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CHOICE – A NEW STANDARD FOR ANALYSIS? a Choice — A New Standard for Analysis?

Editors Paul Nihoul Nicolas Charbit Elisa Ramundo

Associate Editor Duy D. Pham

© Concurrences Review, 2016

GO TO TABLE OF CONTENTS All rights reserved. No photocopying: licenses do not apply. The information provided in this publication is general and may not apply in a specifc situation. Legal advice should always be sought before taking any legal action based on the information provided. The publisher accepts no responsibility for any acts or omissions contained herein. Enquiries concerning reproduction should be sent to the Institute of Competition Law, at the address below.

Copyright © 2016 by Institute of Competition Law 60 Broad Street, Suite 3502, NY 10004 www.concurrences.com [email protected]

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Publisher’s Cataloging-in-Publication (Provided by Quality Books, Inc.)

Choice—a new standard for competition law analysis?

Editors, Paul Nihoul, Nicolas Charbit, Elisa Ramundo. pages cm LCCN 2016939447 ISBN 978-1-939007-51-3 ISBN 978-1-939007-54-4 ISBN 978-1-939007-55-1

1. Antitrust law. 2. Antitrust law—Europe. 3. Antitrust law—United States. 4. . 5. behavior. 6. —Attitudes. 7. ()

I. Nihoul, Paul, editor. II. Charbit, Nicolas, editor. III. Ramundo, Elisa, editor.

K3850.C485 2016 343.07’21

QBI16-600070

Cover and book design: Yves Buliard, www.yvesbuliard.fr Layout implementation: Darlene Swanson, www.van-garde.com

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In this book, ten prominent authors offer eleven contributions that provide their varying perspectives on the subject of : Paul Nihoul discusses how has emerged as a crucial concept in the application of EU competition law; Neil W. Averitt and Robert H. Lande provide a detailed argument that enforcement agencies should adopt consumer choice as a new paradigm for antitrust; Peter Behrens lays out the historical origin of consumer choice as a concept grounded in German ; Robert H. Lande, in another contribution, provides an updated argument for why the US antitrust agencies should adopt consumer choice as the new model for antitrust enforcement; Elisabeth de Ghellinck discusses how approach the idea of consumer choice; Joshua D. Wright and Douglas H. Ginsburg draw on economics to argue that an economic standard should remain the governing paradigm in antitrust enforcement rather than consumer choice; Steven Anderman discusses how the concepts of consumer welfare and consumer choice are used in EU competition law to reconcile it with intellectual law; Neil W. Averitt and Robert H. Lande, in another contribution, argue that consumer choice can be used as a principle for understanding and unifying competition and ; Neil W. Averitt, in another contribute, provides practical guidance on how consumer choice can be used to improve competition and consumer protection laws at the enforce- ment and remedial stages; J. Thomas Rosch discusses whether, or the extent to which, consumer choice can be used to facilitate convergence between US antitrust law and EU competition law; Maurice E. Stucke draws on insights from to highlight when more choice is better for consumers and when it is not. This volume offers readers an exhaustive and multifaceted discussion of the crucial concept of consumer choice and its relevance for modern competition law. The editors would like to give their sincere thanks to the ten authors for their hours of labor dedicated to this unique collection of articles.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? iii Table of Contents

Editors’ Note ...... iii PAUL NIHOUL, NICOLAS CHARBIT & ELISA RAMUNDO

PART I: Consumer choice in EU and national competition law “Freedom of choice”: the emergence of a powerful concept in European competition law ...... 9 PAUL NIHOUL

Using the “consumer choice” approach to antitrust law ...... 41 NEIL W. AVERITT & ROBERT H. LANDE

The consumer choice paradigm in German ordoliberalism and its impact on EU competition law ...... 123 PETER BEHRENS

Consumer choice as the best way to re-center the mission of competition law ...... 153 ROBERT H. LANDE

PART II: Consumer choice — different perspectives

Consumer choice: an economic perspective ...... 167 ELISABETH DE GHELLINCK

The goals of antitrust: welfare trumps choice ...... 185 JOSHUA D. WRIGHT & DOUGLAS H. GINSBURG

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? v Consumer welfare and consumer choice in the reconciliation of the conficts between competition law and IPRs ...... 205 STEVEN ANDERMAN

Consumer choice: the practical reason for both antitrust and consumer protection law ...... 229 NEIL W. AVERITT & ROBERT H. LANDE

How “consumer choice” can unify the felds of competition and consumer protection law ...... 253 NEIL W. AVERITT

Can consumer choice promote trans-Atlantic convergence of competition law and policy? ...... 265 J. THOMAS ROSCH

When more is better and when less is more: behavioral antitrust and choice ...... 283 MAURICE E. STUCKE

GO TO TABLE OF CONTENTS vi CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Contributors

Steven Anderman Robert H. Lande University of Essex University of Baltimore

Neil W. Averitt Paul Nihoul FTC:Watch University of Louvain

Peter Behrens J. Thomas Rosch University of Hamburg US Federal Commission

Elisabeth de Ghellinck Maurice E. Stucke University of Louvain-la-Neuve University of Tennessee

Douglas H. Ginsburg Joshua D. Wright United States of Appeals for the George Mason University School of Law District of Columbia Circuit

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? vii “Freedom of choice”: the emergence of a powerful concept in European competition law*

PAUL NIHOUL [email protected] Professor of Antitrust Law, University of Louvain President, Academic Society for Competition Law

I. Introduction

Is Europe engaging on a path that will to the transformation of its competition policy? In the last few years, the has adopted landmark decisions bringing to the foreground a concept that had so far gained limited attention—the concept of choice, that is, the possibility, and the right, for customers to choose freely the products/services best corresponding to their needs, and the economic partners they want to deal with.

* This article frst appeared, with minor differences, in Concurrences, n°3-2012, pp. 55-70. It is reproduced with the authorization of the Publisher.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 9 “Freedom of choice”: the emergence of a powerful concept in European competition law

This new approach has not been limited to decisions issued by the Commission but has also been adopted by the European , i.e., the General Court (GC) and the European Court of (ECJ), which, within the European Union (EU), have the highest authority to interpret European law, including the rules of competition. The consequence of this development may be the radical transformation of the justi- fcations used by European institutions to explain their decision to intervene, or not, in given cases. This new approach is analyzed in this essay, which is divided into three parts. In Part II, the essay examines cases where the emerging trend appears with the highest clarity. In Part III, it considers whether that trend remains exceptional or whether it can claim some basis in earlier cases and can be established in all the relevant provisions dealing with competition law. In Part IV, the new approach is discussed as regard to its substance.

II. An emerging trend

1. Leading case: France Télécom In Europe, the rules of competition are enshrined in the of the European Union that were concluded by the Member States and that organize the modalities of coex- istence between the Member States. As in the United States, these rules are formulated in general terms—thus permitting interpretation by the European Commission which, in many regards, designs the policy carried out in the name of competition, under the guidance and supervision of the European courts. This situation signals the importance of the when it comes to analyzing what competition policy is about in the European Union. Traditionally, this case law is divided into three categories depending on the type of behavior adopted by companies and challenged by authorities. One category concerns —called “ of ” in Europe, although the two concepts do not entirely correspond with each other. Another category concerns anticompetitive agreements. And the last category concerns mergers or on operations amounting to concentrations, that is, consolidation of businesses. As regard to the concept of choice, the most developed body of case law has been adopted in the application of Article 102 of the on the Functioning of the

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10 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Paul Nihoul

European Union (TFEU),1 which prohibits dominant frms from abusing their position in markets. According to case law, Article 102 TFEU applies where a is domi- nated2 by a frm, and that frm that dominant position. Among the cases adopted in application of this provision, the most important one, in the context of this paper, is likely France Télécom3.

That case started with an investigation by the European Commission into practices adopted by the incumbent French telecommunications operator France Télécom (FT)4. FT was found to dominate the market for internet access services and was selling such services at a loss. The question arose whether and, if so, to what extent the charged by FT could be deemed predatory.

To be found predatory, prices charged by dominant frms must be below costs. In technical terms, they must be, at least, below total costs. Thus, the cost of producing all units must be higher than the revenues obtained when selling those units. When considered per unit, this implies that the cost incurred to produce any output unit must be higher than the charged for that unit.

Furthermore, these below cost prices must be part of a plan aimed at eliminating competitors and/or competition. The existence of such a plan can be established through a variety of means: emails, declarations, internal documents, recordings, etc. Sometimes, gathering is not easy and can be cumbersome. To facilitate the task of inves- tigators, the ECJ has held that a prima facie case exists where a dominant frm sells at a loss. In technical terms, it introduced a threshold based on . In technical terms, the Court introduced a threshold based on marginal cost. Under that case law, prices are presumed to be predatory where they are under marginal costs 5. In such a situation, there is no need of further evidence on the existence of a plan to eliminate competition. For the Court, it is hardly conceivable that a frm may sell units at such low prices—prices lower, even, than just the costs incurred to produce the additional

1 Consolidated Version of the Treaty on the Functioning of the European Union, [2008] O.J. C115/13, (last visited 29 Jan. 2016). 2 According to the classical defnition, that concept refers to the ability of a frm to behave independently of competitors, and of consumers. Under case law, that ability results from the that the frm has been able to build up through all sorts of means: access to international capital markets, large array of products offered to consumers, superior organization, etc. In some instances, a dominant position can be held by several frms acting in common. The application of the concept of collective dominance, however, has remained exceptional. 3 Case C-202/07 P, France Télécom v. Commission, [2009] E.C.R. I-2369. 4 It has given rise to the three kinds of instruments that can be obtained in a procedure applying European competi- tion law at the European level: a decision by the European Commission, a by the Court of frst instance (CFI), now the GC, and a ruling by the ECJ. The case has thus provided an opportunity to all bodies intervening in the application of European competition law. 5 There is no certainty as to whether this presumption can be reversed.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 11 “Freedom of choice”: the emergence of a powerful concept in European competition law units concerned, without covering any element pertaining to fxed costs6. For the Court, the motivation for such prices cannot be anything other than a desire to drive compet- itors out of business 7. For its , FT raised several objections—one of which was that an infringement should only be found if the dominant frm had the prospect of recouping, after compe- tition was eliminated, the revenues that were foregone while selling at a loss. This condition, the frm argued, was pervasive, although not explicitly mentioned, in European competition law. Furthermore, this condition was required, in the United States, for this sort of practice to be held illegal8. The argument was rejected, successively, by the European Commission, by the CFI, and by the ECJ. Among the decisions issued by these institutions, the one with the most relevance here is the ruling issued by the latter9. That argument was dismissed for various reasons, among which was the concern for consumer choice. For the Court, the prospect of cost recoupment is not essential for the practice to be found abusive. Supposing that the frm would not able to recover its losses, and would continue to charge low prices, this would not take away another source of harm that consumers would undergo: with the elimination of one or several competitors, the choices that are available to consumers in the would be reduced. As a result, the Court held that: [T]he lack of any possibility of recoupment of losses is not suffcient to prevent the undertaking concerned reinforcing its dominant position, in particular, following the withdrawal from the market of one or a number of its competitors, so that the degree of competition existing on the market, already weakened precisely because of the presence of the undertaking concerned, is further

6 Why would a frm sell an additional product at a price that is lower than the cost incurred to produce that additional product? In selling below marginal cost, the frm does not only renounce to cover all of its fxed costs. It accepts that the mere cost of producing the additional unit will not be paid for either. This, for the Court, cannot be explained otherwise than by a desire to eliminate competition. In my interpretation, the Court was probably seeking to differentiate situations on the basis of the level of loss sustained by the dominant frm. Sustaining a small loss is not the same as incurring a large one. It can be considered, legitimately, in my opinion, that a big loss probably implies that the frm is seeking other purposes than to sell or services. A diffculty, however, in trying to distinguish situations is to determine the moment when a loss can be deemed substantial. The distinction between average and marginal costs provided a sort of expedient threshold. 7 In France Télécom, the European Commission demonstrated that the prices charged by FT for the sale of internet access services were, at times, below average costs. That demonstration was accompanied by documents and declarations establishing that, in the analysis made by the Commission, an elimination plan indeed existed. In some instances, the prices were even below marginal costs. In conformity with the case law, the Commission deemed these practices illegal, during these periods, without seeking further evidence. 8 Under US law, is prohibited if, and to the extent, when engaging in such pricing practices, the frm had the ability of recouping the losses made by selling below cost. 9 As a reminder, the ECJ holds the ultimate authority to interpret European law including the rules on competition.

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12 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Paul Nihoul

reduced and customers suffer loss as a result of the limitation of the choices available to them10.

2. Landmark decision: The France Télécom ruling is important because it indicates that, under competition law, a reduction in the opportunities for exercising choice might be more important than low prices. But it is far from being the only decision in which the focus on choice appears prevalently. Another milestone in the emergence of choice as a possible standard is Microsoft11. The decision issued in that case by the Commission preceded France Télécom by a few months. It is possible that Microsoft may actually have provided the background against which the France Télécom ruling would be issued12.

In substance, the case13 raised two issues. First, is it permissible for a dominant frm to withhold information necessary to ensure the interoperability of products? Second, should a dominant frm be allowed to bundle products—thus prohibiting customers from purchasing one of these products without the other? These questions are discussed in the following paragraphs, with a focus on consumer choice.

2.1 Work group servers: interoperability information

In the case, Microsoft was challenged, inter alia, for withholding information regarding its work group server software. Networks often have several servers. Similar to personal computers (PCs) and electronic devices generally, such equipment would not work without software. In the relevant market, Microsoft was refusing to provide informa-

10 Case C-202/07 P, France Télécom v. Commission, para. 112. Interestingly, no similar statement appeared in the decision adopted by the Commission nor the judgment issued by the General Court. In these latter two instances, the word “choice” is not even mentioned. In answer to an argument raised by the dominant operator, the Commis- sion stated that the possibility of cost recoupment after the elimination of competition was not a condition to be fulflled for the application of the prohibition. Alternatively, the Commission argued that, should that condition be introduced, it would be satisfed in the case as, in its analysis, recoupment was indeed possible, and even probable. As far as it is concerned, the CFI did not even consider the second part of the analysis made by the Commission. It simply dismissed the argument by stating that loss recoupment did not have to be established. (CFI, 227-28) (Commission, 332-67). 11 Commission Decision COMP/C-3/37.792 — Microsoft, [2007] O.J. L 32/23. 12 Microsoft is an impressive decision by the degree of sophistication displayed in the reasoning developed by the Commission. For that reason, it must be considered, for our discussion, as an important element in the construction of the position adopted by the European institutions in the interpretation of Article 102 TFEU. That degree of sophistication is due, probably, in part, to the identity and the wealth of the company that was targeted. Microsoft is a jewel of the US economy. At the time of the case, it had the biggest capitalization worldwide. Hundreds of worked full-time on the case for the company for several years, whereas the Commission could only assign a few offcials—most of them involved in parallel cases at the same time. The decision issued in Microsoft is also impressive by the scope of the fne that was imposed on the frm: 497 millions —by far the largest ever, at that time, to be imposed on a single frm (even if the record was later to be broken by the one imposed on ). 13 The case gave rise to a decision by the European Commission, stating that the frm infringed Article 102 TFEU. The case went to the CFI, which upheld the decision. No appeal was lodged, with the consequence that the ECJ did not have a chance to express its views on the case.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 13 “Freedom of choice”: the emergence of a powerful concept in European competition law tion that would have made it possible for other software products to interact with servers equipped with the software designed by Microsoft. This issue was deemed important because Microsoft dominated the market. In European law, dominance refers to situations where frms build up considerable economic power allowing them to behave independently of consumers and/or competitors, that is, without having to fear that customers might substitute different products, or that competitors might engage in strategies allowing them to gain substantial market share14. In the present case at issue, most servers were equipped with software developed by Microsoft. In such a context, work group managers would not purchase server software that would not be compatible or interoperable with the one made by Microsoft, which, chances are, they had already acquired, and installed on their server(s). Interoperability was thus of great importance and, combined with the refusal by Microsoft to provide essential interoperability information, the situation placed clients in front of the following dilemma: purchase competing products and face technical faws as these products would not work properly in a Microsoft dominated environment; or opt for a fawless by engaging in a homogenous Microsoft based environment, but then renouncing any possibility of looking for software that would possibly better correspond to their needs, if this were necessary or desirable15. The latter alternative, the Commission stated, is not one competition policy should accept. With competition policy, enforcement agencies should strive to make sure that customers can choose the products they consider as best to ft their needs. Intervention is necessary wherever these possibilities are impaired or threatened because of behavior adopted by a dominant frm. “Due to the lack of interoperability that competing work group server products can achieve with the Windows domain architecture, an increasing number of consumers are locked into a homogeneous Windows solution at the level of work group 16 server operating systems” (emphasis added) . “Microsoft’s refusal to supply has the consequence of stifing in the impacted market and of diminishing consumers’ choices by locking them into a homogeneous Microsoft solution. As such, it is

14 For instance, a frm would be deemed dominant, under that defnition, if, and to the extent, it would be in a position to raise prices substantially, without being concerned about losing a signifcant number of clients—the latter being locked into a form of dependency vis-à-vis the frm, and the competitors being incapable of challenging the dominant frm by, for instance, maintaining clients. 15 Commission Decision COMP/C-3/37.792 — Microsoft, para. 706 (“When confronted with a ‘choice’ between putting up with interoperability problems that render their business processes cumbersome, ineffcient and costly, and embracing a homogeneous Windows solution for their work group network, customers will tend to opt for the latter proposition. Once they have standardised on Windows, they are unlikely to report interoperability problems between their client PCs and the work group servers. While this shows that there is interoperability between Windows client PCs and Windows work group servers, it does not prove the absence of abusive conduct or harm to customers. In fact, it screens out the antecedent conduct which had anti-competitively undermined customer choice in the frst place and had made the standardisation on Windows a preferred option” (emphasis added). 16 Commission Decision COMP/C-3/37.792 — Microsoft, para. 694.

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14 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Paul Nihoul

. . . inconsistent with the provisions of Article [102](b) of the Treaty” (emphasis added)17.

2.2 Multimedia software: practices Another issue examined by the Commission in the case was the integration of Micro- soft’s multimedia software, WMP18, into its PC operating system Windows. As is widely known, the share detained by Microsoft in the latter market was overwhelming (more than 90% worldwide).19 Windows was pre-installed on computers. Microsoft had also developed multimedia software, which it had included in Windows—thereby ensuring the availability of the software on all PCs equipped with Windows and making it superfuous for consumers to download or otherwise acquire other multimedia player software. This strategy prompted the quick decline of the US frm RealNetworks, which had initially encountered success with its then original streaming video software. The share obtained by RealNetworks in the market vanished while that obtained by Microsoft was growing exponentially. According to the analysis made by the Commission, that exponential growth was due to two elements. First, consumers did not seek to acquire other multimedia software but used the one pre-installed on their computers and integrated into Windows. Second, as customers were increasingly using WMP func- tionality, content providers tended to use that system to encode content—thereby reinforcing the trend by limiting content that could be provided by RealNetworks and other competitors. For the Commission and the European courts, Microsoft’s practices amounted, again, to an abuse: although it was a bit different from the one examined in the frst half of the case, the strategy created the same result, i.e., a situation where choice was reduced to an unacceptable level. First, consumers did not have any real chance to use other multimedia software as one was already pre-installed. Second, other software manu- facturers could not develop competing products that could then be offered to consumers. Content providers were concentrating their encoding activities on the standard devel- oped in WMP. They were not using other standards proposed by competing manufac- turers. This, in turn, implied that competitors could not develop alternatives, among which consumers would then have a possibility to choose. Consequently, the Commis- sion concluded that: “[I]t constitutes an abuse when an undertaking in a dominant position directly or indirectly ties its customer by a supply obligation since this deprives

17 Ibid., para. 782. 18 Windows Multimedia Player. 19 See Commission Decision COMP/C-3/37.792 — Microsoft, para. 431.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 15 “Freedom of choice”: the emergence of a powerful concept in European competition law the customer of the ability to choose freely his sources of supply and denies other producers access to the market” (emphasis added)20.

3. Most detailed analysis: Intel France Télécom and Microsoft are thus important elements in the discussion carried out here. But the most useful case to date is undoubtedly Intel21—a case that gave rise to a decision containing the fullest analysis, thus far, on the relevance of choice in the reasoning developed by the European institutions in the interpretation of Article 102 TFEU22. In that case, the US chip manufacturer Intel dominated the market for x86 Central Processing Units (chips or CPUs) used in computers. The frm was engaging in prac- tices aimed at hindering activities carried out by its main competitor AMD23 with the goal of driving it out of business. Of these practices, one took the form of naked restrictions24. Such restrictions consisted of payments made by Intel to computer manufacturers so that they would not sell equipment containing chips made by AMD. The other practice consisted of conditional rebates. These rebates were payments made to customers on the condition that they will place all or nearly all their orders with Intel—and not with AMD or other competitors. On both accounts, Intel was found in violation of Article 102 TFEU, and the Commis- sion ordered the payment of the biggest fne ever imposed on a single company25.

3.1 Payments to hinder AMD’s activities For each of these practice, the Commission provided a thorough analysis as to why, in its view, under competition policy, choice must be protected in markets. On naked restrictions, the Commission concluded that, as a result of the payments made by Intel, AMD had not been in a position to commercialize products that were in demand. This

20 Commission Decision COMP/C-3/37.792 — Microsoft, para. 835. 21 Case COMP/C-3/37.990 — Intel. 22 The case gave rise to a decision by the European Commission and an annulment procedure is pending before the General Court—with the possibility of an appeal to the ECJ. As the courts have had no opportunity to rule yet, the case does not provide an overview of the positions adopted by the three bodies involved in the enforcement of European competition law at the European level. This does not take away from the importance of the case for the discussion carried out here. 23 Advanced Micro Devices, Inc. 24 The market was defned as covering, worldwide, X86 chips for computers. Intel was found to be dominant as it held, on average, about 80% of the relevant market. See Case COMP/C-3/37.990 — Intel, para. 852. 25 Intel was fned 1,060,000,000 . For Microsoft, the fne imposed originally under Article 102 TFEU was 497,000,000 euros. The latter company faced other penalties in the course of the implementation of the decision.

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16 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Paul Nihoul resulted in harm for consumers, who were deprived of opportunities to make choices in the relevant market. “[E]ach OEM referred to in this section was planning the introduction of a specifc AMD-based product. Such products either existed or technical development or preparations for introduction to the market were well advanced. This was due to the fact that there was consumer demand for such AMD-based products”26. “In each case, Intel paid the OEMs to delay, cancel or otherwise restrict the commercialization of the planned AMD-based products. In each case, Intel’s conduct had a material effect on the OEMs’ decision-making in that they delayed, cancelled or otherwise restricted their commercialization of the AMD-based computers”27. “As a consequence, AMD- based products for which there was a customer demand did not reach the market, or did not reach it at the time or in the way they would have in the absence of Intel’s conduct. As a result, customers were deprived of a choice which they would have otherwise had”28.

3.2 Conditional rebates The second type of practice adopted by Intel was assessed by the Commission along the same lines. For the Commission, the rebates granted by Intel were designed to lure computer manufacturers away from purchasing competing chips. The practice resulted in AMD’s inability to place its products in computers. The computer manufacturers were not harmed directly and substantially, as they receive Intel’s payments29. But AMD was harmed—and so were ultimate consumers because they were deprived of opportunities to exercise choice in a context where demand existed for AMD-based equipment. “Intel was able to use the tool of conditional rebates that were capable of inducing loyalty and thereby limiting consumer choice and foreclosing the access of competitors to the market”30. “As a result of Intel’s rebates and payments, end-customers were artifcially prevented from choosing other products on the merits (price and quality of the respective x86 CPUs), since Intel’s conduct prevented the competitors’ product from being offered with certain individual OEMs and with MSH. In this case, this

26 Case COMP/C-3/37.990 — Intel, para. 1677. 27 Ibid., para. 1678. 28 Ibid., para. 1679. 29 Using AMD chips might have developed further computer markets, to the beneft of computer manufacturers. Through its rebates, Intel did not attempt to compensate for any loss in revenue that computer manufacturers could possibly undergo through not developing AMD-based equipment. The rebates were designed, according to the Commission, so as to just provide the necessary incentive for these manufacturers to be satisfed with the immediate payment they received, even if they had to forego, for that reason, the possibility to develop other sorts of products in demand. 30 Case COMP/C-3/37.990 — Intel, para. 1598.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 17 “Freedom of choice”: the emergence of a powerful concept in European competition law excluded, limited or delayed AMD x86 CPUs in the market. As such, Intel’s exclu- sionary practices had a direct and immediate negative impact on those customers who would have had a wider price and quality choice if they had also been offered the product of their favorite OEM and/or retailer with x86 CPUs from Intel’s competitors”31. III. The scope of the new approach

1. Foundational cases The attention paid to the three cases discussed in the previous sections of this paper should not be interpreted as an indication that the European institutions were silent, earlier, on choice in the enforcement of competition law. Arguably, the concept does not always appear as prominently in decisions and judgments. But it has always been there. For instance, it was present, and considered as an essential element, in the three cases where the European approach to abuses by dominant frms was developed. Indeed, choice was given a prominent position in the frst case involving Article 102 TFEU: Hoffmann La Roche32, where the dominant frm—a Swiss pharmaceutical company—had provided clients rebates which, as in Intel, ensured that purchasers would not buy products from competitors. In their decisions, the Commission and the Court defned the notion of abuse, in the context of dominance, as encompassing behavior meant to hamper or remove the freedom of choice of purchasers, and to deprive or restrict purchasers’ possible choices. “The conduct of Roche . . . constitutes an abuse of a dominant position, because by its nature it hampers the freedom of choice . . .33 and restricts competition between bulk vitamin manufacturers in the common market”34. “The fact of agreeing with purchasers that they will buy all or a very large proportion of their requirements from only one source by its very nature removes all freedom of choice from purchasers”35. “Obligations . . . to obtain supplies exclusively from a particular undertaking . . . are

31 Ibid., 1602. 32 Commission Decision 76/642/EEC — Vitamins (Hoffmann-La Roche), [1976] O.J. L 223/27. 33 In that excerpt, the Commission also notes that the behavior adopted by Roche hampers the equality of treatment of purchasers. This echoes Article 102 TFEU, under which dominant frms may not impose different terms to partners located in similar conditions. 34 Commission Decision 76/642/EEC — Vitamins (Hoffmann-La Roche), para. 22. 35 Ibid., para. 24.

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18 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Paul Nihoul incompatible with the objective of undistorted competition . . . because . . . they are not based on an economic transaction which justifes this burden or beneft but are designed to deprive the purchaser of or restrict his possible choices of sources of supply and to deny other producers access to the market”36. The concept of choice appeared with the same prominence in the second case where Article 102 was applied—United Brands37, which featured a dominant frm preventing the sale of bananas to other Member States and refusing to sell its products to distributors that sold bananas from competitors. For the Commission, this last practice amounted to an abuse by virtue of the effect produced on the freedom of purchasers— who could not freely choose what they saw as corresponding to their needs as they would otherwise lose the commercial relationship with the main supplier, which was essential to them: A buyer must be allowed the freedom to decide what are his business , to choose the products he will sell, even if they are in competition with each other; in effect to determine his own sales policy. When dealing with a supplier in a dominant position, such buyer may well fnd it worthwhile to sell several competing products, including those of the dominant frm, and to advertise them, but to an extent which he must remain free to decide for himself38. The same prominence is also given to the concept of choice in the third case applying

Article 102–Michelin I39, which was a case where the dominant frm similarly used rebates to tie purchasers. The Commission and the Court concluded that an abuse had been committed as these rebates created a situation where the opportunity for purchasers to choose their products was unduly restricted. “[Michelin’s] commercial conduct constitutes an abuse of a dominant position. It restricts dealers’ freedom of choice and results in inequality of treatment as between tyre dealers. The access of other tyre producers to the market is also restricted”40. “In deciding whether Michelin NV abused its dominant position in applying its discount system it is . . . necessary . . . to investigate whether, in providing an advantage not based on any economic service justifying it, the discount tends to remove or restrict the buyer’s freedom to choose his sources of supply, to competitors from access

36 Case 85/76, Hoffmann-La Roche v. Commission, [1979] E.C.R. 461, para. 90. See also paras. 103, 106. 37 Commission Decision 76/353, Chiquita (United Brands), [1976] O.J. L 95/1. 38 Ibid., s. II, para. 3. 39 Commission Decision 81/969/EEC, Bandengroothandel Frieschebrug BV/NV Nederlandsche Banden-Industrie Michelin (Michelin I), [1981] O.J. L 353. 40 Ibid., para. 37.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 19 “Freedom of choice”: the emergence of a powerful concept in European competition law to the market, to apply dissimilar conditions to equivalent transactions with other trading parties or to strengthen the dominant position by distorting competition”41. “Such a situation is calculated to prevent dealers from being able to select freely at any time in the light of the market situation the most favourable of the offers made by the various competitors and to change supplier without suffering any appreciable economic disadvantage. It thus limits the dealer’s choice of supplier and makes access to the market more diffcult for competitors. Neither the wish to sell more nor the wish to spread more evenly can justify such a restriction of the customer’s freedom or choice and independence. The position of dependence in which dealers fnd themselves and which is created by the discount system in question, is not there- fore based on any countervailing advantage which may be economically justifed”42.

2. Subsequent case law The variations in the language used in these cases as regard to the importance of choice have been remarkably limited. But some of them—specifcally, the most important ones—are worth mentioning. In Napier Brown43, the dominant sugar manufacturer in the British market, British Sugar, was attempting to tie purchasers to its products through various types of price-related strategies. The Commission found that: Such an offer44, which has the effect of requiring certain existing [British Sugar] customers to “tie-in” other companies to purchase exclusively from [British Sugar] in order to receive a reduced price for sugar, is . . . designed to deprive the purchasers in question of, or restrict their possible choices of, sources of supply and furthermore deny other producers . . . access to the market (emphasis added)45. In Tetra Pak II 46, the dominant frm dominated various markets relating to liquid packaging, including the cartons where the liquid is poured, the machines involved in the packaging process as well as related services such as service and repair. It was using various practices to eliminate competition. For instance, clients purchasing packaging machines were compelled to use the repair and maintenance services

41 Case 322/81, NV Nederlandse Banden-Industrie Michelin v. Commission, [1983] E.C.R. 3461, para. 73. 42 Ibid., para. 85. 43 Commission Decision 88/519/EEC, Napier Brown v. British Sugar, [1988] O.J. L284. 44 The offer in question involved rebates. 45 Commission Decision 88/519/EEC, Napier Brown v. British Sugar, para 74. 46 Commission Decision 92/163/EEC, Tetra Pak II, [1992] O.J. 1992, L 72/1.

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20 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Paul Nihoul provided by the frm for these machines. The behavior was found abusive as it prevented clients from making their own choices. “[A] requirement that the customer obtain maintenance and repair services exclusively from Tetra Pak closes the door to any competitor on the maintenance and repair services market. It also binds the customer completely to Tetra Pak, not allowing him any freedom to make his own choice” (emphasis added)47. “The Commission wonders why, if the claim that only Tetra Pak cartons may, for technical reasons, be used on Tetra Pak machines is true, this group sees the need to make such use the subject of a contractual obligation. If there is genuinely no technical alternative, such an obligation is unnecessary. However, if such an alternative does exist, the choice should be left to the user, and any obligation to purchase solely from an undertaking which is in a position such as that occupied by Tetra Pak should be prohibited” (emphasis added)48. In Michelin II49, new proceedings were initiated against the Michelin for, again, rebate related practices. The Commission and the CFI50 used the language introduced in Hoffman and the earlier Michelin case51. In its ruling, the CFI added: Because it was loyalty-inducing, the quantity rebate system tended to prevent dealers from being able to select freely at any time, in the light of the market situation, the most advantageous of the offers made by various competitors and to change supplier without suffering any appreciable economic disad- vantage. The rebate system thus limited the dealers’ choice of supplier and made access to the market more diffcult for competitors, while the position of dependence in which the dealers found themselves, and which was created by the discount system in question, was not therefore based on any counter- vailing advantage which might be economically justifed (emphasis added)52. Most recently, proceedings were initiated against the German telecommunications operator Deutsche Telekom for price squeeze practices53. In its ruling, the ECJ referred to the ruling issued in France Télécom that was discussed in an earlier section of this paper. For the Court, these prices were abusive since, in the absence of competitors, they would result in consumers not being allowed to choose their supplier.

47 Ibid., para. 108. 48 Ibid., para. 109. 49 Commission Decision 2002/405/EC, Michelin II, [2002] O.J. L 143/1. 50 Case T-203/01, Michelin v. Commission (Michelin II), [2003] E.C.R. II-4071. There was no appeal to the ECJ. 51 See ibid., para. 60 (quoting Hoffmann and Michelin I). 52 Case T-203/01, Michelin v. Commission (Michelin II), para. 110. See also Commission Decision 2002/405/EC, Michelin II, para. 331. 53 Commission Decision 2003/707/EC, Deutsche Telekom AG, [2003] O.J. L 263/9; Case T-271/03, Deutsche Telekom v. Commission, [2008] E.C.R. II-477; Case C-280/08 P, Deutsche Telekom AG v. Commission, [2010] E.C.R. I-9555.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 21 “Freedom of choice”: the emergence of a powerful concept in European competition law

“Article [102 TFEU] prohibits a dominant undertaking from . . . adopting pricing practices which have an exclusionary effect on its equally effcient actual or potential competitors, that is to say practices which are capable of making market entry very diffcult or impossible for such competitors, and of making it more diffcult or impos- sible for its co-contractors to choose between various sources of supply or commercial partners, thereby strengthening its dominant position by using methods other than those which come within the scope of competition on the merits” (emphasis added)54. “[T]he margin squeeze also has the effect that consumers suffer detriment as a result of the limitation of the choices available to them and, therefore, of the prospect of a longer-term reduction of retail prices as a result of competition exerted by competitors who are at least as effcient in that market” (emphasis added)55.

3. Beyond words: choice as a mechanism As appears from these cases, choice has thus been given a relatively prominent in the application of Article 102 TFEU since the beginning of European integration. But not all decisions or rulings issued in application of the provision contain explicit references to the concept. For instance, in 2006 the Commission adopted the decision in Tomra.56 The decision does not refer even once to the concept of choice—even though it was adopted after Microsoft, where the concept was used extensively, and only a limited time before Intel, which to date contains the fullest analysis of the function that choice plays in European competition policy. Tomra concerned practices used by a frm found dominant in the market for recycling machines (liquid containers) in various Member States. Customers were retail outlets installing recycling facilities on their premises to collect bottles or cans used by fnal consumers. According to the Commission, Tomra infringed Article 102 by imposing, on its clients, either exclusivity or quasi-exclusivity obligations. In the case, the Commission followed a reasoned three step-analysis—which correspond to the three main issues to be addressed in an application of Article 10257.

54 Ibid., para. 177. 55 Ibid., para 182. 56 Case COMP/E-1/38.113 – Prokent-Tomra, [2008] O.J. C219/12. 57 In addition to these steps, agencies and courts applying the provision must determine whether the entity involved in the proceedings constitutes an undertaking for the application of the rules of competition. They must verify that the internal market is affected—this being a condition to apply European competition law in addition to, or instead of, national competition rules. The dominant position must be held on a substantial part of the common market. And the possibility of an objective justifcation must be evaluated, if the practices at stake are found to be prima facie abusive. This last condition is examined later in this paper.

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22 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Paul Nihoul

Among these steps, the frst is the defnition of the relevant market. In Tomra, the Commission basically sought to determine what machines would be regarded as substitutable by customers. In doing so, the Commission was trying to determine whether, and to what extent, a signifcant ratio of customers would choose one instead of another if the price underwent a small but signifcant non-transitory increase in price (SSNIP test)58. In the second step, after defning the relevant market, the Commission sought to deter- mine in Tomra whether the frm involved in the proceeding dominated the market. Under case law, dominance refers to a situation where a frm has the ability to carry out its business activities in the relevant market, to a signifcant extent, independently from possible reactions by consumers and/or competitors due its business decisions. Suppose that the frm would decide to raise its prices. An examination of dominance would consist of trying to determine whether, and to what extent, customers would be ready to react by choosing another supplier that is pricing the same product lower. This would entail an analysis of the possibility for competitors to increase their output to serve customers disappointed by the offers made by the frm involved59. The last step in the reasoning developed in Tomra was whether the behavior adopted by the dominant frm could be deemed abusive. On that point, the Commission concen- trated on the ratio of transactions which, among those carried out in the relevant market, could be deemed “contestable”. The concept refers to a division made by economists among transactions carried out in dominated markets. For economists, some of these transactions are “non-contestable”. This means that, for these transactions, customers have no choice but to deal with the dominant frm. For a variety of possible reasons, they could not choose another supplier in the event they are not be satisfed with the frm. This may be due, for instance, to capacity constraints weighing on competitors and preventing them from increasing output to serve dissatisfed customers even if they wanted to. Such transactions are labelled non-contestable since, for these constrained suppliers, competitors are not able to challenge the position of the dominant frm as a viable supplier. For the other transactions, which are called “contestable”, some choice is still possible. Customers may decide to seek supplies from the dominant frm—or they may prefer

58 The defnition of the relevant market also involves the determination of the substitutability of products in the eyes of producers or suppliers. In this context, the question is whether frms involved in adjacent activities would consider choosing as a possible sector the market as defned on the basis of demand substitutability. The same question is raised for the defnition of the geographic market, both as regard to customers and suppliers. 59 As appears from the case law, the existence of a dominant position may result from a variety of reasons—all based on the circumstances of each case. One reason could be that competitors lack the capacity to serve dissatisfed customers because they are not in a position to raise their output. Another could be that they do not have the information necessary to identify unsatisfed customers. Competitors could also not have access to a channel allowing them to serve more customers. (For example, in Microsoft, RealNetworks could not reach customers because of the integration of WMP into Windows.)

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 23 “Freedom of choice”: the emergence of a powerful concept in European competition law dealing with other suppliers. The consequence is that competition can still be said to exist as regard to these transactions. In Tomra, it clearly appears that, when seeking to determine whether the behavior adopted by the dominant frm amounted to an abuse, the Commission concentrated on the contestable part of the market. The Commission, however, was not challenging, in itself, the dominant position held by the frm. Indeed, under case law, dominance is not prohibited per se. The attention of the Commission was rather focused on the contestable transactions. Clearly, the Commission’s purpose was to prevent the domi- nant frm, through its behavior, from pre-empting competition in the contestable part of the market where competition remained effective—i.e., where customers still had a choice between suppliers. This discussion demonstrates that, in each and every step followed by the Commission, choice was indeed present, even if the word does not appear explicitly in the decision. In defning the relevant market, the Commission analyzed the choices made by customers60. When assessing , it tried to assess the opportunities for choice that were offered to customers, thus attempting to determine whether the frm had become for them an unavoidable partner. When analyzing behavior, it sought to identify whether customers were still free to choose other suppliers for the contestable part of the market.

4. and anticompetitive agreements The cases examined thus far arose in the context of Article 102 TFEU—thus raising the question: is the importance of choice limited to that provision or is the analysis also valid in regard to the other rules composing European competition law? In substance, these rules can be divided into two categories. Some apply to undertak- ings. They indicate what behavior frms must avoid in markets so as not to inhibit competition. The other ones concern public authorities. They stipulate what these authorities cannot do in markets—with the main message that, in most circumstances, public authorities cannot grant undertakings fnancial or regulatory advantages that would distort the position of frms in markets, jeopardize the competitive process, and unduly create inequalities among market participants.

60 The Commission also analyzed the economic decisions contemplated by manufacturers, in the context of supply substitutability.

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24 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Paul Nihoul

In this paper, we are not concerned with the latter category of rules—those which apply to public authorities. Such rules indeed rest on a logic, and on principles, which are specifc. My focus here is on the rules applicable to undertakings. These rules have among them a common feature: they all involve intervention on the part of enforcers because market power has been acquired in a relevant market. In Article 101 TFEU, market power is addressed through the prohibition of anticompetitive agreements concluded by undertakings. The purpose is to avoid the adoption of such agreements because the consequence would be the market would not function properly. In the context of merger , the main idea is to ensure that the frms combining their activities will not create, through their concentration, a situation where, as a result of the acquisition or reinforcement of market power, markets will likely cease to function adequately. As appears from this brief presentation, these rules have a common concern, which is the effect that market power can have on markets; the object being examined under these various provisions depends on the circumstances where the issue is raised. It thus comes as a no surprise that the application of these two sets of provisions (merger control and the prohibition of anticompetitive agreements) are submitted to the same three steps that have been examined in connection with Article 101 TFEU. Take merger control. To apply the rules regarding the concentration of undertakings, enforcers seek to defne the relevant market(s). To that effect, they analyze choices actually or potentially made by customers between products that could perform the same type of function. Enforcers will also assess the strength that parties have in the market(s) so defned, relative to the possible force and vigor displayed by other market participants. Then, they will examine the effect that the merger might have in the relevant markets. If the effect is that market power would be acquired, or reinforced, the conclusion will be that the deal cannot go through. In the context of this paper, I am more concerned with the third step of the Commission’s competition analysis, since my purpose is to determine in what circumstances a specifc behavior cannot be adopted as a result of competition law. The third step is also present—along with the two other ones—in the application of Article 101 TFEU. After defning market(s) and possibly assessing the existence of market power, European enforcers analyze, in the context of Article 101, the effect that the agreements have in the relevant markets. And again, choice related considerations appear central in these determinations. In substance, the Commission and the European courts examine, in this context, whether the agreements would negatively affect consumers’ choices, if they are allowed to exist. The word may not always appear, but the substance of the analysis of the enforcers leaves no doubt. Here also, a prohibition will be expressed if, as a result of such

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 25 “Freedom of choice”: the emergence of a powerful concept in European competition law agreements, customers would lose, to an unacceptable degree, their ability to switch to other suppliers—thus losing their ability to choose their economic partner.

IV. Analysis of the new approach

1. “Switching” The discussion on the main steps involved in the application of Article 102 tends to indicate that, even where the word does not appear, choice is present as a mechanism in all Article 102 cases. The possibility for customers to choose products indeed lies at the heart of market defnition. It is central in the determination of whether a frm holds a dominant position. And it is inherent to the notion of abuse where, when deciding whether a behavior is abusive, the European institutions seek to ensure that competition—or choice—subsists in the part of the market that can still be deemed contestable. To be more precise, one should state that the central feature in the steps leading to the application of Article 102 is the possibility of “switching”—the possibility for customers to turn to one or several other suppliers, or partners, when it is not satisfed with the performance displayed by the dominant frm. Indeed, when defning the relevant market in the context of Article 102 TFEU, the Commission and the European courts assess whether, in reaction to a small but signifcant non-transitory increase in price, customers would switch from product A to product B—in which case the latter would be regarded as substitutable with the former61. In the market so defned, they would then seek to determine whether, and to what extent, customers would still have the ability of switching from one supplier to another—more specifcally, from the frm under investigation to another supplier. Should that possibility not exist any longer, the conclusion would be that the market is being dominated.

61 Similarly, the Commission and the European courts wonder whether producers would switch their facilities from the production of C to the production of B if prices increased in the market for the latter product in the manner described. And, again, they follow the same approach when it comes to defning the geographic market—asking to what extent customers would indifferently purchase in location Z or W, and whether producers established elsewhere would be able to start selling their products in these locations in reaction to such a price increase.

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26 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Paul Nihoul

Dominance having been established, the Commission and European courts would examine whether, and to what extent, through its behavior, the frm has attempted to hinder the ability of customers to switch to the contestable part of the market. If the frm’s behavior does hinder switching, the conclusion would be that an abuse has been committed62.

2. All economic partners Choice is thus important in decisions and rulings adopted in the implementation of competition policy within the European Union—but whose choice are we talking about? With regard to the determination of the people or entities affected by possible abuses, there appears to be a certain ambiguity in the as well as, more generally, in European competition law as a whole. This ambiguity arises from the variation in the terminology used by the Commission and the European courts in their decisions. Arguably, these variations may be due, to a certain extent, to the circumstances of each case. For instance, it makes sense—partly at least— to describe the impact on consumer choice of the integration of WMP in Windows by Microsoft. People affected by the integration are, indeed, to a large extent fnal consumers— i.e., individuals who use their PC in a private setting as opposed to a business environment63. By contrast, using the word “consumer” may be less adequate when discussing the effect of a possible abuse on opportunities for choice of the fve most important worldwide computer manufacturers—who cannot really be described as individuals purchasing goods for their personal use64. Yet, that word was used by the Commission to refer to these businesses in various passages of the decision adopted in Intel. So, ultimately, who is concerned by that choice mechanism? In other words, who is protected by the Commission and the European courts when it comes to assessing behavior adopted by dominant frms? The answer would appear to be straightforward:

62 For instance, in Tomra, it was found that, through obligations and fnancial incentives, the frm was seeking to impose on its customers an obligation to place with it all their orders or an overwhelming part of them. The same pattern took place in Intel where, through rebates and naked payments, the frm sought to avoid the possibility that the main computer manufacturers would place orders with AMD. In Microsoft, the Commission and the CFI found that, by refusing interoperability information, the frm was seeking to undermine the possibility for customers to choose competing server software. The same conclusion was reached as regard to WMP where, as a result of the integration of its multimedia software in Windows, Microsoft was rendering meaningless any alternative that competitors could come up with. 63 Even in that situation, the word “consumers” may not be entirely appropriate. Personal computers are not only used by private individuals—they are also used by businesses. To refect that variety of possible users, “customers” might have been more appropriate. 64 Traditionally, the term “consumer” is used, in European law, as designating individuals (as opposed to entities) acting in a private (as opposed to business) capacity. See e.g. N. Reich, H-W Micklitz, P. Rott, European Consumer Law, Intersentia, pp. 1-36 and s. 9.3.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 27 “Freedom of choice”: the emergence of a powerful concept in European competition law in the context of Article 102 TFEU, any type of economic actor involved in choices concerning products or services offered by a dominant frm or by other businesses. In the context of this paper, the purpose is not to criticize these variations in terminology. For our discussion, I only note that the use of words by the Commission and the European courts in these cases do not appear to result from a careful assessment of the meaning or connotation that could be conveyed. “Consumers”, “customers”, ”clients”, “users”, “buyers”, “purchasers”—to name a few—tend to be used interchangeably in decisions and rulings65. To some extent, the variation in terminology serves the demonstration proposed here, as it indeed suggests that the identity of the persons or entities involved is immaterial. From this uncertainty as to what category of users is concerned, one can probably infer that the essential point, in that regard, is not who is affected—but what. What is impacted, as a matter of fact, is choice—whoever may be involved. Whatever their status or the category they belong to, the dominant frm is attempting to diminish and, possibly, to eliminate the ability of customers to switch to other suppliers when they are not satisfed with the products or services provided by the dominant frm. As appears from the case law, dominant frms seek to impede choice as a step towards eliminating competitors and competition. And they seek to eliminate competitors and competition to diminish, again, the power that customers would otherwise have in competitive markets to turn to other suppliers.

65 For a more complete analysis, see P. Nihoul, “The Status of Consumers in European Directives”, Yearbook on Consumer Law, 2009, pp. 67-106. See also, by the same author, “Is Competition Law Part of Consumer Law?”, in Josef Drexl, Warren Grimes, Clifford Jones, Rudolph Peritz and Edward Paine (ed.), More Common Ground for International Competition Law, Edward Elgar, Northampton, 2011, pp. 46-59. The only setting where some importance is granted to terminology in the feld of competition law would appear to be when the Commis- sion devises communications meant for the public. In my book La Concurrence et le droit, I have proposed a division into three categories the information produced by the Commission in the feld of competition law. The frst category would consist of documents (internet pages, etc.) prepared for the public, and intended to explain why competition policy is important for citizens. In these communications, the emphasis is on advantages expected from competition for individuals, that is, fnal consumers. The second category would be made of decisions adopted by the Commission in concrete, specifc cases. In these decisions, one can rarely detect any form of specifc attention paid to the situation of fnal consumers. The attention is instead on concepts, the existence of which governs the application of the provision (abuse of dominance, relevant market, etc.). Between these categories, a middle ground would contain more general, but technical information—guidelines, discussion papers, , etc. These documents announce policies to be carried out in specifc sectors, or regarding specifc types of behavior and situations. As such, they also focus on concepts like those mentioned above. At the same time, they are more general than decisions and can be read by a more general audience, without going so far as being meant for the public. Thus, it may happen that, in this last category of instruments, some attention may be devoted to publicizing the advantages for citizens derived from competition.

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28 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Paul Nihoul

3. Why did they not switch

Independent of who they are, customers66 are scrutinized when it comes to assessing behavior adopted by dominant undertakings on the contestable part of the market. In decisions and rulings, one can notice an increasing attention being placed, by the Commission and the European courts, on the specifc moment when, although they could still choose products provided by other suppliers, these customers ultimately turn to the dominant frm and, as a result, increase its dominant position in the relevant market. Interestingly, dominant frms claimed, in all the cases examined above, that their increase in market share was due to business superiority. Indeed, there would be no legitimate justifcation for an authority to intervene, on the basis of Article 102 TFEU, against an undertaking for the mere reason that its products are excellent, and preferred by customers. But in the last few years, this claim has been extensively challenged. Typically, the dominant frm would provide surveys and analysis aimed at demonstrating its superi- ority—to which the Commission would respond by pointing to elements, in these studies, indicating that the success met by the frm was due, rather, to its behavior, which could be considered abusive. For instance, in Tomra, the Commission, provided statistics demonstrating that the market share held by the dominant frm decreased during the periods when the domi- nant frm did not impose on its customers exclusivity or quasi-exclusivity constraints, customers turned to competitors. Meaning, for a variety of possible reasons67, customers switched to other suppliers when they were not prevented from doing so. Similarly, in Microsoft, the Commission provided rankings prepared by specialized reviews about the performance of multimedia software. In most of these rankings, the product designed by RealNetworks was considered as being of a higher quality. This higher quality, however, did not prevent the market share held by RealNetworks from declining steadily while the share held by Microsoft was dramatically soaring. The Commission concluded that the discrepancy between the declared by users and the economic decisions ultimately made by them to purchase WMP could only be

66 This word is used, throughout the paper, to refer to those acquiring goods or services from dominant frms. Arguably, competition also protects economic actors located upstream in the supply chain (suppliers) against abusive practices adopted by dominant buyers. This topic is beyond the scope of this paper. 67 As was the case for the reasons explaining the acquisition of a dominant position by a frm, the reasons explaining that customers may prefer other suppliers may be diverse—and are often specifc to the circumstances of each case. In Intel, for instance, the computer manufacturers mentioned various advantages of the chips made by AMD as a reason explaining that they were contemplating switching to that frm away from the dominant frm for a part of their supply.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 29 “Freedom of choice”: the emergence of a powerful concept in European competition law due to the diffculties, orchestrated by the dominant frm, for customers to turn to the products made by competitors68. In the same case, the Commission referred to a survey carried out by a consulting company and provided by Microsoft to establish the superiority of its products. But, contrary to its expectation, the survey was interpreted by the Commission as indicating that all meaningful differences between the products could be explained by the following problem considered crucial by the Commission: customers would not chose competing products because there was no guarantee that such products would interoperate with software designed by Microsoft—software that had become the standard in the market. Thus, for the Commission, the success encountered by Microsoft was not due, neces- sarily, to the superiority of its products, but rather to the fact that, contrary to business traditions in the sector, it was refusing to provide information essential to ensure interoperability on its networks69.

4. The decisive reason But among all the cases recently handled in Europe dealing with Article 102 TFEU, Intel provides the best illustrations of the focus increasingly placed by the Commission on the reason why, for the contestable part of the transactions carried out in the relevant market, customers ultimately opted for the dominant frm in a context where, absent the behavior adopted by the frm, they would have opted for competing products. In the decision, the Commission successively reviewed the business decision taken by the major computer manufacturers to deal with the dominant frm for that part of their transactions. In the following paragraph, I analyze the review conducted by the Commis- sion. In its decision, the Commission provided evidence that, during the period under investigation, was actively considering purchasing part of its supplies from AMD. For Dell, such a decision would make sense from a business perspective. The chips made by AMD presented various advantages, in terms of price and quality. “Dell, which at the time was 100% Intel-exclusive, was actively considering switching a share of its x86 CPU supplies to AMD, whose products it recognised had improved and which in its view offered certain price and performance advantages”70. “However, given the conditional MCP rebates . . . Dell remained exclusively loyal to Intel”71. “[T]

68 Commission Decision COMP/C-3/37.792—Microsoft, paras. 647–65, 699. 69 Ibid., paras. 948-51. 70 Case COMP/C-3/37.990 — Intel, para. 931. 71 Ibid., para. 932.

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30 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Paul Nihoul he Intel rebates were aimed at infuencing that choice and actually were one of the factors behind Dell’s choice, and more precisely ‘an important part’”72. “[As a result of conditional rebates,] customers which, on the basis only of competition on the merits, may have awarded a part of their purchases to a competing supplier, may prefer to source all or nearly all of their inputs from the dominant company in order to obtain the beneft of the discount”73. According to the Commission, the same scenario unfolded with Hewlett Packard (HP)—at that time the second largest manufacturer worldwide in terms of computer sales. As appears from the Commission’s decision, there was evidence that, during the period under consideration, HP was preparing to integrate AMD chips into some products as a result of demand expressed by fnal consumers. It however did not, ultimately, because Intel provided rebates conditional upon HP not dealing with Intel’s competitor. According to the Commission, the rebates were specifcally calculated to annihilate the business advantage that HP would have obtained by placing AMD chips into some of its products. “HP was the frst large OEM to offer . . . a business desktop with an AMD x86 CPU. The launch of that product by HP derived from a demand from US IT managers for an AMD-based desktop from a top tier OEM. According to an HP internal memo, 343 US IT managers had petitioned for an AMD based desktop from a top tier OEM. In addition, AMD-based corporate desktops had already won several big tenders . . . HP also published a press release in which it stated that it had received ‘inquiries from large companies about Athlon based machines’ and that HP ‘didn’t rule out the possi- bility that HP might use Hammer [the next generation of AMD x86 CPUs] too in some machines.’ . . . The press release . . . stated that HP considered that AMD’s new architecture for PCs and servers . . . had ‘very interesting performance and cost attri- butes’ and was considered to be ‘a disruptive product to Intel’”74. “However, despite its plans for a signifcant deployment of AMD-based corporate desktops, HP ended up shipping only limited amounts of such products, representing less than 5% of the x86 CPUs purchased by HP for that segment”75. In its decision, the Commission also described the situation of Media-Saturn-Holding (MSH)—another major computer manufacturer. In its review, the Commission noted that the manufacturer had been actively seeking to purchase products from AMD. Such a strategy made a sense given the lower prices charged by that frm. It also sought to produce computers based on non-Intel chips to explore the possibility that some

72 Ibid., para. 936. 73 Ibid., para. 938. 74 Ibid., para. 952. 75 Ibid., para. 953.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 31 “Freedom of choice”: the emergence of a powerful concept in European competition law diversity might be requested by markets. For these reasons, it repeatedly negotiated with Intel to see whether it would be willing to maintain its rebates if some chips were bought from AMD. But the request was not accepted as Intel was demanding exclusivity. For that reason, MSH did not purchase AMD chips: “In MSH’s perception, certain AMD-based products constituted a competitive and attractive alternative to comparable Intel products, in particular with regard to specifc price ranges . . . Against that background, MSH has repeatedly strived to negotiate an exception from its exclusivity agreement with Intel for cases in which ‘a certain AMD processor is clearly and verifably more competitive and cheaper’, . . . or at least ‘for the sales of specifc brand products equipped with AMD processors . . . ’ However, these endeavours were eventually unsuccessful”76. “MSH has ‘repeatedly reviewed its purchasing strategy’ and thus reconsidered its exclusive relationship with Intel in view of the resulting lack of product variety and the apparent lack of competitiveness of Intel x86 CPUs in the entry price ranges. As a result, MSH has repeatedly entered into with AMD ‘to explore whether, under terms potentially offered by AMD, terminating the exclusive sales of Intel equipped computers would be commercially sensible for MSH’”77. “However, it was clear to MSH that a change in its supplier strategy would lead at least to a substantial and disproportionate reduction of total payments from Intel, although there was some uncertainty as regards the amount of payments MSH would lose if it switched even minor parts of its demand to AMD . . . Against that background, MSH ‘has to date always considered that the commercial offers made by AMD would not be attractive enough to MSH from a commercial point of view’, . . . and has, in fact, stayed 100% loyal to Intel”78. The last situation reviewed here is that of the computer manufacturer Lenovo. As indicated in the decision, the frm was convinced that the chips provided by AMD had to be purchased. They provided the perfect material for the submarket targeted by that manufacturer: they were cheaper than the corresponding products proposed by Intel; and the manufacturer found it advantageous, from a business point of view, to have a certain diversity in its sources of supply—rather than depend on just one supplier. Despite these various reasons, which made a lot of sense from a business point of view, the manufacturer dropped its intention to purchase AMD chips—and remained 100 % Intel during the period considered.

76 Ibid., para. 997. 77 Ibid., para. 998. 78 Ibid., para. 999.

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32 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Paul Nihoul

“Lenovo . . . had numerous business reasons to introduce AMD-based notebooks in parallel with its already existing Intel based notebooks. Most importantly, Lenovo experienced growing market demand for AMD x86 CPUs . . . Lenovo’s intention to introduce AMD-based products was particularly driven by the fact that . . . ‘AMD has widespread penetration’; . . . ‘AMD Has the highest penetration in the market Lenovo is targeting for growth’; ‘AMD gaining momentum in Notebooks’; ‘AMD Gaining Momentum in the Enterprise; AMD technologies are competitive; Lenovo sales teams are asking for an AMD alternative’; ‘AMD CPU Prices Are Signifcantly Below Intel; ASP Gap growing due to Intel ASP increasing while AMD ASP is decreasing’; ‘AMD Gaining [geographical area] Market Share EXPECTATIONS: Large CPU cost gap will continue to drive AMD share; [Lenovo notebook product] will increase mobile share’ . . . AMD CPUs were also cheaper in segments critical to Lenovo. In some executives’ views, ‘the combination of price and performance favoured at times AMD over Intel’”79. “In addition to AMD’s competitiveness and growing demand for AMD-based notebooks, Lenovo recognised that pursuing a dual-source strategy for notebooks, as it already did for its desktops, would result in more advantageous business relationships and commercial terms with both AMD and Intel, and would also secure supplies in times of ”80.

5. Several considerations In some decisions analyzed here, choice is the only consideration mentioned to justify intervention81. But this is far from being common. In many cases, choice is joined by other considerations—and no indication as to which has priority and/or how they possibly integrate. In Microsoft, the Commission mentioned two considerations to support its fnding that an abuse had been committed: the restriction of choice opportunities for customers and the negative effect produced on innovation by the practices at stake82. In Deutsche Telekom, the ECJ ruled that, by squeezing competitors out of the market, the dominant German telecommunications operator had unduly restricted customer

79 Ibid., para. 985. 80 Ibid., para 986. 81 See, e.g., Case C-202/07 P, France Télécom v. Commission, para. 112 (“[C]ustomers suffer loss as a result of the limitation of choices available to them”); Case COMP/C-3/37.990 — Intel, para. 1679 (“[C]ustomers were deprived of a choice which they would have otherwise had”). Commission Decision 76/353, Chiquita (United Brands), [1976] O.J. L 95/1, s. II, para. 3 (“[A] buyer must be allowed the freedom to decide”). Commission Decision 92/163/ EEC, Tetra Pak II, para. 109 ([T]he conduct does not allow customers any “any freedom to make his own choice” and “the choice should be left to the user”). Case C-280/08 P, Deutsche Telekom AG v. Commission, para. 182 (“[C] onsumers suffer detriment as a result of the limitation of the choices available to them”). 82 Commission Decision COMP/C-3/37.792 — Microsoft, para. 782 (“Microsoft’s refusal to supply has the consequence of stifing innovation . . . and of diminishing consumers’ choices”).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 33 “Freedom of choice”: the emergence of a powerful concept in European competition law choice. In the same ruling, it signaled, however, that low prices are an integral objec- tive to be pursued under competition policy—leaving readers uncertain as to how these considerations would be balanced (traditionally, low prices are associated with which, in many sectors, require some consolidation—and thus, possibly, resulting in less choice for customers). In Michelin I, the ECJ stressed that conditional rebates prevent customers from choosing their suppliers freely. But it also explained that such rebates caused customers to be treated unequally83. As a result, some dealers were receiving higher rebates than others, even though they were selling the same number of Michelin tires. The ECJ concluded that frms were treated unequally, in contravention of Article 102 TFEU. It also ruled that, as competitors left the tire market, the choices open to customers in that market was unduly reduced. To these considerations must be added others mentioned by the Commission in its Guidance Paper announcing priorities for the enforcement, in the future, of Article 102 TFEU.84 As appears from the document, the focus will be on the most serious infringe- ments—being defned as those causing the greatest harm to consumers. For the Commission, consumers may suffer three types of harm as a result of anticompetitive conduct. First, prices may be higher than they ought to be—and would be if the market was effectively competitive. Second, quality may be lower than one would anticipate in a truly competitive environment. Third, opportunities for choices may be restricted for consumers—compared to those which would be open to them in the absence of infringement. “[T]he Commission will focus on those types of conduct that are most harmful to consumers. Consumers beneft from competition through lower prices, better quality and a wider choice of new or improved ”85. In the Guidance Paper, the Commission however goes further by stating that, in fact, the infringements causing the greatest harm to consumers are those that foreclose competitors. This would appear to indicate that, in the interpretation provided by the Commission, the practices adopted by dominant frms must be considered, in the frst instance, as to the effect they produce on competitors. Consumers are considered second, to the extent that intervention would only be warranted, in cases of diffculties caused to competitors, when a negative effect is produced on consumers.

83 Case 322/81, NV Nederlandse Banden-Industrie Michelin v. Commission, [1983] E.C.R. 3461, para. 73. 84 OJ 2009, C 45/02, “Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings”, (last visited 29 Jan. 2016) (Guidance Paper). 85 Ibid., para. 5.

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34 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Paul Nihoul

“The aim of the Commission’s enforcement activity . . . is to ensure that dominant undertakings do not impair by foreclosing their competitors in an anti-competitive way, thus having an adverse impact on consumer welfare, whether in the form of higher price levels than would have otherwise prevailed or in some other form such as limiting quality or reducing consumer choice”86. This position would seem to remarkably echo a trend pervasive in the jurisprudence, which mentions, on the one hand, the effect on competitors, or competition, and, on the other hand, the effect on customers, as the main reasons for antitrust authorities to act on the basis of competition policy—without explaining necessarily how they articulate these considerations or whether each of them stands, by itself, as a suffcient justifcation to support action. Below are examples of these considerations being discussed in several decisions. Effect on competition. Hoffmann-La Roche “hampers the freedom of choice . . . and restricts competition”87. Effect on competitors. Hoffmann-La Roche was seeking “to deprive the purchaser of or restrict his possible choices . . . and to deny other producers access to the market”88. Microsoft “deprives the customer of the ability to choose freely . . . and denies other producers access to the market”89. Michelin “limits the dealers’ choice of supplier and makes access to the markets more diffcult for competitors”90. British Sugar was seeking to “deprive the purchasers . . . of, or restrict their possible choices . . . and furthermore deny other producers . . . access to the market”91.

6. Can these considerations be ranked? As the European antitrust approach seems based on various considerations, a question is whether the various considerations can be prioritized—in other words, whether an order of priority can be established among them. In the context of this paper, the issue would be whether, and to what extent, choice comes out of case law as being the most important consideration—or whether other considerations are considered more important.

86 Ibid., para. 19. 87 Case 85/76, Hoffmann-La Roche v. Commission, para. 90. 88 Ibid. 89 Commission Decision COMP/C-3/37.792 — Microsoft, para. 835. 90 Case 322/81, NV Nederlandse Banden-Industrie Michelin v. Commission, para. 85 (quoted in Case T-203/01, Michelin v. Commission (Michelin II), para. 110). 91 Commission Decision 88/519/EEC, Napier Brown v. British Sugar, para. 74.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 35 “Freedom of choice”: the emergence of a powerful concept in European competition law

An argument supporting a claim of priority could be based on the line of decisions and rulings adopted in the last few years that provide greater emphasis on choice. The trend started in 2004, when the Commission adopted its decision in Microsoft. In the frst part of this paper, I explained why that decision is important for European competition law—especially when considered in light of the history of cases adopted in application of Article 102 TFEU. So, it can be considered relevant for our discussion to highlight the fact that, in the decision, the Commission placed a great emphasis on the effect produced on customer choice by the practices adopted by the dominant frm. The year after (2005), that decision was followed by the ruling issued by the ECJ in France Télécom. Earlier, I asserted that the ruling can be regarded as important with respect to the jurisprudence of the Court. In that ruling, the ECJ indeed mentioned choice explicitly, and unequivocally, as being the one reason for which, ultimately, the prices charged by the dominant frm were to be regarded as abusive—independent of the issue of whether the dominant frm could recoup losses afterwards. More recently, the Commission adopted the Intel decision—which, as I discussed, contains the fullest analysis, to date, on the subject matter. In that decision, the Commis- sion devotes a considerable portion of its analysis to demonstrate that the behavior adopted by Intel distorted business decisions that customers would have made other- wise. Another argument suggesting a form of primacy could be the pervasive nature of choice as a consideration leading to infringements decisions and rulings. In the sections above, it has observed that choice has always been an important consideration—appearing in foundational cases and being mentioned in the most recent cases. It was also asserted that, in addition to being always present, choice was also everywhere, since it is inherent in the three major steps followed by the Commission and the European courts when applying Article 102 TFEU. The pervasive nature of the concept cannot be found with a similar intensity in the other considerations mentioned by the Commission or European courts. For instance, innovation is essential—there is no doubt about it. But it is not at stake, arguably, in all circumstances. Some antitrust cases concern sectors with mature technology, where the room for innovation is limited. Similarly, the importance of treating equally all commercial partners is not established in all cases involving the application of European competition law. In various situations, the obligation to treat equally frms that are placed in similar circumstances is complied with. Nonetheless, intervention may be necessary on the basis of competition policy to ensure the persistence of a suffcient degree of choice in markets.

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36 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Paul Nihoul

7. Choice vs. effciency As far as ranking is concerned, a fnal argument could be based on the ruling issued in France Télécom and already mentioned in this section. As a reminder, the case concerned predatory prices allegedly charged by the French telecommunications operator. To support its position, the operator was claiming that, when charging these prices, it could not have recouped the losses it was then incurring. Entry barriers were indeed low in the market—implying that the frm would not be able to raise tariffs later as high tariffs would have attracted other frms, which would have pushed the tariffs down again. In their reply to that argument, the Commission and the CFI stated that, in their view, the possibility of loss recoupment was not a condition in the application of the prohi- bition—with the Commission going further and, on basis of economic analysis, providing evidence that, contrary to the claim made by the operator, the possibility of loss recoupment existed when the predatory prices were charged. In the appeal, the ECJ did not go into the economic analysis but rather confrmed that possible loss recoupment is not a condition for the prohibition of the abuse. Suppose that prices remain low and, thus, losses cannot be recouped. As regard to prices, that situation would be, economically, to the beneft of customers. But another sort of damage ought to be considered: the Court noted that the reduction suffered by customers in the opportunities for choice as a result of the exit of competitors was a harm to consumers. The ruling is important because it appears to prioritize choice above effciency. In European competition law, the latter concept is, traditionally, about hard numbers. It is interpreted as implying, under the effciency doctrine, that law enforcers should not act against practices giving rise to cost passed on to customers. As proposed by that doctrine, lower prices should be preferred in all circumstances. Consequently, prima facie anticompetitive agreements and prima facie abuses of dominant positions should not give rise to proceedings where, if not prosecuted, they would result in lower prices. The reference made to choice in France Télécom appears to alter that order of prefer- ence. The ruling suggests that action was warranted even though prices may have remained low—as low indeed as those charged by the operator selling at a loss. As the ECJ observed, there was a possibility that the intervention carried out by the Commis- sion may have resulted in higher tariffs in the relevant market. But, for the ECJ, such a possibility should not imply that the operator should be allowed to sell at a loss.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 37 “Freedom of choice”: the emergence of a powerful concept in European competition law

When charged by dominant frms, below cost prices may cause competitors to exit the market—resulting in less choice for customers92.

8. Competition should not be eliminated Effciency claims are generally raised in the second part of antitrust investigations— when conduct is deemed prima facie anticompetitive and the question arises whether it could be justifed93. The examination of effciencies in the second part of investiga- tions indicate that courts and agencies would be prepared to accept a reduction in the degree of competition existing in the relevant market94 and, consequently, a reduction in the degree of choice available to customers in that market, if the reduction comes with cost savings that result lower prices. As Intel claimed during the investigation directed against it, “consumers cannot be worse off if they are buying a product at a lower price”.95 But that argument raises a systemic diffculty in European competition law. Arguably, objective justifcations are admitted under Article 102 TFEU—as they are under Article 101 TFEU and in the context of merger control. However, the Commission and the European courts have proven diffcult to convince. To a large extent, the possibility of an effciency justifcation has remained theoretical96. This is because, under European competition law, frms arguing that their prima facie anticompetitive conduct should be accepted must present arguments along the following lines. On the one hand, they must establish that the conduct in question was meant to realize an objective that can be deemed legitimate under European law97. On the other hand, they must also demonstrate that the means98 used to attain that objective were acceptable too. For that part of the exercise, three tests apply. Test 1: the frm must establish that the conduct was of a nature that allowed the realization of the objective

92 That position adopted by the ECJ has not remained isolated. In Intel, the dominant frm was also claiming effciency gains that passed onto customers. But the argument was rejected for lack of evidence. And the Commission echoed France Télécom by noting that low prices are not everything that matters for the enforcement of the provision. Choice is also important. As the Commission then stated, “[effciency] in itself does not address the argument that product variety has suffered”. Case COMP/C-3/37.990 — Intel, para. 1612. 93 If it is justifed, the conduct is accepted and the frm is not found to have infringed. 94 The conduct was found to be prima facie anticompetitive. 95 Case COMP/C-3/37.990 — Intel, para. 1612. 96 Among all decisions adopted in the implementation of Article 102 TFEU, only one ruling issued by the ECJ involved an admission by the Court that, in the case at issue, the dominant frm should be allowed to resort to the practice that was originally deemed unacceptable by the Commission, and by the CFI. 97 This part of the reasoning is not the most diffcult for the frm, as it is always possible to pretend that the purpose considered was a considered as being important in European law. Such values can be identifed easily on the basis of case law and . 98 That is, the conduct being investigated.

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38 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Paul Nihoul at stake. In other words, the conduct was useful to realizing that objective. Test 2: the frm must show that no as effcient, less anticompetitive conduct could be used to achieve the same result. In other words, the behavior was necessary or even indispens- able because the frm could not reach the same result using other conduct that would hinder competition to a lesser degree. Test 3: the frm must demonstrate that its conduct would not eliminate competition in a substantial part of the internal market99. In this fnal test, the question is whether a prima facie anticompetitive conduct can be accepted when it restricts competition to an extent that amounts to elimination or quasi-elimination of competition. At that stage, the assessment is on what should be preferred. A promise of lower prices as a result, mainly, of economies of scale coming from an increase in the market share held by the dominant frm? Or the protection of the remaining—but limited—degree of competition? In European law, the preference is clear—it goes to competition. Throughout their decisions, rulings, and documents, European antitrust authorities insist that, in their view, the main source of economic effciency is the pressure exercised by the possibility for customers to switch to other suppliers where they are not satisfed with the products or services provided by their current provider. Why would they adopt a different attitude when confronted with dominated markets, where one frm has been able to free itself from that constraint—and is using the dependence of customers to provide them with products and terms and conditions that they would not accept if they were free to choose their partner(s)? Ultimately, the dilemma referred to above is between two forms of constraints. One is the constraint resulting from the pressure placed on frms by the possibility for customers to switch to other suppliers where they are not satisfed. The other is the one exercised by dominant frms on customers when they restrict opportunities for choice open to customers through the adoption of abusive behavior. In the latter constraint, behavior deemed abusive creates situations where customers are compelled to accept the products or services provided by the dominant frm when they cannot renounce altogether purchasing in the relevant market. For European antitrust authorities, effciency, by nature, cannot come from an environ- ment where competition has ceased, or could cease, to exist. As a market based economy, the EU rests on the idea that results are better when economic activities are carried out in competition—that is, in a context where unsatisfed customers can switch. Where that switch or choice mechanism is threatened or eliminated, frms cannot be

99 These conditions are based on case law. They are expressed explicitly in Article 101(3) TFEU, as regard to prime facie anticompetitive agreements that the parties would seek to justify. In European law, the conditions also apply in other contexts—for instance as regard to the conditions under which one can admit national measures that, otherwise, would fall under a prohibition to introduce restrictions to the free movement of goods, services, workers, and capital.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 39 “Freedom of choice”: the emergence of a powerful concept in European competition law expected to improve performance on a constant and systematic basis in hope of retaining customers and possibly attracting more. This vision involves a distribution of roles, in the economy, between markets and authorities (including ). In European competition law, the issue of whether a situation will lead to more effciency should not be decided by frms in legal or judicial proceedings. For the Commission and the European courts, that issue should not be resolved by judges or civil servants. It should dealt with by the markets themselves— knowing that the latter only function properly, in the European vision, where compe- tition remains in the market100. “Under Community competition law an undistorted competition process constitutes a value in itself as it generates efficiencies and creates a climate conducive to innovation”101. “[I]t is not for the Commission to make absolute judgments on the technical performance of the products at stake, or relative judgments on the[ir] comparative performance”102. “[Customers] are the best-placed to come to the soundest judgment as regards their supply needs, and the most appropriate products to fulfll those needs”.103

100 The question then is to determine what degree of competition should remain. In the context of Article 102 TFEU, the answer is that the market should still be contestable, when proceedings are initiated, and should remain effec- tively competitive. 101 Commission Decision COMP/C-3/37.792 — Microsoft, para. 969. 102 Case COMP/C-3/37.990 — Intel , para. 1698. 103 Ibid.

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40 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Using the “consumer choice” approach to antitrust law*

NEIL W. AVERITT [email protected] Opinion Columnist, FTC:WATCH Former Attorney, Offce of Policy and Coordination,

ROBERT H. LANDE [email protected] Venable Professor of Law, University of Baltimore School of Law

The current paradigms of antitrust law—price and effciency—do not work well enough. True, they were an immense improvement over their predecessors, and they have served the feld competently for a generation, producing reasonably accurate results in most circumstances. Accumulated experience has also revealed their shortcomings, however. The price and effciency paradigms are hard to fully understand and are not particularly transparent in their application. Moreover, in a disturbingly large number of circum-

* This article frst appeared in Antitrust Law Journal, Volume 74, pages 175-264, p. 2007. It is reprinted with the authorization of the Publisher. The views expressed in this article are solely the authors’ own and are not necessarily those of the Federal Trade Commission or any individual Commissioner. We are grateful for valuable suggestions from Alden Abbott, Terry Calvani, Russell Damtoft, Albert Foer, Paul Halpern, Caswell Hobbs, Elizabeth Jex, Paul Karlsson, William Kovacic, Thomas Krattenmaker, Thomas Leary, Michael Moiseyev, James Mongoven, John Parisi, Suzanne Patrick, Robert Skitol, Mary Lou Steptoe, Randolph Tritell, Oscar Voss, and Erika Wodinsky. We are also grateful for helpful research assistance from Alice Arcieri, Fran Cariaga, Benson Cohen, Sarah Duran, Joseph Pulver, J. Andrew Stevens, Andrea Tony, and Thomas Werthman. Any errors remain our own.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 41 Using the “consumer choice” approach to antitrust law stances they are unable to handle the important issue of nonprice competition. In this article we suggest replacing the older paradigms with the somewhat broader approach of “consumer choice”1. The choice framework has several advantages. It takes full account of all the things that are actually important to consumers—price, of course, but also variety, innovation, quality, and other forms of nonprice competition. It is also far more transparent, which is an important administrative virtue even where, as in the great majority of cases, it will reach the same result. And in some important real-world situations it will lead to better substantive outcomes. There are a number of variety- valuing industries and circumstances that can be assessed correctly only by including an effective analysis of nonprice factors. We identify several of those in the article. To illustrate their importance we go on to identify eight noteworthy recent cases that would probably have been decided differently under a choice approach. Throughout the article the focus is on the practical issues of day-to-day management, and we show how the choice approach can be made as predictable and administrable as the other paradigms. The current price and effciency models can deal only awkwardly with nonprice compe- tition. At best, they try to help consumers achieve nonprice objectives indirectly, by folding them into the price analysis in the form of quality-adjusted prices, or by assuming that markets that are price competitive will also be competitive for nonprice preferences. That surrogate analysis usually produces reasonable results, but it is not particularly intuitive. In some cases, moreover, it does not work properly. In those cases the choice factors will have to be addressed directly if they are to be considered at all. Antitrust encounters at least three common situations in which a simple price is inad- equate. First, in some markets there is little or no price competition to begin with, as a result of regulation, joint ventures, or third-party payors. There is no good way to assess consumer welfare in those markets without considering the nonprice choice issues. Second, some conduct—such as horizontal agreements to limit adver- tising—will increase consumers’ search costs or otherwise impair their decision-making ability. This will cause consumers to select products that are less desirable or less well-suited to their particular needs. A complete analysis must take account of these adverse effects on suitability and satisfaction as well as the adverse price effects of the conduct. Finally, in some markets the frms compete not primarily on price but rather through independent product development or creativity. These efforts may involve areas, such as high-tech innovation, delivery of new patient-friendly hospital services, or editorial independence in the news media. Effective innovation in these markets may sometimes require more providers than are required to ensure price competition. Thus principles taken from a price context may not ensure robust competition in the respects most relevant to consumers of these

1 We refer to this as the “consumer choice,” or sometimes, for linguistic ease, as simply the “choice” model.

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42 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande kinds of products. In all three situations, the explicit use of a choice approach to antitrust is likely to lead to enforcement decisions that better refect consumer concerns and preferences. Our proposal for dealing with these issues attempts to combine the virtues of narrow- ness and breadth—to offer both relatively cautious substantive reform and relatively broad conceptual change. To begin with, the proposal accepts that the price and effciency models have brought some much-needed discipline and rigor into antitrust analysis, and it advocates new consideration for choice in only a limited number of cases on the margin. The choice model is anchored in current practice in at least fve different ways. First, in over 95 percent of cases either the relevant choice is still going to be based on price, or price competition will ensure effective nonprice competition. In these circumstances enforce- ment will simply continue along familiar lines. Second, even where the antitrust analysis should focus on nonprice effects, we propose only a more explicit and rigorous consideration of those factors than before, not a fundamental break with the past. Third, our approach would not condemn practices that result in only trivial reductions in the range of options. A reduction from ten to nine providers would not normally be an antitrust concern, even though there has been, in principle, some loss of variety2. Fourth, the choice approach will not condemn practices that limit options through ordinary market competition. It asks only whether a particular business practice has resulted in some unreasonable and signifcant limitation on consumer choice, unmediated by a marketplace test. And ffth, a choice approach is not a return to the “social and political values” paradigm of the 1960s and 1970s, which proved standardless and unduly hostile to business3. A consumer choice theory based on these principles can operate in as disciplined and predictable a way as any other model of the antitrust laws. At frst glance, the choice approach may seem to have less scientifc objectivity and rigor than the effciency or price models. Those older models, however, are based not only on science, but also on long experience and seasoned judgment. In this article we will demonstrate that a choice model, carefully developed through case-by-case analysis and supplemented by retrospective case studies and , can build the same kind of empirical foundation for itself. Such a foundation will identify the relevant standards and thresholds, which can then be expressed and applied in administrable and predict- able ways. For example, the enforcement agencies might announce that they will apply

2 This is true by analogy to the price model, which does not condemn a practice likely to result in only a trivial increase in price. 3 The social-political paradigm rested on an underlying suspicion of or even hostility toward big business, and this animus is not present in an approach that merely tries to factor consumers’ nonprice desires into the analysis.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 43 Using the “consumer choice” approach to antitrust law the Herfndahl (HHI)4 fgures in the Horizontal more strictly in particular markets where choice is likely to be important, or choice might be identifed as an explicit additional factor for a rule of reason analysis. Although making only moderate changes in practice, our proposed choice model is also broadly and essentially new in principle. It represents nothing less than a new paradigm of the antitrust laws, one that will be helpful throughout the antitrust feld. The consumer choice approach is fundamentally superior to the price and effciency paradigms because it asks the right question. It recognizes that consumers do not just want competitive prices—they want options5. Framing the issue in this way starts the analysis on the right foot, presents the questions in a desirably transparent way, ensures that important long-term factors like innovation receive their full due6, and helps to guard against circumstances in which enforcers inadvertently neglect important choice factors that are simply hard to translate into terms of price7. Competitive prices will then become just one of the choices that are relevant to consumers—the controlling choice and the focus of analysis in the vast majority of cases, to be sure, but conceptu- ally still a subset of choice8. Most important, use of the new paradigm should result in better substantive outcomes in some important situations. A key section of the article reviews eight recent cases that would probably have come out differently under our proposed approach. Consider, for example, a merger that effciently combines the last two defense contractors making air-to-air missiles—a product using cutting-edge technology. If the merger were accom- panied by circumstances guaranteeing lower prices, it might be acceptable under conventional analysis, but choice analysis would call attention to the benefts of main- taining a variety of competitive approaches in a high-tech product like this one, where

4 The Herfndahl-Hirschman (HHI) is a measure of market concentration used in the antitrust agencies’ merger guidelines, calculated by summing the squares of the individual market shares of all the participants. See U.S. Dep’t of Justice & Federal Trade Comm’n, Horizontal Merger Guidelines (1992, revised 1997), 4 Trade Reg. Rep. (CCH) ¶ 13,104 at n.17, available at http://www.ftc.gov/bc/docs/horizmer.htm. 5 Consumers want books that refect their interests, not just cheap books; and they want pharmaceuticals that will cure their illness, not just cheap pharmaceuticals. 6 Innovation is the key to having future choices. The choice formulation thus brings to antitrust analysis an increased emphasis on two related elements: the short-term importance of nonprice options and the long-term importance of innovation. This can work either for or against an enforcement action. Sometimes the greater emphasis on innova- tion might make an innovation defense more likely to prevail, so that the new model could result in certain cases not being brought. In any event, we would see a somewhat different menu of cases. 7 This may be a more frequent shortcoming than is commonly realized. The price or effciency approach typically defnes “price” as price that is adjusted, somehow, for quality, variety, and innovation. See infra note 28. It is not clear how often these adjustments are actually made in reality. 8 This would parallel the structure on the consumer protection side of the FTC Act, where the largest single group of cases, involving deception, are conceptually a subset of the broader authority over “unfair practices.” See Int’l Harvester Co., 104 F.T.C. 949, 1060 (1984).

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44 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande the best path to future improvements is inherently impossible to predict9. Or consider a hospital merger that does not threaten price competition but that brings all the hospi- tals in a market under the control of institutions that are unwilling, on religious grounds, to provide certain reproductive services, such as tubal ligations. Conventional price analysis might well permit this merger, but a choice analysis would highlight the importance of protecting the particular services that are at risk10. Or consider a set of strong incentives to engage in in a pharmaceutical product. Conven- tional analysis might have seen the incentives as involving only benign or even benefcial price discounts, but choice analysis would ask whether the excluded alternatives would have been therapeutically better for some patients or if they might have been a useful starting point for future innovation11. Approaching such cases in choice terms helps call attention to the relevant kinds of market failures. The industries in which variety and choice are most important tend also to be industries that are especially susceptible to information-related market failures. Among producers, it is sometimes hard to know what kinds of creative products a novelty-craving public or a rapidly evolving technology will demand. Among consumers, it is hard to know what kinds of their suppliers could have offered but did not, and so it is hard for them to demand from the marketplace. For both these reasons it may be important to have additional independent centers of innovation in such markets. In addition to its primary substantive advantages, the consumer choice model also confers a number of practical administrative and managerial benefts. These include its ability to communicate antitrust policy in broadly acceptable terms to other govern- ments in both the developed and the developing worlds, and to explain that policy in intuitive terms to important nonspecialist audiences, such as , Congress, and the general public. The model may also help to highlight possible synergies between antitrust and consumer protection theories in Federal Trade Commission (FTC) activities. And it may help to rationalize the allocation of cases between the FTC and the Department of Justice (DOJ). Because the consumer choice model can lead to better analysis and results, and has no signifcant drawbacks, it deserves to be—and it is in fact—emerging as the new paradigm of antitrust. We elaborate this thesis in the remainder of this article, which is divided into six principal sections. Part I introduces the idea of consumer choice by defning the term,

9 Cf. Press Release, U.S. Dep’t of Justice, Justice Department Requires Raytheon to Sell Key Electronics Businesses in Order to Go Forward with Its Hughes Aircraft Deal (Oct. 2, 1997) [hereinafter Raytheon Press Release], avail- able at http://www.usdoj.gov/opa/pr/ 1997/October97/415at.html, discussed infra note 172. 10 Cf. Dominican Santa Cruz Hosp., 118 F.T.C. 382 (1994), discussed infra Part IV.C. 11 Cf. J.B.D.L. Corp. v. Wyeth-Ayerst Labs., No. 01-00704, 2005 U.S. Dist. LEXIS 11676 (S. D. Ohio 2005), appeal docketed, No. 05-3988 (6th Cir. Aug. 5, 2005), discussed infra Part IV.E.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 45 Using the “consumer choice” approach to antitrust law contrasting it with other plausible approaches to antitrust, and showing how it is not merely consistent with the decided body of antitrust case law, but actually the best way of explaining it. Part II starts the process of operationalizing these concepts, by reviewing the economics literature that sheds light on the optimal level of consumer choice. Part III discusses the particular industries and business circumstances for which an effciency or price model is inadequate. Part IV shows that the discussion in the previous section has practical consequences, by identifying eight signifcant recent cases that were handled one way under a price or effciency theory, but probably would have come out differently under a choice theory. Part V shows that a consumer choice approach can be made at least as administrable and predictable as any other. Part VI identifes some of the further administrative and managerial advantages of the choice approach. Finally, a brief conclusion explains why the shift to a new paradigm would have many and, far from disrupting day-to-day administration of antitrust law, is instead the next logical step in its evolution.

I. Defning the consumer choice approach to antitrust

The concept of “choice” pervades trade regulation law, at both the general and the particular levels. We begin with an introduction to the broad “consumer choice theory” used to explain trade regulation law as a whole—antitrust and consumer protection laws collectively—and then from this we derive a narrower “choice” interpretation of antitrust law in particular. We then explain how this choice-oriented approach to the goals of antitrust is broadly consistent with case law and the existing consensus on antitrust policy12.

12 We have addressed these background issues in a number of earlier theoretical papers. See Neil Averitt & Robert Lande, “: A Unifed Theory of Antitrust and Consumer Protection Law”, 65 Antitrust L.J. 713 (1997) [hereinafter Consumer Sovereignty]. For a more concise statement see Neil W. Averitt & Robert H. Lande, “Consumer Choice: The Practical Reason for Both Antitrust and Consumer Protection Law”, 10 Loy. Consumer L. Rev. 44 (1998). For a discussion of choice theory in an antitrust context, see Robert H. Lande, “Consumer Choice as the Ultimate Goal of Antitrust”, 62 U. Pitt. L. Rev. 503 (2001) [hereinafter Choice as Ultimate Goal]. See also Robert H. Lande, “Wealth Transfers as the Original and Primary Concern of Antitrust: The Effciency Interpretation Challenged”, 34 Hastings L.J. 65, 124 (1982) [hereinafter Wealth Transfers] (antitrust violation requires a external to consumers that “restrict or distort consumers’ available options”); Neil W. Averitt, “The Meaning of “Unfair Acts or Practices” in Section 5 of the Federal Trade Commission Act”, 70 Geo. L.J. 225, 281–82 (1981) [hereinafter Unfair Acts or Practices] (effective marketplace requires two elements: “a reasonable number of options” and ability “to make a free and rational choice from among those options”); Neil Averitt, “The Meaning of “Unfair Methods of Competition” in Section 5 of the Federal Trade Commission Act”, 21 B.C. L. Rev. 227 (1980) [hereinafter Unfair Methods of Competition] (reviewing various theories by which marketplace options can be protected).

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46 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande

A. Nonprice competition and the general concept of consumer choice The proposed choice paradigm of antitrust law arises from a long experience with the operation and interpretation of the Federal Trade Commission Act. In particular, it arises from a general theory of consumer choice that has been developed over the last 20 years as a way of harmonizing the two functions of antitrust and consumer protection, as they have been presented by the two halves of that agency’s . This general consumer choice theory suggests that antitrust and consumer protection laws perform different but complementary tasks13. Operating together, these two bodies of law ensure that consumers have the two ingredients needed to exercise effective consumer choice14—options, and the ability to choose among them. Antitrust law protects a competitive array of options in the marketplace, undiminished by artifcial restrictions, such as price fxing or anticompetitive mergers. Consumer protection law then guards against other market failures by ensuring that consumers are able to make a reasonably free and rational selection from among those options, unimpeded by artifcial constraints, such as deception or the withholding of material information15. Together the laws function to protect a economy16.

