June 23, 2014 Workshop Transcript Conditional Pricing Practices: Economic Analysis & Policy Implications Federal Trade Commission and U.S. Department of Justice June 23, 2014 FTC Conference Center 400 Seventh Street, SW Washington, DC 20024 [Video 1 of 8] Introductory Remarks Remarks: Assistant Attorney General William J. Baer (DOJ) ....................................... 4 Remarks: Commissioner Maureen K. Ohlhausen (FTC) ............................................... 7 Overview of the Economics of Conditional Pricing Practices Presentation: Michael Waldman (Cornell) & Michael Whinston (MIT) .................... 11 [Video 2 of 8] The Economics of Conditional Pricing Practices Presentation: Michael A. Salinger (Boston University) ............................................... 28 Presentation: Abraham L. Wickelgren (University of Texas) ...................................... 33 Presentation: Timothy J. Brennan (UMBC) ................................................................. 39 Presentation: Benjamin Klein (UCLA) ......................................................................... 43 Discussion: Francine Lafontaine (University of Michigan) .......................................... 49 Discussion: Randal Heeb (Bates White) ...................................................................... 50 Moderators: Patrick DeGraba (FTC), Patrick Greenlee (DOJ) [Video 3 of 8] The Economics of Conditional Pricing Practices, continued Presentation: Julie Holland Mortimer (Boston College) ............................................. 55 Presentation: Kusum Ailwadi (Dartmouth)................................................................. 61 Presentation: Joseph Farrell (UC Berkeley) ................................................................ 67 Presentation: Miguel de la Mano (European Commission) ........................................ 73 Discussion: C. Scott Hemphill (Columbia University) .................................................. 80 Discussion: Matthew Bennett (Charles River Associates) .......................................... 83 Moderators: Matthew C. Mandelberg (DOJ), Michael G. Vita (FTC) [Video 4 of 8] The Economics of Conditional Pricing Practices, continued Roundtable Discussion ................................................................................................ 87 Participants: Matthew Bennett (Charles River Associates), Benjamin Klein (UCLA), Francine Lafontaine (University of Michigan), Julie Holland Mortimer (Boston College), Michael Waldman (Cornell) Moderators: Patrick Greenlee (DOJ), Daniel O’Brien (FTC) [Video 5 of 8] Integrating the Economics of Exclusion with Current Legal Policy: Two Paradigms Presentation: Steven C. Salop (Georgetown) ........................................................... 104 2 [Video 6 of 8] The Law of Conditional Pricing Practices Presentation: Einer R. Elhauge (Boston University) ................................................. 115 Presentation: Daniel A. Crane (University of Michigan) ........................................... 120 Presentation: Randall Heeb (Bates White) ............................................................... 125 Presentation: Robert O’Donoghue (Brick Court Chambers) ..................................... 129 Discussion: Richard Brunell (AAI) .............................................................................. 134 Discussion: Willard K. Tom (Morgan, Lewis & Bockius) ............................................ 136 Moderators: Michael J. Bloom (FTC), Robert A. Potter (DOJ) [Video 7 of 8] The Law of Conditional Pricing Practices, continued Presentation: Jonathan Jacobson (Wilson Sonsini Goodrich & Rosati) .................... 140 Presentation: Sean P. Gates (Morrison & Foerster) ................................................. 144 Presentation: Leah Brannon (Cleary Gottlieb Steen & Hamilton) ............................ 149 Presentation: Fiona M. Scott Morton (Yale) ............................................................. 153 Discussion: Abraham L. Wickelgren (University of Texas) ........................................ 159 Discussion: Steven C. Salop (Georgetown) ............................................................... 160 Moderators: Samuel N. Weinstein (DOJ), Andrea Zach (FTC) [Video 8 of 8] Where Do We Go From Here: Open Questions and Policy Considerations Roundtable Discussion .............................................................................................. 163 Participants: Jonathan Baker (American University), Daniel A. Crane (University of Michigan), C. Scott Hemphill (Columbia University), Fiona M. Scott Morton (Yale), Richard M. Steuer (Mayer Brown), Michael Whinston (MIT) Moderators: Deborah L. Feinstein (FTC), Renata B. Hesse (DOJ) Closing Remarks Remarks: Andrew I. Gavil (FTC) ................................................................................ 