CPI 4(2)

From the Editor

David Evans, Nov 01, 2008

From the Editor: Autumn 2008

Over 90 percent of antitrust litigation in the United States is filed by private plaintiffs, sometimes as class actions, and always seeking treble damages. As Judge Douglas Ginsburg and Leah Brannon have observed in these pages, such cases have been the source of most of the fodder that the courts have used to develop the precedents that constitute antitrust U.S. law. The situation has been far different in the European Community where the rights of private action have been limited, class actions largely unknown, and multiple damages uncommon. In the last few years several of the EC countries have embraced or considered adopting some aspects of private rights of action for violations of the competition laws, especially for the recovery of damages. Most recently the European Commission issued its White Paper on antitrust damage actions. The move in the EC towards private litigation for violation of the antitrust laws, and the issues and challenges this presents, begins the Autumn 2008 issue of CPI. The symposium consists of articles by authors from several different parts of the competition policy community: Christopher Cook, Vincent Smith, Assimakis Komninos, and Renato Nazzini & Ali Nikpay.

Thus far, private actions in Europe have mainly followed from the findings of a competition authority that a company participated in a cartel. It is thus fitting that we turn to two articles concerning collusion. The first, by Malcolm Coate, reports the result of an empirical study of the role of collusion in the FTC´s merger reviews. The second, by Stephen Davies & Matthew Olczak, considers the conditions for overt and tacit collusion and uses both empirical and experimental evidence to address whether one theory fits all.

The issue concludes with a collection of papers that, roughly speaking, debate how the relative roles of static and dynamic competition in the economy affect antitrust rules for firms with significant market power. The colloquy begins with a paper by Keith Hylton and me which examines the implication of the fact that the antitrust laws generally do not condemn firms for having or acquiring significant market power, or enjoying the fruits of that power, as such.We conclude that the antitrust laws, like the intellectual property laws, are based on a tradeoff between static and dynamic monopoly power. Richard Schmalensee, the Chairman of our Editorial Board, has solicited comments from Jonathan Baker, Christian Ewald, Richard Gilbert, and Herbert Hovenkamp all of whom disagree with the certain aspects of the article sometimes quite strongly. We are planning to continue this debate in the pages of  GCPThe Online Magazine early next year .

This grouping is followed by an article by Dennis Carlton and Ken Heyer which examines antitrust policy towards monopolies from a different perspective. They distinguish between the extension of monopoly power, which should be the subject of antitrust prohibitions, and the extraction of rents from a monopoly, which they argue should not be, in part because of its role in stimulating innovation.

The previous papers mention Schumpeter over 40 times. It is therefore fitting that the economist who coined the second most popular two words in economics should be the subject of our classic writings on antitrust this month. Thomas McCraw, the author of Prophet of Innovation: Joseph Schumpeter and Creative Destruction, has written an essay reviewing the Viennese Harvard professor´s musings regarding antitrust. It contains excerpts from the small portions of Schumpeter´s writings that actually dealt with antitrust as well as from a classic review of Schumpeter´s views from a piece written a half-century ago by Professor Edward Mason.

On behalf of the journal´s readers and its editorial team, I am delighted to extend my thanks to all the contributors of this issue.

David S. Evans
University College London and University of Chicago

A Symposium on Private Litigation in the European Community

Christopher Cook, Nov 01, 2008

Private Enforcement of EU Competition Law in Member State Courts: Experience to Date and the Path Ahead

This article provides an overview of the current state of private enforcement of EU competition law. In doing so, it summarizes and assesses the central recommendations of the European Commission´s 2008 White Paper on damages actions for breaches of EU competition law, considering the context under which the White Paper was issued as represented by the policy options laid out initially in the Commission´s 2005 Green Paper, existing member state legal systems, and experience in national antitrust damages litigation.

Vincent Smith, Nov 01, 2008

Will Europe Provide Effective Redress for Cartel Victims?

This article gives an overview of the history of the development of private redress for competition law breaches in Europe. The article begins by reviewing the current proposals to improve private actions, examines the areas where further development is still required, and makes some suggestions as to how to tackle the most important of these. The issues discussed include how to determine which court should hear competition claims, how to institute a process that does not result in a multiplicity of actions across the European Union, and what system would ensure that claimants achieve effective redress while also being fair to defendants.

Assimakis Komninos, Nov 01, 2008

The Road to the Commission’s White Paper for Damages Actions: Where We Came From

The European Commission´s April 2008 White Paper on Damages Actions for Antitrust Violations is a groundbreaking development. It marks the establishment of a system of private antitrust enforcement system in Europe, which, however, does not imitate the U.S. example but is rather European in its conception, origins, and main parameters. To help understand the White Paper proposals, it is imperative to review its origins (i.e., where we came from). This article aims at presenting the jurisprudential developments in Europe that created the right atmosphere for the White Paper to come in existence. The review of these developments explains the main qualities and basic premises of the White Paper. In particular, it explains the fundamental choice to depart from the U.S. solution and instead opt for allowing both offensive and defensive passing-on.

Renato Nazzini, Ali Nikpay, Nov 01, 2008

Private Actions in EC Competition Law

The paper considers the case for reform of the system of private actions in the European Union. In doing so, it seeks to identify the central changes which would need to be made if private actions are to play a more significant role in the competition regime. Contrary to recent statements made by the European Commission, the paper argues that any changes made must recognize that private actions perform a dual function in EC competition law: they not only compensate those who have been harmed by anticompetitive behavior but also contribute to the overall level of deterrence generated by the competition regime. Going further, it argues that whilst increased deterrence and compensation almost always go hand in hand, the primary objective of private actions is to support effective competition enforcement.