13 For a full elaboration of this thesis, see Averitt & Lande, “Consumer Sovereignty”, supra note 12. Each of these bodies of law is aimed at, and limited to, correcting the consequences of market failures. 14 In our earlier writings we have sometimes referred to this type of consumer choice as “consumer sovereignty.” The two terms have the same meaning. See Int’l Harvester Co., 104 F.T.C. 949, 1061 n.47 (1984) (referring collectively to “consumer choice or consumer sovereignty”). 15 This interpretation was not changed by the passage of 15 U.S.C. § 45(n), which requires, among other things, that an unfair consumer practice be one that “is not reasonably avoidable by consumers themselves”. Section 45(n) is an additional screen, not a complete defnition of unfairness. Consumers normally avoid injury through the exercise of choice in the marketplace. This view underlay the Commission’s 1980 Unfairness Policy Statement, 4 Trade Reg. Rep. (CCH) ¶ 13,203 (1980). Section 45(n) was intended to provide a rational, empirical means of determining when the conduct has impaired consumers’ ability to make choices. See Orkin Exterminating Co. v. FTC, 849 F.2d 1354, 1365 & n.13 (11th Cir. 1988); Timothy Muris, Chairman, Federal Trade Comm’n, The Federal Trade Commission and the Future Development of U.S. Consumer Protection Policy, Remarks Before the Aspen Summit on Cyberspace and the American Dream at n.29 (Aug. 19, 2003), available at http://www.ftc.gov/speeches/muris/030819aspen.htm. It is the effect on choices that is the ultimate test of . See infra note 16. 16 Thus the agency ultimately defnes its mission in fairly specifc economic terms: Some commentators have interpreted our policy statement as involving essentially a general balancing of interests, with all the imprecision of that course, rather than a defnable economic rule. In fact, however, the principal focus of our unfairness policy is on the maintenance of consumer choice or consumer sovereignty, an economic concept that permits relatively specifc identifcation of conduct harmful to that objective. International Harvester, 104 F.T.C. at 1061 n.47 (citing Averitt, Unfair Acts or Practices, supra note 12). The FTC has elsewhere described the necessary conditions for consumer choice in slightly more elaborate terms, making a further distinction between deception and unfairness in its consumer protection function: The various components of the statute form an integrated whole, allowing the Commission to promote the diverse benefts of a free and open economy. Thus the ban on unfair competition prevents exclusionary or anti-competitive behavior and helps preserve a full variety of marketplace options for consumers to choose among; the ban on deception helps ensure that consumers will not make that choice on the basis of misleading information; and the ban on unfair practices ensures that the choice is not distorted by coercion, the withholding of important information, or similar practices. at all three levels are needed to ensure that substantial consumer injury is adequately addressed. Companion Statement on the Commission’s Consumer Unfairness , 4 Trade Reg. Rep. (CCH) ¶ 13,203 at 20,909–03 (1980).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 47 Using the “consumer choice” approach to antitrust law

B. The paradigm of antitrust within the choice model Antitrust fts very comfortably within this framework. Its mission is to protect the array of options in the marketplace17. The setting of antitrust policy within the more general “choice” framework has several implications for its proper construction, however. It suggests that the role of antitrust should be broadly conceived to protect all the types of options that are signifcantly important to consumers. An antitrust violation can, therefore, be understood as an activity that unreasonably restricts the totality of price and nonprice choices that would otherwise have been available. Market power remains central to this analysis; antitrust conceived in these terms will still focus on preventing frms from improperly acquiring or exercising such power. However, the concept of “market power” should now be specifed in a way that ensures we are capturing all its relevant aspects. Instead of just the power to cause a deviation from the prices that would be set by competition18, market power will mean the power to signifcantly change the of price/quality/variety choices that would arise from competition19. The power to produce adverse changes in these respects could be improper even if it is not deliberately sought or knowingly held by the frms involved20. Putting this concept into more operational terms will require answers to two practical questions: What particular choices are protected by choice-based antitrust law? How great must the reduction in choice be in order to justify government intervention? Identifying the protected options is relatively simple. Antitrust should protect any type of choice that is of practical importance to consumers. The “consumers” at issue are normally individual ultimate consumers, but the model protects all entities engaged

17 For an elaboration of this thesis, see Lande, Choice as Ultimate Goal, supra note 12. 18 This has traditionally been the focus of the defnition. See NCAA v. Bd. of Regents, 468 U.S. 85, 109 n.38 (1984) (“market power” is “the ability to raise prices above those that would be charged in a competitive market”); United States E.I. du Pont de Nemours & Co., 351 U.S. 377, 391 (1956) ( power is “the power to control prices or exclude competition”). See generally Thomas G. Krattenmaker, Robert Lande & Steven Salop, “Monopoly Power and Market Power in Antitrust Law”, 76 Geo. L.J. 241 (1987). 19 Although market power in this expanded sense is a thoroughly conventional economic concept, we do not recom- mend demonstrating it through conventional economic analysis in all circumstances; often the calculations of quality-adjusted price will be too complicated for that. In those cases variety will be better demonstrated through other means. In about 95% of cases, however, the standard approach to market power, focusing upon price, and the choice-based approach, focusing on price/quality/variety options, will produce identical results. For the Euro- pean Union’s treatment of this issue, see infra note 270. 20 Just as antitrust has always sought to prevent even an unexercised power to control prices, it should equally be concerned about acquisition of a power to unreasonably restrict nonprice options, even if the frms intend to compete vigorously. A frm possessing such power might not always realize it. Its employees might be doing their best to satisfy consumer demand, but may be unable to do so optimally because they are limited by the uncertainties of high-tech research paths or by their frms’ accustomed ways of doing business. One may need to preserve one or two additional frms in certain markets in order to ensure competition. See infra notes 92–102.

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48 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande in purchase transactions, including buying intermediate industrial goods21. The options that they value are identifed by their preferences as expressed in the marketplace. Thus, a choice-based theory of antitrust is fundamentally just one that is fully attentive to empirical evidence on purchasers’ nonprice, as well as price, prefer- ences. It will continue to protect price competition and other activities likely to result in cost savings because competitive prices are one of the options most highly valued by consumers. But it also recognizes and protects the main additional aspects of nonprice competition, such as innovation, variety, quality, safety, and other product attributes, because consumers base their decisions on these features as well22. Identifying the degree of diminution in choice against which antitrust will protect consumers is more subtle. Antitrust law does not require that the number of options be maximized23, and it does not affrmatively require the creation of new options24. What choice theory does do is prohibit business conduct that harmfully and signifcantly limits the range of choices that the free market, absent the restraints being challenged, would have provided. The actual importance to consumers of any particular nonprice attribute can be measured here as it is elsewhere in antitrust. For example, it can be tested by predicting the response to a small but signifcant and nontransitory falloff in that quality25. If we can succeed in isolating one particular attribute as a variable, then the number of consumers who would switch to another supplier gives some indication of the importance of the attribute and, therefore, of the strength of antitrust concerns. However, certain free- market transactions, such as effcient joint ventures, might also result in some affrmative loss of variety but still be permissible if the consumer benefts of the action appear to outweigh the costs. Applying the antitrust laws with this kind of awareness of both

21 The vocabulary of trade regulation is not accustomed to thinking of corporations as “consumers,” perhaps because they are not usually subject to the same kinds of decision-making diffculties that can harm individual persons. Still, they are consumers for choice purposes whenever they make a purchase. See infra note 281. 22 These other attributes have become increasingly important as the economy has moved away from producing and providing relatively simple goods at the lowest possible price towards producing more complex and specialized items. 23 Maximum consumer choice is not necessarily good, because it may be accompanied by production ineffciencies and higher prices. In extreme cases it can cause unduly high consumer search costs and confusion. See infra notes 50–54 and accompanying text. 24 A policy aimed at affrmatively increasing choice goes beyond the requirements of the antitrust , which address conduct that results in a substantial reduction of competition. See, e.g., 15 U.S.C. § 18 (forbidding acqui- sitions whose effect “may be substantially to lessen competition”). Moreover, since nonprice product attributes are limited only by entrepreneurs’ imaginations, an infnite variety of options is potentially available, and the law could not and should not require all of them to be created. 25 A test of some kind is important because antitrust has long been worried about the risks of “false positives”—mistaken condemnations that will chill vigorous competition. See, e.g., Verizon Communications Inc. v. Law Offces of Curtis V. Trinko , LLP, 540 U.S. 398, 414 (2004) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 594 (1986)). We share that concern, although we also note that, with the increasing concentration of many sectors, the risks associated with false positives and false negatives may be converging.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 49 Using the “consumer choice” approach to antitrust law costs and benefts will help ensure consumers a suffcient—but not infnite—array of options from which to choose.

C. Contrasting the choice paradigm with earlier approaches to antitrust We can also defne the choice-based concept of antitrust by contrasting it with the earlier price and effciency models. It does not differ too greatly from those models, because they have generally served the economy well. However, it does differ in that it includes, and is broader than, either of them.

1. Contrast with the price paradigm First, the consumer choice approach to antitrust includes, and goes beyond, the consid- erations inherent in a price model. It agrees with the price model that consumers should be able to choose from among the price options that the competitive market would provide to them. Choice-based antitrust is, therefore, fully concerned about any activity (such as behavior) that artifcially fxes prices, because this distorts or eliminates certain price options that consumers value and it unfairly transfers consumer wealth26 to frms with market power27. However, the choice model posits that consumers are also entitled to the mixed price/ quality and price/variety levels that the competitive market would provide. This represents not necessarily an advance in theory, but certainly an advance in practice and realism over the price model. In theory, a price model could still adequately encompass these factors by working with “prices” that have been adjusted for quality, safety, variety, service, and so on28. If two cars are mechanically identical and are offered at the identical price, but one is painted in a popular color, and the other in an unappealing color, we can, in theory, explain the greater diffculty in selling the unattractive car on the grounds that it has a higher quality-adjusted price.

26 This is usually called “consumer surplus.” For a discussion, see sources cited infra notes 43–44. 27 See generally Lande, Wealth Transfers, supra note 12. 28 Economists commonly say that when they use the term “price,” it is a shorthand for the relevant price/quality and price/variety combinations. See, e.g., , The Theory of Price 22–23(3ded.1966); see also European Union, DG Competition, Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses ¶ 24 (Dec. 2005), available at http://ec.europa.eu/comm/competition/antitrust/others/discpaper2005.pdf (“In this paper, the expression ‘increase prices’ is often used as a shorthand for the various ways these parameters of competition [innovation, variety, etc.] can be influenced to the harm of consumers.”).

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50 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande

In practice, however, nonprice attributes often are extremely diffcult to measure and translate into price equivalents29. As a result, the relatively quantifable price issues draw all of the attention at the expense of the relatively unquantifable nonprice issues. Price effects are discussed in the text, while nonprice considerations are relegated, either fguratively or literally, to the footnotes, which usually are forgotten30. A choice model of antitrust does not attempt the diffcult task of translating these choices into price terms and, thus, is able to keep them squarely in the analysis where they belong31.

2. Contrast with the effciency paradigm A choice approach to antitrust also includes but goes beyond the effciency model. The effciency model has three concerns: minimizing allocative ineffciency, minimizing the costs of production, and encouraging innovation32. First of all, it looks at the harms to allocative effciency stemming from higher prices, as the fow of resources is distorted in response to distorted price signals. The resulting deadweight welfare loss is the reason the higher prices resulting from illegally acquired market power—an anticom- petitive effect in itself under the price model—are generally condemned under an effciency model as well. Second, the effciency model looks at productive effciency, and it values any cost savings associated with the practices at issue. Because effciencies that affect marginal cost of production also tend to affect ultimate price33, many of the effects of productive effciency will also feed back into the consumer price analysis34. Third, the effciency model considers innovative effciency, and it assesses the effects of the practices on future product development. The choice approach to antitrust furthers (and, thus, includes) all three of these goals. First, because it is concerned with protecting price options and price competition, the choice model necessarily shares the effciency model’s distaste for the allocative ineffciency that results from supracompetitive

29 Only rarely do economists make serious attempts to compare the value of existing products to hypothetical products that might exist if frms were allowed to make innovations optimally. For example, it is hard to know how much most consumers would pay for a computer operating system that crashes only 20% as often as the best existing otherwise equivalent system. 30 For illustrations from the history of the Horizontal Merger Guidelines, see infra notes 39–42. 31 In other words, rather than use the term “price” and then engage in long and complex discussions to explain that this term really means “price and nonprice variety and quality,” we propose that antitrust law choose a label that simply and directly takes account of choice. 32 See Lande, Wealth Transfers, supra note 12, at 71–80. 33 See Phillip Areeda & Herbert Hovenkamp, “Antitrust Law” 106–07 (2000). 34 See Alan A. Fisher & Robert H. Lande, “Effciency Considerations in Merger Enforcement”,71 Cal. L. Rev. 1580, 1654–56 (1983); Alan Fisher, Frederick Johnson & Robert Lande, “Price Effects of Horizontal Mergers”,77 Cal. L. Rev. 777, 809–10 (1989).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 51 Using the “consumer choice” approach to antitrust law pricing35. Second, the choice model cares about productive effciency because it recognizes that cost savings can result in lower consumer prices (or can prevent price increases that would otherwise occur), thus resulting in a wider and more desirable set of price options. Among other consequences of this view, choice-based antitrust would continue to recognize an effciency defense to antitrust violations. And third, a choice model is concerned with innovation at least as much as the effciency model because it recognizes that in the long run innovation—in production techniques and services— is the source of future36 marketplace options37. Despite these many similarities, however, the choice model differs from and goes beyond the effciency paradigm in three other ways: in its true emphasis on innovation, its focus on consumer effects, and its more transparent methodology. First of all, the choice model truly values innovation. The effciency model purports to value all three types of effciencies. As a practical matter, however, it gives only limited attention to the factor of innovation. Effciency defenses are almost always cast in terms of whether the practice will lower costs. Whether the practice might raise or lower the rate of innovation in products or services is usually only an afterthought38. For example, in the 1982 Merger Guidelines there were four references to cost-savings effciencies and no references to non-cost effciencies39. In the 1984 Guidelines there were nine references to cost savings and, again, none to non-cost40. The current Guide-

35 Supracompetitive prices resulting from activities like price fxing are a problem under the effciency approach only insofar as they lead to allocative ineffciency, however. Under the choice approach, on the other hand, they are undesirable in themselves. Prices fxed at an artifcial level rob consumers of the competing price options to which they are entitled. 36 See Michael Porter, “Competition and Antitrust: Toward a Productivity-Based Approach to Evaluating Mergers and Joint Ventures”, 46 Antitrust Bull. 919, 958 (2001) (the most important issue involving a merger or is not static effciency but its “impact on productivity growth and on the health of competition”). 37 Even though the choice model values innovation, innovation should not be considered the ultimate goal, but only the means to the goal of providing optimal consumer choice. Some have argued that recent antitrust has been too much focused on “innovation markets.” See infra note 137. However, Landman shows that the purported innovation market cases are really about future products and that the innovation market label is just a way of focusing on expected future competition. See Lawrence B. Landman, “Innovation and the Structure of Competition: Future Markets in European and American Law (pt. 3)”, 81 J. Pat. & Off. Soc’y 838, 850–51 (1999). 38 See Porter, supra note 36, at 933 (“The effect of mergers or competitive practices on the overall rate of innovation is usually only paid lip service.”); see also Timothy J. Muris, “The Effciency Defense Under Section 7 of the Clayton Act”, 30 Case W. Res. L. Rev. 381, 420 (1980) (emphasizing cost savings with scant mention of innovation); Oliver E. Williamson, “Economies as an Antitrust Defense: The Welfare Tradeoffs”, 58 Am. Econ. Rev. 18, 29 (1968) (briefy touching on “technological progress” but stating that “it is at least arguable that the prevailing uncertainties are too great to give any effect to . . . [this factor]. They are, nevertheless, potentially of such signifcance that to dismiss them may run the risk of serious error”). See also Fisher, Johnson & Lande, supra note 34. Sometimes, of course, the effects on innovation do receive more extended discussion. See, e.g., FTC v. H.J. Heinz Co., 246 F.3d 708, 722–24 (D.C. Cir 2001) (discounting alleged innovation in baby food recipes). 39 The key passage is from Section V(A), note 53: “At a minimum, the Department will require clear and convincing evidence that the merger will produce substantial cost savings resulting from the realization of scale economies, integration of production facilities, or multi-plant operations....” U.S. Dep’t of Justice, Horizontal Merger Guide- lines (1982), 4 Trade Reg. Rep. (CCH) ¶ 13,102, available at http://www.usdoj.gov/atr/hmerger/ 11248.htm. 40 The key passage is from Section 3.5: “Cognizable effciencies include, but are not limited to, achieving economies of scale, better integration of production facilities, plant specialization, lower transportation costs, and similar effciencies relating to specifc manufacturing, servicing, or distribution operations of the merging frms. The Department may also consider claimed effciencies resulting from reductions in general selling, administrative,

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52 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande lines have an Effciencies section that expresses some concern for innovation, but its primary concern is still with the cost and subsequent price effects of mergers41. The emphasis is similar in the 2006 agency commentaries on the Guidelines42. The choice model also differs in that it focuses on the benefts and consequences of conduct as they appear to consumers. Under the effciency approach, a cost will count as a social beneft even if it is retained by a frm with market power, and the additional paid by consumers as a result of supracompetitive prices does not count as a negative factor43. By contrast, a choice model recognizes cost savings or innovation as benefts only insofar as they lead to new marketplace options—and, thus, it recog- nizes only those fnancial savings that are likely to be passed on to consumers in the form of lower prices44. Finally, the choice model values marketplace options in a way that is uniquely simple, transparent, and understandable. The term “effciency” is vague, and to most people it simply means cost savings. It can be translated into a concern with price only through a careful explanation of the diffcult concept of the allocative effciency effects of supracompetitive pricing. It can be further translated into product variety and choice only through additional manipulations. Again, however, rather than attempting the diffcult explanation of how “effciency” really means “choice,” we propose using a much simpler vocabulary that takes account of choice directly.

and overhead expenses, or that otherwise do not relate to specifc manufacturing, servicing, or distribution operations of the merging frms, although, as a practical matter, these types of effciencies may be diffcult to demonstrate”. U.S. Dep’t of Justice, Horizontal Merger Guidelines (1984), 4 Trade Reg. Rep. (CCH) ¶ 13,103, available at http://www. usdoj.gov/atr/hmerger/11249.pdf. 41 Section 4 of the Horizontal Merger Guidelines observes: [M]ergers have the potential to generate signifcant effciencies by permitting a better utilization of existing assets, enabling the combined frm to achieve lower costs in producing a given quantity and quality than either frm could have achieved without the proposed transaction. Indeed, the primary beneft of mergers to the economy is their potential to generate such effciencies. Horizontal Merger Guidelines, supra note 4, §4. 42 The commentary certainly recognizes the relevance of effciencies in both cost and innovation, but the great majority of the discussion and examples deals with cost effects. See Federal Trade Comm’n & U.S. Dep’t of Justice, Commentary on the Horizontal Merger Guidelines 49–59 (2006), available at http://www.ftc.gov/os/2006/03/ Commentary on the Horizontal Merger Guidelines March 2006.pdf. 43 See Muris, supra note 38; Fisher, Johnson & Lande, supra note 34. 44 For an analysis of which cost savings are likely to be passed to consumers, see Fisher, Johnson & Lande, supra note 34.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 53 Using the “consumer choice” approach to antitrust law

D. Consistency with antitrust policy and case law The proposed choice paradigm fts squarely within the existing policy categories and case law of the feld. Thus, it can be adopted without greatly straining the vocabulary or consensus of antitrust law.

1. Consistency with antitrust policy

The choice model fts within the existing set of antitrust policy concerns. The familiar categories of antitrust violations all involve conduct that restricts consumer choice: price fxing diminishes the number of distinct price (or price/quality) points; mergers diminish the potential sources of supply in the market; limits price options; and nonprice vertical restraints can limit the way in which a product can be marketed. In short, each antitrust violation is of concern because it artifcially and substantially diminishes the range of options that would otherwise have been present in the marketplace. A choice model is, thus, broadly consistent with accumulated antitrust policy.

2. Consistency with antitrust case law

The consumer choice model is also consistent with the existing body of case law. In many cases the court’s language has been quite explicit in referring to “choice”. This term may be found in contexts ranging across the antitrust feld from horizontal agree- ments, to mergers, to boycotts45. Typical of these decisions is Dentsply, where the court noted that an “additional anticompetitive effect is seen in the exclusionary practice here that limits the choices of products open to dental laboratories”46. Some other decisions are less explicit, but their outcomes are still best explained in terms of choice as well. Where the conduct involved is price fxing, for example, the court’s decision

45 See, e.g., NCAA v. Bd. of Regents, 468 U.S. 85, 102 (1984) (horizontal agreements among competitors may be desirable when the actions “widen consumer choice—not only the choices available to sports fans but also those available to athletes”); United States v. Philadelphia Nat’l Bank, 374 U.S. 321, 368 (1963) (merger might harm nonprice characteristics of bank, such as “variety of credit arrangements, convenience of location, attractiveness of physical surroundings, credit information, advice....”); Full Draw Prods. v. Easton Sports, Inc., 182 F.3d 745, 755 (10th Cir. 1999) (boycott eliminated a competitor, “thereby limiting consumer choice to the other source of output”); Roy B. Taylor Sales, Inc. v. Hollymatic Corp., 28 F.3d 1379, 1384 (5th Cir. 1994) (tie-in likely to be if it involves “a foreclosure of choice to an ultimate consumer”); Gowan Car Care Ctr. v. Murphy Oil USA, Inc., No. 99-5775. 2000 WL 1477789, at *8 (6th Cir. Sept. 26, 2000) (unpublished) (monopolization claim unfounded when plaintiffs “failed to suggest how [defendant’s] pricing practices have hindered consumer choices. In fact, it seems quite clear that consumers have benefted....”); see generally Lande, “Choice as Ultimate Goal”, supra note 12, at 508–11. 46 United States v. Dentsply, 399 F.3d 181, 194 (3d Cir. 2005).

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54 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande may speak only of effects on “price,” but even there the courts are implicitly treating the conduct as harmful because it eliminated the competing, perhaps less expensive, price choices that would otherwise have existed47. A highly visible recent matter in which choice was important is the Microsoft case, a monopolization matter that was not so much about the price of software as it was about protecting characteristics like innovation, reliability, and suitability for various purposes48. The consumer choice model presented in this article, therefore, does not require any fundamental rethinking of the case law. It instead is a compact, intuitive way of explaining, interpreting, and applying a long line of precedents.

E. Conclusion on background issues Our argument that antitrust analysis should explicitly shift to consumer choice is more than just an academic suggestion based on the apparent of the new paradigm. It is also descriptive. There is reason to believe that the law is already evolving toward the choice model, as revealed through the underlying rationale of many decisions and the explicit methodology of the . The next step is to explore how to take these theoretical insights and translate them into practical operational terms, including identifying where the new theory will be important and how it might be applied.

47 This is well illustrated by Arizona v. Maricopa County Medical Society, 457 U.S. 332, 348 (1982). An agreement to limit maximum prices was improper, the Court held, because even high prices provide consumers with valuable points of variety, which can facilitate innovative service packages or provide incentives for practitioners to develop an unusually high level of skill. 48 The goals of the case were described in terms of choice by all parties and at all stages of the litigation. The found that Microsoft had illegally maintained its monopoly power in the Windows operating systems by stifing competition that “would have conduced to consumer choice and nurtured innovation”. United States v. Microsoft Corp., 84 F. Supp. 2d 9, 112 (D.D.C. 1999). The appellate briefs of the parties supported and assailed these fndings in light of the standard of consumer choice. See Microsoft Brief at 12 (the frm was an innovator, and consumers “have greatly benefted from Microsoft’s efforts to offer improved products at attractive prices”), available at http://cyber.law.harvard.edu/msdoj/ ms-appeal.html; Government Brief at 121 (Microsoft’s exclusionary conduct “restricted consumer choice and deterred innovation”), available at http://www.usdoj.gov/atr/cases/ f7400/7425.htm. The liability decision of the D.C. Circuit also is written in terms of choice, not price or effciency: “Microsoft . . . violated Section 2 by engaging in a variety of exclusionary acts . . . to maintain its monopoly by preventing the effective distribution and use of products that might threaten that monopoly”. United States v. Microsoft Corp., 253 F.3d 34, 58 (D.C. Cir. 2001). On the remedy issue the circuit court held that there should have been an evidentiary hearing, thus prompting a remand, but there, too, one key issue would be choice. See id. at 101–2. Microsoft Chairman had testifed that the government’s originally proposed remedy would harm choice. “[Dividing Micro-soft] along the arbitrary lines proposed by the Government” would limit the availability of products “that users could access from a wide range of devices”. Id. at 99. Finally, the government’s overall view of its case, set out in the Competitive Impact Statement, discussed how the remedy would improve consumer choice by “requiring Microsoft to provide the ability for computer manufacturers and consumers to customize, without interference or reversal, their personal computers as to the middleware they install, use and feature, and by.... [e]nsuring that software and hardware developers are free to develop, distribute, or write to software that competes with Microsoft middleware or operating system software....” Competitive Impact Statement 4, United States v. Microsoft Corp., Nos. 981232&98-1233(D.D.C. Nov.15, 2001), available at http://www.usdoj.gov/atr/ cases/f9500/ 9549.pdf. For a further discussion, see Lande, “Choice as Ultimate Goal”, supra note 12, at 511–14.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 55 Using the “consumer choice” approach to antitrust law

II. The economics of optimal consumer choice

If antitrust is about protecting consumer choice, what level of choices or options should our enforcement principles aim to preserve? We have seen that choice theory tries to preserve the number of options that the competitive market would have provided, but how do we estimate that optimal number when the market may have already been distorted by improper conduct? Economic analysis provides some initial answers to these questions. Four principles emerge: (1) consumers beneft from a reasonable range of choice; (2) there are nonetheless to variety, as there are to almost everything else; (3) we should take account of long-term variety in innovation as well as short-term variety in immediate consumption; and (4) because of uncertainties about the general relationship between concentration and benefcial variety, it will be fruitful for antitrust policy to identify particular industries in which lower concentration and greater variety are especially important to consumers. Taken together, these principles suggest the optimal amount of choice should be determined on an -by-industry basis, through the methodology that will be described later in Part IV.

A. The general benefts of variety Consumer tastes vary widely. As a result, variety of supply is generally benefcial, and competitive markets typically offer this variety in response to consumer demands. Consumers are able to satisfy their desires more closely to the extent the market contains different types, prices, locations, and qualities of products and services49.

B. Diminishing returns to variety This does not mean simply that more choices are better, however. At least three other factors limit the benefts of increasing variety. First, to the extent that goods are differ- entiated, there is less room for economies of scale, so product differentiation tends to lead to higher prices50. Second, to the extent that products are highly differentiated, there is an increased possibility that each maker will have some degree of market

49 See Dennis W. Carlton & Jeffrey M. Perloff, “Modern ” 201 (4th ed. 2005). 50 F.M.Scherer & David Ross, “Industrial and Economic Performance” 601 (3d ed. 1990); Carlton & Perloff, supra note 49, at 201 (“Which would you prefer: a choice of three different-flavored soft drinks at 50 cents per drink or only one flavor at 25 cents? The answers to such questions determine the optimal variety-price combination”).

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56 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande power, with the accompanying ability to raise prices51. At some extremes this might give rise to problems of monopolistic competition52. Third, although it might seem counterintuitive, there is evidence that too much choice can be detrimental to consumers53. Research shows that additional choice tends to lead to increased satisfac- tion only up to a point. Beyond that point, choice overload can lead to stress, decision- making paralysis, and “buyers’ remorse,” in the sense that consumers become concerned that they did not fnd the one perfect choice among the fully stocked range of options54. For all these reasons there is an optimal level of consumer choice. This is identifed through a complex tradeoff that seeks to achieve most of the benefts of choice while not sacrifcing economies of scale, producing market power, or causing excessive . This tradeoff is best performed by the free market, with antitrust being limited to ensuring that anticompetitive activity does not interfere with the market’s ability to make these calculations.

C. Short-term variety and long-term innovation Optimal consumer choice has two components: a short-term aspect that focuses on removing immediate restrictions on marketplace variety, and a long-term aspect that focuses on removing impediments to future innovation. Both are important. Consumers desire not only a competitive range of options, but also an optimal amount of innova- tion because only innovation will lead to new choices55. Again, the market will normally

51 Scherer & Ross, supra note 50, at 601. 52 See id.at 32–34, 575–76. 53 See Barry Schwartz, “The Paradox of Choice” (2004); see also Kirstin Downey, Buried in Choices, Wash. Post, June 4, 2005, at F1 (quoting Schwartz’s example that home buyers “fnd it harder to choose when many options are available, and after they do, they are apt to second-guess themselves...”). 54 See Schwartz, supra note 53, at 86; Jon Elster, Ulysses Unbound (2000). 55 This may actually be more important than short-term variety. Professor Michael Porter puts the point this way: While protecting short-run consumer welfare measured by price cost margins is undeniably important, the benefts of healthy competition are in fact broader and more essential to consumers and to society. The fundamental beneft of competition is to drive productivity growth through innovation, where innovation is defned broadly to include not only products, but also processes and methods of management. Productivity growth is central because it is the single most important determinant of long-term consumer welfare and a nation’s standard of living. Porter, “Competition and Antitrust”, supra note 36, at 922–23; see also Interview with Professor Porter, Antitrust, Spring 1991, at 5 (“I believe that a merger that improves static effciency but that threatens dynamism is a poor tradeoff”). These principles apply to the global economy as well as in local markets: International competitiveness increasingly depends on innovation. With continued operational improvement in and infrastructure now a given, and with local companies able to rapidly acquire and deploy technology from around the word, producing standard products using standard methods no longer sustains competitiveness. Among high countries, differences in prosperity are closely related to differences in the intensity of innovation. For developing nations, low-cost in puts by them selves are no longer suffcient to maintain competitiveness. Companies must increasingly be able to access and ultimately develop global technology. Michael Porter & Scott Stern, “Ranking National Innovative Capacity, in Unique Value: Competition Based on Innovation Creating Unique Value” 111 (Charles Weller ed., 2004).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 57 Using the “consumer choice” approach to antitrust law fnd the equilibrium point for the various desires, but here too antitrust has a role in ensuring that mergers and other actions do not distort the market’s ability to do so. How to take account of innovation in antitrust analysis is a diffcult issue. There is much disagreement about how to reach the optimal level56. Some argue that innovation is typically spurred by competition in general57, and specifcally by races to innovate58. Others assert that innovation is instead often or normally accomplished by “large and often monopolistic enterprises” that have more resources59. Still others believe that the weight of economic theory shows that there is a non-linear, inverted-U-shaped relation- ship between concentration and innovation, with innovation being greatest at moderate levels of concentration and tending to diminish at very high and very low levels60. Important innovations are not limited to the technological sphere. Innovation also includes new developments in formulating and delivering services. These service innovations may fourish in different market conditions from technical ones. They may not require high levels of concentration to achieve because they often require only attentiveness to one’s customers, rather than more investment-heavy R&D in underlying technologies. Service innovation may, therefore, sometimes call for keeping markets at ordinary levels of competitive concentration, rather than providing an effciency rationale that would permit them to consolidate further to achieve vital scale economies. The one possible point of consensus to emerge from these models is that exceptionally high concentration is probably not good for innovation and future options: “[V]ery high concentration has a positive effect only in rare cases, and more often it is apt to retard progress by restricting the number of independent sources of initiative and by dampening frms’ incentives to gain market position through accelerated R&D”61.

56 Here too the optimal level is not the simple maximum. No one suggests that all of society’s resources should be devoted to innovation; consumers also should be able to enjoy the fruits of past innovations. Similarly, it is not always desirable to have a huge number of attempts to achieve each specifc innovation. It might sometimes be enough to have a small number of attempts; any more would not be signifcantly more likely to be successful and would be likely to waste resources that could have been employed elsewhere. 57 “Competition can stimulate innovation. Competition among frms can spur the invention of new or better products or more effcient processes”. Federal Trade Comm’n, To Promote Innovation: The Proper Balance of Competition and Law and Policy 1 (2003) [hereinafter To Promote Innovation], available at http://www.ftc.gov/os/2003/10/ innovationrpt.pdf. 58 Id. at 10. See also Philip Nelson et al., The Economics of Innovation: A Survey, ABA Section of Antitrust Law Task Force Report 25–26 (2002), available at http://www.abanet.org/ antitrust/at-comments/2002/reports/econom- icssurvey.pdf [hereinafter ABA Report]. 59 To Promote Innovation, supra note 57, at 12 (quoting , , Socialism, and Democracy (1942)). 60 Id. at 13 (quoting Scherer & Ross, supra note 50, at 660). This last school of thought holds that “innovation increases with concentration up to some point and then declines”. ABA Report, supra note 58, at 34. 61 Scherer & Ross, supra note 50, at 660. The Department of Defense conducted a study of the nation’s defense industrial base and concluded that 35–45% of the critical new technology was being supplied by frms with fewer than 100 employees. See Suzanne Patrick, Deputy Under Secretary of Defense for Industrial Policy, Options for Maintaining a Robust, Adequate and Effcient Industrial Base, Remarks to the Heritage Foundation 8 (Feb. 23, 2005). An FTC study has reached a similar conclusion: “What is needed for rapid technical progress is a subtle blend of competition and monopoly, with more emphasis in general on the former than the latter....” To Promote

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58 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande

Uncertainties remain, however. There is no uniform correlation between market structure and innovation, and “industries probably vary too much for one theory to ft all”62. Even the widely accepted inverted-U relationship between industry concentra- tion and innovation depends upon a multitude of industry characteristics63. Because optimal overall consumer choice depends upon short-term considerations (involving the current array of choices on the market) as well as long-term goals (involving the optimal level of innovation), the task of formulating a single antitrust rule for all circumstances would be diffcult indeed.

D. Need to focus on particular industries Given these diffculties in formulating a single general antitrust rule, it makes sense to proceed instead on an industry-by-industry basis. This approach would gain insight from the general studies, but its focus would be on particular markets. Antitrust prac- titioners will seek to understand in which industries variety is particularly important to consumers; in which ones the necessary variety must be created by independent competitors; and what particular number of competitors are required64. These are complex questions65, but the profession’s long experience with merger analysis shows that it is possible to consider even quite complex economic questions effectively when they are presented by the empirical facts of a specifc market66.

Innovation, supra note 57, at 34 (quoting Scherer & Ross, supra note 50, at 660). The ABA Report notes that well-funded corporate research is not necessarily the key to discovery: “Jewkes, Sawyers, and Stillerman (1969) reviews seventy important Twentieth Century innovations and fnds that only 24 had their origins in industrial research laboratories”. ABA Report, supra note 58, at 31. 62 Id. at 14 (quoting Dennis Carlton & Robert Gertner, , Antitrust and Strategic Behavior 14 (Nat’l Bureau of Econ. Research, Working Paper No. 8976, 2002)); accord id. at 35. 63 See ABA Report, supra note 58, at 34. The report lists among the relevant variables the characteristics of demand for the products, the institutional framework, and the frms’ strategic interaction. See id. at 34–35 (economists “have recognized that both concentration and R&D efforts may be simultaneously determined by other market charac- teristics”). 64 These are all questions of degree, of course, as is the extent of the market failure that is the prerequisite to any real antitrust problem. But antitrust necessarily deals with questions of degree. 65 Even for particular industries the relationship is likely to be complex. See Dror Ben-Asher, “In Need of Treatment? Merger Control, Pharmaceutical Innovation and Consumer Welfare”, 21 J. Legal Med. 271, 305 (2000) (“In summary, the rapid growth of the biomedical R&D sector suggests that scientifc creativity in drug development is likely, perhaps even more likely, to be found in proportionally smaller and more informal organizations” (citation omitted)). 66 See Robert Lande & James Langenfeld, “From Surrogates to Stories: The Evolution of Federal Merger Policy”, Antitrust, Spring 1997, at 5.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 59 Using the “consumer choice” approach to antitrust law

III. Circumstances where the choice approach would be superior

The next step is to identify the specifc places where a choice-oriented antitrust theory would be most useful. The broad conclusions are simple: the areas better assessed under a choice paradigm all involve markets in which nonprice competition is particularly important, or situations with other important nonprice issues. Three such areas are particularly signifcant: (1) where there is little or no price competition as a result of regulation, industry wide joint ventures, or third-party payors; (2) where market-specifc conduct has increased consumers’ search costs or impaired their decision-making ability, thus impeding the effectiveness of price competition; or (3) where independent decision making and creativity, rather than price, are the main forms of competition.

A. Markets with little or no price competition There is no good way for a price or effciency model to analyze antitrust issues in markets that do not have price competition to start with. The choice model is, therefore, superior in dealing with markets, like certain regulated industries, that lack such competition. In these circumstances the price paradigm is essentially useless unless we resort to the awkward notion of quality-and variety-adjusted price, which is analytically sound but not very practical. Framing the issue in terms of effciency is no better. To the extent that prices in these markets are regulated, there is little risk of allocative ineffciency, and the kinds of qualitative ineffciencies that might arise (such as subpar design or service) involve value-laden consumer preferences that are hard to quantify. The best way to take account of qualitative factors is through a direct focus on consumer choice. Industries with regulated or quasi-regulated prices occur (1) in markets where prices are explicitly regulated; (2) in markets dominated by legal joint ventures; and (3) in markets dominated by third-party payors, where consumers might not be price- sensitive.

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60 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande

1. Markets where prices are explicitly regulated Price competition can be completely absent in markets where the government simply sets the rates. Competition itself has not been lost in such markets, however, but has merely taken other forms. It is particularly important to protect that nonprice compe- tition when regulation has closed the other paths of rivalry. Recent history provides several instances of this transformed competition. In the years before , for example, airlines all charged the same regulated prices67. Nonetheless, antitrust policy quite properly prevented them from merging because keeping them separate ensured that they would engage in competition to provide higher service68. This led to such phenomena as the “piano bars” and other indicia of luxury service designed to attract customers to certain American Airlines fights69. In this way consumers continued to receive the benefts of at least some limited competition.

2. Cases involving industry wide joint ventures Price competition may be similarly attenuated in markets dominated by a single joint venture embracing most or all of the market participants. There too it be comes impor- tant to preserve nonprice competition among the venture partners. A case of this sort was Aspen Skiing70 which involved a joint venture encompassing the entirety of what the Supreme Court accepted as a relevant market—downhill skiing on the four moun- tains of Aspen, Colorado71. The two frms owning these mountains formed a joint venture to offer consumers a lift ticket good at all four areas. Although the two frms were, thus, no longer competing on the basis of price in this particular respect, the Court found the joint venture permissible because it offered the important effciency

67 Prior to the Airline Deregulation Act of 1976, codifed as amended at 49 U.S.C. § 41713(b)(1) (Supp. 2005), the Civil Aeronautics Board (CAB) specifed ticket prices, discouraged competition, and restricted entry into the airline market. Jonathan Ogur, “The Deregulated Airline Industry: A Review of the Evidence”, Econ. Issues, Jan. 1988, at 3–5. 68 See, e.g., United States v. Civil Aeronautics Bd., 511 F.2d 1315, 1317 (D.C. Cir. 1975) (refusing to allow CAB approval of a multilateral capacity reduction agreement on the grounds that it would have anticompetitive effects). 69 See Richard A. Posner, “The Effects of Deregulation on Competition: The Experience of the United States”, 23 Fordham Int’l L.J. 7, 17 (2000). 70 Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985). 71 The Court referred to a that the relevant market was “[d]ownhill skiing at destination ski resorts”, id. at n.20, and that the “Aspen area” was a relevant geographic market. We express no view on the correctness of these markets.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 61 Using the “consumer choice” approach to antitrust law of a combined product that a large percentage of consumers valued highly72. Important for our present purposes, the arrangement was structured in a way that fostered continued nonprice competition because the joint venture partners shared the revenue from the four-mountain tickets on the basis of how often skiers used each area. This arrangement, thus, “allowed consumers to make their own choice on . . . matters of quality”73 and it gave each partner a strong incentive to make its facilities attractive in order to maximize its share of the joint revenue. In other words, the continuing presence of nonprice competition among the joint venture partners was an important factor in making the venture itself permissible74. Antitrust law should be alert to this kind of nonprice competition when judging other marketwide joint ventures75.

3. Cases involving third-party payors Finally, price competition will exist in only an attenuated form in markets dominated by third-party payors. This situation can arise whenever a consumer’s bills are paid by someone else76, such as in the case of students who choose a college while being supported by their parents, or business travelers on expense accounts. The most familiar example, however, is insurance coverage. If a person knows that the insurance company will pay medical or car repair bills, he or she is not likely to be price sensitive. The customer will instead choose on the basis of a nonprice attribute, such as quality, service, or location77. Insurance company programs have reduced, but not eliminated, this price indifference. Because insurers and government payors are aware of the incentive problem, they often impose requirements that force consumers to engage in some price comparisons.

72 The frms also continued to offer tickets for their own mountains only. See id. at 591. 73 Id. at 610. 74 Broadcast Music, Inc. v. CBS, 441 U.S. 1 (1979), involved similar facts. There two joint ventures encompassed the music-licensing industry. Owners of copyrighted music formed the ventures to sell blanket licensing agreements to media outlets. The outlets compiled data on the number of times individual songs were played and paid royalties accordingly. This joint venture, with its price-fxing aspects, was permitted because it was necessary for the very existence of the product. Without it, songwriters could not, as a practical matter, be compensated for their music because individual transactions between composers and users would be unduly expensive. Yet, within this price-fxed venture, the songwriters continued to compete with one another on what was probably the more important aspect of their work—the quality and variety of their songs. 75 For a recent example of such a joint venture, see Press Release, Federal Trade Comm’n, FTC Intervenes in Formation of ULA [United Launch Alliance] Joint Venture by Boeing and Lockheed Martin (Oct. 3, 2006) [here- inafter ULA Press Release], available at http:// www.ftc.gov/opa/2006/10/ula.htm, discussed infra note 165. 76 Price competition may still exist in the form of competition to obtain business from those actually paying the bill. Our focus here, however, is on the competition to make the sale to the ultimate consumer. 77 Still more specialized nonprice considerations may sometimes be controlling. Among business travelers, fyers may select particular airlines in order to maximize their frequent-fyer benefts, rather than to obtain the least- expensive fight.

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62 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande

These may include a requirement that the consumer obtain multiple estimates, a threat of rate increases if excessive claims are made, or a requirement of a consumer copay- ment. These mechanisms are only partial solutions, however, because they seldom reimpose all the costs on the consumer78. Other insurance companies may designate a panel of preferred suppliers who promise to charge no more than a certain price and require all their customers to use those suppliers. Once consumers are steered to that panel, however, their bills are still paid by the insurance company and they again become likely to choose among the designated suppliers on the basis of nonprice factors. Thus, regardless of the payors’ efforts to introduce partial market mechanisms in these situations, nonprice competition will continue to be important, and a choice model will be particularly useful in safeguarding that competition. These observations suggest that antitrust should pay close attention to the role of nonprice competition in specifc industries dominated by insurance payors. These include auto-glass repair, replacement auto parts, medical services in general, and hospital services in particular.

B. Circumstances where consumers have been led to purchase an unsuitable product A second broad area in which the choice paradigm confers signifcant advantages involves search costs. Increased search costs have the effect of degrading consumers’ ability to make effective judgments in some particular market, causing them to become less-effective shoppers. One consequence of such conduct is a rise in prices—an anticompetitive effect that can be and is captured by a price model. Another conse- quence, however, is that consumers can end up choosing products that suit their needs less well than they otherwise would. Because only the choice paradigm provides a suitable means of accounting for this second adverse effect, the choice model should be employed for all cases involving harm to consumer decision-making abilities. This approach is useful in assessing advertising-restraint cases in particular and restrictions that increase consumer search costs in general.

78 If they did, they could hardly be called insurance plans. The effectiveness of such claim-limiting arrangements is further limited by the fact that they may sometimes be subject to antitrust charges themselves. See, e.g., Arizona v. Maricopa County Med. Soc’y, 457 U.S. 332 (1982) (involving maximum fees that physicians could claim as part of certain health care plans); O’Halloran, 5 Trade Reg. Rep. (CCH) ¶ 22,543 (1988) (consent order against obstetricians alleged to be colluding to obtain additional Medicare revenue).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 63 Using the “consumer choice” approach to antitrust law

1. Advertising restrictions Impaired consumer decision-making ability is an important part of the rule of reason analysis in antitrust cases involving restrictions on advertising. The price consequences of this impairment have been important in assessing bans adopted by lawyers79, dentists80, and optometrists81. Restricted advertising will lead not only to price increases, however, but also, in some cases, to the selection of a doctor, , or other profes- sional who may not optimally suit the client’s preferences. Under these circumstances, for example, the patient may not locate the doctor who specializes in the particular condition the patient has, or the one that emphasizes gentler or reassuring treatment approaches that may be important to a particular individual. The ultimate assessment of a particular advertising ban may be different depending on whether these nonprice harms to choice are also considered82.

2. Other practices that impede consumer decision making Beyond advertising restraints, the case law records efforts to impede consumer decision making in a number of other ways. In many of these cases the frms inhibited comparison shopping by making it harder for customers to obtain competing bids. This was the effect of the agreement in National Society of Professional Engineers v. United States83, where the rules of a professional association explicitly restricted upfront competitive bidding for services. The conduct in Detroit Auto Dealers—

79 Bates v. State Bar of Ariz., 433 U.S. 350, 384 (1977) (rule forbidding most attorney advertising overturned on First Amendment grounds). For more detailed descriptions of the cases discussed in this subsection, see Robert H. Lande & Howard P. Marvel, “The Three Types of : Fixing Prices, Rivals, and Rules”, 2000 Wis. L. Rev. 941, 953–84 (2000). 80 Dental Ass’n v. FTC, 526 U.S. 756, 779 (1999) (ethical rule against misleading ads was applied to prohibit many truthful ads involving discounts and quality; case returned to appellate court to assess whether there was a suffcient basis for this application). 81 Massachusetts Bd. of Registration in Optometry, 110 F.T.C. 549 (1988) (board regulations impeding advertising by corporate providers, and prohibiting advertising of discounts, were unauthorized by statute, and condemned as antitrust violations). 82 The Supreme Court’s decision in California Dental Association suggests that it is not merely permissible but mandatory to conduct a rule of reason analysis that considers all the relevant nonprice effects. See California Dental Ass’n v. FTC, 526 U.S. 756 (1999). In that case the FTC had condemned advertising restraints under both the per se and the “quick look” or abbreviated rule of reason approach. The Supreme Court was concerned, however, that in a professional advertising context the restrictions may have had signifcant benefts in preventing consumer confusion, and it held that the FTC should have used a more extended rule of reason analysis to be sure of considering these potentially important factors. See id. at 781 (Breyer, J., concurring) (situation did not necessarily call for the fullest market analysis, but at least “an enquiry meet for the case”; put differently, “a less quick look was required”). Id. at 758. An extended rule of reason analysis is particularly inclusive in the context of professional advertising. It requires consideration of cost savings, prevention of deception, and other consumer benefts on one side, and price increases and impaired substantive selection of the desired product or service on the other side. 83 435 U.S. 679, 681 (1978).

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64 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande an agreement among competing car dealers to restrict their hours of operation—also made competitive offers harder to fnd84. A complete rule of reason analysis in such cases needs to take account of all the harms that fow from this conduct, including the adverse effects on choice and suitability. In the Detroit Auto Dealers case, for example, the restricted hours may not have left consumers with enough time to locate the car best suited to their needs in terms of styling, size, horsepower, accessories, and mechanical features85. These are bona fde economic costs, which should be identifed and included in the analysis86. Even more serious nonprice consequences were threat- ened in Indiana Federation of Dentists, which involved an agreement among dentists to restrict insurance companies’ access to diagnostic x-rays87. This agreement did not merely raise prices by impeding the insurance companies’ ability to conduct a cost- containing review of proposed treatments; it also may have physically harmed consumers by impeding their access to independent advice from their insurers and subjecting them to increased risk of unnecessary or fraudulent dental work88.

C. Markets in which independent decision making or creativity are crucial Finally, the consumer choice paradigm will produce superior results when assessing markets where creativity or innovation—not price—are the most important tools of competition. For example, people usually choose a movie based on whether they think they will enjoy it; they choose a newspaper based on whether they fnd it entertaining and informative; they value particular vaccines based on whether they are likely to be effective89. In these situations the decision is made with much less attention to price

84 Detroit Auto Dealers Ass’n, 111 F.T.C. 417, 681 (1989). For additional cases, see Lande & Marvel, supra note 79. 85 Detroit Auto Dealers, 111 F.T.C. 417. 86 Potential purchasers commonly see and test drive a number of cars before choosing one. If consumers must shop at times they fnd undesirable, the added costs of this inconvenience should be counted as a real loss for them. Other real losses are those due to settling for the suboptimal selection. For example, if a consumer pays $20,000 for a particular car, but would have been willing to pay $22,000 for a mechanically comparable car available for the same price at another dealer, which would have been a better choice in terms of styling and adaptation to small children, and if the consumer would have reached that dealer if not for the agreement to restrict hours of operation, then the losses need to include this unrealized $2,000 in potential consumer surplus, less whatever additional search costs would have been incurred. 87 FTC v. Indiana Fed’n of Dentists, 476 U.S. 447, 448–49 (1986). 88 Id. at 462. Of course, if the more familiar price-related antitrust factors are suffciently clear, a particular case might still be decided without reaching choice factors. For example, if a court fnds that the effciencies are strong while the price increases are trivial or highly speculative, it might resolve the case on that basis alone. See, e.g., Vogel v. Am. Soc’y of Appraisers, 744 F.2d 598, 604 (7th Cir. 1984). Conversely, if the court fnds that the proffered effciency claims are pretextual and that prices increased signifcantly, it might also not need to reach the practices’ effects on choice. 89 See Thomas B. Leary, “Freedom as the Core Value of Antitrust in the New Millenium”, 68 Antitrust L.J. 545, 555 (2000) (“Attention to individual tastes will become more and more important as exploding technology provides the means to satisfy them in ways heretofore unknown”).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 65 Using the “consumer choice” approach to antitrust law than is normally the case90; indeed, it may be that prices are uniform and that there is no price competition at all91. If creative qualities are the dominant means for competing in such a market, however, and if market failures92 result in a situation where these creative qualities can fourish only in an atmosphere of organizational independence, then more than the usual, price-determined number of frms may be required to ensure a suffcient range of consumer choice. Creativity and innovation are, of course, impor- tant to some degree in every market. The matter of degree is crucial, however. Markets naturally fall along a continuum, with one end being products that are sold primarily on the basis of price and the other end being products that are sold primarily on their nonprice attributes. Creativity will rise to the level of special antitrust relevance only for products on the latter end of the spectrum. Indeed, special antitrust concern is appropriate for only one subset of the products at the creative end of the spectrum— products for which the necessary level of creativity and variety can only be achieved in an environment of organizational independence. Such products will be limited in number because they are a subset of a subset. But they do exist and are important. This can be illustrated through a contrast of two familiar industries: cookie baking and book publishing. In many industries, such as cookie baking, the price model will work reasonably well, even for assessing effects on choice as well as on prices. This is true because frms that are engaged in effective price competition are usually also competing vigorously in terms of variety, service, quality, and other elements of nonprice competition. For example, suppose that there are four bakeries making cookies, but three would be enough for effective price competition93. Two of these frms could then merge without any harmful effect. Being competitive, as measured by price competition, each of the three surviving frms will still have an incentive to make every type of cookie for which there is a signifcant demand. And being competent bakers, each of the frms will be able to act on that incentive; a new line of cookies would not require a separate .

90 Price might count in an extreme case, of course, but it is unlikely that many people would attend one movie rather than another just to save a dollar. Illustrating this, a recent edition of entertainment section contained a seven-page listing of the movies currently playing, with capsule reviews of each. Nowhere in this comparative shopping guide was there any mention of price. 91 Movies all tend to have similar prices citywide. Even where they do not, the owner of a multiplex theater complex will typically price all of its own flms identically. The multiplex might compete against other theater chains on the basis of price, but, from the consumer’s perspective, the different movies in the complex compete with one another only on a nonprice basis. Similarly, all over-the-air television is free and so may be said to have identical prices of zero (or of the viewers’ opportunity costs, which are also identical across different programs). 92 For a discussion of the relationship between market failure and organizational independence, see infra notes 95–98. Graham Allison has explored some of the organizational characteristics that may contribute to these problems. See discussion infra note 96. 93 This is, of course, a stylized example. We are not asserting that three frms are always enough for effective price competition. This hypothetical requires the existence of substantial barriers to new entry into a well-defned cookie market and other factors. We are further supposing that three frms could make cookies as effciently as four and that each frm can make all different kinds of cookies.

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66 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande

In this situation, there is no advantage to using a choice standard over a price or effciency standard. Price competition would be the proxy for all the other issues that concern us. In other industries, however, the price model is clearly less satisfactory. Consider book publishing. There too, let us assume, three frms are suffcient to ensure price compe- tition, and those three frms are motivated to compete intensely in the nonprice arenas of creativity, variety, and willingness to bring forward promising new authors. Does this mean that the publishing industry should be allowed to consolidate to three frms with no harmful consumer effects94? Not at all. Even if the publishing frms are moti- vated to supply a full range of consumer options, and they compete in the most perfect good faith, they may simply be unable to do so. A bakery may be able to make every kind of cookie, but a publisher is not necessarily able to publish every kind of book. The options brought out by a particular publisher may be constrained by subconscious habits of mind or by an imperfect connection with popular tastes. In this industry the price model is not necessarily an adequate surrogate for effects on consumer choices. Those issues can be captured only by a model that focuses explicitly on choice. Some kind of market failure must be present before an industry will fail to respond to the full range of consumer demand in this way95. However, there are a particularly wide range of information-based market failures that may affect the . Some failures are due to imperfect information on the part of suppliers. It is hard to know just what a fckle public will demand or to know just which research avenues will result in popular products. And in the absence of objective performance measures on these points, frms in the creative industries may have a particular tendency to follow intellectual and cultural that will narrow the range of marketplace options96.

94 Here, too, we assume a market with entry barriers, so that we can focus just on the mechanisms of competition among the frms already in the market. 95 The existence of any real competition problem requires a market failure of some sort. See Averitt & Lande, “Consumer Sovereignty”, supra note 12, at 722–33. 96 This can lead to risk-avoiding consensus views on the kinds of news stories to cover, the kinds of television shows to produce, or the proper height of hemlines. Personal incentives, in other words, can sometimes prevail over corporate purposes. See generally Graham Allison, “Essence of Decision: Explaining the Cuban Missile Crisis” (1971). Allison postulated that many complex government decisions could be classifed as following one of three models. Model I decisions are made by the classical “rational actor” and seek to advance the organization’s logical goals rationally achieved. To understand this method of decision making, an outside observer can simply understand the organization’s goals and resources and does not need to look inside the entity for its particular decision making characteristics. By contrast, Model II decisions are determined by the organization’s internal process. They are caused by (or infuenced by) such factors as standard operating procedures, factored problems, fractionated power within the organization, parochial interests of different divisions, and the pursuit of sequential goals. Model III decisions emerge as a result of the personalities of the individual decision makers, who may have individualized goals, stands, stakes, interests, and attitudes towards risk that can heavily affect outcomes. Although Allison developed his insights to explain governmental decision making, others have applied these or similar ideas to business decisions as well. See, e.g., F.M. Scherer, “Industrial Market Structure and Economic Performance” 225–27 (2d ed. 1980). The presence of “irrational” Model II and Model III decision making means that business conduct cannot always be predicted by a “black box” analysis of what a proft-making frm would be likely to do. Of course, if a business does not earn a suffcient proft it will go bankrupt. But within some range of suffcient proftability, organizational and personality-driven issues can affect decision making and outcomes. Economists have developed these insights into a number of proposed qualifcations to the theory of the frm. See, e.g., Herbert A. Simon, “Theories of Decision Making in Economics and Behavioral Science”, 49 Am. Econ. Rev. 253, 263 (1959) (frms with target rates of return will try to reach “satisfactory” profts rather than maximum profts).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 67 Using the “consumer choice” approach to antitrust law

Some other market failures are due to imperfect information on the part of customers. Buyers of books and newspapers, for example, may not recognize that their options have been distorted and, therefore, may not demand corrections. Similarly, purchasers of high-tech products, such as pharmaceuticals and defense equipment, may not easily recognize situations where innovations could have been made but were not97. Some suppliers may anticipate these kinds of market failures and, in the absence of antitrust enforcement, may make anticompetitive acquisitions in the hopes of enjoying suffcient profts combined with a quiet life of limited innovation98. Even casual observation of the world suggests that there are industries that act more like our hypothetical book publisher example than like our bakery example. When General Motors was a member of the “Big Three” and imports were not a major factor in the marketplace, GM had every incentive to extend its product line to cover the full range of consumer demand and, apparently, it had a deliberate corporate strategy of doing so99. But somehow all its products ended up looking like “GM cars” nonetheless. The product line did not include economy cars, small sports cars, or true luxury cars. This may have been due to a number of reasons: a desire to economize on design resources, a hope of discouraging the movement of consumers into a market segment with traditionally smaller markups100, a failure to anticipate future consumer preferences correctly101, or simply the numbing hand of corporate orthodoxy as to what a car “should” look like. But for whatever reason, GM did not act like our theoretical cookie company, and it did not extend its product line to satisfy the full range of consumer demand that it could reasonably have served. The stunning success of small imports in the 1960s and 1970s showed how defcient the domestic carmakers had become at creating diverse vehicle types102. If in 1959 the auto industry had experienced a merger wave in which the Big Three had been allowed to purchase every other carmaker in the world on the grounds that the industry still would be suffciently price competitive,

97 Departures from perfect market conditions are of course ubiquitous. Determining when a particular shortfall results in a cognizable market failure is a matter of degree— but matters of degree are relevant and recur throughout the antitrust feld. See Averitt & Lande, “Consumer Sovereignty”, supra note 12, at 722–33. 98 Enforcement actions, therefore, do not necessarily involve the government agencies in second-guessing good-faith determinations about the best innovation strategy to pursue in the companies’ own areas of expertise. In the situ- ation posited in the text, the company is aware of its market power. Even where there is an element of good-faith disagreement, moreover, it occurs in circumstances of market failure that keep either party from perfect knowledge. And as we will discuss below, any enforcement policy will be developed to refect the consensus from a broad and prolonged experience and not just the views of any single offcial. 99 In the 1920s, “General Motors . . . decided to provide cars to satisfy the tastes of every consumer and . . . offered variety in styling, as well as comfort, accessories, and power”. Mira Wilkins, “Multinational Automobile Enterprises and Regulation: An Historical Overview, in Government, Technology, and the Future of the Automobile” 227 (Douglas Ginsburg & William Abernathy eds., 1980). 100 See Lawrence White, “The Automobile Industry Since 1945” (1971). 101 See Jeffrey O’Connell & Arthur B. Myers, “Safety Last” 155 (1966) (reporting on an industry consensus in 1950s and 1960s that “safety doesn’t sell”). 102 See Michael Pearce, “International Competition in the World , in Government”, Technology, and the Future of the Automobile, supra note 99, at 259–60.

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68 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande these imports might have never entered the market and the current variety in the automobile marketplace might never have come into being, or might have been signifcantly delayed. It was far better for consumer welfare that the market remained unconcentrated enough for innovation to fourish. There are at least three industries in which effective competition may require the kind of organizational independence that can only fourish in a relatively unconcentrated market: (1) communications media; (2) hospitals; and (3) certain types of innovative high-technology businesses.

1. Media The media industry provides the most familiar example of the need for nonprice competition. A healthy democracy benefts from having a range of opinions in the marketplace for ideas103. Congruent with that social need, the marketplace also demands a range of opinion to satisfy the diverse preferences of individual readers and listeners. It is possible, however, for mergers among media frms to threaten that benefcial competition. Acquisition by a single parent corporation may tend to result in uniformity of views within the various parts of the , and special antitrust rules calling for more than the usual number of frms in media markets, therefore, seem to be appropriate. First of all, ownership by a single parent corporation can threaten the diversity of content presented by the individual frms within that corporate family. Newspapers within a publishing family sometimes pursue a similar editorial policy104; insiders with

103 Public policy has always recognized the value of diverse voices in a democracy. The Supreme Court has repeatedly emphasized the importance of free political communications, noting the “profound national commitment to the principle that debate on public issues should be uninhibited, robust, and wide-open”. New York Times Co. v. Sullivan, 376 U.S. 254, 264–65, 270 (1964) (ability to publish a national newspaper without undue concern for local libel actions). See also Buckley v. Valeo, 424 U.S. 1, 14 (1976) (“Discussion of public issues and debate on the qualifcations of candidates are integral to the operation of the system of government established by our Constitu- tion....”); Roth v. United States, 354 U.S. 476, 484 (1957) (First Amendment gives broad protection to political expression “to assure [the] unfettered interchange of ideas for the bringing about of political and social changes desired by the people”). The Court has gone on to protect diversity in this respect by protecting the right of outsiders to use various suitable forms of communications. See, e.g., Republican Party of Minn. v. White, 536 U.S. 765, 788 (2002) (statements of substantive views in judicial elections); McIntyre v. Ohio Election Comm’n, 514 U.S. 334, 357 (1995) (anonymous leafets on issues); NAACP v. Claiborne Hardware Co., 458 U.S. 886 (1982) (boycott of town merchants for civil rights purposes); New York Times Co. v. Sullivan, 376 U.S. 254 (1964). Political scientists have concurred on the benefts of diverse sources of information. See Bureau of Competition, Federal Trade Comm’n, Proceedings of the Symposium on Media Concentration (Dec. 1978). New information technologies may have displaced some of the ones involved above. The underlying principle expressed in these cases, however, that the nation benefts from variety and diversity in its media, surely remains valid. See Maurice E. Stucke & Allen P. Grunes, “Antitrust and the Marketplace of Ideas”, 69 Antitrust L.J. 249, 270 (2001). 104 This kind of family uniformity can occur regardless of whether the parent organization leans left or right, of course. On the one hand, the Washington Post and are both basically liberal papers, and their corporate affliates, Newsweek and the Boston Globe, respectively, do not pursue observably different editorial policies. On the other hand, a former political reporter at the newspaper The Australian recounted how all of the Murdoch-owned papers in that country were ordered to support a particular conservative candidate for prime minister. See Frontline: Who’s Afraid of Rupert Murdoch? (PBS television broadcast, Nov. 7, 1995) (remarks of Mungo MacCallum) (Journalists “were given specifc instructions on what they could write and what they couldn’t

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 69 Using the “consumer choice” approach to antitrust law media frms have admitted to the existence of such a thing as a corporate viewpoint105; and op-ed columnists familiar with the phenomenon of increasing concentration have expressed concern about it106. A particular market failure contributes to this problem. Newspapers, and other types of information-heavy media, are what consumer protec- tion specialists refer to as “credence goods”107. Their actual quality is diffcult to determine even after they have been bought and consumed, and it must to some degree be taken on faith. A newspaper claims that it is fair and balanced, but a consumer is not well equipped to check on that fact and generally does not know what things have not been reported. This means that, within limits, an editor has some range of discre- tion to spin stories or coverage. This, in turn, means that the editor of a publication will have the latitude to track the editorial policies of its corporate parent, with only limited concern about corrective pressures from the market. Some may argue that special antitrust rules are not needed to deal with this situation because a media conglomerate has ample incentives to encourage internal diversity, as this is the path to serving the greatest number of customers and maximizing profts108. While this point is worth considering seriously, there seem to be three persuasive responses to it. First, a media conglomerate may squeeze out diversity accidentally, even if not as a deliberate policy. No monopolist monopolizes unconscious of what it is doing109, and presumably no frm unconsciously fxes prices either, but a frm may easily diminish editorial competition through the unconscious process of promoting those people who have demonstrated sound judgment by sharing the worldview

write. And where the instructions weren’t specifc, they learnt pretty bloody quickly because nothing appeared in the paper if it didn’t follow the line”), available at http://www.pbs. org/wgbh/pages/frontline/programs/tran- scripts/1404.html. Another journalist has said that Murdoch “put all his newspapers behind Mrs. Thatcher...” Id. (remarks of Michael Grade, Chief , Channel 4, U.K.). 105 For example, the “Public Editor” or ombudsman at The New York Times posed the question, “Is the New York Times a Liberal Newspaper?” and then answered the question with the topic sentence, “Of course it is”. Daniel Okrent, The Public Editor: Is the New York Times a Liberal Newspaper?, N.Y. Times, July 24, 2004, § 4, at 2, available at http://query.nytimes.com/gst/fullpage.html?res=9D01E7D8173DF936A15754C0A9629C8B63. 106 See, e.g., William Safre, “The Five Sisters, N.Y. Times”, Feb. 16, 2004, at A19 (“You don’t have to be a populist to want to stop this rush by ever-fewer entities to dominate both the content and the conduit of what we see and hear and write and say”). 107 Michael R. Darby & Edi Karni, Free Competition and the Optimal Amount of , 16 J.L. & Econ. 67, 68–69 (1973) (“Credence qualities are those which, although worthwhile, cannot be evaluated in normal use. Instead the assessment of their value requires additional costly information.... The line between experience and credence qualities of a good may not always be sharp, particularly if the quality will be discerned in use, but only after the lapse of a considerable period of time”). 108 See, e.g., Peter O. Steiner, “Program Patterns and Preferences, and the Workability of Competition in Radio Broadcasting”, 66 Q.J. Econ. 194, 212–17 (1952) (arguing that a monopolist is more likely to offer a broad array of programming than independently owned outlets because it can afford to develop more specialized material for its broader base of outlets). The Benton Foundation has produced empirical studies arguing the contrary, reporting that radio groups at or above the FCC’s local ownership cap actually have less variety in programming formats than station groups that are under the cap. The studies are available at http://www.benton.org/index.php?q=node/3800. 109 Cf. United States v. Aluminum Co. of Am., 148 F.2d 416, 432 (2d Cir. 1945) (L. Hand, J.).

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70 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande of the promoting executives110. Second, some media owners may have causes to advance and may value that power more than the marginal revenue that they might lose111. Third, the merger laws are intended to prevent the creation of potential market power, and enforcers are not swayed by the argument that a particular acquirer will not exer- cise that power. It is no defense to an otherwise anticompetitive conventional merger that the parent company promises to let its price independently112. It should, therefore, be no defense to an otherwise anticompetitive media merger that the parent promises to let its outlets frame their editorial policies independently113. Some media markets are already suffciently concentrated to make this additional uniformity a problem. This is not true of all markets, of course. Some, like book and magazine publishing, are still very diverse. However, other markets are already relatively concen- trated as a result of high capital costs (cable systems) or the need for proprietary content (Internet gateways, such as Yahoo and ), or status as niche markets serving a limited audience. The concentration levels in some of these markets are already prob- lematic even in a conventional price analysis, and the addition of choice analysis might be enough to raise real questions about recent mergers. For example, the mergers of the three main supermarket tabloids might raise concern as impairing the range of consumer choices in that specialized market114. Or one might have been concerned about the $3 billion transaction to bring together the largest Spanish-language televi-

110 The ombudsman at The New York Times has noted the paper’s consistently left-leaning treatment of social issues like gay marriage and gun control: “I don’t think it’s intentional when The Times does this. But doesn’t have to be intentional”. He went on to note, “This has not occurred because of management fat, but because getting outside one’s own value system takes a great deal of self-questioning”. Okrent, supra note 105. See Ted Turner, My Beef with Big Media, Wash. Monthly, July/Aug 2004, available at http:// www.washingtonmonthly.com/ features/2004/0407.turner.html (salaried local managers of a media conglomerate are unlikely to be the kinds of people who will take risks and innovate). 111 The causes they pursue can, again, be either of a liberal or a conservative bent. On the one hand, some critics charged that the Sinclair Broadcast Group was pursuing explicitly non-economic goals when it planned to air an anti-Kerry flm on the eve of the 2004 Presidential election, even though doing so appeared likely to have a negative effect on advertising revenue and stock prices. See Bill Carter, “Broadcaster’s Stock Picks up After Change on Kerry Film”, N.Y. Times, Oct. 21, 2004, at A27. On the other hand, other critics charged that CBS News had similar motives in planning to break the story of missing ammunition stocks in Iraq, embarrassing to the Admin- istration, just on the eve of the same election. See Howard Kurtz, “Leaks Hastened Report on Missing Explosives”, Wash. Post, Oct. 28, 2004, at A7. Some recent economic analysis has proceeded from the premise that media outlet owners may be “willing to sacrifce some proft in order to engage in ideological persuasion”. See generally David Balan, Patrick DeGraba & Abraham Wickelgren, “Media Mergers and the Ideological Content of Programming” (preliminary draft) (Feb. 2004) (copy on fle with authors). 112 See, e.g., Evanston Northwestern Healthcare Corp., FTC Docket No. 9315, Initial Decision of Judge 204 (Oct. 21, 2005) (hospital merger), available at http://www.ftc.gov/os/adjpro/d9315/051021idtextversion. pdf. 113 Cf. Turner, supra note 110 (“Naturally, corporations say they would never suppress speech. But it’s not their intentions that matter; it’s their capabilities. Consolidation gives them more power to tilt the news and cut impor- tant issues out of the public debate. And it’s precisely that power that the rules should prevent”). 114 See Paul Farhi, “Three-Headed Baby? Rival Tabloids Joined in Corporate Deal”, Wash. Post, Nov. 3, 1999, at C1. Rather than continuing to compete with one another, each publication reportedly will specialize in one niche of the tabloid market. The National Enquirer reportedly will focus on Hollywood news; the Sun will use health and religious stories to appeal to the 55-plus audience; and the Weekly World News will concentrate on paranormal stories involving aliens, UFOs, and Elvis. See C. Eugene Emery, “Sensationalism Six Pack: One Company Owns All the U.S. Supermarket Tabloids”, Skeptical Enquirer, Jan./Feb. 2001, at 8 (quoting the American Journalism Review), available at http://www.fndarticles.com/p/articles/ mi_m2843/is_1_25/ai_68966510. One might be

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 71 Using the “consumer choice” approach to antitrust law sion network and the largest Hispanic-audience radio chain115. Where such an issue does exist, the presence of fringe media suppliers will not necessarily be suffcient to cure it116. With such concerns in mind, antitrust enforcement has been as vigilant to maintain competition in the media industry as in any other. Cases have been brought involving newspapers, radio stations, television stations, and cable networks117. The problem with those cases, however, is precisely that they did treat the media industry as any other industry. They aimed to achieve the levels of concentration that had been shown, in previous antitrust matters, to be suffcient to protect price competition. It is not clear that they went beyond those levels to separately protect editorial diversity118. There are some indications that antitrust is starting to change in these respects, however. A new respect for media diversity may have been on display in the consent order the FTC negotiated with AOL and Time Warner119. This complex merger had resulted in, among other things, a vertical integration of the Time Warner cable systems, which

forgiven for asking whether it is possible for headlines to become any more varied in a world with even more tabloid choices, but the market should be given the opportunity to put that to the test. One issue in any such case would be whether supermarket tabloids in fact remain a relevant market or whether more traditional media are now starting to overlap with it. 115 The parties were Univision Communications, Inc. and Hispanic Broadcasting Corporation, which combined reached an estimated 97% of all Spanish-speaking , with as much as 80% of the television and radio audience in many top Hispanic markets. The principal issue in antitrust review was whether there was a general Spanish media broadcast market, combining both radio and television. See Hispanic Broadcasting Corp., Docket No. MB 02-235, FCC File Nos. BTC-20020723ABL et al., Memorandum Opinion and Order 4 (Sept. 22, 2003), available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/ FCC-03-218A1.pdf. 116 At frst glance one might think that the presence of fringe suppliers will solve any problems in media markets. The fringe suppliers in a conventional, price-driven market may not be able to constrain the prices of the primary frms, and so they are largely irrelevant. But the fringe suppliers in a media market might appear capable of supplying whatever demand for diversity exists. The customer who wants more varied sources of information can turn to specialty publications and Internet Web sites and fully satisfy his or her demand, even though these fringe suppliers may account for only a small percentage of the market. On refection, however, it is clear that in neither the price nor the media cases do the fringe suppliers resolve the competitive concerns because in neither case are they suffciently effective substitutes for the primary suppliers. In a price-competitive market the fringe suppliers are imperfect substitutes because of inconvenient locations, subtle product distinctions, and similar factors. We know that such differences are important because they keep these products from constraining the prices of the dominant frms in the frst place. In the media market the fringe suppliers can be imperfect substitutes for similar reasons. They may provide fully functional alternative sources of information but fall short in collateral respects that are important to consumers: the alternative newspapers may not offer home delivery; the magazines may not offer advertisements for familiar products; the information source of whatever kind may not offer the social reassurance of having a large circulation. See, e.g., C. Edwin Baker, “Media Concentration: Giving Up on Democracy”, 54 Fla. L. Rev. 839, 889 (2002) (arguing that fringe operators, and even non-fringe market actors, do not provide substitutes for consumers seeking a particular type of news source, such as a mainstream paper or a local paper). Hence, a merger that brings too many of the “respectable mainstream” publications under common control will not be cured by the availability of alternative publications on the margins. 117 See, e.g., Lorain Journal Co. v. United States, 342 U.S. 143, 149–50 (1951) (newspaper required exclusive dealing by advertisers in effort to injure competing radio station); United States v. R.C.A., 358 U.S. 334, 336, 351 (1959) (possible antitrust violation where network threatened to cancel affliation unless a frm agreed to exchange of stations). 118 Cf. Stucke & Grunes, supra note 103, at 271 (antitrust courts have protected editorial competition among newspa- pers as a form of economic competition, but not necessarily one requiring additional actors). 119 America Online and Time Warner, FTC Docket No. C-3989. See Federal Trade Comm’n, Press Release, FTC Approves AOL/Time Warner Merger with Conditions (Dec. 14, 2000), available at http://www.ftc.gov/opa/2000/12/ .htm.

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72 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande served about 20 percent of US cable households, and AOL, which was the nation’s largest Internet service provider (ISP). To address the resulting concerns about vertical exclusion, the order required that for fve years the merged frm offer three other non-affliated cable broadband ISP services to its subscribers120. The order, thus, protected a four-frm market structure. The order and the accompanying analysis do not refer explicitly to special standards for a media context, and litigation to protect a four-frm market in other contexts is not unprecedented. Nonetheless, it is relatively uncommon for the Commission to challenge four-to-three mergers121, and the individual comments of the Commissioners indicate that considerations of variety and diversity were much on their minds122. The case might, therefore, be understood as a frst attempt to make some special allowances for a media context. It is worth emphasizing that our proposed analysis of media competition is framed solely in conventional antitrust terms and not in terms of the . Some have argued that consideration of First Amendment values should persuade antitrust law to seek a higher than usual level of competition in media markets123. We are not making that argument. We believe that it is appropriate—and suffcient—to frame the analysis in terms of the ordinary level of competition that antitrust works to protect in any market. We are arguing that, in order to achieve this ordinary level of nonprice compe- tition in the particular factual circumstances of a media market—where jointly owned producers are likely to encounter special obstacles to the production of genuinely

120 One of these ISP alternatives had to be offered before AOL itself began offering service, and the other two within 90 days thereafter. Various other provisions of the order kept Time Warner from interfering with or discriminating against the content of these independent services. 121 The FTC reports only about three enforcement actions per year involving challenges to four-to-three mergers or in less concentrated markets, out of an average total of 16 merger challenges per year. See Federal Trade Comm’n, Staff Report, Horizontal Merger Investigation Data, Fiscal Years 1996–2003 at 1, 25–26, Tables 6.1-6.2 (2004), available at http://www.ftc.gov/opa/2004/02/horizmerger.htm. Interpreting these statistics involves some implicit questions about the defnitions of “challenges” and the treatment of market defnition over time, but it is clear that four-to-three merger cases are relatively uncommon under any measure. 122 See, e.g., FTC Backs AOL-Time Warner Merger, Journal Record, Dec. 15, 2000, available at 2000 WL 14300520 (quoting Chairman Robert Pitofsky) (“Our concern here was with access, that these two powerful companies would create barriers that would injure competitors”); Alec Klein, AOL Merger Clears Last Big Hurdle, Wash. Post, Dec. 15, 2000, at A1 (quoting Commissioner Leary saying: “I had and I continue to have concerns about these content issues”); AOL/Time Warner, supra note 119 (concurring statement of Commissioner Thompson) (the consent agreement will “send an important message to the market that high speed internet should continue to provide consumers with choice of service and diversity of content”). While suggestive, however, these quotes are not conclusive. They show that the Commissioners recognized that frms in this industry compete in large part through innovation and variety. They do not necessarily show that the Commissioners believed that this variety required lower concentration levels here than in other industries. 123 See, e.g., Wilfrid C. Rumble, Comment, “The FCC’s Reliance on Market Incentives to Provide Diverse Viewpoints on Critical Issues of Public Importance Violates the First Amendment Right to Receive Critical Information”, 28 U.S.F. L. Rev. 793 (1994). For a general review of such arguments, see Federal Trade Comm’n, Proceedings of the Symposium on Media Concentration, Dec. 14–15, 1978, at 22 et seq. (remarks of Professor Monroe Price, UCLA ). See also James N. Dertouzos & William B. Trautman, “Economic Effects of Media Concen- tration: Estimates from a Model of the Newspaper Firm”, 39 J. Indus. Econ. 1, 13 (1990) (FCC rules restricting newspaper-broadcast cross-ownership do not have an economic basis, although they may make sense if one is concerned about media diversity).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 73 Using the “consumer choice” approach to antitrust law diverse product lines—it may be necessary to have more than the usual number of producing frms124.

2. Hospitals Diverse sources of supply would also be valuable in the hospital industry. Hospitals, like media, are an industry in which consumers desire a wide diversity in types of service but are hindered by various market failures in their ability to demand it. As a result, it may be appropriate to call for the preservation of a few more frms in antitrust markets here than in most others. The need for variety in hospital services arises from several sources. One factor is the widely varied preferences of particular local communities. These may call for special- ized innovations, such as operation of storefront clinics, or accommodation of nontra- ditional medical assistants, or research into locally important industrial diseases. Another factor involves the wide variety in patients’ personal values. The hospital industry is associated with many events that raise what are fundamentally values questions: Should fathers be present for the birth of their children? Should spouses be present for treatment of potentially critical conditions in their husbands or wives? Should adult children be present for efforts to resuscitate elderly parents? Individual preferences on such basic questions will surely vary widely—both as a result of personal disposition and as a consequence of cultural norms—and will tend to be relatively inelastic. All these factors suggest that there will be a strong demand for diversity both in the substance of hospital services and in the ways of providing them125. Numerous market failures, however, hinder consumers’ ability to assert these prefer- ences. One set of failures is intrinsic to the patient population. Hospital patients tend to be old, very sick, and worried. They purchase hospital services only occasionally and under unexpected or trying circumstances, none of which is conducive to effective bargaining126. Moreover, they are represented in some respects by their doctors, Medi-

124 The industries provide an additional, related example of a sector where independent centers of innovation and creativity are crucial. Many of their products compete primarily through the excitement and imagination of new styles, and price can be distinctly secondary. The importance of this nonprice competition makes an uncon- centrated structure important in these markets as well. The market failure of imperfect information—the imperfect ability to predict the future—would make it diffcult for any small number of frms to anticipate the full range of consumer demand. Nevertheless, these industries have not been a traditional subject for antitrust attention because they are generally unconcentrated and have low . However, choice and variety are important and should be considered if they appear in jeopardy in any particular market. 125 Cf. Hosp. Corp. of Am., 106 F.T.C. 361, 478–79 (1985) (nonprice or quality competition in health care has historically been more important than price), aff’d, 807 F.2d 381 (7th Cir. 1986). 126 Hospitals may sometimes contribute to these market failures by withholding important information from consumers. For example, hospitals frequently offer surgical patients a premedication called Versed, explaining in their background materials that it is a sedative that will help them relax, which it does. Often unmentioned, however, is the fact that this drug also produces amnesia. See American Hospital Formulary Service, Drug Information 2478 (2006) (drug “provides sedation . . . and anterograde amnesia of perioperative events”).

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74 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande care, or insurance carriers, who may not be perfect agents for their interests. Another set of market distortions can be found on the hospital side of the equation. Hospitals deal in some respects with insurance carriers rather than with patients; they produce uniform industrywide “standards of care”; and they are regulated by government agencies that may have been wholly or partially captured by the nominal subjects of this oversight. Custom, inertia, and the unfortunately short distance between caring and paternalism may be factors as well. For all these reasons the hospital industry may not fully respond to consumer desire for choice and creative innovations in the delivery of care127. Hospitals’ limited responsiveness shows up in historical ways, such as the uniform ban on husbands in delivery rooms until a new generation of parents-to-be forced the issue128. It shows up today in forms, such as undignifed gowns, that are trivial in themselves but suggest more deep-seated issues129. And it shows up in some larger ways, suggesting that there are other demands, like that for husbands in delivery rooms, that are still latent. For example, parents generally cannot accompany children into the operating room, even though this is routinely done in a few institutions without ill effect130, and even though “practically all” parents elect to use this procedure when it is offered131. Parents are present at fewer than 5 percent of pediatric anesthesia induc- tions in the United States, but they are present at 75 percent of cases in Great Britain132. Family members are similarly excluded from resuscitation efforts in most emergency rooms, even though, when it is offered, they almost always value the experience and

127 Hospitals are perhaps the only place in the economy where someone can set out to make a semi-discretionary purchase of several tens of thousands of dollars worth of services and not fnd a supplier willing, and even eager, to meet a variety of desires. It is true that hospital services must sometimes be purchased on an emergency basis from the nearest facility and that insurance plans also restrict hospital selection. Most often, however, patients and their doctors have some discretion over where and when the services are bought. 128 The swift changeover to admitting husbands suggests that a latent consumer demand for their presence was there to some degree in earlier years and was simply not known because the marketplace provided no ready avenue for expressing it. 129 That practical alternative gowns exist is suggested by the fact that at least a few institutions make a point of offering them. See Lindy Washburn, “Hospital Adds Stylish Touch to Help Its Patients Recover”, The Record (Northern New ), June 30, 1999, at A1. The obvious question is why all institutions do not offer them. 130 See Mary Fennell, “Parents in the OR? You Bet!”, RN Magazine, Dec. 1999, at 38; Jitka Zobal-Ratner et al., “Parents in the Operating Room and Post Anesthesia Care Unit, Conference Poster”, American Association for Pediatric Ophthalmology and Strabismus (1996). For a statement by a hospital using the procedure, see, e.g., the Web site of Children’s Hospital Boston, available at http://www.childrenshospital.org/clinicalservices/Site1864/ main pageS1864P17.html. 131 Michael W. Gauderer et al., “Is There a Place for Parents in the Operating Room?”, 24 J. Pediatric Surg. 705, 705–06 (1989). See also Ellen Kavee, Parents in the Operating Room, Monitor: Newsl. of the N.Y. State Soc’y of Anesthesiologists, Fall 2000, available at http://www.nyssa-pga.org/fall-2000.html (“98% of parents questioned said they would like to be present if their child ever needed surgery in the future”); Josephine McGann, “Parental Presence During Induction: The Role Parents Play: Is It Valid?”, Canadian Nursing J., Mar./Apr. 1999 (parental presence “can help decrease the stress and anxiety of both the patient and parents”); Patricia A. LaRosa-Nash & Jane M. Murphy, “A Clinical Case Study: Parent-Present Induction of Anesthesia in Children”, Pediatric Nursing, Mar. 1996, at 109 (in one survey of parents, “99% who chose to be present at induction believed that their presence helped their child”). 132 See Jerrold Lerman, “Anxiolysis—By the Parent or for the Parent?”, 92 Anesthesiology, Apr. 2000, at 925.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 75 Using the “consumer choice” approach to antitrust law the psychological closure it provides133, and the Emergency Nurses Association has taken the position that this procedure is workable and should be a right of patients and their families134. Any tendency toward rigid procedures in these respects is undoubtedly reinforced by other, unrelated factors. These include doctors’ fear of exposure135, or quality of care standards that may be written with the doctors’ convenience in mind and may be more restrictive than warranted136. But the lessening in the number of competitors surely contributes to any problem that exists. To ensure a suffcient level of competi- tion in these respects it may be helpful to maintain an industry structure that is slightly less concentrated than would be needed for purely price competition.

3. High technology Imagination and creativity are also important in high technology, where leaps of science are the stuff of new products. To preserve future competition in such products it can be important to protect a variety of different research approaches. In markets using truly cutting-edge technology, manufacturers do not necessarily know which research avenues are going to work out, and they, therefore, do not know what particular products consumers are going to demand. To maintain competition in the face of this potential market failure it may again be useful to keep a larger number of independent frms in the market137.

133 See Theresa Meyers et al., “Family Presence During Invasive Procedures and Resuscitation”, Am. J. Nursing, Feb. 2000, at 32. Within the universe of family members that were offered and accepted the visitation option, 97.5% thought they had a right to be present, and 100% thought that it was important and helpful to them to be with their loved one at a time of crisis. Id. at 36. 134 See Ben Harder, “Opening the Curtain”, U.S. News & World Rep., Sept. 10, 2001, at 64. 135 See Meyers, supra note 133, at 39 (29% of ER providers worried that family members might initiate litigation); Fennell, supra note 130, at 40 (“Liability is . . . probably the strongest and most widely heard argument against having a parent present.... Administrators and providers alike may worry about being sued if a parent observes an adverse event involving the patient or is injured while observing his or her child in the OR”). 136 Doctors advocating the conventional practices acknowledge that the majority of parents prefer to accompany their children, “[w]hen asked their opinion,” but suggest using pre-operative sedative drugs to keep young patients calm. Lerman, supra note 132, at 925. This piece went on to make the decidedly non-market suggestion that doctors are under no obligation to respect the preferences of the people who hire them. Parental presence “is not an inalienable right but a therapeutic option to be used at the discretion of the anesthesiologist, not the parent, to facilitate induction of anesthesia”. Id. at 926. There is a marked occupational and sociological split on this issue, with nurses supporting more open access to procedures and doctors opposing it. 137 Antitrust already considers some aspects of future competition under the heading of “innovation markets.” All commentators agree on the general importance of innovation, see the discussion in Porter, supra note 36, but have reached no consensus on whether the concept of innovation markets will help frame useful antitrust rules for dealing with it in the high-tech context. Some may also argue that the concept of the innovation market does not really address the issues of variety and choice at all. It provides a legal basis for considering, as a presently existing area of competition (the innovation market) the state of future competition in the industry. It does not necessarily provide a substantive analytical tool for assessing whether greater than normal numbers of frms should be required for satisfactory competitive results. That task can be pursued, however, through the more focused, market-specifc methodology we discuss in this article.