181 Remarks: Robert A. Potter (DOJ) ............................................................................. 183 3 [START OF WORKSHOP] ANDREW I. GAVIL: To open today’s workshop, it is my very great pleasure to introduce and welcome Assistant Attorney General Bill Baer of the Justice Department’s Antitrust Division, who will offer some welcome remarks, to be followed by FTC Commissioner Maureen Ohlhausen. Please join me in welcoming Bill Baer. [APPLAUSE] INTRODUCTORY REMARKS • William J. Baer, Assistant Attorney General, Antitrust Division, U.S. Department of Justice • Maureen K. Ohlhausen, Commissioner, Federal Trade Commission WILLIAM BAER: I am going to take Andy’s introduction as that my remarks are “welcome” rather than “welcoming remarks.” I want to welcome you all to this joint workshop, both those of you here in the room and those of you on the webcast. This joint Department of Justice/FTC Conditional Pricing Practices Workshop is a great celebratory event to be able to have this at the new FTC Conference Center. And it is great to share the podium not just with Andy and our next panel, but with Commissioner Ohlhausen. As many of you know, the FTC and the Department of Justice Antitrust Division have held a series of workshops over the years on significant antitrust policy and enforcement issues. The goal is to illuminate challenging antitrust problems and studying—having these kinds of hearings are integral to our effort to make smart enforcement decisions. Perhaps most importantly, they fulfill that joint commitment the two agencies have to work with the public in identifying issues of significant importance in antitrust policy. We work hard at both agencies to analyze and understand the difficult questions so each of us can make the right enforcement decisions. When these sorts of recurring problems with broad implications for the economy arise, we think it is very helpful, very productive, to bring the best and the brightest together to discuss the issues. That is why in the last couple of 4 years we have held workshops on most favored nation clauses and patent assertion entity activities. And that is why we are holding today’s Conditional Pricing Practices Workshop. These practices, including loyalty and bundled pricing, are common throughout the economy. They arise in many forms and across many industries. And there’s debate, considerable debate, among lawyers, among economists, and others about the competitive effects and what the right legal analysis is in evaluating them. Courts that have analyzed loyalty and bundled pricing have generated different and sometimes conflicting tests for finding liability. We are aware, and I think need to continue to be aware, that conditional pricing practices, in many cases, save consumers money. Many of us benefit from some kind of loyalty or bundle pricing in the retail setting. You may have gotten a cup of coffee this morning and used your smartphone app or your frequent buyer card in your pocket to get a free latte. Others take advantage of bundled pricing at fast food restaurants where you can get—you can super-size it, get your fries, your burger, your 74 ounce Coke. Those tend to be cheaper than buying them separately. These are not, as a general matter, the kinds of conditional pricing practices we worry about. We do have concerns, however, when a monopolist, when a dominant firm uses loyalty or bundled pricing in a way that restricts competition and maintains or enhances a position of market power within a supply chain. The Division’s most recent enforcement action in this area was in 2011 involving United Regional Health Care system of Wichita Falls, Texas. United Regional enjoyed significant market power. It had entered into contracts with insurers that required them to pay significantly higher prices if they contracted with competing hospitals. Because the insurers needed United Regional's business—it was the dominant firm in the area to compete in Wichita Falls. The penalty for contracting with rivals was so severe that almost every insurer in the area entered into exclusive dealing arrangements with United Regional. That, in turn, reinforced the dominant position of United Regional, and it kept prices higher. Our enforcement action ultimately resulted, done jointly with the Texas AG’s office, in a consent decree, which prevented United Regional from engaging in these practices going forward. 5 Now, as I said at the beginning, it is not always easy to draw the line between the pricing practices that injure competition and those that don’t. We want to be careful in drawing that line because we don’t want to discourage the kinds of legitimate discounts