Many of the leading controversies in competition policy in the last two decades, especially those surrounding the Microsoft case, reflect the challenges posed by platform industries. Unfortunately, too often economists and policymakers have drawn the wrong lessons when thinking about such industries.
Software platforms usually impose rules and standards and often exclude participants that harm others in the community, and reward participants that benefit others in the community. Competition policy should presume that these governance systems, and the restrictions they place on platform participants—including their possible expulsion from the platform—are efficient and pro-competitive. Software platforms could, however, employ governance systems to foreclose competition.
The European Court of Justice recently delivered two seminal rulings in Groupement des Cartes Bancaires v Commission and MasterCard v Commission. These two judgments brought much awaited clarification to the application of Article 101 of the Treaty on the Functioning of the European Union ("TFEU") in two important areas. First, they spelled out the distinction between "by object" and "by effect" restrictions of competition. Second, they presented a novel analysis for the assessment of efficiencies under Article 101(3) TFEU in the context of multi-sided market. These clarifications will have important implications on the future assessment of two-sided markets under Article 101(1) TFEU. All the more, the Court in Cartes Bancaires made some important statements that have the effect of intensifying the level of judicial review of matters over which the Commission has traditionally enjoyed a "margin of appraisal," such as for complex economic matters.
This paper reexamines the economics of two common features of credit card networks: the interchange fee paid by merchant banks, or acquirers, to cardholder banks, or issuers; and the restraint commonly placed on merchants against surcharging for credit card transactions. We show that the parallels with the economics of conventional one-sided markets offer insights that have been overlooked in the credit card economics literature, which stresses the two-sided nature of the market. The characterization of the optimal interchange fee is equivalent to the Dorfman-Steiner theorem from conventional price theory. The principle that the interchange fee maximizes output when an optimum exists and the possibility of interchange fee neutrality also have precise parallels in one-sided markets with promotion. Our analysis shows that the no-surcharge rule is equivalent to a retail MFN constraint. The no-surcharge rule raises prices to merchants due to a competition-suppression effect as well as a cost-externalization effect. The market condition underlying interchange neutrality (when surcharging is allowed) eliminates the impact of the no-surcharge rule in the case of a credit-card duopoly. Yet the same condition magnifies the impact in the presence of cash customers.
In 2013, I served as a court-appointed expert in consolidated class and individual plaintiff antitrust litigation against Visa and Mastercard in the Eastern District of New York. The litigation involved a challenge to default interchange fees established by Visa and Mastercard, and to certain network rules imposed on affiliated merchants. Although it was not my task to adjudicate the dispute, an evaluation of the reasonableness of the eventual settlement from an economic perspective inevitably entails a comparison between what the plaintiffs received in the proposed settlement and the expected returns to the plaintiffs of litigating the case to conclusion. The returns to litigation in turn depend on the prospects of establishing liability, the likely magnitude of damages and the nature of any injunctive relief conditional on liability, and of course the costs of litigation. In this commentary, I focus on the liability, damages, and injunctive relief issues because of their economic novelty and broader implications for other antitrust cases.
In connecting buyers to sellers, some two-sided platforms require that sellers offer their lowest prices through the platform, disallowing lower prices for direct sales or sales through competing platforms. In this article, we explore the various contexts where such restrictions have arisen, then consider effects on competition, entry, and efficiency. Where there are plausible mitigating factors, such as efficiencies from platforms' price restrictions, we explore those rationales and compare them to the harms. We identify a set of responses for competition policy, look at experiences to date, and suggest some future attempts to improve the functioning of these markets.
In January 2013, the Federal Trade Commission closed its nineteen-month antitrust investigation into Google’s search practices. The FTC’s investigation and its resolution raised interesting antitrust issues, some of which were novel, and some of which were fundamental to sound antitrust enforcement.
The press release announcing that Jean Tirole had been awarded the 2014 Nobel Prize in Economic Sciences noted that he had “made important theoretical research contributions in a number of areas.†One of his most important contributions was the discovery and pioneering analysis of multi-sided platforms in his 2003 paper with Jean-Charles Rochet, Platform Competition in Two-Sided Markets.