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76 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande

This is obviously a proposition in need of a limiting principle. We do not intend to suggest that any industry that uses technology in a form more advanced than an ox cart is subject to special choice-based antitrust rules. Rather, we should focus on the particular subset of high-tech industries in which innovation is particularly important138. In order to keep this set reasonably limited, industries would be included only if they satisfy three conditions: (1) the industry must have a history of continuous innovation; (2) the innovation must be cutting-edge; and (3) any successful innovation must have strong positive for the public as a whole, in the sense of providing indirect benefts for those who were neither sellers nor users of the product. Each of the three limiting principles is important. First, an established history of innovation is relevant because it provides an empirical basis for believing that innovation will be the main method of competing in the future. Second, the use of cutting-edge technology is a key marker because it identifes situations in which additional centers of innovation are especially needed. The defning characteristic of cutting-edge technology is that no one knows even approximately what the successful research avenues will be. It seems particularly useful to preserve a variety of institutionally independent approaches in that circumstance to ensure that avenues are not prematurely closed off139. And third, positive externalities deserve emphasis because they establish that the general public has a major stake in successful innovation, beyond just the participants’ economic stakes, and there is a strong reason to avoid unnecessary delays in achieving it. Together, these three factors will mark out just a few industries in which innovation is so impor- tant that it is properly protected by special antitrust principles. There are at least two industries that call for consideration under these criteria: phar- maceuticals and advanced defense products.

a. High-technology: pharmaceuticals The seems to meet all three of our limiting principles. First, it has a long history of innovation and of competition through new products140. Second, the relevant innovations are frequently cutting-edge, in the sense that the right avenues of inquiry are not known beforehand. Suggestions have been variously made, for example, that cancer might be attacked by inhibiting the cancer cells’ ability to divide,

138 In appropriate cases courts have recognized the use of high-technology manufacturing techniques as a factor defning a distinctive market. See, e.g., FTC v. PPG Industries, 798 F.2d 1500, 1502 (D.C. Cir. 1986) (Bork, J.) (approving district court’s defnition of the relevant product market as “one of aircraft transparencies requiring, for want of a better term, ‘high technology’ to produce, without regard to the materials of which they are fabricated”). 139 Corporate culture may unduly inhibit the range of different research avenues that are tried within a single frm—certain avenues are thought to be uneconomical, to have been suffciently explored before, or to be “obviously” wrong. 140 The pharmaceutical product is actually a package consisting of the pharmaceutical itself plus information about how to dispense and use it most effectively. This provides an additional nonprice dimension in which suppliers can exercise innovation—in the techniques of dosage and use that are independently valuable to patients and their doctors.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 77 Using the “consumer choice” approach to antitrust law or the creation of blood vessels to supply nutrients to them, or by bolstering the body’s own defenses against them141. No one knows for sure. Only by providing a reasonable variety of these avenues can consumers be assured of the benefts of meaningful competition—that is, competition with a reasonable likelihood of producing effective products—among the research frms142. Third, successful innovation in this industry has a high public . The benefts include not just better products at competi- tive prices, but health rather than illness, life rather than death. It is particularly important to innovation in such circumstances. The relief in at least one decided matter seems to refect an agency conclusion that additional innovating frms may sometimes be necessary. In 2000, the FTC approved the $182 billion merger of SmithKline Beecham and Glaxo Wellcome, on the condition that there be divestitures in six particular markets143, including several markets where research and innovation appeared particularly important. In some of these markets the frms were present only through their research efforts, rather than through any available products, and the merger would have resulted in higher concentration than is normally accepted. The FTC-ordered divestitures, thus, confrmed the general proposition that innovation programs are a proper subject for antitrust analysis144. Most signifcantly, in one specifc market—that for migraine treatment drugs—the FTC required that four independent frms be maintained145, apparently for special reasons related to protecting innovation. The press release accompanying the settlement noted that the single, merged entity would have been likely to delay or eliminate the inherited SmithKline research program because any resulting new drug would have competed with Glaxo’s own existing products: “The result would be less product innovation, and, consequently, fewer product choices and higher prices for consumers”146. To resolve this problem, the merging frms agreed to assign all of SmithKline’s rights to its independent development partner, allowing that frm to pursue

141 See David Hamilton, “Genentech Wins FDA Approval for Cancer Drug”, Wall St. J., Feb. 27, 2004, at B1. Similar uncertainty exists for many other ailments, of course. For example, some researchers believe that brain plaques cause Alzheimer’s Disease and others believe that they are a symptom of the disease. 142 In theory, one company could pursue a variety of different approaches. However, for the same behavioral reasons discussed earlier in connection with media conglomerates and GM cars, a frm may tend to concentrate on certain favored avenues and downplay other ones. 143 See Press Release, Federal Trade Comm’n, Resolving Competitive Concerns, FTC Agreement Clears $182 Billion Merger of SmithKline Beecham and Glaxo Wellcome (Dec. 18, 2000), available at http://www.ftc.gov/opa/2000/12/ skb.htm. 144 See Complaint ¶ 22, Glaxo Wellcome, FTC File No. 001-0088, FTC Docket No. C-3990 (Dec. 18, 2000) (prophy- lactic herpes vaccine market). At the time of the complaint there was no vaccine available to prevent or treat herpes vaccines, but the merging parties were two of the few frms developing such vaccines, and the other research programs were not as far advanced. 145 Glaxo already was marketing two drugs of the triptan class for treating migraines; SmithKline had an in a competing triptan drug that was in its late development stages; and Merck and Astra Zeneca were selling the other approved drugs in the class. See Glaxo Wellcome, Analysis to Aid Public Comment. 146 Press Release, supra note 143.

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78 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande a fully separate effort. This stipulation was particularly suggestive because of the FTC’s record of not commonly challenging four-to-three mergers147. The outcome here, thus, suggests that more than the usual number of frms may be appropriate in the case of innovation-dependent pharmaceutical markets148. In a similar vein, former FTC Chairman Timothy Muris noted the existence of two cases from his tenure as Chairman that also resulted in pharmaceutical development programs being protected by ensuring a relatively large number of market participants149.

b. High-technology: advanced defense industries The feld of advanced defense technology also appears to meet the three-part test for special solicitude. This part of the defense industry has been marked by continuous innovation involving cutting-edge technology, such as wholly new computer tech- nologies or high-performance aircraft150. And there is a strong external public beneft from successful innovation—not just a more cost-effective product, but more successful national military operations. For all these reasons, one expert in government and antitrust has expressed concern that conventional analysis might permit excessive consolidation: “Distributing R&D funds to a wider range of frms, each with a different design philosophy and distinct technical strengths, may yield a superior range of options”151.

147 See Horizontal Merger Investigation Data, Fiscal Years 1996–2003, supra note 121, at tbl. 4.1. 148 See Ben-Asher, supra note 65, at 348–49 (arguing that federal antitrust offcials should investigate mergers in the pharmaceutical sector falling outside the premerger notifcation threshold in order to preserve competition in R&D). 149 See Amgen, Inc., FTC Docket No. C-4053 (consent order) (Sept. 3, 2002) (R&D into cytokines that promote tissue infammation and involving a 4-to-3 merger in one market, in which one of the merging parties was present only through a research program), available at http://www.ftc.gov/os/2002/09/amgendo.pdf; Cytyc Corp., FTC File No. 0210098 (June 24, 2002) (staff authorized to seek preliminary injunction) (merger involving tests used to screen women for cervical cancer) (involving 5-to-4 merger in one market, with most frms present only through research programs or in FDA approval process). For a contrasting outcome see Genzyme/Novazyme, in which the Commis- sion, on case-specifc grounds, declined to challenge a merger to monopoly in research programs for the cure to a rare genetic disorder. Genzyme, FTC File No. 021-0026 (Jan. 13, 2004), available at http://www.ftc.gov/opa/2004/01/ genzyme.htm., discussed infra Part IV.B. Chairman Muris noted that an important feature of all these cases was the presence of the regularized FDA approval process, which made it possible for the FTC to identify potential entrants, determine how many years away from market entry they were, and to conclude that other substitutable R&D programs could not enter without having to start at the beginning of the approval process. See Muris Statement, Genzyme, id. at 4 n.11. Muris did not specify whether the number of actors protected in the frst two cases was greater than would have been called for under the usual antitrust principles, although it appears probable that it was. 150 Here again there are likely to be technical problems whose solutions are not even approximately known. For example, is an economical, low-cost path to orbital fight best achieved through the Space Shuttle, air launches, single-stage-to-orbit technology, or by something else? We simply do not know. See, e.g., Graham Warwick, “Reusable Reality”, Flight Int’l, July 8, 2003 at 29(examining the technical hurdles to reusable spacefight and the increase in costs and complexity since the Columbia crash). 151 William E. Kovacic, “Competition Policy in the Post consolidation Defense Industry”, 44 Antitrust Bull. 421, 433 (1999). The FTC has taken a similar institutional view. Although then-Chairman Pitofsky favored some defense consolidation to reduce expensive over head, he also noted that it was important to preserve competition in quality and innovation: “In the defense industry, these nonprice indicators may be as important as, or even more important than, price”. Robert Pitofsky, Chairman, Statement of the Federal Trade Commission Before the Senate Committee, Subcomm. on Antitrust, Business Rights, and Competition (July 24, 1997), available at http://www. ftc.gov/os/1997/07/ defense4.htm.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 79 Using the “consumer choice” approach to antitrust law

The Department of Defense (DoD) has found the subject of competition and innovation so important that it made this topic the principal focus of the Defense Industrial Base Capabilities Study152. This study reviewed the technology areas that were important to the military and identifed particular markets in which innovation is especially crucial153. The study concluded that the DoD should make a point of maintaining independent suppliers in some of those markets in order to ensure diverse approaches to emerging technologies. The DoD has said that it will sometimes seek to do so “even in face of apparent competitive suffciency”154—meaning even if the market would still be price competitive after further consolidation. The Industrial Base Study gave several examples to illustrate possible applications of this policy. Oxygen-iodine lasers, which can be developed for high-power weapons uses, are currently produced at two-to-fve US frms, and additional R&D is being conducted at other companies. Nonetheless, the DoD indicates that any further consolidation would face the strong possibility of Department of Defense objection155. A similar situation prevails in supercavitating/supersonic projectiles, which can penetrate long distances into water. There are presently three domestic sources, and one can speculate that consolidation among them might bring cost savings156. The DoD still suggests that there is a strong possibility that it will oppose joint ventures and

152 See generally Suzanne Patrick, Deputy Undersecretary of Defense for Indus. Policy, U.S. Dep’t of Defense, Defense Industrial Base Capabilities Study (DIBCS) Series, Presentation to the FTC Staff by the Deputy Undersecretary of Defense for Industrial Policy (2005) [hereinafter Industrial Base Presentation] (copy on fle with the authors). This presentation introduced the FTC antitrust lawyers to the content and method- ology of the DoD’s fve-volume study of the nation’s defense-related industrial base. 153 The DoD identifed the critical areas of diversity fairly systematically. The Industrial Base Capabilities Study is a series of fve reports, each one assessing a broad area of military activity—battle space awareness, command and control, logistics, force application, and force protection. The fve reports can be found on the DoD Web site at http:// www.acq.osd.mil/ip/ip_products.html. A typical example is U.S. Dep’t of Defense, Defense Industrial Base Capa- bilities Study: Force Application (Oct. 2004), available at http:// www.acq.osd.mil/ip/docs/dibcs_fa_10-29-04.pdf [hereinafter Force Application Study]. Each of these reports frst identifes the most theoretically promising military capabilities, then breaks those down to the component technologies involved, and then reasons backward from the technologies to identify the kind and number of industrial facilities needed to perform the tasks of inventing and manufacturing them. Id. at 9. However, attaining the optimal level of performance is more important in some areas of innovation than in others. The DoD, therefore, identifes certain technological felds where it is desirable for the United States to be ahead of other countries by a technology generation or by an order of magnitude in performance— such as locating underground structures or recovering a signal from background noise. Suzanne Patrick, Deputy Undersecretary of Defense for Indus. Policy, U.S. Dep’t of Defense, Defense Industrial Base Capabilities Study: Relevance to Antitrust Reviews, Presentation to the FTC Staff by the Deputy Undersecretary of Defense for Indus- trial Policy 7–8 (May 3, 2005) (copy on fle with the authors) [hereinafter Antitrust Presentation]. It also identifes still more critical felds where we want to be way ahead of rivals by several cycles of technology—such as the means of integrating various sensor inputs to depict the electromagnetic battlespace. Id. These felds are the ones in which it is most important to have diverse suppliers. For a more extensive breakout of felds in these terms see Force Application Study, supra, at app. A. 154 Antitrust Presentation, supra note 153, at 18. 155 See Industrial Base Presentation, supra note 152, at 17; see also Force Application Study, supra note 153, at 55 (“Deny teaming that limits innovation; maintain present number of sources at minimum”). 156 The DoD is not indifferent to the cost of maintaining alternative approaches, particularly when that requires expensive production facilities. See Force Application Study, supra note 153, at 26 (the limited market for hypersonic weapon propulsion systems is “not likely able to support more than one supplier at this time”).

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80 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande mergers “that limit competition” in this market, and it has established a goal to “sustain suffcient suppliers”157. In cases where the technology is so truly cutting-edge that even the right general avenues of research cannot be known in advance, the DoD has explicitly called for the preservation of numerous suppliers. “Swarming control tools”, for example, which are still at the R&D stage, would be used for the futuristic task of enabling a group of unmanned vehicles, such as pilotless aircraft, to coordinate and conduct autonomous attacks, without need for ground control. The DoD says there are “many” frms working on this technology158. The Department is nonetheless worried about acquisitions among them and has cited its sensitivity to this issue as one of the major insights coming out of the Industrial Base Study159. Case law suggests that the antitrust enforcers have accepted these principles160, at least as a general proposition. One example is the Justice Department’s successful opposi- tion to the merger between Lockheed Martin and Northrop Grumman161, which would have reduced from four to three (along with Boeing and Raytheon Hughes) the number of prime contractors with “broad-based capability to design, develop, and produce complex weapons systems”162. More importantly, the merger would have reduced the suppliers in the critical market for high-performance fxed-wing military aircraft from three to two163. These are high levels of concentration, but in many other markets the DoD had already permitted mergers to such levels, suggesting it believes that two frms

157 Industrial Base Presentation, supra note 152, at 18. 158 Id.at16. 159 Id. at 16, 21. Other insights include beliefs that (1) important breakthroughs commonly come from small suppliers with fewer than 100 employees; (2) variety is often more important in early R&D than in later development; (3) separate companies may be useful in applying new technology to different felds; and (4) acquisition of a small innovator by a large parent is likely to trigger a round of defensive sales of other companies. For these reasons, the DoD has expressed concern about further consolidation in certain relatively unconcentrated markets, such as those involving active hyperspectral imagers, which are used for assessing the composition of debris clouds, where there are presently four domestic R&D programs; and infantrymen’s helmet-mounted displays, where there are presently fve programs. Id 160 For practical purposes, the “enforcers” in the defense feld include the Pentagon offcials who decide whether to recommend a challenge to a merger. The DoD has substantial infuence over antitrust decisions because it would be very diffcult for the antitrust agencies to win cases without its supporting testimony as the sole purchaser of these products and as the primary voice for national security considerations. 161 See Press Release, U.S. Dep’t of Justice, Justice Department Goes to Court to Block Lockheed Martin’s Purchase of Northrop Grumman (Mar. 23, 1998) [hereinafter Lock-heed Press Release], available at http://www.usdoj.gov/ atr/public/press_releases/1998/ 212681.htm; see generally Complaint, United States v. Lockheed Martin Corp., 6 Trade Reg. Rep. (CCH) ¶ 45,098 (D.D.C. Mar 23, 1998), available at http://www.usdoj.gov/atr/cases/ f212600/212680. pdf. 162 Kovacic, “Competition Policy”, supra note 151, at 422. 163 See Lockheed Complaint, supra note 161, ¶ 2. The merger would also have reduced from two to one the suppliers of directed infrared countermeasures systems and of airborne early warning radar. These seem like more specialized areas of concern, however.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 81 Using the “consumer choice” approach to antitrust law are ordinarily enough to secure price competition in the major products it buys164. A year after the Lockheed challenge there were only two suppliers of such important weapons systems as non reusable space launch vehicles (Boeing and Lockheed Martin)165; certain kinds of combat ships, such as destroyers and cruisers (General Dynamics and Litton); and tracked vehicles (General Dynamics and United Defense Systems)166. It is likely that the different result in Lockheed/Northrop—the antitrust challenge—was due to concern for maintaining innovation in the more rapidly evolving, less mature aerospace sector. The complaint and the press release both highlighted this factor. The complaint noted that increased interdependence among the remaining frms “may lead to reduced competition among aircraft platforms, less price competition, and reduced innovation in the high-performance fxed-wing military aircraft market”167. Because it appears that similar concentration levels had been accepted in other defense industries, the decision here seems to refect a judgment that protecting innovation in more cutting-edge technological applications calls for some- what more diversity—perhaps one additional effective center of innovation—than antitrust would ordinarily require168.

D. Conclusion on the areas of advantage for choice theory Further study may identify additional industries that call for more than the usual number of competitors. Such industries are not likely to be numerous, however. The three limiting principles that we have proposed should allow the exclusion of most candidates from consideration fairly promptly. For example, the introduction of shelf-stable canned foods was a striking innovation, but the grocery industry does not have a recent history

164 The DoD might have several reasons for accepting two suppliers rather than seeking to preserve the more common number of three. It might believe that the minimum effcient scale for producing complex products will permit only two producers. It might also have confdence—perhaps undue confdence—in its own powers as a large and sole institutional buyer. 165 The market for medium-to heavy-lift government vehicles was subsequently allowed to consolidate to a single joint venture. This caused concern, but was ultimately thought to be justifed by qualitative effciencies in reliability. See ULA Press Release, supra note 75. 166 See Kovacic, supra note 151, at 423. 167 See Lockheed Complaint, supra note161, ¶ 4.In this respect the complaint was expressing the views of the DoD management, if not necessarily those of the individual services. See id. ¶ 7 (quoting letter from William S. Cohen, Secretary of Defense, to Janet Reno, Attorney General (Mar. 23, 1998)). The press release quoted Janet Reno as saying that the merger, unless blocked, “would cost the taxpayer and take the competitive wind out of the sails of innovation in the production of many critical systems....” Lockheed Press Release, supra note 161. 168 In order to be a truly effective center of innovation, however, several specifc things are required. These include staff, research facilities, , and institutional culture. That, in turn, to a series of practical questions about minimum effcient scale: How many such centers are possible; how many are necessary; and how does that number compare with the result expected from the proposed actions? These questions call for careful industry-specifc inquiry. See, e.g., John Birkler et al., “Competition and Innovation in the U.S. Fixed-Wing Military Aircraft Industry” (RAND 2003).

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82 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande of competing primarily through such innovations. The development of video games and other electronic consumer entertainment may involve cutting-edge technology, but it does not involve public externalities that greatly exceed the price of the products themselves. Devices to increase automobile safety may involve that kind of broad externality beneft to public health and welfare, but many of the available techniques seem to be generally known and certainly do not depend entirely on cutting-edge technology. The few industries that satisfy all three tests should, therefore, be ones in which there is a truly strong case for drawing on choice theory.

We have identifed some choice-sensitive industries in this section. But it is important to be clear about what this fact implies: It is not that antitrust should automatically require a larger number of market participants in those industries than it now does, but simply that antitrust should be attuned to the possibility that such a result is necessary. Making that determination in an individual case will call for a careful market-specifc analysis. We now turn to some concrete examples of how that process could have worked.

IV. Eight recent cases that would probably have come out differently under a choice analysis

A more vigorous use of consumer choice principles in antitrust enforcement will involve more than just a change of vocabulary or methods. It will also make a practical differ- ence in outcomes. This can be seen from a review of eight recent matters that would probably have come out differently. We draw these examples from most of the major areas of advantage discussed in the previous section: defense, pharmaceuticals, two hospital matters, a vertical restraint case, a regulated industry, a media joint venture, and real brokerage practices.

A. Raytheon/Hughes Aircraft This was a merger to monopoly, narrowly and controversially justifed by price consid- erations, in the market for supplying air-to-air missiles to the Defense Department. Between the two of them, Raytheon and Hughes manufactured virtually all the air-to- air missiles used by the US military, including the AMRAAM, a medium-range missile

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 83 Using the “consumer choice” approach to antitrust law that was the Department’s most advanced. Raytheon was a longtime leader in this feld, supplying the AMRAAM, Sidewinder, and Sparrow169. Hughes competed with Raytheon to supply the AMRAAM. The competition between the frms had reportedly been benefcial to the government, both improving the product and reducing its cost170. In approving a merger that would eliminate this competition, the DoD and the Depart- ment of Justice were swayed—perhaps too much—by the prospect of short-term price benefts. Some consideration of scale economies was inescapable, because production runs were shrinking in the post-Cold War environment171. However, the Department of Justice also used the merger negotiations as a price-bargaining chip, announcing that it would hold up fling an agreed-upon settlement involving other aspects of the merger so that it could “continue to monitor negotiations” between Raytheon and the DoD “regarding the benefts that will be passed along to the government because of the substantial effciencies the parties expect to achieve by combining the production of their AMRAAM missiles”172. Two weeks later, when those negotiations were completed, the DOJ emphasized the price effects of the merger: “Raytheon and Hughes have been competing bidders for the AMRAAM missile and, although the acquisition eliminates further competition between the two, the setting of a frm price will save the Air Force $180 million over the next four years”173. Those reviewing the merger were also aware of the importance of innovation, but they thought they could protect it by encouraging new or potential entry into the air-to-air missile market174. The DoD concluded that the technology used in all anti-aircraft missiles was fundamentally similar, so that manufacturers of sea-or land-based missiles

169 See http://www.af.mil/factsheets (links to AMRAAM, Sparrow, and Sidewinder systems can be found under the “Weapons” tab). 170 See Center for Security Policy, Decision Brief No. 97-D 87 (June 24, 1997) (the DoD deliberately invested to ensure that two frms could produce the AMRAAM missile; the competition between them “has saved taxpayers hundreds of millions of dollars”) (attributing this view to Paul Kaminski, Under Secretary of Defense for Acquisition), available at http://www.centerforsecuritypolicy.org/index.jsp?section=papers&code=97-D_87; Lawrence Korb, Defense Mega-Mergers Weaken the U.S., Newsday, Apr. 28, 1998, at A33 (competition had brought “improvement in the technology” and a 20% drop in unit cost). 171 See Force Application Study, supra note 153, at 36. 172 “Although the Department expects that these [AMRAAM price] negotiations will be concluded successfully, it will not fle its complaint and proposed settlement with the court until that happens”. Raytheon Press Release, supra note 9 (provisionally announcing agreement that required sale of two electronics businesses and construction of a frewall involving an anti-tank missile). 173 Id. Other divestitures were required as part of the contemporaneous purchase of Texas Instruments. 174 A second factor might also have eased the DoD’s concerns. Some important sources of innovation can be found not in the missile manufacturer, but rather in the subcontractors who make critical components, such as sensors and guidance systems. These frms were not involved in the merger and their ability to innovate was unimpaired. This does not necessarily remove all concerns, however, because any prime contractor still needs to be competitively motivated to encourage, seek out, use, and pay for innovative technology.

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84 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande could enter the air-to-air market if need be175. Other industry observers suggested that foreign manufacturers could license designs here as well176. While the possibility of new entry is always helpful, impediments and barriers may signifcantly limit its impact in this particular market. It is not clear how transferrable the skills are between air-launched and ground launched products; nor is it clear that the Pentagon would be comfortable relying on foreign designs for this crucial tech- nology. Raytheon apparently remains the sole supplier of air-to-air missiles to the US government today. Presumably for these reasons, the Raytheon/Hughes merger was strongly questioned at the time177. While the decision to permit the merger on price and cost grounds may have been defensible, a choice model of antitrust law would have placed greater emphasis on maintaining diversity and innovation in this key technology. Given that the transaction was problematic even when viewed in price terms alone—recall the benefcial price effects of the earlier competition—the addition of choice considerations might well have tipped the DoD and the DOJ in the direction of challenging it.

B. Genzyme/Novazyme A second matter that might have come out differently under the choice approach is the FTC’s 2004 decision to close its investigation of Genzyme Corporation’s acquisition of Novazyme Pharmaceuticals178. The two frms had the world’s only two known research programs aimed at fnding a cure for Pompe disease, a rare and often fatal genetic disorder that affects about 10,000 people, mainly infants and children. In the years between 1998 and 2001, Genzyme

175 “The review found that the components and characteristics of these missiles are shared by all air-intercept missiles and that the strengths of other companies in this market will ensure robust competition for any future programs”. Press Release, U.S. Dep’t of Defense, DoD Completes Review of Raytheon-Hughes (Oct. 2, 1997), available at http:// www.defenselink.mil/releases/1997/b10021997_bt527-97.html. It is not clear if the DoD study specifcally assessed whether such entry would be induced by a 5% price rise, the usual merger methodology. See Horizontal Merger Guidelines, supra note 4, § 1.11; see also infra note 244. 176 See Defense Mergers & Acquisitions Newsl., Nov. 2001 (“the ‘monopoly’ which Raytheon gained in the air-to-missile market was of short duration, as both Lockheed Martin and Boeing scrambled to bring home foreign designs for the Pentagon’s consideration”). 177 Lawrence Korb was Assistant Secretary of Defense in the Reagan Administration and, more recently, a Senior Fellow at the Brookings Institution. He noted that Washington was “correct” to question the Lockheed-Northrop merger, but “it should have used the same criteria to halt . . . Hughes-Raytheon....” Korb, supra note 170, at A33. William Kovacic noted soon after the merger was announced that the combined Raytheon-Hughes would be “truly dominant” in air-to-air missiles, and that “[t]heir challenge is to argue to antitrust offcials that there’s another plausible company the government can turn to . . . One potential in the deal is losing the beneft of different corporations’ different technological solutions”. See John Mintz, “Raytheon Deals Raise Antitrust Concerns”, Wash. Post, Jan. 28, 1997, at C1 (quoting Kovacic). 178 FTC File No. 021-0026 (Jan. 13, 2004). The Commission vote was 3–1–1. The closing letter, statement of Chairman Muris, dissenting statement of Commissioner Thompson, and separate statement of Commissioner Harbour are available at http://www.ftc.gov/opa/2004/01/genzyme.htm.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 85 Using the “consumer choice” approach to antitrust law had made acquisitions or joint ventures that gave it control over two other Pompe R&D programs179, which were subsequently closed due to anticipated manufacturing diffculties180. The market was, thus, already narrowed. The Commission nonetheless decided not to challenge the fnal merger to monopoly between Genzyme and Nova- zyme, reasoning that the merger would accelerate the pace of research and might increase its probability of success through the combination of the two research programs181. The agency also noted that the combined frm would still have ample incentives to bring both its products to market, to serve differentiated patient require- ments, and to respond to various contractual incentives182. The argument of the FTC majority, thus, focused on the benign research synergies and economic incentives facing the frm. What the majority did not seem to consider was the possibility that the merged frms, although still having the means and motivation to engage in vigorous innovation, might have a diminished managerial ability actually to do so. The majority assumed that both the Genzyme and Novazyme approaches could continue to be pursued effectively. However, after the merger Genzyme could name the people to head the Novazyme program. Although the longstanding head of that program remained for a time183, he left after a year, in frustration, some have suggested, over his inability to control the new owner’s research agenda184. The manager’s departure raises concerns about whether the emergence of a single corporate viewpoint could cause a merged program not to pursue all the research avenues theoretically open to it185. In short, this merger presented enforcers with a mix of good and troublesome features—effciencies in the conduct of research versus a potential lessening of research diversity. In balancing these factors, the FTC majority chose to emphasize the provable, short-term economic benefts and accept the merger. By contrast, people employing a choice theory would emphasize the loss of diversity and long-term innovative potential and

179 See Thompson Genzyme Statement, supra note 178, at 4. 180 See Muris Genzyme Statement, supra note 178, at 6–7. 181 See id. at 17. 182 See id. at 14. 183 See id. at 16. 184 See Thompson Genzyme Statement, supra note 178, at 10. See generally Geeta Anand, “For His Sick Kids, a Father Struggled to Develop a Cure”, Wall St. J., Aug. 26, 2003, at A1. The dispute between Genzyme and the manager appears to have involved a personal divergence of interest rather than a dispute over research strategy. The manager wanted to enroll his own children—who suffered from the disease themselves—in early clinical . But the underlying point illustrated here is that corporate control over personnel implies control over policy. 185 There was also evidence that, after the merger, the schedule for the introduction of Novazyme products was delayed by several years, although the reasons for this delay are unclear. See Muris Genzyme Statement, supra note 178, at 17.

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86 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande would view the transaction with more concern186. Under either a conventional or a choice approach, the individual facts have to be carefully studied. The facts and special circumstances of this case—including the fact that the merger was already consum- mated—might still have counseled against a complaint here187. But under a choice theory the investigation would at least have included a more detailed inquiry into the practical ability of the merged frm to maintain competing research programs, and it would have led to an antitrust challenge if this revealed real risks that could be avoided by keeping the frms separate.

C. Dominican Santa Cruz/ Community Hospitals This merger resulted in church-affliated organizations controlling approximately three-quarters of local hospital capacity in Santa Cruz, California188. On religious grounds, the hospitals were reluctant to provide tubal ligations because these were a form of voluntary sterilization189. The range of consumer choice was, therefore, signifcantly threatened in an important non price dimension, which should have been considered in the consent as carefully as the price considerations. The merger brought together Dominican Santa Cruz Hospital and the AMI-Community Hospital, both located in Santa Cruz. There was only one other hospital in the county, located in a more rural area 15 miles away190. After the merger, the combined frm had 76 percent of an alleged county market as measured by patient days, and 73 percent as measured by beds. The surviving hospital—Dominican—was run by an order of nuns, and, at the time the acquisition was frst planned, it apparently had a policy of not

186 Michael Porter appears to be such a person. Speaking about mergers generally, he concluded that if there is a probability “greater than...0.2” that a merger will lead to a “bad outcome”— by which he means a loss of future innovative potential—then he would block the merger absent “a pretty compelling counterargument in terms of the [short term cost savings]”. Jonathan B. Baker & Steven C. Salop, “Should Concentration Be Dropped from the Merger Guidelines?”, 33 UWLA L. Rev. 3, 15 (2001) (quoting Porter’s comments from an ABA Roundtable Conference). See also Scherer & Ross, supra note 50, at 32–34, 575–76. 187 Several other special factors also weighed against a complaint. The Commission had two years of post-acquisition evidence that tended to show continuing robust research. In addition, a post-acquisition divestiture might have been especially disruptive to the ongoing combined research efforts in a way that would ultimately have harmed the public interest. Finally, the small size of the potential market here meant that any treatment would be subject to the terms of the Orphan Drug Act. See Muris Genzyme Statement, supra note 178, at 11. That act gives the initial therapy a seven-year period of exclusivity, unless a later drug can affrmatively demonstrate that it is superior. These provisions tended to affect the likelihood of having two therapies available even if an antitrust action were taken. 188 Dominican Santa Cruz Hosp., 118 F.T.C. 382 (1994). 189 The separate and diffcult subject of abortions was not a signifcant issue in this case. In this county, as in many areas, abortions were generally performed in freestanding clinics and were, therefore, not directly affected by the hospital merger. 190 That hospital may not have been a fully effective substitute for the others because some insurance plans might not have included it and some doctors might not have had privileges there.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 87 Using the “consumer choice” approach to antitrust law performing tubal ligations191. Dominican initially indicated that this restriction would be extended to the acquired hospital, and the range of important marketplace options, thus, appeared at risk. The merged hospital subsequently ameliorated that policy and may have taken steps to offer the procedure in some circumstances192. There remained some grounds for concern, however, that the continued availability of the procedure was uncertain. Antitrust concern under the choice framework would therefore have been warranted193. The FTC’s addressed the main price effects of the merger, but it was relatively limited and its chief provision was simply a requirement that the respondents notify the agency before acquiring any additional hospitals194. Some of the FTC’s restraint was inevitable. Because this acquisition had not been reportable under the HSR Act, the agency’s ability to obtain complete relief was necessarily limited195. It would have been better, however, to recognize that the nonprice option of tubal ligations would not necessarily be preserved by measures aimed at protecting marketwide price competition and to have instead included an order provision specifcally designed to protect it196.

191 An article in the area newspaper quoted doctors expressing concern that the procedure would no longer be available when it needed to take place in a hospital setting. See Bob Levy, “Hospital Offer Raises Concerns”, San Jose Mercury News, Feb. 28, 1990. 192 At the time the acquisition was actually consummated, Dominican informed obstetricians that it would allow completion of some tubal ligations that had already been scheduled, although no further procedures of this kind would be booked. Thereafter the procedure apparently would be unavailable at the Dominican hospitals. See Lee Quarnstrom, Sterilization Services Limited but Santa Cruz Clinics Closed for Tubal Ligations, San Jose Mercury News, Nov. 5, 1991, at 1B. Two years later, however, at the time the consent decree was becoming fnal, the hospital had obtained authorization from the local bishop to perform ligations under some defned circumstances. See Lee Quarnstrom, “Birth Control Ban Is Eased at Dominican”, San Jose Mercury News, Sept. 11, 1992, at 1B. 193 The hospital might have made two arguments against an enforcement action. Each has some merit, but neither should have prevented a successful challenge. First, Dominican might have argued that it would have been legal if Community Hospital had been bought by an unrelated out-of-state Catholic hospital, and tubal ligations would have been equally eliminated under that merger. Thus, it could not be said that the loss of this service fowed uniquely from the acquisition by Dominican. This observation, however, even if it could be proven factually correct, is legally irrelevant. The antitrust laws may not reach every loss of consumer options that fows from an acquisition, but that does not mean they cannot reach those losses that are the consequence of a legally relevant horizontal merger. Second, the hospital might have argued that any remedy here would involve the government in requiring the hospital to offer a service that is contrary to its religious values, and this would violate its freedom of religion under the First Amendment. This argument is also unpersuasive because any remedy is imposed as a result of a voluntary act by the hospital and, thus, is easily avoidable. If the hospital cannot make an acquisition without violating the antitrust laws, if it is not willing to be subject to an order that violates its religious beliefs, and if a satisfactory compromise cannot be negotiated, then it can simply forgo that particular transaction. 194 See Dominican Santa Cruz Hosp., 118 F.T.C. 382, 389 (1994). 195 The acquisition was consummated before the staff could open an investigation or consider seeking an injunction against it. By the time the consent order was negotiated, the acquired hospital had been converted to a skilled nursing and rehabilitative care facility and no longer operated as a hospital; reconversion would clearly have been diffcult. In addition, another hospital chain had announced plans to enter the market, an action that would restore a third competitor. See Dominican Hospital, 118 F.T.C. at 390–91 (statement of Chairman Steiger). Notwithstanding these considerations, Commissioners Azcuenaga and Yao dissented and suggested that the consent order did not provide an adequate remedy. In 1996, subsequent to this discussion, and six years after the acquisition itself, the Sutter system opened the Sutter Maternity and Surgery Center, a small specialty hospital focusing on women’s issues. This seems to have solved most problems of access. It is still worth considering whether antitrust policy should ordinarily be content with new entry that is subject to this many delays and uncertainties. 196 It would be desirable to keep any such order provision as non-regulatory as possible, perhaps by permitting delega- tion of the management of any specifcally protected medical service to an independent entity.

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88 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande

D. Butterworth/Blodgett Hospitals Another hospital case that might have come out differently under choice analysis is the Butterworth/Blodgett merger, which a district judge declined to enjoin in spite of the high concentration that resulted197. The judge carefully examined the probable price effects in hospital services, and perhaps implicitly considered some nonprice compe- tition, but failed to consider the possible need for additional competitors to respond to the full range of consumer preferences implicit in the selection of medical treatments. Butterworth and Blodgett were the two largest of the four hospitals in Grand Rapids, Michigan, and between them accounted for 65–70 percent of the city’s capacity198. Concentration was clearly high by any measure, and the judge acknowledged that this made out a prima facie case for the government. He nonetheless held that the defendants had successfully rebutted that case by showing that a price increase was unlikely: nonproft hospitals charge lower prices than for-proft ones in concentrated markets; the hospital board members represented the interests of the patient community and desired competitive prices; there were capital and operating effciencies in the merger; and the hospitals had issued a public “Community Commitment” statement and were willing to sign a formal order limiting their prices and profts to specifed levels199. It is striking how the court’s analysis focused almost entirely on price effects200. Nonprice competition—even on the core value of quality of care—was mentioned only in passing201. Not mentioned at all were the more subtle forms of nonprice compe- tition, through which all hospitals respond, more or less aggressively, to varied patient and community preferences on issues of health care. Nonprice preferences should be crucial to hospital competition, however. That compe- tition needs to be able to respond to the wide range of individual preferences that exist—and that may, in turn, require a number of independent decision makers. Many hospital markets, however, including the Grand Rapids market, may be like the car companies of the 1950s. The Big Three automakers may have appeared intensely competitive in both price and design terms, but the later rise of imports revealed that they had not in fact been anticipating and supplying the full range of latent consumer

197 FTC v. Butterworth Health Corp., 946 F. Supp. 1285, 1303 (W.D. Mich. 1996), aff’d without opinion, 121 F.3d 708 (6th Cir. 1997). 198 When they merged, the HHIs increased by between 1064 and 2001 points, to a level between 2767 and 5079, depending on the particular markets and units of measurement used. See id. at 1294. 199 See id. at 1295–98. The judge was apparently untroubled by the price-regulatory features of this undertaking. 200 See id. at 1298 (hospitals’ proferred price guarantee corroborates other evidence that nonproft hospitals may be treated differently under the antitrust laws, and further undermines the predictive value of the FTC’s prima facie case). 201 Id. at 1297 (hospital directors “testifed convincingly that the proposed merger is motivated by a common desire to lower health care costs and improve the quality of care”).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 89 Using the “consumer choice” approach to antitrust law preferences. As we discussed previously, there is evidence suggesting the possibility of similar unsatisfed demands for variety in the provision of hospital services202. Just how important consumer preferences in hospital mergers are remains to be deter- mined. We do not know enough about the consumer demand for particular medical services to rely on that factor alone in reaching an antitrust judgment. Moreover, a desire to protect overall nonprice competition, as presented in this case, would require maintaining a market structure in which hospitals will be responsive to consumer demand for choice in general, which is a less focused and, therefore, more challenging remedial assessment than would have been involved in protecting one known and particular choice, as was presented by the Santa Cruz hospital merger. Nonetheless, when a merger is already far over the line in terms of concentration—as it was here— then the probable consumer demand for variety should be included as part of a complete analysis and should have been enough here to call for a different result.

E. J.B.D.L. Corp. v. Wyeth-Ayerst Laboratories Many of the examples in this section involve acquisitions, but the use of choice theory does not change outcomes solely by giving the government an additional theory of liability in merger cases. It can also change the outcomes of cases in which private corporate plaintiffs have challenged vertical restraints. Wyeth Labs was one such matter, involving an exclusive dealing requirement203. Wyeth manufactures Premarin, an estrogen product approved for a number of uses, including primarily the treatment of symptoms associated with menopause. While there are other oral estrogen replacement therapy drugs on the market, only one other competitor’s then-recently approved drug, Duramed’s drug Cenestin, was also a conju- gated estrogen product204. The relevant market for antitrust purposes is uncertain, but is dominated by Wyeth under almost any defnition. Premarin’s share of the oral estrogen replacement therapy market had been approximately 70 percent during the relevant period, and Wyeth conceded for summary judgment purposes that it had monopoly

202 See supra notes 125–136 and accompanying text. 203 J.B.D.L. Corp. v. Wyeth-Ayerst Labs., Inc., No. 01-00704, 2005 U.S. Dist. LEXIS 11676 (S.D. Ohio June 13, 2005), appeal docketed, No. 05-3988 (6th Cir. Aug. 5, 2005). The problematic restraints in Wyeth might be characterized as involving incentives toward de facto exclusive dealing or, alternatively and more generally, as anticompetitive exclusionary contracts. 204 A conjugated estrogen differs chemically from other estrogen products. There are no generic equivalents of Premarin approved by the FDA. Id. at *4.

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90 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande power in that market205. If conjugated estrogen products were considered the relevant market instead, Premarin’s share would have been approximately 98 percent206. Wyeth sought to protect the dominant market position of Premarin207. A key part of its strategy was to prevent Duramed from entering into contracts for its competing Cenestin product with third-party payors, such as insurance plans, and with pharmacy benefts managers (PBMs), which manage formularies for health plans. Wyeth made many of those entities sign “sole conjugated estrogen” clauses if they wanted to get any of the rebates that it paid on sales of Premarin and other Wyeth products. A group of buyers challenged this and similar practices under both Sections 1 and 2 of the Sherman Act. They reasoned that the bundled discounts were suffciently important to amount, in practical terms, to exclusive dealing requirements, and that the exclusive dealing improperly permitted Wyeth to maintain its monopoly in the oral estrogen replacement market: “[T]he synergistic effects of Wyeth’s sole conjugated estrogen clauses together with Wyeth’s formulas for rebates to PBMs, effectively foreclosed competition from Duramed’s Cenestin”208. Moreover, Wyeth “attempted to include these sole conjugated estrogen clauses . . . in most of its PBM contracts”209. The district court nonetheless granted Wyeth’s motion for summary judgment. The judge gave a number of reasons for this: foreclosure was not complete210; the “sole conjugated estrogen” clauses were only 30–60 days in duration211; the PBMs allegedly benefted fnancially from Wyeth’s discounts212; bundled discounts were said to be common in the pharmaceutical industry213; and the court stated that it wanted to mini- mize the uncertainty, which could chill benefcial conduct, that arises when such complex issues go to jury trial214. This summary termination of the case would be considered an error under our proposed choice analysis. Wyeth’s practices created the potential for both types of decreases in

205 Id. at *14, *32. 206 Id. at *26. 207 One goal was to hold Cenestin “to less than two percent of prescription market share in 1999, approximately $20 million in assumed sales”. Id.at*6. 208 Id. at *8. Financial incentives to exclusivity can sometimes limit choice as effectively as contractual provisions do. See Willard Tom, David Balto & Neil Averitt, “Anticompetitive Aspects of Market-Share Discounts and Other Incen- tives to Exclusive Dealing”, 67 Antitrust L.J. 615 (2000). 209 Id. at *11; Wyeth’s index of its PBM contracts indicates that, as of , 2000, 31 out of 74 contracts contained a “sole conjugated estrogen” clause. Id. 210 Id. at *30. 211 Id. at *22. 212 Id.at *8. 213 Id. at *7. 214 Id. at *48.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 91 Using the “consumer choice” approach to antitrust law consumer choice that we have discussed—signifcant short-term restrictions on the availability of the choices that consumers might like to have, and a long-term diminu- tion in consumer choice due to decreased incentives to invest in innovation. In the short term, Wyeth’s use of its monopoly power to impose bundled multi-product discounts may have deprived consumers of the ability to make a free choice from among the products that an undistorted market would have presented to them (i.e., their ability to choose from among a number of oral estrogen replacement drugs). Such effects on consumer choice commonly call for examination whenever a dominant frm is involved in imposing them. They raise particular questions, however, when applied in the context of a pharmaceutical market. Patients respond differently to different medicines, and individual medicines frequently give rise to different side effects in different patients. A reduction in variety may, therefore, have special weight in a rule of reason analysis in this setting. In the long run, moreover, this type of exclusionary conduct can deter entry, thus making innovation more diffcult, eventually hampering consumer choice even more. As discussed in an earlier section, independent centers of innovation are especially valuable in cutting-edge technologies like pharmaceuticals. Wyeth’s bundled discounts, with their potential for signifcantly discouraging new entry, could have the long-term effect of inhibiting this important form of competition. Because this case was dismissed on a summary judgment motion, and because the record is sealed, the signifcance of these potential losses in consumer choice cannot be properly evaluated. For example, we do not know the extent to which the entities impeded by the allegedly exclusionary distribution contracts were the true, de facto centers of innovation in this industry215. Nor can we evaluate Wyeth’s potentially offset- ting effciency arguments. Bundled discounts, even by frms with monopoly power, might be justifed by effciencies or by lower prices overall. However, the adverse effects on consumer choice here (as well as possible adverse price effects) might also have been enough to outweigh any alleged effciencies. To have adequately explored these issues the court should not have granted summary judgment when it did.

215 On the present publicly available record it is not clear whether the effective unit of innovation is the FDA-approved product or the broader manufacturing frm. Nor is it clear to what degree the excluded frm here is one that competes by innovation, as distinct from some generic frms that compete primarily on price. But the point is that these issues should have been explored.

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92 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande

F. Montgomery County Taxicab Regulation This matter involved a county’s decision to allow one taxicab frm to grow to dominant status, protecting consumers from price effects through price regulation but nonethe- less leaving them vulnerable to poor service216. Barwood, Inc., serves the suburban Washington jurisdiction of Montgomery County, Maryland: “Of the 580 licensed cabs in the county, 433 use the Barwood name, . . . [and] 360 are [directly] owned by the company”217. As early as 1988, Barwood came to a position of dominance, with about 80 percent of the market218, through purchases of fve other frms and about 40 individual licenses219. Later, in 1992, Barwood bought Silver Spring Taxi, with another 70 licenses220. More recent regulatory actions have helped to maintain Barwood’s position by waiving the usual requirement that unused licenses be revoked221. The regulatory authority permitted concentration to increase over the years without objection, perhaps on the presumption that because prices were regulated there was no signifcant risk of consumer harm222. The regulators failed to take account of the nonprice effects, however. In the absence of competition, service appears to have deteriorated. Montgomery County has about 15 times as many complaints about cab service as neighboring Fairfax County, Virginia, which issues about the same number of licenses223. A consultant’s report in 2001 concluded that “greater competition could rectify problems such as long customer waiting times and cab no-shows. Customers dissatisfed with one company should be

216 See Matthew Mosk, “Taxicab Firm’s Infuence Flagged”, Wash. Post, Nov. 18, 2003, at A1. Similar situations appear to have occurred in other cities around the country. See, e.g., “Robert Hardaway, Taxi and Limousines: The Last Bastion of Economic Regulation”, 21 Hamline J. Pub. L. & Pol’y 319, 324 (2000) (experience suggests that unregulated markets provide better service at lower prices); Ross D. Eckert, “The Los Angeles Taxi Monopoly: An Economic Inquiry”, 43 S. Cal. L. Rev. 407, 426, n.80 (1970) (“The Board has apparently been unconcerned that the Yellow Cab Company immediately upon its consolidation of competitors in 1934, reduced its number of operating cabs by approximately 30 per cent . . . and that the quantity of service offered has declined steadily over the past ffteen years”. By 1952, Yellow Cab operated “about 900 cabs out of a total of 975” (footnotes omitted)); see also Edmund Kitch, Mark Isaacson & Daniel Kasper, “The Regulation of Taxicabs in Chicago”, 14 J.L. & Econ. 285, 286 (1971) (80% share of Chicago’s market was held by two companies that came to be controlled by one person). 217 See Matthew Mosk, “Duncan Pushes Cab Competition”, Wash. Post, Dec. 16, 2003, at B1. 218 See Sue Anne Pressley, “Montgomery to Add 150 Cabs Over 3 Years”, Wash. Post, July 6, 1988, at B3. 219 See Claudia Levy, “Upper County Has Few Easy Cab Riders”, Wash. Post, Feb. 25, 1988, at D1. 220 E-mail from Nancy Kutz, Offce of Medicaid and Taxicab Regulation, Montgomery County, Md., to Thomas Werthman, Research Assistant, University of Baltimore School of Law (Nov. 29, 2005) (on fle with authors). 221 Mosk, Taxicab Firm’s Infuence Flagged, supra note 216, at A1. Until 2004, the Montgomery County Code gave regulators considerable discretion in how to treat cab operations. See, e.g., Montgomery County, Md., Code § 53-48(e) (provisions on transferability) (“The director may waive any prohibition against transferability if the director is satisfed that granting a waiver is likely to produce: (1) More effective competition; and (2) Based on the business plan of the transferee, an improved level of taxicab service for consumers in the County”). 222 See id. § 53-106(a) (County Executive is to set the rates for all cabs and cab companies). 223 Mosk, Taxicab Firm’s Infuence Flagged, supra note 216, at A1.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 93 Using the “consumer choice” approach to antitrust law able to turn to other companies for better service”224. A choice model of competition would have anticipated these kinds of problems and would not have allowed this level of concentration to arise, even in a regulated industry225.

G. The Voter News Service Joint Venture A choice-centered approach would also have challenged the formation of the Voter News Service (VNS) joint venture that gradually took over the exit polling and election- prediction operations of six major television news operations. VNS grew between 1964 and 1990 and eventually included ABC, CBS, NBC, Fox, CNN, and the Associ- ated Press226. Thereafter, while there may have appeared to be many networks fore- casting the election results, only one underlying organization provided the raw data on which the networks relied, and, thus, consumer choice was limited to that one frm. The consequences of this limited choice were vividly displayed in the 2000 Presiden- tial election. All the networks wrongly called the Bush/Gore race in Florida, withdrew their predictions, called it again, and only then settled on the correct assessment that it was too close to call227. The uniform series of errors sprang from the fact that all the networks relied on the same underlying information and methodology from VNS. Conventional price-oriented analysis would probably still have upheld the formation of VNS, however, for several reasons. The venture did result in cost savings because duplicate staffs of interviewers and analysts were no longer maintained. It had no power to raise prices228or to reduce the output of election night programming. And it was apparently supported by the Supreme Court’s ruling that it was proper for a number of newspapers to combine to form and operate the Associated Press229.

224 Mosk, Duncan Pushes Cab Competition, supra note 217, at B1. The county administrator reached a similar conclu- sion: “Right now, you have one big player. If we can create competition, we’ll see service improve”. Id. 225 The current taxicab code provides: “The Director must not approve the transfer of any license if the transferee already holds, or would then hold, more than 40% of the total of licenses then in effect.” Montgomery County, Md., Code § 53-204(e), available at http://www.montgomerycountymd.gov/content/DPWT/transit/taxi reg/testfle/ chapter53taxicabsrevised12.06.pdf. We believe that such a market share cap is wise in light of the historic domina- tion of the Montgomery County taxicab market by one company. We also believe that the optimal level of nonprice competition is much more likely to result from competition than from rate regulation and administrative oversight of a frm with market power. The diffculties of oversight are especially worrisome in where the dominant frm has historically had a strong infuence over its own regulation. 226 See Jeremy Gerard, “TV Networks May Approve a Pool of Election Exit Polls”, N.Y. Times, Oct. 31, 1989, at C26; James A. Barnes, “The Polling Business”,5 Public Persp., Nov./Dec. 1993, No. 1, at 17; Frank Reuven, “Election Night” ,75 New Leader, Oct. 5, 1992, at 20; see also Moshe Adler, “Bungled Election Projection? Blame the Feds!”, salon.com, Dec. 7, 2000, http://archive.salon.com/tech/feature/2000/12/07/antitrust/index.html. 227 See James Grimaldi, “Battle of the Titans”, Wash. Post, Nov. 27, 2000, at E8; Kathy Chen, “Election 2000: Antitrust Advocacy Group Seeks Breakup of Voter News Service”, Citing Florida, Wall St. J., Nov. 28, 2000, at A12. 228 It could have raised neither advertising rates nor the price at which it sold its information to its client networks, because it was owned by the networks. 229 Associated Press v. United States, 326 U.S. 1 (1945).

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94 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande

Choice analysis would have pointed the way toward distinguishing Associated Press, however. The AP organization provided a unique effciency in that papers could collectively carry out important tasks that were beyond the resources of any individual paper, and it therefore resulted in an increase in the market options available to news- paper readers. By contrast, in the case of VNS each network had provided its own analysis before the venture was created and could have continued to do so. The consumer-choice benefts from creating the VNS joint venture were, therefore, smaller or nonexistent, and the costs, in the form of diminished competition among networks to provide accurate and insightful analysis, were greater. The venture would therefore have been banned under a choice version of antitrust230.

H. Realcomp II One fnal matter is still in litigation, and so the facts are not yet fully known, but it is likely to be an instance where choice theory has already made a difference in outcome. The matter involves the alleged exclusion of the low-price, low-service option from a real estate brokerage market231. On October 12, 2006, the FTC fled an administrative complaint against a multiple listing service (MLS) used by about 2100 brokerage offces in the metropolitan Detroit area. The complaint alleged that the MLS discrim- inated against nontraditional, limited-service, discount brokers by refusing to permit their listings to be transferred from the MLS to Internet-based Web sites accessible to consumers. Because many house-hunters now begin their search on such Web sites, the disadvantage to discount brokers is commercially important. This case might have been diffcult to bring under conventional price theory—not impossible, but harder. The full-service brokers could then have argued that their quality-adjusted price was no higher than that of the discounters, so that even those consumers who were forced to use them would still have suffered no adverse price effects. Disproving those claims through an assessment of quality-adjusted prices would have been complex. In choice terms, however, the complaint was easy. Customers of the brokerage services were forced to buy a comprehensive package of services even though they might not want all the elements in that package. For example, some home- owners might want to conduct the open house themselves, or to do their own price negotiations, and those customers were forced to buy unnecessary services if they wanted any realtor assistance at all. Thus, home sellers and buyers were both deprived

230 For a more detailed description of this Voter News Service matter see Lande, Choice as Ultimate Goal, supra note 12, at 519–21. 231 Realcomp II, FTC Docket No. 9320; FTC File No. 061-0088 (Oct. 12, 2006), available at http://www.ftc.gov/ opa/2006/10/realestatesweep.htm. A second, similar complaint was announced at the same time, along with fve proposed consent agreements. Id.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 95 Using the “consumer choice” approach to antitrust law of the option of having lower-service, lower-cost brokerage. The agency described the case primarily in these choice terms in a press release announcing the complaint232.

V. Implementation and methodology of the consumer choice paradigm

To adopt consumer choice as a new paradigm, antitrust policy must also fnd that it can be implemented in a relatively simple, objective, and predictable manner233. And the challenges in these respects are certainly real enough. Choice theory is somewhat more complex than the alternatives, and it is less tied to objective metrics, such as prices and elasticities. Perhaps most diffcult, it is something novel, so there is some uncertainty about its application. All these factors may raise concerns about the risks of unpredictable or overly aggressive enforcement. The choice approach does require somewhat more analytical complexity. Fortunately, however, there are mechanisms to avoid or minimize this problem, which are elaborated through a discussion of fve main points: (1) the Merger Guidelines could be amended to state explicitly that these additional choice issues are relevant to its analysis; (2) there are a variety of reasonable and practical sources of information to draw upon in deciding the new issues; (3) the conclusions from this process could be expressed without too much diffculty in revised HHI thresholds for an otherwise standard merger analysis; (4) alternatively, choice considerations could be brought into the rule of reason analysis of mergers that are above the current thresholds of the Guidelines even if the thresholds themselves are left unchanged; and (5) various safeguards are avail- able to prevent any undue exercise of prosecutorial discretion. Though some diffculties in the analysis of nonprice competition will surely remain, the analysis must nonetheless be undertaken: “[F]acts cannot be ignored simply because present methods do not permit them to be described and measured with full scientifc rigor”234.

232 See Press Release, Federal Trade Comm’n, FTC Charges Real Estate Groups with Anticompetitive Conduct in Limiting Consumers’ Choice in Real Estate Services (Oct. 12, 2006), available at http://www.ftc.gov/opa/2006/10/ realestatesweep.htm. 233 It is likely that the effciency paradigm succeeded in replacing the social/political paradigm, even though it actually has little foundation in the antitrust laws’ legislative history, because its proponents successfully argued that it was the more objective and predictable approach. See Robert Lande, “The Rise and (Coming) Fall of Effciency as the Ruler of Antitrust”, 33 Antitrust Bull. 429, 430–38 (1988). 234 Leary, supra note 89, at 556.

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96 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande

A. Comparing the complexity of the different paradigms In assessing the administrability of different approaches, the frst thing to consider is how complicated an analysis each will require. Here the choice paradigm admittedly requires a more complex analysis than its alternatives, although we will see in later sections that the resulting problems are modest and can be surmounted235. Of the price, effciency, and choice models, the price paradigm remains the simplest to implement. It requires the least information to apply and is the most predictable in its outcomes for many reasons236. Perhaps the most important reason is that the price model simply eliminates some relevant areas of inquiry altogether, such as future innovation. It also assumes that consumer preferences with respect to nonprice values are fully captured in the concept of “quality-adjusted price”. As we have seen above, however, although both these conventions may simplify matters, the results are frequently inaccurate. An effciency model is substantially more complex. Because it begins with a price analysis, it has the same analytical burden as a price paradigm. The effciency model also adds another layer of inquiry, assessing the signifcance of the price changes in terms of the three basic categories of effciencies—allocative, productive, and innovative237. A choice model would, in theory, be no more complicated than an effciency model, but in actual practice would probably be one step more elaborate. In theory, the elements of choice will already all be captured in the various types of effciency238. In practice, however, the effciency model usually focuses on cost savings and shortchanges the factors of variety and innovation. A choice approach would always treat these as important. Adding these elements to the analysis will necessarily make the choice approach somewhat more complex. Nevertheless, it should not be unduly diffcult to apply, as the next sections will demonstrate.

235 And, of course, we should always remember that choice analysis will make a difference only in a limited number of cases; most will continue to be assessed as they are now. 236 See Fisher, Johnson & Lande, supra note 34, at 809–13. 237 Id. 238 One important formal difference is that a choice model would count the transfer effects of the higher prices, in addition to the ineffciency effects. See Averitt & Lande, “Consumer Sovereignty”, supra note 12, at 717 n.11. Because the transfer effects of market power can easily be calculated if the allocative ineffciency effects are known, however, this would not require the antitrust decision makers to obtain any additional information. See Fisher, Johnson & Lande, supra note 34, at 809–10; Fisher & Lande, supra note 34, at 1653–59.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 97 Using the “consumer choice” approach to antitrust law

B. Increasing the emphasis on choice in the Merger Guidelines To provide an institutional foundation for considering the various issues related to choice, it may be useful, frst of all, to amend the Horizontal Merger Guidelines to acknowledge the importance of choice explicitly. One can certainly construe even the current Guidelines to support choice as a factor, and, of course, merger cases can be brought even if they do not come within the Guidelines. However, two amendments could help remove any uncertainties. The frst change would amend the Guidelines’ discussion of its “policy assumptions,” in which the “unifying theme of the Guidelines” is now presented almost entirely in price terms239. The discussion focuses on market power as it might be exercised by the seller, not on choice as presented to the buyer, except for a single footnote240. Choice theory deserves higher visibility than this. We suggest including in the text some language along the following lines: “Sometimes reduced competition will result in fewer short-term consumer choices in terms of product quality, variety, or service; or in less innovation in the long term. These harms can occur even in markets that are price competitive”. Elevating this idea to text will inform the Guidelines’ users that this is a more important concept. It would also be useful to amend the later section of the Guidelines that discusses particular theories of litigation. Section 2 of the Guidelines identifes two particular adverse competitive effects that mergers can have: the lessening of competition through coordinated interaction (Section 2.1), and the lessening of competition through unilat- eral effects (section 2.2). Although it is possible to ft choice theory within one or both of these categories241, it does not ft easily. The harm from a choice-related merger does not come only from collusion to raise price among the frms in the market, but could also come from the diminished range of options offered. Nor does a choice-related

239 Section 0.1, Purpose and Underlying Policy Assumptions, states: The unifying theme of the Guidelines is that mergers should not be permitted to create or enhance market power or to facilitate its exercise. Market power to a seller is the ability proftably to maintain prices above competitive levels for a signifcant period of time.[note 6] In some circumstances, a sole seller (a “monopolist”) of a product with no good substitutes can maintain a selling price that is above the level that would prevail if the market were competitive. Similarly, in some circumstances, where only a few frms account for most of the sales of a product, those frms can exercise market power, perhaps even approximating the performance of a monopolist, by either explicitly or implicitly coordinating their actions. Circumstances also may permit a single frm, not a monopolist, to exercise market power through unilateral or non-coordinated conduct—conduct the success of which does not rely on the concurrence of other frms in the market or on coordinated responses by those frms. In any case, the result of the exercise of market power is a transfer of wealth from buyers to sellers or a misallocation of resources. Horizontal Merger Guidelines, supra note 4. 240 Id. at n.6 (“Sellers with market power also may lessen competition on dimensions other than price, such as product quality, service, or innovation”). 241 This is particularly true because note 6 referred to the existence of nonprice competition, so we know that topic must be covered somewhere in the Horizontal Merger Guidelines. Id.

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98 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande merger obviously threaten to permit a conventional unilateral exercise of market power; the unilateral harm does not lie in a conventional price increase, but rather in the innovations that are not made. We, therefore, propose adding a new Section 2.3 to explain how mergers can, in the circumstances previously identifed in Part III of this article, lead to consumer harm even though price may not necessarily be affected242. The analysis under the new section would not all run in the direction of enabling the antitrust agencies to more easily show anticompetitive effects, of course. Although choice can sometimes lead to a merger being blocked even if it is unlikely to have detrimental price effects, it can also lead to situations in which the merging parties show benefcial effects on choice and innovation suffcient to outweigh the possibility of somewhat higher prices243.

C. Where to fnd the information needed for choice analysis With or without clarifcations in the Guidelines, the antitrust agencies can begin to deal with choice cases. Some practitioners may be concerned that suitably precise information will not be available once we move beyond price. In fact, however, a variety of techniques are available for gathering, organizing, and digesting the appro- priate data. Some techniques will give the agencies information needed to make decisions in immediate cases, and others will help acquire information that will be useful in future cases. Antitrust has always been a common-law discipline, and a movement into choice theory should not call for any change in that approach. In assessing individual cases, enforcers might draw upon any of several sources. First, they can make a point of asking about choice issues in their interviews with frm managers and other market participants. Second, they can look creatively to identify particular aspects of a case that lend themselves to quantitative assessments in choice terms, even if the case as a whole may still require other techniques. In some investigations, for example, quan- titative data on consumer choices may be helpful in defning the boundaries of the relevant product or geographic market244, even though such data may not yet be

242 Alternatively, one could make smaller additions to §§ 2.1 and 2.3. 243 In other words, there can be an effciencies defense in the innovation context, a possibility that we will discuss below. 244 Markets are currently defned through a “thought experiment” keyed to price. We ask whether a hypothetical monopolist could proftably raise prices by a small but signifcant amount, such as 5–10%, for a signifcant period of time. See Horizontal Merger Guidelines, supra note 4, § 1.11. In markets where nonprice competition is the most important kind, however, the boundary-defning test might better be conducted in nonprice terms instead. The issue then would be whether a hypothetical monopolist could make the product less desirable in some “signifcant and

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 99 Using the “consumer choice” approach to antitrust law suffciently developed to quantify the ultimate consumer harm that results from a loss of variety. Third, they can turn to the FTC’s Bureau of Consumer Protection for assistance and use some of that bureau’s techniques, such as focus groups and polling245, to gain insight into the extent to which the consumers of a particular product value nonprice options. Fourth, economists assigned to a case can begin to develop quanti- tative methods for assessing the value that consumers put on variety in that particular factual context. These might usefully include some instances of experimental economics, among other techniques, on the theory that the preference variables identifed in an investigation may still be so complex that a laboratory setting will be helpful in isolating their individual effects246. In addition, the agencies may begin to collect information from a number of more general, less case-specifc sources, not for immediate use, but rather to build up a base of knowledge that will help in the assessment of future matters. There are several possible sources of this material. First, when enforcers conduct post hoc retrospectives of consum- mated mergers, they should attempt to ascertain the effects of the merger on innovation, quality, and variety, as well as on prices. Second, and similarly, when enforcers have encountered an industry in which variety competition was at risk, and have obtained a corrective measure increasing consumer information or otherwise facilitating enlarge- ment of the range of marketplace options247, they can conduct retrospectives to determine how consumers in fact responded to the new environment. Third, they can study the business and sociological literature about specifc industries, focusing on information about the factors thought to affect variety, creativity, and innovation in that industry, uch as the structural conditions most conducive to it248. Fourth, they can review the economics literature on similar issues and, with the assistance of the antitrust agencies’

non-transitory” nonprice way, without prompting market shifts that would frustrate the step. In a hospital context, for example, the question might be whether a monopoly institution could successfully cut corners to the point where its rate of complications rose by 5%. Giving choice considerations more emphasis might cause the markets for certain choice-sensitive products to become defned more narrowly, as the analysis is shifted to a new metric to which consumers are more responsive. This will tend to show market power in a larger number of cases. We cannot, however, predict how great any changes would be in practice. 245 Using this technique will take advantage of the FTC’s unique asset in having both antitrust and consumer protection expertise under one roof. 246 For example, results from economic laboratory tests show that “four frms seem to be enough to approach a competitive equilibrium in most (but not all) experimental markets”. Paul Pautler, “Evidence on ”, 48 Antitrust Bull. 119, 207 (2003). 247 The FTC’s R-value rule, mandating disclosures on the effectiveness of home insulation, was, in part, an attempt to help the market provide better insulation products. See Labeling and Advertising of Home Insulation, 16 C.F.R. pt. 460 (2005). For an interpretation, see Averitt, “Unfair Acts or Practices”, supra note 12, at 260, 263. This may also have been a factor behind the Green Guides. “Guides for the Use of Environmental Marketing Claims”, 16 C.F.R. pt. 260 (1992). 248 Relevant topics might include such things as the degree of actual control that parent media companies typically exercise over their subsidiaries and information about the effects of newspaper joint operating agreements.

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100 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande economics bureaus; can work to expand that literature249. Fifth, they can give speeches and write articles identifying quality and variety competition as areas of interest and inviting members of the bar to come forward with relevant problems or examples. Then, when (and if) the enforcers have gained enough experience from these ad hoc, situation-specifc applications, they could consider translating these insights into more formal general rules. The agencies have already announced one such general rule in the Competitor Collaboration Guidelines; one of the two safe harbors there was declared for situations in which there were at least four centers of innovation250. Thus, there is prec- edent for articulating antitrust rules involving even so diffcult a topic as concentration and innovation. We discuss possible ways of expressing more general conclusions in the choice area under the next two headings. One approach involves changing the numerical criteria for challenge in choice-related industries, and the second approach involves a less structured incorporation of choice factors into the general rule of reason analysis.

D. Incorporating choice considerations into the Herfndahls First of all, the accumulated conclusions of choice analysis could be formalized as bright lines in the Horizontal Merger Guidelines, with special levels of concentration announced as the thresholds for concern in particular markets where choice is known to be especially relevant251. Choice considerations might actually be expressed in the HHI in either of two general ways: the agencies could designate choice-based lines on an industry-by-industry basis, or they could identify a larger (although still limited) group of industries in which choice is particularly important and apply the alternative HHI measure to all members of that group.

249 For example, the number of frms that will maximize innovation under various types of market conditions remains in dispute. Further studies that help to resolve these issues— or even just narrow the range of disagreement—would obviously be useful for antitrust purposes. 250 See U.S. Dep’t of Justice & Federal Trade Comm’n, Antitrust Guidelines for Collaborations Among Competitors, Safety Zone for Research and Development Competition Analyzed in Terms of Innovation Markets § 4.3 (2000), available at http://www.ftc.gov/os/ 2000/04/ftcdojguidelines.pdf. It could be argued that this rule is aimed primarily defending against charges of traditional collusion, but the underlying concept of critical concentration levels may be useful in other contexts as well. 251 This new approach would have some real consequences for merger enforcement. Admittedly, the measurement of changes in the HHI index now plays only a small role in enforcement agency and court decisions. So many other factors are involved that, despite what some of the language in the Guidelines appears to suggest, modern merger analysis is close to following a full rule of reason for all cases that are not within the Guidelines’ safe harbors. “[M] erger policy has been moving away from reliance on surrogates [such as the HHI] and towards an approach that instead tells a story of anticompetitive harm—an approach that directly asks and answers the ultimate question: are prices to consumers likely to increase as a result of a merger?” Lande & Langenfeld, “From Surrogates to Stories”, supra note 66. The HHI provides a starting point for the analysis, however, and starting points often have an effect on conclusions.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 101 Using the “consumer choice” approach to antitrust law

1. On an industry-by-industry basis The simplest step is to designate individual industries for special standards. After having handled a number of specifc cases in an industry, the agency may develop a sense for the role of choice on competition in that industry as a whole. For example, after looking at enough media mergers the agency may conclude that three media frms are likely to generate price competition as robust as the price competition that 5 or 50 frms would produce. But they might also conclude that some larger number of media frms might, on average, be needed to produce the level of variety that consumers require to feel that the market has provided them with a competitive range of options. When this learning becomes suffciently developed, the Merger Guidelines could refect it252. Antitrust might stop at this point and never generalize beyond the industry level. Alternatively, one more stage of generalization may be both possible and useful.

2. For choice-valuing industries as a group Over time, antitrust policymakers could develop similar assessments for other indus- tries. When enough of these estimates accumulate, it may become possible to generalize from them and announce appropriate HHI thresholds for certain choice-valuing industries as a group. While each of these approaches may sound worrisomely imprecise, what will make those new alternative thresholds persuasive is the variety of experiences on which they are based—not only the variety of industries, but also the variety of inquiries and methods used in the assessment of each industry. It is important to realize that this is exactly the same process that led to the selection of the current HHI thresholds for price competition. The current Guidelines state that mergers leading to HHI increases of more than 100 can give rise to market power issues253. Why did the Guidelines pick 100 as the critical number instead of 200 or 400? The economics literature shows that there is no rigorously derived, dispositive scientifc basis for any of the numbers254. The thresholds in the Guidelines are in some respects unproven and unprovable. They are further complicated by the fact that the underlying defnitions of product and geographic markets—necessary for calculation of the HHIs—are themselves riddled

252 Even when stated in the Horizontal Merger Guidelines, of course, this number would merely be a presumptive starting point for analysis. It would not establish an absolute bar to above-threshold mergers. 253 Some have argued that there is an element of imperfect communication in the Horizontal Merger Guidelines, in the sense that analysis actually begins with presumptions at HHI levels different from those formally announced. We do not address that issue in this article, however. 254 Barry Harris & David Smith, “The Merger Guidelines vs. Economics: A Survey of Economic Studies”, Antitrust Rep., Sept. 1999, at 23; see also Paul Pautler, “Evidence on Mergers and Acquisitions”, 48 Antitrust Bull. 119 (2003).

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102 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande with uncertainties. Notwithstanding these uncertainties, the Guidelines are accepted because people recognize that complete certainty in this feld is neither possible nor desirable and because the Guidelines refect an accumulated body of experience and wisdom from a variety of sources. The Guidelines have been further refned over time through their application by Administrations of different political beliefs. As a result, they have evolved over decades into something very much like the “right” answer255. If antitrust made a point of conducting this same kind of inquiry in the area of nonprice competition, it could eventually arrive at results in which we could have approximately equal confdence256.

E. Accounting for choice without changing the Herfndahls If amending the HHIs seems too abrupt, however, there is an alternative. Choice considerations could simply be incorporated into merger analysis as one more enumer- ated factor to be considered in a rule of reason assessment under the current HHIs. Under this approach, choice would be treated like other important second-level factors, such as ease of entry257, effects on coordinated behavior258, or effciencies259. Choice considerations could be brought into the Guidelines’ analysis in any of four secondary ways: (1) as a tie-breaking factor; (2) as a guide to when the stated thresh- olds of the Guidelines will be more rigorously enforced; (3) as an explicit, equal form of harm to competition; or (4) as an affrmative effciencies defense.

1. Tie-breaking factor Choice considerations could be used as a tie-breaking factor. If enforcers were deciding whether to challenge a merger in a choice-sensitive industry like advanced aerospace, and if they were exactly on the margin after considering the likely effect on price, then choice considerations could be used to nudge the decision in one direction or the other.

255 In other words, a rough bipartisan consensus has emerged as to both the formally announced and the actually enforced thresholds, whatever those latter might be. 256 Indeed, the outcome of cases may become more predictable than they are now because the relevant choice considerations will have been openly identifed and articulated, rather than left to work behind the scenes as unannounced “fudge” factors. 257 Horizontal Merger Guidelines, supra note 4, §3. 258 Id. § 2 259 Id. § 4.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 103 Using the “consumer choice” approach to antitrust law

2. Increasing the probability of challenge Choice considerations could also be used as an implicit interpretive factor that would increase the probability of challenge under the Guidelines. Assume that for normal industries where price competition is most important, the enforcers challenge 20 percent of above-Guidelines mergers. For those industries where consumer choice issues are especially crucial, it might be appropriate for the enforcers to apply the current elements of the Guidelines somewhat more strictly, in a way that would lead them to challenge 40 percent of above-Guidelines mergers.

3. Express factor in rule of reason analysis Choice could be elevated to the status of a briefy mentioned but explicit substantive factor in the rule of reason analysis of the Guidelines260. Under this approach, a merger could be challenged if it were suffciently likely to lead either to higher prices or to signifcantly fewer consumer choices, assessing this broadened feld of effects with the tools of the existing HHI presumptions and starting points. This will lead to a greater focus on variety and innovation because those factors will have been identifed as primary, rather than footnote, considerations. Making the choice factor explicit will further change enforcement results by refning our notions of which frms are the closest substitutes for each other. This can be in the way that antitrust would come to treat a merger among frms that compete in some particular nonprice dimension—for example, in innovation. Not every company within an industry competes in such terms. Some will compete by making existing products less expensively, by superior marketing, or by superior service. A choice-based analysis would distinguish the innovator and the non-innovator companies and would assign different competitive consequences to mergers between frms that compete in the same way and those that compete in different ways. Suppose, for example, that a market consists of fve frms—A, B, C, D, and E; that three frms are enough to have effective price competition in this industry; and that three frms are also enough for effective choice or innovation competition. But suppose that only frms A, B, and C have large R&D budgets and a history of making signifcant innovations, and only they compete signifcantly by engaging in innovation. Firms D

260 See, e.g., Memorandum from Jonathan Baker, Professor of Law, American Univ. Washington Coll. of Law, to the FTC/DOJ Joint Workshop on Merger Enforcement, Comments on Applying the Horizontal Merger Guidelines 18 (Mar. 18, 2004), available at http:// www.ftc.gov/bc/mergerenforce/comments/bakerjon.pdf (federal enforcers should “consider adding a new section making explicit their approach to analyzing innovation competition,” and can do so “without altering any existing Guidelines text”). An alternative method for explicitly considering the effects of a merger on innovation was suggested by Michael Porter. See Porter, supra note 36, at 936–42 (using “fve forces” analysis).

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104 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande and E compete by making existing products less expensively instead. Suppose, fnally, that frms A and B (two of the frms that compete by innovating) want to merge. Under a price-centered analysis, the decision makers should permit this merger because afterwards there will still be four frms left in the market, which is enough for effective price competition. Under choice analysis, however, decision makers might block the merger because it is likely to result in only two independent sources of choice or innova- tion261, while optimal choice or innovation would require three independent suppliers262.

4. Innovation as an effciency defense Just as choice considerations can lead to some mergers being blocked even if they are unlikely to have detrimental price effects, it can also lead to some mergers being approved even if they pose a risk of a short-term price rise. This could happen if the mergers are likely to lead to increased innovation suffciently valuable to offset this risk. This is a specialized type of effciency defense263, focused on innovation as the most valuable of the relevant effciencies264. Merging frms can present such a defense today, but do not commonly do so in convincing detail265. Choice analysis would more explicitly invite such evidence. Merging frms would be encouraged to demonstrate that their merger would lead to a greater incentive towards, and capability and likelihood of, signifcant innovations that would enhance consumer choice. The range of relevant innovation should be defned broadly for these purposes. It should include not only technological innovations, but also innovative new services, new service delivery techniques266, and higher-quality

261 This is analogous to unilateral effects analysis, except that instead of more carefully scrutinizing a merger between two frms that are active within the same market-space niche of a market, choice analysis could be said to focus on a niche consisting of innovators. It is also similar to the “innovation market” idea. See supra note 37. 262 We need not take this idea further by extending it to additional or less important dimensions of nonprice competition. Suppose that only three of the fve frms in a market compete by offering high levels of sponsorship of local sports teams (or high-quality advertising, or any other signifcant but secondary dimension of competition) and that two of the sponsorship-oriented frms want to merge. Should we prevent this merger? Not necessarily, because those other arenas are not, in most cases, as important for consumers as choice and innovation. This proposition can be tested by imagining the consumer response to a 5% diminution in the relevant conduct. 263 This assumes that the merger enforcement or liability decision properly permits an effciency defense in the frst place. The Clayton Act does not contain an explicit exception for an effciency-enhancing merger. It prohibits mergers the effect of which “may be substantially to lessen competition, or to tend to create a monopoly”. 15 U.S.C. § 18. However, competition could be enhanced in the long run if a merger leads to increased innovation that helps the innovating frm challenge an established monopolist, so an innovation defense might still be implicitly justifed under the statute. For an analysis of the relevant policy considerations see Fisher & Lande, supra note 34, at 1651–77. 264 See Porter, supra note 55. 265 See generally Malcolm Coate, “Twenty Years of Federal Trade Commission Merger Enforcement Activity (1985–2004)”, at 17–18 (Potomac Law and Econ. Working Paper No. 05-02, 2005), available at http://papers.ssrn. com/sol3/papers.cfm?abstract_id=708503. 266 The importance of innovation in services is illustrated by the growth of Internet-based shopping options.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 105 Using the “consumer choice” approach to antitrust law products. Just as with cost-oriented effciencies, however, effciencies in innovation are much easier to claim than to demonstrate. The burden of persuasion for a choice or innovation defense, like the current burden for a cost-savings defense267, should be on the merging parties because they are most likely to have access to the relevant information. They should also have to show that the innovation could not be accom- plished in any other way, such as through a joint venture.

F. Preventing excessive prosecutorial discretion Any explicit incorporation of choice considerations into antitrust analysis could lead to overbroad enforcement. The choice model is analytically more complete than the other models and, thus, provides more avenues of attack and, thus, is more susceptible to abuse. Improper enforcement could occur, for example, if the choice approach were misconstrued as a quest for the maximum number of choices, rather than as a way to preserve the number and variety of choices that competition would bring. We believe that the antitrust community and the courts will understand the proper role of choice analysis and will enforce those limits through the appointment of sensible enforcement offcials and through appellate review. It seems better to rely on these kinds of checks and balances than to deliberately continue to use an incomplete legal theory. If one still fears the risks, however, antitrust could compensate by formally limiting the range of prosecutorial discretion under a choice model. Choice considerations could be permitted only as a tiebreaker or weighting factor, for example, or as a separate analytical screen only after a price or effciency analysis has been completed. By following those approaches it would be possible to achieve at least some of the benefts of the choice model rather than forgoing it altogether.

G. Conclusion on implementation issues The question is not whether the choice model can be implemented perfectly or without diffculty, but rather whether the greater relevance of the choice theory, combined with the relatively modest incremental complexity of its application, will allow antitrust decision makers to make those decisions better than they currently do. We believe that it will. Applied with care, the choice approach can do more or less as practical a job in answering the right questions as the other models can do in answering the wrong questions.

267 See Horizontal Merger Guidelines, supra note 4, §4.

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106 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande

VI. Administrative advantages of the choice paradigm

Adopting the choice paradigm does not just ensure that particular cases will be decided more correctly. It also has important practical administrative advantages for external communication and internal case management. The new paradigm will: (1) facilitate dialogue and convergence with foreign antitrust regimes; (2) make it easier to explain antitrust policy to non-specialists in the media and the American public; (3) lead to greater enforcement effciency because it draws attention to the right issues; (4) make it easier to identify useful synergies between competition and consumer protection matters; and (5) suggest a more rational allocation of cases between the FTC and the Justice Department.

A. Facilitates dialogue and convergence with foreign governments First, the choice paradigm will help to smooth our interactions with the antitrust offcials of foreign countries. This model may be particularly useful for presentation to the European Union as a mutually-acceptable midpoint around which the ongoing conver- gence of national policies in the industrialized nations can continue. The European Union is less completely committed than we are to the effciency-centered antitrust paradigm. European laws and enforcement patterns currently embrace a variety of values268, and, although effciency is high among these values269, it seems unlikely that

268 The Preamble to the EU Merger Control Regulation states that the Commission must assess competition and market concentration “within the general framework of the achievement of the fundamental objectives referred to in Article 2 of the Treaty establishing the European Community....” Council Regulation (EC) No. 4064/89, art. 3, 1989 O.J. (L 257) ¶ 23, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri= CELEX:31989R4064:EN:HTML. Article 2 of the Treaty then provides: “The Community shall have as its task...to promote ...a harmonious, balanced and sustainable development of economic activities, a high level of employment and of social protection, equality between men and women, sustainable and non-inflationary growth, a high degree of competitiveness and conver- gence of economic performance, a high level of protection and improvement of the quality of the environment, the raising of the standard of living and quality of life, and economic and social cohesion and solidarity among Member States”. Treaty Establishing the European Community (Consolidated Text) art. 2, 2002 O.J. (C 325) 8, available at http:// eur-lex.europa.eu/en/treaties/dat/12002E/pdf/12002E_EN.pdf. 269 Former EU Competition Commissioner Mario Monti observed that most people commenting on proposed revisions to the merger regulations “consider that there should be an ‘effciency defense’ that could mitigate a fnding of dominance”. He further noted that “I share this approach,” and that only “a small minority” of commenters advo- cated “for the introduction of other policy considerations in the assessment of mergers, like . . . their social consequences”. Mario Monti, Review of the EC Merger Regulation— Roadmap for the Reform Project, Remarks Before the British Chamber of Commerce, Brussels (June 4, 2002), available at http://europa.eu/rapid/pressRe- leasesAction.do? reference=SPEECH/02/252&format=HTML&aged=0&language=EN&guiLanguage=en.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 107 Using the “consumer choice” approach to antitrust law the European enforcers would be comfortable relying on effciency alone270. But they might agree to rely on a choice model. In fact, some EU statements on competition policy are already framed in terms very similar to our proposed choice approach271. If US and European enforcers were able to converge on the choice model, there would be greater prospects for international harmonization of law, to the beneft of all participants in the world economy. For somewhat different reasons, the choice model may also be useful when dealing with the governments of developing economies. The concept of choice is readily communicated across the barriers of different language, culture, and experience. It is much more transparent and straightforward than the language of effciency. This makes it suitable for presentation to the regulators and enforcers in emerging economies, who may not have large numbers of experienced market-oriented economists to consult272. The vocabulary of choice may also be a useful corrective to some prior habits of mind. Especially if they have come out of a system of price regulation, foreign competition offcials might tend to attach undue importance to price considerations at the expense of quality, innovation, or service273.

B. Easier to explain to congress and the public It is not enough for a nation to have a sound antitrust policy that is understood by its specialist practitioners. The policy also has to be communicated effectively to non- specialists, such as business executives who must comply with the law, judges and juries who enforce the law, the senators and representatives who appropriate the enforcement budgets, the media, and ultimately the general public. The choice model is particularly useful in this regard because there is something simple and intuitively

270 The Europeans have defned their areas of concern more broadly. “Market power is the power to influence market prices, output, innovation, the variety or quality of goods and services, or other parameters of competition on the market for a signifcant period of time”. DG Competition, Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses ¶ 24 (Dec. 2005), available at http://ec.europa.eu/comm/competition/ antitrust/ others/discpaper2005.pdf. See European Comm’n, EU Competition Policy and the Consumer 8 (2004), available at http://ec.europa.eu/comm/competition/publications/consumer_en.pdf (an anticompetitive merger “is likely to harm consumers through higher prices, reduced choice or less innovation”); see also Mario Monti, Preface, European Comm’n, Competition Policy in Europe and the Citizen 4 (2000), available at http://ec.europa.eu/comm/ competition/publications/competition_policy_and_the_citizen/en.pdf (merger policy ensures “a diversity of mass- market consumer goods” as well as “low prices”). Moreover, “ensuring that consumers are able to make choices which affect the conduct of frms” is also a means of “guaranteeing that markets function on a competitive basis”. Id. at 5. 271 See supra note 270. However, even if American and EU competition policies, as applied in recent years, have produced “broadly convergent outcomes,” particularly with respect to and horizontal mergers, Monti, supra note 269, they have not yet fully converged, particularly with respect to other issues like abuse of dominance. 272 See, e.g., Russell Pittman, Chief, Competition Policy Section, Antitrust Division, U.S. Dep’t of Justice, The Heart of Antimonopoly Investigation: The Choices of Consumers, Remarks to Staff Members of Antimonopoly Offces of Central and Eastern Europe at FTC/DOJ Conference, Investigating Competition Cases (Mar. 7, 1994). 273 At the same time, we would not want national administrators to fall into the opposite error by using a choice theory to systematically oppose any reduction in the number of options, perhaps by protecting incumbent frms. A careful discussion of the limits on the theory would also be necessary.

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108 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande obvious about the basic concept of protecting a range of options and the ability to choose among them274. By contrast, an effciency model is exceedingly diffcult to communicate to non-specialists. It leads them to think that the law considers only simple changes in the cost of production, or else that it considers a bewildering, impenetrable variety of technical economic concepts, in which almost everything is relevant and nothing is determinative275.

C. Greater enforcement effciency Another administrative beneft of the new paradigm is that it will direct enforcers’ atten- tion to the most relevant considerations in the mass of facts that makes up an antitrust case. This will reduce the risk of focusing on secondary facts, which can waste resources and lead to erroneous conclusions requiring later correction. The case of vertical restraints illustrates these benefts. The investigator who approaches such a constraint with a price model in mind is immediately at a loss because price evidence in that context is inherently ambiguous. A price rise may be due to the harmful stifing of intrabrand competition or to the benefcial elimination of short-term free riders, and the observed price behavior alone will not indicate which explanation is correct276. Nor is a shift to the more elaborate effciency model of much help. It simply tells the investigator to “consider all relevant considerations”, which, while perfectly true, fails to provide practical guidance. But a choice model will immediately direct the investigator to the right question, by asking whether the consumer options (including both price and nonprice options) have been enriched or diminished as a result of the vertical restraint. Thus, the choice model provides some generally valid and useful rules of thumb—“more consumer choice is probably good”—and provides a quick test that can help people avoid gross error277.

274 See Barbara Swain, “Consumer Choice: A Theme Jurors Find Compelling”, Antitrust Rep., Aug. 2000, at 8, 16 (“When structuring case themes, it is important to keep in mind that jurors today are concerned about consumer choice in the marketplace. They want assurances that consumers have price and product alternatives. Thus, it is important to establish choice, or lack thereof, in order to prevail”). 275 On several occasions one of the authors, Professor Lande, has discussed the effciency approach with business journalists. He has tried to explain that under this approach the only problem with supracompetitive pricing is that it causes allocative ineffciency, and he also has tried to help journalists understand the underlying concept of the welfare triangle. On no occasion did the reporters seem to intuitively grasp the concept of alloca- tive ineffciency, or to accept that the only problem effciency adherents have with anticompetitive mergers or cartels is that they cause such ineffciency. 276 Compare Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752 (1984), with Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977). 277 If the restraint will produce more choices for consumers, it is presumably benefcial because it probably helps overcome a free rider or other problem. By contrast, if all the restraint does is to reduce consumers’ price choices, it is likely to be anticompetitive. Some other situations will have mixed effects that must be more carefully examined.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 109 Using the “consumer choice” approach to antitrust law

D. Better synergies between competition and consumer protection theories The choice approach will also help practitioners more readily identify possible syner- gies between antitrust and consumer protection theories. The choice model puts both those theories on the table at the same time, as the two essential components of a market transaction. In so doing, it makes it easier to recognize two potentially powerful synergies between them. The frst is the synergy of coordination. If an agency, such as the FTC, that has jurisdic- tion over both antitrust and consumer protection, is contemplating a broad approach to some troublesome sector of the economy, it might consider how its work under one of its responsibilities can sometimes help advance its goals under the other, and take advantage of that reinforcement wherever possible278. For example, the provision of better, more transparent consumer information about health-care providers (a consumer protection concern) might result in better and more rational competition among them (an antitrust concern)279. The second synergy involves the possibility of substitution. Sometimes it may turn out that a particular issue, long addressed on one side of the line between antitrust and consumer protection is actually better suited to handling on the other side. For example, if a frm has an exclusionary strategy that relies on misleading consumers or compet- itors, this might be challenged by the FTC’s Bureau of Competition, but under a consumer protection theory that focuses on the frm’s use of the particular tactics of deception or coercion280. There are at least three types of antitrust matters that might

278 Cf. Note from the FTC and the U.S. DOJ Antitrust Division to the OECD Global Forum on Competition, The United States Experience in Competition Law Technical Assistance: A Ten Year Perspective (Feb. 6, 2002) ¶ 24, available at http://www.oecd.org/dataoecd/37/61/1833990.pdf: “A competition agency cannot function in a vacuum. For it to do its job, there must be other institutions in place that understand the role of competition in a .... The linkages between competition and consumer protection are well understood in the United States, and if the competition agency does not itself handle this function (as the FTC does in the U.S.), a competition agency should have a healthy relationship with the consumer protection agency and should be able to help it understand that consumer protection should complement, not replace, competition in a market economy”. 279 The same synergy of coordination can sometimes also be achieved on a smaller scale by combining different categories within the single discipline of antitrust law. For example, it may sometimes be useful to use structural remedies to cure a conduct violation. See generally Neil W. Averitt, “Structural Remedies in Competition Cases Under the Federal Trade Commission Act”, 40 Ohio St. L.J. 781 (1979). 280 The use of consumer protection laws in a business context should not be troublesome, in principle. Business corporations can certainly be “consumers” in their role as purchasers of inputs. See, e.g., McGregor v. Chierico, 206 F.3d 1378, 1380–81, 1388 n.11 (11th Cir. 2000) (deceptive acts by telemarketers to induce businesses to pay for unordered photocopier toner); FTC v. Certifed Merchant Servs., Civ. Action No. 4:02cv44, Complaint ¶¶ 28–31 (E.D. Tex. Feb. 11, 2002), available at http://www.ftc.gov/os/2002/02/cmscmplnt.pdf (allegedly unfair to subject small businesses to unfavorable terms that had been improperly added to credit card processing contracts after signature); Press Release, Federal Trade Comm’n, Three California Telemarketers Banned from Telemarketing as Part of FTC Settlement (Feb. 5, 2001), available at http://www.ftc.gov/opa/2001/02/datadist.htm (including consent

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110 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande sometimes be reframed in consumer protection terms281. These are cases involving: (1) deception of standard-setting organizations; (2) strike suits or other forms of nuisance litigation; and (3) exploitation of locked-in customers.