Collusion

Malcolm Coate, Nov 01, 2008

Alive and Kicking: Collusion Theories in Merger Analysis at the Federal Trade Commission

This paper undertakes a systematic review of 75 merger decisions to identify the conditions that increase the likelihood of a collusion finding. Standard structural concerns are readily identified, while behavioral factors defy characterization. The results of the analysis also support a Folk Theorem in which structural concerns are validated with some type of performance evidence.

Stephen Davies, Matthew Olczak, Nov 01, 2008

Tacit vs. Overt Collusion Firm Asymmetries and Numbers: What’s the Evidence?

It is conventional wisdom that collusion is more likely the fewer firms there are in a market and the more symmetric they are. This is often theoretically justified in terms of a repeated non-cooperative game. Although that model fits more easily with tacit than overt collusion, the impression sometimes given is that one model fits all. Moreover, the empirical literature offers few stylized facts on the most simple of questions how few are few and how symmetric is symmetric? This paper attempts to fill this gap while also exploring the interface of tacit and overt collusion, albeit in an indirect way. First, it identifies the empirical model of tacit collusion that the European Commission appears to have employed in coordinated effects merger cases apparently only fairly symmetric duopolies fit the bill. Second, it shows that, intriguingly, the same story emerges from the quite different experimental literature on tacit collusion. This offers a stark contrast with the findings for a sample of prosecuted cartels; on average, these involve six members (often more) and size asymmetries among members are often considerable. The indirect nature of this evidence cautions against definitive conclusions; nevertheless, the contrast offers little comfort for those who believe that the same model does, more or less, fit all.

A Colloquy on Static and Dynamic Competition

David Evans, Keith Hylton, Nov 01, 2008

The Lawful Acquisition and Exercise of Monopoly Power and Its Implications for the Objectives of Antitrust

The antitrust laws of the United States have, from their inception, allowed firms to acquire significant market power, to charge prices that reflect that market power, and to enjoy supra-competitive returns. This article shows that this policy, which was established by the U.S. Congress and affirmed repeatedly by the U.S. courts, reflects a tradeoff between the dynamic benefits that society realizes from allowing firms to secure significant rewards, including monopoly profits, from making risky investments and engaging in innovation; and the static costs that society incurs when firms with significant market power raise prices and curtail output.

Jonathan Baker, Nov 01, 2008

” Dynamic Competition” Does Not Excuse Monopolization

This comment critically evaluates Evans and Hylton´s defense of Justice Scalia´s legal and economic claims, and the policy implication drawn by Assistant Attorney General Barnett. It shows, first, that the legal claim is at best only partially correct, as the conduct requirement for the monopolization offense was importantly prompted by concerns other than for innovation. Second, it shows that the economic claim misleads unless qualified by the observation that the push of competition generally spurs innovation more than the pull of monopoly. Third, it explains why greater attention to fostering innovation does not call for relaxing antitrust enforcement, contrary to the policy implication.

Christian Ewald, Nov 01, 2008

Competition and Innovation: Dangerous “Myopia” of Economists in Antitrust?

My comments on Evans & Hylton´s arguments are twofold: First, I consider it necessary to put at least two question marks behind their diagnosis that there is a severe risk of a myopic application of state-of-play antitrust economics. Second, in my view at least two further qualifications have to be made regarding Evans & Hylton´s perception of the scope and limitations of antitrust enforcement
which explicitly or implicitly drives their argument. Both pillars
together carry my view that to stay within the picture prescribing antitrust enforcers strong glasses which are in the risk of leading to a severe hyperopia or even blindness seems not to be a suitable therapy for an alleged myopia in antitrust; the Schumpeterian tradeoff should not provide the justification for an overly cautious hands-off approach.

Richard Gilbert, Nov 01, 2008

Injecting Innovation into The Rule of Reason: A Comment on Evans and Hylton

The Evans and Hylton paper on The Lawful Acquisition and Exercise of Monopoly Power and its Implications for the Objectives of Antitrust arrived in my in-box at about the same time as the U.S. Department of Justice´s report on Competition And Monopoly: Single-Firm Conduct Under Section 2 Of The Sherman Act (DOJ Report). The two documents have much in common. Both place the historical development of the legal treatment of monopoly in an historical
context and consider appropriate tests to evaluate when single-firm conduct should run afoul of the Sherman Act.

Herbert Hovenkamp, Nov 01, 2008

Schumpeterian Competition and Antitrust

As Evans and Hylton so powerfully observe, neoclassical economics is much more comfortable modeling the relatively stable situation than the Schumpeterian one. Economists since Alfred Marshall have observed that the static, partial equilibrium analysis that dominates industrial economics is readily susceptible to mathematics, and many of its rather specific propositions are
testable. The Schumpeter model may be testable at a very general level, but probably not in any sense that antitrust policy finds useful. Schumpeter´s analysis is much too concerned with the mostly unmanageable realities of the economy as a whole and with largely unanticipated developments that cannot readily be modeled within the equilibrium-searching forces of neoclassical economics.

Assessing Single-Firm ConductThe Classics

Thomas McCraw, Nov 01, 2008

Joseph Schumpeter on Competition

The following documents illustrate the relevance of Schumpeter´s thought to competition policy. Part I is an introduction to Schumpeter´s ideas; Part II a series of excerpts from his book, Capitalism, Socialism and Democracy; Part III a 1951 critique of his stance toward antitrust by the economist Edward S.
Mason; and Part IV an evaluation of the current use of Schumpeter´s theories in discussions of competition policy.