All competition policy and enforcement systems consist of essentially two components: the legal instruments (‘rules’) governing both substance, competences and procedure, and the administrative structures and processes through which the legal instruments are implemented. Each of these is necessary for the success of the system as a whole. Good rules remain a dead letter if there is no efficiently run organisation with the processes to implement them. Conversely an efficiently managed authority cannot compensate for fundamental flaws in the rules which it is to implement.
Dennis Lu and Guofu Tan look at the evolution of private antitrust litigation in China, describing both the legal standards and the economic evidence that courts seem to require based on three private action cases taken under the law. An interesting conclusion of theirs is that while plaintiffs do not seem to rely on economics, courts seem perfectly capable of understanding these concepts.
An introduction to Appropriating the Returns from Industrial Research and Development, the classic that describes the results of an inquiry into appropriability conditions in more than one hundred manufacturing industries, and includes informed opinions about an industryA¢â‚¬â„¢s technological and economic environment rather than quantitative measures of inputs and outputs. David S. Evans (University of Chicago Law).
In modern antitrust law, intellectual property rights (IPRs) are treated like all other forms of property. Joshua D. Wright (US Federal Trade Commission) & Douglas H. Ginsburg (US Court of Appeals, DC Circuit)
This article lays out the economics of competition between branded and generic pharmaceuticals and its welfare consequences. I explain the logic behind so-called A¢â‚¬A“pay-for-delayA¢â‚¬Â or A¢â‚¬A“reverse paymentsA¢â‚¬Â in the context of the current IP environment where weak (probabilistic) patents are frequently granted by the PTO. Fiona Scott Morton (Yale University).
Antitrust concerns about “Pay For Delay” patent settlements are based on two theory of harms, one that stresses the need for Courts to review the validity of patents and one that emphasises the “probabilistic” nature of patent rights. The main weakness of the first theory of harm is that it fails to explain why some forms of patent settlements would be less desirable than others. The “probabilistic” theory of harm raises fundamental questions about the legal obligations of a patent-holder, the type of uncertainty that should be reflected in the probabilistic nature of the patents and whether the theory can be applied to anything but the simplest PFD settlements. The paper also discusses the likely effect of a PDF ban on innovation and reviews both the European approach to recent and on-going PDF cases and the recent Actavis decision of the US Supreme Court.
Seth Sacher questions the need for the drafting of formal guidance on vertical restraints as suggested by Geradin and Pereira Neto. His focus is mostly on explaining the complexity involved in analyzing vertical restraints and noting that it is important for authorities to flexibly use economic analysis when these types of conducts are involved.
Paulo Furquim de Azevedo, while praising Geradin and Pereira Neto's paperA¢â‚¬â„¢s contribution to the analysis of vertical restraints in a developed and emerging jurisdiction (the EU and Brazil), notes some of the more practical problems that may arise with their reliance on a A¢â‚¬A“rigorous effects-based analysisA¢â‚¬Â , using an important Brazilian case on exclusive dealings to make his point.
This article explores the UK Competition CommissionA¢â‚¬â„¢s Anglo/Lafarge merger decision (2012) focusing on the reasoning for a finding of coordinated effects in cement. Julie Bon (UK Competition Commission), Pietro Crocioni (UK Office of Communications) & Francesca Sala (UK Competition Commission).
Our classic this time is Lee BenhamA¢â‚¬â„¢s empirical analysis on the effects of advertising restrictions in the prices of eyeglasses. Kobayashi and Muris provide a context in which this article was written and note its continued importance over the 40 years since its publication. As the authors note, the results challenged conventional economic wisdom and provided empirical evidence that addressed two important theoretical controversies: the pro-competitive versus anticompetitive effects of advertising, and the public versus private interest theories of the regulation of licensed occupations. It also heralded an era of antitrust analysis based on empirical foundationsA¢â‚¬â€ it is a must read for any antitrust practitioner.
The economic justification for any regulatory intervention in patent litigation, especially those for standard essential patents, comes from the view that hold-up of users of patents is endemic to some industries, especially ICT. The paper reviews these reasons why hold-up is more likely in ICT industries and discusses the type of evidence that is available. (Kai-Uwe Kuhn, University of Michigan).
Competition law and Intellectual Property have divergent intellectual culturesA¢â‚¬â€œthe former more pragmatic and experimentalist; the latter influenced by natural law and vested rights. Tim Wu (US Federal Trade Commission)