1. Deception of standard-setting organizations A choice between antitrust and consumer protection theories will be possible in cases involving the deception of standard-setting organizations. Standardization agreements ensure that different brands of technical devices, such as computers or audio systems, can be operated together and their individual components can compete with one another. This is a clear effciency, and such agreements generally pass antitrust muster. Some- times, however, one party to the agreement has secured a patent on the intellectual property covered by a standard; misrepresented (either expressly or by silence) to the association that no such patent exists; waited until the industry has committed itself to the standard and has become locked in; and then asserted its patent rights. The FTC’s case in Rambus involved essentially these facts282.

order in FTC v. National Supply & Dist. Center, Inc., No. CV-99-12828 (C.D. Cal. fled Dec. 7, 1999) involving misrepresentation of the existence of prior business relationship when selling toner to small businesses). Manage- ment textbooks have long recognized that businesses can be subject to the same imperfect decision-making processes as individual consumers. See supra note 96. 281 The issues of defnition and limiting principles will naturally be important when it comes to extending consumer protection law to these new antitrust contexts. Developing a formal list of limiting principles is outside the scope of this article, but a number of possibilities—which at this point we neither endorse nor reject—can be identifed. Enforcement through consumer-protection theories could be limited to: (1) particular areas of the law (such as suits) in which there is a heightened risk that private parties can engage in abusive litigation; (2) cases presenting objective that private defenses are ineffective; (3) cases presenting objective proof that the aggressor is not pursing bona fde economic goals; (4) cases involving conduct that deviates substantially from industry-standard methods to which purchasers have already grown accustomed; (5) situations where at least a substantial minority of consumers have had their decisions adversely swayed; and (6) cases involving particularly large economic harm. All these enforcement actions could concentrate on situations affecting initial purchase decisions, thus also excluding many forms of business , breaches, and other post-purchase opportunistic conduct. However, the list of limiting principles does not include a notion that consumer protection theories can be used in an antitrust context only to protect individuals and small businesses. To be sure, as a matter of resource allocation and prosecutorial discretion, those situations may account for virtually all FTC actions. As a matter of legal theory, however, the FTC Act covers unreasonable impairments of a purchaser’s ability to choose, regardless of the size or nature of the purchaser; the law does not withdraw its equal protection from large entities merely because they are large. 282 See Press Release, Federal Trade Comm’n, FTC Finds Rambus Unlawfully Obtained Monopoly Power (Aug. 2, 2006) [hereinafter Rambus Press Release], available at http:// www.ftc.gov/opa/2006/08/rambus.htm. The Commis- sion pursued a somewhat similar theory against Unocal. See generally Complaint, Union Oil Co., FTC Docket No. 9305 (Mar. 4, 2003) [hereinafter Union Oil Complaint], available at http://www.ftc.gov/os/2003/03/ unocalcmp. htm. Unocal involved charges that the patent-holding frm deceived a unit of the California state government as well as other industry participants. Unocal eventually agreed to release the relevant patents to the public as part of a settlement with the FTC, in the context of the frm’s acquisition by Chevron. See Press Release, Federal Trade Comm’n, Dual Consent Orders Resolve Competitive Concerns About Chevron’s $18 Billion Purchase of Unocal, FTC’s 2003 Complaint Against Unocal (June 10, 2005), available at http://www.ftc.gov/opa/2005/06/chevronunocal. htm.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 111 Using the “consumer choice” approach to antitrust law

The complaint there was framed in antitrust terms, charging “unfair methods of competition”283 which in that context were acts of monopolization. The Commission ultimately determined that the central act of monopolization was the respondent’s deception. The case might also have been brought in explicitly consumer protection terms, however. The standard-setting group “purchased” the intellectual property needed for the joint standard, and “paid” for it with their reciprocal agreements to follow the standard; and this purchase process was disrupted by the deceptive failure of Rambus to disclose its own patent rights. The consumer protection approach would be advantageous in some circumstances. Deception of this sort can take place even without market power—because consumers are injured through other mechanisms instead284. The consumer protection approach will, therefore, be the better theory to use in situations when market power or market defnitions are unclear, as, for example, some thought they had been in the earlier Dell Computer case285.

2. Strike suits and extortionate litigation A choice of competition and consumer protection approaches is also available for dealing with strike suits and extortionate litigation. This kind of conduct is usually approached as an antitrust matter. The aggressor frm may be engaged in an act of monopolization, such as a plan to drive all others from the market through specious patent litigation, or a strategy designed to raise its rivals’ costs through burdensome legal proceedings. The same facts can also be viewed in consumer protection terms, however. The target frm in these cases is, in a sense, being coerced by the threat of unwarranted litigation expenses into “buying” a license or some other indulgence from the aggressor. Because consumer protection law prohibits coerced purchases, a viola- tion on that theory may be present286. Coercion, like deception, does not necessarily require market power. Consumer protection will, therefore, provide the more appropriate

283 Complaint at ¶¶ 122–124, Rambus, Inc., FTC Docket No. 9302 (June 18, 2002), available at http://www.ftc.gov/os/adjpro/ d9302/020618admincmp.pdf. 284 Antitrust violations involve conduct that takes place “outside the head” of the consumer and so they imply the existence of market power, whereas consumer protection violations take place “inside the head” of the consumer and so they do not require any particular market context. See Averitt & Lande, “Consumer Sovereignty”, supra note 12, at 730, 733. 285 See Dell Computer Co., 121 F.T.C. 616, 632 (1996) (Azcuenaga, Comm’r, dissenting) (“the majority fails to identify the relevant market in which market power assertedly was ‘conferred’”). 286 See, e.g., Holland Furnace Co. v. FTC, 295 F.2d 302, 303 (7th Cir. 1961) (salesmen disassembled home furnaces for inspection and then refused to reassemble them until the customer agreed to buy additional parts or services); see also Arthur Murray Studio of Washington, Inc. v. FTC, 458 F.2d 622, 625 (5th Cir.1972) (high-pressure, closed- door sales pitches for dance lessons); Door-to-Door Sales Rule, 16 C.F.R. pt. 429 (1972) (establishing a cooling-off period out of concern for the effects on consumers who are cornered in their own homes). See generally Averitt, “Unfair Acts or Practices”, supra note 12, at 252–55.

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112 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande legal theory in situations where the aggressor frm does not have a high market share, as patent predators frequently do not287.

3. Exploitation of locked-in consumers Finally, there can be a signifcant consumer protection component to antitrust cases that involve the exploitation of locked-in consumers. Such cases may frst present themselves to the antitrust bar as tying arrangements—that is, as potential competition violations. That was the situation in the Supreme Court’s Kodak case, where customers had to buy the frm’s maintenance services in order to obtain its spare parts288. There are actually a great many consumer protection attributes to this kind of case, however. What made the Kodak tie-in of concern is not a long-announced program requiring manufacturer service, but rather an unanticipated shift in the supplier’s policy. The problem was a breach of the implicit (or explicit) understanding that users would be allowed to handle maintenance in a certain way over the lifetime of the product, thus making the initial, unfulflled promise a deceptive one. The FTC has brought a number of consumer protec- tion cases involving post-hoc contract breaches289. Pursuing a tie-in matter in these terms will be appropriate in cases where consumers have been injured by the faulty informa- tion about policy changes rather than by an exercise of market power.

287 There is also a second advantage to use of consumer protection theories in strike-suit cases—the conduct then does not appear to be protected by the Noerr petitioning immunity that normally shields even ill-founded litigation from antitrust challenge. Compare Prof’l. Real Estate Investors v. Columbia Pictures Indus., Inc., 508 U.S. 49, 64 (1993) (setting strict test for bad-faith antitrust litigation), with Spiegel v. FTC, 540 F.2d 287, 294 (7th Cir. 1976), and J.C. Penney Co., 109 F.T.C. 54 (1987) (consent order) (challenging as unfair the practice of suing consumers for unpaid debts in distant or inconvenient fora). There appears to be a principled basis for this distinction. Consumers with shallow pockets are more readily intimidated and abused by bad-faith litigation than businesses would be and, thus, predators’ freedom to institute such litigation under the protection of Noerr should be more restricted on the consumer protection side of the statute. This principle might apply even where the targets of the abusive are businesses, at least where they are small businesses that may have many of the behavioral and resource characteristics of an individual consumer. It is also possible that the Noerr immunity should be more restricted for FTC actions in general, and not just consumer protection actions in particular. See generally Union Oil Complaint, supra note 282 (raising although not resolving this issue). 288 See Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 458 (1992). Kodak had changed its photo- copier service policies around 1985, in an effort to limit the growth of independent service organizations. Customers who had bought copiers before the policy change were forced against their expectations to pay higher prices as a result of this new tie-in because they were already locked in to using Kodak machines. See Averitt & Lande, “Consumer Sovereignty”, supra note 12, at 738–40. For a more detailed discussion of this case, see Robert H. Lande, “Chicago Takes It on the Chin: Imperfect Information Could Play a Crucial Role in the Post-Kodak World”, 62 Antitrust L.J. 193 (1993). 289 See Orkin Exterminating Co., 108 F.T.C. 263, 347, 368 (1986) (company breached “lifetime” service contract by raising annual renewal fees when it had promised not to do so); cf. FTC v. Certifed Merchant Services, Civ. Action No. 4:02cv44, Complaint ¶¶ 28– 31 (E.D. Tex.), available at http://www.ftc.gov/os/2002/02/cmscmplnt.pdf (unfair- ness authority invoked to keep small businesses from being held subject to contracts for credit card processing services on unfavorable terms, when the adverse terms had been improperly added to the contracts after signature). Of course, if there is merely a policy change, but no reasonable understanding of any promise that the policy would not be changed, then there is no violation at all.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 113 Using the “consumer choice” approach to antitrust law

E. Better allocation of cases between FTC and the Justice Department Finally, the consumer choice paradigm can help to allocate antitrust cases more appro- priately between the Federal Trade Commission and the Department of Justice290. Choice theory implies that antitrust should always be construed with an awareness of how it will mesh with consumer protection. The FTC’s special expertise in consumer protection means that it will be uniquely suited to handle those antitrust cases in which consumer protection considerations are particularly important. Because this division would more fully take advantage of each agency’s methodological expertise, it is likely to produce better results than the current allocation criteria that look to industry expe- rience only. This change is probably also modest enough to be instituted without disruption. It would affect the allocation of only about 5 percent of antitrust cases, an impact suffciently large to distinguish the agencies’ missions but still small enough to let most cases proceed routinely. Moreover, the division of authority would be only a presumption that could be set aside in favor of compelling industry experience in any particular case. Competition matters range from those that should presumptively go to the FTC, to those (the great majority) that can be handled equally well by either agency, to those that should presumptively go to DOJ, and they include some others that are specifcally allocated by statute.

1. Cases that should presumptively go to the FTC Antitrust cases that would usually go to the FTC are those in which the most important and complex element in the antitrust theory is the assessment of the effects of certain conduct on consumers’ decision-making abilities. At least four general types of antitrust cases can present this circumstance: (1) where a frm monopolizes through consumer protection-type offenses like deception291; (2) where market power is achieved by

290 This has long been a concern. See Ernest Gellhorn, “Two’s a Crowd: The FTC’s Redundant Antitrust Powers”, 5 Regulation, Nov./Dec. 1981, at 32; Miles W. Kirkpatrick et al., “Report of the American Bar Association Section of Antitrust Law Special Committee to Study the Role of the Federal Trade Commission”, 58 Antitrust L.J. 43, 113–24 (1989). 291 See Allied Tube & Conduit v. Indian Head, Inc., 486 U.S. 492, 499, 511 (1988) (abuse of standard-setting process in way that effectively misrepresented the state of professional opinion on safety issues); Conwood Co. v. U.S. Tobacco Co., 290 F.3d 768, 775–76 (6th Cir. 2002) (among other acts of monopolization in market for moist snuff, U.S. Tobacco misrepresented its sales fgures to retail purchasers).

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114 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande deception of a standard-setting group292; (3) where tying arrangements may harm consumer decision making293; and (4) where the main effect of a horizontal agreement is to restrict advertising or otherwise raise consumer search costs294. Two additional groups of cases have consumer protection elements that, although not the single most important issue in the theory of violation, are suffciently important that there are benefts to using consumer protection expertise and that justify adding them to the list of matters that should usually go to the FTC. These are: (5) cases in which a harm to consumer decision-making ability must be considered as one part of a full rule of reason analysis295; and (6) merger cases where consumer preferences for creativity and variety require a relatively wide range of independent suppliers. A key question in this last group of cases is ascertaining just how many suppliers of newspaper and television services, for example, are needed for individual consumers to feel that they have a satisfactory range of options296.

292 See Rambus Press Release, supra note 282 and accompanying text; cf. Dell Computer Co., 121 F.T.C. 616 (1996). 293 Tying arrangements frequently present this situation. A tie can be a technical antitrust violation because it restricts the choices available to consumers. See Lande, “Choice as Ultimate Goal”, supra note 12, at 510 n.33. What often makes a tie of actual enforcement concern, however, is that it can also enable a frm to harm consumers’ decision- making abilities, perhaps through some exploitation of particular vulnerabilities. For example, a tie between two related products may make it more diffcult for consumers to determine the price of either of the products in the package, thus making price competition less effective. See Sandoz Pharm. Corp., 115 F.T.C. 625 (1992) (consent order) (tie between drug and services to monitor for adverse reactions). Or a tie between a product and a service can take advantage of those consumers who have diffculty calculating lifetime service costs. Cf. Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 475–76 (1992) (presenting, but not deciding, these issues). Conversely, other ties can be justifed on consumer protection grounds, as when they assign responsibility for the performance of multi-part systems to a single visible party. Cf. United States v. Jerrold Elecs. Corp., 187 F. Supp. 545, 560 (E.D. Pa. 1960), aff’d per curiam, 365 U.S. 567 (1961). Similarly, some other nonprice vertical restraints might be justifed on consumer protection grounds because they preclude a certain mode of doing business—that is, a certain marketplace option—that presents an exceptionally high risk of consumer abuse. See Bd. of Trade of City of Chicago v. United States, 246 U.S. 231, 240 (1918) (upholding restrictions on after-hours commodity trading because such trading could lead to abuse of less-well-informed parties). Whatever the specifcs of these varied tying cases, they all involve an integral balancing of competition and consumer protection goals and thus should go to the FTC. 294 What makes such a horizontal agreement either bad or good is its underlying consumer protection impact. The standards may burden advertising with so many disclosures that the frms can no longer communicate effectively to potential customers, which would make the standards impermissibly anticompetitive. Or the standards could actually protect consumers from false or misleading information, in which case the defendants would have an effciency defense. See, e.g., Vogel v. Am. Soc’y of Appraisers, 744 F.2d 598, 603–04 (7th Cir. 1984). 295 See supra Part III.B, notes 79–88. 296 To answer this question the agency will have to draw, in part, on consumer protection methodologies, using polling, focus groups, opinion surveys, advertising studies, and other techniques to understand the consumer demand for variety. See supra Part IV.C, notes 244–49.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 115 Using the “consumer choice” approach to antitrust law

2. Matters that can be handled by either agency At the center of the spectrum are the great majority of antitrust matters, which can be handled with equal facility by either the FTC or the DOJ. These include the familiar mix of merger, horizontal agreement, and vertical restraints matters. To be sure, handling such matters may sometimes beneft from a careful assessment of consumer behavior. A merger is best judged, for example, when one has a sense of how readily consumers will substitute away from the affected products in response to a price increase, or how quickly consumers will fnd out about a new product or price discount297. Nonetheless, the consumer behavior involved in these mid-range cases is relatively straightforward and familiar, does not call for specialized agency expertise, and would not call for any specialized consumer protection input. For this reason these cases are traditionally and properly allocated between the FTC and DOJ on the basis of an agency’s familiarity with particular industries298, rather than on its ability to handle particular legal theories299.

3. Matters that should presumptively go to the Department of Justice Some matters should presumptively go to the Department of Justice. The most impor- tant of these are cases involving price fxing and other per se horizontal violations. Department of Justice matters will also include one subset in a larger class of cases that ordinarily go to the FTC. The FTC will normally handle cases in which impaired consumer decision making must be included in a full rule of reason analysis. These cases typically involve horizontal agreements on nonprice matters, such as restrictions on advertising that, in turn, diminish the useful information available to consumers. In some cases, however, the horizontal agreements on marketing arrangements may also

297 This is, of course, the basis for the market defnition section of the Horizontal Merger Guidelines, which ask the likely effect on in response to a small but signifcant and non-transitory increase in price. See Horizontal Merger Guidelines, supra note 4, § 1.11. 298 See FTC-DOJ Clearance Agreement (1993, as amended 1995), summarized at http:// www.ftc.gov/opa/predawn/ F95/h-s-r-reform.htm. The result of this process is that certain industries are generally handled by the FTC (e.g., supermarkets, pharmaceuticals, petroleum); others are generally handled by the Antitrust Division (e.g., steel, beer, telecommunications); and still others are handled by both agencies (e.g., computers, defense, hospitals). 299 Another group that can be handled by either agency involves cases in which creativity and organizational indepen- dence may be important to institutional buyers, such as corporations and governments. These cases involve purchases in such felds as pharmaceuticals, defense contracting, and other high-tech areas. The FTC may be particularly well suited to identifying the necessary number of competitors in markets serving individual consumers, such as media and fashion, since it has tools for assessing individual consumer preferences. (Just how many news sources does it take to make people feel comfortably well informed?) The DOJ would not have any disadvantage in assessing how many suppliers are needed to satisfy business organizations seeking to buy technical innovation, however, because that task is more likely to involve stated organizational policy rather than half-hidden individual preferences.

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116 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande include more hard-core agreements on price, or divisions of customers or territories. Even those agreements are not automatically improper, because the total package may still include enough effciencies to put it into the realm of rule of reason analysis. Where this price-fxing component is an important part of the equation, however—as it was in cases like Broadcast Music—the matter should presumptively go to the DOJ for decision300. Price fxing, in other words, with the associated need to consider criminal prosecution, something that only the DOJ can undertake, should be a more important consideration in allocating cases than FTC-type burdens on decision making would be.

4. Matters allocated by statute Some other matters are allocated between the agencies by statute and are, as a result, outside this scheme of allocation on the basis of choice theory. They can instead be thought of as anchoring the two ends of the spectrum—matters that should always be allocated to the FTC at one end of the spectrum and to the Department of Justice at the other. At the FTC end, that agency should handle all those matters that are outside the letter of the Sherman Act but are nonetheless within the “gap-flling” purposes of the FTC Act301. These specialized cases include such things as invitations to collude302 and noncollusive but potentially anticompetitive conduct of the sort considered in Ethyl303. At the DOJ’s end of the spectrum, that agency should handle all matters involving industries specially committed to its jurisdiction304 and all per se offenses suffciently serious that they are best pursued criminally. On a related although some- what discretionary note, the DOJ should also handle most matters in which it is appropriate to pave the way for private treble-damage actions.

300 In Broadcast Music, Inc. v. CBS, 441 U.S. 1 (1979), composers had agreed on prices as part of the process of packaging and marketing blanket licenses for musical compositions. Under prior law, this conduct might have been challenged on a per se theory. However, the Court held that a full analysis should entertain the argument that the restraints were essential if the product were to be marketed at all. Id. at 24–25. 301 For a discussion of those purposes, see Averitt, “Unfair Methods of Competition”, supra note 12, at 251–71. 302 The Sherman Act reaches attempts to monopolize but not attempts to collude, unless that collusion would result in a monopoly if successful. For FTC Act cases in these circumstances, see Valassis Communications, FTC File No. 051-0008 (Mar. 14, 2006) (consent order); Stone Container Corp., 125 F.T.C. 853 (1998) (consent order); Precision Moulding Co., 122 F.T.C. 104 (1996) (consent order); YKK (U.S.A.), Inc., 116 F.T.C. 628 (1993) (consent order); AE Clevite, Inc., 116 F.T.C. 389 (1993) (consent order); Trailer Prods. Corp., 115 F.T.C. 944 (1992) (consent order). 303 See E.I. du Pont de Nemours & Co. v. FTC, 729 F.2d 128, 142 (2d Cir. 1984). In that opinion the Second Circuit rejected an FTC attempt to establish such a violation. That outcome appears to have been due to a failure to prove actual anticompetitive effects, however, rather than to any fatal faw in the theory itself. 304 Airline mergers, for example, are handled by the DOJ. See Anne Bingaman, Ass’t Att’y Gen., U.S. Dep’t of Justice, “Consolidation and Code Sharing: Antitrust Enforcement in the Airline Industry”, Address Before the ABA Forum on Air and (Jan. 25, 1996), available at http://www.usdoj.gov/atr/public/speeches/speech.akb.htm. Cf. 15 U.S.C. § 45(a)(2) (FTC lacks jurisdiction over banks and common carriers).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 117 Using the “consumer choice” approach to antitrust law

5. Conclusion on allocation between agencies The two agencies divide their work in an atmosphere marked by a high volume of cases, tight deadlines on merger matters, legitimate differences of opinion as to which agency should handle a particular matter, and many other demands on their leaders’ time. The allocation of cases, therefore, needs to be tempered by a sensitivity to the practical needs of day-to-day administration. Two further principles may help attain this goal. First, the rules relating to the recognition of consumer protection-type factors should become progressively streamlined over time, trading off some subtlety in the characterization of legal theories for the sake of establishing a few clear general categories of cases that should be assigned to the FTC. This would parallel the stream- lined way in which per se horizontal restraints are normally assigned to the DOJ. Second, the principles of allocation should be applied so as to leave each agency with roughly the same workload it now has, avoiding any suggestion of a winner or a loser in the process305. We do not want to overstate the weight that choice theory should have in case alloca- tion. It is a signifcant factor, but only one factor among many. Other factors include the specialized statutes, DOJ criminal authority, and a sense that novel or complex matters are better suited to the FTC’s administrative process306. Most important, the two agencies historically have agreed to allocate cases among themselves on the basis of which agency is most familiar with the particular industry involved307. This usually remains the most compelling consideration. The choice paradigm should, therefore, be relevant in allocating only about 5 percent of cases, and, even there, it should be seen as creating only a presumptive inclination, not an irrebuttable rule.

305 Although we have written at greater length about cases that should go to the FTC, this does not imply that the FTC’s cases should be more numerous or more important. It is instead an attempt to provide an introduction to some relatively unfamiliar consumer protection theory. 306 The FTC conducts its proceedings before a specialized and expert body; there is no private right of action; and remedies are prospective and injunctive only, rather than involving damages, and they do not automatically give rise to private actions. But cf. FTC v. Labs., 62 F. Supp. 2d 25, 36–37 (D.D.C. 1999) (supporting redress remedy). For these reasons many commentators have suggested that unfamiliar theories might, in fairness, be preferentially tried before the FTC. 307 See FTC-DOJ Clearance Agreement, supra note 298.

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118 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande

VII. Conclusion

Antitrust policy cannot be made rational until we are able to give a frm answer to one question: What is the point of the law—what are its goals? Everything else follows from the answer we give308. Any attempt to improve the overall course of antitrust must begin by asking the right question. Even if we cannot answer it perfectly today, focusing the attention and formidable analytic powers of the legal community in the right direction will cause the right answer to emerge through a process of evolution here, as it has in so many other areas of antitrust309. Doing this is especially necessary now in light of the over- whelming importance to our economy of innovation and the consumer choices it brings. The consumer choice model of antitrust is being used with increasing frequency because, fundamentally, it asks the right questions and identifes the right goals. It explains accurately, simply, and intuitively, better than the price or effciency models can, why antitrust is good for consumer welfare. It is more transparent and provides a better initial rule of thumb for what antitrust is all about. It should lead to a better fnal analysis of several important types of antitrust situations and should not lead to an inferior analysis of any type of situation. And it can be implemented in at least as administrable and predictable a manner as other models. By contrast, the price and effciency models of antitrust should be restricted for the same reasons that we have restricted the fat-earth model of geography. It is not that the older models lack utility; they will produce the correct result under most day-to-day working conditions. The problem is that their underlying premises are seriously fawed. The fat-earth model is off by only about eight inches per mile, so an architect surveying a building, for example, can assume the earth is fat and usually experience no problems. But under some important conditions—say, when planning a long journey—the small errors inherent in the fat-earth model add up and lead to wrong conclusions. The price or effciency models can lead to similar errors. On its face, the notion of shifting to a new paradigm sounds alarming and disruptive, a leap into the unknown at the very least, and perhaps something fraught with the dangers of erroneous decisions in an area of the economy where it is important to avoid

308 , “The Antitrust Paradox” 50 (1978). 309 Sometimes antitrust cannot as a practical matter grapple with the right questions and so must use surrogates, at least for a while. For example, some 25 years ago Landes and Posner argued that the only things we need to know to make correct enforcement decisions in merger cases are of demand and elasticity of supply. They then conceded that because we can rarely measure these things reliably in a merger context we should instead continue to use the surrogates of market defnition, market share, etc. See William M. Landes & Richard A. Posner, “Market Power in Antitrust Cases”, 94 Harv. L. Rev. 937, 938, 944 (1981). Since then, however, merger analysis has been moving closer to an approach that ignores the surrogates and instead tries to ascertain the relevant elasticity questions directly. For a discussion, see Lande & Langenfeld, supra note 66, at 6–8.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 119 Using the “consumer choice” approach to antitrust law mistakes. The actual facts are much more nearly routine, however. The paradigm shift proposed here is intended to make antitrust law easier to understand and apply, and to bring about some useful changes in outcome on the margins310, but it is also meant to preserve the basic methodology and outcomes in the vast majority of cases. Price and effciency would remain the centerpiece of analysis in most matters. The substantive changes would affect less than 5 percent of cases. Antitrust jurisprudence is easily capable of absorbing a paradigm shift of this magni- tude. The law has never been fxed, but rather has redefned the statement of its fundamental mission every few decades for over 100 years311, in response to accumu- lating practical experience and changes in the nature of the problems that it addresses. In the years before World War I, the main point of antitrust was literally an opposition to trusts— an attack on the industry wide price-fxing cartels that were organized through trusts of voting stock. In the 1930s, in a world shaken by depression and the rise of fascism, the role of antitrust was redefned to include a strong element of protecting social stability by protecting small businesses312. In the 1960s and 1970s, antitrust expressed a fear of corporate bigness and sought to advance a variety of social and political goals associated with deconcentration, as well as purely economic goals313. In the 1980s, with the elections of Presidents Ronald Reagan and George H.W. Bush, antitrust took up the only alternative that was available, the one used by the economists, and it came to be dominated by a sensitivity to economic effciencies of all kinds314. From the mid-1990s and until the present time, under both Presidents Clinton and George W. Bush, antitrust enforcement has become more nuanced, with effciency goals being tempered by a concern for prices to ultimate consumers and, increasingly, with a nascent purpose of using antitrust as a way of ensuring optimal levels of consumer

310 Since 1890, most changes in antitrust have been slight and gradual. Naked price fxing is prosecuted in any administration, and most mergers will be evaluated in a similar fashion (in light of the general acceptance of the Horizontal Merger Guidelines) under any view of antitrust. Many of the other core issues within antitrust enforce- ment show stability and usually do not involve wide pendulum swings from one administration to the next. See Timothy Muris, Chairman, Federal Trade Comm’n, “How History Informs Practice—Understanding the Develop- ment of Modern U.S. Competition Policy”, Remarks to the ABA Section of Antitrust Law Fall Forum (Nov. 19, 2003), available at http:// www.ftc.gov/speeches/muris/murisfallaba.pdf; William Kovacic, “The Modern Evolution of U.S. Competition Policy Enforcement Norms”, 71 Antitrust L.J. 377 (2003). 311 Although antitrust existed in limited form at , its modern incarnation started with the Sherman Act of 1890. 312 The Robinson-Patman Act, for example, can be understood as a response of independent grocery stores to the rise of the more effcient A&P chain supermarkets. See Richard C. Schragger, “The Anti-Chain Store Movement, Localist Idealogy, and the Remnants of the Progressive Constitution, 1920–1940”, 90 L. Rev. 1011 (2005). 313 The feld was not blind to issues of productivity, however, and tried to balance social and political concerns with other concerns for consumer welfare and corporate productivity. See John J. Flynn, “Introduction, Antitrust Jurisprudence: A Symposium on the Economic, Political and Social Goals of Antitrust Policy”, 125 U. Pa. L. Rev. 1182 (1977). 314 The effciency revolution can be traced to a single article. See Robert Bork, “Legislative Intent and the Policy of the Sherman Act”, 9 J.L. & Econ. 7 (1966). For the history of the ascendancy of the effciency perspective, see Lande, “Effciency as the Ruler of Antitrust”, supra note 233.

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120 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande choice315. The full shift to a choice and options framework would, therefore, be neither a large nor unprecedented step. This limited paradigm shift is still important and worth making. Even if the shift does not greatly affect the numbers of cases brought, it will affect the vocabulary of the enterprise and the kind of analysis that is brought to bear, and will introduce analytical pathways that are more nearly predisposed toward reaching accurate conclusions. We believe that the choice model asks the right questions and assigns antitrust to its proper context in the larger mission of protecting consumer choice, and so is likely to begin the process in an understandable, readily implemented way.

315 See, e.g., Timothy Muris, Chairman, Federal Trade Comm’n, “The Interface of Competition and Consumer Protec- tion, Remarks at the Fordham Institute’s 29th Annual Conference” on International Antitrust Law & Policy 3–4 (Oct. 31, 2002) (“Competition presses producers to offer the most attractive array of price and quality options. In competitive industries, the imperative to gain new sales by satisfying consumer needs increases the spectrum of choices available.... competition does more than simply increase the choices available to consumers, however”). The growing role of choice analysis is illustrated by such varied and important matters as Microsoft, supra note 48; AOL/Time Warner, supra note 119; and Lockheed/Northrop, supra note 161.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 121 The consumer choice paradigm in German ordoliberalism and its impact on EU competition law

PETER BEHRENS [email protected] Professor em. of Law, University of Hamburg, Faculty of Law Director, Institute for European Integration (Europa-Kolleg Hamburg)

I. Introduction

From a European perspective, the fact that some American authors such as Neil Averitt and Robert Lande1 are suggesting the replacement of the price and effciency paradigms, which still prevail in US antitrust law, for a consumer choice approach attracts great attention. This comes at a time when the European Commission is advocating a more

1 See Averitt and Lande “Using the ‘Consumer choice’ Approach to Antitrust Law”, (2007) 74 Antitrust L.J. 175, (last visited 31 Jan. 2016). For references to earlier publications by the authors, see ibid. at 180-81 n.12.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 123 The consumer choice paradigm in German ordoliberalism and its impact on EU competition law economic approach based on a consumer welfare paradigm which would focus on just that: a price and effciency analysis. Are US antitrust law and EU competition law moving again in opposite directions, each of them re-defning their goals in terms of the other’s outdated paradigms? Not quite. Whether the consumer choice approach will push US Antitrust law into a new direction remains to be seen. The more economic approach at least has had a less than revolutionary effect on EU competition law although its impact can be felt in the Commission’s enforcement activities. This is partly due to the fact that the Commission’s own policy statements indicate a much broader (and less unambiguous) approach than its US counterpart. In its guidelines on abuse of dominance (the guidelines), the Commission expressly says: Consumers beneft from competition through lower prices, better quality and a wider choice of new or improved goods and services. The Commission, therefore, will direct its enforcement to ensuring that markets function prop- erly and that consumers beneft from the effciency and productivity which result from effective competition between undertakings2. Here, effciency and consumer welfare are defned in much more comprehensive terms than just price and output. The Commission’s approach still leaves room for the protec- tion of effective competition as such, which—if properly defned—leaves room for consumer choice considerations. What is even more important is the fact that the European Court of Justice (ECJ) has expressly refused to read a consumer harm standard into EU competition rules3. The Court rather sticks to its longstanding juris- prudence in which it has always emphasized the relevance of the market structure for the effectiveness of competition and of consumer choice as a driving force behind producers’ rivalry4. The following contribution attempts to demonstrate that the choice paradigm has always been and still is deeply rooted in the legal and economic theories of competition and markets represented by the German school of ordoliberalism whose impact can still be felt in contemporary EU competition policy and law. A preliminary, not merely terminological, remark is necessary, however. It has been argued that the economic paradigm (of which consumers’ freedom of choice is just a refection) is not part of ordoliberal, but rather of neoliberal thought which is said to have never had

2 O.J. 2009, C 45/02, “Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings”, para. 22, (last visited 29 Jan. 2016). 3 Joined Cases C-501/06 et al., GlaxoSmithKline v. Commission, [2009] E.C.R. I-9291, 9374, para. 63. 4 With regard to potentially anticompetitive business strategies of dominant undertakings, see Case C-52/09, Telia- Sonera Sverige, [2011] E.C.R. I-527, para. 28.

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124 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Peter Behrens any infuence on EU competition policy and law at all5. A distinction of ordoliberalism and along these lines is, however, highly artifcial and unwarranted in substance6. If there is a common denominator of classical laissez-faire liberalism, neoliberalism, and ordoliberalism, it relates to the central role of economic liberty, including producers’ freedom to compete as well as consumers’ freedom of choice. As will be demonstrated, the differences are differences of emphasis with regard to what it takes to institutionalize a competitive market based on individual freedom, in particular on the consumer choice paradigm. Classical laissez-faire liberalism as well as neoliberalism and ordoliberalism concur as far as the state’s duty to provide the institutional underpinnings of a market economy is concerned, which consist of the core elements of a system of such as the protection of private property, the principle of pacta sunt servanda, the principle of responsibility for damages caused to third parties, etc. Different from some misconceived views, the market, therefore, is the opposite of an unregulated chaos where the law of the powerful prevails instead of the power of the law. So even “laissez-faire” does not mean “everything goes”. Whereas classical laissez-faire liberalism used to be mainly concerned about state intervention in the market, neoliberalism and, particularly, ordoliberalism also empha- size the enforcement of the “rules of the game” against restraints of competition established not by the state but by the market agents themselves. One’s freedom thus cannot include the freedom to restrict the use of other’s freedom. It is not without justifcation therefore that the terms “neoliberalism” and “ordoliberalism” are sometimes used interchangeably7 despite certain differences that do not matter in the present context. However, since in contemporary political debates the term neoliberalism is polemically used in a quite distorted way to designate “free markets without rules” (“untamed turbo-capitalism”)8, it is practically associated with a “libertarian” approach that some American authors propagate9 but that has almost no followers in Europe. Here, even laissez-faire liberalism used to recognize the important role of the law for the constitution of markets. And that is even truer for neoliberalism and ordoliberalism. Be that as it may, in the present context the term ordoliberalism is used for a school of thought, which emphasizes the crucial role of private law and competition rules for the proper functioning of competitive markets.

5 Maier-Rigaud, “On the normative foundations of competition law – effciency, political freedom and the freedom to compete”, in Zimmer (ed.), The Goals of Competition Law (Cheltenham, UK, 2012), ch. 8, p. 132. 6 For a rebuttal of the argument, see Schweitzer, “Effciency, political freedom and the freedom to compete – comment on Maier-Rigaud”, in Zimmer (ed.), The Goals of Competition Law (Cheltenham, UK, 2012), ch. 9, p. 169. 7 See, e.g., Willke, Neoliberalismus (Frankfurt, 2003) (which is in substance nothing else than an introduction to ordoliberalism). 8 For a critical assessment of the neoliberal agenda of unrestrained markets, see, e.g., Crouch, Making Capitalism Fit for Society (Cambridge, UK, 2013). 9 See, e.g., Armentano, Antitrust and Monopoly: Anatomy of a Policy Failure (New York, 1982).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 125 The consumer choice paradigm in German ordoliberalism and its impact on EU competition law

In order to analyze the consumer choice paradigm in German ordoliberalism and its impact upon EU competition law, I shall begin by pointing to the most important historical roots of the consumer choice paradigm in classical liberalism, especially in the work of and later in the works of the Austrian School of Economics (section II). I shall then describe in some detail the formative period of ordoliberalism in Germany represented by the early Freiburg School (section III). Since ordoliberal thought never became petrifed within the limits of the original Freiburg School, but rather has undergone major changes since then, I shall explore the development toward its contemporary version(s), a development that is often left unexamined outside Germany (section IV). Its impact upon the competition policy and law of the EU will briefy be discussed (section V), followed by a discussion of the interrelationship between the consumer choice paradigm and the consumer welfare (effciency) concept (section VI). I shall close with some conclusions regarding the adequacy of an economic theory that is designed for competition law purposes (section VII).

II. Historical roots of the choice paradigm

1. The concept of individual economic freedom The history of competition policy can be understood as the quest for a working defni- tion of competition as a prerequisite for the defnition of restraints of competition, which laws should prohibit in order to protect competition. The concept of competition by far antedates any properly defned concept of (private) restraints of competition and their prohibition by competition law. Adam Smith, by providing us in his seminal work, Inquiry into the Wealth of Nations10, with a scientifc price theory that explained the notion of value in a market system based on transactions, was the frst to concep- tualize competition. He argued that whenever the “market price” deviates from the “natural price” (which in modern terminology is the equilibrium price that equals marginal cost), the price mechanism automatically tends to bring the market price into line with the natural price. This self-regulating mechanism, according to Smith, is driven by self-interest on the part of producers as well as consumers. It works properly

10 Smith, (Everyman’s Library ed., 1977).

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126 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Peter Behrens only if each person is left free to follow his or her own economic incentives, which leads quite naturally to competition among sellers and buyers. In order to allow competition to work, the government should refrain from interfering with private economic activities except so far as is necessary to prevent theft and fraud, to ensure national defence and domestic (), and − most importantly − to administer justice (we shall come back to this later). This was the birth of the laissez-faire approach to competition that characterized classical liberalism. In Smith’s own words: All [governmental] systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men11. The laissez-faire concept of competition, therefore, started from the proposition that competition is the natural consequence that results from market participants making use of their individual economic freedom unrestrained by the government but protected by the rules of private law. Thus, the core element of economic liberalism was from the very beginning based on a behavioral notion of individual economic freedom, i.e., the freedom to act and to interact with others, hence to compete. Adam Smith referred to the overall system of such action and interaction as a “system of natural liberty” that required and allowed individuals to act freely with regard to transactions in the market. According to Smith, competitive markets would lead self-interested individuals by an “invisible hand” to promote the general welfare, even though that was not part of their intention. In modern terms, competitive markets lead to the enhancement of consumers’ welfare, i.e., allocative effciency. Smith expressly stated that, “by directing [the] industry in such a manner as its produce may be of the greatest value, he [i.e., the individual] intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was not part of his intention”12. “Individual” clearly refers to individuals in their capacity as consumers, whereas “industry” refers to producers. Therefore, what Smith is saying here is that consumers’ choices among producers’ products are the driving force of competition, which ultimately leads to the promotion of the general welfare. Hence, Adam Smith conceived of competition as rivalry among producers (suppliers) who in their production and supply decisions are directed by consumers’ choices. This is the historical birth of the consumer choice paradigm. Smith was of course well aware of producers’ tendency to restrict competition among themselves at the expense of consumers. He knew that whenever people of the same

11 Ibid. at Bk. IV, ch. IX, p. 180. 12 Ibid. at Bk. IV, ch. II, p. 400.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 127 The consumer choice paradigm in German ordoliberalism and its impact on EU competition law trade meet together “the conversation ends in a against the public or in some contrivance to raise prices”13. But he also considered it impossible to prevent this from happening. He was of the opinion that the law could not hinder people of the same trade (i.e., competitors) from assembling and fxing prices (i.e., conspiring in ). Adam Smith considered it not necessary to comprehensively analyze the nature of restraints of competition in terms of producers’ restrictions of market participants’ freedom to act and to interact. His concern was exclusively targeted at governmental interventions14. His remedy against the anticompetitive practices of producers was in essence the same remedy that he recommended against mercantilist interventions and regulations by the government, namely .

2. Economic action as choice It took a while until Adam Smith’s system of natural liberty and his notion of competi- tion based on the exercise of market participants’ freedom of action was refned and transformed into a theory of human action. When Ludwig von Mises, who was one of the most prominent representatives of the Austrian subjectivist school of economics, published his seminal treatise on economics15, he used as its main title Human Action, thereby indicating that economics must be understood as part of a more comprehensive science devoted to the analysis of human behavior (others would later characterize economics as a social science and would initiate the modern move- ment that applies economic analysis to all kinds of human behavior16). In the present context, the most interesting aspect is the fact that von Mises characterized all human action in terms of choice (others would later develop logical theories of economic choice or analyze the interrelationship between cost and choice)17. In von Mises’ own words: Until the late nineteenth century remained a science of the “economic” aspects of human action, a theory of wealth and selfshness. It dealt with human action only to the extent that it is actuated by what was − very

13 Ibid. at Bk. I, ch. X, p. 117. 14 Interestingly enough, however, Smith alluded in a side remark to fxing cartels: When masters combine together in order to reduce the of their workmen, they commonly enter into a private bond or agreement not to give more than a certain wage under a certain penalty. Were the workmen to enter into a contrary combination of the same kind, not to accept of a certain wage under a certain penalty, the law would punish them very severely; and if dealt impartially, it would treat the masters in the same manner. Ibid. at 129. 15 Von Mises, Human Action: A Treatise on Economics (New York, 4th ed.1996). The original German version was published in 1940. 16 See, e.g., Frey, Ökonomie ist Sozialwissenschaft: Die Anwendung der Ökonomie auf neue Gebiete [Economics is Social Science: The Application of Economics to New Fields] (Munich, 1990). 17 For an illuminating analysis, see Buchanan, Cost and Choice: An Inquiry in Economic Theory (Chicago, 1969).

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128 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Peter Behrens

unsatisfactorily − described as the proft motive, and it asserted that there is in addition other human action whose treatment is the task of other disciplines. The transformation of thought which the classical economists had initiated was brought to its consummation only by modern subjectivist economics, which converted the theory of market prices into a general theory of human choice. For a long time men failed to realize that the transition from the classical theory of value to the subjective theory of value was much more than the substitution of a more satisfactory theory of market exchange for a less satisfactory one. The general theory of choice and preference goes far beyond the horizon which encompassed the scope of economic problems as circum- scribed by the economists from Cantillon, Hume, and Adam Smith down to . It is much more than merely a theory of the “economic side” of human endeavors and of man’s striving for commodities and an improve- ment in his material well-being. It is the science of every kind of human action. Choosing determines all human decisions. In making his choice man chooses not only between various material things and services. All human values are offered for option. All ends and all means, both material and ideal issues, the sublime and the base, the noble and the ignoble, are ranged in a single row and subjected to a decision which picks out one thing and sets aside another. Nothing that men aim at or want to avoid remains outside of this arrangement into a unique scale of gradation and preference. The modern theory of value widens the scientifc horizon and enlarges the feld of economic studies. Out of the political economy of the classical school emerges the general theory of human action, praxeology18. Von Mises’ contribution to our theme was the profound insight that what goes on in any , including market economies, is the result of countless conscious and purposive actions, choices, and preferences of individuals, each of whom tries as best as he or she can under the circumstances to attain various wants and ends and to avoid undesired consequences. Markets are characterized by von Mises as follows: The direction of all economic affairs is in the market society a task of the entrepreneurs. Theirs is the control of production. They are at the helm and steer the ship. A superfcial observer would believe that they are supreme. But they are not. They are bound to obey unconditionally the captain’s orders. The captain is the consumer. Neither the entrepreneurs nor the farmers nor the capitalists determine what has to be produced. The consumers do that. If a businessman does not strictly obey the orders of the public as they are

18 Von Mises (n. 15) at 2.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 129 The consumer choice paradigm in German ordoliberalism and its impact on EU competition law

conveyed to him by the structure of market prices, he suffers losses, he goes bankrupt, and is thus removed from his eminent position at the helm. Other men who did better in satisfying the demand of the consumers replace him19. So, here we are: it is consumers’ choice that is regarded as the driving force of a competitive market economy. Von Mises combines this concept with the idea of individual freedom: Liberty and freedom are the conditions of man within a contractual society. Social cooperation under a system of private ownership of the factors of production means that within the range of the market the individual is not bound to obey and to serve an overlord. As far as he gives and serves other people, he does so of his own accord in order to be rewarded and served by the receivers. He exchanges goods and services, he does not do compulsory labor and does not pay tribute. He is certainly not independent. He depends on the other members of society. But this dependence is mutual. The buyer depends on the seller and the seller on the buyer20. So, in sum, classical liberal concepts such as those developed by Adam Smith and later by von Mises and the subjectivist Austrian school of economics set the stage for a new liberal learning in Germany that became known as the ordoliberal school of thought. It started out as the Freiburg School and later developed into the multifaceted contem- porary school of ordoliberalism.

19 Ibid. at 269. 20 Ibid. at 282.

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130 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Peter Behrens

III. The new learning of the Freiburg School

1. The background The group of intellectuals whose thoughts became known as the Freiburg School was composed of jurists and economists who in the 1930s joined together in order to pursue an interdisciplinary research project for a fundamental reconstruction of economic and legal sciences21. Their intention was to overcome the traditional German historical school of economics (which had been purely descriptive) as well as the Austrian school of economics (which was considered purely theoretical). The former was lacking any potential for theoretical analysis, the latter was lacking an awareness of the relevance of (legal) institutions for the proper functioning of the economy. Both were regarded as inadequate to explain and resolve the economic (and political) problems of the day resulting from the of the late 1920s. The members of the Freiburg School attributed the shortcomings of the prevailing economic, legal, and political conditions to a breakdown of the balance between public power (which was taken over by the Nazi state) and private power (which was hijacked by infuential interest groups and by highly integrated and cartelized industrial complexes). A future reform (after the expected fall of the Nazi regime) would therefore have to focus on an institutional arrangement that would effectively check public as well as private power. The Freiburg School was searching for a totally newly designed system that would be able not only to avoid unwarranted government intervention in economic affairs but also to effectively control the market power of private actors. As liberals, the members of the Freiburg School all shared the conviction that only the institution of a competitive market economy was able to guarantee a society that would be at the same time prosperous, free, and equitable. In this regard, they clearly followed Adam Smith’s fundamental insight that individual economic freedom is the basis for a properly functioning market and that the resulting rivalry among market participants results quite naturally in an enhancement of overall welfare. Some members of the group emphasized in addition the importance of an equitable distribution of the benefts of competitive markets. This implied mainly that those who would be unable

21 For a comprehensive account of the “Freiburg School”, see Gerber, Law and Competition in Twentieth Century Europe: Protecting Prometheus (Oxford, 1998), 222 (Gerber, Law and Competition); Gerber, “Constitutionalizing the Economy: German Neo-Liberalism, Competition Law and the ‘New’ Europe”, (1994) 42 Am. J. Comp. L. 25; Streit, “Economic Order, Private Law and Public Policy: The Freiburg School of Law and Economics”, (1992) 148 J. Instit. & Theoretical Econ. 675; Rieter and Schmolz, “The Ideas of German Ordoliberalism 1938-45: Pointing the Way to a New Economic Order”, (1993) 1 Eur. J. Hist. Econ. Thought 87.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 131 The consumer choice paradigm in German ordoliberalism and its impact on EU competition law to survive on the basis of what they could (or could not) earn on the market should be supported by transfer payments (hence the concept of a “social market economy”22 that later became the offcial German model of organizing the post-war economy)23. But the most important cornerstone of the reform was based on the traditional liberal notion of individual freedom of action in the market, i.e., the freedom to engage in transactions. The potential for the emergence of powerful positions in the market was fully recognized, but competition was regarded as the proper means to control such private power. Competition was seen as a control mechanism that was preferable to direct control by the government that would risk the re-emergence of unwarranted state intervention with individual freedom. All of this was still fairly in line with classical liberalism but, in some important respects, also went far beyond.

2. The institutional approach (the role of the law) The contributions of the new learning introduced by the Freiburg School to our under- standing of markets and competition was, frst of all, a new emphasis on their institutional underpinnings. The fundamental insight was that in practice there can be no freedom and consequently no competition unless it is granted and protected by law. It was the most eminent jurist among the members of the School, Franz Böhm, who in his impor- tant 1933 book Wettbewerb und Monopolkampf [Competition and the Struggle for Monopoly]24 intended, according to his own words, to translate the economic principles that govern markets into legal principles. He argued that participants in competitive markets must be empowered and at the same time controlled by legal rules that grant equal freedom to all (consumers as well as producers), private property rights pertaining to economic resources, , enforcement of and full responsibility for obligations resulting from contractual agreements, and liability for damages inficted upon others. Such legal institutions are, according to Böhm, constitutive elements of markets and competition. They represent nothing less than an economic constitution largely based on private law. It turns market participants into legal subjects and the market society into a private law society. It follows that competition is the result of individuals making use of their rights to freely engage in market transactions. It is worth mentioning that Franz Böhm expressly referred to Adam Smith who, on frst sight, may

22 The term was originally coined in Alfred Müller-Armack, Wirtschaftslenkung und Marktwirtschaft [Economic Governance and Market Economy] (1947, reprinted in 1990). 23 The term “social market economy” has found its way even into the Lisbon Treaty. See Consolidated Version of the Treaty on the Functioning of the European Union, [2008] O.J. C115/13, art. 3(3)(2), (last visited 29 Jan. 2016) (TFEU). 24 Böhm, Wettbewerb und Monopolkampf [Competition and the Struggle for Monopoly] (1933, reprinted in 2010).

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132 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Peter Behrens seem to have neglected the legal underpinnings of the system of natural liberty. But a closer look at his lectures on jurisprudence25 are proof to the contrary. He was not only the father of liberal economics but also, at the same time, an eminent jurist and legal philosopher. And he was quite explicit in his writings that competition as a mechanism that allows consumers to control producers (or in more general terms, buyers to control sellers) must be based on legal institutions. He stated in clear terms that: [C]ommerce and manufacturers can seldom fourish long in any state which does not enjoy a regular administration of justice, in which the people do not feel themselves secure in the possession of their property, in which the faith of contracts is not supported by law, and in which the authority of the state is not supposed to be regularly employed in enforcing the payments of debts of all those who are able to pay26. Freedom for Adam Smith does not naturally fall from heaven, but it is rather a matter of legislation; in his own terms, a matter of the state’s “administration of justice”. It has therefore quite rightly been said that the invisible hand of the market is guided by the visible hand of the law27. Böhm can therefore be said to have explored in detail the implications of Adam Smith’s basic idea in light of the development of modern private law.

3. The systemic approach (the concept of order) The second innovative element of the new learning introduced by the Freiburg School was the emphasis on the systemic nature of a competitive exchange economy. In this regard, Franz Böhm’s concept of competition as a matter of the legal order was matched by Walter Eucken’s concept of economic order28. Eucken’s ambition was to bring economics back into touch with reality. His basic approach was morphological. The starting point was the economic problem, i.e., the problem of allocating scarce resources, which Eucken conceived as a problem of . Therefore, for him the distinguishing center piece of an economic system was economic planning,

25 Smith, Lectures on Jurisprudence (Indianapolis, 1978). 26 Smith (n. 10) Bk. V, ch. III, p. 392. 27 See Mestmäcker, “Die sichtbare Hand des Rechts: Über das Verhältnis von Rechtsordnung und Wirtschaftssystem bei Adam Smith” [The Visible Hand of the Law: The Interrelationship between Legal Order and Economic System in the Work of Adam Smith], in Mestmäcker, Recht und ökonomisches Gesetz [Legal Order and Economic Law], (2nd ed. 1984), 104. 28 For an excellent account of Eucken’s approach, see Weisz, “A Systemic Perception of Eucken’s Foundations of Economics”, in Labrousse and Weisz (eds.), in France and Germany: German Ordolib- eralism versus the French Regulation School (Berlin, 2001), 129.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 133 The consumer choice paradigm in German ordoliberalism and its impact on EU competition law i.e., the allocative decision making by relevant actors. He started from an empirical study of how such economic decision making was organized in different economic systems; in other words, how individual plans are coordinated so as to establish order in the sense of an organized whole instead of chaos. By way of abstraction, he then identifed a number of pure forms of economic orders, the two extremes being the centrally directed economy (Zentralverwaltungswirtschaft) and the decentralized exchange economy (Verkehrswirtschaft). The former is characterized by coordination of individual planning through hierarchy, the latter coordinates individual planning through market transactions. In other words, the former relies on central planning (presumably by the state), while the latter relies on decentralized planning (by individual market participants). Planning clearly requires choices and Eucken would certainly agree with a concept that characterizes competitive markets as social mechanisms for the coordination of consumers’ and producers’ choices. Eucken’s liberal convictions lead him quite naturally to favor competitive markets as the most promising combina- tion of individual freedom to make choices and the resulting prosperity of society at large (today we would refer to this as effciency). It is not diffcult to recognize this as a reformulation of Adam Smith’s system of natural liberty with its unintended positive consequences.

4. The quest for competition rules (control of market power) There is, however, one crucially important difference between the Freiburg School’s approach and Adam Smith’s as well as the Austrians’ approaches. The difference pertains to the conviction of the Freiburg School that free competition may easily lead to self- destruction. Monopolization and cartelization, if left unchecked, would cause dysfunc- tional imbalances in the market. Corrections by way of state intervention would, however, be similarly dysfunctional in a system of decentralized economic planning (the German state control over cartels had proven to be a total failure29). What was therefore indispens- able for the proper functioning of competitive markets was, according to the Freiburg School, the legal institutionalization of binding rules that would determine the border- line between (lawful) competitive and (unlawful) anticompetitive market conduct. Böhm characterized such competition rules as “rules of the game” that would allow only “competition on the merits” and outlaw other practices that would lead to the artifcial formation of market power (by way of cartelization or monopolization)30. The disturbing

29 See Kronstein and Leighton, “Cartel Control: A Record of Failure”, (1946) 56 Yale L.J. 297. 30 Böhm, Ordnung der Wirtschaft [The Order of the Economy] (Berlin, 1937), 120.

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134 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Peter Behrens infuence of market power upon competition was the major concern also for Eucken31. The Freiburg School therefore argued, frstly, in favor of a legal prohibition of cartels32; secondly, when it came to dominant positions in the market, they tended to suggest control by a state agency (especially where market power was the unavoidable result of success in the market or of market forces in case of a ) if not their dissolution by way of divestiture (de-concentration)33. The underlying principle was that the limits of governmental intervention in the economy as well as the limits of private power in the market were turned from matters of discretionary political decision- making into legal questions to be ultimately decided by independent courts.

5. Shortcomings To be sure, the original learning of the Freiburg School of ordoliberalism had its conceptual shortcomings that were responsible for a number of fundamental misun- derstandings. The frst important shortcoming was related to the use of the model of perfect (or complete) competition as the benchmark for assessing restraints of compe- tition. This approach neglected the fact that under conditions of there is no competition at all in terms of rivalry among market participants (this is explained in more detail below). In other words, competition may be better understood as market actors’ competitive struggle for market power. Thus a restraint of competi- tion cannot be defned by a deviation from perfect competition, but rather by a practice that distorts the rules of the game and that negatively impacts the system of natural liberty based on individual rights to engage in market transactions. The second shortcoming was the uncompromisingly hostile attitude toward market power even where it is the result of competition on the merits. This gave rise to the charge that the Freiburg School would protect competitors instead of competition and would in particular protect small and medium-sized frms34. The third shortcoming was caused by some adherents of the Freiburg School who attempted to formalize the notion of competition on the merits by defning certain types of market conduct (e.g., below cost pricing by dominant frms) as per se unlawful without suffcient economic reasoning and justifcation. This prompted the charge that the Freiburg School was formalistic and economically not well founded.

31 Eucken, Grundsätze der Wirtschaftspolitik [Principles of ] (Stuttgart, 7th reprint 2004), 291. 32 Ibid. at 138. 33 A similar suggestion was made in the United States by representatives of the Harvard School of Antitrust such as Carl Kaysen and Donald Turner. See Kaysen and Turner, Antitrust Policy: An Economic and Legal Analysis (Cambridge, MA, 1959), 111. 34 See Whish and Bailey, Competition Law (Oxford, 7th ed. 2012), 22.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 135 The consumer choice paradigm in German ordoliberalism and its impact on EU competition law

It is explained further below that the Freiburg School of the mid-twentieth century underwent a number of fundamental changes that eliminated these shortcomings without giving up its basic insight that competitive markets are not self-suffcient but require proper legal underpinnings, including laws against restraints of competition initiated by the market participants themselves. In this sense, the Freiburg School must be regarded as a German version of institutional economics.

6. Lasting merits For the present context it remains to be stated that, whatever the shortcomings of the original Freiburg School may have been and apart from its additions to the traditional learning, the gist of the new learning was its continuing focus on individual economic freedom (i.e., producers’ and consumers’ sovereignty with regard to economic planning) as the legally protected basis for a system of decentralized planning (i.e., a system of competition). It went without saying that planning necessarily implied choosing among alternative economic options. For the Freiburg School it was axiomatic that such a system (i.e., a competitive market economy) would be governed by consumers who were expressly regarded by Böhm and Eucken as the arbiters in the process of compe- tition. Competition was conceived as a process of selection based on what we would call today “consumers’ choice”. This is why the Freiburg School must be understood as the frst attempt to integrate law and economics in order to explore the prerequisites for the proper functioning of competition on the basis of consumers’ freedom of choice. The Freiburg School’s approach was new then in the sense that it went far beyond classical laissez-faire liberalism. Eucken, in order to avoid any misunderstanding, expressly rejected the idea that the new learning was equivalent to liberalism or neo- liberalism35. Hence the new label “ordoliberalism” that has unfortunately caused some confusion outside of Germany.

35 Eucken (n. 31) at 374: „Die Prinzipien, die hier dargestellt wurden, werden bisweilen ‚liberal‘ oder ‚neoliberal‘ genannt. Aber diese Bezeichnung ist oft tendenziös und nicht zutreffend“. [“The principles laid out here are sometimes called ‘liberal’ or ‘neoliberal’. But this labeling is often tendentious and inaccurate”].

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136 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Peter Behrens

IV. Beyond the Freiburg School: contemporary ordoliberalism

1. The quest for modernization Since its inception within the framework of the Freiburg School, German ordoliberalism has undergone considerable refnements that are important to note and understand. This is especially important for an assessment of the impact of German ordoliberalism on EU competition law. Outside of Germany, the developments after the Freiburg School are barely recognized, due in part to the of ordoliberal publications in English36, but in part also due to David Gerber’s widely used, though unfortunately truncated, presentation of the original Freiburg School as the German school of ordo- liberalism37. This has given rise to many misunderstandings, misrepresentations, and ill-informed statements that made it easy for critics to dismiss the ordoliberal approach as formalistic, non-appreciative of economic analysis, overly concerned about market power, protective of small enterprises and of competitors instead of competition, favoring instead of effciency, and even pro-regulatory38. None of these charges are justifed in light of the development that ordoliberalism has undergone over the last decades. The second generation of ordoliberals that followed the founding fathers of the Freiburg School have been receptive of modern insights into the operation of competitive markets without, however, giving up the core elements of the Freiburg School’s learning, most importantly the focus on individual freedom, consumer choice, and the specifc notion of “ordo”39. Three considerations may be identifed as having infuenced the ordoliberal approach considerably.

36 But see Eucken, Foundations of Economics (1950); see also Möschel, “Competition Policy from an Ordo Point of View”, in Peacock and Willgerodt (eds.), German Neo-Liberals and the Social Market Economy (London , 1989), 142. For a short but illuminating presentation of the core tenets of contemporary ordoliberalism, see Schweitzer (n. 6). 37 See, e.g., Whish and Bailey (n. 34) at 22 n.100 (who on the basis of their reference to Gerber’s Law and Competi- tion identify German ordoliberalism exclusively with the Freiburg School.) For a frst hand critique of Gerber’s presentation, see Mestmäcker, “The development of German and European competition law with special reference to the EU Commission’s Article 82 Guidance of 2008”, in Pace (ed.), European Competition Law: The Impact of the Commission’s Guidance on Article 102 (Cheltanham, UK, 2011), 25, 39 et seq. 38 See Gerber, Law and Competition (n. 21) at 247. 39 For a comprehensive presentation of the contemporary ordoliberal approach to competition law, see Mestmäcker and Schweitzer, Europäisches Wettbewerbsrecht [European competition Law] (Munich, 3rd ed. 2014). For an excellent account of the modernization of ordoliberalism, see Broyer, “German Contemporary Analyses of Economic Order: Standard Ordnungstheorie, Ordoliberalism and Ordnungsökonomik in Perspective”, in Labrousse and Weisz

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 137 The consumer choice paradigm in German ordoliberalism and its impact on EU competition law

2. From “perfect” to “workable” competition Firstly, the model of perfect (or complete) competition has since long been acknowl- edged as an inappropriate point of reference for the application of competition rules to real market behavior and for the identifcation of restraints of competition40. The model was fnally recognized for what it is: no more than a model that explains inter- relationships between prices, costs, and output. It may allow predictive propositions, but these are totally inadequate to be converted into normative propositions that would justify competition policy proposals. The extremely rigid prerequisites of the model (i.e., homogeneity of goods and services offered and demanded on the market by market participants none of whom have any infuence on market conditions, full transparency of the market and complete information of all market participants, absence of transaction costs and barriers to entry, and absence of any impediments for immediate reactions and adjustments by market actors to changes in market data) exclude any room for competition in terms of rivalry because no market participant could expect to proft from a move away from the equilibrium. It was Friedrich von Hayek who, in his Stafford Little Lecture on “The Meaning of Competition”41 given in 1946 at Princ- eton University, had clearly and convincingly stated: [W]hat the theory of perfect competition discusses has little claim to be called “competition” at all and its conclusions are of little use as guides to policy. The reason for this seems to be for me that this theory throughout assumes that state of affairs already to exist which, according to the truer view of the older theory, the process of competition tends to bring about (or to approxi- mate) and that, if the state of affairs assumed by the theory of perfect compe- tition ever existed, it would not only deprive of their scope all the activities which the verb “to compete” describes but would make them virtually impossible42. Consequently, contemporary ordoliberalism recognizes that only signifcant deviations from the model of perfect or complete competition may give rise to antitrust concerns. It is rather common ground today that market power in terms of the ability to raise prices without losing too many customers is a pervasive phenomenon in real markets due − among other factors − to product differentiation and differences in production costs even for homogeneous goods. In other words, some degree of market power is

(eds.), Institutional Economics in France and Germany: German Ordoliberalism versus the French Regulation School (Berlin, 2001), 93, 114. 40 For the modern rather nuanced ordoliberal concept of competition, see Mestmäcker and Schweitzer (n. 39) at 72 et seq. 41 Reproduced in von Hayek, Individualism and Economic Order (Chicago, 1963), 92. 42 Ibid.

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138 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Peter Behrens almost a prerequisite for competition, defned as rivalry among producers (sellers) who are struggling for the enhancement of their share of the market. Also, it is generally accepted that where market power or even monopoly is the result of success on the market there is no justifcation to punish it. Contemporary ordoliberal thought recognizes that market power, even where it gives rise to a dominant position in the market, cannot be held illegal per se43. This is recognized as an unavoidable antinomy inherent in the concept of the freedom to compete that is also granted to dominant undertakings44. Market dominance, however, must be acquired by lawful means. It should neither be allowed to result from external growth (by way of mergers or acquisitions) nor be abused in ways that have a negative impact upon the market structure and, consequently, on the options available to consumers (thereby damaging workable competition).

3. Competition as a dynamic process of discovery The second point that is interrelated with the foregoing considerations and that has refned ordoliberal thinking considerably was von Hayek’s concept of competition as a dynamic process (more precisely, as a discovery process45) that produces all the information necessary to determine consumers’ wants, their demand for specifc goods and services, and their willingness to pay as well as all the information necessary for producers to determine what to produce at what cost. Von Hayek convincingly argued that the availability of these data cannot be assumed (as the theory of perfect compe- tition is doing), they can only emerge from market transactions. According to von Hayek, “the starting point of the theory of competitive equilibrium assumes away the main task which only the process of competition can solve”46. And he goes on to say, “[Consumers’] knowledge to the alternatives before them is the result of what happens on the market, of such activities as advertising, etc.; and the whole organization of the market serves mainly the need of spreading the information on which the buyer is to act”47. Consequently, rather than sticking to the traditional static approach to competi-

43 Judge ’s famous formula that “the successful competitor, having been urged to compete, must not be turned upon if he wins” (US v. Aluminium Co. of America 148 F. 2d 416 (2nd Cir. 1945) is common ground among contemporary ordoliberals. 44 For an in depth ordoliberal analysis of the problem of private economic power and its control by means of compe- tition, see Böhm, “Democracy and Economic Power”, in Kartelle und Monopole im modernen Recht [Cartels and in Modern Law], Internationale Kartellrechtskonferenz 1960 [International Antitrust Law Conference 1960] (1961), 25. 45 Von Hayek (n. 41) at 94. 46 Ibid. at para 96. 47 Ibid.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 139 The consumer choice paradigm in German ordoliberalism and its impact on EU competition law tion, ordoliberalism has fully captured the dynamic concept of competition as an information producing process of interaction between market participants48.

4. The limits of competition The third aspect of ordoliberalism’s development relates to the recognition of market failures that may require the state to play a positive role in order to compensate for the limits of competition49. This applies, in particular, to natural monopolies, which require state regulation, as well as to public goods. Indeed, Adam Smith listed among the duties of the sovereign: the duty of erecting and maintaining certain public works and certain public institutions which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the proft could never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great society50. The creation and protection of legal institutions that are the indispensable underpinnings of competitive markets fgures prominently among the duties of the state. In Adam Smith’s words, the proper “administration of justice” is in modern terminology a “” that needs to be produced by the state. This includes, at minimum, a system of private law, and, according to today’s mainstream ordoliberals, also a system of competition rules that protect market participants’ freedom to make use of their private rights by preventing others from distorting the rules of the game instead of being governed by them.

5. The profle of contemporary ordoliberalism These most important refnement of the Freiburg School’s approach to competition may be appreciated as a modernization of the traditional learning, but to a certain degree it at the same time resulted in a loss of ordoliberalism’s unambiguity. Many adherents to the ordoliberal approach developed their own nuanced views on its central paradigms. Von Hayek’s concept of competition as a dynamic process of discovery was, for instance, complemented by the Schumpeterian notion of rivalry as a process of “”51, i.e., a process of constant emergence and erosion of market

48 See Mestmäcker and Schweitzer (n. 40) at 90 et seq. 49 See ibid. at 507 et seq. (with regard to the regulation of network industries). 50 Smith (n. 10) Bk. IV, ch. IX, p. 180-81. 51 See Schumpeter, Capitalism, Socialism, and Democracy (1942), ch. 7.

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140 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Peter Behrens power, where innovative frms strive to outcompete each other but then are challenged in turn by more effective innovators and so on (in Germany it became common to speak of “vorstoßender Wettbewerb” [pioneering competition]). Others developed the Hayekian approach to competition further into the notion of a cybernetic, self-regulating, and evolutionary system based on voluntary transactions whose concrete effects can neither be anticipated nor in any way measured52. Another strand of ordoliberal thought has integrated the fundamental insights of the institutional economics movement, especially the relevance of transaction costs and incomplete information of market participants for the assessment of their competitive behavior in markets53. All of these variants of contemporary ordoliberalism have, however, never questioned − but rather reinforced − the emphasis on four core tenets dating back even to Adam Smith, namely that: » competition results from the freedom of producers to choose what they want to offer and of consumers to choose what they want to buy; » competition, therefore, must be understood as a system (process) of interaction between choice making individuals who by making their choices reveal their preferences and produce the kind of information that other individuals need to make their choices; » the fundamental role of the system of private law is to provide individuals with legal rights, the unrestricted use of which forms the basis of competitive rivalry among producers and of consumers’ freedom of choice among alternative sources of supply; and » it is the task of the state to provide laws against restraints of competitive rivalry and to enforce them as rules of the game with which market participants have to comply. In the vein of Adam Smith, Walter Eucken, Franz Böhm, and Friedrich von Hayek, contemporary mainstream ordoliberalism continues to insist that a competitive market system can only be established on the basis of an adequate system of private law buttressed by a set of effective competition rules54. The most prominent living repre- sentative of German ordoliberalism, Ernst-Joachim Mestmäcker, has further explored this concept and its important legal implications. His infuential publications have always emphasized the concept of rights-based freedom of action (i.e., freedom of

52 See, e.g., Hoppmann, “Über Funktionsprinzipien und Funktionsbedingungen des Marktsystems” [On Principles and Conditions for the Functioning of the Marketsystem], in Wegehenkel (ed.), Marktwirtschaft und Umwelt [Market Economy and Environment] (Tübingen, 1981), 219. 53 See Vanberg, “‘Ordnungstheorie’ as Constitutional Economics: The German Conception of a ‘Social Market Economy’”, (1988) 39 Ordo − Jahrbuch für die Ordnung der Wirtschaft und Gesellschaft 17; Richter and Furubotn, Institutions and Economic Theory: The Contribution of the New Institutional Economics (Michigan, 1997). For an analysis of the parallels and divergences between ordoliberal thought and the New Institutionalist School, see Broyer (n. 39) at 118. 54 Today the view that “institutions matter” is shared much more widely than an analysis of ordoliberalism alone may suggest. See, e.g., , World Development Report 2002: Building Institutions for Markets (Washington, DC, 2002) (where the World Bank stated in its foreword “that markets are central to the lives of poor people” and “that institutions play an important role in how markets affect people’s standards of living and help protect their rights”).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 141 The consumer choice paradigm in German ordoliberalism and its impact on EU competition law choice) as the cornerstone of the system of competition, which is protected by the competition rules against private restrictions of this freedom55. However, it is important to understand that this freedom is conditioned upon the workability of the whole system of interactions; more precisely, the freedom of all market participants to voluntarily engage in transactions is conditioned on the workability of the whole market. Consumers’ freedom of choice is therefore dependent upon producers’ freedom to compete and vice versa. From an ordoliberal point of view, it is the role of competition law, therefore, to protect competition as a system within which individuals are free to make their choices in the market. In order for consumers to be able to make choices, it is indispensable that there exists a suffcient variety of competing producers (suppliers). This brings us to the relevance of the market structure, which refects the number of producers (suppliers) and their market shares. Consumers’ freedom (or consumers’ sovereignty for that matter) to choose between alternative products or services offered in the market is dependent upon the degree of decentralization of production. The higher the degree of concentration, the lower the number of alternatives available to consumers and the more limited consumers’ freedom of choice. The degree of concentration in a given market may, however, itself be the result of competition, but only if that is the case can it be justifed. It follows that a restraint of competition is characterized by a limitation of consumers’ choice due to an increase of concentration among producers that does not result from legitimate competition. Hence, from an ordoliberal point of view, a restraint of competition may be found wherever (1) the number of freely competing producers is artifcially reduced in ways that do not result from the normal process of competition, and (2) a practice reduces the scope of alternatives among which consumers may freely choose. This focus on the protection of freedom of action of market participants and especially of consumers’ freedom of choice is sometimes said to protect competitors instead of competition56. This criticism is unfounded. Market participants, including competitors, are protected for the sake of the proper functioning of the competitive process. How could there possibly be competition without competitors? Competitors must therefore be understood as an indispensable element of the system of competition and through the protection of their freedom of action (choice) we protect the system of competition.

55 For Mestmäcker’s fundamental critique of Posner’s purely welfare economic theory of law that substitutes legal standards with effciency criteria, see Mestmäcker, A Legal Theory without Law: Posner v. Hayek on Economic Analysis of Law (Tübingen, 2007). 56 See, e.g., Wish and Bailey (n. 34) at 22.

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142 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Peter Behrens

V. Ordoliberal thought and EU competition law

It is no accident that the of 1957 provided for the establishment of a “system ensuring that competition in the internal market is not distorted” (Article 3 EEC-Treaty) and that this principle is still today part of the internal market concept (Article 3 EU-Treaty in conjunction with Protocol No. 27 on the Internal Market and Competition). This indicates that the Treaty lends itself easily to be interpreted in light of the systemic approach to competition that is the hallmark of ordoliberalism. The modernized version of ordoliberalism did in fact have an important impact on EU competition law and policy57. This is widely acknowledged for the formative period58 of the EU when the leading persons responsible for competition policy at the European Commission were recruited from German ordoliberal circles. They were strong rivals of those who preferred to follow the French model of centralized governance of the European economy through industrial policy. The German Commissioner Hans von der Groeben was able to have the following statement included in the Commission’s memorandum on an action program for the second phase of integration between 1962 to 1965, which was (unsuccessfully) designed by the Commission to install the French model of “planifcation” at the level of the European Economic Community: As a matter of economics competition and even imperfect competition satis- fes the need of buyers and consumers to a high degree. The more effective competition is, the stronger are the motivation and necessity for industry and trade to fuller exploit opportunities to improve and rationalize production and distribution facilities in the interest of consumers. In this way competition simultaneously contributes to technical and economic progress. Finally, competition prevents or stifes tendencies of higher costs and prices, more particularly prevents to recoup higher costs through prices. Competition contributes to a more equal distribution of profts over the different sectors of the economy and minimizes the danger of false . In addition, the competitive order is to confer on all members of society the highest possible degree of personal liberty59.

57 See Gerber, Law and Competition (n. 21) at 334; Patel and Schweitzer (eds.), The Historical Foundations of EU Competition Law (Oxford, 2013). 58 See Mestmäcker, “Towards a Concept of Workable European Competition Law – Revisiting the Formative Period”, in Patel and Schweitzer (n. 57), 191. 59 Kommission, Memorandum über das Aktionsprogramm der Gemeinschaft für die zweite Stufe [Commission, Memorandum on the Action Programme of the Community for the Second Phase], Brussels 24 October 1962, COM (62) 300, para. 23 (English translation quoted from Mestmäcker (n. 58) at 197).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 143 The consumer choice paradigm in German ordoliberalism and its impact on EU competition law

When the Commission and the European Court of Justice later developed their interpre- tation and application of the competition rules, it became also evident that ordoliberal concepts prevailed60. The initially controversial interpretation of Article 86 EEC [later Article 82 EC; now Article 102 TFEU] is particularly revealing. Whereas some authors favored the position that this provision was meant exclusively to prevent the direct infiction of harm upon consumers by way of exploitative abuses of market dominance61, the opposing view was that the provision also meant to prevent indirect harm to consumers through the elimination of competitors by way of exclusionary abuses62. This latter position was clearly refecting the ordoliberal conviction that “the purpose of the compe- tition rules is to preserve the freedom of choice of those who transact business” and “the abuse therefore would materialize when the dominant position is used to restrain or eliminate the freedom of decision of either competitors or of the consumers”63. Fully in line with this conviction, the European Court of Justice in the Continental Can case made its famous statement regarding the purpose of Article 86 EEC: “The provision is not only aimed at practices which may cause damage to consumers directly, but also at those which are detrimental to them through their impact on an effective competition structure, such as is mentioned in Article 3(f) of the Treaty.”64 Accordingly, the European Court of Justice defned in Hoffmann-La Roche the concept of abuse in the following terms: The concept of abuse is an objective concept relating to the behavior of an undertaking in a dominant position, which is such as to infuence the structure of the market where, as a result of the very presence of the undertaking in question the degree of competition is weakened and which through recourse to methods different from those which condition normal competition in product or services on the basis of the transaction of commercial operators, has the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition65.

60 This is the dominant view in spite of dissenters such as Maier-Rigaud (n. 5); see, e.g., Gormsen, “Article 82: Where Are We Coming From and Where Are We Going To?”, (2005) 2(2) Competition L. Rev. 5, 11 (who acknowledges that in any case the jurisprudence of the EU Commission and the courts has been infuenced by ordoliberal thought). 61 Joliet, Monopolization and Abuse of Dominant Position: A Comparative Study of the American and European Approaches to the Control of Economic Power (The Hague, 1970), 250. 62 For an early in depth analysis of Article 86 EEC from an ordoliberal point of view that emphasized the protection of competition against structural changes, in addition to the direct protection of consumers against exploitation, and that paved the ground for the landmark decision of the ECJ in the Continental Can case (see below at n. 64), see Mestmäcker, “Concentration and Competition in the EEC”, Part I: (1972) 6 J. World Trade L. 613, 639 et seq., Part II: (1973) 7 J. World Trade L. 36 et seq. 63 Deringer, The Competition Law of the European Economic Community: A Commentary on the EEC Rules of Competition (Article 85-90) (New York, 1968), para. 533. 64 Case 6/72, Continental Can v. Commission, [1973] E.C.R. 215, para. 26. 65 Case 85/76, Hoffmann-La Roche v. Commission, [1979] E.C.R. 461, para. 91.

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144 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Peter Behrens

In spite of the Commission’s somewhat misleading “more economic approach” rhetoric in its recent guidelines66, these jurisprudential holdings are still good law67. The emphasis on the protection of the competitive market structure for the sake of the protection of market participants’ freedom of action (freedom of choice) as the basis for the competitive process has recently become particularly clear in the case Telia- Sonera Sverige where the European Court of Justice held: In order to determine whether the dominant undertaking has abused its posi- tion by the pricing practices it applies, it is necessary to consider all the circumstances and to investigate whether the practice tends to remove or restrict the buyer’s freedom to choose his sources of supply, to bar competi- tors from access to the market, to apply dissimilar conditions to equivalent transactions with other trading parties, or to strengthen the dominant position by distorting competition68. The Commission is far from offering a coherent approach in its various guidelines. As has been demonstrated elsewhere, the Commission, in order to identify a restriction of competition, oscillates between a consumer harm test, a negative market effects test, a market power test, and a competitive process test69. On the one hand, the Commission seems to focus on the direct welfare loss to consumers caused by the business strategy under consideration; on the other hand, it seems to be still concerned with the protection of effective competition as a process70. To the extent that effciency is attributed to the

66 For a critical assessment of the Commission’s Article 82 guidance document of 2008, see Mestmäcker (n. 37). 67 See Case C-95/04, British Airways v. Commission, [2007] E.C.R. I-2331, para. 106; Case T-340/03, France Télécom v. Commission, [2007] E.C.R. II-117, para. 266; Case T-201/04, Microsoft v. Commission, [2007] E.C.R. II-3601, para. 664; see also Case C-549/10, Tomra Systems ASA et al. v. Commission, [2012] E.C.R. I-0000, para. 59 et seq., as well as Case C-23/14, Post Danmark A/S v. Commission, [2015] E.C.R., I-0000, para. 31 et seq. (where the ECJ analyzed a rebate scheme in light of Article 102 TFEU; the Court as well as the Commission itself relied on the exclusionary effect of the scheme (i.e., its negative impact on the market structure) rather than on the equally effcient competitor test that forms an essential part of the “more economic approach” as outlined in the Commis- sion’s Guidance regarding Article 102 TFEU). − It would be a totally unwarranted departure from the ECJ’s jurisprudence based on Continental Can, and worse than merely turning the wheel back, if exploitation were now made an indispensable element of the notion of “abuse” in Article 102 TFEU even in cases dealing with the exclusionary effect of a dominant undertaking’s practice as suggested by Akman, The Concept of Abuse in EU Competition Law: Law and Economic Approaches (Oxford, 2012), 96 et seq. 68 Case C-52/09, Konkurrentsverket v. TeliaSonera Sverige, [2011] E.C.R. I-527, para. 28. For earlier cases where an exclusionary abuse of market dominance was found to infringe upon Article 82 EC [now Article 102 TFEU], because the negative impact upon the market structure was considered to restrict consumers’ freedom of choice, see e.g. Case 85/76, Hoffmann-La Roche v. Commission, [1979] E.C.R. 461, para. 90 (exclusive purchasing agree- ment or loyalty rebate eliminates customers’ choice among different sources of supply); Case C-202/07, France Télécom v. Commission, [2009] E.C.R. I-2369, para. 112 (predatory prices harm consumers by limiting their options due to the elimination of competitors of the dominant frm); Case C-280/08, Deutsche Telekom v. Commission, [2010] E.C.R. I-9555, para. 182 (margin squeezing by a dominant frm that leads to the elimination of competitors harms consumers by limiting their choices); Case COMP/C-3/37.990 — Intel, para. 1598 et seq., upheld by CFI Case T-286/09, Intel v. Commission, [2014] E.C.R. 2014, II-0000, appeal pending: ECJ Case C-413/14, OJ 2014 C 395, 25, as well as ECJ Case C-23/14, Post Danmark A/S v. Commission, [2015] E.C.R., I-0000, para. 31 et seq. (conditional rebates leading to a limitation of consumers’ choices). 69 See Behrens, “The test for Legality under EU Competition Rules – What Guidance Do the Commission’s Guidelines Provide?”, in Govaere and Hanf (eds.), Scrutinizing Internal and External Dimensions of European Law, Vol. II (Brussels, 2013), 555. 70 See the quotation from the Commission’s guidance document on Article 102 at n. 2.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 145 The consumer choice paradigm in German ordoliberalism and its impact on EU competition law competitive process as such, this is in line with the established concepts based on ordoliberal thought, especially with the consumer choice paradigm. To the extent, however, that the Commission attempts to attribute effciency effects to specifc business conduct, it misses the relevant point. This brings us back to the confict between the consumer choice concept and the consumer welfare (or effciency) paradigm.

VI. Consumer choice versus consumer welfare

The ordoliberal focus on market participants’ freedom of action is sometimes said to disregard economic effciency as competition law’s objective71. It has been argued, in particular, that since EU competition law has had effciency as its aim from the very beginning, ordoliberalism cannot have had an infuence upon its formation72. This argument is based on a misunderstanding of the role that effciency plays in the context of an ordoliberal approach to competition as opposed to the consumer welfare approach. However, ordoliberalism has always appreciated and emphasized the positive welfare (i.e., effciency) effects of competition, but it refuses to measure the allocative or dynamic effciency effects of individual business strategies, which are instead left to pass the test of consumers’ choice in the market. Since Adam Smith, it has always been the conviction of liberals, including ordoliberals, that competitive markets are the best way to promote effciency in terms of the general welfare of the people. The important point, however, is that the ordoliberal school considers total welfare as the result of a truly competitive process. Since competition is conceived as a dynamic process of discovery based on market participants’ voluntary transactions, general welfare effects cannot be attributed to individual market transac- tions but only to the whole process of competition as such. Two distinctions need to be made here: on the one hand, we have to distinguish between productive, allocative, and dynamic effciency; on the other hand, we have to distinguish between the frm level and the level of the economic system at large73. On the micro-level of the individual frm, it may be relatively easy to determine the productive effciency of a specifc

71 See, e.g., Akman (n. 67) at 55 et seq., 60; see also Akman, “Searching for the Long-Lost Soul of Article 82 EC”, (2009) 29(2) Oxford J. Legal Stud. 267. 72 Ibid. 73 For a constitutional economics perspective, see, e.g., Vanberg, “Consumer Welfare, total welfare and economic freedom: On the normative foundations of competition policy”, in Drexl, Kerber, and Podszun (eds.), Competition Policy and the Economic Approach: Foundations and Limitations (Cheltenham, UK, 2011), 59 (“The relevant issue is, therefore, not about whether economic effciency arguments have a role to play in advising competition policy. It is, instead, about the proper level at which they have to play their role”.).

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146 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Peter Behrens business strategy in terms of lower production costs (due, for instance, to economies of scale or savings) resulting in lower prices or larger output. On the macro-level of the whole economy, however, it is almost impossible to precisely measure allocative effciency (in terms of satisfaction of consumers’ wants74) or dynamic effciency (in terms of the development of innovative or higher quality products in the future). This depends on consumers’ preferences regarding non-price criteria such as quality, speed of delivery, after sales service, new or better products, etc. The problem is that these data can only be derived from consumers’ preferences as revealed by market transactions. It follows that the determination of allocative and dynamic eff- ciency effects of a specifc business strategy must be left to the competitive process that allows consumers to make their choices. So, in the end, any business conduct that appears effcient on the micro-level of the individual frm(s) must pass the effciency test on the macro-level of the system of competition where consumers decide what they want75. This is why Article 101(3) TFEU allows an effciency defense (on the micro-level) for the justifcation of an anticompetitive agreement or concerted practice (typically based on productive effciencies76 or even on consumer choice arguments77) while at the same time insisting that suffcient competition on the market is left so that the overall effects of the justifed restraint of competition can be tested (on the macro- level) in light of consumers’ choice. This is a recognition of the fact that it is not for the competition authority or the courts to measure the overall effciency effects of the business strategy under consideration, but exclusively for the consumers themselves to make the determination. In opposition to the ordoliberal school of thought, the more economic approach to competition law promoted by the European Commission, is—at least to the extent that it emphasizes the consumer harm test—informed by the neoclassical economic analysis of the Chicago School78, modifed, however, by Post-Chicago approaches. This approach starts with the homo oeconomicus model of individual behavior. According to this model, economic actors in the market are wealth maximizers. Hence, if markets are

74 This is what Bishop and Walker seem to have in mind when they defne allocative effciency as relating to the difference between the cost of producing the marginal product and the “valuation of that product by consumers”. See Bishop and Walker, Economics of EC Competition Law: Concepts, Application and Measurement (3rd ed. 2010), 25 75 Constitutional economics distinguishes between the (constitutional) choice between different sets of competition rules and the (sub-constitutional) choices made under those rules. Whereas at the latter level economic freedom of consumers may be the proper goal to be protected by competition rules, if those rules are chosen at the constitutional level, effciency will determine the choice of competition rules at the constitutional level. See Vanberg (n. 70). 76 For example, an improvement of production may be based on economies of scale resulting from a specialization agreement. 77 For example, the promotion of technical or economic progress may be based on the development of new or better products, i.e., on an enhancement of the options available to consumers. 78 For a detailed frst hand ordoliberal account of the more economic approach, see Mestmäcker (n. 37) at 25, 44 et seq.; see also Schweitzer and Patel, “EU Competition Law in Historical Context: Continuity and Change”, in Schweitzer and Patel (n. 57) at 207, 220.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 147 The consumer choice paradigm in German ordoliberalism and its impact on EU competition law to serve individuals’ interests, competition should operate so as to maximize welfare. Accordingly, competition law should be interpreted and applied so as to avoid punishing wealth-maximizing behavior as anticompetitive. One of the pioneers of the Chicago School was Robert Bork who, in his infuential book The Antitrust Paradox79, reduced the problem of an adequate interpretation and application of antitrust law to the appli- cation of the consumer welfare calculus. This calculus would require a comparison of the dead-weight loss of potentially anticompetitive conduct and the resulting cost savings. Bork argued that: [This calculus] can be used to illustrate all antitrust problems, since it shows the relationship of the only two factors involved, allocative ineffciency and productive effciency. The existence of these two elements and their respec- tive amounts are the real issue in every properly decided antitrust case. They are what we have to estimate − whether the case is about the dissolution of a monopolistic frm, a conglomerate merger, a requirement contract, or a price- fxing agreement80. Bork acknowledged, however, that we cannot directly measure effciencies or ineffcien- cies and that the consumer welfare calculus merely illustrates a relationship. Instead, he suggested that the only relevant and manageable criterion for assessing the poten- tially anticompetitive effects of specifc market conduct should be its impact on output. Only output reducing behavior should therefore be considered anticompetitive81. According to neoclassical price-theory, the fip side of output reduction is the increase of prices. Bork and the Chicago School’s approach may therefore be summarized as follows: A restraint of competition can be assumed only if a specifc market behavior leads to an increase in prices or a restriction of output. Bork expressly disapproved of the notion that competition implies rivalry and that the elimination of rivalry should therefore be the relevant criterion82. As already stated by Adam Smith, rivalry (among producers) clearly involves consumer choice. Consequently, the rejection of the rivalry paradigm implies the rejection of the consumer choice paradigm. Bork felt that the rivalry (or consumer choice) paradigm was too broad a standard for antitrust law because it would catch behavior that enhances productive effciency. So, what should really matter is productive effciency, which may easily be translated into consumer welfare in terms of lower prices and larger output. , another pioneer of the Chicago School, is a little more careful. According to him, competition should also be viewed “as a state in which consumer

79 Bork, The Antitrust Paradox: A Policy at War with Itself (New York, 1978), 107. 80 Ibid. 81 Ibid. at 122. 82 Ibid. at 135.

