferson Parish case, the Visa/ MasterCard credit-debit card litigation, and Hilti vs. European Commission. He explained how in all four cases, the test was severely inaccurate in identifying anticompetitive tying practices. The Jefferson Parish case arose when the Jefferson Parish Hospital required surgical patients to use the hospital’s anesthesiologists because the hospital had an exclusive contract with an anesthesiologist group. The hospital was charged with anticompetitive tying, but Mr. Evans argued that this was not anticompetitive because the hospital had no market power. In the Visa/ MasterCard credit-debit card litigation, the credit card giants were accused of anticompetitive typing because they required merchants that accepted these two credit cards to also accept debit cards—and thus pay for both services. Mr. Evans explained that even after Visa and MasterCard were forced to stop tying the two types of transactions, the fee for credit card charges rose while the fee for debit card charges declined, with the combined fee remaining unchanged. This is strong economic evidence that this tying was not anticompetitive. In Hilti vs. European Commission, Hilti--a company that made nail guns, cartridges, and nails--was charged with illegally tying nails and cartridges. Mr. Evans explained that economists now almost unanimously agree that this tying was not anticompetitive.

Michael Waldman
Cornell University Johnson School of Business

Michael Waldman began by presenting the results of previous analyses of tying. He explained how multiple analyses conclude that a monopolist of one product will not have an incentive to tie if her product is “essential” (meaning that all uses of the complementary good of interest require the initial, monopolized product). Mr. Waldman showed that the previous result does not hold in durable goods settings characterized by product upgrades over multiple periods. In these cases, tying is advantageous for the monopolist--especially when consumer switching costs are present. His conclusion is that the use of tying to extend market power will be more common in durable goods settings than in nondurable goods settings. Mr. Waldman finished by arguing that tying can both improve social welfare and serve a firm’s strategic purpose, as in Microsoft’s case. 

Question and Answer Session

The questions following the presentations focused on the applications of antitrust theory to policy. One audience member asked the panelists to define antitrust. Mr. Froeb defined antitrust as a government action to curtail a tying practice that harms consumer welfare. Mr. Evans modified this definition to incorporate legal and administrative considerations, such as whether the “error” costs of pursuing an antitrust case are not exorbitant. Another question concerned the use of economics in making antitrust decisions. Mr. Evans responded that the application of economics is often difficult, but that the government should take a free-market orientation. He commended the European antitrust authorities for being “free-market economists interested in antitrust.” Mr. Waldman maintained that by default, antitrust authorities worldwide should allow tying unless it is a clear-cut anticompetitive case or there is a sufficient process for evaluation. 

Katrina Kosec and Rohit Malik, researchers at the AEI-Brookings Joint Center for Regulatory Studies, prepared this conference summary.