Market Failure and Non-Standard Contracting: How the Ghost of Perfect Competition Still Haunts Antitrust

Modern antitrust policy has a ‘love hate’ relationshipwith non-standard contracts that can overcome market failure.On the one hand, courts have abandoned various per se rulesthat once condemned such agreements outright, concluding thatmany non-standard contracts may produce benefits that are cognizableunder the antitrust laws.¹ The prospect of such benefits, itis said, compels courts to analyze these agreements under theRule of Reason, under which the tribunal determines whethera given restraint enhances or destroys competition.² At thesame time, courts, scholars, and the enforcement agencies haveembraced methods of rule of reason analysis that are undulyhostile to such agreements.³ In particular, courts and othersare too quick to view such agreements and the market outcomesthey produce as manifestations of market power. This articleseeks to explain why these agreements are still the object ofundue hostility.     

Assessing Market Power: The Trade-off Between Market Concentration and Multi-Market Participation

This analysis reveals that traditional market power measuresare biased under the conditions of multi-market participationand demand interdependence. Specifically, when complementary(substitutable) demands dominate, traditional market power measuresare biased upward (downward). A similar bias carries over tothe evaluation of mergers. To wit, mergers that simultaneouslyincrease market concentration and multi-market participationcan result in lower prices even in the absence of merger economies.It follows that merger guidelines that place undue emphasison market concentration can lead policymakers to block (approve)mergers that enhance (diminish) consumer welfare.     

NETWORK REGULATION: THE MANY FACES OF ACCESS

Telecommunications regulation has experienced a fundamentalshift from rate regulation to increased reliance on compelledaccess, perhaps best exemplified by the Telecommunications Actof 1996's imposition of no fewer than four new access requirements.Unfortunately, each access requirement is governed by a separateset of rules for determining both the scope and the price ofaccess. The resulting ad hoc regime has created difficult definitionalproblems and opportunities for regulatory arbitrage. In thisarticle we propose a system inspired by the discipline of mathematicsknown as graph theory that integrates all of the different formsof access into a single analytical framework. This system separatesdifferent access regimes into five categories: (1) retail access,(2) wholesale access, (3) interconnection access, (4) platformaccess, and (5) unbundled access. It also provides insightsinto how each type of access complicates the already difficultproblems of network configuration and management and introducesinefficient biases into decisions about network capacity anddesign. The approach we propose also provides insights intothe transaction cost implications of the different types ofaccess. Drawing on the Coasean theory of the firm, our approachexamines the tradeoffs between internal governance costs andthe external transaction costs of providing access to offera theory of network boundaries. This framework shows how accessregulation distorts networks' natural boundaries and providesa basis for evaluating whether private ordering through marketswould lead to more efficient network design.     

DOES ECONOMICS PROVIDE A RELIABLE GUIDE TO REGULATING COMMODITY BUNDLING BY FIRMS? A SURVEY OF THE ECONOMIC LITERATURE

This article surveys the voluminous economic literature on commoditybundling. While bundling has been widely studied, the vast majorityof the literature has focused on theoretical treatments of bundlingthat demonstrate a wide range of reasons why firms might engagein bundling. These papers generally contain restrictive assumptions,including assumptions regarding the existence of monopoly insome markets, and the nature of rivalry in others. The modelscontained in these papers also generally suppress the more obviousand ubiquitous reasons firms may use bundling. Moreover, thesemodels have not been subject to robustness checks, nor havetheir assumptions been tested empirically. This review of theeconomic literature generally confirms the US Solicitor General'sview in 3M v. LePage's regarding the underdeveloped state ofthe economics literature and its position that the US SupremeCourt should defer promulgation of antitrust standards for bundling.While the literature has demonstrated the possibility that bundlingcan generate anticompetitive harm, it does not provide a reliableway to gauge whether the potential for harm would outweigh anydemonstrable benefits from the practice. As a result, the widespreadapplication of the antitrust laws to bundling by firms can generatesignificant error costs by erroneously condemning or deterringefficient business practices. In the future, economists shouldseek to expand their understanding of both the anticompetitiveand procompetitive reasons firms engage in bundling. This willentail studying the reasons why bundling is adopted by firmswithout market power, relaxing the assumption of monopoly intheoretical models, and generating testable hypotheses and thedata to test them.     

A CRITIQUE OF PROFESSOR CHURCH'S REPORT ON THE IMPACT OF VERTICAL AND CONGLOMERATE MERGERS ON COMPETITION

We discuss Professor Jeffrey Church's report to the EuropeanCommission in 2004 on the effects of vertical restraints andmergers. Although thorough and accurate, the report could bemisinterpreted by practitioners, as it does not emphasize thatmarket power is only a necessary condition for harm to competition,and that most vertical mergers that present the possibilityof competitive harm also present economic efficiencies thatare intrinsic to the integration.     

Proficiency testing (external quality assessment) of drug detection in oral fluid

Eighteen external quality assessment (proficiency testing) samples were prepared from client specimens collected with the Intercept^® oral fluid collection device and by spiking drug-free oral fluid. Samples were circulated in pairs at quarterly intervals to 13 UK and USA based laboratories for analysis by a panel of OraSure micro-plate Intercept^® enzyme immunoassay kits and hyphenated mass spectrophotometric techniques. During the survey, there was a single case of non-specificity in a false report for methadone. The major errors were of lack of sensitivity relative to the concentration thresholds specified for the immunoassays. The sensitivity for overall ‘present’/‘not found’ reports calculated as true positives/(true positives + false negatives) were for the amfetamine specific assay 50%, methyl-amfetamines 93%, barbiturates 64%, cannabinoids 73%, cocaine and metabolites 100%, benzodiazepines 69%, methadone 95%, opiates 79% (opiates excluding oxycodone 93%), phencyclidine 93% and human gamma-globulin 97%. A small number of the sensitivity errors were attributable to errors in chromatographic confirmation techniques.