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148 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Peter Behrens interests are well served rather than as a process of rivalry that is diminished by the elimination of even one tiny rival”83 (none of the proponents of competition as a process of rivalry based on consumer choice have ever suggested that “the elimination of even one tiny rival” should give rise to an antitrust problem). Posner admits, however, that “it is very diffcult to measure the effciency consequences of a challenged practice”. And he concludes that, “[e]ffciency is the ultimate goal of antitrust, but competition [in terms of a process of rivalry] a mediate goal that will often be close enough to the ultimate goal to allow courts to look no further”. What prevents Posner from recognizing that competition as a process of rivalry based on consumer choice is the optimal way of serving consumers’ interests? The neoclassical homo oeconomicus model assumes that market agents always act in a rational way, i.e., they know their preferences, they reveal their preferences by demonstrating their willingness to pay for a specifc good or service offered on the market, they are able to translate any non-monetary charac- teristic of an object of their desire into monetary terms (i.e., prices), and they are fully capable of making decisions on the basis of all relevant information and are able to immediately react to changing prices. If this were true in real life, why then is the neoclassical approach not supportive of the (subjective) consumer choice paradigm but rather of a consumer welfare concept that is fraught with all the diffculties of objective measurement of welfare effects? Why then should competition policy replace consumers’ subjective calculus by an objective welfare calculus? The answer has to do with the history of . It developed out of the theory of public fnance and used to be primarily targeted at the assessment of the welfare effects of government projects and economic policy measures. Here the comparative assessment of different states of the world—according to the Pareto, the Kaldor-Hicks, and other welfare criteria—makes sense to the extent that the welfare calculus can be made in a roughly correct way. Looking at the enforcement of antitrust or competition laws by the state from this perspective misses the point, however. The question is not whether a governmental measure against a potentially anticompetitive business strategy is justifed because it may enhance overall welfare by preventing consumer harm. From a liberal perspective, the state’s role here is not to invest taxpayers’ money in governmental projects as effciently as possible, but to enforce the rules of the game that are fundamental for competitive markets to work effciently. This presupposes the protection of market participants’ freedom to engage in transactions that comply with their preferences, in particular to protect consumers’ freedom of choice as the driving force behind competi- tion, which will lead to the promotion of overall welfare. The overall welfare effects of a certain business strategy cannot be anticipated. Even Bork recognized the problem of measurement, but his way out of the dilemma comes

83 Posner, Antitrust Law (Chicago, 2nd ed. 2001), 28-29.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 149 The consumer choice paradigm in German ordoliberalism and its impact on EU competition law at the price of oversimplifcation. The purely output and/or price oriented defnition of consumer welfare or consumer harm for the purposes of identifying restraints of competition is by far too simplistic. Price and output may be the criteria that neoclas- sical economic theory is most easily able to capture. But that does not prove the predominant relevance of these criteria. This situation may rather remind us of the man who in the middle of the night loses his keys somewhere and now searches for the keys underneath the streetlight simply because it happens to be less dark there. In Robert Bork’s own words: “Economists, like other people, will measure what is susceptible of measurement and will tend to forget what is not, though what is forgotten may be far more important than what is measured”84. The Commission is therefore well advised to apply its more economic approach not in too narrow terms. Some statements of the Commission in its various guidelines85 indicate indeed a broader view of consumer welfare than the Chicago School’s price or effciency paradigm would suggest86. Various Post-Chicago approaches have questioned the rigid assump- tions of the Chicago School without, however, establishing a new school yet87. The behavioral economics approach has called the homo oeconomicus into question, the approach emphasizes the dynamics of competitive markets, another important approach applies to competition analysis, and modern industrial economics emphasizes the relevance of econometric studies for the analysis of antitrust cases. So, today there is no monolithic Chicago approach anymore, but the effciency paradigm appears still to be the common denominator of the Post-Chicago learning. The Commission’s enforcement practice seems to be open to these new approaches, but also indicates a strong inclination toward a welfare maximization approach along the lines of the consumer welfare paradigm88. It has been stated already that this is not in line with the jurisprudence of the ECJ, which until now sticks to a structural approach based on the consumer choice concept89.

84 Bork (n. 79) at 127. 85 See, e.g., the statement quoted at (n. 2). 86 A recent study by PriceWaterhouseCooper of consumers’ behavior in online trade, reported in the German daily newspaper Frankfurter Allgemeine Zeitung on 6 January 2014, reveals that consumers’ fxation on price is a myth. More important factors turned out to be, for instance, speed of delivery or innovative products. 87 For introductions into the various approaches, see Drexl, Kerber, and Podszun (eds.), Competition Policy and the Economic Approach: Foundations and Limitations (2011). 88 See, e.g., Case COMP/C-3/37.990 — Intel, para. 925 (where the Commission, merely in order to support the fnding of an infringement of Article 102 TFEU by Intel’s practice to grant exclusionary loyalty rebates based on the traditional test, considered it necessary to also fnd (direct) consumer harm by conducting an as effcient competitor analysis on the basis of the Commission’s guidance document on Article 102 TFEU). The ECJ has emphasized, however, in Case C-23/14, Post Danmark A/S, [2015] E.C.R. I-0000, para 57 et seq., that there is no legal duty to apply the as effcient competitor test for the establishment of the abusive nature of a rebate system and that this test may even be inadequate where the structure of the market would not allow the entry of an as effcient competitor; the Court rather upheld once more the exclusionary effect test which emphasizes the relevance of barriers to entry and the negative impact on consumers’ choice (see ibid. at para. 31). 89 For references, see (n. 65).

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150 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Peter Behrens

VII. Conclusion

German ordoliberalism, which has shaped EU competition policy and law, has come under attack from the Chicago School’s economic welfare approach to competition precisely because it has been and continues to be based on the consumer choice para- digm. Ordoliberalism has therefore been charged with being out of touch with economic theory. This paper demonstrates the contrary. The fundamental question remains: what are the criteria that an economic theory must meet in order to be able to adequately inform competition policy and law? Real life phenomena such as economic competition are by far too complex to be grasped by any one theoretical model. Abstraction from reality is indispensable, but it must not go too far if competition theory is to have an impact upon competition policy. A good theory about competition must therefore be both: adequate and tractable. Adequacy requires a suffcient degree of complexity that is close enough to reality; tractability requires a suffcient degree of reduction of complexity in order for a theory to be manageable for enforcement agencies and market participants. In short, the theory underlying competition policy (and law) must neither be too complex nor too simple. The Chicago School’s price or effciency concept proves to be too simple because it is unable to adequately refect the non-price dimensions of consumer preferences. Post-Chicago approaches demonstrate that a narrowly defned homo oeconomicus model of rational behavior cannot justify conclusions to be drawn from micro-level productive effciencies to general welfare effects in terms of allocative and dynamic effciencies on the macro-level. The latter can only be determined by a process that allows consumers to reveal their preferences. In order for this to happen, consumers’ freedom of choice is of the essence and this in turn presupposes a suffciently competitive market structure that refects rivalry among producers. We cannot know in advance what consumers want. What we know, however, is that consumers do not always want more and more of the same thing at lower and lower prices; rather, they want options and relevant alternatives. More importantly, consumers’ rationality is bounded. So, instead of speculating about consumer welfare, why do we not give consumers the chance to decide for themselves? There is no justifcation for a break with the ordoliberal choice paradigm, which focuses on the legally protected economic freedom of market agents within the framework of a market structure that is not arti- fcially constricted by producers at the expense of the alternatives that are open to consumers. In light of past experience, this approach appears adequate for the purposes of competition law and at the same time tractable by enforcement agencies. We may as well say, in Averitt and Lande’s words, that “the consumer choice approach is

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 151 The consumer choice paradigm in German ordoliberalism and its impact on EU competition law fundamentally superior to the price and effciency paradigms because it asks the right question” (emphasis original)90.

90 Averitt and Lande (n. 1) at 178.

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152 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Consumer choice as the best way to re-center the mission of competition law*

ROBERT H. LANDE [email protected] Professor of Law, University of Baltimore School of Law Director, American Antitrust Institute

I. Introduction

The mission of competition law needs to be clarifed, and this article asserts that the best way to do this is to interpret and enforce the law in terms of consumer choice. This reformulation is necessary due to the uncertainty and instability that exists in the feld. For example, even though the United States’ competition laws, which it calls antitrust laws, are more than a century old, it is unable to decide upon these laws’ overall purpose. The “main point of antitrust” in the United States from 1890 to the 1970s was a variety of social/political/economic objectives, including the belief that

* This chapter is in large part a condensation and update of Averitt and Lande, “Using the ‘Consumer Choice’ Approach to Antitrust Law”, (2007) 74 Antitrust L.J. 175, (last visited 31 Jan. 2016). I am grateful to Christine Carey for excellent research assistance.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 153 Consumer choice as the best way to re-center the mission of competition law big businesses were suspect and small businesses were good1. Then the effciency-only paradigm emerged during the Reagan and Bush administrations2. More recently, the Clinton Administration seemed to care about enhancing economic effciency and also with protecting consumers from paying more as a result of illegally acquired market power (i.e., the “wealth transfer” or “protecting consumers’ property from theft by market power” reason for competition law)3. What antitrust policies will future U.S. administrations believe and implement? Of course they will care about improving economic effciency. They might well also use as their loadstar an approach that focuses on consumer choice. The consumer choice approach began being implemented during the Clinton Administration, and it often has been used by the European Union4. It might have even more infuence over U.S. antitrust policy in the future. This article will: (1) defne the consumer choice approach to competition law or antitrust law and show how it differs from other approaches; (2) discuss the types of situations where a consumer choice focus is likely to make a difference in enforcement outcomes, producing better results than the other paradigms; (3) show that another important advan- tage of using the consumer choice approach would be to nudge enforcement and judicial decisions in the right direction; and (4) offer a brief overview of implementation issues.

1 Lande, “Wealth Transfers as the Original and Primary Concern of Antitrust: The Effciency Interpretation Challenged”, (1982) 35 Hastings L.J. 56, 101-05 (Lande, “Wealth Transfers”). See also Kirkwood and Lande, “The Fundamental Goal of Antitrust: Protecting Consumers, Not Increasing Effciency”, (2008) 84 Notre Dame L. Rev. 191, (last visited 31 Jan. 2016). 2 See ibid. at 191-96. The effciency approach originated in the 1960s, with Robert Bork, and was spread by Judge Posner and others. This approach did not merely assert that effciency is important, but rather asserted that effciency is the only acceptable goal of antitrust. With Reagan’s 1980 election, federal enforcement offcials who adhered to the effciency approach were appointed, and it came to dominate antitrust. Today many scholars still exclusively believe in the effciency goal. This is especially true of economists. 3 The Clinton Administration did not adhere to any one specifc approach and, during its eight years, did not speak with one voice on the subject. Effciency was a large part of its concern, and there was no inclination to return in any way to a “big is bad/small is good” philosophy. But it also was concerned with prices to consumers, or “wealth transfers” from consumers to frms with market power (when cartels raise prices they cause not only allocative ineffciency, they also cause a transfer of wealth from consumers to frms with market power). Lande, “Wealth Transfer” (n. 1) 101-05. This is the theft explanation for antitrust or competition law, and it asserts that these laws are at their core about corporations stealing consumers’ property—consumers’ surplus. Cartels are undesirable because they unfairly raise prices to consumers above the competitive level and thereby represent a taking of consumers’ property by the cartel. Ibid. at 96. Perhaps surprisingly, this same theft or wealth transfer approach also has been adopted by the US Supreme Court. See Kirkwood and Lande (n. 1) 192, 216-19, (last visited 31 Jan. 2016). Because its last 15 antitrust cases were all decided in favor of the defendants, one might think that the US Supreme Court had endorsed the effciency paradigm. But these cases may be explained better by a concern with protecting consumers from paying supracompetitive prices than they are with effciency. Effciency is important to the Court, but the transfer seems to be even more important. 4 See (nn. 38 and 39).

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154 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Robert H. Lande

II. What is the “consumer choice” approach to competition law?

If you examine every type of competition law or antitrust law violation, from price fxing to predation, and ask what they have in common, the answer is they all signif- cantly restrict consumer choice. Every violation signifcantly and artifcially distorts or diminishes the choices that otherwise would be offered by the free market5. This does not mean everything that signifcantly reduces consumer choice is, or should be, a violation of competition laws. But if you examine what these violations have in common, it is that they signifcantly reduce consumer choice. How does a consumer choice approach differ from either a price approach or an effciency approach? It is broader than both, and includes both. First, it includes price considerations because consumers should be able to choose from among the price options a free market would provide. Additionally, it encompasses the wealth transferred from consumers to frms acquiring market power (the belief that when cartels raise prices above the competitive level this constitutes the theft of consumers’ property). The consumer choice approach also includes effciency considerations, especially the innovation concern, because optimal innovation gives rise to optimal consumer choice. Because cost savings effciencies can affect price, these considerations are included as well. But most important, the consumer choice approach also gives a high priority to other consumer concerns such as competition in terms of quality, variety, service, and privacy6. Some other crucial elements of a choice paradigm include the idea that: (1) not every decrease in consumer choice counts as an injury to competition—only signifcant decreases—but not, for example, a reduction in choice from 10 down to nine options; (2) more choice is not necessarily good—the goal of competition policy should not be to maximize choice, but rather to eliminate practices that artifcially restrict the choices

5 For example, collusion, including price fxing, and the division of markets and customers, diminish the choices— usually the price choices—available to consumers, and replace price choices determined by competition with price choices determined by collusion. By contrast, procompetitive joint ventures leading to new or less expensive products do not restrict consumer choice. A second example is anticompetitive mergers, which can produce too few frms in the marketplace and thus lead to fewer choices than the free market would offer. Also, monopolization through predation artifcially reduces the choices available to consumers. For an analysis of every antitrust violation in choice terms, see Lande, “Consumer Choice as the Ultimate Goal of Antitrust”, (2001) 62 U. Pitt. L. Rev. 503, 506-08. 6 See Averitt and Lande, “Using the ‘Consumer Choice’ Approach to Antitrust Law”, (2007) 74 Antitrust L.J. 175, 183 (last visited 31 Jan. 2016).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 155 Consumer choice as the best way to re-center the mission of competition law the free market otherwise would have provided; (3) although every competition law violation reduces consumer choice, not every reduction in consumer choice violates competition law (some reductions in consumer choice—such as when a monopolist reduces its variety of offerings—do not violate any law); (4) reductions in consumers’ ability to choose from among the offerings the market provides are consumer protec- tion violations7; and (5) competition law under a consumer choice perspective would continue to have effciency defenses since effciencies can positively affect consumer choice.

The overall approach can be illustrated by the most highly publicized US antitrust litigation of our generation—the Microsoft case8. This case illustrates the importance of choice, and illustrates how we have been moving towards a choice paradigm, because it was litigated primarily in “choice” terms. The products in question were operating systems and web browsers. The pertinent briefs and court decisions reveal that both the litigants and the courts focused primarily on innovation, new products, and short- and long-term consumer choice9. Naturally, both sides strongly disagreed about how to maximize consumer choice, but the important point is that price and cost savings were less important concerns. In Microsoft, little attention was paid to the price of the operating system—a market over which Microsoft had a legal monopoly—or the price of the , which was given away free. Nor were cost savings effciencies the primary concern. Rather, diminished short-term consumer choices, innovation, and the resulting long-term choices innovation would have brought, were the key issues10. Even though this article urges that competition law should shift to employing an explicit focus upon consumer choice, Microsoft illustrates that the United States is engaged in a lengthy process of shifting from an effciency or price approach toward a choice approach, even if choice terminology is not always explicitly used. This case also illustrates how a price or effciency model often is inadequate to address our concerns in the competition or antitrust area.

7 Ibid. at 181-82. 8 Lande (n. 6) at 503, 511-14. 9 Ibid. at 511-12. 10 Ibid. at 511.

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156 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Robert H. Lande

III. When would the consumer choice formulation make a difference?

At this point one might think: of course competition law should be concerned about more than just price and cost savings. Of course quality, service, etc., should impact the analysis. However, if a market is competitive in terms of pricing, would it not also be competitive in terms of non-price dimensions? If a market has three frms, or fve frms, or whatever number of frms one believes is enough to ensure price competition in a particular market, would this same number of frms not also ensure non-price competition? If so, what is the harm in using just a price standard? Would ensuring price competition not automatically give us the non-price options we want as well? Normally this is indeed true. Normally there is no difference between a choice approach and a price approach, and therefore little beneft to using a choice standard. For example, suppose there were four frms that made cookies, that three frms are enough to have price competition, and that three frms could make them at the same cost as four. If consumers want 20 different types of cookies, or 200, three frms should be able to supply them just as well as four. If two of the four frms wanted to merge, there would be no advantage to using a choice standard over a price standard or an effciency standard to assess this merger. But sometimes it would make a difference. There are three broad categories of cases where a choice analysis could lead to a different (and in each case superior) result: (1) cases in markets with little or no price competition; (2) cases involving conduct that increase consumers’ search costs or otherwise impairs their decision-making ability; and (3) cases in markets in which frms compete primarily through independent product development and creativity, rather than through price.

1. Markets lacking serious price competition The frst group of cases involves conduct in markets with little or no price competition as a result of regulation, industrywide joint ventures, or third party payers. In these situations there is no way to properly assess consumer welfare without focusing explicitly on non-price issues. First, consider markets where prices are regulated. For example, airlines in the United States, before they were deregulated, competed in terms of quality and service, as

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 157 Consumer choice as the best way to re-center the mission of competition law

demonstrated by their intense competition over the quality of the meals they served11. A price analysis of this market would have been seriously incomplete. One even could ask why the United States did not permit every airline to merge during the period when their rates were regulated. After all, they could not have raised prices. The answer is that we wanted non-price competition. Now consider a market where all the signifcant frms were allowed to merge. Mont- gomery County, Maryland, allowed both of its major taxicab companies to merge, on 12 the theory that prices were regulated so there could be no harm from this merger . Unfortunately, as a result of these mergers service and quality went down signifcantly13. This example illustrates that even if prices are regulated, competition often leads to better service, and the potential harm to consumers in these markets from a lack of competition often are extremely diffcult to quantify in price terms.

14 Second, consider situations involving industrywide joint ventures . There have been many US cases, including Aspen15 and Broadcast Music Incorporated16, involving all or most of a relevant market. These joint ventures severely restricted price competition as a necessary part of their operations, and also involved activity that limited consumer choice. In these cases it would have been meaningless to decide whether the joint venture was procompetitive or anticompetitive by only focusing on price terms because there was only limited price competition in the relevant markets. In each case there was, however, signifcant non-price competition between the frms that entered into the joint venture. Consumers could pick from among the frms in the market on the basis of service, quality, or another dimension of competition. Alternatively, one could ask why all the frms in these joint venture cases were not allowed to merge since they were setting joint prices already? The answer is that we wanted to preserve choice competition.

Third, consider cases involving third party payers17. Whenever their bills are paid by someone else, consumers are likely to care more about quality, service, and variety than price. If a person knows their medical or car repair bills will be paid by their insurance company, for example, a price model would be woefully inadequate at explaining their behavior.

11 Averitt and Lande (n. 7) at 175, 196-97, nn.67-69. 12 Ibid. at 233-35. 13 Ibid. at 234. 14 Ibid. at 197-98. 15 Ibid. at 197 (citing Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985)). 16 Ibid. at 198 (citing Broadcast Music, Inc. v. CBS, 441 U.S. 1 (1979)). 17 Ibid. at 198-99.

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158 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Robert H. Lande

2. Conduct that increase consumers’ search costs or otherwise impairs their decisionmaking ability A second broad category of cases when a consumer choice approach will work better involves conduct that increases consumers’ search costs or otherwise impairs their decisionmaking ability. This conduct tends to cause consumers to obtain products or services less suited to their needs, at a cost higher in terms of the value of consumers’ time, in addition to adversely impacting price.

In the United States there have been a large number of these cases, including the advertising restriction cases: Bates v. State Bar of Arizona18, Mass Board of Optometry19, and similar cases that involve collusion to raise consumer search costs, including National Society of Professional Engineers20, and Detroit Auto Dealers21. Prices of the products and services in question—legal services, optician services, cars, etc.—prob- ably increased as this was the restraints’ purpose22. The restrictions against advertising also made it harder for consumers to choose the service or product that best suited their needs23. Moreover, consumers’ selection of a less optimal engineer, lawyer, opti- cian, automobile, etc., harms their welfare. In each instance, effciencies were claimed for the practices. Depending upon the case, the effciencies were more, or less, believable24. If practices such as these were evaluated under the rule of reason, the negative effects of the practices—both the higher prices and the deleterious effects of consumers obtaining an engineer, lawyer, optician, or automobile that were suboptimal for their purposes—should be balanced against the practices’ effciencies. If only the negative price effects were included in this tradeoff, the balance easily could come out in favor of the restraint. However, a tradeoff that included the negative effects on consumer

18 Ibid. at 200 (citing Bates v. State Bar of Arizona, 433 U.S. 350, 384 (1977)) (rule forbidding most attorney advertising overturned on First Amendment grounds). 19 Ibid. (citing Massachusetts Bd. of Registration in Optometry, 110 F.T.C. 549 (1988)) (board regulations impeding advertising by corporate providers, and prohibiting advertising of discounts, were unauthorized by statute, and condemned as antitrust violations). 20 Ibid. (citing National Society of Professional Engineers, 435 U.S. 679, 681 (1978)). 21 Ibid. at 200-201 (citing National Society of Professional Engineers, Detroit Auto Dealers Ass’n, 111 F.T.C. 417, 681 (1989)). 22 Ibid. 23 Ibid. at 200. 24 Ibid.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 159 Consumer choice as the best way to re-center the mission of competition law choice, as well as the negative price effects, would more accurately measure the effects of the restrictions on overall consumer welfare.

3. Markets in which frms compete primarily through independent product development and creativity, rather than through price Finally, there are some markets in which frms compete primarily through independent product development and creativity, rather than through price. These markets may involve high-tech innovation or editorial independence in the news media. Effective competition in these industries may sometimes require more independent centers of decisionmaking than are required to ensure price competition, so market concentration principles taken from a price context may not ensure robust competition in the dimen- sions that are actually most relevant to consumers. In these cases, competition law decisionmakers should focus upon artifcially diminished consumer choice even if prices are competitive. For this reason, in these markets a price standard is inadequate. The media, for example, is an area where society cares a great deal about independent judgment, decisionmaking, and creativity. Suppose there were only four remaining media frms of a particular type (such as book publishers, or television, radio, or magazine owners) and that two of them wanted to merge. Suppose they could guarantee that the prices of the remaining three frms would remain competitive following the merger. Should society approve this merger? Or would society fear the artifcially diminished choice that can result from fewer independent sources of opinion and information? If so, some large media mergers might well be evaluated differently under a choice standard than a price standard. It might be instructive to contrast a media merger with the earlier example of a conven- tional merger of cookie making frms. Recall the example where there were only four frms that made cookies, and three would be enough to yield effective price competition. If consumers want 20 or 200 different types of cookies the remaining three frms should supply them. For a hypothetical four to three cookie merger there would be no advan- tage to using a choice standard over a price standard or an effciency standard. The key difference is that the owners of the cookie companies do not care which cookies their customers eat, so they will produce whatever kinds of cookies consumers want. In contrast, owners of the media might have distinct preferences concerning the edito- rial content of the news. Within limits they may be able to add their own slant to coverage. Moreover, the media owners might have unconscious biases and presup- positions, so even if they have the best intention they might not be able to supply the

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160 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Robert H. Lande full range of views. While companies easily can make many different types of cookies, it is much more diffcult to hold all sorts of different worldviews.

To emphasize the point; the United States has six major TV networks25. Should all six be allowed to merge the entirety of their news operations into one? Media pooling is currently permitted, and dozens of newspapers were permitted to form the Associated Press26. Why not allow all six of the major TV networks to merge all of their news operations? This merger would produce signifcant cost saving effciencies. But it is extremely uncertain that it would produce any anticompetitive effects on prices. Because TV news programs compete for advertising dollars and personnel with many other types of televised broadcasts, and also to some extent with other forms of media, an anticom- petitive price effect would be extremely diffcult to demonstrate. The real harm from this news gathering merger, however, could easily be expressed in terms of choice—i.e., in terms of perspectives, quality, and varieties of approaches to news coverage. A choice model would account for this harm much better than a price or effciency model27. Alternatively, consider high-technology markets where innovation is crucial. It is virtu- ally meaningless to apply a price standard to evaluate the effects of a merger or joint venture on future technology since that technology does not yet exist. For mergers in the defense, pharmaceutical, computer, or other high-tech sectors, to ensure the optimal level of future consumer choice we want divergent sources to attempt to innovate. Consumers quite often prefer innovation over low prices on existing products28. These situations should be evaluated explicitly and directly as to whether research that might lead to new and better products will be enhanced or eliminated. Price effects also should be evaluated, but a consumer choice approach would, quite properly,

25 Ibid. at 235. 26 Ibid. at 226. 27 The Voter News Service (VNS) is also illustrative. See Lande (n. 6) at 519-22. At 8:00pm on 7 November 2000, Election Day in the United States, all the major TV networks declared that Presidential candidate Al Gore won the state of Florida, and therefore the election. Later, at 10:00pm all the networks simultaneously declared Florida too close to call. Next, the networks called it for Presidential candidate George W. Bush. Then once again, the networks later declared Florida was too close to call. Each network called the state of Florida wrong twice—once for each candidate. Why the uniformity of incorrect results? Previously six election prediction organizations existed independently, but they gradually combined the entirety of their election polling and prediction operations to form the VNS. This produced signifcant cost saving effciencies. Did it also have negative effects on prices? It is extremely diffcult to fnd any signifcant price effects. Whether VNS charged the six news organizations a monopoly price is irrelevant since the six news organizations owned it. Unfortunately, due to their combination there was no effective competition in terms of choice of information, quality, perspective, or variety of approaches to election prediction. If the VNS were analyzed under the rule of reason, and all that was balanced was its considerable cost savings against its non-existent or highly uncertain price effects, VNS probably would survive an antitrust challenge. But if the balance weighed these cost savings against both the dubious price effects and also the far more certain decrease in quality, fewer independent approaches to election prediction, and less viewer choice, then the case might well come out differently. If there had been competition among six (or even between two) election polling or prediction organizations, the predictions might have been more accurate, and viewer choice would have been greater. 28 Ibid. at 193-95.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 161 Consumer choice as the best way to re-center the mission of competition law intensify the focus on products that might never be invented but for the merger or joint venture. The practices at issue mostly affect non-price competition, so competition law should focus on these issues explicitly. Doing so might sometimes result in the recognition that more frms are needed for innovation or prospective competition than for price competition.

IV. Implementation issues

Competition law cannot seriously consider adopting an overall approach unless it can be implemented in a relatively objective, predictable manner. How does the choice focus compare to the other approaches in terms of predictability? What are the guiding principles for determining how much weight to give to signifcant decreases in consumer choice? How can we conduct the analysis relatively objectively? Mergers seem to be the easiest place to discuss implementation issues. The US Merger Guidelines express concern with the price effects of mergers 12 times, and in a footnote, acknowledge that mergers also can reduce quality, variety, and innovation29. Even the Effciency section of the Guidelines largely focuses on cost savings rather than inno- vation30. But, suppose the Guidelines made innovation and the resulting consumer choices a higher priority. As a practical matter, how could it do this optimally? The best solution might be for the US Merger Guidelines explicitly to say there were certain types of markets (including technology, media, fashion, entertainment, etc.) where the need for innovation or prospective competition means that a larger number of frms may be required to have effective choice competition. Mergers in these markets might be evaluated in terms of different concentration levels or different changes in concentration levels. Alternatively, if the enforcers were reluctant to explicitly say that different structural standards should apply to certain markets, as a practical matter consumer choice concerns could be accommodated into merger analysis in these markets in three different ways. First, choice considerations could simply be used as a tie-breaker or plus factor. If a decision-maker were deciding the legality of a media merger, for example, and if they were on the margin as to whether to challenge a transaction when they only considered price effects, choice considerations could cause them to make a different decision. Second, and similarly, choice considerations could be used as an implicit factor that would operate within the current structure of the US Merger Guidelines. Suppose that

29 Ibid. at 188 n.41. 30 Ibid. at 187-88.

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162 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Robert H. Lande for industries where price competition was most important, the enforcers would chal- lenge 20% of above-Guideline mergers. But perhaps for those industries where consumer choice issues were especially crucial—for mergers involving sectors such as high-tech, media, entertainment, or fashion—the enforcers would block 40% of above-Guideline mergers. To implement choice concerns this way, as an informal part of the enforcers’ discretion, the concentration levels in the Guidelines would not be changed. But the Guidelines would be enforced more vigorously whenever choice competition was especially important. Third, the US Merger Guidelines could make choice analysis a separate explicit factor in the merger review process. Under this approach, a merger should be challenged either if it were likely to lead to higher prices, or if it were likely to lead to signifcantly less consumer choice because the merger was likely to hinder innovation (the most important factor that determines consumer choice in the long run). As a practical matter this would mean that the merger investigation and decision would make a separate, high priority inquiry into both the price and the innovation effects of the merger. This is similar to the way that innovation is already a separate factor in the US Collaboration Among Competitors Guidelines31. This inquiry sometimes could lead to a different result from the current price oriented inquiry, especially because not every company within an industry competes substantially through innovation. Some frms instead largely compete by making existing products less expensively, by supe- rior marketing, by superior service, etc. This method of inquiry would be different from attempting to predict whether a particular merger would be likely to lead to more, or to less, innovation (another possible method of inquiry for the enforcers). Rather, it would mean attempting to ascertain whether particular frms historically had been centers of independent innovation. Here is how this inquiry could work. Suppose an industry consisted of fve frms: A, B, C, D, and E. Suppose the enforcers believe that three frms are enough to have effective price competition in this market, and also that three frms are enough for effective innovation competition. But suppose that only frms A, B, and C compete signifcantly by innovating, that only these three have large research and development budgets, and that only these three have a history of making signifcant innovations. Suppose that frms D and E compete in other ways—perhaps they are imitators that make existing products less expensively. Suppose that frms A and B (two of the frms that compete by innovating) want to merge. Under price analysis we should permit this merger because after the merger there would still be four frms left, and it is stipulated that three frms is enough for effective price competition.

31 Ibid. at 242 n.250.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 163 Consumer choice as the best way to re-center the mission of competition law

But under choice analysis we should block the merger because it is likely to lead to less innovation, the long-term source of optimal consumer choice. Regardless of which number of frms we believe is necessary for effective price competition, choice analysis could lead to tougher merger enforcement32.

V. Conclusions

Nudge, a book by Cass Sunstein and , stresses the importance of starting points, presumptions, and the questions that are frst asked33. This book persuasively demonstrates how actions that non-coercively tend to point decision-makers in particular directions often affect the outcome of a wide variety of situations. This principle also illustrates the importance of the choice focus: if used as a starting point it often will nudge antitrust law or competition law towards incorporating choice considerations more fully and carefully. This would be desirable because consumers do not just want low prices. They want options. This is an important reason why consumer choice is an emerging way to explain and analyze potential competition law violations. Consumer choice analysis in most cases would produce the same result as price or effciency analysis. But factors like innovation, perspectives, quality, service, privacy, and safety now all too often remain in the footnotes of the analysis, where they are usually forgotten. The consumer choice approach would in effect move them into the text, where they would play a more prominent role in the evaluation. As noted throughout this article, the consumer choice mission could lead to better case analysis in several important and general types of situations34. The consumer choice approach also has the advantage of explaining accurately and simply, in a way that everyone can understand, why competition is good for consumer welfare. It is the best, the most intuitive way, to explain the advantages of free competition to a diverse array of audiences, including judges, legislators, the media, and the public. As a fnal example, to show how much clearer and easier to understand the choice formulation is, and how awkward and non-intuitive the other approaches to competi- tion policy can be, consider an old case brought by the US Federal Trade Commission

32 This is analogous to a unilateral effects analysis, which proposes that we should be especially tough on mergers between two frms producing goods within the same niche of a relevant market, and more lenient on mergers between frms producing dissimilar goods. Choice analysis arguably also could be said to create a “submarket” consisting of innovators, or an “innovation market”, within a broader market. Ibid. at 215-16. 33 See Sunstein and Thaler, Nudge: Improving Decisions About Health, Wealth, and (New York, 2008). 34 In addition, the choice approach will not lead to a worse analysis than a price or effciency approach. See generally Averitt and Lande (n. 7). Moreover, the choice approach is as easy to implement, and as predictable, as a price or effciency approach. Ibid. at pt. V.

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164 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Robert H. Lande

(FTC) against frms’ jointly set advertising restrictions concerning the safety of bulletproof vests35. A trade association of manufacturers of bulletproof vests adopted a rule that stipulated it was unethical for members to advertise safety or to claim their products were safer. The FTC’s concern was that without safety advertising consumers might purchase bulletproof vests that were less safe than they would prefer36. Would anyone be satisfed if their bulletproof vest performed poorly so long as it was sold at a competitive price? In theory, we could translate safety harms caused by advertising restrictions into price harms or effciency harms using complex Procrustean intellectual gymnastics. But, would it not be better for the enforcers to straightforwardly say that consumers care about safety, so the enforcers were going to focus on that form of competition explicitly?

The Bush Administration was dominated by the belief that competition laws only should be analyzed in terms of economic effciency. For this reason, during the years of the Administration there was little chance of arriving at an international consensus as to the main goal of competition policy. By contrast, the European Union seems to have given choice issues a higher priority, as demonstrated by its recent Article 102 policy statement37 and the relevant case law38.

35 See discussion at Averitt and Lande, “Consumer Sovereignty: A Unifed Theory of Antitrust and Consumer Protec- tion Law”, (1997) 65 Antitrust L.J. 713, 750, (last visited 31 Jan. 2016). 36 Ibid. 37 The European Commission’s Directorate General for Competition’s 2008 guidance document states: “In applying Article 82 to exclusionary conduct by dominant undertakings, the Commission will focus on those types of conduct that are most harmful to consumers. Consumers beneft from competition through lower prices, better quality and a wider choice of new or improved goods and services”. OJ 2009, C 45/02 Communication from the Commission, “Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings”, at para. 5, (last visited 29 Jan. 2016). The guidance document recognizes that “competitors who deliver less to consumers in terms of price, choice, quality and innovation will leave the market.” Ibid. at para. 6. “In this document, the expression ‘increase prices’ includes the power to maintain prices above the competitive level and is used as shorthand for the various ways in which the parameters of competition—such as prices, output innovation, the variety or quality of goods or services—can be infuenced for the proft of the dominant undertaking and to the detriment of consumers.” Ibid. at para. 11. Additionally, the document clarifes that “The aim of the Commission’s enforcement activity in relation to exclusionary conduct is to ensure that dominant undertakings do not impair effective competition by foreclosing their rivals in an anticompetitive way and thus having an adverse impact on consumer welfare, whether in the form of higher price levels than would have otherwise prevailed or in some other form such as limiting quality or reducing consumer choice.” Ibid. at para. 19. 38 See Independent Music Publishers & Labels Association (Impala) v. Commission, [2006] E.C.R. II 02289, para. 107 (“The Commission also failed to consider whether the concentration might result in an ability to reduce supply, in terms of numbers of new titles or in terms of originality of new releases, or whether it would impoverish creativity, quality and diversity in musical choice . . . or would have an impact on consumer choice, as it had done in the statement of objections in the EMI/Time Warner case (see point 55, which deals with marginalization of the independents and its impact on the choice and diversity of music being offered to the public). Last, the analysis took no account of Article 151(4) EC or of cultural diversity.”); Van den Bergh Foods Ltd. v. Commission, [2003] E.C.R. II 04653, para. 152 (“The exclusivity clause constitutes a barrier to market entry and to the expansion of the relevant market . . . Retailers are prevented from exercising their freedom of choice with regard to the products that they wish to stock and to the optimization of space at the sales outlets. Moreover, consumer choice is reduced”.); Roberts v. Commission, [2001] E.C.R. II 01881, para. 40 (“In this respect, the Commission rightly observes in its pleadings that the consumer’s choice between those establishments is infuenced primarily by their environment and atmosphere, even within the sub-category of pubs distinguished by the applicants”.).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 165 Consumer choice as the best way to re-center the mission of competition law

Today there is optimism that US antitrust enforcers might well vigorously adopt the consumer choice formulation and mission. If they do, there might be a chance that the international community could at least think about working together towards a common understanding about the primary goal of competition policy.

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166 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Consumer choice: an economic perspective

ELISABETH DE GHELLINCK* [email protected] Professor of Economics, Economic School of Louvain, University of Louvain-la-Neuve

I. Introduction

Tenants of the consumer choice approach1 advocate in favor of freedom of choice being a distinct goal of competition policy. Competition policy should ensure that the level of choice that competition and the free market would offer is not signifcantly impaired by frms’ conduct. The goal of this paper is to review what economists have to say about the level of choice that competition and the free market offer. In the second part of this paper, I discuss whether choice as a specifc goal for competition policy is likely to infuence the current implementation of antitrust laws in Europe. Choice as such is not a major concern for economists. It appears as an important vehicle in the competitive process, which is deemed to foster the effcient allocation of resources and to increase total welfare. In the perfectly competitive model, where information is perfect, products are homogeneous, sellers and buyers are numerous, frms enter

* Special thanks to Christian Huveneers for comments on a previous version.

1 See, e.g., Averitt and Lande, “Using the ‘Consumer Choice’ Approach to Antitrust Law”, (2007) 74 Antitrust L.J. 175.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 167 Consumer choice: an economic perspective and exit freely, and economies of scale and externalities are absent, the allocation of resources observed at the long run equilibrium is maximizing total welfare. In that model, the homogeneity of goods restricts consumer choice to the price of the product and the ability to choose among numerous suppliers ensures that products are priced at marginal cost, which maximizes consumer and total welfare. Economists have developed myriads of models trying to fgure out what happens when the assumptions of the perfectly competitive model are lifted. The limited scope of this paper does not allow for a comprehensive review of the economic literature that might be relevant to the issue of choice. I have decided to focus on one dimension of choice, namely variety of products. Choice is often associated with the availability of multiple options that consumers would value. A logical conclusion is to consider that reducing the number of options (as in the case of a merger or tying practices) or reducing the ability for consumers to make a choice between available options (as in the case of long term contracts or exclusivity clauses) is bad. Is this vision shared by economists? Do they conclude that maximum variety is offered in free markets and should be a goal to pursue? Issues of variety have been mostly analysed in the framework of horizontally differ- entiated product markets with free entry. In this paper, I review the main conclusions these models allow us to draw about variety offered in free and competitive markets before examining the issue of variety as a specifc competition policy goal.

Section A: Economic approach to variety

II. Homogeneous goods markets

In homogeneous goods markets, choice is measured by the number of players as, by defnition, consumers consider the products offered by frms in those markets as perfect substitutes and base their purchase decisions exclusively on price. Choice is between suppliers offering similar goods but potentially at different prices. Choice is then the vehicle that makes price competition feasible. Is the number of players relevant for maximizing welfare?

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168 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Elisabeth de Ghellinck

In perfectly competitive markets, it is clear that a high number of frms ensures that none of them has the ability to infuence the equilibrium market price and is a crucial condition for driving prices down to marginal costs and maximizing total welfare. In imperfectly competitive markets, a similar outcome can generally be derived. Increasing the number of frms decreases the market power of frms (measured by the difference between their price and their marginal cost) and hence increases welfare. One exception to this general principle concerns markets characterized by natural structures, i.e., markets where economies of scale put a limit on the number of effcient frms (or frms that can minimize their average costs of production) that the level of demand can sustain. In these markets, there is a confict between produc- tive and allocative effciency. Maximizing allocative effciency by increasing the number of frms in order to increase the competitive pressure and drive prices down to marginal cost will be achieved at the expense of productive effciency as those frms will not be able to produce at the quantity that minimizes their average costs. Competition and free markets are usually unable to solve this trade-off2.

III. Differentiated goods markets

In differentiated goods markets, the story becomes much more complicated. Basically, whether or not products are differentiated depends on consumer preferences. In these markets, consumers consider products as imperfect substitutes and hence do not base their purchase decisions exclusively on price. There are multiple reasons why consumers consider products as differentiated: location, design, safety characteristics, quality, pre- and post-sales services, etc. Products are differentiated because consumers think they are different. They do not necessarily need to be intrinsically different. Economists have developed different types of models to cope with different approaches to product differentiation. Do consumers care for variety? Do different consumers share the same perception about differences between products and services? Do consumers value in the same way these perceived differences? Do consumers buy one unit of a differentiated product (as in the car market) or varying quantities of a specifc

2 Unless markets are contestable, namely characterized by free entry and exit (no sunk costs) and the absence of any incumbency advantages. Consumers in those markets react faster to price decreases offered by the entrant than the incumbent does. In such markets, the trade-off between productive and allocative effciency is solved at the expense of choice between different suppliers as a perfectly contestable equilibrium does not require a large number of frms in the market and the threat of entry forces even a monopolist to equate its price with its . See Jacquemin, The New Industrial Organization: Market Forces and Strategic Behavior (Cambridge, MA, 1987), 25-28; and Bellefamme and Peitz, Industrial Organisation, Markets and Strategies (Cambridge, UK, 2010), 41.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 169 Consumer choice: an economic perspective brand (as in the ready-to-eat cereals market) or a bunch of varieties (as in the media or wine market)? The nature of the products/services considered will hence determine which type of model is appropriate for analyzing the competition in the market3. Economists have classifed the multiple static models of product differentiation into two broad types: horizontally differentiated product models and vertically differentiated product models4. Horizontally differentiated markets are markets in which suppliers offer products based on a combination of characteristics that consumers do not consider as basically superior or inferior to each other. In vertically differentiated product markets, consumers agree on a ranking of the products offered by the suppliers based on their quality and are ready to pay more for products that they consider of higher quality. The distinction between variety and quality can be summarized by observing that, at equal prices, consumers split themselves between the different suppliers in the case of horizontal differentiation while they all buy the highest quality product in the case of vertical differentiation. Cremer and Thisse5 show that basically horizontally and vertically differentiated product models belong to one same broad class of models with horizontally differentiated models being a special case of a vertically differentiated product model. I focus on horizontally differentiated product markets. Is choice still related to the number of frms and the ability to choose between them or is choice in those markets related to the scope of products offered in the market? What do these models tell us about the extent of variety that free competition will deliver?

3 A and unit demand model (consumers have a preference for a variety and buy only one unit of the differentiated product) will be appropriate for the car market whilst a discrete choice but varying demand curves will provide a better description of the ready-to-eat breakfast cereals market (consumers have preferences for a variety but buy them according to a continuous demand function). Finally, consumers in the media or wine market are best described as having a preference for variety but having heterogeneous willingness to pay for such products. 4 Models for innovation-driven markets form a separate class of models. 5 Location models of horizontal differentiation: a special case of vertical differentiation models, (1991) 39(4) J. Int’l Econ. 383.

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170 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Elisabeth de Ghellinck

IV. Horizontally differentiated markets

Starting with models (i.e., markets in which free entry increases the number of frms offering a differentiated product up to the point where the marginal frm is just breaking-even), economists distinguish between two approaches to differentiation: the spatial or location model (preference for a variety) and the representative consumer model (preference for variety). These models usually consider single-product frms with non-constant . Multi-product frms are considered below in section 4.

1. Models based on a preference for a variety The model developed by Lancaster considers heterogeneity in consumers’ preferences that is based on the underlying product characteristics6. A product is a bundle of different characteristics. Consumers have preferences over these bundles. Each consumer has a preference for an ideal combination of characteristics and prefers a product whose characteristics are closest to its ideal product. A consumer is willing to pay a premium for its preferred products. He or she may not care about the price of goods presenting a combination of characteristics very different from its ideal product. Only “close” products are considered as substitutes. A spatial version of the model has been developed by Hotelling and Salop 7 that considers consumers buying at most one unit of the product from the frm offering the lowest “generalised price”, i.e., the price augmented by the transport costs8. Differentiation corresponds in that case to distance to the supplier. In both models, frms are single-brand suppliers and consumers view each frm’s product as having a particular location in geographic or product (characteristic) space. In these models, consumers also have locations in geographic or product space. It costs consumers more to shop at stores farther away or, alternatively, they suffer disutility from consuming products whose characteristics deviate from their ideal. Firms compete only for customers located close to their geographic or product location. Similarly,

6 For example, in the ready-to-eat cereals market, the space of characteristics could include: sweetness, mouth feel, chocolate or fruits, etc. See Lancaster, Variety, Equity and Effciency (New York, 1979). 7 Salop, (1979), Monopolistic competition with outside goods, Bell J. of Economics, 10, 141-156. 8 Many different aspects of product differentiation can be captured under the heading of transportation costs. Basically, it represents the disutility from not purchasing the consumer’s ideal variety.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 171 Consumer choice: an economic perspective actions relating to any single brand generally have important effects on only a small number of other brands. The number of frms in such a market is determined by free entry, which ensures that profts are competed away. What each consumer does value is the proximity to its ideal variety. At the market level, heterogeneity in consumers’ preferences generates value for variety. The more heterogeneous consumers are, the more varieties will be offered at equilibrium, all else equal. Limits to variety in these markets are set by increasing returns for individual brands. In the absence of fxed costs, variety is maximized, meaning that each consumer gets a product exactly tailored to his or her tastes. Because of economies of scale, however, only a limited number of varieties can be proftably produced. The number of suppliers—and hence the extent of variety—is determined by the heterogeneity in customers’ (geographic or product) location, the importance of economies of scale as well as the number of customers (the size of the market). Increasing the size of the market (e.g., by opening the market to ) will result in more varieties offered at a lower price. Individual consumers do not value variety as such, but rather, they value the availability of a product close to their “ideal” product. Increasing variety increases the number of consumers that are able to fnd a product that is closer to their ideal product.

2. Model with a preference for variety (Dixit-Stiglitz framework) In models with a preference for variety9, consumers consider10 that all products offered by the various suppliers are equal substitutes for each other11. They value variety as such and they typically buy from each frm. Firms confronted by such consumer demand compete equally for all consumers, which are assumed to have the same preferences. The degree of differentiation observed at equilibrium in these markets depends on the elasticity of substitution between the brands, the level of sunk costs, and the size of the market.

9 For the originator of this type of model, see Chamberlin, The Theory of Monopolistic Competition (Cambridge, MA, 1933). 10 Those models work with a representative consumer, as preference for variety is enough for generating differentiated products at equilibrium. 11 The assumption of a constant elasticity of substitution between products has nice modelling but is not realistic in several markets.

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172 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Elisabeth de Ghellinck

The lower the elasticity of substitution between products, the lower the impact on the price and hence the proftability of existing suppliers of an additional entrant/variety on the market and the higher the variety observed in the market.

3. Is the extent of variety offered in monopolistic competition markets optimal? Variety is the outcome of the trade-off between the number of brands and the quantity of each brand that is sold12. This requires knowledge of consumers’ preferences on price versus variety, namely how much more consumers would be willing to pay for additional variety at a higher price and how homogeneous consumers are in their evaluations. There is no guarantee that competition and the free market will deliver the optimal number of varieties from a social welfare point of view. There may be either too little or too much variety. As summarized by Carlton and Perloff: “Two factors determine the variety in a monopolistic competition equilibrium. One of them leads to too few brands, but the other may lead to too many brands . . . Because the two factors work in opposite directions, there may be too many or too few brands compared to the social optimum”13. Fixed costs prevent desirable products from being produced and hence keep the number of brands below the optimal level. On the other hand, when the impact on other frms’ profts from the launch of an additional variety is not taken into account, too many frms are induced to enter the market and hence too many varieties are offered in the market14. The evolution in the Belgian banking sector from 1980 to 2010 provides a good illustration of the cost of non-price competition when prices are regulated. Until the end of the 1980s, price competition was nonexistent as banks collectively set domestic interest rates. Banks could then only compete on non-price variables. They competed by, among other things, increasing the number of branches. In 1989, there were 8,978

12 As shown by Helpman and Krugman, Market Structure and Foreign Trade (Cambridge, MA, 1985), the most effcient way to resolve that trade-off is to open the market to international trade. This allows for more varieties to be available for domestic consumers at a lower price; some of them being produced in and exported from the country whilst the others are produced abroad and imported. Achieving a true internal market is hence the optimal path to increased consumer welfare when increased competition between frms leads them to specialize on specifc brands produced at lower costs and sold at lower prices due to a better exploitation of increasing returns to scale and to increased competition from abroad, while imports allow consumers to beneft from a greater variety. See Jacquemin, de Ghellinck and Huveneers, “Concentration and Proftability in a Small Open Economy”, (1980) 29(2) J. Indus. Econ. 131; Buigues and Jacquemin, “Les effets d’attraction du grand marché sur les exportations et les investissements directs industriels des Etats-Unis et du Japon”, (1991) 55(1) Revue d’Économie Industrielle 162. 13 Carlton and Perloff, Modern Industrial Organization (4th edn. Boston, 2005), 215. 14 The transfer of profts between frms is not increasing the total surplus.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 173 Consumer choice: an economic perspective branches in Belgium15, 904 branches per million inhabitants. Variety was clearly exces- sive in the sense that it led to a costly distribution structure. When price competition was reintroduced and intermediation margins started to decrease16, the pressure on costs, especially in the distribution sector, increased signifcantly. The number of branches decreased to 4,425 in 2007 or approximately 400 branches per million inhabitants. Mergers and acquisitions that led to a signifcant reduction in the number of banks (from 176 in 1980 to 105 in 2010) helped to rationalize the distribution structure by reducing the number of branches and relocating them.

4. Competition between multi-product frms Most frms offer more than a single product17. In that case, frms have to decide how many products to offer and how much of each product they want to produce and sell. , stemming from the existence of costs common to the production of a range of products, are one reason why frms offer more than one product. Internal- izing the externalization effect is another one. Single-product frms are constrained from raising prices by the fear of losing customers to other frms. When offering multiple products, the percentage of lost sales18 is decreasing because, in the case of a price increase, some share of the demand will be diverted to other product(s) supplied by the frm that raised its price (see section B, UPP tests). Furthermore, in case of multiple products adjacent on the characteristics space, customers located in the middle are locked in as long as the disutility from choosing a competitors’ product is higher than the price differential between suppliers. Limits to the number of products offered by a frm is driven by the cannibalization effect—namely the decrease in demand for existing product(s), including those produced by the same frm, resulting from the launch of an additional product—that increases with the market share of the frm. How many products are offered in a free market and by how many frms? The literature on multi-product frms is recent but growing. It reveals the importance of frm heterogeneity for understanding the diversity of situations observed in real markets and in particular the coexistence of multi- and single-product frms.

15 This fgure covers branches of members of Febelfn, the Belgian federation of the fnancial sector, that together represent 95% of the sectorial balance sheet. It excludes branches of the as well as postal distribution points. See https://www.febelfn.be/fr/chiffres/vade-mecum-le-secteur-fnancier-belge-en-detail, vade mecum 2007., table 3-4-1. 16 See Heremans and Van Cayseele, “Concentratie en concurrentie in de Belgische fnanciele sector”, (1996) 82 Leuvense Economische Standpunten 5. 17 Thirty-nine percent of American frms produced more than one product and these frms accounted for 87% of total output in 1997. See Luong, Multiproduct frms and the endogenous choice of varieties (Princeton U. Working Paper, 2011), 2. 18 Also called the diversion ratio.

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174 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Elisabeth de Ghellinck

Heterogeneity between frms in their productivity level19 leads to a varying scope of products offered by the different frms. More productive frms can develop more products, which intensifes the competition on the product market, leaving the least effcient frms just able to launch a single product. Heterogeneity in a frm’s ability to produce different varieties (the core competence approach also called the fexible manufacturing approach) leads to distinguishing between core products that the frm produces best and other products characterized by a higher marginal cost of production the farther the product is from the core activities20. Single-product frms in that frame- work are frms just able to focus on their core product. In such a market, the lower the competitive pressure, the higher the number of products launched by frms. Increasing the competitive pressure will force frms to drop marginal, and less proftable, products and to concentrate on their core products21. Heterogeneity of consumers also has an impact on the product scope offered by frms. Most preferred brands will be the frst ones to be offered in a market. When the size of the market grows, less popular brands that are more costly to produce can be launched in the market. To summarize, the scope of products offered by frms in a free market depends not only on economies of scope between products, economies of scale per product, and market size but also on heterogeneity of frms and consumers. Variety is then the combination of number of frms and scope of products offered by each frm. More competition in the market—i.e., lower prices or productivity, or higher marginal costs—leads frms to drop peripheral, less popular brands, decreasing the variety in the market.

5. Variety as a strategic weapon Most models about competition in differentiated industries with imperfect competition emphasize that frms tend to compete more in non-price variables than in price as they offer more powerful weapons against potential entry. Excessive variety is one of the strategies that can be used as an entry-deterrence tool. Consumer choice in the short-term between existing varieties is hence achieved at the expense of price and further entry and innovation in the long-term. Starting from the

19 See Luong, 2011, n. 17. 20 See, e.g., Carsten and Neary, “Multi-Product Firms and Flexible Manufacturing in the Global Economy”, (2010) 77 Rev. Econ. Stud. 188; Mayer, Melitz and Ottaviano, “Market Size, Competition and the Product Mix of Exporters” (NBER Working Paper No. 16959, 2011). 21 This is confrmed by empirical evidence showing that the majority of product creation and destruction happens within the boundaries of the frm. See Feenstra and Ma, “Optimal choice of product scope for multiproduct frms under monopolistic competition” (NBER Working Paper No. 13703, 2007), (last visited 30 Jan. 2016) (quoting Broda and Weinstein, “Product Creation and Destruction: Evidence and Price Implications” (NBER Working Paper 13041, 2007)).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 175 Consumer choice: an economic perspective observation that established frms in the ready-to-eat breakfast cereals market were mainly competing through the launch of new brands22, Schmalensee proposes a model23 showing that brand proliferation could be a proftable strategy to deter entry in a market24. By crowding the product space, incumbent frms prevent new entrants from fnding a suffcient number of customers to launch new brands successfully25. As pointed out by Schmalensee, the problem in such a market is not that too many brands are introduced but rather that too little price competition occurs. An appropriate remedy should hence focus on interventions seeking to improve price competition and facilitate entry.

6. Product differentiation in the presence of imperfect information All the models discussed above are models that assume perfect information not only for frms on consumer preferences but also for consumers on product characteristics, as well as assuming rational behavior by all agents. Focusing on consumers, it appears that product differentiation, whilst benefting consumers with heterogeneous tastes or having a preference for variety, might also harm them when information about product characteristics is imperfect. Tying/bundling practices are, among others, justifed on the basis of meeting consumers’ needs for reduced search costs. Restricted variety imposed/proposed by frms in such a case is valued by consumers, even without any impact on price. Competition, on the other hand, may in some cases work to exacerbate consumer misperceptions when frms multiply their tariff plans, increasing the complexity of their pricing schemes and making comparisons more diffcult, which increases consumers’ switching costs26.

22 Between 1950 and 1972, the 6 leading producers introduced over 80 brands, bringing the total number of brands from 20 in 1950 to 80 in 1972. See Schmalensee “Entry deterrence in ready-to-eat breakfast cereal industry”, (1978) 9(2) Bell J. Econ. 305. 23 His model is a spatial competition model with immobile brands where price competition is avoided and rivalry is focused on new brand introduction. 24 For brand proliferation to be a credible entry-deterring strategy, costs to withdraw a product facing a direct competitor have to be above a certain level. Bellefamme and Peitz, n.2, 417. 25 Even if the shift in consumers’ tastes in favor of natural cereals in the early 70s, largely unanticipated by established leaders, generated the entry of major frms in that segment in 1972 and 1973, the decrease in demand for natural cereals from mid-74 led to the exit of those entrants but one still present at national level in the USA in 1977. See Schmalensee (n. 22). 26 This is a frequent claim in telecommunication markets when some consumers complain that pricing schemes proliferation has made choice so complex that it has a negative rather than a positive value for them.

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176 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Elisabeth de Ghellinck

Other factors can play a role in consumers’ preferences for restricted variety such as reduced competition between agents that operate on the same side of a two-sided market27.

7. Conclusions Preference for variety is an assumption that is sustainable only in a perfect information framework and with unbounded rational consumers. Even when consumers value variety, they do not express an absolute preference for variety but a relative one, i.e., depending on the costs in terms of the higher price to be paid for more variety. In monopolistic competition markets, willingness to pay for more variety determines the extent of variety offered in the market as the price to pay for more variety is a smaller quantity produced of each variety and higher prices resulting from higher unit costs. Pushing for lower prices and more varieties—both enhancing consumer welfare— will hence be hard to achieve in such markets. In free markets, variety depends on economies of scale, size of the market, and hetero- geneity of frms and consumers. The scope of products offered in free markets is not necessarily optimal. In imperfectly competitive markets, frms might use a strategy of product proliferation in order to prevent entry into their market. Variety in those markets is hence excessive. Taking into account market imperfections, less variety is not necessarily harming to either consumer or total welfare. Maximum variety cannot hence be considered an appropriate goal for competition policy. However, variety has to be taken into account when evaluating the impact of specifc frm behavior as long as it infuences consumer welfare28.

27 Halaburda and Piskorski, “Competing by Restricting Choice: The Case of Search Platform” (Harv. Bus. Sch. Working Paper, No. 10-098, 2013). The authors consider a two-sided market with users who have heterogeneous outside options and whose taste for complements is subjective. If a larger choice of potential matches is positively valued by users as it increases the probability to fnd the appropriate match, this larger choice is also increasing the competition between agents on the same side and hence reducing the probability of a successful match. They show that agents with heterogeneous outside options resolve that trade-off differently. Heterogeneity in customers’ valuation of a larger choice is linked to the heterogeneity in the availability of outside options and in the valuation of time. Customers with lots of outside options do care less about competition between agents and about the time necessary to fnd an appropriate match; hence they will give more weight to the availability of a larger choice. On the contrary, customers with limited outside options give more value to the restriction in competition and would even be ready to pay a premium price for getting access to a restricted choice platform. In such a market, a two-sided platform can successfully compete by limiting the choice of potential matches it offers to its customers while charging higher prices than platforms with unrestricted choice. 28 It is important to insist on the difference between variety—which measures the extent of choice—and the ability to choose that can be limited by tying practices, exclusive contracts, switching costs, etc.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 177 Consumer choice: an economic perspective

V. Vertically differentiated markets: preference for quality

In vertically differentiated markets, all consumers agree that some products present characteristics that make them more desirable than others. Consumers agree that high quality products are better than low quality products but might differ in their readiness to pay for higher quality. Without differences in the cost of producing different quality levels—which seems quite unrealistic—all frms offer the high quality product at the same price. There is no such thing as preference for variety in this case. As soon as differences in production costs are associated with quality, frms have an incentive to offer different qualities in order to reduce price competition. However, if the cost function is characterized by sunk costs and/or when consumers all agree which of the products is preferred when priced at marginal cost (i.e., small degree of heteroge- neity in preferences), the number of frms/qualities at equilibrium will be limited. Markets with vertical product differentiation may even be natural monopolies, i.e., only one frm may enter proftably29. In such a case, choice between different qualities is not supported by the free market. Imperfect information on the level of quality might also restrict the choice of qualities offered by frms30. The number and type of qualities that are offered in free markets is hence infuenced by the specifcities of the cost function, the heterogeneity in consumers’ preferences, and the size of the market. At equal price, consumers are not valuing choice but the availability of high quality products. When prices refect differences in quality, heterogeneity in willingness to pay for a higher quality makes choice between different qualities at different prices a valuable option for consumers31.

29 See Bellefamme and Peitz, (n. 2), p. 124. 30 In markets in which product quality is exogenous but unobservable, high-quality products may not be offered for sale. See Bellefamme and Peitz, (n. 2), p. 287. 31 When the one dimensional differentiation assumption is lifted by assuming that frms compete in a multi-dimensional framework, the main conclusion is that frms tend to maximize differentiation on one dimension and minimize it on the others. See Vandenbosch and Weinberg, “Product and Price Competition in a Two-Dimensional Vertical Differentiation Model”, (1995) 14(2) Marketing Sci. 224; Irmen and Thisse, “Competition in Multi-characteristics Spaces: Hotelling Was Almost Right”, (1998) 76(1) J. Econ. Theory 76.

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178 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Elisabeth de Ghellinck

Section B: To what extent are these economic models relevant for competition policy?

Economic theory does not provide for an integrated approach to competition in differ- entiated product markets. Different types of models, each focused on a particular aspect, are available but none of them describe exactly the competition observed in real markets, namely frms and consumers making choices on both price and non-price dimensions in an imperfect competition framework. The models presented in section A prove to be particularly useful for evaluating mergers between providers of differentiated consumer products since in those markets the focus on market share and concentration is problematic. They have led to the development of empirical tools for measuring the extent of competitive pressure that frms are exercising on each other and to the development of merger simulation in order to predict post-merger price effects. A merger simulation exercise forces assumptions to be explicit and reveals what factors really matter, why they do, and how they affect consumer surplus. It indicates the type of qualitative evidence that antitrust authorities have to collect in order to back up the validity of the model used. Despite its shortcom- ings, economic theory can bring value to competition policy by helping antitrust authorities focus on the right questions. The frst set of questions relates to the relevance of the underlying model used. If innovation or a market leader is driving competition in the market being considered, another set of models than the one that has been presented in section A has to be considered where dynamic considerations are playing a decisive role. The second set of questions focus on whether specifc factors could offset any anticompetitive effects assumed in the basic model, namely whether entry and repositioning of products is easy or whether frms are capacity constrained. The evaluation of the impact on consumer welfare of a merger in a horizontally differentiated product market raises the question of whether the merger will lead to a general price increase and/or reduction in the number of products offered in the market. Using the models presented in section A, let us frst answer this question putting aside cost effciencies, entry, and product repositioning. Considering a model for localized competition, only a merger between close competitors could have such an effect. Pre-merger, the merging parties are constrained from raising prices (or from launching an additional product) by the fear of losing customers partly to each other as well as to other frms. Post-merger, the switching of customers between the merging parties as a response to changes are no longer lost sales, and hence lost proft, for the merged entity. This is the intuition behind the “upward pricing test” (UPP test)

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 179 Consumer choice: an economic perspective proposed by Farrell and Shapiro32. Only switching to the merged entity’s competitors will put a constraint on its pricing behavior. The magnitude of the merger’s impact on price will depend upon the own- and cross-price elasticities of the demand for the products of the merging parties that tell us how consumers’ purchases react to relative price changes. This result, however, is not valid anymore when economies of scope between the two brands are strong enough33 to counteract the incentive for the merging entity to increase price or when the merger induces the entry of a new brand34. Suppose the merger has transformed two single-brand frms into a multi-product frm. A natural question then is whether the frm would like to manage its product portfolio differently, namely whether it would be induced to drop one brand or modify the localization of the two brands (“repositioning”). Merging frms have the incentive to relocate brands farther away in order to increase their market power over customers located in between. This strategy, however, can be counteracted by existing or poten- tial competitors deciding to relocate/locate their own brand in between. In that case, relocation plays a similar role as free entry in reducing the anticompetitive effects of a merger by constraining the ability of the multi-product frm to increase its market power. This rests upon the assumption that repositioning brands—like free entry—is almost costless. However, rebranding requires investments to alter the consumer’s perceptions of existing brands and hence is often a costly, risky, and time-consuming strategy. In that case, ignoring repositioning strategies when evaluating conduct is appropriate35. These conclusions remain tentative as little work has been done on the effects of mergers among competitors that choose both price and another non-price strategic variable such as product positioning or the level of promotion36. Models with multi-product heterogeneous frms show that decreasing competitive pressure—which might be expected as an outcome of a merger in a market without free entry—will lead frms to increase rather than decrease the scope of products offered37. Information about barriers to entry, cost of repositioning, and heterogeneity

32 Farrell and Shapiro, “Antitrust Evaluation of Horizontal Mergers: An Economic Alternative to Market Defnition”, (2010) 10 The B.E. Journal of Theoretical Economics, Art. 9. 33 The question then is why did the frms not exploit those economies of scope by launching several products rather than remaining single product frms. 34 This option is realistic only for a nearly-proftable entrant in the pre-merger situation or when the post-merger price is increased signifcantly. 35 For the relevance of such an assumption in the case of the ready-to-eat breakfast cereals market, see Schmalensee (n. 22) at 310. 36 Werden and Froeb, “Unilateral competitive effects of horizontal mergers”, in Buccirossi (ed.), Handbook of Antitrust Economics (Cambridge, MA, 2008). 37 Protecting the number of frms that competitive markets would have provided would thus lead competition authorities in such a case to restrict the scope of products offered on the market.

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180 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Elisabeth de Ghellinck of frms are needed before being able to evaluate the impact of a merger on the variety of products offered in the market. Economists are also proposing empirical tests for measuring the extent of competitive pressure that frms are exercising on each other. The availability of scanner data in consumer goods industries allows for direct measures of diversion ratios, namely the amount of purchases that consumers switch to other products when the price of a particular product is increased38. The extent to which customers view the merging parties’ products as substitutes can also be revealed by the use of tender data. Firms will be identifed as close competitors when, pre-merger, they confront each other frequently in tenders and are among the top-fnalists in any bidding context and when the content of each frm’s bid is infuenced by the presence of the other frm. In both cases, price and non-price variables are taken into account by consumers when evaluating offers made by different suppliers. This is particularly relevant in the case of medical equipment as the terms of reference of the tender reveal the relative impor- tance given by the buyer to price and non-price factors—such as the compatibility of proposed equipment with existing material—when making its choice between the various offers. The importance of that compatibility criterion led the European Commis- sion to clear the acquisition of Instrumentarium by GE39 subject to commitments to ensure the interoperability that currently exists between anesthesia machines, patient monitors, and clinical information systems, revealing that even if the focus of the anticompetitive effects analysis of the proposed acquisition is done in terms of the ability to increase price, non-price aspects are also taken into account.

38 Measured diversion ratios may be different from those based upon market shares. This may affect the predicted post-merger price effects. Mathiesen, Nilsen, and Sorgard, “Merger simulations with asymmetric frms: the application of diversion ratios” (NHH Dep’t. Econ. Discussion Paper No. 27/2010) (showing that diversion ratios from a local grocery market in Norway from the acquired to the acquiring stores were considerably smaller than suggested by market shares and predicted average price increase from the acquisition 40% lower than when using a model based upon market shares). 39 Case No COMP/M.3083 - GE/Instrumentarium, paras. 321-58.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 181 Consumer choice: an economic perspective

VI. Conclusion

Should we then conclude, as Averitt and Lande conclude40, that the shortcomings of the current economic paradigm justify choice as a separate antitrust goal? I frst want to stress that choice is already part of the assessment done by competition authorities. While the general focus on the price impact of frms’ behavior might give the feeling that the price dimension is given precedence over non-price dimensions, economic theory does not deny the relevance of non-price variables for consumers. One issue might be that, because price effects are considered easier to measure than non-price effects, there is a tendency to focus the analysis on prices only. This would not be a problem if the price effect is lower, and hence the estimated UPP is considered a maximum, when price is not the only strategic variable. However, this is not necessarily the case. Proposing a model where frms compete using both price and promotion, Tenn, Froek, and Tschantz41 show that price-only merger models will under- (over-) estimate the magnitude of the post-merger price increase, depending on whether the promotional activity makes demand more (less) elastic. Only in the special case of a complete absence of impact of promotional activities on demand will the price-only model provide an accurate prediction of a merger’s price effect. In any case, considering the limits of the economic approach, namely the reliance on assumptions about the demand and cost functions, qualitative factors remain extremely important to check whether quantitative results are plausible. The measurement of the “upward pricing pressure” resulting from a merger is only about the likelihood of such a price increase. The insistence of the European Commission to rely on a combination of qualitative and quantitative evidence should ensure that non-price factors relevant to consumer welfare are not left out of the picture. On the other hand, by using bidding data or measuring diversion ratios, one ensures that both price and non-price factors relevant to customers in the short-term are taken into account. Second, I believe the shortcomings of the current paradigm are not overcome by the proposed choice model because identifying the range of choices that the free market would provide remains a challenge in certain cases, especially when several conficting

40 See Averitt and Lande (n. 1). 41 Tenn, Froek, and Tschantz, “Mergers when frms compete by choosing both price and promotion”, (2010) 28 Int’l J. Indus. Org. 695.

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182 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Elisabeth de Ghellinck competitive dimensions—such as price, variety of existing and new products, quality, etc.—are simultaneously at stake. Furthermore, in cases of market failure, i.e., inability of free markets to make the trade-off between choice and economies of scale or choice in the short-run and choice in the long run, what is the benchmark that should be used in the choice model? Are the limitations of current economic thinking enough to justify basing competition policy on a general presumption that variety/choice is always valued by consumers? The fear is that, rather than trying to correctly identify the harm to consumers that a particular conduct is generating, one would switch to a general presumption that increasing choice between suppliers is always benefcial to consumers and, by so doing, one would move from protecting consumer choice to protecting competitors. The identifcation of a theory of harm does encompass more than just identifying the price effect. The need to establish a clear and detailed theory of harm is consistent with the need to devote enough attention to non-price effects without giving undue preference to choice over other dimensions valued by consumers. Rather than promoting consumer choice as such, there is a need for an explicit discus- sion on the relative importance society wants to give to each component of effciency— e.g., productive versus allocative effciency or static versus dynamic effciency—in order to help practitioners in making appropriate assessments about potential harmful effects on consumers from specifc conduct.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 183 The goals of antitrust: welfare trumps choice*

† JOSHUA D. WRIGHT [email protected] Professor of Law, George Mason University School of Law Former Commissioner, US Federal Trade Commission

‡ DOUGLAS H. GINSBURG [email protected] Senior Circuit Judge, United States Court of Appeals for the District of Columbia Circuit Professor of Law, George Mason University School of Law

* This article frst appeared in 81 Fordham L. Rev. 2405 (2013). It is reproduced with the authorization of the Publisher. † The views stated here are the author’s own and do not necessarily refect the views of the Commission or other Commissioners. ‡ The authors thank Anna Aryankalayil and Angela Diveley for research assistance.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 185 The goals of antitrust: welfare trumps choice

I. Introduction

The evolution of US Supreme Court antitrust jurisprudence over the past 50 years is well known. As one of us has written, “[f]orty years ago, the U.S. Supreme Court simply did not know what it was doing in antitrust cases”1. The Court interpreted the Sherman2 and Clayton Acts3 to refect a hodgepodge of social and political goals, many with an explicitly anticompetitive bent, such as protecting small traders from more effcient rivals4. The failure of antitrust law to promote competition and further consumer welfare over this period is unsurprising and inevitable, for the courts and agencies were operating without a coherent answer to the question: “what are the goals of antitrust?” The economic revolution in antitrust that took hold in the Supreme Court in the late 1970s and 1980s was brought on at least in part by Robert Bork’s analysis of the original understanding of the Sherman Act5. In Continental TV, Inc. v. GTE Sylvania Inc.6, the Court, shifting its focus from this mix of economic, social, and political goals to the overall market impact of an alleged restraint of trade, recognized the potential for vertical non-price restrictions to promote interbrand competition and declared interbrand competition “the primary concern of antitrust law”7. It is diffcult to overstate the importance of GTE Sylvania as the foundation of the economic approach to antitrust analysis: antitrust would no longer serve multiple masters; economic goals would be exclusive. Soon the Court would assert more specifcally that Congress designed the Sherman Act as a “consumer welfare prescription”8 and that “[a] restraint that has the effect of reducing the importance of consumer preference in setting price and output is not consistent with this fundamental goal of antitrust law”9.

1 Ginsburg, “Originalism and Economic Analysis: Two Case Studies of Consistency and Coherence in Supreme Court Decision Making”, (Winter 2010) 33(1) Harvard J. L. & Pub. Pol’y 217. 2 15 U.S.C., ss. 1–7 (2006). 3 15 U.S.C., ss. 12–27; 29 U.S.C., s. 52–53 (2006). 4 See Utah Pie Co. v. Cont’l Baking Co., 386 U.S. 685, 703 (1967) (condemning rivals’ attempts to compete with Utah Pie by lowering prices because “each of the respondents also bore responsibility for the downward pressure on the price structure” and the “[Clayton] Act reaches . . . that is intended to have immediate destructive impact”); Brown Shoe Co. v. United States, 370 U.S. 294, 344 (1962) (“[W]e cannot fail to recognize Congress’ desire to promote competition through the protection of viable, small, locally owned businesses. Congress appreciated that occasional higher costs and prices might result from the maintenance of fragmented industries and markets. It resolved these competing considerations in favor of decentralization.”); United States v. Trans-Mo. Freight Ass’n, 166 U.S. 290, 323 (1897) (antitrust law exists to protect “small dealers and worthy men”). 5 Bork, “Legislative Intent and the Policy of the Sherman Act”, (1966) 9 J. L. & Econ. 7, 48; see also Ginsburg, “Judge Bork, Consumer Welfare, and Antitrust Law”, (2008) 31 Harvard J. L. & Pub. Pol’y 449 (excerpted from Ginsburg, “An Introduction to Bork (1966)”, (Spring 2006) 2 Competition Pol’y Int’l, at 225). 6 433 U.S. 36 (1977). 7 Ibid. at 52–56. 8 Reiter v. Sonotone Corp., 442 U.S. 330, 343 (1979). 9 NCAA v. Bd. of Regents of the Univ. of Okla., 468 U.S. 85, 107 (1984).

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186 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Joshua D. Wright & Douglas H. Ginsburg

The promotion of economic welfare10 as the lodestar of antitrust laws—to the exclusion of social, political, and protectionist goals—transformed the state of the law and restored intellectual coherence to a body of law that Robert Bork had famously described as paradoxical11. Indeed, there is now widespread agreement that this evolution toward welfare and away from noneconomic considerations has beneftted consumers and the economy more broadly12. Welfare-based standards have led to greater predictability in judicial and agency decision-making. They also rule out theories of liability (e.g., a transaction will tend to reduce the number of small businesses in a market) and defenses (e.g., the restraint upon trade is necessary to save consumers from the conse- quences of competition) that would signifcantly harm consumers. Further, the focus upon economic welfare has led the Court to reject per se prohibitions of conduct once thought anticompetitive but now, owing to advances in our economic knowledge, understood to be effcient13. Untethered from an economic welfare standard, it is diffcult to imagine a rationale for eliminating those per se prohibitions.

10 We put to the side issues of whether the appropriate standard is aggregate economic effciency, often referred to as the total welfare standard or “true” consumer welfare (in the economic sense of a consumer surplus) standard. See generally K. Heyer, “Welfare Standards and Merger Analysis: Why Not the Best?”, (Autumn 2006) 2 Competition Pol’y Int’l, at 29; Salop, “Question: What Is the Real and Proper Antitrust Welfare Standard? Answer: The True Consumer Welfare Standard”, (2010) 22(3) Loy. Consumer L. Rev. 336, 353. Our focus is upon the desirability of welfare standards over alternative non-welfare antitrust objectives, and more specifcally, over the proposed “consumer choice” standard. 11 Bork, The Antitrust Paradox: A Policy at War with Itself (New York, 1978), 7 (demonstrating “[c]ertain of its doctrines preserve competition, while others suppress it, resulting in a policy at war with itself”). 12 Areeda and Hovenkamp, Antitrust Law (New York, 3rd ed. 2006) (“The biggest advantages conferred by the use of relatively traditional as the guiding principle for antitrust are two: coherence and welfare . . . [P]opulist goals should be given little or no independent weight in formulating antitrust rules and presumptions. As far as antitrust is concerned, they are substantially served by a procompetitive policy framed in economic terms . . . [I]njection of populist goals, by broadening the proscriptions of business conduct, would multiply legal uncertainties and threaten ineffciencies not easily recognized or proved . . . [Despite some inadequacies,] economics gives a focus to antitrust interpretation and is critical to any formulation of rational rules”.); Kovacic, “The Intel- lectual DNA of Modern US Competition Law for Dominant Firm Conduct: The Chicago/Harvard Double Helix”, (2007) 1 Colum. Bus. L. Rev. 35 (“Both [the Chicago School and Harvard School] generally embrace an economic effciency orientation that emphasizes reliance on economic theory in the formulation of antitrust rules. Although Chicago School and Harvard School scholars do not defne effciency identically, the two schools discourage consideration of non-effciency objectives such as the dispersion of political power and the preservation of oppor- tunities for smaller enterprises to compete.”); Turner, “The Durability, Relevance, and Future of American Antitrust Policy”, (1987) 75 Cal. L. Rev. 797, 798 (“Antitrust law is a pro-competition policy. The economic goal of such a policy is to promote consumer welfare through the effcient use and allocation of resources, the development of new and improved products, and the introduction of new production, distribution, and organizational techniques for putting economic resources to benefcial use . . . The legislative history of the Sherman Act and other antitrust laws also suggests ‘populist’ goals—social and political reasons for limiting business size and preserving large numbers of small businesses and business opportunities. However, economics-based antitrust law serves those goals to a substantial extent by preventing agreements, mergers, and monopolizing conduct that tend to eliminate or reduce competition without yielding economic benefts . . . [T]here is no reasonable basis for presuming that courts must give priority or even weight to populist goals where the pursuit of such goals might injure consumer welfare by interfering with competitive pricing, effciency, or innovation. Indeed, even where there is no such apparent confict, it is questionable whether populist goals are appropriate factors to consider when formulating antitrust rules. The pursuit of these goals would broaden antitrust’s proscriptions to cover business conduct that has no signifcant anticompetitive effects, would increase vagueness in the law, and would discourage conduct that promotes effciencies not easily recognized or proved”.). 13 See, e.g., Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 907 (2007) (lifting per se prohibition of minimum resale price maintenance (RPM)); State Oil Co. v. Khan, 522 U.S. 3, 19 (1997) (lifting per se prohibi- tion of maximum RPM); Cont’l T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 54 (1977) (lifting the per se prohibi- tion against vertical non-price restraints).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 187 The goals of antitrust: welfare trumps choice

The “consumer choice” standard is the latest challenge to the welfarist understanding 14 of antitrust . In a series of articles, Neil Averitt and Robert Lande present the consumer choice standard as an alternative to effciency or welfare standards15—including not only the “consumer welfare” and “total welfare” standards16 but even the “consumer surplus” standard17. Perhaps the clearest articulation of the consumer choice standard is that “[a]n antitrust violation can . . . be understood as an activity that unreasonably restricts the totality of price and nonprice choices that would have otherwise been available”18. Averitt and Lande occasionally use their alternative model to highlight perceived weaknesses in the current approach to non-price competition and to call for a greater focus upon that dimension of the competitive process19. That shift would be desirable to the extent it improves courts’ and agencies’ ability to understand the competitive consequences of some business arrangements. Still, they clearly have something more ambitious, even grandiose, in mind: “nothing less than a new paradigm of the antitrust laws”20. They also point to the consumer choice standard as the starting point for understanding section 5 of the Federal Trade Commission (FTC) Act21; the gap between the European and the purportedly less well-targeted US law of monopolization22; a

14 Earlier such challenges include Lande, “Wealth Transfers as the Original and Primary Concern of Antitrust: The Effciency Interpretation Challenged”, (1999) 50 Hastings L.J. 871, 874 (“Congress was concerned principally with preventing ‘unfair’ transfers of wealth from consumers to frms with market power”.); Pitofsky, “The Political Content of Antitrust”, (1979) 127 U. Pa. L. Rev. 1051, 1075 (“[I]f the free-market sector of the economy is allowed to develop under antitrust rules that are blind to all but economic concerns, the likely result will be an economy so dominated by a few corporate giants that it will be impossible for the state not to play a more intrusive role in economic affairs.”); Stucke, “Reconsidering Antitrust’s Goals”, (2012) 53 B.C. L. Rev. 551, 624 (rejecting “[a] ntitrust’s current objectives of promoting consumer welfare and effciency” in favor of using antitrust to “secure political, economic, and individual freedoms”). 15 See Averitt and Lande, “Consumer Choice: The Practical Reason for Both Antitrust and Consumer Protection Law”, (1998) 10 Loy. Consumer L. Rev. 44 (Averitt and Lande, “Consumer Choice”); Averitt and Lande, “Consumer Sovereignty: A Unifed Theory of Antitrust and Consumer Protection Law”, (1997) 65 Antitrust L.J. 713 (Averitt and Lande, “Consumer Sovereignty”); Averitt and Lande, “Using the ‘Consumer Choice’ Approach to Antitrust Law”, (2007) 74 Antitrust L.J. 175 (Averitt and Lande, “Using Consumer Choice”); Lande, “Consumer Choice As the Ultimate Goal of Antitrust”, (2001) 62 U. Pitt. L. Rev. 503. 16 Heyer (n. 12). 17 Salop (n. 12). 18 Averitt and Lande, “Using Consumer Choice” (n. 17) at 182. 19 Ibid. at 176 (“The current price and effciency models can deal only awkwardly with nonprice competition. At best, they try to help consumers achieve nonprice objectives indirectly, by folding them into the price analysis in the form of quality adjusted prices, or by assuming that markets that are price competitive will also be competitive for nonprice preferences”.). 20 Ibid. at 178. 21 Averitt, “The Meaning of ‘Unfair Acts or Practices’ in Section 5 of the Federal Trade Commission Act”, (1981) 70 Geo. L.J. 225, 281–82. Section 5 makes unlawful, and authorizes the FTC to prohibit, “unfair methods of compe- tition.” 15 U.S.C., s. 45(a)(1). 22 Rosch, Commissioner, US Federal Trade Commission, “Can Consumer Choice Promote Trans-Atlantic Convergence of Competition Law and Policy?” (Remarks Before the Concurrences Conference on ‘Consumer Choice’: An Emerging Standard for Competition Law”, Brussels, , 8 June 2012), (last visited 2 Feb. 2016).

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188 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Joshua D. Wright & Douglas H. Ginsburg

unifed theory of competition and consumer protection law23; and the role of behavioral economics in antitrust24. Averitt and Lande correctly claim that adopting the central idea of the consumer choice framework, i.e., the loss of a “choice” (however defned) is a cognizable antitrust injury even when associated with a reduction in price or an increase in output, would repre- sent a revolution in antitrust thinking. As we explain, that revolution would have seriously detrimental consequences for consumers. The fatal faw in the consumer choice standard is that it simply, indeed simplistically, rejects economic analysis of consumer preferences as the fundamental guiding principle of antitrust analysis, including the preferences consumers express in making unavoid- able tradeoffs between price and non-price values. The consumer choice standard rejects even the view that the role of antitrust is to protect the competitive process as one that produces desirable outcomes (i.e., consumer welfare) in favor of an antitrust regime that analyzes non-price competition as a standalone and inviolable virtue. Part II of this Essay reviews the consumer choice standard as its proponents present it. We demonstrate that the consumer choice standard is necessarily a noneconomic approach to antitrust analysis; that is, it is inconsistent with not only the economic welfare standard but also with much of modern economic theory and practice, despite its authors occasionally restating it in economic terms as a call for greater attention to non-price competition. Part III demonstrates that the consumer choice standard, like other noneconomic objec- tives of antitrust that have been rejected in the past, would inevitably reduce both total and consumer welfare. Ironically, it would also diminish what the authors most value: non-price competition, product variety, and innovation.

23 Averitt and Lande, “Consumer Sovereignty” (n. 17). 24 Stucke, “Behavioral Economics at the Gate: Antitrust in the Twenty-First Century”, (2007) 38 Loy. U. Chi. L.J. 513.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 189 The goals of antitrust: welfare trumps choice

II. The consumer choice standard

The consumer choice standard was born out of a concern that the traditional welfare approach ignores the benefts that non-price competition generates for consumers. Averitt and Lande occasionally promote a milder form of the choice standard, one based upon welfare but, they say, “fully attentive to empirical evidence on purchasers’ nonprice, as well as price, preferences”25. They point to supposed failures of the standard approach, which, owing to conceptual and technological shortcomings, they claim ignores or insuffciently takes account of non-price competition26. The primary faw in the traditional welfare approach, according to Averitt and Lande, is economists’ purported inability to quantify and incorporate qualitative considerations into the price dimension, with which they are more familiar, and their consequent failure to account fully for consumer welfare gains and losses associated with changes in non-price competition27. For example, Averitt and Lande assert that “[o]nly rarely do economists make serious attempts” to evaluate the welfare consequences of inno- vations and, even when economists do so, Averitt and Lande are skeptical of the process by which they “somehow” generate quality-adjusted prices28. This critique is at the very least an overstatement. Quality-adjusted prices have been part of the industrial organization toolkit since the early 1900s29. The Bureau of Labor

25 Averitt and Lande, “Using Consumer Choice” (n. 17) at 184. 26 Ibid. at 1845–86. 27 Ibid. 28 Ibid. at 178 n.7, 186 n.29. 29 See, e.g., Bureau of Labor Statistics, BLS Handbook of Methods (1997), ch. 14, at 3–4, (last visited 2 Feb. 2016) (“When a company respondent reports a price that refects a physical change in a product, the BLS uses one of several quality adjustment methods”.); Fisher, The Making Of Index Numbers: A Study Of Their Varieties, Tests, and Reliability (Boston, 1922), 459-60 (“The frst index numbers were of wholesale prices and most index numbers are such today. For a long time it was thought that goods at retail were not suffciently standardized as to quality to make retail index numbers practicable. This diffculty has not been fully overcome. But index numbers of retail prices of foods were begun in the United States in 1907, and today index numbers of retail prices are very common in most countries”.); National Bureau of Economic Research, The Price Statistics of the Federal Government (1961), (last visited 2 Feb. 2016); Waugh, Quality as a Determinant of Vegetable Prices: A Statistical Study of Quality Factors Influencing Vegetable Prices in the Boston Wholesale Market (New York, 1929), 47 (“By making an adjustment to allow for the variation in these quality factors, the following estimate was made of the average price”).

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190 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Joshua D. Wright & Douglas H. Ginsburg

Statistics has used this tool for nearly a century30. Furthermore, quality-adjusted prices are frequently used in industrial organization economics31 and in antitrust analysis32. If the consumer choice standard were no more than an evidence-based approach to incorporating non-price competition into the traditional welfare standard, it would be unobjectionable. Averitt and Lande, however, clearly contemplate a departure from the welfare standard in favor of a strong presumption of illegality for any business conduct that reduces the number of choices available to consumers33. The faw in this approach is that both economic theory and empirical evidence are replete with examples of business conduct that simultaneously reduces choice and increases welfare in the form of lower prices, increased innovation, or higher quality products and services. Nonetheless, Averitt and Lande propose to defne an antitrust violation as “an activity that unreasonably restricts the totality of price and non-price choices that would otherwise have been available”34 , or alternatively, as business conduct “that harmfully and signifcantly limits the range of choices that the free market, absent the restraints being challenged, would have provided”35.

30 See, e.g., Mitchell, “Index Numbers of Wholesale Prices in the United States and Foreign Countries”, (1915) 284 Bulletin of the US Bureau of Labor Statistics 5, 10 (“The grading and standardizing of commodities increased the number of articles which could be safely accepted as substantially uniform in quality from one year to the next”.). 31 For representative examples in the economics literature, see Hazlett, “Prices and Outputs Under Cable TV Reregulation”, (1997) 12 J. Reg. Econ. 173; Wise and Duwadi, “Competition Between Cable Television and Direct Broadcast Satellite: The Importance of Switching Costs and Regional Sports Networks”, (2005) 1 J. Competition L. & Econ. 679 (“We fnd that, when quality-adjusted prices for basic cable services increase substantially, subscribers will switch from cable to [direct broadcast satellite], presumably at the point at which the price change is larger than the cost of switching”.). On modern approaches to generating quality-adjusted prices, see Gordon and Griliches, “Quality Change & New Products”, (1997) 87 Am. Econ. Rev. 84; Hausman, “Sources of Bias and Solutions to Bias in the Consumer Price Index”, (2003) 17 J. Econ. Persp. 23. For examples of the economic approach to valuing the consumer welfare gains from the introduction of new products, adjusted for quality, see Hausman, “Valuation of New Goods Under Perfect and Imperfect Competition”, in Bresnahan and Gordon (eds.), The Economics of New Goods (Chicago, 1997), 209; Petrin, “Quantifying the Benefts of New Products: The Case of the Minivan”, (2002) 110 J. Poli. Econ. 705. 32 Including antitrust analysis at the Federal Trade Commission and by Federal Trade Commission economists. See, e.g., Balan and Deltas, “Better Product at Same Cost, Lower Sales and Lower Welfare” (Fed. Trade Comm’n Working Paper no. 312, 2012), (last visited 2 Feb. 2016); Kessler, “Can Ranking Hospitals on the Basis of Patients’ Travel Distances Improve Quality of Care?” (Nat’l Bureau of Econ. Research Working Paper no. 11419, 2005), (last visited 2 Feb. 2016). Merger simulation models also account for quality. Merger simulations estimate a choice model and then simulate consumer substitution patterns explicitly taking quality into account when the merged frms internalize price competition between them. See Tenn et al., “Mergers When Firms Compete by Choosing Both Price and Promotion”, (2010) 28 Int’l J. Indus. Org. 695; Werden et al., “Merger Simulation”, in Harkrider (ed.), Economet- rics: Legal, Practical, and Technical Issues (Chicago, 2005), 269; Werden and Froeb, “The Effects of Mergers in Differentiated Products Industries: Logit Demand and Merger Policy”, (1994) 10 J. L. Econ. & Org. 407; Werden and Froeb, “Unilateral Competitive Effects of Horizontal Mergers”, in Buccirossi (ed.), Handbook of Antitrust Economics (2008), 43. Courts have also recognized the impact of business conduct upon quality-adjusted prices. See, e.g., Roland Mach. Co. v. Dresser Indus., Inc., 749 F.2d 380, 395 (7th Cir. 1984) (“If, as [Defendant] argues, exclusive dealing leads dealers to promote each manufacturer’s brand more vigorously than would be the case under nonexclusive dealing, the quality-adjusted price to the consumer (where quality includes the information and other services that dealers render to their customers) may be lower with exclusive dealing than without, even though a collateral effect of exclusive dealing is to slow the pace at which new brands . . . are introduced”.). 33 Averitt and Lande, “Using Consumer Choice” (n. 17) at 184. 34 Ibid. at 182. 35 Ibid. at 184.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 191 The goals of antitrust: welfare trumps choice

Understanding the business arrangements that restrict the number of price and non-price choices facing consumers, and that would therefore violate the consumer choice standard, requires an of the number of choices that would be available to consumers in the counterfactual scenario without the restraint. The types of conduct that would be illegal under the consumer choice standard, and the implications of that standard, are best illustrated with a series of examples drawn from Averitt and Lande’s analyses. We present one example for each of the three major concerns of antitrust law: cartels, mergers, and monopolization. We begin with the least controversial of business arrangements under the antitrust laws: naked price-fxing arrangements are per se illegal under the current welfare standard and also would be under the choice standard. Averitt and Lande, however, object to more than just the allocative ineffciency of price-fxing. “Under the choice approach”, they say, “[cartels] are undesirable” because “[p]rices fxed at an artifcial level rob consumers of the competing price options to which they are entitled”36. There is no debating that cartels restrict output and increase price; they also reduce the variance of prices within a market37. Averitt and Lande make clear that under the choice standard, pricing arrangements that restrict the availability of price options would be unlawful even if they do not increase average prices38. Such a rule would amount to harmless error in the case of naked price-fxing cartels, but it exposes some troublesome implications of the consumer choice approach in the area of horizontal restraints that involve prices as well as pricing practices more generally. Consider Broadcast Music, Inc. v. Columbia Broad. Sys., Inc.39, which involved the American Society of Composers, Authors, and Publishers (ASCAP) and Broadcast Music, Inc. (BMI), joint ventures by which thousands of owners of copyrighted music established blanket licensing agreements for use of their music on network television programs40. The Supreme Court analyzed the restraint and concluded it was unlikely to reduce welfare41. In fact, the Court found the restraint necessary to the distribution of the music, which would not otherwise have been practical because it would have required thousands of individual transactions between composers and consumers (here

36 Ibid. at 187 n.35. 37 See, e.g., Abrantes-Metz et al., “A Variance Screen for Collusion”, (2006) 24 Int’l J. Indus. Org. 467, 473 (case study showed price-rigging “conspiracy not only increased the but reduced its variance as well”.); Connor, “Collusion and Price Dispersion”, (2005) 12 Applied Econ. Letters 335, 336 (“[C]artelization suggest[s] a reduction in price variance”.). 38 Averitt and Lande, “Using Consumer Choice”, (n. 17) at 187 n. 35. 39 441 U.S. 1 (1979). 40 Ibid. at 4–5. 41 See ibid. at 20–21.

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192 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Joshua D. Wright & Douglas H. Ginsburg represented by broadcasters)42. All the same, the blanket license was the product of an agreement among competitors to reduce dramatically the number of pricing options that might have been available to consumers but for the restraint43. This welfare- increasing arrangement necessarily violates the consumer choice standard. The economic logic of the choice framework is also problematic for the many business practices that involve price discrimination. Price discrimination is generally effcient and welfare increasing44. For simplicity, imagine a monopolist able to engage in perfect price discrimination (i.e., charging each individual the maximum price that consumer is willing to pay instead of offering a single, uniform price to all—this is what colleges and universities with market power are doing when they set a high price and then give scholarships based upon “ability to pay”). Price discrimination reduces the availability of pricing options in the marketplace because the pricing arrangement deprives some consumers of their preferred option—namely, the option to pay a uniform and lower price—that would be available in the absence of discriminatory pricing. Although each consumer is still offered a single price, and thus the number of pricing options available to each consumer remains unchanged, it is clear that the choice standard would condemn this practice45. Recall that for Averitt and Lande, price-fxing is condemned not because it reduces the total number of prices available in the market—and it need not do so, for example, when a single competitive price is replaced by a single cartel price—but because consumers are deprived of pricing options. Price discrimination necessarily results in higher prices for some consumers than they would otherwise be offered. Price discrimination in the case of our example of a perfectly price-discriminating monopolist is effcient; but price discrimination is also a common feature of compet- itive markets. The ubiquity of price discrimination in the modern economy renders troublesome the implication that the choice model would condemn it. Averitt and Lande also posit a merger between two frms—call them A and B—in a market with fve frms (also including C, D, and E)46. We are asked to assume that A, B, and C have the capacity to compete by innovating; that “three frms are enough to have effective price competition in this industry; and that three frms are also enough

42 Ibid. at 21. 43 Ibid. at 32–33 (J. Stevens, dissenting). 44 This is true in the static economic welfare case. The welfare case in favor of price discrimination becomes stronger when one considers the role of price discrimination in intensifying upstream competition and dynamic effciencies such as the incentive to innovate. See Cooper et al., “Does Price Discrimination Intensify Competition? Implications for Antitrust”, (2005) 72 Antitrust L.J. 327; Klein and , Jr., “Competitive Price Discrimination as an Antitrust Justifcation for Intellectual Property Refusals to Deal”, (2003) 70 Antitrust L.J. 599. This economic logic highlights a relationship entirely ignored in the choice analysis between business arrangements restricting choice and simul- taneously increasing incentives to innovate or to improve quality, thus increasing choice. The choice model provides no method, in the absence of welfare analysis, of analyzing these tradeoffs. 45 The choice standard would also condemn a variety of other discriminatory pricing arrangements, not limited to perfect price discrimination, for the reasons described in the text. 46 Averitt and Lande, “Using Consumer Choice” (n. 17) at 246.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 193 The goals of antitrust: welfare trumps choice

for effective choice or innovation competition”47. They conclude that such a merger would likely be lawful under a welfare approach because enough frms remain for the market to be competitive but unlawful under their choice analysis because it would reduce the number of independent sources of choice or of innovation to less than the optimal number48. Ignoring for a moment that we are very unlikely ever to know the optimal number of frms for innovation in a given market49, and certainly cannot do so with the current set of economic tools50, the merger example sheds additional light upon problems with the choice model. The critical point is that the choice model assumes a strong relation- ship between market structure and innovation, the latter under the rubric of choice: in short, fewer frms generate less innovation and therefore fewer choices. That strong presumption simply is not warranted by the evidence. Not surprisingly, therefore, it is also inconsistent with modern merger analysis, which has retreated from structural presumptions because they are not probative of likely competitive effects, including competitive effects associated with non-price dimensions of competition51. The merger example highlights another problem with the application of the choice standard. The authors’ example, in which it is known how many frms are “suffcient” for non-price and price competition, not only assumes knowledge of facts that are not ordinarily known and in most cases are unknowable, it also obfuscates the key economic trade-off at issue in analyzing a horizontal merger. A and B might be merging to achieve economies of scale or other effciencies that would reduce costs and put downward pressure on prices, and might increase innovation. The key question is whether that downward pricing pressure yields welfare gains (under a consumer welfare standard rather than a total welfare standard) suffcient to offset potential consumer welfare losses insofar as the merger reduces price or non-price competition. The welfare approach immediately highlights the right question and provides a framework for the answer. The choice standard avoids the relevant economic questions—how does the merger change the incentives to compete, and what implications do those changed

47 Ibid. 48 Ibid. 49 See, e.g., Katz and Shelanski, “Mergers and Innovation”, (2007) 74(1) Antitrust L.J. 22 (“The literature addressing how market structure affects innovation (and vice versa) in the end reveals an ambiguous relationship in which factors unrelated to competition play an important role”.). 50 See Ginsburg and Wright, “Dynamic Analysis and the Limits of Antitrust Institutions”, (2012) 78(1) Antitrust L.J. 12. 51 See U.S. Department of Justice & Federal Trade Commission, Horizontal Merger Guidelines (2010), s. 4 (“The measurement of market shares and market concentration is not an end in itself, but is useful to the extent it illumi- nates the merger’s likely competitive effects.”); see also Shapiro, “The 2010 Horizontal Merger Guidelines: From Hedgehog to Fox in Forty Years”, (2010) 77 Antitrust L.J. 701, 707–08 (“Many observers have noted specifcally that the 2010 Guidelines place less weight on market shares and market concentration than did predecessors . . . The revised Guidelines emphasize that merger analysis ultimately is about competitive effects”.); Wright, “Aban- doning Antitrust’s Chicago Obsession: The Case For Evidence-Based Antitrust”, (2012) 78 Antitrust L.J. 241.

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194 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Joshua D. Wright & Douglas H. Ginsburg incentives, if any, have for welfare?—and instead presumes a loss to consumers based upon market structure. In this way, the choice standard imposes a presumption that operates much like the now discredited presumptions of pre-modern merger analysis refected in the 1968 Horizontal Merger Guidelines52. One further example underscores the tendency of the choice standard to distract from the key economic questions and to avoid analysis of the relevant tradeoffs. Most exclusive dealing arrangements reduce choice in the sense relevant to the choice standard. An exclusive dealing arrangement between a manufacturer and retailer or set of retailers necessarily reduces the choices available to the consumer at the retailer’s store(s). For the sake of simplicity, assume the manufacturer’s exclusive dealing arrangements with its retailers and distributors also generate a net reduction in consumer choice, expressed as a loss of product variety in the marketplace. Under the choice standard, nearly all exclusive dealing contracts will be deemed unlawful because they restrict the number of non-price choices (e.g., other brands) available to consumers compared to the number that would be available but for the exclusive dealing contracts. Though exclusive dealing arrangements can and do pose competitive risks, they are generally effcient53. There are a number of well-known effciency justifcations for exclusive dealing. For example, some exclusive arrangements involve intensifying competition for scarce shelf space or distribution and therefore result in lower prices for consumers54. The various effciency justifcations for exclusives pose the same types of problems discussed above in the merger example, because the choice framework applies a presumption of illegality to conduct that is likely to improve consumer welfare, accounting for both the gains to consumers in the form of lower prices and any losses attributable to some consumers substituting a less-preferred brand for a more-preferred one55. The exclusive dealing example also exposes a more serious problem with the internal consistency of the choice paradigm. Many exclusive dealing arrangements do not just increase price competition; they are intended to align the incentives of manu- facturers with those of distributors to supply non-price, promotional services56 or to

52 US Department of Justice, 1968 Merger Guidelines (1968), (last visited 2 Feb. 2016). 53 See generally Abbott and Wright, “Antitrust Analysis of Tying Arrangements and Exclusive Dealing”, in Hylton (ed.), Antitrust Law and Economics (Cheltenham, UK, 2010), 183. 54 See, e.g., Cooper et al. (n. 46) at 342–43; Klein and Murphy, “Exclusive Dealing Intensifes Competition for Distribution”, (2008) 75 Antitrust L.J. 433, 443 (Klein and Murphy, “Exclusive Dealing”). 55 Ibid. at 436. 56 See Klein and Wright, “The Economics of Slotting Contracts”, (2007) 50 J. L. & Econ. 421, 432–33; see also Klein and Lerner, “The Expanded Economics of Free-Riding: How Exclusive Dealing Prevents Free-Riding and Creates Undivided Loyalty”, (2007) 74 Antitrust L.J. 473, 489–90; Klein and Murphy, “Vertical Restraints as Contract Enforcement Mechanisms”, (1988) 31 J. L. & Econ. 265, 266 (Klein and Murphy, “Vertical Restraints”).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 195 The goals of antitrust: welfare trumps choice induce asset specifc investments that might facilitate innovation57. These non-price effciencies may simultaneously reduce present choices but increase future choices by providing incentives to invest and to innovate. The choice standard provides no analytical framework with which to assess these tradeoffs. Indeed, while Averitt and Lande pay lip service to the importance of taking seriously the tradeoffs between various forms of competition—including price, non-price, innovation, quality, and others—the examples betray a structural presumption of illegality to be imposed upon a broad range of business conduct that is generally thought to be effcient under conventional welfare analysis, including welfare analysis incorporating non-price effects58.

III. Welfare trumps choice

The shift from myriad social, political, and protectionist goals to welfare has produced signifcant benefts for consumers and brought coherence to antitrust law. Put simply, the welfare approach has served antitrust well; Averitt and Lande acknowledge as much59. They are not alone. The Antitrust Modernization Commission observed that “[f]or the last few decades courts, agencies, and antitrust practitioners have recognized 60 consumer welfare as the unifying goal of antitrust law” . The choice standard, as noted in Part II, is not designed to sharpen the welfare paradigm but to replace it with “nothing less than a new paradigm of the antitrust laws”61. Averitt and Lande take pains to comfort readers that the choice approach is “not a return to the ‘social and political values’ paradigm of the 1960s and 1970s, which proved standard- less and unduly hostile to business”62. As we have demonstrated, however, the defect

57 Klein and Murphy, “Exclusive Dealing” (n. 56) at 443–44 (describing the role of exclusive dealing in facilitating asset-specifc investments); Klein et al., “Vertical Integration, Appropriable Rents, and the Competitive Contracting Process”, (1978) 21 J. L. & Econ. 297, 302–07 (discussing contractual solutions to opportunistic frm behavior). 58 Commissioner Rosch has endorsed the choice standard. It is unclear whether the endorsement is anything more than a call for greater attention to non-price competition in the application of welfare standards. Commissioner Rosch agrees the goal of antitrust should be to promote consumer welfare, but he frst endorsed the consumer choice approach as consistent with that goal because it focuses upon harms that result when a “frm’s conduct impairs the choices that free competition brings to the marketplace.” Rosch, Commissioner, US Federal Trade Commission, “Rewriting History: Antitrust Not As We Know It . . . Yet” (Remarks at the ABA Antitrust Section 2010 Spring Meeting, Washington, D.C., 23 Apr. 2010, (last visited 2 Feb. 2016). As discussed above, however, the consumer choice standard is in signifcant tension with the consumer welfare standard. More recently Rosch has suggested a welfarist approach to consumer choice, which he observed may best be viewed as “a strand of consumr welfare that is promoted whenever we enforce the antitrust laws against unreasonable restraints on output”. Rosch (n. 24) at 13. 59 Averitt and Lande, “Using Consumer Choice” (n. 17) at 175 (describing the welfare goals of antitrust as “an immense improvement over their predecessors, and they have served the feld competently for a generation, producing reasonably accurate results in most circumstances”). 60 Antitrust Modernization Commission, Report and Recommendations (2007), 35, (last visited 2 Feb. 2016). 61 Averitt and Lande, “Using Consumer Choice” (n. 17) at 178. 62 Ibid. at 177.

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196 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Joshua D. Wright & Douglas H. Ginsburg with the choice standard is that it is inconsistent with the modern economic approach to antitrust analysis that focuses courts and agencies not just upon the right outcomes (i.e., prices, quantities, innovation, quality, etc.), but also upon understanding the relationship between the restraint at issue and those outcomes and the tradeoffs between different and sometimes inversely related dimensions of competition. Without the discipline economic analysis provides by reducing the range of plausible outcomes in a given case and, thus, limiting the discretion of agencies and courts, it is unclear why Averitt and Lande think their new paradigm will not allow the same or other political and social values to trump welfare in the name of choice63. Further, the choice standard will certainly reduce welfare. To the extent the choice standard does indirectly focus upon economic welfare, Averitt and Lande’s examples suggest their model embraces an effects-based analysis rooted in simple structural presumptions relating the number of frms or brands in a market to consumer welfare. These presump- tions have no basis in modern economic theory, are not supported by empirical evidence, and are likely to provide misleading answers to the very questions concerning non-price competition and innovation that the choice standard was designed to address64. Before we discuss resale price maintenance (RPM)—an example of the advantages of welfare analysis over the choice model—consider this basic but underappreciated point concerning the economic theory of consumer choice as it relates to antitrust welfare standards: nothing in the microeconomic theory of consumer choice and the associated concept of revealed preference65 requires antitrust analysis to ignore or to give less weight to non-price dimensions of competition. Economists consult consumers’ revealed preferences, as expressed in their actual choices, in order to recover information about their welfare. The standard microeconomic framework requires the assumption that consumer preferences are relatively stable, but those preferences can and do incorpo- rate various non-price values. Within the standard model, consumers economize on tradeoffs by evaluating different bundles of goods and services with different price and non-price attributes and make purchasing decisions subject to a . Therefore, to incorporate non-price elements into the standard model, as a conceptual matter, no revolution is required. Moreover, as a practical matter, nearly all merger simulation models, a variety of other applications in industrial organization, and

63 For one application of the choice framework to justify increased regulation of media mergers on social and political grounds, see Stucke and Grunes, “Toward a Better Competition Policy for the Media: The Challenge of Developing Antitrust Policies that Support the Media Sector’s Unique Role in Our Democracy”, (2009) 42 Conn. L. Rev. 101. 64 For critiques of the behavioral economics antitrust program, see Ginsburg and Moore, “The Future of Behavioral Economics in Antitrust Jurisprudence”, (2010) 6 Competition Pol’y Int’l 89; Wright and Stone II, “Misbehavioral Economics: The Case Against Behavioral Antitrust”, (2012) 33 Cardozo L. Rev. 1517. 65 Varian, Intermediate Microeconomics: A Modern Approach (New York, 8th ed. 2010), 121 (describing with the statement: “If a bundle X is chosen over a bundle Y, then X must be preferred to Y” (internal quotation marks omitted).).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 197 The goals of antitrust: welfare trumps choice antitrust analysis specifcally contemplate consumers making decisions among products differentiated in both price and quality66. We focus here upon two primary advantages of the welfare standard over the choice standard in cases involving non-price competition and innovation. First, the welfare approach highlights tradeoffs between various forms of competition and their effects. This is critical because, contra Averitt and Lande, a marginal increase in the number of choices available in a market could increase, decrease, or have no effect upon non-price competition. Second, the welfare approach highlights, rather than obfuscates, the relevant economic forces at work. Again, this advantage is critical to coherent and predictable antitrust analysis under the rule of reason67 because economic analysis illuminates how a business arrangement affects the incentives of frms and of consumers and which tradeoffs matter in any particular case, and can give a sense of the magnitudes of the competitive effects at issue. We explore these advantages with an example showing how welfare analysis focuses upon the right questions and avoids the errors the choice framework would bring to such cases. In Leegin Creative Leather Products, Inc. v. PSKS, Inc.68, the Supreme Court stipulated that minimum resale price maintenance would be analyzed under the rule of reason69. The Court deemed the previously longstanding per se rule against RPM inappropriate because, although RPM could be anticompetitive, the economic theory and evidence simply did not demonstrate that the practice “always or almost always tend[s] to restrict competition and decrease output”70. The fundamental economic question concerning RPM—both minimum and maximum— especially in a competitive retail market with no free riding71, is whether retailers lack

66 See (nn. 33–34) and accompanying text. We are more sympathetic to the view that neither the theoretical relation- ship between competition and innovation nor the available empirical evidence provides suffcient economic knowledge for reliable predictions required for antitrust analysis. See Ginsburg and Wright (n. 52) at 1. However, Averitt and Lande appear to endorse these presumptions and “innovation market” analysis. See Averitt and Lande, “Using Consumer Choice” (n. 17) at 187. 67 Obviously, per se rules and de facto per se rules are quite predictable even if they are welfare decreasing and anticompetitive, as Justice Potter Stewart famously noted in his dissent in United States v. Von’s Grocery Co., 384 U.S. 270, 301 (1966) (Stewart, J., dissenting) (criticizing the majority’s analysis while observing “[t]he sole consistency that I can fnd is that in litigation under § 7, the Government always wins”). 68 551 U.S. 877 (2007). 69 The Court had overruled the per se rule against maximum RPM 10 years earlier in State Oil Co. v. Khan, 522 U.S. 3 (1997). See Klein, “Distribution Restrictions Operate by Creating Dealer Profts: Explaining the Use of Maximum Resale Price Maintenance in State Oil v. Kahn”, Sup. Ct. Econ. Rev. 7 (1999). 70 Leegin, 551 U.S. at 894 (quoting Business Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 723 (1988)); see Brief of Amici Curiae Economists in Support of Petitioner at 16, Leegin, 551 U.S. 877 (No. 06-480), 2007 W.L. 173681 (“In the theoretical literature, it is essentially undisputed that minimum RPM can have procompetitive effects and that under a variety of market conditions it is unlikely to have anticompetitive effects”). The best estimate of the prevalence of collusion in RPM cases is no greater than 15 percent. See Ippolito, “Resale Price Maintenance: Empirical Evidence from Litigation”, (1991) 34 J. L. & Econ. 263, 270. 71 For an effciency explanation of RPM in the presence of interdealer free riding on promotional services, see Telser, “Why Should Manufacturers Want Fair Trade?”, (1960) 3 J. L. & Econ. 86, 91-93.

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198 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Joshua D. Wright & Douglas H. Ginsburg a suffcient incentive to promote the manufacturer’s product adequately. In other words, why is competition at the retail level not a suffcient incentive to provide the effcient level of promotional services? It is a question that has stumped many, including Justice Breyer, who dissented in Leegin72. Interestingly, the opinion of the Court provides an answer, citing Klein and Murphy’s seminal article on the economics of vertical restraints, which analyzed this question more than 20 years ago73. Klein and Murphy demonstrate that retailers will undersupply promotional services because manufacturers do not take into account the incremental proft margin the manufacturer earns on promotional sales when some, but not all, consumers value the promotional service. Manufacturers and retailers have divergent interests with respect to the retailers supplying presale promotional effort. The confict derives from two economic factors common in markets where RPM is observed. First, a manufacturer’s proft margin (the difference between the wholesale price and the marginal cost of production) on an incremental sale induced by retailer promotion is generally larger than the retailer’s proft margin (the difference between the retail and wholesale prices)74. Second, the manufacturer’s incremental sales owing to the retailer’s brand-specifc efforts are often greater than the retailer’s incremental sales. When a retailer provides services to promote a specifc manufacturer’s product, the increase in total retail sales is not generally suffcient to offset the lower retail proft margin. In fact, when a multiproduct retailer promotes a particular brand, for example Coca-Cola, the primary effect is to shift demand among brands, not to increase the aggregate quantity demanded for all brands75. When these conditions exist, we expect to observe manufacturers compensating retailers for providing promotional services. One such method of compensation involves RPM; others involve per-unit time payments, such as slotting contracts, cooperative marketing arrangements, or a reduction in the wholesale price. The fundamental objective of all such payments is to provide a premium stream of revenue to retailers as an inducement to provide promotional services. These promotional services are valuable to some

72 551 U.S. at 921 (Breyer, J., dissenting) (“I do not understand how, in the absence of free riding (and assuming competitiveness), an established producer would need resale price maintenance. Why, on these assumptions, would a dealer not ‘expand’ its ‘market share’ as best that dealer sees ft, obtaining appropriate payment from consumers in the process? There may be an answer to this question. But I have not seen it”.). 73 See ibid. at 892 (majority opinion) (citing Klein and Murphy, “Vertical Restraints” (n. 58)). For a recent restatement and extension of Klein and Murphy’s analysis, see Klein, “Competitive Resale Price Maintenance in the Absence of Free Riding”, (2009) 76 Antitrust L.J. 431. 74 This is highly likely to be the case where manufacturers produce branded, differentiated goods and face substantially less elastic demand than do retailers. Because retailers do not take into account the additional proft margin the manufacturer earns on promotional sales, their incentive to provide promotion will be insuffcient from the manu- facturer’s point of view. For a more complete analysis of the incentive confict-based inter-retailer demand effects, see Klein and Wright (n. 58); Winter, “Vertical Control and Price Versus Nonprice Competition”, (1993) 108 Q.J. Econ. 61. 75 In other words, promotion-induced sales of Coca-Cola are likely to be at least partially offset by a decrease in the sales of other soda products.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 199 The goals of antitrust: welfare trumps choice consumers but not others; their provision is effcient, however, in the sense that they increase output. Indeed, despite claims to the contrary76, understanding RPM as facilitating the supply of non-price promotional services implies that RPM can both increase output and reduce retail prices77. The welfare approach not only accounts for the non-price amenities associated with RPM; it also answers the fundamental question why frms adopt RPM arrangements. We are therefore equipped with a better understanding of the competitive effects of RPM on both price and non-price dimensions. An important implication is that antitrust agencies and courts should evaluate RPM by its effects not upon price, but upon output. The welfare approach thus illuminates the correct questions, deepens our understanding of the business practice, and can identify for courts and agencies what types of evidence are useful in determining its actual impact and role in the competitive process. The choice framework, on the other hand, approaches RPM without regard to its welfare effects. Averitt and Lande briefy mention RPM as potentially harmful because it tends to decrease the number of price options available in the marketplace78. RPM restricts the pricing freedom of retailers and, thus, inevitably restricts the pricing options avail- able to consumers; it is therefore presumably suspect under the choice framework. Commissioner Rosch agrees and claims that, after Leegin, evidence of a reduction in consumer choice is suffcient to make out a prima facie case that a defendant’s RPM arrangement violates section 1 of the Sherman Act79. Rosch argues this is the law because Leegin permits consumers to choose between buying from a “no frills” discounter and buying at a higher price from a reseller offering pre- or post-sale services

76 Critics of RPM claim that RPM either cannot or does not prevent some retailers from free riding on the promotional services provided by other retailers and therefore infer an anticompetitive effect from any increase in retail prices. See Grimes, “The Path Forward After Leegin: Seeking Consensus Reform of the Antitrust Law of Vertical Restraints”, (2008) 75 Antitrust L.J. 467; Lao, “Free Riding: An Overstated, and Unconvincing, Explanation for Resale Price Maintenance”, in Pitofsky (ed.), How the Chicago School Overshot the Mark: The Effect of Conservative Economic Analysis on U.S. Antitrust (Oxford, 2008), 196. 77 Those who claim RPM always increases the retail price contemplate a manufacturer increasing the retailer’s margin by holding the wholesale price constant, increasing the retail price above competitive levels, and imposing RPM to ensure that price competition does not dissipate the additional proft margin. A manufacturer can achieve the same effect by reducing both the wholesale price by an amount greater than it reduces the retail price—thus, still increasing the retailer’s proft margin and inducing provision of the presale services. Consequently, RPM does not necessarily result in higher retail prices as a matter of economic theory. Rather, one should think of the provision of presale services as reducing the “effective price” paid by the consumers who value those services; that is, a reduction in price to marginal consumers moving the manufacturer along the . Similarly, this well- accepted analysis of RPM implies that evaluating only the price effects of RPM is an error. Because retail prices might increase under both the anticompetitive cartel explanation of RPM as well as under the effciency explana- tion, a better test is to evaluate the effects of the restraint upon output. 78 Averitt and Lande, “Using Consumer Choice” (n. 17) at 189. 79 Rosch, Commissioner, US Federal Trade Commission, “Convergence and Comity: Still Improbable?” (Remarks Before the Friends of Europe Roundtable on New Transatlantic Trends in Competition Policy 7, Brussels, Belgium, 10 June 2010), (last visited 2 Feb. 2016) (“[A]fter the Supreme Court’s Leegin decision, injury to consumer choice (as well as an increase in price) is now recognized as injury to consumer welfare in the United States”.).

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200 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Joshua D. Wright & Douglas H. Ginsburg along with the product80. “Or, to put it in economic terms, a higher resale price may be justifed by evidence that, despite the higher price, there has been an increase in output”81. Leegin neither holds nor says that. The Court abandoned the per se rule against minimum RPM and, in so doing, gave manufacturers the legal ability, by contract, to prevent retailers from discounting the price of their product. Although the Court acknowledged that RPM might result in a greater diversity of price and quality options for consumers82, nowhere did the Court suggest that merely demonstrating a reduction in choice is suffcient to shift to the defendant the burden of justifying its RPM policy with evidence of increased output. On the contrary, the Court rejected arguments that isolate a single dimension of competition, including price, to demonstrate that RPM is likely to have had an anticompetitive effect in a particular case precisely because an increase in price is not inconsistent with RPM having increased consumer welfare when non-price benefts are taken into account83. The Court is not as easily moved off the welfarist foundation of modern antitrust law as Commissioner Rosch seems to think or to wish. There are, to be sure, modern antitrust decisions in which courts generally discuss choice or product variety as they relate to competitive effects, which Averitt and Lande cite in support of their argument that the choice standard is consistent with prevailing law84. That there are such cases is not surprising, however: holding price, output, and quality constant, eliminating a choice valued by at least some consumers does reduce welfare. That does not make choice rather than welfare a goal of antitrust law, much less an adequate guide to antitrust decision-making. The very point of analyzing the economics of business arrangements, and a point that has not escaped the courts, is that those arrangements arise not randomly but rather because of their effects upon prices, output, quality, and innovation. Economic analysis allows a better understanding of how business arrangements affect incentives to compete along different margins, how to assess those tradeoffs in theory and in practice, and how to analyze the ultimate effect of those restraints upon welfare.

80 Ibid. 81 Ibid. 82 Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 890 (2007) (“Resale price maintenance also has the potential to give consumers more options so that they can choose among low-price, low-service brands; high- price, high-service brands; and brands that fall in between”.). 83 Ibid. at 895 (“Respondent is mistaken in relying on pricing effects absent a further showing of anticompetitive conduct”.). 84 Averitt and Lande, “Using Consumer Choice” (n. 17) at 189–91. For example, Averitt and Lande point to United States v. Dentsply International, Inc., 399 F.3d 181 (3d Cir. 2005), where the Third Circuit observed “[a]n additional anti-competitive effect is seen in the exclusionary practice here that limits the choices of products open to dental laboratories.” Ibid. at 194.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 201 The goals of antitrust: welfare trumps choice

RPM also provides an excellent example of the benefts of a welfare standard informed by the empirical evidence that has been accumulated over the last 30 years. A few recent surveys summarize the existing empirical literature on vertical restraints generally and on RPM in particular. The frst, by a group of economists at the US Federal Trade Commission and the Antitrust Division of the US Department of Justice, reviewed 24 empirical papers published between 1984 and 2005, focusing upon the effects of vertical restraints and vertical integration (which substitutes managerial for contractual imposi- tion of vertical restraints). They concluded, “[e]mpirical analyses of vertical integration and control have failed to fnd compelling evidence that these practices have harmed competition, and numerous studies fnd otherwise”85. The second study reviewed a similar and overlapping set of papers and reached similar conclusions86. A more recent analysis of the theoretical and empirical literature on vertical restraints, including RPM, by an economist at the Federal Trade Commission, concluded that, “[w]ith few exceptions, the literature does not support the view that these practices are used for anticompetitive reasons”, and that the evidence “supports a fairly strong prior belief that these practices are unlikely to be anti-competitive in most cases”87. The RPM example not only illustrates the advantages of the welfare standard in cases involving non-price elements, it also shows that the errors induced by Averitt and Lande’s choice standard are not harmless but are likely to be harmful to consumers on both price and non-price dimensions.

85 Cooper et al., “Vertical Antitrust Policy as a Problem of Inference”, (2005) 23 Int’l J. Indus. Org. 639, 658. 86 Lafontaine and Slade, “Exclusive Contracts and Vertical Restraints: Empirical Evidence and Public Policy”, in Buccirossi (ed.), Handbook of Antitrust Economics (2008), 391. 87 O’Brien, “The Antitrust Treatment of Vertical Restraints: Beyond the Possibility Theorems”, in Konkurrensverket (ed.), The Pros and Cons of Vertical Restraints (Stockholm, 2008), 40, at 76, (last visited 2 Feb. 2016).

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202 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Joshua D. Wright & Douglas H. Ginsburg

VI. Conclusion

The choice standard, if adopted, would inevitably reduce consumer and total welfare by shifting the focus of antitrust analysis from effciency to more easily observed, but misleading, proxies for consumer welfare, to wit, the number of frms on offer in a market. While incorporating product variety, quality, and innovation into the standard welfare analysis is desirable when done correctly, no “new paradigm of the antitrust laws” is required to do that; modern antitrust analysis quite comfortably incorporates the tradeoffs between price and quality that consumers face. The faw of the choice standard is that it altogether rejects the economic approach to dealing with these tradeoffs and instead imposes a structural presumption that the number of frms or brands in competition is directly correlated with consumer welfare. This involves two major errors: by rejecting the economic approach, the choice standard forgoes illumi- nation as to why certain restraints arise in a particular market and, by imposing a structural presumption, it implicitly depends upon conclusions about welfare that are not justifed either by theory or by evidence. In sum, the choice standard would produce antitrust decisions uninformed by the contributions of modern industrial organization economics. The ultimate question is whether the consumer choice standard offers any offsetting beneft in exchange for the loss of welfare it entails. If not, as we think we have shown, then shifting to defendants the burden of justifying any reduction in consumer choice would be merely a revival of the long ago repudiated inhospitality tradition in antitrust88 that should and likely will be rejected by the enforcement agencies and the courts.

88 The phrase “inhospitality tradition” seems to have originated with Turner, “Some Refections on Antitrust”, N.Y. State Bar Association Antitrust Law Symposium (New York, 1966), 1, at 1-2 (“I approach territorial and customer restrictions not hospitably in the common law tradition, but inhospitably in the tradition of antitrust law”.). On the inhospitality tradition today, see Meese, “Reframing Antitrust in Light of Scientifc Revolution: Accounting for Transaction Costs in Rule of Reason Analysis”, (2010) 62 Hastings L.J. 457, 466.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 203 Consumer welfare and consumer choice in the reconciliation of the conficts between competition law and IPRs

STEVEN ANDERMAN [email protected] Emeritus Professor of Law, University of Essex

Visiting Professor of European Law, University of Stockholm

I. Introduction

Both the US and EU competition authorities assert that competition policy and intel- lectual property laws share the common aim of promoting “consumer welfare”. The US Antitrust Guidelines of 1995 stress that the two felds “share the common purpose of promoting innovation and enhancing consumer welfare”1. Similarly, the EU Tech-

1 US Department of Justice and Federal Trade Commission, Antitrust Guidelines for the Licensing of Intellectual Property (1995), para. 1.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 205 Consumer welfare and consumer choice in the reconciliation of the conficts between competition law and IPRs nology Transfer Guidelines maintain that “both bodies of law share the same basic objective of promoting consumer welfare and an effcient allocation of resources”2. These statements may be useful to remind us that both bodies of law promote innova- tion and not, as some maintain, that competition law is a drag upon the innovation promoted by the exercise of intellectual property rights (IPRs). Moreover, they remind us, as they are intended to do, that there is no inevitable confict between the two felds of law. However, they do little to suggest that there may be important differences between the respective contributions of the two systems of law to consumer welfare and consumer choice. Nor do they indicate how these differences infuence the way competition law limits the exercise of IPRs when it contravenes competition rules. Although both intellectual and competition law pursue the common goal of consumer welfare, they do so in rather different ways. Competition law makes an overall policy commitment to consumer welfare, which is followed through and refned in the way the agencies deal with individual cases. Consumer welfare as a policy goal in the EU tends to be viewed as a concept of aggregate economic welfare achieved by the maintenance of effective competition in markets. The EU courts view effective competition as a means to achieve consumer choice as well as consumer welfare3. It is assumed that well-func- tioning markets will provide goods and services in response to consumer choices (allocative effciencies) and at the same time increase aggregate total output by promoting productive effciencies. There is also an understanding today that effective competition acts as a spur to produce innovative effciencies4, in addition to those created through IPRs. There is more than a hint of the political economic vision of Adam Smith’s “invis- ible hand” guiding the economy to a favorable result. It is important to note however that this aspect of competition policy, which is economy wide, relies more on theoretical welfare analysis and general equilibrium analysis than on empirical measurement5. When the European Commission decides individual cases under Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU)6, consumer welfare is defned more precisely based on a analysis of a relevant market and refers to consumer harm resulting from anticompetitive conduct. Using this yardstick, cases are decided by defning a relevant market or markets by reference to

2 O.J. C 101/2 [2004], “Commission Notice – Guidelines on the Application of Article 81 of the EC Treaty to technology transfer agreements”, para. 7. 3 See, e.g., Nihoul, “Freedom of Choice: The Emergence of a Powerful Concept in European Competition Law”, (2012) 3 Concurrences. 4 Competition policy sides more with Arrow than Schumpeter on this issue. See Arrow, “Economic Welfare and the Allocation of Resources for Invention”, in Nelson (ed.), The Rate and Direction of Inventive Activity (Princeton, 1962), 609-26; Schumpeter, Capitalism, Socialism and Democracy (Connecticut, 2nd ed. 2011). For further discus- sion of this topic, see Peritz, “Competition within IP Regimes”, in Anderman and Ezrachi (eds.), Intellectual Property and Competition Law: New Frontiers (Oxford, 2011), 29-30. 5 See Werden, “Antitrust’s Rule of Reason: Only Competition Matters”, (2014) 79(2) Antitrust L.J. 713. 6 Merger assessment by the Commission requires a more nuanced treatment than can be provided in this article.

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206 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Steven Anderman consumer choices, using economic analysis to assess the market power of the accused frms and determining within a legal framework of rules whether or not the conduct of the dominant frm or agreement is anticompetitive. The methodology at the operational level uses an economic model analyzing the potential price and output effects of an agreement as well as the potential exclusionary effects of unilateral conduct by dominant frms as symptoms of consumer harm, or loss of consumer surplus rather than total surplus7. From a legal point of view these forms of consumer harm are taken as symptoms of damage to effective competition. The basis for the analysis is short-term or static; the dynamic effciencies of new technologies are only taken into account if provable. In this way, the overall policy goal of consumer welfare is refned into protection of consumer surplus as well as a protection of effective competition and consumer choice in the market. The link between consumer welfare and intellectual property law presents a more controversial picture. On the one hand, the contribution of the exercise of IPRs to innovation is widely viewed as an overall contribution to economic welfare because of its incentive effect on innovation. As Schumpeter described them, IPRs are “the baits that lure capital on untried trails”8. It is clear that innovation increases the size of the pie through . Indeed, the contribution of innovation to overall economic welfare has almost certainly been greater than the contribution of competi- tion law9. However, what is less clear is whether the incentive effect on “frst inventor” innovation is always a contribution to economic welfare if it chokes off “follow on” innovation and interferes with cumulative innovation10. Nor is it clear that a contribu- tion to economic welfare is the same as a contribution to consumer welfare if there is insuffcient follow through at the level of implementation of the overall goal11. In the frst place, at the operational level, the specifc rules of patent and copyright law12 have been affected by the strong property rights movement in recent decades and the increased length and scope of the protection provided by patents and copyright have on the whole favored the interests of individual rights holders more than “follow

7 A partial equilibrium model based on consumer surplus can be distinguished from one based on total surplus, which is consumer plus producer surplus. 8 Schumpeter (n. 4) at 90. 9 See, e.g., Bohannan and Hovenkamp, Creation without Restraint: Promoting Liberty and Rivalry in Innovation (New York, 2012), 7-11; see also Werden (n. 5) at 716 (“Social welfare gains stem largely from technical progress ignored by static analysis”.). 10 See, e.g., Kaseberg, Intellectual Property, Antitrust and Cumulative Innovation in the EU and the US (Portland, OR, 2012). 11 In principle an increase in economic welfare can beneft producers rather than consumers. 12 In contrast, , if strictly defned, offer a less ambiguous contribution to consumer welfare, because of their assurance of quality to consumers, as well as to overall economic welfare, because of their role in supporting brands.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 207 Consumer welfare and consumer choice in the reconciliation of the conficts between competition law and IPRs on” innovators. This imbalanced approach can harm the process of overall innovation and hence economic welfare13. Secondly, the periods of exclusivity granted to the rights holder, 20 years for patents and 70 years plus life for copyright, are “one size fts all” grants for practical reasons and make no adjustments for the social value of inventions14. The net effect of these features of the specifc rules of patent and copyright has meant that there are many situations where it is unclear whether the specifc patent and copyright protection rules make a negative or positive contribution to economic welfare, let alone consumer welfare15. Finally, in recent years, certain patent practices of dominant frms—such as unlawfully extending patent protection16, patent ambush17, applying for injunctions to enforce standard essential patents against willing licensees while under an obligation to license on fair, reasonable, and non-discriminatory terms (FRAND)18, “payment for delay” patent dispute settlements19, and baseless claims for patent infringement20—have shown that the patent system can give rise to certain types of anticompetitive conduct by patentees that harms consumer welfare but are not always capable of correction by patent laws. When an intellectual property owner’s commercial practices clash with the existing competition rules in the TFEU, the European Court of Justice has held that the right of exclusivity cannot itself protect conduct that infringes the competition rules21. In effect, the consumer welfare vision of the competition rules takes precedence over the rights conferred by the intellectual property rules. The patent and copyright laws themselves may be but, once an exclusive right is granted to the patentee

13 Heller, The Gridlock Economy: How Too Much Ownership Wrecks Markets, Stops Innovation and Costs Lives (New York, 2008); Ghidini, Innovation, Competition and Consumer Welfare in Intellectual Property Law (Chel- tenham, UK, 2010), 33-92; Kaseberg (n. 10). 14 See, e.g., Kaplow, “The Patent-Antitrust Intersection: A Reappraisal”, (1984) 97 Harvard L. Rev. 1813. 15 There is a surprising lack of convincing empirical evidence for the causal link between patents and innovation. Apart from certain well-established sectors, such as pharmaceuticals, chemicals, and agricultural products, most empirical studies suggest a weak or inconclusive correlation. See, e.g., Landes and Posner, The Economic Structure of Intellectual Property Law (Cambridge, MA, 2003); Carrier, Innovation for the 21st Century (Oxford, 2009). However, it is unclear whether the empirical studies included the system as a whole including its disclosure effects as opposed to the frst inventor incentive effect. 16 Case C-457/10 P, AstraZeneca plc v. Commission, [2012] E.C.R. I–000. 17 Case COMP/38.636 — Rambus, [2010] O.J. C30/17. 18 See Case C-170/13, Huawei v. ZTE. 19 IP/13/563, Lundbeck (pay-for-delay agreement resulted in fne for Lundbeck and generics). 20 Case T-111/96, ITT Promedia v. Commission, [1998] E.C.R. II-02937; Case T-119/09, Protégé International v. Commission (not yet published). 21 See, e.g., Case C-418/01, IMS Health GmbH & Co v. NDC Health GmbH &co KG, [2004] E.C.R. I-5039.

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208 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Steven Anderman or copyright holder, it is viewed as a private property right that is subject to the competition rules22. This article frst examines how consumer welfare has evolved as a goal of competition law (Part B). It then considers in some detail how consumer welfare applies as a goal of intellectual property law (Part C). The third part (Part D) examines how the European Commission and the courts factor in the contribution of IPRs to consumer welfare in their decisions and judgements and the implications of this analysis for the way conficts between intellectual property and competition law are resolved.

II. “Consumer welfare” as a goal of antitrust and competition law

1. Introduction: the US antitrust experience Any study of consumer welfare as the goal of antitrust law must go back to Robert Bork’s writings in the 1960s and 1970s, particularly The Antitrust Paradox. Bork chose the phrase in order to take antitrust law away from its normative approach favoring the preservation of smaller businesses. His strategy was to argue that antitrust should be based more on economic analysis because he was convinced that this would lessen the weight of non-economic factors and hence the degree of regulation of commercial activity by antitrust law23. Since that time, consumer welfare has been adopted by the US courts, agencies, and specialist academics as the essential goal of antitrust24. The concept was also adopted by the European Commission as part of its modernization program of 2000 and found a home in the Commission’s guidance paper on enforcement priorities for Article 10225. More recently, the EU courts have begun to make reference to this concept26. The rhetorical attraction of this concept on both sides of the Atlantic

22 Of course, the patent and copyright laws are themselves public laws. In the United States, they are based on a provision in the Constitution and, in the EU, there will eventually be a unifed patent act. 23 See Bork, “The Goals of Antitrust Policy”, (1967) 57 Am. Econ. Rev. 242 (Bork, “Goals”). 24 Hovenkamp, The Antitrust Enterprise: Principle and Execution (2005), 2 (“Most now agree that the protection of consumer welfare should be the only goal of antitrust laws”.). 25 O.J. 2009, C 45/7, “Guidance on the Commission’s enforcement priorities in applying Article 82 EC Treaty to abusive exclusionary conduct by dominant undertakings” (Guidance Paper). 26 See, e.g., Case C-209/10, Post Danmark A/S v. Konkurrencerådet, [2012] E.C.R. I-0000, para. 22.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 209 Consumer welfare and consumer choice in the reconciliation of the conficts between competition law and IPRs and throughout the world has been due to its clear implication that competition law and policy directly beneft consumers and its assurance that there is an economic basis to the legal rules of competition policy. However, consumer welfare has proven to be a rather multifaceted legal concept and has been defned rather differently in different regulatory contexts. Bork’s early concept of consumer welfare was an economy wide concept equated with the general equilibrium concept of social welfare. He defned it as “the total welfare of consumers as a class” in the sense that a competitive economy freed of excess legal interference will produce an improvement in overall output, thus increasing “the wealth of the nation”27. He rather controversially claimed that in the end consumers would eventually beneft from an increase in total welfare28, yet he was not concerned about issue of distribution. He favored productive effciencies because of their contribution to total welfare, arguing that they contributed to allocative effciency by lowering marginal costs29. He argued that, in principle, the positive welfare effects of productive effciencies should be balanced against anticompetitive harms to assess the overall welfare effects of unilateral conduct, restraints, or mergers30. However, he did not argue for a welfare-balancing test as the methodology for a rule of reason test when deciding individual cases31. Indeed, he warned against the courts attempting to measure effcien- cies. He understood that courts, when deciding cases on the basis of the rule of reason, must use a series of steps with the burdens of proof in each step clearly placed on either the plaintiff or defendant32. At the time he wrote, Bork was attempting to convince the courts to accept a greater use of economic analysis. By reducing the scope of the per se test, expanding the rule of reason test, and taking greater account of real market power, this would lead antitrust law away from mistakes of over enforcement. His strategy has largely been successful, after being strongly reinforced by the support of others in the Chicago School such as Richard Posner and Frank Easterbrook33. The transformation or “revolution” in US

27 Bork, The Antitrust Paradox: a Policy at War with Itself (New York, 1978), 90 (Bork, Paradox). 28 See Bork, “Goals” (n. 23). 29 As Bork put it, “the whole task of antitrust was to improve allocative effciency without impairing productive effciency so greatly as to produce either no gain or a net loss in consumer welfare”. Bork, Paradox (n. 27) at 91. 30 He even maintained that if a merger would result in increased productive effciencies, this could improve consumer welfare to the point of justifying merger to monopoly. 31 Werden (n. 5) at 726 (“His argument that ‘consumer welfare’ was the goal of the Sherman Act was not intended to inject welfare analysis in to antitrust cases, but rather to keep non-economic considerations out”.). 32 He actually warned that economic analysis should not be taken so far. Bork, “The Rule of Reason and the Per Se Concept: and Market Division, Part II”, (1966) 75 Yale L.J. 373, 387-90 (Bork, “The Rule of Reason”). In normal cases, he argued, the task is to assess probable effect “by applying the rules of thumb constructed with the aid of economic analysis” where the “main criterion is market power”. Ibid. at 389. 33 See Bork, Paradox (n. 27); Posner, Antitrust Law (Chicago, 2nd ed. 2001); Easterbrook, “The Limits of Antitrust”, (1984) 63(1) Tex. L. Rev. 1. See generally “Special Issue: The Limits of Antitrust Revisited”, (2010) 6 J. Compe- tition L. & Econ.

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210 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Steven Anderman antitrust law, as some portray it, was accomplished over more than four decades with the introduction of a more realistic assessment of market power and a drastic reduction of the scope of the per se test in the US courts, along with a wider reach for the more demanding rule of reason test. The US Supreme Court may have retained the rhetoric of consumer welfare as the goal of antitrust and accepted the need for more economic analysis, but it has not adopted Bork’s particular take on effciencies and total welfare34. Instead, the Court has placed a greater emphasis on encouraging the process of competition as the means to achieve consumer welfare35. Thus in Actavis, a case involving a reverse payment for delay settlement, the Court stated that that “the point of antitrust is to encourage competitive markets to promote consumer welfare”36 and suggested that the exercise of a patent can sometimes violate antitrust laws. In Leegin37, a case replacing the per se rule in respect of resale price maintenance with a rule of reason, the majority said that the Sherman Act and antitrust policy are intended to serve the “interests of consumers” and added: “The Sherman Act seeks to maintain a market-place free of anticompetitive practices. . . . The law assumes that such a marketplace . . . will tend to bring about the lower prices, better products, and more effcient production processes that consumers typically desire” (emphasis added)38. The Court’s main focus is “the impact of the challenged restraint on the competitive process”39. The application of the goal of consumer welfare to individual cases in the United States has not involved a balancing of welfare effects as is sometimes supposed40. “Consumer welfare” has been redefned into an assessment of “consumer harm” or loss of “consumer surplus” in a particular market using partial equilibrium analysis. As Joseph Brodley suggested: “if consumer welfare is to serve as an operational principle of antitrust law, it must refer to the direct and explicit economic benefts received by the consumers of

34 See, e.g., Orbach, “The Antitrust Consumer Welfare Paradox”, (2010) 7(1) J. Competition L. & Econ. 133. 35 Werden (n. 5) at 36. The rule of reason is the accepted standard for testing whether a practice restrains trade in violation of the Sherman Act. 36 FTC v. Actavis, Inc., 133 S. Ct. 2223, 2238 (2013). This refected the statements in a long line of cases. 37 Leegin Creative Leather Products, Inc v. PSKS, Inc., 551 U.S. 877, 886 (2007). 38 Ibid. at 904, 909. In Leegin, the Court explicitly acknowledged that its view of consumer welfare is based on an assumption rather than an empirically proven relationship. 39 See, e.g., NCAA v. Bd of Regents of the Univ. of Okla., 468 U.S. 85, 104 (1984). This statement may have to be modifed in the case of mergers. See, e.g., US Federal Trade Commission and Department of Justice, Horizontal Merger Guidelines (2010), (US Horizontal Merger Guidelines). 40 See Carrier, “The Rule of Reason: An Empirical Update for the 21st Century”, (2009) 16 Geo. Mason L. Rev. 827. The following discussion is mainly focused on cases brought by the agencies and appealed to the courts does not include a nuanced view of private actions.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 211 Consumer welfare and consumer choice in the reconciliation of the conficts between competition law and IPRs a particular product as measured by its price and quality. Using the more precise language of economics, consumer welfare can be defned as consumer surplus”41. The US agencies and courts have taken a partial equilibrium approach when employing a “structured rule of reason”. However, they initially look for proof that unilateral conduct or restraints42 cause consumer harm either in terms of higher prices, lower output, or exclusionary effects. An important part of the evidence in this analysis includes a market power/structure screen43. If proof of actual or likely consumer harm can be found, it will be extremely rare to fnd a case where they will be offset by proof of gains from actual or probable productive effciencies. Moreover, the test of effciency gains is limited to short-term probable effects and does not incorporate unproven potential long-term effciencies. Consumer surplus or loss of consumer surplus, rather than total welfare or total surplus,44 drives the underlying economic model for price and output analysis, but the legal focus is on damage to competition45. This operational defnition of consumer welfare has been accepted by the US Supreme Court with the understanding that proof of consumer harm in terms of higher prices or lower output, as well as exclusionary effects, are essentially proxies for harm to competition. This anticompetitive effect test may focus on price and output but the concern is with the competitive process. The Court accepts that price and output “restraints are the most destructive of the competitive process” and undermine the “role of the market in satisfying consumer wants”46. Thus, if a practice is good for consumers but damages competition it will be held to be unlawful. A good example is predatory pricing that, once the requirements of below marginal cost pricing and probable recoupment are met, will be held to be anticompetitive under Sherman Act, Section 2, even though lower prices may be good for consumers47. At the same time, if a practice is bad for consumers but does not damage competition, the courts will not fnd it to be anticompetitive48. The rule of reason has long entailed a balance of probabilities test of anticompetitive effects or harms. What is new since the Chicago School reforms is the gradual replace-

41 Brodley, “The Economic Goals of Antitrust: Effciency, Consumer Welfare and Technological Progress”, (1987) 62 N.Y.U. L. Rev. 1020, 1032-33. 42 The test for mergers is different in certain respects. See US Horizontal Merger Guidelines (n. 39). 43 Areeda and Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and their Application (New York, 4th ed. 2015), paras. 500 et seq. 44 See (n. 7) and accompanying text. 45 See Werden (n. 5). 46 Ibid. at 740. 47 Brooke Group Ltd v. Brown and Williamson Tobacco Corp., 509 U.S. 209 (1993). 48 See NYNEX Corp v. Discon Inc., 525 U.S. 128 (1998) (“a regulatory fraud” that “hurt consumers” but the injury did not derive “from a less competitive market”).

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212 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Steven Anderman ment of per se categories of alleged harms with rule of reason categories, a more sophisticated economics based market power screen, a restrictive approach to existing unilateral abuses49, and an unwillingness to accept new categories of abuse50. There is a defnite predisposition to avoid errors of over enforcement even at the expense of errors of under enforcement.

2. The European Commission’s modernization program and consumer welfare In the EU, the European Commission has adopted consumer welfare as a goal of competition law as part of its modernization reform. It has somewhat surprisingly attempted to take the concept into a welfare effects balancing exercise at the operational level. It does acknowledge that “what really matters is protecting an effective competitive process and not simply protecting consumers”51 and that the protection of competition is its primary objective52. In other words: The aim of the Commission’s enforcement activity is to ensure that dominant undertakings do not impair effective competition by foreclosing their competitors in an anticompetitive way, thus having an adverse impact on consumer welfare, whether in the form of higher price levels than would otherwise have prevailed or in some other form such as limiting quality or reducing consumer choice53. At the same time, the Commission harbors ambitions to use the concept of consumer welfare to shape its methodology for deciding specifc cases by looking more closely at effciencies and balancing welfare effects. It argues that “an effects based approach” is called for which would concentrate on balancing consumer benefts from effciencies against consumer harm54. This is to be a case-by-case balancing process.

49 See, e.g., Verizon Commc’ns Inc. v. Law Offces of Curtis V. Trinko LLP, 540 U.S. 398 (2004) (on refusal to supply). 50 See, e.g., Pacifc Bell Telephone Co. v. linkLine Communications, Inc., 555 U.S. 438 (2009) (on price squeeze). 51 See Guidance Paper, para. 4. The Commission added: “This may well mean that competitors who deliver less to consumers in terms of price, choice, quality and innovation will leave the market”. Ibid. at para. 6. In its guidance on Article 101(3), the Commission also stated, “The objective of Article [101] is to protect competition on the market as a means of enhancing consumer welfare and of ensuring an effcient allocation of resources”. Ibid. at para. 13. 52 See, e.g., O.J. 2010, C 130/1, “Guidelines on Vertical Restraints”, para. 7 (“[T]he protection of competition is the primary objective of competition policy as this enhances consumer welfare and creates an effcient allocation of resources. In applying the EC competition rules, the Commission will adopt an economic approach which is based on the effects of the market”). 53 Guidance Paper, para. 19. 54 O.J. 2004, C 101/7, “Guidelines on the application of Article 81(3) of the Treaty”, para. 104.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 213 Consumer welfare and consumer choice in the reconciliation of the conficts between competition law and IPRs

Under Article 10255, the Commission advocates two steps, the frst of which starts with an identifcation of theories of anticompetitive foreclosure56. The second step introduces a balancing test, which looks at the procompetitive effects of effciency gains. For example, dominant frms will be permitted to show countervailing effciencies “suff- cient to guarantee that no net harm to consumers is likely to arise57. The burden of proof is placed on the Commission but the dominant undertaking must make a plausible case for an effciency claim. In principle, this test adopts the goal of consumer welfare with its attempt to quantify and balance welfare effects58. The Commission acknowledges that in practice its welfare effects based test must be adjusted to take into account the overall goal of maintaining a competitive market. Thus, in striking a welfare effects balance, in the assessment of productive effciencies, the accused frm must show not only that consumers will beneft from the prima facie anticompetitive conduct but that it “will not eliminate competition in that market”59. The Commission acknowledges that its methodology in applying a welfare effects balancing test, must include a presumption in favor of competition, which is “an important driver of effciency and innovation . . . where agreements have both substan- tial anticompetitive effects and substantial pro-competitive effects”60. Finally, the European Commission importantly acknowledges its reservations about adopting a pure economic welfare balancing assessment in part because “welfare balancing assessments necessarily require value judgements because of the diffculties of quantifcation”61. Nevertheless, the Commission has indicated that it intends to use a welfare effects balancing test in deciding cases as part of its commitment to the goal of consumer welfare62.

55 This article concentrates on Article 102. 56 Guidance Paper, para. 19. 57 Guidance Paper, para. 29. 58 See too the balancing test partially refected in Article 101(1) but more fully refected in Article 101(3). See O.J. 2004, C 191/97, “Guidelines on the application of Article 81(3) of the Treaty”, para. 33 (Guidelines to Art. 101(3)). Moreover, an effciency defense modelled on the structured test of Article 101(3) is also applicable to mergers in the newly modifed form of an exercise that attempts to quantify and balance welfare effects. 59 See Guidance Paper, para. 30. See also Article 101(3) TFEU; Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EC Merger Regulation), [2004] O.J. L 24/1, art. 2 (“The interests of the immediate and ultimate consumers” can be taken into account as well as “the development of technical and economic progress provided that it is to consumers’ advantage and does not form an obstacle to competition” (emphasis added).). 60 Guidelines to Art. 101(3), para. 92. 61 See Guidance Paper, para. 12. 62 See, e.g., Case T-201/04, Microsoft v. Commission, [2007] E.C.R. II-3601; Case C-549/10 P, Tomra Systems ASA v. Commission, [2012] E.C.R. II-00000.

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214 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Steven Anderman

3. The EU’s courts’ version of consumer welfare The EU courts have not been particularly receptive to the Commission’s operational test of consumer welfare. The European Court of Justice recently reiterated in Post Danmark that Article 102 must be interpreted to refect the fact that the maintenance of an effectively competitive structure of markets is the means to ensure consumer welfare and consumer choice63. The Court also stated that Article 102 “covers not only those practices that directly cause harm to consumers but also cause consumers harm through their impact on competition”64. In Glaxo SmithKline, the General Court stated that the competition rules aim “to protect not only the interests of competitors or of consumers, but also the structure of the market and, in so doing, competition as such”65. By protecting the structure of the market, the courts believe they are also protecting consumer choice66 because, if a market loses suppliers, consumers will have fewer chances to switch and suppliers will be less responsive to consumer demand in markets, assuming some barriers to entry. This approach to consumer choice, however, does not mean that the process of compe- tition cannot alter the structure of a market. As the court in Post Danmark was at pains to emphasize, Article 102 does not “seek to ensure that less effcient competitors should remain on the market” because such competitors are “less attractive to consumers from the point of view of, among other things, price, choice, quality or innovation”67. This concern to protect the process of competition in markets has led to a preference for a continued normative approach to defning abusive conduct under Article 102, which calls into question the Commission’s test based on an economic assessment of welfare effects. This approach includes the concept that a dominant frm has a “special responsibility” not to further weaken, or “distort” the level of competition in a market except by “competition on the merits”68. As long as a frm competes on the merits, it can legitimately eject less effcient competitors from the market69. AstraZeneca offers

63 Case C-209/10, Post Danmark A/S v. Konkurrencerådet, para. 24. 64 Ibid. at para. 20. The British Airways case also reaffrmed that Article 102 “is aimed not only at practices that may cause prejudice to consumers directly but also those that are detrimental to them because of their impact on an effective competitive structure”. Case C-95/04 P, British Airways v. Commission, [2007] E.C.R. I-2331, para. 106. 65 Case T-168/01, GlaxoSmithKline Unlimited v. Commission, [2006] E.C.R. II-2969, para. 63. 66 See Nihoul (n. 3). 67 Case C-209/10, Post Danmark A/S v. Konkurrencerådet, paras. 20, 22. 68 Ibid. at para. 22. 69 Ibid. Moreover, it is accepted that non-dominant frms have more latitude to engage in commercial conduct that would be abusive if engaged in by dominant frms and still legitimately acquire dominance. Case C-52/09, Konkur- rensverket v. TeliaSonera Sverige AB, [2011] E.C.R. I-527, para. 24.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 215 Consumer welfare and consumer choice in the reconciliation of the conficts between competition law and IPRs an example of how aggressive corporate strategies can be compatible with competition on the merits70. In that case, the European Court of Justice made it clear that a dominant frm can engage in a strategy to protect its product’s competitive position after the patent has expired, without it necessarily being anticompetitive, as long as it does not resort to anticompetitive means71. The decisive legal test of the normative approach to abuse is whether the dominant frm is competing on the merits or engaging in abusive conduct—i.e., determining which of the two legal categories a course of conduct falls72. If substantial market power is present and the dominant frm is found to be engaging in conduct which is not based competitive merits, the EU courts have made the point forcibly that the Commission’s proposed standard of proof of likely anticompetitive effects is not necessary73. In British Airways, the European Court of Justice stated, “For the purposes of establishing an infringement of Article [102 TFEU], it is not necessary to demonstrate that the abuse in question had a concrete effect on the markets concerned. It is suffcient in that respect to demonstrate that the abusive conduct of the undertaking in a dominant position tends to restrict competition or, in other words, that the conduct in question is capable of having or likely to have such an effect74. In Telia Sonera75, the Court said that the practice must have an effect on the market but the effect does not have to be concrete. It is suffcient to demonstrate that there was an anticompetitive effect that “potentially excludes competitors who are at least as effcient as the dominant undertaking”. In AstraZeneca, the Court stated that it is suffcient to demonstrate that there is a potential anticompetitive effect76. The more recent cases, which stress the need to demonstrate a potential for anticom- petitive harm or that the conduct is capable of having a foreclosing effect, have introduced a clearer plausibility “screen”. The European Court of Justice has indicated that the Commission must make a plausible case both in terms of the degree of market strength of the accused frm77 and the potential exclusionary effects of its conduct78.

70 Ibid. 71 Case C-457/10 P, AstraZeneca AB v. Commission, [2010] O.J. C 301/18, para. 129. 72 A good intention is not relevant if the dominant frm engages in anticompetitive conduct. Evidence of anticom- petitive intent may be relevant to confrm the conduct. 73 Case C-209/10, Post Danmark A/S v. Konkurrencerådet, para. 25. 74 Case C-95/04 P British Airways plc v. Commission; Case C-549/10 P, Tomra Systems ASA v. Commission, paras. 68 and 79. In Microsoft, the General Court talked about “liable to or likely” or “gives rise to a risk of elimination of competition”. Case T-201/04, Microsoft v. Commission, [2007] E.C.R. II-3601. 75 See Case C-52/09, Konkurrensverket v. TeliaSonera Sverige AB, [2011] E.C.R. I–527, para. 64. 76 Case C-457/10 P, AstraZeneca AB v. Commission, para. 112. 77 See, e.g., Case C–52/09, Konkurrensverket v. TeliaSonera Sverige AB, para. 81. If there is no showing of indispens- ability, there must be a showing of suffcient market power. 78 Case C-549/10 P, Tomra Systems ASA v. Commission, paras. 68 and 79.

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216 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Steven Anderman

Moreover, since Deutsche Telekom79, the EU courts have insisted on a theory of harm that is plausible in the actual conditions of the affected market. For example, in Post Danmark, the court suggested that the fact that the competitor targeted by the selective price-cutting had actually improved its position after the discounts could be taken into account in assessing the fact of abusive conduct80. A plausibility test is applied to both the assertions of the Commission and the assertions of the defendant81. However, once the plausibility test is met, it is not necessary to prove actual or likely effects82. Furthermore, the EU courts have not been receptive to the Commission’s idea of treating effciencies in a balancing test of welfare effects under the standard of objec- tive justifcation. Instead, they have insisted on a step-by-step analysis with the burden of coming forward placed either on the defendant or on the Commission. In Microsoft83, the General Court held that what was required once the constituent elements of the abuse have been established, was a more structured test of objective justifcation with the burden placed on the defendant to come forward with suffcient evidence to show that it had a plausible claim. In that case, Microsoft did not meet its burden because its arguments were too vague, general, and theoretical. It is true that in Post Danmark, the court suggested that objective necessity and effciencies that “counterbalance or outweigh” the exclusionary effects could be objective justifcations. However, the court also strictly defned the conditions under which effciencies were relevant and stated that they cannot justify conduct that will eliminate “effective competition”84. The EU judicial test thus sets certain limits to the role of economics in individual cases, even as it endorses the overarching goals of consumer welfare and consumer choice. The courts accept that economic analysis can help to achieve a more sophisticated assessment of market power but have decided that it has its limitations at the level of legally determining abusive conduct. We shall look more closely at how this interpre- tation affects the intellectual property/competition law interface after we consider the relationship between intellectual property and consumer welfare.

79 Case C-280/08 P, Deutsche Telekom AG v. Commission, [2010] E.C.R. I-9555. 80 Case C-209/10, Post Danmark A/S v. Konkurrencerådet, para. 39. Similarly in Telia Sonera, the Court indicated that the referring court needed to consider whether the theory of harm was viable in light of the fact that the dominant frm’s wholesale product was not an essential input. 81 Thus the General Court in Telefónica, rejected the suggestion that possible strategies were available to rival operators wishing to construct a viable downstream broadband package. C-295/12 P, Telefónica and Telefónica de España v. Commission, paras. 182 et seq. The Court of Justice in Tomra rejected the argument that the non-foreclosed section of the market was suffciently large that an effcient competitor could still achieve minimum effcient economies of scale needed to challenge the dominant frm. Case C-549/10 P, Tomra Systems ASA v. Commission, para. 42. 82 Thus in Tomra, the court held that a “suction effect” helped to establish potential exclusionary effect. Ibid. at para. 78. 83 Case T-201/04, Microsoft v. Commission (n. 62). 84 Case C-209/10, Post Danmark A/S v. Konkurrencerådet, paras. 40-42.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 217 Consumer welfare and consumer choice in the reconciliation of the conficts between competition law and IPRs III. IPRs and consumer welfare

The contribution of IPRs, particularly patents, to consumer welfare, or more accurately economic welfare85, is generally portrayed in terms of providing a reward/incentive of a limited period of exclusivity for an invention or creation of a new product or process. The benefts of the reward/incentive mechanism are thought to contribute to overall economic welfare despite the potential consumer harms of higher than competitive prices for patented inventions, the existence of “blocking” patents, and unused patented inventions. This is essentially a macroeconomic or political view akin to the idea that IPRs, along with other property rights and freedom of contract, operating in a competitive market, will deliver an increase in standards of living. Indeed, the resulting innovation probably “contributes much more to economic growth, than the general movement of markets from lesser to greater price competition”86. However, in the frst place, this is essentially a “total” welfare version of “consumer welfare”. It is necessary to examine the imple- mentation of the intellectual property laws in order to obtain a more nuanced view of their contribution to consumer welfare, as well as consumer choice. At this level, the view of a link between the exercise of IPRs, innovation, and growth has been subject to criticism on at least three broad fronts. In the frst place, as has been mentioned, the incentive effect of patents in innovation is not confned to the individual incentive created by the reward of patent exclusivity to a pioneering innovator. Any attempt to assess the contribution of the patent protec- tion system to economic welfare must recognize its second dimension, i.e., its effect on follow on innovation. This contributes to consumer welfare by stimulating cumula- tive or plural sources of innovation87. Indeed, more innovation is the result of prior innovation than so called “stand alone” innovation88. The contribution to follow on innovation by patent laws consists, frst of all, of infor- mational benefts to innovation during the period of exclusive rights and not only after the period of protection expires and the protected product enters the public domain. For example, the patent’s grant of exclusivity ensures that the information contained

85 See, e.g., Bohannan and Hovenkamp, “IP and Antitrust: Reformation and Harm”, (2010) 51 B.C. L. Rev. 905; Hovenkamp, “Consumer Welfare in Competition and Intellectual Property Law”, (2014) 9 Competition Pol’y Int’l 53. 86 See Bohannan and Hovenkamp (n. 9). 87 See, e.g., Kaseberg (n. 10). See also Drexl, “Is there a More Economic Approach to Intellectual Property and Competition Law?” in Drexl (ed.), Research Handbook on Intellectual Property and Competition Law (Cheltenham, UK, 2008). 88 See, e.g., Scotchmer, “Standing on the Shoulders of Giants, Cumulative Research and the Patent Law”, (1991) 5 J. Econ. Persp. 29.

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218 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Steven Anderman in the patent claim and description is extracted from the trade secrets of the patentee and made public to all other inventors during the period of protection. Arrow89 and Merges90 have suggested that the patent regime offers a trade-off of two economic effects on technological innovation: (i) the exclusive right as an incentive to invent; and (ii) the patentee’s disclosure of information in the patent claim and specifcations. The latter helps to spur on research and development and follow on innovation during the patent period. The disclosure effects also create transactional benefts for patents. Technology pools and patent pools, particularly those leading to standards, would be more diffcult, if not impossible, to organize without the information in the patent claims and specifcations. Moreover, all intellectual property laws create specifc “exceptions” to, and “limitations” of, the exclusivity rights during the period of protection that offer recognized defenses to infringement. This creates an internal balance of protection between patentees and follow on innovators. For example, patent laws in the EU also offer “experimental use” and “second medical use” exceptions to exclusive rights as well as a right to claim a compulsory license in the case, inter alia, of non-use or blocking patents91. The scope of copyright protection, even for industrial copyright, is limited overall by the idea/ expression dichotomy, with copyright exclusivity extending only to the particular expression of the idea, leaving the idea itself in the public domain. Under copyright law, moreover, there are exceptions, such as “fair dealing”, “educational use”, and “public interest use”, that allow use of the copyrighted material during the period of protection92. Further, in the EU Computer Program Directive there is a general principle of program interoperability as well as a specifc decompilation, or reverse engineering, right for competitors93. All these exceptions make it clear that the innovation policy of IPRs cannot be viewed in narrow terms as solely focused on the reward/incentive to the original inventor. Any assessment of the benefts to economic welfare require an assessment of the balance actually struck between the reward incentive effect and the spur the law provides to follow on innovation. This perspective raises the issue of whether the existing scope and length of patent protection actually make a contribution to economic welfare. It is mistaken to claim that the wider the patent or copyright the greater will be its innovative force and

89 See Arrow (n. 4) at 609–26. 90 Merges, “Institutions for Intellectual Property Transactions: The Case of Patent Pools”, in Dreyfus, Zimmerman, and First (eds.), Expanding the Boundaries of Intellectual Property: Innovation Policy for the Knowledge Society (Oxford, 2001), 123–66. 91 See, e.g., Bently and Sherman, Intellectual Property Law (Oxford, 2002), part II. 92 Ibid., part II. 93 O.J. 2009, L 111/16, “Directive 2009/24/EC on the legal protection of computer programs”.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 219 Consumer welfare and consumer choice in the reconciliation of the conficts between competition law and IPRs contribution to economic welfare. For example, Merges and Nelson have made the following observation: When a broad patent is granted . . . its scope diminishes incentives for others to stay in the invention game, compared with a patent whose claims are trimmed more closely to the inventor’s actual results. This would not be undesirable if the evidence indicated that control of subsequent developments by one party made subsequent inventive effort more effective. But the evidence, we think, points the other way94. In other words, a wide patent grant runs the risk that the social and economic costs of intellectual property protection will exceed the innovative value of the grant by fore- closing too many avenues to future improvements by later innovators. It can therefore be damaging to economic welfare. In those sectors where IPRs are effective in increasing innovation, the benefts of new technology outweigh consumer harms in the form of higher than competitive prices. For example, a new effective drug for treating cancer or a new electronic gadget like a smart phone offer consumer benefts that arguably outweigh the potential harms of the higher prices extracted to compensate the inventors for their research and develop- ment costs. The alternative would be no new product at all. However, in those sectors where the IPRs offer a weak or ineffective incentive, the potential harms of the grant of exclusivity may actually exceed any benefts of the reward/incentive. Consumers will be paying higher than competitive prices for the patented product without a causal link between the higher prices and the invention of the new product. Firms will enjoy a blocking patent for new technologies created by the grant of a patent and the concomitant exclusive rights to make, use, and sell the protected technology. Finally, where patented products and processes lie unused by their owners, consumers will be deprived of access. In such cases, the exercise of IPRs may actually have a negative effect on economic welfare as well as consumer welfare. Consequently, from a consumer welfare point of view, the nature of the trade-off between the extent of consumer benefts and consumer harms on individual inventions raises certain questions. Patents are granted for 20 years irrespective of their social value or beneft to consumers. Ideally, a patent system concerned with economic welfare or consumer welfare would more carefully calibrate the rewards to the social value of the invention95. However, since this is impossible without creating a huge as well as requiring an ability to assess the social value of an invention ex ante, the current patent system remains infexible, i.e., one size fts all. Consequently, there will

94 Merges and Nelson, “On the Complex Economics of Patent Scope”, (1990) 90 Colum. L. Rev. 839, 916. 95 See Kaplow (n. 14).

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220 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Steven Anderman be extra consumer costs rather than benefts in the case of certain patents. Moreover, inventions may be lost because the patent period is not long enough to produce the necessary returns. On the other hand, there may be gains if frms accept the lower proft margins that come with a more limited period of exclusivity. Finally, as we have seen, the exploitation of patent protection by corporations in recent years has offered examples of the misuse of patents by rights holders for commercial purposes and these actions, if left uncorrected by the patent system, can add to its negative effects on economic welfare.

IV. The IP/competition interface and the consumer welfare goal

In the past decades, the European Court of Justice’s judgments have made it clear that while the competition rules leave considerable room for the normal exercise of IPRs, in exceptional cases, they place defnite limits upon the exercise of IPRs in the name of consumer welfare and consumer choice. The considerable room for the normal exercise of IPRs under the competition rules stems from the belief that the exercise of IPRs, together with entrepreneurial freedom, makes an overall contribution to economic welfare by producing innovative activity. This view is built into the very fabric of the competition rules and is applied at the operational level. Thus, Article 102 itself makes it clear that achieving a dominant position itself can be lawful. This has been interpreted to mean that a frm can legiti- mately grow to a dominant position through internal growth owing to effciencies of production and distribution, investment in research and development, and exploitation of IPRs. Moreover, even though Article 102 is concerned about maintaining competi- tion in markets that are threatened by a dominant player, and places a special respon- sibility upon dominant frms not to further weaken residual competition abusively, it nevertheless allows a dominant frm to compete and eject frms from the market as long as it “competes on the merits”. This allows the already dominant frm to increase its profts and market share through the legitimate use of IPRs and innovation96. For

96 A similar analysis can be done in relation to Article 101. See Anderman, “The IP and Competition Interface: New Developments” in Anderman and Ezrachi (eds.), Intellectual Property and Competition Law: New Frontiers (Oxford, 2011).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 221 Consumer welfare and consumer choice in the reconciliation of the conficts between competition law and IPRs example, in AstraZeneca97, the European Court of Justice found that it was legitimate for a dominant frm to collect data on tests and clinical trials and to protect that data while the patent had not expired. However, while the contribution of IPRs to consumer welfare is taken into account by competition law in these ways, if the commercial use of an IPR by a dominant frm clashes with a prohibition in the competition rules, it will be constrained by those rules. Thus, in the defnition of the relevant market, an IPR product can fnd itself in a one product market owing to the narrow market determinations of the Commission. For example, in AstraZeneca, the product Losec, a treatment for ulcers, was characterized as in a separate market for proton pump inhibitors and not in a general market for anti-ulcer drugs. Similarly, in the assessment of dominance there are no special conces- sions for IPRs. The market power of the IPR owning frm is assessed by a factual analysis, assisted by economic reasoning, which is similar to the analysis of the market power of any other form of property ownership. The IPRs could be factually relevant to the market power of the frm or be factually irrelevant. The IPRs could create real restrictions on competition in the form of barriers or impediments to entry or they may have no such effect. At this stage, the innovative features of IPRs are viewed factually in light of their contribution to market power. As we know, patents only rarely assumed to coincide with market power. Most patents are merely legal monopolies that either have no market at all or, if in a market, have substitutes. However, even though there is no longer an assumption that a patent is automatically associated with market power, an IPR in a rare case can be found as a matter of fact to be an asset that helps its owner enjoy dominance in a market98. On the other hand, the treatment of the concept of abuse contains certain concessions for the contribution of IPRs to innovation and consumer welfare. That is not entirely surprising because the concept of competition on the merits embraces the theory of dynamic competition, which recognizes that IPRs offer a reward/incentive to invent new products and is complementary to the pressure on frms to innovate created by effective competition. Two good examples of this are Articles 102(a) on unfair pricing and 102(b) on refusals to license. Thus under Article 102, the abuse of refusing to license an IPR is given special treatment. It requires “exceptional circumstances” to be shown before an IPR owning frm that refuses to offer a license can be found to be infringing Article 102(b) TFEU99. Another example is the test of unfair pricing in

97 Case C-457/10 P, AstraZeneca AB v. Commission. 98 See, e.g., AstraZeneca. 99 See, e.g., Joined Cases C-241/91 P and C-242/91, Radio Telefs Eireann (RTE) and Independent Television Publi- cations (ITP) v. Commission (Magill), [1995] E.C.R. I-743; Case T-201/04, Microsoft v. Commission. These cases are discussed in Anderman and Schmidt, Intellectual Property Rights and EU Competition: The Regulation of Innovation (Oxford, 2nd ed. 2011).

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222 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Steven Anderman

Article 102(a) TFEU, which takes into account the costs and risks of investing in research and development and IPRs and the economic value of the product in deter- whether or not the pricing of an IPR is unfair100. However, as we have seen, the normative approach of the EU courts, based on a concern to maintain effective competition in markets, has meant that EU competition law sets limits to the exercise of IPRs where they plausibly threaten foreclosure of competitors. This approach is viewed as an indirect protection for consumers but the primary concern is focused on the protection of “as effcient” competitors to ensure that such competitors are not eliminated from the market because of anticompetitive practices. If certain types of conduct by a dominant frm, with or without IPRs, result in a further weakening of as effcient competitors in a market by means other than competition on the merits, the test can be quite strict. The fnding that a frm engages in such conduct, without objec- tive justifcation, will be suffcient to prove abuse, as long as such conduct can be plausibly shown to be capable of having exclusionary effects101. In addition to the low burden of proof of anticompetitive effects discussed above, an important component of the normative approach under Article 102 TFEU is the EU courts’ treatment of the dynamic effciency defense as an objective justifcation. A recent version of the dynamic effciency defense is the argument that, if competition rules provide compulsory licenses of IPRs as a remedy, they will reduce the incentives of undertakings to innovate. For example, in the Microsoft case, Microsoft asserted that it would have less incentive to develop a given technology if it would be required to make that technology available to its competitors. The Commission had attempted to tackle Microsoft’s assertion by balancing the arguably negative impact on Microsoft’s incentives to innovate against the positive effect that a compulsory license would have on dynamic effciency for the industry as a whole, because interoperability would result in several sources of innovation and would avoid consumers being locked in to the innovation of a single frm. The General Court took the view that what was called for under Article 102 TFEU was not a balancing exercise of the two theories of innovation but a more legally structured assessment of Microsoft’s arguments. It held that Microsoft’s assertion could only be recognized as an objective justifcation if Microsoft came forward with suff- cient evidence to show that it had a plausible claim. The Court stated that once the constituent elements of the abuse have been established, in this case that there were exceptional circumstances requiring an obligation to provide interface information, the burden shifts to the dominant frm to raise any plea of objective justifcation and support it with arguments and evidence. In the case, Microsoft did not meet its burden.

100 Ibid. 101 Case C-549/10 P, Tomra Systems ASA v. Commission, paras 68, 79.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 223 Consumer welfare and consumer choice in the reconciliation of the conficts between competition law and IPRs

Its arguments were too vague, general, and theoretical102. As we have seen previously, the European Court of Justice in Post Danmark indicated that effciencies defenses are valid but not when they would eliminate effective competition103. Thus, arguments about incentives to innovate (and pro-consumer effciencies) will be accepted as objective justifcations only in so far as they are rooted in fndings of fact about current conduct or information known at the time the conduct was engaged in. Predictions about the future may be too speculative to provide convincing legal evidence. It is important to note that when the substantive competition rules are applied to the practices of IPR owners, they often take the form of support for follow on innovation and its contribution to consumer welfare when the support has not been offered by intellectual property laws. Thus, in Microsoft104 the court approved the Commission’s interpretation of the exceptional circumstances rule to extend to all cases where the conduct of the dominant frm tends to limit the technological development of markets to the detriment of consumers. This substantive rule attempts to ensure that Article 102 can be used to strike a balance in favor of plural sources of innovation in an industry as opposed to individual sources of innovation where the protected IPR owner attempts to use its market power to block other sources of innovation. Similarly, in Magill105 the competition rules were held to offer a remedy of compulsory licenses where the dominant IPR owner refuses to supply or license an indispensable input for a new product for which there is demonstrable unmet consumer demand. The competition rules thus place a premium on satisfying consumer wants—and hence consumer choice. In addition, the competition rules have been interpreted to supplement the intellectual property laws when patentees engage in a misuse of their patent protection. AstraZeneca shows how the misuse of the process of Supplemental Certifcates for pharmaceuticals can be unlawful under the competition rules because it denies access to generic producers. A series of cases following the Pharmaceutical Sector Inquiry have found that pay for delay patent dispute settlements can take anticompetitive forms106. Further- more, patent ambush107 and injunctions against willing licensees108 by standard essential patent holders with FRAND obligations have been restricted by the compe-

102 Case T-201/04, Microsoft v. Commission, para. 698. 103 Case C-209/10, Post Danmark A/S v. Konkurrencerådet, para. 42. 104 Case T-201/04, Microsoft v. Commission. 105 Joined Cases C-241/91 P and C-242/91, Radio Telefs Eireann (RTE) and Independent Television Publications (ITP) v. Commission (Magill). 106 IP/13/563, Lundbeck. 107 See, e.g., Rambus. 108 See Case C-170/13, Huawei v. ZTE.

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224 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Steven Anderman tition rules. Finally, baseless claims of patent infringement by dominant frms have been viewed as potential violations of Article 102 by the Commission109. These cases provide a form of regulation of conduct by patentees that has not been adequately regulated by the patent laws. In such situations, the competition rules reinforce consumer choice against the misuse of IPR owners of their property rights.

V. Concluding thoughts

The reconciliation of competition law and the exercise of IPRs has been directly affected by the consumer welfare goals of the two felds of law in two respects. On the one hand, as we have seen, the framework of competition law gives a wide berth to the “normal” exercise of IPRs as competition on the merits and limits the commercial exercise of IPRs only in “exceptional” cases. This is the way in which the accommodation and reconciliation of the competition rules with IPRs takes place. This is the sense in which there is a partial congruence between the two felds of law in promoting consumer welfare and consumer choice. On the other hand, in the exceptional cases of confict, the competition rules set rather strict limits on anticompetitive conduct by IPR owners when they threaten effective competition in markets. The competition rules do this because a threat to effective competition is viewed as a threat to consumer choice and consumer welfare. The Commission, with the support of the courts, assesses potential and actual consumer harms (or harms to effective competition) using the tools of narrow market defnition, economically sophisticated assessment of market power, and normative, or rule based, approach to abuse. The limits placed on IPRs by competition law do not necessarily curb their innovative force. In the frst place, as part of their efforts to maintain competition and consumer choice, the competition rules have often acted to reinforce the efforts of the intellectual property laws to ensure follow on innovation in situations where the patent and copy- right holders are not restrained by the intellectual property laws from blocking such innovation110. Under Article 102(b), when patent owners are limiting the technical development of markets, the competition rules have been brought to bear against the holdups caused by patent holders in the context of technology pools and the standard setting process111. This can be seen as enhancing the innovative role of IPRs rather than restricting it.

109 See Case T-111/96, ITT Promedia v. Commission; Case T-119/09, Protégé International v. Commission. 110 See, e.g., Microsoft. 111 See, e.g., Rambus.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 225 Consumer welfare and consumer choice in the reconciliation of the conficts between competition law and IPRs

Although the competition rules can occasionally reinforce the process of cumulative innovation, it would be a mistake to assume that they can be looked to as a systemic solution to the imbalance within intellectual property laws. From the consumer welfare and consumer choice perspectives, the burden of providing a more appropriate balance within intellectual property laws between frst inventor/creator and follow on inventors and creators falls squarely upon the shoulders of legislators and judges. Finally, the normative approach of the European courts in this area has been subject to extensive criticism by defense lawyers, economists, and lobbyists. They have argued that it would be more realistic to have a more economic assessment of anticompetitive effects in the interpretation of Article 102 in the name of economic welfare and consumer welfare following the pattern in the United States112. They have also argued that the short-term approach is based on a static economic viewpoint and pays inad- equate heed to dynamic effciencies given that the goal is intended to be consumer welfare. However, in the face of the efforts of the Commission to introduce a more economic assessment of effciencies and probable harm, the EU courts continue to insist that the Commission must operate within the legal framework established by the courts and that the maintenance of effective competition requires a normative or rule based approach. In recent cases, as we have seen, the EU courts have already added some economic thinking to the normative approach by incorporating an economic plausibility screen in which a plausibility test is applied to assertions of the Commission as well as those of the defendant. This plausibility screen imports an economic element that can modify the normative legal conclusion. However, the courts have remained reluctant to add economic analysis to proof of likely harm once anticompetitive conduct has been demonstrated. They indicate that it should not be necessary to wait for actual or imminent harm; if the rules are broken, a plausible potential for harm is suffcient to establish anticompetitive conduct. The EU courts are also wary of the problems of presenting and evaluating conficting economic models offering evidence of probable effects. Some evidence for this is offered by the way the General Court limits its review on matters of assessment of economic and technical issues and defers to the “margin of appreciation” or “margin of discretion” of the Commission. It restricts its powers of full review to “matters of fact”. EU judges are clearly reluctant to introduce further economic argument into the assessment of exclusionary abuse.

112 See, e.g., Economic Advisory Group on Competition Policy, Report by the EAGCP—An economic approach to Article 82 (2005), (last visited 2 Feb. 2016).

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226 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Steven Anderman

Despite the assertions of economists, it is not the case that a greater use of economic analysis to determine legal “effects” is necessarily more objective or neutral than traditional legal reasoning113. Economic analysis is based on economic models which in turn are based on limiting assumptions and this weakens their claim to be “proof” in a legal sense. From a forensic point of view, some models are based on limiting assumptions that appear to allow them to achieve a pre-determined result114. Even Robert Bork warned that economic analysis should not be taken so far115. He thought that the measurement of effciencies for all practical purposes was impossible. He was not confdent that judges would be capable of weighing economic evidence in the context of applying the rule of reason. As he put it, weighing effects in any direct sense will usually be “beyond judicial capabilities” and is not needed116. Furthermore, the European Commission itself importantly acknowledged some reservations about adopting a pure economic welfare balancing assessment in part because “welfare balancing assessments necessarily require value judgements because of the diffculties of quantifcation”117. In any event, the Commission seems to have belatedly discovered that the adoption of what is effectively an additional constituent element to the test of abusive conduct will restrict the effectiveness of its enforcement measures. If, for example, to prove predatory pricing the Commission must frst show pricing below average variable costs and, in addition, a probability of recoupment, the rules against predatory pricing will be that much more diffcult to enforce. Hence, in recent cases, there are signs that the Commission has been arguing its competition cases more pragmatically by relying on the fact that the conduct is anticompetitive because of its object even if it attempts to make out a case of likely effects. If its own analysis of effects is inadequate, it can still achieve a result through “normative” object analysis. The EU courts’ continued adherence to a rule based approach may be based on a reluctance to engage with economics and economists. However, it is also true that it refects a predisposition to be more concerned with allowing competitive markets to

113 Ibid. 114 See Lianos, “‘Judging’ Economists: Economic Expertise in Competition Litigation: A European View”, in Lianos and Kokkoris (ed.), Towards an Optimal Competition Law System (The Hague, 2009), 185. 115 Bork was convinced that the trial of a rule of reason case should proceed without reference to consumer welfare and be structured into a series of steps with the burden of coming forward with evidence clearly placed on either the plaintiff or defendant. See Bork, “The Rule of Reason” (n. 32). In normal cases, he argued, the task is to assess the probable effect “by applying the rules of thumb constructed with the aid of economic analysis” where the “main criterion is market power”. Ibid. at 389. 116 See Rothery Storage & Van Co. v. Atlas Van Lines Inc., 792 F.2d 210, 230 n.11 (D.C. Cir. 1986). 117 See Guidance Paper, para. 12.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 227 Consumer welfare and consumer choice in the reconciliation of the conficts between competition law and IPRs be weakened by mistakes of under-enforcement118. The effect of this approach on the interface between intellectual property and competition laws is that the competition rules are more strict than those in the United States, but also possibly more predictable. From the viewpoint of the impact of the competition rules on IPRs, this is a desirable result.

118 The courts’ technique is possibly also infuenced by their experience in applying strict rules in freedom of movement of goods cases, as suggested by Katharina Voss, Stockholm University.

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228 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Consumer choice: the practical reason for both antitrust and consumer protection law*

NEIL W. AVERITT [email protected] Opinion Columnist, FTC:WATCH Former Attorney, Offce of Policy and Coordination, Federal Trade Commission

ROBERT H. LANDE [email protected] Venable Professor of Law, University of Baltimore School of Law

This article is about the relationship between antitrust and consumer protection law. Its purpose is to defne each area of law, to delineate the boundary between them, to show how they interact with each other, and to show how they ultimately support one another as the two components of a single overarching unity. That overarching unity is consumer choice. Antitrust and consumer protection law share a common purpose in that both are intended to facilitate the exercise of consumer sovereignty or effective consumer choice. Such consumer choice exists when two fundamental conditions are

* This article frst appeared in Loyola Consumer Law Review, Volume 10, No. 1, 1998, pages 44-63. It is reproduced with the authorization of the Publisher.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 229 Consumer choice: the practical reason for both antitrust and consumer protection law present: (1) there must be a range of consumer options made possible through compe- tition; and (2) consumers must be able to select freely among these options. The boundary between antitrust and consumer protection is best defned by reference to these two elements of consumer choice. The antitrust laws are intended to ensure that the marketplace remains competitive, so that a meaningful range of options is made available to consumer, unimpaired by practices such as price fxing or anticom- petitive mergers1. The consumer protection laws are intended to ensure that consumers can select effectively from among those options with their critical faculties unimpaired by such violations as deception or the withholding of material information. Protection by both the antitrust and consumer protection laws is needed to ensure that a market economy can continue to operate effectively. This protection is needed when “market failures” arise, which may create or permit competition or consumer protection problems. This article will demonstrate that antitrust violations (which impair the menu of options) stem from market failures in the general marketplace external to consumers, whereas consumer protection violations (which impair the individual’s ability to select) fow from internal market failures that take place, in a sense, “inside the consumer’s head”2. While this formula appears on its face to be of Doric simplicity, it provides a coherent theoretical framework from which antitrust and consumer protection law may be better understood and applied. This framework has not only theoretical interest, but also at least four signifcant practical consequences. First, a unifed theory of antitrust and consumer protection law will assist the enforcement authorities in determining when particular conduct or transactions should be pursued on antitrust as opposed to consumer protection grounds. Many concrete aspects and effects of a litigation vary according to whether it is clas- sifed as an antitrust or a consumer protection matter. For example, only antitrust violations give rise to criminal sanctions and automatic treble damages, and only in consumer protection cases is the Federal Trade Commission (FTC or Commission) required to use certain rule making and investigatory procedures. A unifed theory will make clear when antitrust or consumer protection laws should be utilized. Second, the importance of marketplace options in consumer choice suggests that antitrust should devote more attention than it now does to the role of nonprice competition. In certain sectors of the economy, such as high tech or mediarelated industries, diversity of

1 Not every activity that unreasonably distorts or restricts the options that otherwise would be open to consumers is an antitrust violation, however. The activity in question must also violate a specifc antitrust statute. Similarly, not everything that unreasonably interferes with consumers’ ability to choose among the available options is a consumer protection violation. The activity also must violate a specifc consumer protection principle. 2 Not every market failure is or should be illegal. Certain market failures lead to specifc activities that society has made illegal, however, including cartels and deceptive advertising.

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230 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande options may be far more important to consumers than price competition. Third, because consumer choice is important, consumer protection actions should be limited to conduct that has a reasonably clear effect on consumers’ ability to select, and such actions should not be brought against conduct that is objectionable on less clearly defned moral or equitable grounds. Finally, our framework should be useful to those countries that are establishing or reorganizing trade regulation programs for the frst time. The discussion of our proposed unifed theory will be divided into four principal sections. The frst section introduces and defnes the concept of effective consumer choice, which requires both the existence of consumer options and the ability to select among these options. The second section reviews antitrust and consumer protection case law and shows that this law is consistent with (and explicable by) an optionoriented model of consumer choice. The third section identifes and discusses the economic market failures that may tend to impede the exercise of consumer choice by restricting either the menu of options or consumers’ ability to select among them. Finally, the fourth section explores the practical implications and consequences of our proposed framework. Among these consequences, the framework suggests that antitrust law should be construed somewhat more broadly than in the past, and consumer protection law somewhat more narrowly.

I. An optionoriented concept of consumer choice

Simply put, consumer choice or consumer sovereignty is the state of affairs that prevails or should prevail in a modern freemarket economy. It is the set of societal arrangements that cause that economy to act primarily in response to the aggregate signals of consumer demand, rather than in response to government directives or the preferences of indi- vidual businesses. It is the state of affairs in which the consumer is truly “sovereign”, in the sense of having the power to defne his or her own wants and the ability to satisfy those wants at prices not greatly in excess of the costs borne by the providers of the relevant goods and services3. The concept of consumer sovereignty goes so far as to embody at least some implicit notions about the proper relationship between the individual and the state; it is part of the Western world’s answer to the prescriptions of Marxism.

3 Moreover, each product has a cluster of other attributes, such as quality, safety, and availability of related services. The free market will decide the mix of price, quality, and related attributes that consumers value most.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 231 Consumer choice: the practical reason for both antitrust and consumer protection law

The essence of consumer sovereignty is the exercise of choice. By choosing some goods or some options over others, consumers satisfy their own wants and send signals to the economy. It is, therefore, critical that the exercise of consumer choice be protected. We have already seen that effective consumer choice requires two things: options in the marketplace and the ability to select freely among them. To turn this conceptual paradigm into operational policy, at least some rough degree of quantifcation is required. Just how many options must be present in the market? Just how free from external infuences must consumers be? In an imperfect world, of course, the answers to these questions must be standards of suffciency rather than standards of perfection. In other words, we look for enough options and enough freedom to ensure that the choices are right (i.e., welfaremaximizing) most of the time. That approach does not prevent unsatisfactory outcomes in some individual cases, but it should ensure that unsatisfactory options are weeded out fairly quickly. Thus, we do not simply require the maximum number of options. Antitrust law does not prevent all conduct or transactions that have the effect of reducing the number of options available to consumers. Nor does the law affrmatively require the creation of options. Rather, it prevents business conduct that artifcially limits the natural range of options in the marketplace4. Indeed, the law permits even some artifcial reductions, such as some mergers, if the benefts of the action appear to outweigh the costs. Through these means, the antitrust laws aim to preserve a suffcient, although not a perfect, array of options for consumers to choose among. Consumer protection laws are similar in the sense that they seek to protect the ability of consumers to make rational choices among competing options but do not necessarily strive to ensure that consumers have perfect information5. Probably no consumer is a perfect reasoning machine, existentially free from all the extraneous infuences of early upbringing, cultural values, or halfremembered advertising campaigns from years ago. What we ask of consumer protection law is therefore something relatively modest. We ask that consumers be enabled to make rational choices to the extent that they wish to concentrate on doing so. Consumer protection law ensures that buyers are protected from coercion, deception, and other infuences that are diffcult to evade or to guard

4 Some products are withdrawn from the market because not enough consumers desire to purchase them; some frms exit the market because they are not as innovative or effcient as rival frms; and some frms disappear through merger because they had not attained a minimum effcient scale. These processes refect the ordinary workings of the marketplace. What antitrust forbids is conduct that artifcially reduces the number of options directly and without the mediating agency of consumer choice. 5 The FTC has the authority to require that certain fundamental information be make available to consumers for such purposes as correcting statements that would otherwise be misleading, or correcting “pure omissions” in circum- stances where doing so would deliver a net beneft to consumers. The scope of this authority is limited by several factors, however. There are practical and equitable limits on how much affrmative disclosure frms can made. See, e.g., In re International Harvester Co., 104 F.T.C. 949 (1984) (holding that though manufacturer’s failure to disclose known safety risks in its tractors was a statutory violation, no remedial action was needed because the tractor design was no longer produced and the manufacturer’s voluntary notifcation program provided as much relief as could be expected).

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232 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande against, but it does not protect buyers from the milder, knowable infuences of things like “image” advertising, which they could set aside if they desired. As protected by these two principles, the exercise of consumer choice should be benefcial to consumers in a number of concrete ways. It will support and lead to an effcient economic market6. That, in turn, will tend to produce an environment offering the lowest prices, the best product quality and variety, the highest degree of consumer surplus, optimal levels of innovation, and all the other benefts of a competitive economy7.

II. Case law embodies this optionoriented approach to consumer choice

Antitrust and consumer protection case law generally follows the pattern that a consum- erchoice model would suggest. The antitrust case law can be explained in terms of protecting the supply of options in the market, and the consumer protection case law can be explained in terms of protecting the ability to select among the available options. The model that we are presenting thus becomes a means of explaining, interpreting, and applying a long line of legal precedents. We demonstrate this thesis under two headings. The frst discusses the law of antitrust by frst identifying the main functional areas of antitrust such as collusion, mergers, and vertical restraints. It then shows that the law in each of these areas addresses a reduction in marketplace options. Under the second heading, we conduct a similar assessment of consumer protection law. We identify the basic substantive topics in this

6 Both antitrust and consumer protection statutes have the goal of enhancing economic effciency. See Robert H. Lande, “Wealth Transfers as the Original and Primary Concern of Antitrust. The Effciency Interpretation Challenged”, 34 HASTINGS L.J. 65, passim and especially at 10626 (1982). The statutes serve other economic goals as well. The primary goal of these statutes is to prevent unfair transfers of wealth from consumers to frms with market power (the antitrust statutes) or to frms unfairly acting against consumer interests (the consumer protection statutes). See id. at 108. 7 We should add some refnements and complexities to our basic model of consumer sovereignty. In some cases the “consumers” who need protection from misleading information are actually corporations who may be buying an industrial input for use in their own operations. See generally Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451 (1992) (describing independent service provider’s suit against producer of copy machines, which tied replacement parts to service). In other cases, the direction in which market power is exercised may be reversed, and it may be the manufacturers who need help fnding a range of marketplace options. For example, a manufacturer may confront a single monopsonist, or confront a cartel of purchasers (or oligopsonists) that have agreed on a common policy to keep prices low. With appropriate adjustments, our concept of consumer sovereignty can accom- modate these different circumstances. For the sake of simplicity, however, in the discussion that follows we will normally speak in terms of the most common situation, which is that of ultimate consumers purchasing from a limited number of manufacturers.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 233 Consumer choice: the practical reason for both antitrust and consumer protection law area of the law, such as deception or failure to disclose material information, and then show how these topics all address conduct that affects the ability to select among options. For most practices that violate the antitrust or consumer protection laws, the dichotomy this article identifes will neatly separate and distinguish the two felds of antitrust and consumer protection law. Predatory pricing and price fxing, for example, overwhelm- ingly affect the supply of options rather than choice among them. They are, therefore, antitrust violations. Fraud and deception, on the other hand, do not directly affect the supply of options, but rather the ability to choose among them. They are therefore consumer protection violations. Most cases are relatively easy to classify in this way8.

A. Antitrust violations reduce consumers’ options Traditional antitrust violationssuch as price fxing and related horizontal restraints, anticompetitive mergers, unreasonable vertical restraints, and predatory pricingft well into our model of consumer choice. Those violations can distort the supply of options by imposing restrictions on the variety of prices and products that the free market would offer. The antitrust laws have banned that restrictive conduct. Price fxing and other illegal horizontal restraints9 artifcially restrict the array of price options the competitive market would otherwise provide10. Price fxing prevents consumers from choosing the best price (or best quality - or variety -adjusted price) that would otherwise have been available11. Mergers are another traditional antitrust violation that has effects on the range of options available to consumers, both directly in the short term, and indirectly in the long term. An

8 Some situations, however, do not ft so neatly into our model. The pure dichotomy only deals with relatively direct effects of the practices in question. In the long run, the effects may interact in more complex ways. Market failures internal to consumers may eventually lead to market failures external to consumers, and viceversa. Similarly, practices that affect the market’s menu of options can also, in time, affect consumers’ ability to choose among options, which in turn could lead to further restrictions, or distortions, in the options made available through the marketplace. These complexities must be factored into the enforcer’s decisions regarding whether to prosecute and, if so, what remedy to seek. For a discussion of these interactions see Neil W. Averitt & Robert H. Lande, “Consumer Sovereignty: A Unifed Theory of Antitrust and Consumer Protection Law”, 65 ANTITRUST L.J. 713 (1997) 713, 73444. 9 Of course, not every horizontal restraint is illegal. A joint venture that increases industrywide innovation, for example, is generally procompetitive and legal. See generally 1 ABA Section of Antitrust Law, Developments 77 (Angland eds., 4th ed. 1997); Herbert Hovenkamp, “Federal Antitrust Policy” 140240 (1994). 10 Price fxing also can, to a small degree, distort consumer choice. A few consumers might not purchase if they knew that prices were fxed. The principal reason why we condemn it, however, is because it eliminates the option of price competition from the market. 11 Price fxing also has a number of indirect anticompetitive effects. It shields ineffcient frms from hard competition. See Lande, supra note 6, at 7879. It also causes allocative ineffciency and a transfer of wealth from consumers to producers. See id. at 7277.

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234 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande anticompetitive horizontal merger can directly eliminate signifcant competition by dimin- ishing options with respect to price, product quality, or product variety. It can also have the longrun or indirect effect of making industry wide collusion easier or more probable12, thus leading to the elimination of still more options that consumers might prefer. Resale price maintenance (RPM) and other vertical restraints can also have the effect of limiting consumer options. RPM directly restricts the price options open to consumers, limiting them to the manufacturer’s preferred price13. Nonprice restraints, such as exclusive dealing and exclusive territories, have similar effects, often signif- cantly restricting downstream frms in the choices that they can offer to consumers14. Predatory pricing similarly interferes with the array of options that a competitive market would present15. Predatory pricing occurs when a frm prices goods below cost in hopes of driving rivals out of the market, discouraging entry of new frms and/or extending the frm’s monopoly power. Predatorily low prices are good for consumers only in the short run. In the long run16, such prices threaten to eliminate frms that are providing alternatives that consumers would actually prefer. A focus on options also explains why certain practices that raise rivals’ costs are undesirable17. The rivals’ higher costs force the victims to raise their prices (or reduce their investment in product improvement and innovation), which enables the predator to raise its own prices (or reduce optionenhancing investment in research and innovation)18. The consumers thus lose the option of purchasing better or more competitively priced products.

12 See Hovenkamp, supra note 9, at 45566, 47988. 13 For an overview of these effects, see Alan A. Fisher et at., “Do the DOJ Vertical Restraints Guidelines Provide Guidance?”, 32 ANTITRUST BULL. 609, 61523 (1987). 14 See id. Of course, each of these practices also can cause signifcant, potentially offsetting procompetitive effects. See id. at 615 16. Moreover, these offsetting effciencies can sometimes be characterized as attempts to overcome market failures. See, eg., id. (discussing the point of sale “free rider” problem). If they are imposed by frms without market power the possibility that their anticompetitive effects (i.e., their option distortions) will be signifcant is probably quite small. For this reason, nonprice vertical restraints are judged under a rule of reason standard. See Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 59 (1977). Many believe that RPM also should be judged under the rule of reason or even that it should be deemed per se legal. See Fisher et al., supra note 13, at 615 n. 18. In any event, it is the possibility of anticompetitive option loss that makes antitrust agencies concerned with these transactions. 15 For an excellent discussion of predatory pricing theory and case law, see James D. Hurwitz & William E. Kovacic, “Judicial Analysis of Predation: The Emerging Trends”, 35 VAND.L.REV. 63 (1982); HOVENKAMP, supra note 9, at 298328. 16 This assumes the existence of effective barriers to entry, for without them similar frms would be able to enter and offer the desired options. 17 See Thomas G. Krattenmaker & Steven C. Salop, “Anticompetitive Exclusion: Raising Rivals’ Costs to Achieve Power Over Price”, 96 YALE L.J. 209 (1986). 18 For a thorough explanation and discussion of the necessary prerequisites to this conduct, see Thomas G. Krat- tenmaker et al., “Airlie House Conference on the Antitrust Alternative: Monopoly Power and Market Power in Antitrust Law”, 76 GEO.L.J. 241, 24853, 26569 (1987).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 235 Consumer choice: the practical reason for both antitrust and consumer protection law

Depending on the specifc antitrust principle involved, improper restrictions on consumer options may occur either directly as a result of frms’ actions vis-à-vis their customers, or indirectly as a result of frms’ actions vis-à-vis their competitors. For example, if a frm with market power over a product will sell it only when packaged with a second product, consumers’ options are directly reduced and distorted. The frm’s action vis-à-vis its customers may be condemned as an illegal tying arrangement. Alternatively, suppose that a frm merges with all of its competitors and then raises prices to a monopoly level. While monopoly pricing and the production of only a single brand is not illegal, the process by which the frm acquired this power to constrain options certainly might be. The frm’s actions vis-à-vis its competitors may then be condemned as involving anticompetitive mergers. In short, antitrust law can best be understood as a way of protecting the variety of consumer options in the marketplace.

B. Consumer protection violations impair consumers’ ability to select among options Consumer protection cases are similarly explicable as a means of safeguarding the ability of consumers19 to select among the options that the market provides. Thus, for example, the FTC has found that false or misleading statements about objective product characteristics are impermissible. It has acted to prevent such misrepresentation in claims involving the materials from which a product is made20, the functions that it can perform21, or the effectiveness with which it can perform them22. The FTC has been emphatic about this choiceoriented approach: “The Commission does not ordinarily

19 Actions that undercut the ability of competing frms to make free or informed decisions are properly considered antitrust violations, insofar as these actions ultimately affect the range of choice that is made available to the marketplace. For example, predation may be accomplished through false or deceptive information if an incumbent frm implements a “noisy” pricing strategy, which conceals the fact that its low prices are not based upon superior effciency but instead are actually below cost. Alternatively, a frm could develop an undeserved reputation for predatory pricing. In both these situations, the false information is likely to affect the target frm’s offerings to the marketplace rather than its purchases from the marketplace, and thus raises more antitrust than consumer protection issues. See infra notes 4445. 20 See, e.g., Federal Trade Comm’n v. Algoma Lumber Co., 291 U.S. 67 (1934) (holding inferior “yellow pine” could not be sold as “white pine”); Federal Trade Comm’n v. Winsted Hosiery Co., 258 U.S. 483 (1922) (ruling clothing made from a partwool mixture could not be sold as “wool”). 21 See, e.g., Carter Prods., Inc. v. Federal Trade Comm’n, 268 F.2d 461 (9th Cir.1959) (describing situation where laxative pills were misrepresented as a “natural method of selftreatment, that they contained no strong medicines, and that they were effective to treat liver conditions”); Charles of the Ritz Distribs. Corp. v. Federal Trade Comm’n, 143 F.2d 676 (2d Cir.1944) (ruling that no cosmetic cream could restore youth and that it was therefore deceptive to advertise a product as such). 22 See, e.g., Continental Wax Corp. v. Federal Trade Comm’n, 330 F.2d 475 (2d Cir.1964) (holding that the product name “Continental Six Month Floor Wax,” where unsupportable by empirical evidence, was deceptive); In re WarnerLambert Co., 86 F.T.C. 1398 (1975), aff’d as modifed, 562 F.2d 749 (D.C.Cir.1977) (ordering that manu- facturer cease and desist from advertising that it mouthwash “prevented, cured and alleviated the common cold”).

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236 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande seek to mandate specifc conduct or specifc social outcomes, but rather seeks to ensure simply that markets operate freely, so that consumers can make their own decisions”23. Misinformation on any of these basic points will, of course, tend to prevent a customer from making the most appropriate choice from among the options in the marketplace. The importance of choice in consumer protection matters is particularly well illustrated by one special class of cases, which involve misrepresentations regarding the collateral, social, or business attributes of a frm. Some cases of this sort may involve false or misleading claims that a particular product is environmentally benign or was produced in an environmentally friendly manner24. Other cases involve the improper use of the “Made in U.S.A.” designation. Information on these points is psychologically impor- tant to many consumers, even though it does not bear directly on operational product characteristics. For example, while some consumers regard the fact that a product was domestically manufactured as an indirect indication of product quality, many other consumers may prefer to purchase domestic products with only the patriotic goal of supporting the American economy. By determining that misrepresentations on these subjects are improper, the FTC has made it clear that the impairment of the ability to choose among options is a harm in itself, and that no more concrete economic harm needs to be shown. The consumer protection case law thus can be understood as addressing concern over the impairment of the buyer’s ability to select from among the market’s options provided25. The centrality of this element is underscored by the FTC’s Policy Statement on Deception26, which states that one prerequisite to liability for deception is that the alleged misrepresentation is “material,” meaning that it “is likely to affect a consumer’s choice of, or conduct regarding, a product”27.

23 In re International Harvester Co., 104 F.T.C. at 1061. 24 For statutory requirements regarding environmental advertisements, see FTC Guides and Trade Practice Rules, 16 C.F.R. §§ 260.1.9 (1998). 25 The FTC cases cited in the preceding paragraphs each involved circumstances of deception. Matters involving the FTC’s less frequently invoked consumer unfairness authority also involve the ability to make free choices, however. See Averitt & Lande, supra note 8. 26 See Deceptive Acts and Practices, 4 Trade Reg.Rep. (CCH) ¶ 13,205. 27 Id. at 20,916. Although the consumer’s “conduct regarding a product” is treated separately from the initial purchase decision, the two concepts are clearly related in that they both bear on the desirability and utility of the product, and hence on the choice among options.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 237 Consumer choice: the practical reason for both antitrust and consumer protection law

III. Market failures can threaten consumer choice

Consumer sovereignty is the state of affairs in which consumers have an unimpaired ability to make decisions in their individual interests, and markets operate effciently in responding to the collective effect of those decisions. These market mechanisms can fail for a variety of reasons, however, leading to an impairment of consumer choice. Some of these market failures are external to the consumer, or “outside the head,” leading to an inability of the market to provide suffcient options. Other failures are internal to the consumer, or “inside the head,” in the sense that they make the consumer unable to effectively select among the available options. Antitrust and consumer protection law may be viewed, in economic terms, as intended to identify and compensate for these two types of market failures28. By so doing, they are again seen, this time through the lens of economics, as helping to attain the ultimate goal of consumer choice. In the discussion that follows, we will frst explain what is meant by a “market failure” generally, and then will discuss the specifc market failures that are of concern to antitrust and to consumer protection.

A. Market failures defned It is axiomatic that perfect competition, the perfect functioning of a competitive market, will maximize the welfare of consumers29. Markets that diverge signifcantly from perfect competition may not do so. If a market’s characteristics differ dramatically from those required for perfect competition, “market failure” can result. The overall level of consumer welfare may then be far below what it otherwise would be, and wealth that Congress assigned to consumers may be “unfairly” acquired by frms with market power.

28 This should not be taken to imply that every practice that has the adverse economic effects of taking advantage of market failures, distorting options, or restricting consumer choice is or should be a law violation. Often these effects are insignifcant or are outweighed by offsetting procompetitive benefts. At other times, practical considerations may suggest that the most appropriate rule is one that is relatively inexpensive, predictable, and easy to administer, even if it does not halt all instances of anticompetitive behavior. For a discussion of these jurisprudential issues, see Alan A. Fisher & Robert H. Lande, “Effciency Considerations in Merger Enforcement”, 71 Cal.L.Rev. 1580, 165259, 167077 (1983); Phillip Areeda, “Monopolization, Mergers, and Markets: A Century Past and the Future”, 75 CAL.L.REV. 959, 960 (1987) (stating “[a]ntitrust law cannot feasibly address every deviation from perfect competition....”). 29 See F.M. Scherer & David Ross, “Industrial Market Structure and Economic Performance” 1529 (3d ed. 1990).

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238 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande

Although economists generally agree on the fundamental concept of perfect competi- tion, there is no universally agreed upon list of factors that defne perfect competition or whose absence may lead to market failure. A leading scholar of the subject, Professor Edwin Mansfeld, believes that perfect competition requires four conditions: (1) product homogeneity; (2) a relatively small number of buyers and sellers; (3) mobile resources; (4) and perfect information30. Professor Jack Hirshleifer has considered the converse situation and found a list of three possible imperfections that can prevent a market from functioning perfectly, including imperfect information, time lags, and transaction costs31. Signifcant problems in any of these areas can cause competition to be subop- timal. Despite disputes over taxonomy32, a basic list of factors that can plausibly cause competition to become suboptimal is relatively noncontroversial33.

B. Market failures subdivided into those external and internal to consumers The market failures identifed in the previous section in general terms can be divided into two types. The frst take place “outside the head” of the ultimate consumer of the product or service at issue and involve imperfections in the external market. These failures can lead to a reduced choice of options and to antitrust problems. The second type of market failures take place “inside the consumer’s head”. They involve the consumer’s imperfect ability to process information and to distinguish the true from the false. These failures can lead to a reduced ability to select among options and to consumer protection problems. A consumer is affected to different degrees by these two kinds of market failures. The model economic consumerallknowing, allrational, and supremely intelligentis not vulnerable to consumer protection violations. But even this hypothetical “perfect” consumer could be vulnerable to antitrust violations. No consumer, no matter how astute, experienced, or wellinformed, can protect him or herself against a cartel or illegally acquired monopoly. Except on rare occasions, ultimate consumers have no choice but to deal with a cartel or monopoly (or else to move to a lessdesirable substi- tute); it generally is not cost effective for an individual consumer to build his or her own factory. By thus subdividing market failures into those taking place “inside” and

30 See Edwin Mansfeld, “Microeconomics: Theory & Applications” 23233 (5th ed. 1985). 31 See Jack Hirshleifer, “Price Theory and Applications”, 41719 (3d ed. 1984). 32 For example, a market with diffcult entry and with sellers or buyers large enough to affect price could be said to experience a “physical” market failure. We also could ask how these frms were able to become so large, and to characterize the causes (e.g., the imperfect information or transaction costs themselves as “market failures”). 33 For a further discussion of some of the complexities that can arise, including the issues of how often market failures are likely to occur and how quickly they will correct themselves, see Averitt & Lande, supra note 8.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 239 Consumer choice: the practical reason for both antitrust and consumer protection law

“outside” the head of ultimate consumers, we make the categories of our economic analysis most nearly congruent with the kinds of consumer choice problems that are of concern to antitrust enforcement agencies.

C. Antitrust violations require market failures external to consumers The market failures that permit antitrust violations all take place in the world external to the consumer. Without such market failures, as this term was broadly defned above, there could be no antitrust violations that signifcantly harm consumer welfare. In a perfect, frictionless world, businesses could still meet and fx prices. This would result in a technical violation of the antitrust laws and even in criminal penalties34. But, the violation could not substantially harm consumer welfare because perfect informa- tion among businesses would allow some to quickly enter the pricefxed markets and compete away supracompetitive margins. What makes antitrust injury possible in these circumstances is the presence of external market failures. Market imperfections such as search costs, faulty information, time lags, and sunk costs can enable a cartel to keep prices elevated for a signifcant period. External market failures may be necessary for the existence of anticompetitively low pricing as well as for anticompetitively high prices35. The most straightforward form of predatory pricing deeppocket predationrequires that there be a faw in the capital market, for without such a faw the victim would be able to secure a loan and ride out the period of belowcost pricing36. Indeed, for every possible predation strategy, a counterstrategy could probably be devised by a suffciently informed and astute competitor or potential victim37.

34 See ABA SECTION OF ANTITRUST LAW, supra note 9, at 21959. 35 See Richard O. Zerbe, Jr. & Donald S. Cooper, “An Empirical and Theoretical Comparison of Alternative Predation Rules”, 61 TEX.L.REV. 655, 658 (1982). 36 If information is perfect and a wouldbe predator lowers price, an equally effcient competitor will have an incentive to mothball its plant and reopen it after the predation ends. If the intended victim runs out of money in the short run, it can get a loan and repay it out of its expected future monopoly profts. Since this mothballing can happen, the antecedent predation will not happen often. In Matshushita Electrical Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574 (1986), the Supreme Court cited Judge Bork and other Chicago School analysts and essentially embraced the view that predatory pricing was an extremely rare phenomenon. The antipredation scenario might not work, however, if information is imperfect. Suppose the owner of the mothballed factory goes to a bank for a loan. The banker probably would say thatdue to imperfect informationhe or she was not certain that the victim was as effcient as the monopolist. The banker therefore would either deny the loan or would loan only at an extremely high rate. Thus, if information is imperfect even oldfashioned deeppocket predation might be possible. For a discussion of more complex forms of predation, including “reputation predation” and “noisy pricing predation” see Averitt & Lande, supra note 8. 37 See Frank H. Easterbrook, “Predatory Strategies and Counterstrategies”, 48 U.CHI.L.REV. 263 (1981).

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240 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande

Other antitrust cases involve practices that take advantage of, even if they do not cause or exacerbate, market imperfections. For example, imperfect information led to the anticompetitive use of resale price maintenance in In re Levi Strauss & Co38. When jeans were a relatively new product for middleclass consumers, Levi Strauss had to use resale price maintenance to guarantee retailer margin and in effect buy shelf space39. During this period, consumers’ imperfect information concerning this relatively new product led to the procompetitive imposition of resale price maintenance. After the product was well established, however, resale price maintenance was no longer needed, and Levi Strauss anticompetitively kept prices at too high a level40. Imperfect informa- tion on the part of Levi Strauss caused the company to fail to realize that it should have changed marketing strategies. It maintained a resale price maintenance strategy longer than was optimal for society, or for Levi Strauss. Some of the market failures discussed above directly impact individuals, and some impact businesses. Regardless of who the ultimate consumers are, however, the failures in all these antitrust cases are external to such consumers.

D. Consumer protection violations require market failures internal to consumers Similarly, consumer protection problems cannot occur absent market failures occurring “inside the head” of ultimate consumers. Hypothetical consumers who are perfectly informed, rational, and intelligent can never be subject to consumer protection abuses. Ordinary consumers, however, can have greater diffculties. The most common internal market failures revealed by the FTC’s experience fall into fve categories. (1) Some consumers are subject to coercion and cannot act with free will. (2) Other consumers are members of a vulnerable group (such as children) and are not always able to make rational decisions. Still other consumers will be acting rationally and with free will, but will be vulnerable to exploitation due to any of several types of information problems: (3) information that is wrong, (4) information that is incomplete, or (5) information that is unduly hard to process. Virtually every consumer protection concern can be understood in terms of one or more of these fve types of internal market failure.

38 See In re Levi Strauss & Co., 92 F.T.C. 171 (1978) (Compl. ¶ 8). 39 See Sharon Oster, “The FTC v. Levi Strauss: An Analysis of the Economic Issues, Federal Trade Commission”, in “Impact evaluations of Federal Trade Commission vertical restraint cases” pp 1, 48 (Ronald N. Lafferty et al., eds., 1984). 40 See id.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 241 Consumer choice: the practical reason for both antitrust and consumer protection law

The frst of the above mentioned market failures involves situations in which an individual cannot exercise free will. This situation can arise most obviously when individuals have been subjected to overt coercion. Such cases are rare but they do exist. One arose when a furnace company adopted the practice of having its salesmen disassemble a homeowner’s heating unit for “inspection” and then refuse to reassemble it until the homeowner agreed to buy additional parts or services41. A second type of market failure involves situations in which consumers are members of vulnerable groups, and thus are susceptible to undue infuence by sellers. For example, certain lottery techniques for selling candy have been found improper in part because they were aimed at “children, too young to be capable of exercising an intel- ligent judgment of the transaction....”42. By far the most important type of consumer protection market failure involves consumers who are capable of rational decisions, but whose decision making abilities have been impaired by incorrect information. A manufacturer’s use of false or misleading information is perhaps the greatest single threat to the free exercise of consumer choice. Therefore, both the FTC Act and other general prohibitions separately and specifcally ban unfair consumer practices43. A related type of “inside the head” market failure can arise if sellers withhold particu- larly important information, not readily available elsewhere, that consumers need in order to make informed comparisons. The FTC has issued several rules addressing such problems. These have required manufacturers to disclose the most basic functional characteristics of their products such as the Rvalue of insulation and the octane rating of gasoline44. The ffth class of market failures can be thought of as a specialized subset of the fourth. Both Congress and the FTC seek to protect consumers against information disclosures that are in a form too diffcult for consumers to process and apply. Credit reporting laws, for example, mandate disclosure that a payment of $100 per month of interest on a certain principal amount for four years really equals a 22% rate of interest. These laws make it easier for consumers of credit to engage in comparison shopping. Like

41 See In re Holland Furnace Co., 55 F.T.C. 55 (1958), aff’d, 295 F.2d 302 (7th Cir.1961). 42 See Federal Trade Comm’n v. R.F. Keppel & Bro., 291 U.S. 304, 309 (1934). 43 Deception cases, an integral part of the larger effort to protect consumer sovereignty, are one specifc application of the broad prohibition against “unfair” consumer practices embodied in Section 5 of the FTC Act. See Neil W. Averitt, “The Meaning of ‘Unfair Acts or Practices’ in Section 5 of the Federal Trade Commission Act”, 70 GEO.L.J. 225 (1981). 44 See Labeling and Advertising of Home Insulation, 16 C.F.R. § 460 (1996) (requiring disclosure of Rvalues); Automotive Fuel Ratings, Certifcation and Posting, 16 C.F.R. § 306 (1996) (requiring disclosure of octane ratings of automotive gasoline).

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242 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande the fourth category, the focus here is on giving the consumer not only accurate infor- mation, but also accurate information that is reasonably complete and useable. All fve of these categories are consistent with our consumer sovereignty model of the consumer protection laws. They all tend to address types of market failures that occur “inside the consumer’s head” and tend to impede the consumer’s ability to choose from among the available options.

IV. Practical consequences of a unifed theory

The view of the law outlined in the previous sections of the article is of more than theoretical interest. It also has a number of intensely practical implications. Four of those implications will be discussed in this section. First, a unifed theory of consumer sovereignty helps ensure that the litigation in each case will follow the procedures and standards set out in the appropriate part of the statute. Second, a modifed theory modestly extends the scope of antitrust law by reminding the legal community of the important role played by nonprice competition. Third, it modestly limits the scope of consumer protection law by focusing attention on conduct that impairs the ability to select, rather than on conduct that is “unfair” in some broader sense. Finally, it suggests a conceptual framework to countries that are adopting or organizing fair competition laws for the frst time.

A. Jurisdictional coverage of the antitrust and consumer protection laws can be clarifed Our dichotomy will make the defnitions of antitrust and consumer protection law more rigorous, which in turn will assist government offcials in deciding under which theory to pursue a particular problem. This determination is important for three reasons. First, Sherman Act antitrust violations can lead to criminal penalties45, and virtually every antitrust violation can lead to automatic treble damages46. In light of these relatively heavy penalties, it only seems fair to articulate more clearly which type of actions are antitrust actions.

45 See 15 U.S.C. §§ 13 (1996). 46 See 15 U.S.C. § 15(a) (1996). Some exceptions exist for those relatively rare events that violate the FTC Act but not the Sherman or Clayton Acts. See generally Neil W. Averitt, “The Meaning of ‘Unfair Methods of Competition’ in Section 5 of the Federal trade Commission Act”, 21 B.C.L.REV. 227, 265 (1980).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 243 Consumer choice: the practical reason for both antitrust and consumer protection law

Second, the decision on which statute to apply has many practical consequences for the development and conduct of a case. It will affect the procedures the parties will follow, the remedies that are available, and which enforcement staff will have jurisdiction over a case. For example, the FTC has been given special procedures for use in rule making47 and in consumer redress48 in consumer protection cases but not for use in antitrust matters. The FTC is similarly required to use civil investigative demands (CIDs) in most consumer protection cases but not in antitrust matters49. Properly assessing the type of case involved will determine which of these procedures should be used. Third, our dichotomy can help determine whether the main substantive charge in a particular matter has been framed under the proper provision of law. This will help ensure that a matter has been brought using the proper terms, and by the right enforcer, and thus may protect against motions to dismiss. Conversely, familiarity with these issues may help members of the defense bar to secure the of actions that have been brought under an improper legal heading.

B. Nonprice competition should become a higher priority for antitrust enforcement A second implication of this article’s analysis is that the antitrust laws should focus on protecting consumer options generally, not just low price options in particular. Expressed differently, it suggests that the interpretation of the antitrust laws should be mildly expanded to take a somewhat greater account of nonprice competition.

47 The FTC Act was amended to provide special, specifc rule making procedures for use “with respect to unfair or deceptive acts or practices....” 15 U.S.C. § 57a(a)(1) (1996). The amendment spells out procedures affecting Federal Register notice, notice to Congress, the rights that the parties have to present evidence, specifc points to be addressed by the Statement of Basis and Purpose, and similar matters. See id. at § 57a. The section further specifes that “[t] he Commission shall have no authority ... other than its authority under this section, to prescribe any rule with respect to unfair or deceptive acts or practices....” Id. at § 57a(a)(2). Competition rules, in contrast, may be promulgated through the general procedures of the Administration Procedures Act. See National Petroleum Refners Ass’n v. Federal Trade Comm’n, 482 F.2d 672 (D.C.Cir.1973). 48 Courts are specifcally authorized to grant redress in certain consumer protection matters. An amendment to the FTC Act states that, where there has been a violation of a rule involving unfair or deceptive acts or practices, or certain types of particularly clear violation of the general consumer protection statutes, courts “shall have jurisdic- tion to grant such relief as the court fnds necessary to redress injury to consumers.... Such relief may include ... rescission or reformation of contracts, the refund of money or return of property, [or] the payment of damages....” 15 U.S.C. § 57b(b) (1996). Somewhat similar remedial authority, usable in both competition and consumer protec- tion contexts, has also been judicially implied as inherent in the courts’ equitable powers to grant injunctions under § 13(b). See Federal Trade Comm’n v. H.N. Singer, Inc., 668 F.2d 1107, 1113 (9th Cir.1992). 49 CIDs may be used in antitrust matters, although the antitrust staff generally prefers to rely on conventional subpoenas. See 15 U.S.C. § 57b 1(a)(7) (1996) (“violation” includes “any antitrust violation”). For most forms of administra- tive litigation in consumer protection matters, however, CIDs must be used as the vehicle for discovery. “For the purpose of investigations performed pursuant to this section with respect to unfair or deceptive acts or practices ... all actions of the Commission [under certain sections] shall be conducted pursuant to subsection (c)....” Id. at § 57b1(b) (1996). That section then spells out special procedures covering such matters as oaths, where and how the CIDs are served, in what way the subjects of the inquiry may be represented by , and the like. See id. at § 57b1(c).

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244 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande

The enforcement agencies have already recognized the importance of preserving nonprice options in suffciently clear circumstances. They have certainly recognized that frms can compete on dimensions other than price. Nonprice competition can be extremely important to both commercial and industrial purchasers. Such competition can take place in terms of innovation, scheduling, service, convenience, or product variety. Such factors can be especially important in particular industries. At certain times in the past, for example, the airlines appeared to compete in large part in terms of scheduling and convenience, and members of the motion picture industry compete in terms of product innovation. Similarly, consents in several recent pharma- ceutical merger cases have resolved FTC concerns that mergers might impair compe- tition, not in current business, but rather in the innovation of future products50. These concerns may or may not be readily expressed in terms of price, but they defnitely involve the range of choice that might become available in the marketplace and thus are most easily comprehended under a formula that focuses on the factor of choice. Indeed, in some products, quality competition may be the most important dimension to consumers. In the market for bulletproof vests, for example, buyers certainly care much more about product reliability than about product price. For this reason, the FTC was concerned when an association of bulletproof vest manufacturers adopted a rule restricting comparative advertising. The association’s rule had declared that it was unethical for any member to represent that another member’s vests had failed certif- cation testing even if the advertising claim was true. The FTC sought and accepted a consent agreement against this practice because elimination of the advertising ban would tend to foster useful quality competition51. In more ordinary antitrust cases, however, where the elimination of nonprice compe- tition is not so obviously central to the violation, the enforcement agencies have sometimes tended to deemphasize this factor. For example, the conventional antitrust analysis under Section 7 of the Clayton Act concentrates almost exclusively on the price effects of a merger, concluding that the merger is to be condemned if it is likely to lead to higher prices. Even if the merger has no signifcant effect on price, however, an anticompetitive merger might adversely affect consumers with respect to other forms of competition. A focus on consumer choice as a goal will make it easier for enforcement agencies to consider the merger’s effects in these areas. Moreover, given that competition in these dimensions might be affected at concentration levels different from those most relevant for pure price considerations, attention to consumer choice may sometimes suggest challenges to mergers that would not otherwise be illegal.

50 See, e.g., Ciba Geigy, Ltd., Analysis to Aid Public Comment, FTC File No. 9610055, 1997 WL 1540 (Fed. Reg. Jan. 3, 1997) (agreement intended to protect competition in development and commercialization of gene therapy treatments) (consent provisionally accepted Dec. 1996). 51 See Personal Protective Armor Association, 59 Fed.Reg. 19,019 (1994) (to be reported at 117 F.T.C. 104).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 245 Consumer choice: the practical reason for both antitrust and consumer protection law

This would represent a change of emphasis from traditional merger analysis. Although merger analysis makes pro forma bows toward other dimensions of competition, the analysis promptly returns to price. The Horizontal Merger Guidelines, for example, have a section entitled “Purpose and Underlying Policy Assumptions of the Guidelines52, which contains roughly a dozen references in the text to “price,” the “transfer of wealth from buyers to sellers,” and similar monetary concepts53. Only a single footnote in the guidelines suggests that merger policy includes nonmonetary concerns54. The National Association of Attorneys’ General (NAAG) State Merger Guidelines refect a similar emphasis.55 Both the federal and NAAG Merger Guidelines therefore permit consid- eration of nonprice elements of competition, but both are structured in such a way as not to particularly encourage use of that consideration. Some elements of nonprice competition might be captured through use of the concept of “qualityadjusted price”. Again, however, neither Guideline is structured to particu- larly encourage that approach. Moreover, “qualityadjusted price” may be a diffcult concept to apply in concrete situations where the nonprice components of competition are particularly important or where they take subtle or complex forms. Consider, for example, an industry making men’s neckties. If this industry was to consolidate through merger to a noncompetitive number of frms, the price might not rise. The frms might instead hold prices steady but invest less money in highquality materials or in staying abreast of fashion56. In theory, one could say that the qualityad- justed price of a tie would have risen since a lessdesirable product would then be offered at the same price as before57. This formulation is not particularly useful, however, since, in the absence of market prices for the (nonexistent) high quality ties, antitrust enforcers cannot know the quantitative extent of the implicit price rise that has occurred. (What is the value of fashion?) Rather than trying to force the analysis into price terms for

52 U.S. Department of Justice and Federal Trade Commission Horizontal Merger Guidelines, 62 Antitrust & Trade Reg.Rep. (BNA) § 0.1, at 107 (April 2, 1992). 53 See id. 54 Footnote 6 of the 1992 Horizontal Merger Guidelines reads, “Sellers with market power also may lessen competi- tion on dimensions other than price, such as product quality, service or innovation”. Id. 55 They concede in a footnote that consumers can be harmed by oligopoly behavior “on terms of trade other than price”. The footnote elaborates this consideration at somewhat more length than the federal guidelines. It reads as follows: “Tacit or active collusion on terms of trade other than price also produces wealth transfer effects. This would include, for example, an agreement to eliminate rivalry on service features or to limit the choices otherwise available to consumers””. See Merger Guidelines 4 Trade Reg.Rep. (CCH) ¶ 13,104, § 2.11 n. 14, at 20,5739 (1992). See also Horizontal Merger Guidelines 4 Trade Reg.Rep. (CCH) ¶ 13,405, at 21,186 n. 17 (March 10, 1987). These Guidelines also declare, more fundamentally, that the “central purpose” of merger law “is to prevent frms from attaining market or monopoly power, because frms possessing such power can raise prices to consumers above competitive levels....” Id. at 21,185. 56 For purposes of this example, we assume that the other conditions of the industry, such as entry barriers, are conducive to an anticompetitive outcome. 57 In the real world, it is of course also possible that antitrust enforcers will simply observe the absence of a price rise and wrongly conclude that no anticompetitive effects at all have taken place.

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246 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande which we lack the necessary data, therefore, it will sometimes be simpler and more effective to frame the analysis directly in terms of quality, diversity, and choice58. This issue must be approached with caution, however, because, where price competi- tion still exists, it will often serve as a reasonably good proxy for nonprice competition. Once a particular market is pricecompetitive, in other words, it may often offer self- equilibrating levels of competition in other dimensions as well. Consider, for example, a postmerger market that is price competitive but that, as the result of a merger, no longer produces the optimum level of product variety. If consumers truly want more variety, and if the frms are truly competitive, then they will soon begin to extend their product lines by introducing a greater number of models and variants to the market. Sometimes, however, price competition alone may provide consumers insuffcient protection59. This problem is most likely to arise with respect to certain kinds of intel- lectual property, some of which can play a competitive role only in an environment of organizational independence. The most important option of this sort may be the independent editorial programming of a communications medium. If one communications medium were to buy another of the same kind, the acquisition might not concentrate the market suffciently to threaten price competition. Being competitive, the market might also soon produce the product menu that consumers desire in terms of types and formats, of shows. But the market will have inevitably sustained a loss of editorial diversity, and this cannot be recreated through the normal mechanism of nonprice competition among the surviving frms; the new products would necessarily bear the editorial stamp of their common owner. This suggests that media mergers should be carefully scrutinized for loss of nonprice competition along the dimension of diversity in programming and,

58 Cf. National Macaroni Mfrs. Ass’n. v. Federal Trade Comm’n, 345 F.2d 421 (7th Cir.1965) (manufacturers had agreed to use less desirable mix of ingredients). Other forms of nonprice competition may involve product variety rather than product quality. Some consumer needs will not be met by even a highquality product at a low price if it is the wrong kind of product. The consumer harm felt here, while real, is also not particularly well suited to price analysis. For example, a family of seven might strongly prefer to purchase a van rather than a conventional car. In an extreme case we can imagine that after a series of mergers the resulting automobile monopoly might decide to limit consumer choice to cars only. This family’s welfare will be signifcantly diminished by the lack of product variety even if the new cars are priced at a competitive level. Since this welfare loss cannot be readily quantifed, however, particularly in the absence of market prices for vans, it would not seem useful to try evaluating the desirability of these automobile mergers solely in price terms. 59 In looking for possible harms to nonprice competition, antitrust decision makers need to be careful and cautious. The consumer choice model will remind the antitrust agencies of the relevance of nonprice factors, but it does not alter or expand the actual reach of Section 7. Harms to nonprice competition are already covered by the Clayton Act and have already informed decisions in merger cases. See, e.g., Federal Trade Comm’n v. PPG Indus., Inc., 798 F.2d 1500 (D.C.Cir.1986) (enjoining preliminarily the merger of manufacturers of “high technology” aircraft transparencies, who competed, among other ways, in new product development).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 247 Consumer choice: the practical reason for both antitrust and consumer protection law where that loss is suffciently severe60, that they be challenged under the Clayton Act, even if there has been no showing of harm to price competition. Suppose, for example, the country had only fve book publishers, and that two of them merged. This might not lead to a loss of price competition or to a narrowing in the range of price options61. On the other hand, it might well lead to a quantifable loss of editorial diversity and thus to a narrowing of the competing marketplace options expressed in terms of the types of titles offered. An antitrust suit might properly chal- lenge this result. This suit would not seek to apply a special standard for the media that is based on First Amendment or diversity considerations62. Rather, it would be based on the ordinary, universal standards of Section 7, once that section has been properly construed to recognize the role of options and of nonprice competition.

C. Consumer protection should focus more closely on conduct that impairs choice If our model of consumer choice suggests that antitrust law should be modestly expanded, it also suggests that the scope of consumer protection should be modestly contracted. The consumer choice model suggests that unfair consumer practices should be limited to those that have a more or less demonstrable effect on consumers’ ability to exercise effective selection, and that the concept should not be extended to conduct that is thought to be “unfair” on more general, less predictable moral or equitable grounds. In this respect, the consumer choice or consumer sovereignty model supports and ratifes a trend that has been underway for the last twenty years. At the beginning of that period, the FTC was following a construction articulated in its “Cigarette Rule,” which stated that consumer unfairness was defned by reference to three broad factors:

60 Antitrust enforcers could not challenge every merger involving intellectual property on the grounds that, by removing the products of the acquired frm as an independent force in the market, the merger would necessarily impair consumer choice. True, in some linguistic sense every merger of a product involving some element of creativity removes a choice from the market. The incorporation of Oldsmobile into General Motors deprived those consumers who preferred the independent Oldsmobile design department of that choice. This alone cannot be the basis for illegality, however, for such an argument would prove too much. It would result in the illegality of every merger involving nonfungible products, regardless of how small the element of independence in the product or how much or little importance consumers attach to that independence in the context of the particular product involved. Congress cannot have intended this to constitute the “substantial” lessening of competition that is the concern of Section 7. Actually fguring out how to express the threshold of substantiality for different types of nonprice competition would be a diffcult job, of course, because there is probably no empirical brightline test comparable to the measure of concentration at which price effects often become visible. Defning such a threshold is nonetheless a task that needs to be undertaken if antitrust is to fully come to grips with nonprice competition. 61 An absence of price effects is particularly likely if we assume relatively low entry barriers and a strategy of limit pricing by the frms in the market. 62 See Associated Press v. United States, 326 U.S. 1, 20 (1945) (ruling First Amendment considerations support application of Sherman Act to the media since both these provisions are intended to encourage diversity, although the media context did not alter ordinary Sherman Act standards).

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248 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande

(1) “public policy;” (2) whether the conduct was “immoral, unethical, oppressive, or unscrupulous;” and (3) whether the conduct caused substantial injury to consumers63. Since then, the defnition of consumer unfairness has progressively narrowed. In a 1980 Policy Statement, the FTC declared that it would no longer rely on the test of immoral or unethical conduct64. The FTC believed that this test was merely duplicative of the others and had never supplied an independent basis for action. In 1994, Congress declared that a second element in the Cigarette Ruleestablished public policiescould likewise no longer be used as independent grounds for fnding conduct unfair. This factor would henceforth be used only in conjunction with other evidence and presum- ably in order to confrm a fnding of consumer injury65. The grounds established in the Cigarette Rule have thus been narrowed to the single primary factor of injury, and an actionable injury of that sort has increasingly been defned as one that manifests itself through the mechanism of impaired consumer ability to select66. Consumer protection jurisdiction can be more narrowly expressed in this way without concern that the agency will become unable to reach some signifcant number of meritorious cases. If conduct is truly “oppressive” or “contrary to public policy,” then it will almost certainly affect consumer choice. Telemarketing worthless securities to the elderly, for example, while surely oppressive, also involves actionable elements of deception. Conversely, if some conduct cannot be characterized as harmful to choice, then there is a good chance that it is something that the government should not try to control. Consider image advertising that associates use of a particular toothpaste with youth and vitality. This association may lead to purchases that are “irrational” by objective standards, but, if consumers freely elect to place a high value on the intangible attributes of a product, that is a market decision that should be respected.

63 Unfair or Deceptive Advertising of Cigarettes in Relation to the Health Hazards of Smoking, Statement of Basis and Purpose, 29 Fed.Reg. 8324, 8355 (1964). These criteria were set out in full, and briefy discussed, in Federal Trade Comm’n v. Sperry & Hutchinson Co., 405 U.S. 233, 24445 n. 5 (1972). 64 Commission Statement of Policy on the Scope of the Consumer Unfairness Jurisdiction, 4 Trade Reg.Rep. (CCH) ¶ 13,203 at p. 20,90903 (Dec. 17, 1980). 65 See 15 U.S.C. § 45(n) (“In determining whether an act or practice is unfair, the Commission may consider established public policies as evidence to be considered with all other evidence. Such public policy considerations may not serve as a primarily basis for such determination”). 66 See Policy Statement, supra note 64, at 20,909 (Most unfairness actions “are brought, not to secondguess the wisdom of particular consumer decisions, but rather to halt some form of seller behavior that unreasonably creates or takes advantage of an obstacle to the free exercise of consumer decision making”).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 249 Consumer choice: the practical reason for both antitrust and consumer protection law

D. Countries establishing or reorganizing trade regulation programs can do so in a more benefcial manner Many nations currently are deciding whether to establish or reorganize trade regulation programs and, if so, which legal areas should be the subject of concern and how the different parts of these programs should relate to one another. The framework suggested here should help with this task and may also help these governments explain the programs in a relatively coherent way to their citizens. A writing on a clean slate might wish to express its trade laws specifcally in choiceoriented terms67. A statute embodying this approach could be worded as follows: It is the national policy to foster an economy in which consumers can make free choices among goods and services in a competitive marketplace. Conduct that unrea- sonably impairs this goal is hereby declared illegal. It is specifcally illegal to engage in: (1) A, B, C, and any other conduct that unreasonably limits the range of competitive options that would otherwise have been present in the market; and (2) X, Y, Z, and any other conduct that unreasonably impairs consumers’ ability to select among these options. A legislature enacting this statute would complete it by flling in the blanks for ABC and XYZ with those specifc items that the country was confdent it wished to ban in light of its own national experience. If the United States was using this approach, for example, it would include specifc bans on such things as monopolization, mergers that may substantially lessen competition, and deception. A statute along these lines would have several attractive features. The specifc prohibi- tions would give the business community as much notice as the nature of the subject matter permits. At the same time, the general residual clauses, written in terms of options and the ability to select among them, would preserve the fexibility necessary to deal with changing conditions68. In this respect, our model statute would be similar to a combination of the Sherman Act and the FTC Act in American law.

67 Organizationally, countries adopting new laws might wish to consider the approach that the United States has taken and have both these types of issues handled by one agency, equivalent to our FTC. There is logic to this approach since the two areas of concern have such a close functional relationship. 68 There is room for disagreement as to whether general provisions of this sort are desirable in the frst place. Clearly they have both advantages and disadvantages. As disadvantages, they offer less certainty and leave more room for judicial discretion than would simple prohibitions against things like pricefxing. This may be a particular concern in countries that do not yet have a tradition of a nonpartisan judiciary. On the other hand, general provisions allow the law to better adapt to changing business practices and to new forms of organization. A resolution of this dispute is beyond the scope of this article, although we may note in passing that many jurisdictions have found it desirable to adopt some form of general clause, either overtly or through expansive constructions of terms such as “contracts in restraint of trade”. In any event, if a decision is made to adopt some form of supplemental general clause, then we believe that the form set out here will achieve the benefts of that approach while creating the fewest associated diffculties.

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250 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt & Robert H. Lande

The proposed model seems to be an improvement over the present combination in two important respects, however. First, by putting the specifc and the general clauses in a single statute, it encourages the enforcers and the judiciary to employ general prin- ciples to guide the development and application of the specifc prohibitions. The statute itself, in other words, would set out internal, general principles of construction that would provide a context within which the specifc provisions will be interpreted in the proper manner. Second, even the general clauses would be framed in a relatively objective way. Conduct would be banned, not on grounds of “unfairness” (the approach used in the FTC Act), which can cause considerable judicial uncertainty, but because of its unreasonable effects on the exercise of consumer choice. The underlying concept of consumer choice will tend to focus the inquiry. Even though the concept of “unrea- sonable” effects on choice still leaves room for interpretation, this uncertainty would tend to be limited to questions of degreeidentifying the threshold level of net effect that becomes actionable rather than leaving the door open to broader uncertainty about what kinds of harm are improper. Perhaps the greatest advantage of a choiceoriented statute is that it would help govern- ments explain to their citizensparticularly those businesses and individuals who are relatively inexperienced at dealing with a market economywhy a system of competitive capitalism is in their best interests.

V. Conclusion

Trade regulation law is ultimately about choice, and choice is ultimately about option- sgetting them, keeping them, and selecting among them. The disciplines of antitrust and consumer protection law are best defned in terms of their roles in this process. An antitrust violation may be understood as an activity that unreasonably distorts or restricts the options that otherwise would be available to consumers. A consumer protection violation may be understood as activity that unreasonably interferes with consumer selection among the options provided in the marketplace. These two felds of law, acting together, give consumers the tools they need to effectively exercise consumer sovereignty. A number of benefts should fow from this unifed conception of the trade regulation laws69. It should make lawyers practicing in these disciplines more alert to the possibility that a case focusing on one element of consumer choice will also raise issues involving

69 If one contrasts an optionoriented defnition of antitrust to other possibilities, one should conclude that the option- oriented version is superior. See Neil W. Averitt & Robert H. Lande, A New Defnition of Antitrust: Option Restric- tion (1997) (unpublished manuscript, on fle with authors).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 251 Consumer choice: the practical reason for both antitrust and consumer protection law the other element. It also suggests that economists practicing primarily in one feld should gain insights from the other. For example, economists have perhaps tended to be most comfortable as a discipline with the hard, “objective” market imperfections involved in antitrust, and to be less comfortable with the more subjective and socio- logical kinds of “inside the head” failures that mark the typical consumer protection matter. Both types of market failures seem to be of equal importance, so both would seem equally deserving of professional study. The fnal purpose of this article has been to help focus the attention of both felds on optionsa shift in focus from the current administrative and judicial emphasis on price. Although price competition often is of utmost importance to consumer welfare, so too is the variety, quality, safety, service and innovation of new products. These attributes have sometimes been treated as afterthoughts when they actually should be at the forefront of debate and analysis in this important area of the law.

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252 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? How “consumer choice” can unify the felds of competition and consumer protection law

NEIL W. AVERITT [email protected] Opinion Columnist, FTC:WATCH Former Attorney, Offce of Policy and Coordination, US Federal Trade Commission

I. Introduction

The feld of commercial regulation is suffering an existential crisis. Mesmerized by the business community’s invocation of “effciency”, it has permitted ever-larger aggregations of corporate power and the development of practices ever more hostile to consumer interests. To counteract these trends, commercial regulation needs to have something more than just particular ad hoc policies. It needs a broad philosophical vision that can be developed and relied upon as an alternative to the Chicago School’s emphasis on effciency.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 253 How “consumer choice” can unify the felds of competition and consumer protection law

“Consumer choice” presents just that kind of comprehensive alternative vision. The concept has become familiar chiefy in the context of competition law1. It is actually applicable in a far broader context, however. It is a way to make sense of commercial regulation as a whole—both competition and consumer protection law—by asking what fundamental purpose all these laws are intended to serve. The best answer is that all these laws are intended to support a market economy that will respond to consumer preferences—i.e., to consumer choice. Once this fundamental purpose is recognized, a cascade of clarifying insights follows almost automatically. A market economy requires two things: an array of options, and the ability to choose effectively among them. These two functions defne the proper missions of competition and consumer protection enforcement, respectively. And then once we understand the functional relation- ship between these two bodies of law, that awareness will lead to further practical insights about how to apply each of them and how to allocate cases between them, when it may be more effective to pursue a particular case under the other legal theory, and when it may be useful to draw a remedy from the other side of the statute2. This thesis is discussed below under the following six topics: (II) What is the relation- ship between competition and consumer protection law? Does the relationship permit a single unifed theory of consumer choice? (III) How does consumer protection law ft within this general framework? (IV) How can the unifed choice concept help create more relevant theories of liability for both antitrust and consumer protection law? (V) How can the choice concepts lead to better remedies? (VI) How might it provide a foundation for privacy protections? (VII) How might it bring other practical benefts for national enforcement programs?

1 See Averitt and Lande, “Using the ‘Consumer Choice’ Approach to Antitrust Law”, (2007) 74 Antitrust L.J. 175, (last visited 2 Feb. 2016). 2 For an elaboration of this thesis, see Averitt and Lande, “Consumer Sovereignty: A Unifed Theory of Antitrust and Consumer Protection Law”, (1997) 65 Antitrust L.J. 713, (last visited 2 Feb. 2016).

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254 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt

II. The single theory of consumer choice

Even casual refection shows that competition and consumer protection laws are both in some way addressed to the exercise of “choice”. Both are aware of and seek to protect the variety of consumer preferences—recognizing, for example, that consumers do not generally pursue a single goal of minimum prices, but rather a more complex mixture of goals that include variety, individualism, and innovation as well. The jurisprudential question is whether there is a suffciently close relationship between these functions to permit a disciplined theory that includes them both. That kind of single theory is in fact possible. Antitrust and consumer protection are both part of a single effort to protect a market economy that will be responsive to the full range of consumer demands. That common goal keeps the two bodies of law closely related to each other in both functional and economic terms3. In functional terms, competition and consumer protection laws work together to provide the conditions that a market economy requires. A market economy requires two basic things to function: an array of options in the marketplace, and the ability on the part of purchasers to go into that marketplace and select freely and effectively from among the options. These two basic functions defne the proper tasks of competition and consumer protection laws. Competition law can be understood as protecting a reason- ably suffcient range of options, ensuring that they are not diminished by artifcial conduct such as price-fxing or anticompetitive mergers. Consumer protection law then comes into play and ensures that buyers can select from among those options with reasonable freedom and effectiveness, with their choices unharmed by such artifcial distortions as coercion or deception. Competition and consumer protection laws can also be viewed in remedial-economic terms as protecting against the two types of market failure that pose the greatest threats to the exercise of consumer choice. The potential market failures are of two general kinds. Some exist in the external commercial environment that surrounds consumers, resulting in failures of the market to provide particular kinds of information or options. These failures can be thought of as taking place “outside the head” of the consumer. No consumer, no matter how shrewd or careful, can create options where they do not exist, and so protections against this kind of market failure have become a responsibility of public enforcement agencies through competition policy. Other kinds of market

3 In the United States, the Federal Trade Commission enforces laws on both competition and consumer protection, which further facilitates an integrated interpretation of the two.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 255 How “consumer choice” can unify the felds of competition and consumer protection law failures exist “inside the head” of consumers. They involve conduct that makes it harder for consumers to assess and choose wisely. In theory a suffciently determined consumer could compensate for this diffculty by investing more time inquiring and evaluating. That can be diffcult, however, and so it does not always happen; and, moreover, there is no just basis for saddling the consumer with the burdens of guarding against other people’s willful deceptions. For these reasons, these second kinds of market failures are also addressed by public enforcement in the form of consumer protection policy. In short, whether viewed affrmatively from the standpoint of a positive function, or negatively from the standpoint of correcting market failures, there is a close relation- ship between competition and consumer protection enforcement. Each is responsible for carrying out one half of the larger enterprise of protecting consumer choice, and each contributes to that common doctrine4.

III. How does consumer protection law ft within this framework?

Consumer protection law fts comfortably within this framework, and draws improved defnition from it. Consumer protection law protects consumers in the exercise of their decisions in the marketplace. It is through these individual decisions that consumers express the complex tradeoffs among price, convenience, and numerous intangible attributes that give their own valuation to a product. These decisions also give consumers the ability to avoid undesirable purchases. Consumer protection enforcement seeks to prevent seller behavior that is intended to thwart this process of free selection. Thus, while antitrust enforcement involves government agencies in safeguarding the competitive environ- ment on a market-wide basis, consumer protection law helps empower buyers to protect themselves individually, purchase-by-purchase. More than anything else, consumer protection law focuses on the problem of deception. If consumers make their choices on the basis of false information their decisions will

4 See US Federal Trade Commission, Companion Statement to Policy Statement on the Commission’s Consumer Unfairness Jurisdiction, reprinted in 4 Trade Reg. Rep. (CCH), para. 13,203 at p. 20,9093 (1980), (last visited 2 Feb. 2015) (FTC, Unfairness Policy Statement) (elaborating on the relationships among various parts of the agency statute).

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256 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt inevitably be sub-optimal. Harmful deception may take a number of different forms. It may involve express falsehoods (“Our medicine will grow hair”). Or it may involve a false implication (“Do you hate growing bald? Then buy our medicine”). Or it may involve a false implication through silence (Saying nothing in response to the question, “Is it safe to assume that your hair-growth product is scientifcally proven?”). Sellers can also harm the quality of consumer decision making through other, more specialized mechanisms. Sometimes a seller may withhold from purchasers the key pieces of information that are needed for informed comparison-shopping. For example, the sellers of home insulation may fail to provide the R-values of their products—the numerical measures of insulation effectiveness that are needed in order to make a meaningful comparison between competing brands5. Or in the starkest kind of affront to the exercise of consumer choice, a seller may sometimes engage in physical coercion of a purchaser’s decision. Improperly coerced sales can occur even in this day and age. One manufacturer of home furnaces, for example, sent salesmen to perform free inspec- tions. The salespeople took homeowners’ furnaces apart for examination, announced that they had found a problem, explained that their ethical standards would not allow them to reassemble a potentially dangerous product, left the homeowner without a source of heating, and then offered to sell the homeowner new parts or services6. In the United States, consumer protection violations are prohibited under the Federal Trade Commission (FTC) Act, relying on different provisions depending on the specifc nature of the conduct. The FTC Act prohibits “unfair or deceptive acts or practices”7. The core consumer protection offense—deception—is thus specifcally covered by the Act. The agency has defned actionable deception as “a representation, omission, or practice that is likely to mislead the consumer”8. The other forms of harm to consumer decision-making are prohibited through the residual provisions of the Act, which go on to prohibit “unfair practices”. The agency has issued a policy statement defning these practices, in more general terms, as “seller behavior that unreasonably creates or takes advantage of an obstacle to the free exercise of consumer decision making”9. Thus consumer protection law will prohibit any form of seller conduct that is likely to materially impede the exercise of consumer choice among the options in the market.

5 See Labeling and Advertising of Home Insulation, 16 C.F.R., s. 460 (1981); cf. Automotive Fuel Ratings, Certif- cation and Posting (the “Octane Rating Rule”), 16 C.F.R., s. 306 (1981). 6 See Holland Furnace Co. v. FTC, 55 FTC 55 (1958), aff. 295 F.2d 302 (7th Cir. 1961). See also Arthur Murray Studio v. FTC, 458 F.2d 622 (5th Cir. 1972) (intense in-person sales pitches to elderly customers). 7 15 U.S.C. s. 45(a)(1). 8 US Federal Trade Commission, FTC Policy Statement on Deceptive Acts and Practices, 4 Trade Reg. Rep. (CCH), s. 13,205 (1983), (last visited 2 Feb. 2016). 9 FTC, Unfairness Policy Statement (n. 4).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 257 How “consumer choice” can unify the felds of competition and consumer protection law

IV. Help in selecting the most effective basis for litigation

This brings us to a key point—probably the most important point made in this chapter. The architecture of consumer choice does more than just provide a theoretical structure for the law. It also has immense practical implications for the successful conduct of litigation. It clearly defnes the two functions of competition and consumer protection enforcement, draws a clear line between them, and makes it possible to assign cases cleanly to one enforcement program or the other. This ensures that cases will be litigated under the most appropriate legal authority, with the fewest irrelevant elements of proof demanded, and with a clear identifcation of the points that do need to be proved. By calling attention to both bodies of law simultaneously, in other words, choice theory encourages agencies to consider the full range of their options, and to be alert to the possibility of reframing a case in different, more effective terms. This marks a real change from prior practice, and allows enforcement agencies to avoid pitfalls that caused them to lose cases in the past. This approach would have been useful, for example, in the FTC’s recent cases involving the deception of standard-setting organizations. In systems where the products of different manufacturers need to be able to work together—such as systems of audio equipment or of computer components—an industry wide trade association will often set out the technical specifcations for the interfaces between components. To ensure that the standard-setting process works smoothly, the association generally expects that the interface specifcations not use any patented technology, or, if some part of it is patented, that the patent owner agree to make that part available to all frms on reasonable and non-discriminatory terms. Sometimes, however, an industry member will game this system. It will sit silent, not declare its patents, wait until the industry is locked into a standard that uses its technology, and then demand large royalties. The FTC recently brought the Rambus case to challenge such conduct10. The challenge was sound on the policy merits. The conduct was exploitive and it rewarded the patent holder on the basis of a hold-up rather than on the merits of its patents. However, a narrow vision of the legal theory doomed the FTC case from the start. Because the facts involved business-to-business conduct, the case was brought by the agency’s Bureau of Competition, and it was refexively put into competition law terms. The agency alleged that Rambus had engaged in monopolization by means of deception.

10 Rambus v. FTC, 522 F.3d 456 (D.C. Cir. 2008).

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258 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt

The court rejected that argument, however, because it could not see how the conduct could involve the act of “monopolizing” if it did not lead to any change in the industry structure. The case would have been easy, however, if it had been expressed instead as a simple matter of deception11. Rambus had deceived the standard-setting organization, through silence and negative implications, in a way that affected the organization’s decision on what technical rights to acquire for use in its standards. Thus Rambus had harmed the organization’s decision-making abilities. That act of deception was a completed offense at that point, without any need to show market power. By adding the further allegation of monopolization the FTC had merely made its life more diffcult. An awareness of the overall choice theory would have pointed the Commission toward a more promising complaint in consumer protection terms. A precondition to using this approach is recognizing that a business corporation can be a “consumer”. This will require changing some habits of mind. Consumer protection law has traditionally focused on protecting individual natural persons. In principle, however, the agency’s task is to protect market processes in general, and to protect purchasers of whatever kind, rather than favoring one or another particular type of purchaser. Resource constraints will generally suggest letting corporations handle their own legal disputes, of course, and so cases to protect deceived corporations are likely to be relatively rare. If public action seems warranted on the merits, however, agencies should not avoid the task merely because of the identity of the parties involved12. Once businesses are recognized as consumers deserving of protection, then enforcement agencies will begin to fnd other types of business-to-business conduct that might be usefully reclassifed as consumer protection matters. Another potentially important form of this conduct is the coerced purchase of a license. If a purchase is coerced by the threat of bad-faith litigation, then the wrongful effect is felt “inside the head” of the purchaser and constrains his or her decision-making ability. This requires only the extortionist’s ability to infict costs that are greater than the costs of settlement, rather than requiring actual market power. Such a matter is more like the consumer protection violation involving coerced furnace sales than it is like a traditional antitrust theory.

11 There is always room for debate about the actual facts of a case, of course, but at least the legal theory would have been straightforward. 12 The FTC’s Bureau of Consumer Protection has taken some frst steps toward this policy. It will sometimes treat at least small sole-proprietorships as if they were consumers. See, e.g., FTC v. National Supply & Distribution Center, CV–99-12828 HLH (AJWx) (5 Feb. 2016) (false assertion of a prior business relationship when selling photocopier toner to small businesses); McGregor v. Chierico, 206 F.3d 1378, 1380-81, 1388 n.11 (11th Cir. 2000) (deceptive methods to persuade businesses to pay for unordered toner).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 259 How “consumer choice” can unify the felds of competition and consumer protection law

This kind of consumer protection approach may provide a handle on the issue of patent trolls, which has largely resisted attempts to challenge it on competition grounds. Cases can also be reframed in the other direction. Conduct that has traditionally been thought of as a consumer protection violation might sometimes be proftably approached in competition terms instead. This approach may be particularly useful in challenging protectionist, self-interested regulations promulgated by state licensing boards. Some years ago the FTC sought to challenge the restrictions on optometry practices that were imposed by state statutes and licensing boards. These included limitations on the commercial or business aspects of a practice, such as bans on practice under a trade name or in a retail setting. The Commission initially took the view that boards imposing these restrictions were guilty of an unfair consumer practice, and said that the Commission’s interpretive rule stating this conclusion could be cited in defense against any state disciplinary proceeding13. An appellate court found, however, that the Commission’s consumer protection authority did not authorize it to override state regulatory actions in this way14. An approach under competition law would probably have led to a better outcome. For one thing, the theory of the case would have been more aptly and persuasively stated, because restrictions on the commercial format of optometry practices will tend to restrict the variety and types of retail experience that are available in the marketplace— thus invoking antitrust’s core concern with protecting the range of options available to consumers. And once a challenge has been framed in competition terms, we can begin to see a path toward overcoming the state action defense. Several limitations on the state action doctrine have been worked out over the years in the context of compe- tition cases. For one thing, state administrative actions are exempt from the antitrust laws only if they are supported by a clearly articulated legislative policy15. And if the case involves fnancially-interested market participants—a description that would ft many of the state boards that are made up primarily of members of the regulated profession itself—then any self-interested actions taken by such boards will have to be reviewed and approved by a neutral authority elsewhere in the state government before they are immune16. For all these tactical reasons an antitrust theory would have given the enforcement agency a greater prospect of success.

13 See Ophthalmic Practice Rules, 54 Fed. Reg. 10, 285 (1989). 14 See California Board of Optometry v. FTC, 910 F.2d 976 (D.C. Cir. 1990). 15 See California Retail Liquor Dealers Ass’n v. Midcal Aluminum, 445 U.S. 97 (1980). 16 See North Carolina State Board of Dental Examiners v. FTC, 135 S.Ct. 1101, 547 U.S. ___ (2015); cf. Town of Hallie v. City of Eau Claire, 471 U.S. 34 (1985).

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260 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt

V. Suggesting additional forms of remedy

The choice model will also lead to the selection of more effective remedies, by reminding enforcement agencies to consider the full range of remedial options that are available. Enforcement agencies generally frame their remedies in the same terms as the violation they are designed to correct. Thus an antitrust violation, which restricts the range of options available to consumers, is corrected by an order increasing that range. If a corporate acquisition, for example, improperly reduced the options in a market, then a remedial order might call for the acquired frm to be reconstituted and divested. Similarly, a consumer protection violation, which harms the decision-making abilities of consumers, might be corrected by an order intended to help these abilities work more effectively. If false advertising has misled consumers, then it might be addressed by an order requiring that the advertising be halted, and sometimes that certain affrma- tive disclosures be made. Sometimes, however, the most effective order may use particular remedies that are borrowed from the other side of an agency’s jurisdiction. Thus competition remedies might sometimes be framed in terms that will also support consumers’ ability to make choices. This has already been done in some specialized situations. For example, the antitrust agencies have often challenged horizontal agree- ments that were reached under the auspices of a trade association, and that limited the fow of information to consumers in a way that made comparison shopping more diffcult. The corrective orders removed these terms, and thereby put an end to the offending horizontal agreement. In doing so, however, the orders also enhanced the fow of price and product information, and thus clearly worked to strengthen consumers’ decision-making abilities17. This kind of cross-theory approach might be kept in mind when devising remedies for other competition problems as well. For example, it has been suggested that one harmful effect of resale price maintenance (RPM) may be that it gives the salespeople in retail stores a perverse incentive to steer customers toward inferior products that are subject

17 See, e.g., National Society of Professional Engineers v. United States, 435 U.S. 679 (1978) (agreement not to engage in competitive bidding); Detroit Auto Dealers’ Ass’n v. FTC, 955 F.2d 457 (6th Cir. 1992) (agreement to limit the business hours available for comparative shopping).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 261 How “consumer choice” can unify the felds of competition and consumer protection law to RPM in order to obtain a higher proft18. Traditional antitrust remedies—such as forbidding future vertical agreements on price—are readily circumvented through nominally unilateral refusals to deal. A consumer protection remedy, however, would recognize that the real issue is the existence of systematic incentives to deceive consumers. If the appropriate facts were shown in a particular case, then an agency might usefully focus a remedy on these issues. Consumer protection remedies might also proft from this kind of innovative approach. There the enforcement agencies might become alert to the possibility that the most useful remedy might be one that aims to increase the number of options in the market- place—the traditional concern of antitrust cases. This approach has already been followed in a few matters. For example, the FTC’s R-Value Rule was primarily addressed to ensuring that more information was available to support comparison- shopping on home insulation. However, the Commission also hoped, quite consciously, that this process would eventually lead to the availability of more and better insulation options19. Similarly, the Franchise Rule was primarily intended to provide clear and systematic information for the beneft of would-be entrepreneurs who were considering the purchase of a franchise. Again, however, the Commission also hoped that the fow of this kind of information would lead to more substantive competition in franchise opportunities, and eventually to the development of a better range of business oppor- tunities from which potential franchisees could fnd one that best suit their needs. Because the choice model covers both competition and consumer protection matters, it would keep all these kinds of cross-theory effects more clearly in sight, and would make it more likely that the agencies would consider all the possibilities when they begin to think about remedies.

18 See Grimes, “Spiff, Polish and Consumer Demand Quality: Vertical Price Restraints Revisited”, (1992) 80(4) Calif. L. Rev. 815. 19 See Statement of Basis and Purpose, Labeling and Advertising of Home Insulation, 44 Fed. Reg. 50,218, at para. 50,223 (1979) (stating in part that information failures “diminish comparison shopping, and create unwarranted competitive parity or advantage for inferior products. Thus, a market that functions in this way not only harms consumers but also lessens fair and open competition”.).

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262 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Neil W. Averitt

VI. A foundation for privacy and data security

The concept of consumer choice may also be helpful in providing a doctrinal founda- tion for an important consumer protection program. The protection of privacy and data security has become an important and popular part of the FTC’s work. However, the legal basis for this popular program is surprisingly shaky. Firms that allow personal information to escape might be charged with decep- tion, but only if they had made some previous commitment to keep the information secure. Or they might be charged with an “unfair act or practice” under the FTC Act. Thus far, however, the FTC has asserted its unfairness theory in these cases only in terms of a general power to assess the net costs and benefts of a practice20. It is far from clear that the courts will allow the agency to claim that much undefned discre- tionary power. A better approach would be to apply the consumer unfairness theory here in terms of consumer choice instead. In other words, consumers should have some choice as to where and how their personal information is shared. To be sure, this approach will not answer all questions. Choice in this sense is not quite the same thing as choice in the context of an initial purchase decision. Still, it is narrower than a general power to do interest balancing. The concept of choice in a general sense will at least start the inquiry on the right foot, and will provide a solid starting point for future doctrinal development.

VII. Other managerial benefts

Finally, the choice model can provide a number of practical managerial and adminis- trative benefts. Two of these may be particularly relevant for enforcement agencies outside the United States that regulate commerce. First, the choice model provides a basis for concluding that it is useful to put both competition and consumer protection functions into a single agency. If are considering this issue in a particular country, then this model provides arguments to the proponents of a single authority. If a country already has separate agencies, then the model suggests that it would be useful for them to fnd ways of coordinating their activities and their doctrines. The resulting coordination would not only lead to more

20 See In re LabMD Inc., Docket No. 9357 (complaint issued 29 Aug. 2013).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 263 How “consumer choice” can unify the felds of competition and consumer protection law effective public administration, as discussed above, but also to more public support, which is a crucial asset for enforcement agencies. Consumer choice is a simple, intuitive goal, which can be readily communicated to the press, the legislature, and the public-at-large. It can help to build broad public support for the agency’s work, in a way that a program expressed in economic terms would have great diffculty doing. Second, the choice model may provide a mutually acceptable midpoint at which both American and European approaches to commercial regulation can converge. Consumer choice is not as narrow and business-friendly as the Chicago School’s close focus on short-term productive effciency, but it is not cut off from all economic learning either. The focus is on the preconditions to a market economy, not on some measure of ultimate social justice. At the same time, consumer choice is not as unstructured as an inquiry into “abuse of dominance”, but neither is it entirely unconcerned about the ways in which dominant frms may seek to cement their positions. The choice model should be broadly acceptable on both sides of the Atlantic.

VIII. Conclusion

The theory of consumer choice is broader than it is commonly assumed to be. It reaches beyond its familiar roots in competition policy, and provides a way to see both compe- tition and consumer protection laws as two essential components in a single, wider venture of protecting a consumer-focused market economy. Competition policy protects options; and consumer protection policy protects the ability to select among options. And from that single, fundamental insight a whole stream of practical conclusions will follow, affecting a range of issues from the categorization of cases, to the selection of legal theories, and to the design of remedies. Even more important, this broader vision will state a general philosophy of commer- cial regulation, which can be developed as a credible alternative to the Chicago School and its cramped focus on short-term productive effciency.

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264 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Can consumer choice promote trans-Atlantic convergence of competition law and policy?*

† J. THOMAS ROSCH Former Commissioner, US Federal Trade Commission

I have been asked to address whether the concept of “consumer choice” can serve as a standard that promotes “convergence” between US antitrust law and EU competition law. To my way of thinking, this question calls for a three-part answer. First, we must ask ourselves whether we can ever achieve total convergence between the two jurisdic- tions—with or without a consumer choice standard—and whether it is even necessary or desirable to do so. Second, if we are to talk about consumer choice as a standard for moving the two jurisdictions towards convergence, then we must have a working defnition of consumer choice on which we can all agree, because even our views on this concept may differ as between the United States and the European Union (EU).

* This article has been posted on the US FTC website and it is available here: https://www.ftc.gov/public-state- ments/2012/06/can-consumer-choice-promote-trans-atlantic-convergence-competition-law-and † The views stated here are my own and do not necessarily refect the views of the Commission or other Commissioners. I am grateful to my attorney advisor, Henry Su, for his invaluable assistance in preparing this paper.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 265 Can consumer choice promote trans-Atlantic convergence of competition law and policy?

Third, assuming we have arrived at a mutually agreeable, working defnition of consumer choice, we need to understand how behavioral economics may affect the robustness of consumer choice as a standard for antitrust and competition law.

I.

I understand that many of our colleagues in the antitrust and competition bar would like to see “convergence” in the law enforcement approaches of the US and EU competition agencies1. While that may be a worthy aspiration for antitrust enforcers, regulators, and policymakers, my own view has long been that total convergence is not possible for several reasons2. Let me review those reasons with you.

A. First, we start off with the fact that the operative statutes are differently worded. For example, Section 1 of the Sherman Act outlaws “[e]very contract, combination in the form of or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations”3. Although US case law has made clear that Section 1 forbids only unreasonable restraints of trade4, the standard for determining

1 See, e.g., Abbott, “Competition Policy and Its Convergence as Key Drivers of Economic Development”, (2009) 28 Miss. C. L. Rev. 37; Delrahim, “Remark: The Long and Winding Road: Convergence in the Application of Antitrust to Intellectual Property”, (2004) 13 Geo. Mason L. Rev. 259; Gotts et al., “Nature vs. Nurture and Reaching the Age of Reason: The U.S./E.U. Treatment of Transatlantic Mergers”, (2005) 61 N.Y.U. Ann. Surv. Am. L. 453; Kovacic, “Competition Policy in the European Union and the United States: Convergence or Divergence in the Future Treatment of Dominant Firms?”, (2008) 4 Competition L. Int’l 8; Parisi, “Comment: International Regula- tion of Mergers: More Convergence, Less Confict”, (2005) 61 N.Y.U. Ann. Surv. Am. L. 509. 2 See “Interview with J. Thomas Rosch, Commissioner, Federal Trade Commission”, (2009 Spring) Antitrust 32, 45, (last visited 29 Jan. 2016) (Rosch Interview); Rosch, Commissioner, US Federal Trade Commission, “Has the Pendulum Swing Too Far? Some Refections on U.S. and EC Jurisprudence” (Remarks Presented at the Bates White Fourth Annual Antitrust Conference, Washington, D.C., 25 June 2007), 13-14, (last visited 29 Jan. 2016); Rosch, Commissioner, US Federal Trade Commission, “The Three Cs: Convergence, Comity, and Coordination” (Remarks Before the 14th Annual International Competition Law Forum, St. Gallen University, Switzerland, 10 May 2007), 2, (last visited 29 Jan. 2016). See also Lowe, Director General, Directorate General for Competition, European Commission (Remarks on Unilateral Conduct Presented at the Federal Trade Commission and US Department of Justice Joint Hearings on Section 2 of the Sherman Act, Washington, D.C., 11 Sept. 2006), 8, (last visited 29 Jan. 2016) (“We are all in search for the right policy. Let there not only be global competi- tion for the best practices, but also global cooperation and discussion to improve our rules. In the end I don’t think we should expect too much divergence in view of the broad consensus on many basic principles. However, we should probably not expect total convergence either”). 3 15 U.S.C. § 1 (2010). 4 See, e.g., NCAA v. Bd. of Regents of the Univ. of Okla., 468 U.S. 85, 98 n.17 (1984) (“[A]s we have repeatedly recognized, the Sherman Act was intended only to prohibit only unreasonable restraints of trade”); Bd. of Trade of Chicago v. United States, 246 U.S. 231, 238 (1918) (“The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition”).

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266 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? J. Thomas Rosch unreasonableness has been left to the appellate courts to develop over time. And there are 13 of those courts, including the US Supreme Court5. By contrast, Article 101 of the Treaty on the Functioning of the European Union (TFEU) is more specifc in both its proscription and its exceptions. The article outlaws “all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market”, and it specifcally enumerates fve categories of restraints that are viewed as violating its strictures6. At the same time, however, Article 101 may be declared inapplicable to agreements, decisions, and concerted practices that meet certain specifed criteria, which include “contribut[ing] to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting beneft”.7 In contrast to Section 1 of the Sherman Act, Article 101 TFEU thus explicitly recognizes that some restraints of trade may be permissible if they beneft consumers by improving output or promoting innovation. Section 2 of the Sherman Act likewise differs from Article 102 TFEU in its wording. Whereas Section 2 outlaws monopolization, attempts to monopolize, and conspiracies to monopolize “any part of the trade or commerce among the several States, or with foreign nations”8, Article 102 more broadly prohibits “[a]ny abuse of . . . a dominant position within the internal market or a substantial part of it”, and it identifes four categories of potential abuse, which include “limiting production, markets or technical development to the prejudice of consumers”9. In a similar fashion to Article 101’s consideration whether a challenged restraint may beneft consumers in the form of increased output or innovation, Article 102 explicitly considers whether a challenged conduct or practice will harm consumers in the form of decreased output or innovation—as opposed to simply increasing prices. By contrast, the Sherman Act contains no such language, and instead leaves it up to the 13 appellate courts to develop the relevant legal standards. This distinction between statutory language

5 I am excluding the United States Court of Appeals for the Federal Circuit, which usually applies the antitrust law developed by the court of appeals for the regional circuit applicable to the case being heard. See, e.g., Nobelpharma AB v. Implant Innovations, Inc., 141 F.3d 1059, 1068 (Fed. Cir. 1998). 6 Consolidated Version of the Treaty on the Functioning of the European Union, [2008] OJ C115/13, art. 101(1), (last visited 29 Jan. 2016) (TFEU). 7 Ibid., art. 101(3). 8 15 U.S.C. § 2 (2010). 9 TEFU, art. 102.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 267 Can consumer choice promote trans-Atlantic convergence of competition law and policy? and a veritable cacophony of judicial decisions10, I would submit, may result in a more receptive attitude in Europe than in the United States towards arguments about benefts or harms based on consumer choice.

B. Another potential obstacle to achieving total convergence is the fact that the United States and Europe have different economic and political histories and cultures. In particular, there are two schools of thought that have infuenced and shaped European competition law and policy in ways unlike what we have experienced here in the United States. First, there is the ordoliberal thought of the Freiburg School, which emerged in Germany after the Second World War. According to historian David Gerber, ordoliberalism, like classic liberalism, believes “that competition is necessary for economic well-being and that economic freedom is an essential concomitant of political freedom”, and the fow of economic resources should be directed by private decision-making rather than by government decision-making11. But ordoliberalism goes one step further than classic liberalism with its view that excessive governmental power is not the only threat to individual economic and political freedom; powerful economic institutions can also misuse their private economic power to trample over individual freedom12. Accordingly, ordoliberalists envision a European state in which the structure and characteristics of the economic system would be constitutionally intertwined with its political and legal systems13. Under the ordoliberal vision, competition law plays a central role of creating and maintaining the conditions of “complete competition”—“that is, competition in which no frm in a market has power to coerce other frms in that market”14. In other words, competition law broadly views private economic power as

10 I have commented on the judicial cacophony before. See Rosch, Commissioner, US Federal Trade Commission, “Does the EU Need a System of Private Competition Remedies to Supplement Public Law Enforcement?” (Remarks Before the 2011 LIDC Congress, Oxford, England, 23 Sept. 2011), 19 (last visited 29 Jan. 2016); Rosch, Commissioner, US Federal Trade Commission, “The Path You Need Not Travel: Observations on Why Can Do Without Section 5” (Remarks Before the Canadian Competition Forum, Toronto, Canada, 4 Feb. 2010), 10, (last visited 29 Jan. 2016). 11 Gerber, “Constitutionalizing the Economy: German Neo-liberalism, Competition Law and the ‘New’ Europe”, (1994) 42 Am. J. Com. L. 25, 36. 12 Ibid. at 36-37. 13 Ibid. at 44-45. 14 Ibid. at 43, 50-51. As Professor Gerber explains in a footnote, the German word for this concept—vollständiger Wettbewerb—is generally translated as “perfect competition” but he uses “complete competition” instead to distinguish the ordoliberal concept from the concept with the same name used in neoclassic price theory. Ibid. at 43 n.86.

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268 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? J. Thomas Rosch inherently the enemy of the competitive process15. This perspective is markedly different from US antitrust law, which has tended to view the potential harm wrought by economic power more narrowly, in neoclassical, microeconomic terms of static, short- term effects on price and output16. Second, there is the neo-mercantilist thought that has evolved from the history and culture of mercantilism among many Member States17. As a recent paper examining the competing economic doctrines at work in European competition policy puts it, “neo-mercantilists have never developed a genuine doctrine for competition policy as such”18. Instead, they have favored “industrial policy and the direct intervention of the state in the economy as a substitute for competition”19. Out of this perspective fow various forms of state action such as subsidies, national champions, and price controls, all of which are aimed at government organization and planning of specifc industries and economic sectors20. Like ordoliberalism, neo-mercantilism markedly differs from anything we have expe- rienced in the United States in a long time. Both schools of thought envision a much more active role for the state—either as the creator of a perfectly competitive market or as a substitute or supplement to the market—than what we have envisioned under the approach of the US antitrust laws21. Furthermore, the decades-old confict between ordoliberalism and neo-mercantilism has driven the EU towards an enforcement approach that emphasizes uniformity within the European Economic Area (EEA)—that is, the notion of a Single Market22—to a degree that we do not see here in the US (for example, in the European Commission’s (EC’s) approach generally to resale price maintenance and other vertical restraints that affect the fow of goods and services). The EU’s concerns of creating and maintaining a may well mean a different conception of consumer choice than what we have here in the United States.

15 Ibid. at 51. 16 Ibid. at 51, 82. 17 For my prior remarks on this school of thought, see Rosch Interview (n. 2) at 32, 45. 18 Montalban et al., “EU Competition Policy Revisited: Economic Doctrines Within European Political Work” (Groupe de Recherche en Economie Théorique et Appliquée, Working Paper No. 2011-33), (last visited 29 Jan. 2016). 19 Ibid. 20 Ibid. 21 See ibid. at 12 (Table 1 sets forth the various doctrines of competition policy at work in Europe and the respective roles for government). 22 Ibid. at 28.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 269 Can consumer choice promote trans-Atlantic convergence of competition law and policy?

C. Another difference is that we in the United States have adopted neoclassical Chicago School economics, with its singular emphasis on rational behavior, allocative effciency, and price theory23, to a degree that the EU has not. Notably, Chicago School economics gained acceptance in the US courts and antitrust enforcement agencies far earlier (in the 1970s)24 than it did in the corresponding institutions of the EU (in the late 1990s)25. So, if nothing else, there is the difference that a couple decades can make in how much a school of thought becomes entrenched in enforcement policy. Also, in the EU, Chicago School economics has had to compete with other strands of neoliberal economic thought (for example, ordoliberalism and Austrian school ultraliberalism) for ascendance. One might ask whether—despite the relative lateness with which Chicago School economics has come to infuence the thinking of competition authorities within the EU—convergence has now been made more likely as a result. On that question, Lars- Hendrik Röller, a former Chief Economist with the Directorate General for Competition, has expressed the view that even with the use of economics, total convergence (i.e., identical enforcement outcomes) is probably still not possible26. Importantly, the EU and the United States have different legal systems (administrative vs. judicial), different markets, differences in prior beliefs about matters like market dynamics and the benefts of competition, and different political environments27. I tend to agree. To be sure, economics can promote what we call “soft” convergence, that is, the adoption of common procedures and methodologies for conducting antitrust analysis28. But economists are human too, and they therefore approach antitrust analysis with their own preconceptions, biases, and belief systems. So it may be unrealistic for us to expect “hard” convergence, that is, congruence in our enforcement decisions and outcomes.

23 See, e.g., Gibbons, “Antitrust, Law & Economics, and Politics”, (1987) 50 Law & Contemp. Probs. 217, 218 (“The Chicago School regards price theory to be as inexorable in operation as Newton’s laws. As a consequence, they contend that the market will inevitably produce effciency and wealth enhancement”). 24 See, e.g., Hovenkamp, “Antitrust Policy After Chicago”, (1985) 84 Mich. L. Rev. 213, 223 (describing the process by which Chicago School economics took hold of antitrust analysis as a change in theory—to view effciency goals to the exclusion of distributive goals—rather than the adoption of an “economic” approach to antitrust problems). 25 See, e.g., Montalban et al. (n. 18) at 33 (describing an intra-neoliberal confict during the period between 1997-2003, from which Chicago School economic doctrine has largely triumphed over ordoliberalism). 26 Röller, Chief Economist, Directorate General for Competition, European Commission, “Antitrust Economics – Catalyst for Convergence?”, Presentation at the George Mason Law Review Symposium on “Hot Topics in EU Antitrust Law”, Washington, D.C., 20 Sept. 2005), 10, (last visited 29 Jan. 2016). 27 Ibid. at 5. 28 Ibid. at 3, 4, 9.

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270 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? J. Thomas Rosch

In summary, I have my doubts as to whether a consumer choice standard can bring the two jurisdictions into closer alignment and harmony with respect to doctrine and policy than we already are. For example, I have noted the extent to which there seems to have been some trans-Atlantic convergence on (1) the basic theoretical principle underlying the analysis of single-frm or unilateral conduct—that the goal of outlawing monopo- lization or abuse of dominance is to promote “consumer welfare”, and (2) on the analytical vocabulary of predation and exclusion—for example, the concept of “proft sacrifce”29. At the same time, however, the degree of movement towards convergence in the area of single-frm conduct has not matched what we have seen with respect to the areas of horizontal merger and cartel enforcement30. I have observed in the past that the two jurisdictions seem to differ in their respective defnitions of “consumer welfare”; the EC, which has taken more of a post-Chicago School perspective, equates consumer welfare with the effects on consumers in the relevant output market, whereas Professor Bork in the United States tends to use a broader defnition that encompasses the welfare of all consumers in society31. Although the US Supreme Court now seems to have embraced a view of consumer welfare that focuses on the output market (and thus, end-user welfare) instead of Professor Bork’s view of consumer welfare32, the two jurisdictions still differ in their views in areas

29 Rosch, Commissioner, US Federal Trade Commission, “Refections on the DG Competition Discussion Paper on the Application of Article 82 to Exclusionary Abuses” (Remarks Before the 13th Annual International Competition Law Forum, St. Gallen University, Switzerland, 11 May 2006), 1-2, (last visited 29 Jan. 2016). See OJ (C 45) 7, Communication from the Commission – Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty to Abusive Exclusionary Conduct by Dominant Undertakings, para. 19, (last visited 29 Jan. 2016) (“European and American horizontal merger enforcement is largely in lock- step—there is real convergence in the principles governing the assessment of mergers between competitors”.) (emphasis original). 31 Rosch, Commissioner, US Federal Trade Commissioner, “I Say Monopoly, You Say Dominance: The Continuing Divide on the Treatment of Dominant Firms, Is It the Economics?” (Remarks at the International Bar Association Antitrust Section Conference, Florence, , 8 Sept. 2007), 15–16, (last visited 29 Jan. 2016); Rosch, Commissioner, US Federal Trade Commis- sion, “ and the Meaning of ‘Consumer Welfare’: A Closer Look at Weyerhaeuser” (Speech Given at the 2006 Milton Handler Annual Antitrust Review, New York, NY, 7 Dec. 2006), 2–3 n.4, (last visited 29 Jan. 2016) (citing Bork, The Antitrust Paradox: a Policy at War with Itself (1978), 66, and observing that the Supreme Court’s position on the defnition of consumer welfare has been “opaque”). 32 Weyerhaeuser Co. v. Ross–Simmons Hardwood Lumber Co., 549 U.S. 312, 324 (2007) (explaining that failed predatory-pricing and predatory-bidding schemes may beneft consumers because the two schemes, in their predatory stage prior to recoupment, produce lower aggregate prices and increased manufacturing output, respec- tively, both of which beneft consumers in the output market); see also NCAA v. Bd. of Regents of the Univ. of Okla., 465 U.S. 85, 107 (1984) (observing that the Sherman Act was designed to be a “consumer welfare prescription” and holding that “[a] restraint that has the effect of reducing the importance of consumer preference in setting price and output is not consistent with this fundamental goal of antitrust law”); Rosch, Commissioner, US Federal Trade

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 271 Can consumer choice promote trans-Atlantic convergence of competition law and policy? such as bundled discounts, loyalty discounts, tying, refusals to deal, exclusive dealing, predatory pricing, and price squeezes33. I therefore think that we simply must respect the differences that exist34.

II.

That does not mean that we should give up on consumer choice as a dimension of competition. It does mean, however, that we should try at most to minimize the differ- ences between the two law enforcement regimes that may expand or contract the concept of consumer choice. In other words, it behooves us to have a common understanding of what we mean when we talk about consumer choice as a standard of antitrust and competition law. Let me describe our recent experience in the United States with refer- ence to the cases that the US Federal Trade Commission (FTC) has brought.

A. For example, in my view, price has never been the be-all and end-all of US competition theory, no matter how much the Chicago School would like to treat it as such. As far back as Indiana Federation of Dentists35, the US Supreme Court said that a reduction in output was an example of an anticompetitive effect that would “obviate the need for an inquiry into market power.”36 In other words, one way to understand consumer choice may be to view it as a strand of consumer welfare that is promoted whenever we enforce the antitrust laws against unreasonable restraints on output. For me, then, the issue has always has been to determine the ways in which output may be reduced. One of those ways is to reduce the number of rivals in a marketplace. That is why I have suggested that the homily that the US antitrust laws protect competition,

Commission, “The Common Law of Section 2: Is It Still Alive and Well?” (Speech Given at the 11th Annual George Mason Law Review Antitrust Symposium, Washington, D.C., 31 Oct. 2007), 3-4, (observing that the Supreme Court’s defnition of consumer welfare in Weyerhaeuser “may facilitate convergence respecting the treatment of facially predatory conduct by dominant frms in the two regimes”). 33 Ibid. at 2; Hay and McMahon, “The Diverging Approach to Price Squeezes in the United States and Europe” (Cornell Law Sch. Research Paper No. 12-07) (discussing the diverging US and EC approaches to price squeezes in Pacifc Bell Telephone Co. v. linkLINE Communications Inc., 129 S. Ct. 1109 (2009), and Case C-280/08 P, Deutsche Telekom v. Commission, [2010] ECR I-9555, and Case C-52/09, Konkurrensverket v. TeliaSonera Sverige AB, [2011] ECRI- 527), (last visited 29 Jan. 2016). 34 Jim Venit has similarly observed that we should acknowledge “that we are the products of our histories and cultures and that these condition our predispositions and beliefs”. Venit, “Cooperation, Initiative and Regulation – A Cross Cultural Inquiry”, in Ehlermann and Marquis (eds.), European Competition Law Annual 2007: A Reformed Approach to Article 82 EC (Portland, OR, 2008). 35 FTC v. Ind. Fed’n of Dentists, 476 U.S. 447 (1986). 36 Ibid. at 460–61.

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272 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? J. Thomas Rosch not competitors37, is too simplistic. As I pointed out in my Intel concurrence, sometimes the elimination of competitors is one way to shrink competition; the best example of that is where the relevant market is highly concentrated38, but it may not be the only example39. Specifcally, in the FTC’s Intel case I expressed the concern that in a highly concentrated market, such as that for central processing units (CPUs) or graphics processing units (GPUs), in which there are only two or three competitors, a dominant frm’s engagement in an exclusionary and unjustifed course of conduct designed to hurt its only rivals hurts competition too40. Furthermore, even if the challenged course of conduct does not result in higher prices, antitrust law—and in particular, Section 5 of the Federal Trade Commission Act—still has application because a price increase is not the only cognizable form of consumer injury, even though it may be the easiest to quantify41. Importantly, the challenged course of conduct may injure consumers (and this includes customers of CPUs and GPUs) by reducing alternatives and thereby limiting their choices42. Thus, challenging attacks on rivals may be one way of enhancing consumer choice, which I think the EC has recognized in the 2009 guidance document describing its enforcement priorities with respect to abusive exclusionary conduct under Article 82 (now Article 102 TFEU)43. Indeed, the EC’s view of the harm caused by abusive, exclusionary conduct would seem to accord with the ordoliberalist vision of “complete

37 See, e.g., Brooke Grp. Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 224 (1993) (“It is axiomatic that the antitrust laws were passed for ‘the protection of competition, not competitors.’” (quoting Brown Shoe Co. v. United States, 370 U.S. 294, 320 (1962)). 38 Concurring & Dissenting Stmt. of J. Thomas Rosch, Intel Corp., No. 9341, at 1 (FTC Dec. 16, 2009) (“Under those unique circumstances, the oft-repeated admonition that the Sherman and Clayton Acts protect competition, not competitors, and the federal courts’ attendant disinclination to protect competitors in cases brought under those statutes, do not ft well.”), (last visited 29 Jan. 2016). See also Spirit Airlines, Inc. v. Northwest Airlines, Inc., 431 F.3d 917, 951 (6th Cir. 2005) (“To be sure, the antitrust laws are for ‘the protection of competition, not competitors.’ Brooke Group, 509 U.S. at 224. Yet, in a concentrated market with very high barriers to entry, competition will not exist without competitors.”). 39 For example, related to the loss of rivals is the loss of product variety, which is specifcally addressed in our 2010 Horizontal Merger Guidelines. The Guidelines include a hypothetical in which acquiring Firm A, post-merger, continues selling its high-end product at a premium price but discontinues the sale of the mid-range product of acquired Firm B, which had catered to more price-sensitive customers. Even though there may be other frms offering low-end products, and even though Firm A may not fnd it proftable to raise the price of its high-end product (owing to the price sensitivity of Firm B’s customers), there may still be loss of competition and harm to consumer choice fowing from the market withdrawal of B’s mid-range product. US Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines (2010), para. 6.4, (last visited 29 Jan. 2016). 40 Concurring & Dissenting Stmt. of J. Thomas Rosch, Intel Corp., No. 9341, at 1. 41 Ibid. at 2. 42 Ibid. 43 Article 82 Guidance (n. 29). Specifcally, in paragraph 5 of the Guidance document, the EC explains that it will focus on the types of conduct most harmful to consumers, which would include depriving consumers of the benefts of “a wider choice of new or improved goods and services”. Ibid. at para. 5. In paragraph 6, the EC goes on to explain that the emphasis of its enforcement activity against abusive exclusionary conduct is on “safeguarding the competitive process in the internal market”, which practically speaking, means ensuring that a dominant undertaking does not exclude its rivals by means other “than competing on the merits of the products or services they provide”. Ibid. at para. 6.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 273 Can consumer choice promote trans-Atlantic convergence of competition law and policy? competition”, which is concerned, as I noted earlier, with ensuring that market participants do not acquire private economic power that may be used to coerce or disadvantage their rivals44. But whereas the EC might be concerned more broadly with any distortions of competition in the internal market, the US agencies are probably going to be focused on agreement or conduct that is likely to eliminate or foreclose a rival from the market45. So there still might not be total convergence, even under a consumer choice standard.

B. Another way to expand consumer choice may be to eliminate rules of per se illegality that basically leave consumers with only one choice, as the US Supreme Court did in Leegin by overturning Dr. Miles46. By getting rid of Dr. Miles, the Court not only let consumers buy the lowest cost product, but also gave them the choice of doing that, or paying more and obtaining frills such as pre- or after-sale services. For example, some consumers may prefer, when shopping for a product like a wedding dress or a set of golf clubs, to pay more to have point-of-sale services that will custom-ft the product for each customer47. Other consumers, however, may not need or care for the point-of-sale services, and choose instead to shop for dresses or clubs at discount retailers that do not offer such services or fancy showroom displays. In the Nine West case, the FTC agreed in light of Leegin to reexamine its 2000 consent decree with Nine West Group that had enforced a ban on the use of resale price maintenance (RPM)48. We granted Nine West’s petition to reopen and modify the consent order based on changed conditions of law in respect to RPM agreements after Leegin49. We concluded that Nine West should be permitted to engage in RPM agree- ments because it lacked market power and was itself the impetus behind the use of RPM50. Specifcally, Nine West asserted that it wanted to use RPM agreements “to

44 See (nn. 13-15) and accompanying text. 45 See Article 82 Guidance (n. 29), para. 69 (“The Commission does not consider that it is necessary to show that competitors have exited the market in order to show that there has been anti-competitive foreclosure”.). 46 Leegin Creative Leather Prods. Inc. v. PSKS, Inc., 551 U.S. 877, 907 (2007) (“Vertical price restraints are to be judged according to the rule of reason”. (overruling Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911))). 47 See Froeb, “Consult an Economist Before Buying a Wedding Dress”, Managerial Econ. (5 Dec. 2011), (last visited 29 Jan. 2016) (commenting on point-of-sale services provided by full-service retailers and methods of preventing free-riding by discount retailers). 48 Nine West Grp. Inc., No. C-3937, 2008 FTC LEXIS 53, 6 May 2008, (last visited 29 Jan. 2016) (reconsidering its prior order at 2000 FTC LEXIS 48, 11 Apr. 2000, (last visited 29 Jan. 2016)). 49 Nine West Grp. Inc., No. C-3937, at *3. 50 Ibid. at *25–26, *29.

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274 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? J. Thomas Rosch

increase the services offered by retailers that sell Nine West products”51. We saw no reason to deny Nine West an opportunity to do so, although we did conclude that it would be appropriate to monitor the effects of such use on prices and output, and we therefore imposed certain reporting obligations on Nine West to facilitate that moni- toring52. I am not an expert on EU law. But as I understand it, the 2010 Vertical Restraint Guidelines still treat RPM as a hardcore restriction that is presumed to be unlawful under Article 101(1)53. The Guidelines consequently place the onus on respondents to plead and prove an effciency defense under Article 101(3)54 (that is, demonstrating that the challenged restraint “contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting beneft”)55. That approach strikes me as limiting consumer choice because it may deter some businesses from experimenting with RPM, out of a concern that they will not be able to prove its benefcial effects to the EC without a track record of its use. More generally, the treatment of vertical restraints may be one arena in which the United States and the EU will continue to see things differently, even from the stand- point of consumer choice. Ever since the 1977 Sylvania decision56, we in the US have steadily relaxed our antitrust scrutiny of vertical restraints because we view such restraints, both nonprice and price, often to be part and parcel of different methods of marketing, distributing, and selling products and services to consumers. Refecting a predominantly Chicago School approach, we have tended to let the market decide which methods are more effcient or more valuable to consumers, and we have tended not to impose our own judgments—through enforcement decisions—about which methods should be preferred over others. By contrast, the EC, with its concern for creating and preserving a single market, may not share the same view.

51 Ibid. at *26. 52 Ibid. at *28–29. 53 Guidelines on Vertical Restraints (EC) of 19 May 2010, 2010 OJ (C 130) 1, paras. 47-48, (last visited 29 Jan. 2016). 54 Ibid. at para. 223. 55 TFEU, art. 101(3). 56 Continental TV, Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 275 Can consumer choice promote trans-Atlantic convergence of competition law and policy?

C. A third example of expanding consumer choice that we have seen in the United States concerns situations in which a trade or profession seeks to prevent consumers from getting access to a lower-cost alternative. Two recent FTC decisions illustrate this fact pattern. The frst decision, Realcomp II Limited, involved the so-called multiple listing service (MLS), which has come to be an integral element of the US real estate industry relating to the sale of homes57. The MLS is a closed database system that contains detailed information about the homes for sale in a given local, residential real estate market, including the number and types of rooms for each property, its square footage, the identity of the listing broker for that property and the services being provided by that broker, and what the compensation would be for any broker who provides a successful buyer58. The full content of the database is accessible only to real estate brokers who are members of the MLS but limited content is made available to members of the public through “data feeds” sent to publicly accessible websites such as Realtor.com59. In the United States, the so-called traditional brokerage model for selling homes involves the seller of a home paying a six-percent commission to his or her broker, who in exchange provides a menu of services to the seller to promote the sale of his or her home. The seller’s broker, however, generally agrees to split the commission with any broker who provides a successful buyer. Some brokers, however, have departed from this traditional model and chosen to discount their fees (for example, a lower percentage commission or even a fat fee), in order to attract home sellers who do not want the full menu of brokerage services60. The FTC’s case concerned Realcomp’s alleged adoption of policies that (1) prohibited discount broker listings from being fed from Realcomp’s MLS to public websites, and (2) limited the exposure of these listings on the closed MLS database61. The FTC found that Realcomp’s policies violated the rule of reason by “narrowing consumer choice” or “hindering the competitive process” engendered by the discount brokerage option62. We noted that those policies, to be successful, did not have to drive discount brokers

57 Realcomp II, Ltd., No. 9320, 2009 FTC LEXIS 250, 30 Oct. 2009, petition for review denied, 635 F.3d 815 (6th Cir.), cert. denied, 132 S. Ct. 400 (2011). 58 Ibid. at *4. 59 Ibid. at *5. As the FTC opinion explains, the type of listing agreement used in the traditional brokerage model is referred to as an “exclusive right to sell” (ERTS) agreement. Ibid. at *12–13. 60 Ibid. at *6. As the FTC opinion explains, a type of listing agreement that refects the discount brokerage option is known as an “exclusive agency” (EA) agreement. Ibid. at *13–14. 61 Ibid. at *7. 62 Ibid. at *111.

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276 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? J. Thomas Rosch out of the market entirely; rather, they only had to detect and punish enough discounters to bring them back to the traditional brokerage model with its higher fees63. Realcomp petitioned the US Court of Appeals for the Sixth Circuit to review our decision for error. The Sixth Circuit denied the petition, agreeing with our fndings that Realcomp’s policies harmed competition, inter alia, by severely restricting consumers’ access to discount brokerage listings, which were not available on the most popular, public websites64. The Sixth Circuit also agreed with us that it was not neces- sary to show price effects in a case where “Realcomp does not regulate rates of commission, offers of compensation, or other price terms”; instead, it was suffcient to “examine the effect of Realcomp’s restrictions on consumer choice, specifcally, the reduction in competitive brokerage options available to home sellers”65. In other words, the harm to competition fowing from Realcomp’s policies could be measured as a reduction in output, couched in terms of “the share of [discount brokerage] listings in the Realcomp MLS, the exposure of these listings to consumers, and the relationship of these outcomes to the Realcomp website policy”66. The second FTC decision, North Carolina Board of Dental Examiners, involved the provision of teeth whitening services to the public67. In that case, the North Carolina Board of Dental Examiners sought to prevent non-dentists from offering teeth whitening services at locations such as mall kiosks, spas, retail stores, and salons, for a fraction of the price charged by dentists and often with greater convenience68. Threatened by the new competition, some dentists complained to the State Board under the guise that non-dentists failed to mention to consumers any public health and safety concerns associated with their services, and the Board took matters into its own hands by issuing cease-and-desist letters against the non-dentists, as well as their suppliers of equipment and products, and mall owners and operators69. In contrast to Realcomp, there was an obvious price effect fowing from the exclusion of non-dentist providers, who were offering teeth-whitening services at signifcantly lower prices, although we held that precise quantifcation of the price increase was not necessary70. Yet, like Realcomp, the actions of the State Board also had the effect of

63 Ibid. at *111 n.43. 64 Realcomp II, Ltd. v. FTC, 635 F.3d 815, 829 (6th Cir.), cert. denied, 132 S. Ct. 400 (2011). 65 Ibid. 66 Ibid. 67 N.C. Bd. of Dental Examiners, No. 9343, 2011 FTC LEXIS 290, 7 Dec. 2011, petition for review fled, No. 12-1172 (4th Cir. Feb. 10, 2012). 68 Ibid. at *2. 69 Ibid. at *3. 70 Ibid. at *88–89.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 277 Can consumer choice promote trans-Atlantic convergence of competition law and policy? depriving consumers of the choice of going to a mall, salon, or spa for teeth-whitening services, and the convenience of obtaining same-day service, which was generally not available at dentist offces unless they offered walk-in service71. We rejected the State Board’s health-and-safety rationale for excluding non-dentists, consistent with the 72 holdings of the US Supreme Court in Indiana Federation of Dentists and National Society of Professional Engineers73. Realcomp and North Carolina Dental can be distinguished from Intel, discussed above in Section II.A, as attempts by an incumbent frm, or group of frms, to hinder or even quash nascent, albeit unproven, competition.74 Put another way, expanding consumer choice is not just about ensuring that rivals who are already offering consumers an alternative in the market do not become the target of exclusionary conduct, but also about ensuring that new entrants have a fair chance to present their alternatives to consumers. In the latter situation, US antitrust case law has relaxed the quantum of proof of anticompetitive effects because those effects may be diffcult to quantify and, in any event, may be small in magnitude.

III.

I have now described three recent examples from the FTC’s enforcement work in which we have viewed the reduction of consumer choice as a type of harm to competition. If we are truly to expand consumer choice, however, any remedy that we fashion as antitrust enforcers should take into account how consumers actually make choices. This means that we should not ignore the recent contributions of behavioral economics (BE) to understanding how consumer decisions actually get made. They may account for the “givens” concerning consumer behavior in the European case law that were described earlier (especially since BE development in Europe is light years ahead of BE in the United States today). Let me provide three examples from the literature.

71 Ibid. at *89–90. 72 FTC v. Ind. Fed’n of Dentists, 476 U.S. 447, 463 (1986) (rejecting the argument “that an unrestrained market in which consumers are given access to the information they believe to be relevant to their choices will lead them to make unwise and even dangerous choices”). 73 Nat’l Soc’y of Prof’l Eng’rs v. United States, 435 U.S. 679, 695 (1977) (holding that “petitioner’s attempt to [justify its restraint under the Rule of Reason] on the basis of the potential threat that competition poses to the public safety and the ethics of its profession is nothing less than a frontal assault on the basic policy of the Sherman Act”). The EC has taken basically the same approach. See Article 82 Guidance (n. 29) at para. 29 (“It is not the task of a dominant undertaking to take steps on its own initiative to exclude products which it regards, rightly or wrongly, as dangerous or inferior to its own product”) (footnote omitted). 74 See N.C. Dental, 2011 FTC LEXIS 290, at *89 (citing United States v. Microsoft Corp., 253 F.3d 34, 79 (DC Cir. 2001)); Realcomp II, Ltd., No. 9320, 2009 FTC LEXIS 250, at *125-26, 30 Oct. 2009 (quoting Microsoft, 253 F.3d at 79), petition for review denied, 635 F.3d 815 (6th Cir.), cert. denied, 132 S. Ct. 400 (2011).

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278 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? J. Thomas Rosch

A. My frst example from the BE literature has been referred to as “choice overload” or “hyperchoice”75. This concept relates to the fact that consumers are able to process only limited amounts of information in making a choice, and therefore too many choices (or too much information about the available choices) may overwhelm a consumer and be counterproductive to competition on the merits. In other words, a menu of choices may produce what Nobel Laureate calls “cognitive strain”, which is our minds’ way of telling us that the decision we are being asked to make is requiring extra effort from our processing faculties76. For example, the choices presented may involve too many variables to compare and contrast, as in the case of products that have different options, add-ons, and accessories. Consumers may well throw up their hands and simply pick the product that is the best known or the most popular. In my enforcement examples, I do not think we were looking at a potential problem of choice overload. But we should be mindful of this concern. From the standpoint of competition law and policy, it may be more important that consumers have a choice than that they have a certain number of choices77. If consumers become overwhelmed by the choices they have and encounter diffculties in making a decision, then we have to wonder whether competition on the merits is really all that robust.

75 See, e.g., Bennett et al., “What Does Behavioral Economics Mean for Competition Policy?”, (2010) 6 Competition Pol’y 111, 112 n.3; D. Mick et al., “Choose, Choose, Choose, Choose, Choose, Choose, Choose: Emerging and Prospective Research on the Deleterious Effects of Living in Consumer Hyperchoice”, (2004) 52 J. Bus. Ethics 207; Sunstein, “Empirically Informed Regulation”, (2011) 78 U. Chi. L. Rev. 1349, 1404. 76 Kahneman, Thinking, Fast and Slow (New York, 2011), 59. See also Ayal, “Harmful Freedom of Choice: Lessons from the Cellphone Market”, (2011) 74 Law & Contemp. Probs. 91, 96 (“One of the interesting aspects of choice overload is that consumers are generally unaware that variety may work to their detriment, and may be unaware of the effects of cognitive overload-despite their actions”.). 77 Averitt and Lande refer to hyperchoice as “diminishing returns to variety”. They observe that the importance of product variety to a consumer choice standard “does not mean simply that more choices are better, however . . . [A]lthough it might seem counterintuitive, there is evidence that too much choice can be detrimental to consumers. Research shows that additional choice tends to lead to increased satisfaction only up to a point.” Averitt and Lande, “Using the ‘Consumer Choice’ Approach to Antitrust Law”, (2007) 74 Antitrust L.J. 175, 192.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 279 Can consumer choice promote trans-Atlantic convergence of competition law and policy?

B. Another example from the BE literature has been referred to as “default bias” or “status quo bias”78. The concept is a simple one: even when consumers are presented with a choice of options, they often stick with what has been made the default instead of evaluating all of the options equally and choosing among them79. Why do consumers behave this way? One explanation is that choosing something other than the default is viewed as a deviation from the norm or the status quo, and that deviation may be associated with negative such as regret or doubt80. For example, software that comes pre-installed on a computer is generally perceived as compatible with the computer’s operating system and performance specifcations. Accordingly, switching to a competing software program may leave a consumer with doubt or uncer- tainty as to whether that program will be just as compatible with the operating system and will perform just as well. A consumer may not want to take the risk. In this regard, the EU’s acceptance of a browser choice remedy from Microsoft in December 2009 provides fodder for discussion81. The browser choice screen82, which places Micro- soft’s alongside 11 other, competing browsers—including Google’s Chrome, Apple’s Safari, Mozilla’s Firefox, and —is intended to give personal computer users “an effective and unbiased choice between Internet Explorer and competing web browsers”83. According to the EC, “This should ensure competition on the merits and allow consumers to beneft from technical developments and innovation both on the web browser market and on related markets, such as web-based applications.”84

78 See, e.g., Bennett et al. (n. 75) at 112 n.4; DellaVigna, “ and Economics: Evidence from the Field”, (2009) 4 J. Econ. Lit. 315, 322 n.21; Kahneman, “Maps of ”, (2003) 93 Am. Econ. Rev. 1449, 1459; Reeves and Stucke, “Behavioral Antitrust”, (2011) 86 Ind. L.J. 1527, 1534 n.57; Stucke, “Money, Is That What I Want? Competition Policy and the Role of Behavioral Economics”, (2010) 50 Santa Clara L. Rev. 893, 962 n.379. 79 For this reason, the FTC has long frowned on “negative option” plans that do not clearly and conspicuously disclose all of the elements—both positive and negative—of staying with the plan. See 16 C.F.R. § 425.1 (2012). 80 Kahneman (n. 76) at 348; see also Ayal (n. 76) at 97-98 n.17 (“Empirical studies show that in a large variety of circumstances, individuals prefer to stick to the default option they were offered, probably in order to avoid examination of the different options and the risk of future remorse”.); Sunstein (n. 75) at 1424 (“One reason is that inertia can be a powerful force; people may procrastinate or decline to make the effort to rethink the default option. Another reason is that the default rule might be taken to carry an implied endorsement by those who have chosen it; people may not depart from the default rule on the ground that it might have been selected because it is helpful or appropriate”). 81 Press Release, European Commission, “Antitrust: Commission Accepts Microsoft Commitments to Give Users Browser Choice” (16 Dec. 2009), (last visited 29 Jan. 2016). See generally “Delivering for consumers: Web browser choice for European consumers”, European Commission, (last visited 29 Jan. 2016). 82 See “Select Your Web Browser”, BROWSERCHOICE.EU, (last visited 29 Jan. 2016). 83 European Commission (n. 81). 84 Ibid.

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280 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? J. Thomas Rosch

Although the browser choice screen seems to address the related problem of “placement bias” by putting Internet Explorer randomly on a horizontal menu with 11 other, competing browsers85, I wonder whether it effectively addresses the default bias that arises from the fact that Internet Explorer has still been pre-installed as the default browser. Will consumers take the time to evaluate all of the competing browsers and make an intelligent switch86? Or might it be more effective from the standpoint of competition—as the commitments also provide—for original equipment manufacturers (OEMs) to pre-install a different browser on their products as the default option87? The power of default bias cannot be underestimated, particularly if it is implemented by a frm with a dominant or near-dominant share of the relevant market. Just last week, Microsoft announced that version 10 of its Internet Explorer, which will launch as part of Windows 8, would feature the option of sending a “Do Not Track” signal to websites as the default setting88. This announcement has angered members of the , who feel that Microsoft’s unilateral decision “may ultimately narrow the scope of consumer choices, undercut thriving business models, and reduce the availability and diversity of the Internet products and services that millions of American consumers currently enjoy at no charge.”89 Microsoft has responded by asserting that its so-called “privacy-by-default state for online behavioral advertising is the right approach” because consumers will be “empowered to make an informed choice”90. In my view, at the heart of this brewing controversy is the phenomenon of default bias—will consumers make an informed choice and change the setting on their browsers to refect their actual preferences for

85 This refers to the tendency of consumers to choose the product that has been placed frst on the list. Bennett et al. (n. 75) at 112 n.4. 86 With 12 browsers on the menu, one has to wonder whether there might also be a choice overload problem. Granted, European consumers are a more diverse group than US consumers, which explains why it was necessary to select and feature 12 of the most popular browsers. 87 European Commission (n. 81) (“The commitments also provide that computer manufacturers will be able to install competing web browsers, set those as default and turn Internet Explorer off”). See also Press Release, European Commission, “Antitrust: Commission Welcomes Microsoft’s Roll-Out of Web Browser Choice” (2 Mar. 2010), (last visited 29 Jan. 2016) (“In compliance with the December commitments, computer manufacturers are now able to install competing browsers on Windows PCs instead of, or in addition to, Internet Explorer. Microsoft further committed not to retaliate against PC manu- facturers who pre-install a non-Microsoft web browser on the PCs they ship and make it the default web browser”). 88 See Glueck, “More Privacy by Default: Do Not Track in ”, MICROSOFT.EU (1 June 2012), (last visited 29 Jan. 2016); Hatchamovitch, “Windows Release Preview: The Sixth IE10 Platform Preview”, MSDN Blog (31 May 2012), (last visited 29 Jan. 2016). 89 Sasso, “Advertisers Fume After Microsoft Makes ‘Do No Track’ the Default in Internet Explorer”, HILLICON VALLEY (1 June 2012), (last visited 29 Jan. 2016) (quoting Stu Ingis, counsel for the Digital Advertising Alliance). 90 Lynch, “Advancing Consumer Trust and Privacy: Internet Explorer in Windows 8”, Microsoft on the Issues (31 May 2012), (last visited 29 Jan. 2016).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 281 Can consumer choice promote trans-Atlantic convergence of competition law and policy? more personalized content, as Microsoft claims, or will they leave their browsers on the default “Do Not Track” setting? Stay tuned as this saga unfolds.

C. A third and fnal example from the BE literature has been referred to as “optimism bias”91. This term describes the tendency of consumers to be overly optimistic when making various decisions for themselves, including over-estimating how much they will use a good, or underestimating how much it will cost them92. In the choice setting, this type of bias may cause consumers to choose a more expensive option than a cheaper, no-frills alternative because they may think that they will actually derive more beneft from the former or they may underestimate how much the more expensive option really is. As Professor Stucke observes in a discussion paper recently submitted to the Organisa- tion for Economic Co-operation and Development (OECD), sellers may try to exploit this phenomenon, for example, by eliminating discounts instead of just increasing the advertised price, or by using various forms of “drip” price increases93. This reality suggests that even though sellers may overtly present consumers with a menu of competing choices, they may secretly be counting on the fact that at least some consumers will be unable to evaluate with predictable accuracy which option, with its combination of features and costs, is best suited for their needs. Such an outcome would not refect true competition on the merits. Like choice overload and default bias, the phenomenon of optimism bias should cause us to examine more closely how competition actually unfolds in the marketplace, even with the presence of “choice”, and whether we can structure a remedy or a set of commitments in such a way as to ensure that the options presented to a consumer are actually given fair and equal consideration. I do not think we as enforcers ever want to nudge or steer a consumer towards a particular option. But choice is illusory, it seems to me, if consumers in fact ignore the options presented and stick with what is the most popular, the default, or what seems like the cheapest when it may in fact not be.

91 Bennett et al. (n. 75) at 112 n.5; Reeves and Stucke (n. 78) at 1557. 92 Kahneman (n. 76) at 252 (describing how people “make decisions based on delusional optimism rather than on a rational weighting of gains, losses, and probabilities. They overestimate benefts and underestimate costs”). 93 Stucke, “The Implications of Behavioral Antitrust” (Note presented at OECD Hearing on Competition and Behav- ioural Economics, 25 July 2012), para. 51, (last visited 29 Jan. 2016) (“So the optimistic consumers choose credit cards with lower annual fees (but higher fnancing fees and penalties) over better suited products (e.g., credit cards with higher annual fees but lower interest rates and late payment penalties)”.). See also Gabaix and Laibson, “Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets”, (2006) 121 Q.J. Econ. 505, 526 (discussing how over-optimism about credit card usage leads to consumer myopia about the cost of a credit card add-on fee).

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282 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? When more is better and when less is more: behavioral antitrust and choice

MAURICE E. STUCKE* [email protected] Professor of Law, University of Tennessee College of Law; Of Counsel, Konkurrenz Group; Senior Fellow, American Antitrust Institute

I. Introduction

One perceived beneft of competition is its providing consumers with more choices of goods and services1. The economic theories underlying competition law presume that increasing variety to meet consumer demand increases well-being, as consumers can more easily select the option that best meets their needs and wants. The assumption is that providing consumers with options, more information about their options, and more

* The author thanks Neil Averitt and Robert Lande for their helpful comments.

1 Addis v Holy Cross Health Sys. Corp., 3:94 CV 118 AS, 1995 WL 914278 (N.D. Ind. July 6, 1995) (recognizing the benefts of competition include higher quality and greater choice); Swarthmore Radiation Oncology, Inc. v Lapes, CIV. A. 92-3055, 1993 WL 517722 (E.D. Pa. Dec. 1, 1993); Police Jury Ass’n of La., Inc. v State, 36 So. 3d 942, 947 (La. App. 1 Cir. 2010).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 283 When more is better and when less is more: behavioral antitrust and choice autonomy in choosing among the options increase welfare. Competitive market forces will set the optimal level of variety. Consequently, the choice model for competition law focuses on too few, rather than too many, choices. This chapter examines several assumptions underlying a consumer choice approach to competition law, namely that (i) consumers beneft from a reasonable range of choice; (ii) in a competitive market, consumers will ordinarily seek and demand variety up to the optimal level; (iii) a competitive market will produce the optimal number of options that feasibly meet consumers’ demand for variety; and (iv) antitrust policy should be concerned about the exercise of market power that reduces variety below the optimal level and to identify particular industries in which lower concentration and greater variety are especially important to consumers2. Section II assesses these assump- tions under . Section III examines these assumptions under the behavioral economics and consumer psychology literature. Section IV discusses two policy implications of choice overload.

II. Choice under competition laws’ neo-classical economic theories

Preserving or increasing choice is one perceived beneft of competition3. However, the US competition policy guidelines, for many years, focused on price and output, and gave less attention to other dimensions of competition. The US Department of Justice (DOJ) & Federal Trade Commission’s (FTC) 1992 Horizontal Merger Guidelines, for example, mentioned non-price competition in a footnote4.

2 N. Averitt and R. Lande, “Using the ‘Consumer Choice” Approach to Antitrust Law”, Antitrust Law Journal 74, (2007): pp. 175-191. 3 See, e.g., FTC v Indiana Fed’n of Dentists, 476 U.S. 447, 459 (1986) (“Absent some countervailing procompetitive virtue-such as, for example, the creation of effciencies in the operation of a market or the provision of goods and services-such an agreement limiting consumer choice by impeding the ‘ordinary give and take of the market place,’ cannot be sustained under the Rule of Reason”) (internal citations omitted). 4 US Dep’t of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines § 0.1 n. 6 (1992, revised 1997) (“Sellers with market power also may lessen competition on dimensions other than price, such as product quality, service or innovation”).

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284 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Maurice E. Stucke

But over the past two decades, prominent scholars5 and policymakers6 have discussed the role of choice in competition law. The DOJ and FTC’s 2010 Horizontal Merger Guidelines note how “[e]nhanced market power can also be manifested in non-price terms and conditions that adversely affect customers, including reduced product quality, reduced product variety, reduced service, or diminished innovation”, and how “[s]uch non-price effects may coexist with price effects, or can arise in their absence”7. The 2010 Guidelines provide an example where the loss of variety, without an increase in price, can reduce consumers’ welfare8. Likewise the European Commission’s Horizontal Merger Guidelines recognize the importance of variety, noting that “[e]ffective compe- tition brings benefts to consumers, such as low prices, high quality products, a wide selection of goods and services, and innovation”, and how frms can exercise market power by, among other things, reducing the choice or quality of goods and services9. Consistent with the policy announcements, recent enforcement activity involving mergers10 and exclusionary dealing11 recognized the importance of choice.

5 R. Lande, “Consumer Choice As the Ultimate Goal of Antitrust”, University of Pittsburgh Law Review 62 (Spring 2001): pp. 503-525; N. Averitt and R. Lande, “Consumer Choice: The Practical Reason for Both Antitrust and Consumer Protection Law”, Loyola Consumer Law Review 10 (1998): p. 44; N. Averitt and R. Lande, “Consumer Sovereignty: A Unifed Theory of Antitrust and Consumer Protection Law”, Antitrust Law Journal 65 (1997): p. 713. 6 N. Averitt, “Consumer Choice on the Menu at FTC”, FTC WATCH, 17 October 2013, www.ftcwatch.com (copy on fle with author); J. Rosch, “Can Consumer Choice Promote Trans-Atlantic Convergence of Competition Law and Policy?”, Concurrences Conference on “Consumer Choice”: An Emerging Standard for Competition Law, 8 June 8 2012, http://www.ftc.gov/public-statements/2012/06/can-consumer-choice-promote-trans-atlantic-conver- gence-competition-law-and. 7 US Dep’t of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines § 1 (2010); see also US Dep’t of Justice, “Antitrust Enforcement and the Consumer” (1996) (“Free and open competition benefts consumers by ensuring lower prices and new and better products”); Fed. Trade Comm’n, “Competition Counts: How Consumers Win When Business Compete” (2007) (“Competition in America is about price, selection, and service. It benefts consumers by keeping prices low and the quality and choice of goods and services high”). 8 2010 Merger Guidelines, supra note 7, at § 6.4, example 21: Firm A sells a high-end product at a premium price. Firm B sells a mid-range product at a lower price, serving customers who are more price sensitive. Several other frms have low-end products. Firms A and B together have a large share of the relevant market. Firm A proposes to acquire Firm B and discontinue Firm B’s product. Firm A expects to retain most of Firm B’s customers. Firm A may not fnd it proftable to raise the price of its high-end product after the merger, because doing so would reduce its ability to retain Firm B’s more price-sensitive customers. The Agencies may conclude that the withdrawal of Firm B’s product results from a loss of competition and materially harms customers. 9 EC Guidelines on the Assessment of Horizontal Mergers under the Council Regulation on the control of concentra- tions between undertakings, 2004/C 31/03, § 8. 10 Plaintiff’s Post-Trial Proposed Findings of Fact, United States v Bazaarvoice, Inc., Case No. 3:13-cv-00133-WHO, paras 198-216 (N.D. Cal. fled Oct. 31, 2013) (discussing how transaction will reduce innovation and product variety); Second Amended Complaint, United States v AT&T, Inc., No 1:11-cv-01560-ESH, para 3 (D.D.C. Sept. 30, 2011) (alleging that unless the acquisition is enjoined, “customers of mobile wireless telecommunications services likely will face higher prices, less product variety and innovation, and poorer quality services due to reduced incentives to invest than would exist absent the merger”). 11 N.C. Bd. of Dental Examiners, No. 9343, 2011 FTC LEXIS 290 (FTC Dec. 7, 2011), petition for review denied, 717 F.3d 359 (4th Cir. 2013); Realcomp II, Ltd., No. 9320, 2009 FTC LEXIS 250 (FTC Oct. 30, 2009), petition for review denied, 635 F.3d 815 (6th Cir. 2011); Intel Corp., No. 9341, 2009 WL 4999728 (FTC Dec. 16, 2009) (Rosch, FTC Commissioner, concurring in part & dissenting in part) (“The Commission must also be concerned with whether a course of conduct by a frm with monopoly power reduces consumer choice by reducing alternatives”).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 285 When more is better and when less is more: behavioral antitrust and choice

Enforcers also recognize that quality and variety are not always refected in the prod- uct’s price. One example is a two-sided market, where the product on one side is offered for free12. Newspapers, magazines, television, and radio compete for an audience to read their articles, and listen and watch their programs, which often are offered for free or a nominal subscriber fee, and for advertisers that seek to target this audience. In one DOJ investigation, the alternative newsweeklies competed fercely for readers and advertisers13. The newsweeklies “responded to the other’s editorial changes and improvements by introducing new or better features or increasing investigative jour- nalism to recapture the readers’ attention to its publication” and the “different, and at times opposing, views and positions of the Defendants’ competing alternative news- weeklies provided readers with alternative viewpoints of important local events affecting social, political, aesthetic, and moral issues”14. The illegal market swap adversely affected both readers and advertisers. Choice can play a key role in media markets, since advertising competition and adver- tising rates do not necessarily capture the editorial competition. Today a newsweekly in the US likely competes against Google and Craigslist for advertising revenue. But Google, while aggregating the news, does not produce in-depth local journalism. Craigslist does not gather the news. Google and Craigslist, while formidable compet- itors to the traditional media for certain advertisers, are not competitive threats for newsgathering. Thus, the newsweeklies’ advertising rates will not necessarily refect the quality of their news content. If Craigslist entered a local geographic market, the increase in classifed advertising competition will not translate into better local jour- nalism. Likewise, if two competing newsweeklies merge, readers will likely be worse off with fewer choices for local investigative journalism, while classifed advertisers, given the presence of Craigslist, may be less affected. Thus a choice approach to competition law appears well-suited to two-sided media markets, where mergers can reduce the non-price editorial competition and diversity of viewpoints needed for an effective democracy. Consequently, agreements or unilat-

12 M. Patterson, “Non-Network Barriers to Network Neutrality”, Fordham Law Review 78 (2010): pp. 2843-2870: Antitrust typically focuses on sellers’ restrictions of output as evidence of anticompetitive effect, but anticom- petitive conduct by search engines would not restrict the quantity of information received by users; rather, it would skew its content. It may be very diffcult to prove that sort of skewing and even more diffcult, perhaps, to show exactly how consumers are hurt by it. Antitrust in fact does not have a well-developed analytical approach to dealing with informational issues. Although some commentators and regulators have recently begun to focus on “consumer choice” as an antitrust issue, the emphasis there is primarily on the elimination of alternatives, not on informational mechanisms of choice. 13 Competitive Impact Statement, United States v Village Voice Media, Civ. Action No. 1:03CV0164 (N.D. Oh. fled Feb. 3, 2003), http://www.justice.gov/atr/cases/f200700/200715.htm. 14 Id.

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286 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Maurice E. Stucke eral restraints that reduce variety in the marketplace at times can be anticompetitive and violate the competition laws15. No one argues that more choices are always better. Under the economic model of perfect competition, choice is less important as products are homogenous16. But the reality is that many products and services are differentiated17. Even with differentiated goods, there is a diminishing return in increasing variety18. As two pioneers of the consumer choice approach to competition law wrote: “[T]here is an optimal level of consumer choice. This is identifed through a complex tradeoff that seeks to achieve most of the benefts of choice while not sacrifcing economies of scale, producing market power, or causing exces- sive consumer confusion. This tradeoff is best performed by the free market, with antitrust being limited to ensuring that anticompetitive activity does not interfere with the market’s ability to make these calculations”19. Thus, the key issue is whether the free market will set the optimal level of variety. Probably yes if the market is competitive, and consumers are rational, informed, self- interested, and act with willpower. Rationality under neoclassical economic theory has a narrow meaning. Rationality is not necessarily being virtuous, fair, pragmatic, thoughtful or compassionate. Instead, rational individuals are objective, seek out the optimal amount of information, readily and continually update their prior factual beliefs with relevant and reliable empirical data, and choose the best action according to stable preferences. As consumers obtain new facts, they revise their beliefs and modify their behavior. So defned, rational consumers with willpower will seek and demand products, services, or companies that align with their personal preferences. Consumers will seek the option that matches their mix of price, performance, quality, and other attributes. One Internet website, for example, rates over 2500 kinds of shampoo sold under 100 brands20. Consumers

15 M. Stucke and A. Grunes, “Toward a Better Competition Policy for the Media: The Challenge of Developing Antitrust Policies That Support the Media Sector’s Unique Role in Our Democracy”, Connecticut Law Review 42 (2009): p. 101; M. Stucke & A. Grunes, “Antitrust and the Marketplace of Ideas”, Antitrust Law Journal 69 (2001): p. 249. 16 In the “perfectly competitive” market, “buyers and sellers are so numerous and well informed that each can act as a price-taker, able to buy or sell any desired quantity without affecting the market price.” J. Black, A Dictionary of Economics (1997), p. 348. Under the model of perfect competition, as more sellers compete, their products should become more homogenous as prices approach marginal cost, and sellers become price takers. 17 F. Hayek, Individualism and Economic Order (1948), p. 96 (“Advertising, undercutting, and improving (“differ- entiating”) the goods or services produced are all excluded by defnition—‘perfect’ competition means indeed the absence of all competitive activities”). 18 N. Averitt and R. Lande, supra note 2, at 192. 19 Id. at 192-193. 20 See, e.g., http://www.goodguide.com/categories/152758-shampoo##btr.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 287 When more is better and when less is more: behavioral antitrust and choice can choose shampoos based on multiple attributes, including price, performance, smell, the characteristics of their hair, and health, environmental and societal concerns. Rational consumers will continue searching and demanding for additional options until the incre- mental beneft from the additional option is less than the incremental cost. Rational consumers will beneft from the variety of choices. Through increased product differentiation, producers can accommodate consumers’ individual needs and tastes more accurately21. Greater variety can also foster innovation. A positive feed-back loop can emerge whereby sellers and consumers experiment with a variety of goods22. No doubt greater variety at times can soften competition23. At times, frms differentiate their products to lessen price competition. But the assumption is that competition can yield greater variety, which increases overall well-being. Consequently, under neoclassical economic theory, the government need not be concerned about too many choices. Instead, the government will be concerned about too few choices that may arise under several commonly identifed market failures. One market failure arises from the sustained exercise of market power, which would “signifcantly change the mix of price/quality/variety choices that would arise from competition”; thus competition law can protect “any type of choice that is of practical importance to consumers” and prohibit “business conduct that harmfully and signif- cantly limits the range of choices that the free market, absent the restraints being challenged, would have provided”24. A second market failure involves externalities, where the “cost or beneft arising from any activity . . . does not accrue to the person or organization carrying on the activity”25. With positive externalities, where the private returns are insuffcient to cover costs, the market may produce fewer (or less diverse) options than a competitive market without signifcant externalities. A third market failure involves signifcant informational asymmetries, which can lead to “lemon”

21 G. Spassova and A. Isen, “Positive Affect Moderates the Impact of Assortment Size on Choice Satisfaction”, Journal of Retailing 89, no. 4 (2013): pp. 397-398. 22 A positive feedback loop emerges from the learning effects from diffused products and services. As users experiment with the various products, the suppliers learn from this diffusion, converge on the popular offerings, and introduce slight variations. S. Johnson, Where Good Ideas Come From: The Natural History of Innovation (2010), p. 21 (discussing how openness and connectivity may be more important for innovation than competition); E. Rogers, Diffusion of Innovations, 5th ed. (2003), pp. 146–147 (discussing how information exchange, trialability, and observability are crucial in the innovation-development process). 23 N. Averitt and R. Lande, supra note 2, at 192 (noting that “to the extent that goods are differentiated, there is less room for economies of scale, so product differentiation tends to lead to higher prices” and “to the extent that products are highly differentiated, there is an increased possibility that each maker will have some degree of market power, with the accompanying ability to raise prices”); G. Spassova and A. Isen, supra note 21, at 398. 24 N. Averitt and R. Lande, supra note 2, at 182-185. 25 J. Black, supra note 16, at 168.

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288 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Maurice E. Stucke markets where dishonest dealers for goods or services drive out honest dealers, and thereby reduce product variety and innovation26. Outside the commonly identifed market failures, policymakers ordinarily are uncon- cerned about too few or too many choices. Rational consumers would stop searching and demanding for variety if the marginal fnancial, emotional, and cognitive costs in the additional option exceeded its marginal benefts. While exceptions exist27, a competitive market generally should provide the optimal level of variety. Consequently, the focus is on too few choices as a result of collusion, monopolies’ exclusionary or predatory behavior, or mergers that lead to the exercise of signifcant market power.

III. Behavioral economics and choice

Behavioral economists note that frms and individuals do not always act in ways the neoclassical economic theories predict. Drawing from the fndings of other disciplines, such as psychology, neuroscience, and , behavioral economists fnd in their feld and lab experiments that people systemically deviate from these rational choice theories’ predicted outcome in several important ways: (1) bounded rationality; (2) bounded willpower; and (3) bounded self-interest28. Bounded rationality refers to the fact that humans are not microprocessors, and often do not engage in the multilevel strategies envisioned under certain rational-choice game theories. Many people, the behavioral economists conclude, generally rely on rules of thumb (heuristics) in making decisions and engage in a couple of steps of iterated reasoning. The behavioral economics literature distinguishes between System 1 and 2 thinking, “two modes of thinking and deciding, which correspond roughly to the everyday concepts of reasoning and intuition”29. System 1 thinking is fast, automatic,

26 See FTC v Winsted Hosiery Co., 258 U.S. 483, 494 (1922) (“The honest manufacturer’s business may suffer, not merely through a competitor’s deceiving his direct customer, the retailer, but also through the competitor’s putting into the hands of the retailer an unlawful instrument, which enables the retailer to increase his own sales of the dishonest goods, thereby lessening the market for the honest product”); G. Akerlof, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism”, Quarterly Journal of Economics 84 (1970): pp. 488-495 (explaining that the cost of dishonesty includes “loss incurred from driving legitimate business out of existence”). 27 See, e.g., J. Waldfogel, The Tyranny of the Market, (2007), p. 5 (arguing that in industries with high fxed costs like broadcasting or newspapers, the market tends to favor the tastes of the majority over “preference minorities”). 28 A. Reeves and M. Stucke, “Behavioral Antitrust”, Indiana Law Journal 86 (2011): p. 1527; M. Stucke, “Behavioral Economists at the Gate: Antitrust in the Twenty-First Century”, Loyola University Chicago Law Journal 38 (2007): p. 513. 29 D. Kahneman, “Maps of Bounded Rationality: Psychology for Behavioral Economics”, American Economic Review 93 (2003): pp. 1449, 1450.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 289 When more is better and when less is more: behavioral antitrust and choice effortless, implicit and emotional: “intuitive thoughts seem to come spontaneously to mind, without conscious search or computation, and without effort”30. In contrast, System 2 thinking is slower, conscious, effortful, explicit, and logical: reasoning “done deliberately and effortfully”31. System 2 reasoning may, but not always (as in the case of priming), detect and correct errors made under System 1 intuition32. Moreover, System 2 thinking takes signifcant mental effort, which can also one’s willpower33. Behavioral economics seeks to enrich the current economic models by better under- standing and predicting consumer behavior. But one criticism is that the cognitive psychology, , and behavioral decision theories underlying the consumer psychology academic literature are nonetheless “overly narrow, putting too much emphasis on mechanistic explanations of consumer behavior”34. The study of consumer behavior, some argue, must extend beyond the mechanical core of biases, heuristics, attention, memory, and inference making, to an affective layer (the “feelings, moods, emotions, and affective preferences” that infuence consumer decisions), motivational ground (“where consumers’ goals, motives, needs, and values reside”), the socio-relational context (“where social infuences, family membership, and social roles come into play”), and cultural background (“that is shaped by language, norms, history, economic system, etc”)35. Currently, some argue, “[l]arge swaths of consumer behavior remain mostly addressed”36. Thus, as discussed below, no universal principle of consumer behavior regarding choice exists.

1. Benefts of choice Autonomy, freedom to choose, and having choices are values embraced in many Western cultures37. Professors Botti and Iyengar, in summarizing the psychology research, mention several reasons why people prefer having choices. First, “choice enhances perceptions of self-determination and intrinsic motivation, which in turn have been associated with desirable consequences, such as greater satisfaction with the task and

30 D. Kahneman, supra note 29, at 1450. 31 Id. 32 D. Kahneman, Thinking, Fast and Slow (2011), p. 28. 33 Id. at 41-44. 34 M. Pham, “The Seven Sins of Consumer Psychology”, Journal of Consumer Psychology 23 (2013): pp. 411, 415. 35 Id. 36 Id. at 413. 37 J. Mill, On Liberty (Barnes & Noble Books 2004) (1859) (“The only freedom which deserves the name, is that of pursuing our own good in our own way, so long as we do not attempt to deprive others of theirs, or impede their efforts to obtain it”); E. Peters et al., “More Is Not Always Better: Intuitions About Public Policy Can Lead to Unintended Health Consequences”, Social Issues & Policy Review 7 (2013): pp. 114, 116.

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290 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Maurice E. Stucke the decision outcome and more positive affect”38. Second, “choice allows people to feel in control of their own fate, thus improving psychological and physical condition”39. Third, “choice causes decision makers to bolster subjective evaluations of decision outcomes, resulting in greater consistency between attitudes and behaviors and increased psychological well-being”40. People like having choices, one recent study found, even when they prefer one item41. Participants in one experiment were more likely to purchase an item, when another item was included in the choice set than when the item was presented by itself. For example, 9 percent of the participants were willing to purchase a Sony DVD player when it was the sole option. When a Philips DVD player was added to the choice set, 32 percent were willing to purchase the Sony DVD player. Likewise fewer people were willing to buy the Philips DVD player when it was the sole option than when it was presented with the Sony DVD player. Participants in a related experiment were willing to lose options, in order to keep searching for additional options. Even when the participants saw the available products, could compare them, and could identify the product they preferred, they were signifcantly less likely to pick the preferred product when presented as the only choice. Many desired to continue searching even after additional options were included in the choice set. As I discuss elsewhere, choice can have greater importance in a post-industrial economy where many are materially well-off42. One insight from the happiness literature is that well-being is promoted along multiple dimensions, including (i) material well-being (income and wealth, housing, and jobs and earnings) and (ii) quality of life (health status, work and life balance, education and skills, social connections, civic engagement and governance, environmental quality, and personal security)43. A competition policy that promotes price competition and greater consumer surplus makes more sense in developing economies where many consumers cannot afford the most basic needs. After all, if impoverished consumers must choose between milk and bread, then with all else equal, lowering the price of milk and bread signifcantly benefts consumers’ health and well-being. But if competition policy’s sole or primary goal is to maximize consumer surplus in a post-industrial economy where many are materially well-off, then the

38 S. Botti and S. Iyengar, “The Dark Side of Choice: When Choice Impairs Social Welfare”, Journal of Public Policy & Marketing 25 (2006): pp. 24, 25; E. Peters et al., supra note 37, at 133. 39 S. Botti & S. Iyengar, supra note 38, at 25 (discussing studies fnding that people given choices “experience increased life satisfaction and health status, whereas the absence or removal of choice makes them helpless and hopeless”). 40 Id. at 26. 41 D. Mochon, “Single-Option Aversion”, Journal of Consumer Research 40 (2013): p. 555. 42 M. Stucke, “Should Competition Policy Promote Happiness?”, Fordham Law Review 81 (2013): p. 2575. 43 “Better Life Initiative: Compendium of OECD Well-Being Indicators”, OECD, 2011, http://www.oecd.org/docu ment/28/0,3746,en_2649_201185_47916764_1_1_1_1,00 .html.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 291 When more is better and when less is more: behavioral antitrust and choice competition policy has a minor, and at times inconsequential, role in maximizing total well-being44. As the country’s living standards increase and its citizens’ basic material needs, such as food, clothing and shelter, are met, then the citizens will likely place greater importance on quality-of-life factors associated with well-being, such as work and life balance, social connections, safety, and environmental quality. Material well- being still matters (especially employment) in promoting well-being. Economic growth can also promote other values, such as “openness of opportunity, tolerance, economic and social mobility, fairness, and democracy”45. But there is less bang (in terms of increased well-being) for that extra buck of consumer surplus. One study of well-being across poorer and wealthier countries found a shift from materialist to post-materialist well-being46. As countries become wealthier, individual well-being tends to become more post-materialist: “[t]he more widespread post- materialist values are in a society, the more the citizenry values personal autonomy, relative to income, as a source of [subjective well-being]”47. People derive greater satisfaction from job creativity than income48. And “[i]n richer countries, personal autonomy drives life satisfaction – relative to income – more strongly”49. Choice can align with personal autonomy. Individuals can choose frms, products, and services aligned with their ethical and moral values. We see this with lifestyles of health and sustainability consumers50, cultural creatives51, and consumers willing to pay more for the increasing number of “fair trade” products52. Thus, other-regarding consumers may want to punish corporate behavior perceived as intentional, unfair, and motivated by greed, by having the choice of taking their business elsewhere53.

44 M. Stucke, supra note 42, at 2626-2628 (discussing some the literature on wealth and well-being). 45 B. Friedman, The Moral Consequences of Economic Growth, (New York: Knopf, 2005), p. ix; see also id. at 79–102. 46 J. Delhey, “From Materialist to Post-materialist Happiness? National Affuence and Determinants of Life Satisfac- tion in Cross-national Perspective”, Social Indicators Research 97 (2010): pp. 65, 74–77. 47 Id. at 73. 48 Id. 49 Id. at 74. 50 See http://www.lohas.com/Lohas-Consumer; see also FTC v Whole Foods Mkt., Inc., 548 F.3d 1028, 1039 (DC Cir. 2008) (FTC’s evidence delineating a submarket “catering to a core group of customers who have decided that natural and organic is important, lifestyle of health and ecological sustainability is important”) (internal citation omitted). 51 N. Hamilton, “America’s New Agrarians: Policy Opportunities and Legal Innovations to Support New Farmers”, Fordham Review 22 (2011): pp. 523-526. 52 M. Henderson and A. Malani, “Corporate Philanthropy and the Market for Altruism”, Columbia Law Review 109 (2009): pp. 571, 617. 53 M. Stucke, “Looking at the Monopsony in the Mirror”, Emory Law Journal 62 (2013): pp. 1509, 1557 (collecting studies).

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292 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Maurice E. Stucke

2. Choice overload and the detriment of more choices Fostering variety and choice have economic and psychological benefts. But the consumer psychology experiments also fnd that increasing variety does not always increase consumer well-being. One premise underlying neoclassical economic theory generally is that “consumers will search for and compare prices and qualities, choose the best product available, and hence stimulate competition among manufacturers.”54 Competition policy typically assumes that market participants can best judge what serves their interests. Once we relax the assumption of market participants’ rationality and willpower, then competition and more choices at times will leave consumers and society worse off55. More options, more information, and greater autonomy, as some behavioral experiments fnd, do not yield greater well-being, but “less satisfaction, more anxiety, greater disengagement, and poorer decision making”56. As the number and attributes of options increase, the information regarding each differentiated option increases as well; the required attention and burden on System 2 thinking to process the information increase as the consumer makes diffcult trade-offs of the options’ benefts and disadvantages57. When confronted by many choices, people at times experience choice overload and decision avoidance58. They are likelier to avoid choosing, even when any choice is preferable to not choosing. They forgo potentially superior options and maintain the status quo59. As product attributes increase in complexity, one cannot expect consumers to keep abreast with the options, search for and compare prices and qualities, and choose the product that closely matches their preferences60. At times consumers lack clear prefer- ences, and simply stick with the default option61. Nor can consumers apply the same mental shortcuts across markets. For example, one likely does not choose fnancial

54 L. Berg and Å. Gornitzka, “The Consumer Attention Defcit Syndrome: Consumer Choices in Complex Markets”, Acta Sociologica 55 (2012): p. 159. 55 Id. at 160 (noting that a central observation drawing on neo-institutionalism, , and behavioral economics “is that consumers do not always act rationally or in their own—or their community’s—best interest”). 56 E. Peters et al., supra note 37, at 135. 57 E. Peters et al., supra note 37, at 117-118. 58 G. Spassova and A. Isen, supra note 21, at 398; M. Bertrand et al., “What’s Advertising Content Worth? Evidence from a Consumer Credit Marketing Field Experiment”, Quarterly Journal of Economics 125 (2010): p. 268. 59 S. Botti and S. Iyengar, supra note 38, at 28. 60 L. Berg and A. Gornitzka, supra note 54, at 171-172. 61 R. Thaler and C. Sunstein, Nudge: Improving Decisions About Health, Wealth, and Happiness (New Haven: Yale University Press, 2008).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 293 When more is better and when less is more: behavioral antitrust and choice products in the same way one chooses milk. The key attributes for milk – price, fat content, organic, quantity, and quality – likely differ from the attributes of a fnancial product – risk, expected return, short and long-term investment goals, social and ethical values of company or industry62. Consequently, consumers cannot always apply the heuristics used in one market (buy the cheapest brand of skim milk, and if it tastes okay, continue purchasing that brand) to other markets. Unlike some purchases, where a bad choice is quickly detected (the taste of the Merlot wine differs from other Merlots purchased) and the consequence of a bad choice is negligible (perhaps $12 dollars for that Merlot), other purchases may involve more opaque products with multiple attributes, have larger downsides if the consumer chooses poorly, and consumers when making the purchasing decision lack the beneft of prior trial-and-error learning. The iconic study by Iyengar and Lepper involved a tasting booth in the upscale Drae- ger’s Supermarket, located in Menlo Park, California, that displayed either 6 or 24 different favors of Wilkin & Sons jam63. They monitored on two consecutive Saturdays both the traffc at the tasting booth and the sales of jam. The customers who stopped at the booth were typically middle-aged Caucasians; approximately 62 percent were women64. One important aspect of the experiment was that “to ensure that potential customers would not just reach for the more traditional favors such as strawberry and raspberry, these common favors were removed from the set of 28, leaving a choice set of 24 more exotic favors.”65 When the tasting booth had 24 favors, a higher percentage of customers (60 percent of the 242 customers) stopped to sample the displayed jams66. In contrast, when the booth had 6 favors, only 40 percent of the 260 customers stopped67. But while attracted to the greater choices, fewer customers who tasted among the 24 favors actually purchased a jar of jam (only 3 percent) relative to the customers tasting only 6 favors of jam (nearly 30 percent of the customers)68. What is remarkable is that choice overload was found for a relatively simple product with few attributes (unlike a cellphone subscription service, which involves complex choice of phone, services, length of service, reception and performance, and other contract terms), a product that the consumers likely purchased before (even though

62 L. Berg and A. Gornitzka, supra note 54, at 163. 63 S. Iyengar and M. Lepper, “When Choice is Demotivating: Can One Desire Too Much of a Good Thing?”, Journal of Personality & Social Psychology 79 (2000): p. 995. 64 Id. at 996. 65 Id. at 997. 66 Id. 67 Id. 68 Id. What is also interesting is that Draeger’s offered over 300 varieties of jam, so any shopper who wished to purchase the jam needed to go to the jam shelf, select the jam of their choice, and then purchase the jam at the store’s main cash registers. “As a result, regardless of the tasting-booth display encountered by each customer, all potential buyers of Wilkin & Sons products necessarily encountered the entire display of favors.” Id.

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294 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Maurice E. Stucke they might not have purchased the particular favor of jam), and where the cost of a poor decision ($3 to $5 after receiving the $1 discount) was likely to be inconsequen- tial for many purchasers at the upscale supermarket. Other examples of choice avoidance include student essays69, chocolates70, Medicare Part D drug subscription plans71, and 401(k) retirement savings programs72. One feld experiment sought to quantify the beneft or cost to the lender of providing consumers additional options73. The study varied a lender’s direct mail solicitation to 53,194 former borrowers in South Africa. The solicited products were small, high- interest (the annual percentage rate was 200 percent), short-term, uncollateralised loans. The targeted audience was mainly the working poor who lacked the credit history and collateralised wealth to borrow from traditional institutional sources, such as commercial banks. The lender’s average take-up from direct mail was about 7 percent (i.e., 7 of 100 recipients of the mailer would seek a loan). The experiment sought to test whether, and by how much, specifc advertising content affected demand (take-up), relative to price. Neoclassical economic theory predicted some of the feld experiment’s results. Reducing price (the loan’s by 100 basis points) increased loan take-up by 0.3 percentage points74. So for every 13 percent decrease in interest rate, there was a 4 percent increase in take-up75. Several results from the feld experiment, however, were inconsistent with neoclassical economic theory, but consistent with other behavioral economic experiments76. Providing consumers with more choices (showing four example loans instead of one) reduced consumer demand. More choices had the same effect in reducing demand as a 25 percent increase in the interest rate (200 basis points)77. On the other hand, including a photo of an attractive female had the same effect on overall demand as a 200-basis point (25 percent) reduction in interest

69 Id. at 1003 (fnding that “students in an introductory college level course were more likely to write an essay for extra credit when they were provided a list of only 6, rather than 30, potential essay topics,” that “even after having chosen to write an essay, students wrote higher quality essays if their essay topic had been picked from a smaller rather than a larger choice set”). 70 Id. (fnding that “people reported enjoying the process of choosing a chocolate more from a display of 30 than from a display of 6” and “despite their greater initial enjoyment in the extensive-display condition, participants proved more dissatisfed and regretful of the choices they made and were subsequently considerably less likely to choose chocolates rather than money as compensation for their participation”). 71 E. Peters et al., supra note 37, at 121. 72 S. Botti and S. Iyengar, supra note 38, at 30 (fnding with that more 401(k) options—fewer participants, for every 10-option increase, predicted individual participation probabilities decline by 2%, and that for every 10-option increase, participants increased their participation in less risky bond or money market accounts). 73 M. Bertrand et al., supra note 58, at 263. 74 Id. at 267. 75 Id. at 290. 76 B. Schwartz, The Paradox of Choice: Why More Is Less (New York: Harper Collins, 2004); S. Iyengar, The Art of Choosing (New York: Twelve, 2010). 77 M. Bertrand et al., supra note 58, at 296.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 295 When more is better and when less is more: behavioral antitrust and choice rate, with a stronger effect on male customers (316-basis points), and no statistically signifcant results on female customers. At other times, people choose from the many options, but have more decision-related anxiety, greater regret over their choice, and lower well-being78. With many options, consumers can make more trade-offs, consider more counterfactuals (“what ifs”) to ponder the options not chosen, and have greater regret over their choice79. Consumers “may come to believe that any imperfect result is their fault, because with so many options, they have no excuse for not getting the ‘right one’.”80 Thus, at times, less is more. Consumers derive greater satisfaction in having to select among fewer options. But, at other times, more is indeed better. Choice overload is not ubiquitous, nor are all of its preconditions well understood. Consumers do not always regret their choice from a large selection. Several attempts to replicate Iyengar and Lepper’s jam study did not fnd choice overload81. One meta-analysis of 50 experiments found mixed results82. In examining the data, the authors “could not reliably identify suffcient conditions that explain when and why an increase in assortment size will decrease satisfaction, preference strength, or the motivation to choose”.83 The behavioral literature identifes several potential contributing factors for choice overload and choice regret. One factor is “the ease with which options can be categorized”84. Categorizing options can reduce the cognitive burden and the likelihood of choice overload85. A second contributing factor is actual or perceived time constraints. People are more likely to feel rushed when choosing among a larger selection86. For example, participants

78 E. Peters et al., supra note 37, at 120 (collecting studies). 79 Id. at 118. 80 A. Roets et al., “The Tyranny of Choice: A Cross-Cultural Investigation of Maximizing-Satisfcing Effects on Well-Being”, Judgment and Decision Making 7 (2012): pp. 689, 689. 81 B. Scheibehenne et al., “Can There Ever Be Too Many Options? A Meta-Analytic Review of Choice Overload”, Journal of Consumer Research 37 (2010): pp. 409-412. 82 Id. at 416. The authors identifed with 24 experiments with different degrees of choice overload, and 31 experiments where to different degrees more-was-better, and an overall mean effect size across studies of virtually zero. One response is that some experiments are designed to identify choice overload and then test factors that may mitigate it. Consequently, counting the number of experiments and combining their results are not informative. A. Chernev et al., “Commentary on Scheibehenne, Greifeneder, and Todd, Choice Overload: Is There Anything to It?”, Journal of Consumer Research 37 (2010): pp. 426, 427.. 83 B. Scheibehenne et al., supra note 81, at 421. 84 Id. at 419. 85 Id. G. Spassova and A. Isen, supra note 21, at 398. 86 Y. Inbar et al., “Decision Speed and Choice Regret: When Haste Feels Like Waste”, Journal of Experimental Social Psychology 47 (2011): p. 533.

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296 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Maurice E. Stucke who were told that a quick choice can often be a better choice did not experience greater regret when choosing among many, rather than a few, options87. A third contributing factor is whether or not consumers have clear preferences88. For example, in Iyengar and Lepper’s jam study, the more traditional, popular favors, such as strawberry and raspberry, were removed from the sample set. A fourth contributing factor for choice overload is whether the alternatives are differ- entiated along many attributes, which increases the cognitive effort in making diffcult trade-offs89. In one experiment, participants had to choose the pen that they liked the most90. In one condition, the pens varied only along one attribute, namely color91. In another condition, the pens varied along six attributes (color, ink color, design, pen width, projected duration of use, and the ink’s light resistance)92. In both the one and six-attribute conditions, participants reported it more complex to make a choice as the number of alternatives increased from six to 15 to 3093. But unlike the participants in the one-attribute condition, participants in the six-attribute condition were less satisfed with their choice of pen as the number of alternatives increased94. A ffth contributing factor is positive affect95. People in one study were initially asked to think about a word and write down the frst thing that came to mind with that word96. In the positive-affect condition, participants provided associations for “ten common, positive-valence words (e.g., blossom, lovely, happiness)”97. In the neutral-affect condition, participants provided associations for neutral words. Consistent with other studies, participants in the neutral-affect condition were less satisfed when choosing among 45 favors of jams than 9 favors (strawberry, grape, raspberry, blackberry, orange, peach, red currant, apricot pineapple, and mango)98. But the positive-affect

87 Id. at 538. 88 R. Greifeneder et al., “Less May Be More When Choosing Is Diffcult: Choice Complexity and Too Much Choice”, Acta Psychologica 133 (2010): pp. 45, 46 (noting experiments where participants with clear preferences were more satisfed after choosing from larger assortments); B. Scheibehenne et al., supra note 81, at 410 (noting one impor- tant precondition for choice overload is “lack of familiarity with, or prior preference for, the items in the choice assortment so that choosers will not be able to rely merely on selecting something that matches their own prefer- ences”); E. Peters et al., supra note 37, at 119. 89 R. Greifeneder et al., supra note 88, at 47; B. Scheibehenne et al., supra note 81, at 419. 90 R. Greifeneder et al., supra note 88, at 47. 91 Id. 92 Id. 93 Id. 94 Id. at 47-48. 95 G. Spassova & A. Isen, supra note 21, at 399. 96 Id. 97 Id. 98 Id. at 399-400.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 297 When more is better and when less is more: behavioral antitrust and choice participants were not dissatisfed when choosing among the larger jam assortment99. Positive affect led to higher satisfaction in the larger assortment, as attention shifted to the perceived quality of the larger assortment100. Participants in the neutral-affect condition thought more about the diffculty of choosing from the large assortment; in contrast, the positive-affect participants had “more positive thoughts about the assort- ment quality in the large, relative to the small, assortment condition”101. A sixth contributing factor is the extent to which consumers engage in counterfactual thinking of the choices foregone102. In one experiment some participants (the high load condition) were occupied with another task (having to identify every time a piano note was played among the four musical instruments); the participants in low load condition did not engage in this other task while choosing. More choices led to more counter- factuals under the low load condition, but not under the high load condition103. Participants in the low load condition expressed less satisfaction when picking among 22 choices than 6 choices; whereas the situation was reversed in the high load condi- tion, where participants expressed greater satisfaction with 22 choices104. Finally, choice regret may depend on dispositional factors, such as whether the person is a maximizer seeking the best choice or a satisfcer seeking a good-enough choice105. Maximers may experience less satisfaction in western societies “where personal choice and the number of options are abundant or even excessive, the value society places on individual choice is high, and the responsibility for being unhappy is attributed to the individual failure to make the right choices.”106

99 Id. at 400. 100 Id. at 406. 101 Id. 102 R. Hafner et al., “Spoilt for Choice: The Role of Counterfactual Thinking in the Excess Choice and Reversibility Paradoxes”, Journal of Experimental Social Psychology 48 (2012): p. 28. 103 Id. at 32. 104 Id. at 31-32. 105 A Roets et al., supra note 80, at 690 (citing studies that maximizers “experience higher levels of regret compared to satisfcers and that they show lower levels of satisfaction with decisions, and lower levels of well-being more generally”); B. Schwartz , supra note 76, at 85-96. 106 A. Roets et al., supra note 80, at 697.

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298 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Maurice E. Stucke

IV. Policy implications

The consumer psychology literature, at this juncture, does not provide competition policymakers with a clear mandate on choice. Because choice overload can depend on situational and dispositional factors, there is no magic number of options that triggers for many consumers choice overload, decreases their motivation to choose, increases their decision-related anxiety and regret over their decision, and reduces well-being107. At times, less is more. At other times, more is better. Competition policymakers cannot assume that market forces will automatically correct for choice overload and yield the optimal level of variety. Indeed, choice overload raises two interesting competition policy issues.

1. Behavioral exploitation One issue is when frms add options and increase their products’ complexity to manipulate consumer demand108. Professor Ariely examined whether by adding a more expensive option marketers can steer consumers to pay more than they otherwise would have109. One hundred MIT students were offered three choices for The Economist magazine: (i) internet-only subscription for $59 (which sixteen students selected); (ii) print-only subscriptions for $125 (which no one selected); and (iii) print-and-internet subscriptions for $125 (which eighty-four students selected)110. Since no one opted for the “decoy” second choice (print-only subscriptions), the students should not choose differently if only the frst and third options were presented. But the students reacted differently111. Sixty-eight students now opted for the cheaper internet-only subscription for $59 (up from sixteen students) and only thirty-two students chose the more expen- sive print-and-internet subscriptions for $125 (down from eighty-four students)112. Consequently, by increasing variety, such as adding a very expensive wine or tea on the menu, sellers can steer consumers to pay more than they might have without the decoy option.

107 B. Scheibehenne et al., supra note 81, at 411. 108 See, e.g., X. Gabaix and D. Laibson, “Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets”, Quarterly Journal of Economics 121 (2006): pp. 505-508; O. Bar-Gill and E. Warren, “Making Credit Safer”, University of Pennsylvania Law Review 157, no. 1 (2008): pp. 27-28; S. Johnson and J. Kwak, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown (Pantheon, 2010), p. 81, 108. 109 D. Ariely, Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions (New York: Harper Perennial, 2010), p. 2. 110 Id. at 5. 111 Id. at 5–6. 112 Id. at 5–6.

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 299 When more is better and when less is more: behavioral antitrust and choice

One criticism of the mobile phone industry is its deliberately increasing choice complexity to exploit consumers: “Too much and too complex information have made it diffcult for all but the most technologically savvy to choose the product best suited to their needs. Customers unable to choose based on attribute preferences appeared to make their choices based on price, only to later fnd out that the product did not meet their needs. This tendency is further complicated by a lack of comprehen- sion. When provided with multiple options, consumers are only able to choose the least expensive about 65% of the time. When faced with the complex options of base service fees, additional features and cost for usage overages, customers tend to choose plans that greatly exceed their requirements, signifcantly overpaying each month rather than risking the chance of occa- sional overage costs. Problems navigating the telecommunications industry are not limited to older adults, although they may be particularly vulnerable.”113 The choice literature raises interesting, but unsettled, issues: are there instances when the government can predict whether more options will reduce, rather than increase, consumers’ welfare? If so, what, if anything, should be the government’s response? Although limiting choice is a risky proposal, it is not uncommon. States, for example, prohibit polygamy. Parents often cannot choose (without relocating) among the public elementary and high schools for their children to attend. When the risk and costs of false positives are high, the government may enable variety but provide default options from which consumers can opt out, or provide tools to help consumers navigate product offerings.

2. A “choice overload” defense A second policy issue is if competitors collectively agree to reduce variety that consumers demand to their detriment. Suppose, as some studies fnd, that a supermar- ket’s product assortment “positively relates to consumers’ perceptions of the value of the store as a whole” and store satisfaction114. Consumers value having a greater variety of brands, like the 300 varieties of jam that Draeger’s supermarket offered, and perceive those stores to be of higher quality. But suppose jam manufacturers and supermarkets recognize that offering so many varieties of jam, while attracting consumers to their stores, also increases the likelihood of choice overload and regret. Suppose the jam producers and retailers recognize that if they offered fewer favors of jam (say six

113 E. Peters et al., supra note 37, at 122. 114 I. Clarke et al., “Consumer Satisfaction with Local Retail Diversity in the UK: Effects of Supermarket Access, Brand Variety, and Social Deprivation”, Environment & Planning (2012): pp. 1896-1899.

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300 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Maurice E. Stucke favors), sales and profts would likely increase115, without reducing consumer well- being. Supermarkets in offering six instead of 24 jam favors could use the shelf-space for other products. No retailer would want to unilaterally limit its jam assortment to six favors, when it risks devaluing its image relative to its competitors. Thus, each frm might want to limit the number of jam favors, but not if it would reduce foot traffc and sales of other products. So supermarkets offer more choices than optimal, to avoid being at a competitive disadvantage to competitors. Suppose consumers, while attracted to the greater variety, are ultimately overwhelmed. Some forego a purchase. Others regret their choice or are otherwise less satisfed than if the supermarket offered only 6 jam favors. Collectively the jam producers, supermarkets, and consumers are worse off. To resolve the collective action problem, suppose the competing supermarkets agreed to limit the selection of jams to any six favors of each supermarket’s choosing. Would the supermarkets’ agreement run afoul of the competition laws? They likely would exercise market power in signifcantly changing the mix of the variety that would otherwise arise from competition. Accordingly, if one key policy objective “is to insure that the freedom of choice of consumers of goods and services is not restricted by conduct that is anticompetitive”116, the supermarkets would be liable.

V. Conclusion

As this chapter examines, at times, having more choices is better. Consumers will demand choices that will increase their well-being. Consumers may demand choices, even when rational choice theory predicts they may not. Choice can enable consumers to align their purchases with social, moral, and ethical concerns. Choice in some markets, such as the media, can play a key role, given the non-substitutability of the products (liberal versus conservative voices), the editorial product in the two-sided market is often offered for free or a steep discount, and the importance of viewpoint diversity for a robust marketplace of ideas and democracy. Thus, the behavioral economics literature provides some support for a consumer choice approach to compe- tition law. In these cases, enforcers should be concerned about frms’ collectively or unilaterally exercising market power to reduce the variety that consumers desire.

115 G. Spassova & A. Isen, supra note 21, at 397 (noting that “managers often fnd that the better part of their sales is accounted for only a small fraction of the offerings in their portfolio”, but many frms pursue a strategy of product proliferation to satisfy a wide range of consumer tastes, deter entry, be perceived as being higher quality, and keep customers from switching to competitors). 116 See Blue Cross of Washington & Alaska v Kitsap Physicians Serv., C81-918V, 1981 WL 2198 (Washington, Oct. 28, 1981).

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 301 When more is better and when less is more: behavioral antitrust and choice

But, at other times, less is more. Market forces can yield too many choices that reduce, rather than increase, consumer well-being. Thus policymakers should not be solely concerned about too few choices. Firms may exercise market power by increasing variety and their products’ complexity above the optimal level, to the detriment of consumers and society. At other times, frms may seek to promote their and their consumers’ welfare by collectively agreeing to reduce variety below the competitive norm. Policymakers are confronted with two heuristics: less is more, and more is better. Choice overload is suffciently robust in lab and feld experiments that it cannot be ignored or marginalized. But policymakers cannot overgeneralize from the choice overload studies about the ubiquity, persistence, and degree of choice overload. Even if choice overload is found in a particular industry, a separate institutional issue is whether we should allow private parties to deal with these types of failures or whether legislation is required. Once competition offcials recognize that market forces at times can yield too many options, which produces suboptimal results, the debate shifts to whether the problem of choice overload can be better resolved privately (by perhaps relaxing antitrust scrutiny to private restraints on variety) or with additional govern- mental regulations (which in turn raises issues over the form of the regulation and who should regulate). Even if one concludes that private restraints were the solution, the consumer psychology literature has not developed an analytical framework that courts and agencies can use, consistent with the , for a “choice overload” defense. Moreover, less restric- tive alternatives may exist, such as the use of choice architecture to categorize options. Thus caution is the maxim here. While two choices are likelier better than one, one cannot conclude that more is always better and that competitive market forces will invariably correct choice overload and yield the optimal level of choices.

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302 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Concurrences Books

GLOBAL ANTITRUST ECONOMICS: CURRENT ISSUES IN ANTITRUST AND LAW & ECONOMICS Douglas H. Ginsburg - Joshua D. Wright • March 2016

ANTITRUST IN EMERGING AND DEVELOPING COUNTRIES - SECOND EDITION Eleanor Fox, Harry First • May 2016

IAN S. FORRESTER QC LL.D. A SCOT WITHOUT BORDERS LIBER AMICORUM (VOL. II) Sir. David Edward, Jacquelyn MacLennon, Assimakis Komninos • December 2015

IAN S. FORRESTER QC LL.D. A SCOT WITHOUT BORDERS LIBER AMICORUM (VOL. I) Sir. David Edward, Jacquelyn MacLennon, Assimakis Komninos • September 2015

COMPETITION DIGEST – A SYNTHESIS OF EU AND NATIONAL LEADING CASES Nicolas Charbit - Elisa Ramundo • December 2015

ANTITRUST IN EMERGING AND DEVELOPING COUNTRIES Eleanor Fox - Harry First • October 2015

WILLIAM E. KOVACIC: AN ANTITRUST TRIBUTE LIBER AMICORUM (VOL. II) Nicolas Charbit - Elisa Ramundo • September 2014

COMPETITION LAW ON THE GLOBAL STAGE: DAVID GERBER’S GLOBAL COMPETITION LAW IN PERSPECTIVE Nicolas Charbit, Elisa Ramundo • January 2014

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CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? 303 DAY TO DAY COMPETITION LAW: A PRACTICAL GUIDE FOR BUSINESSES Patrick Hubert, Olivier Lecroart, Marie Leppard • March 2014

WILLIAM E. KOVACIC: AN ANTITRUST TRIBUTE LIBER AMICORUM (VOL. I) Nicolas Charbit - Elisa Ramundo • January 2013

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304 CHOICE – A NEW STANDARD FOR COMPETITION LAW ANALYSIS? Concurrences Review Concurrences is a print and online quarterly peer reviewed journal dedicated to EU and national laws. It has been launched in 2004 as the fagship of the Institute of Competition Law in order to provide a forum for academics, practitioners and enforcers. The Institute’s infuence and expertise has garnered interviews with such fgures as Christine Lagarde, Bill Kovacic, François Hollande and Margarethe Vestager.

CONTENTS BOARDS More than 15,000 articles, print and/or online. The Scientifc Committee is headed by Laurence Quarterly issues provide current coverage with Idot, Professor at Panthéon Assas University. contributions from the EU or national or foreign The International Committee is headed by countries thanks to more than 1,200 authors in Frederic Jenny, OECD Competition Comitteee Europe and abroad. Approximately 25 % of the Chairman. Boards members include Bruno contributions are published in English, 75 % in Lasserre, Mario Monti, Howard Shelanski, French, as the offcial language of the General Richard Whish, Wouter Wils, etc. Court of justice of the EU; all contributions have English abstracts. ONLINE VERSION Concurrences website provides all articles FORMAT published since its inception, in addition to In order to balance academic contributions with selected articles published online only in the opinions or legal practice notes, Concurrences electronic supplement. provides its insight and analysis in a number of formats: - Forewords: Opinions by leading academics WRITE FOR or enforcers - Interviews: Interviews of antitrust experts CONCURRENCES - On-Topics: 4 to 6 short papers on hot issues Concurrences welcome spontaneous contributions. - Law & Economics: Short papers written Except in rare circumstances, the journal accepts by economists for a legal audience only unpublished articles, whatever the form and - Articles: Long academic papers nature of the contribution. The Editorial Board - Case Summaries: Case commentary checks the form of the proposals, and then on EU and French case law submits these to the Scientific Committee. - Legal Practice: Short papers for in-house Selection of the papers is conditional to a peer review by at least two members of the Committee. - International: Medium size papers Within a month, the Committee assesses whether on international policies the draft article can be published and notifes the - Books Review: Summaries of recent author. antitrust books - Articles Review: Summaries of leading articles published in 45 antitrust journals

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CASE LAW DATABASE PRESTIGIOUS BOARDS e-Competitions is the only online resource that e-Competitions draws upon highly distinguished provides consistent coverage of antitrust cases editors, all leading experts in national or from 55 jurisdictions, organized into a international antitrust. Advisory Board Members searchable database structure. e-Competitions include: Sir Christopher Bellamy, Ioanis Lianos concentrates on cases summaries taking into (UCL), Eleanor Fox (NYU), Damien Géradin account that in the context of a continuing (Tilburg University), Barry Hawk (Fordham growing number of sources there is a need for University) Fred Jenny (OECD), Jacqueline factual information, i.e., case law. Riffault-Silk (Cour de cassation), Wouter Wils (DG COMP), etc. - 12,000 case summaries - 2,600 authors - 55 countries covered - 24,000 subscribers LEADING PARTNERS - Association of European Competition Law Judges: The AECLJ is a forum for judges of SOPHISTICATED national Courts specializing in antitrust case law. Members timely feed e-Competitions with EDITORIAL AND IT just released cases. ENRICHMENT - Academics partners: Antitrust research centres from leading universities write regularly in e-Competitions is structured as a database. The e-Competitions: University College London, editors make a sophisticated technical and legal King’s College London, Queen Mary work on all articles by tagging these with key University, etc. words, drafting abstracts and writing html code to increase Google ranking. There is a team of - Law frms: Global law frms and antitrust niche antitrust lawyers – PhD and judges clerks - and frms write detailed cases summaries specifcally a team of IT experts. e-Competitions makes for e-Competitions: Allen & Overy, DLA Piper, possible. Thanks to this expert Jones Day, Norton Rose Fulbright, Skadden editorial work, it is possible to search and Arps, White & Case, etc. compare cases. The Institute of Competition Law The Institute of Competition Law is a publishing company, founded in 2004 by Dr. Nicolas Charbit, based in Paris and New-York. The Institute cultivates scholarship and discussion about antitrust issues though publications and conferences. Each publication and event is supervised by editorial boards and scientifc or steering committees to ensure independence, objectivity, and academic rigor. Thanks to this management, the Institute has become one of the few think tanks in Europe to have signifcant infuence on antitrust policies.

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