Antitrust Law
Optimizing Dual Agency Review of Telecommunications Mergers
118 Yale L.J. 1571 (2009).
Civil Rights, Antitrust, and Early Decision Programs
115 Yale L.J. 880 (2006) Early decision admission programs--which allow a student to receive early notification of admission in return for a commitment to attend a particular institution--enjoyed explosive popularity at America's institutions of higher education in the 1990s. Schools use the programs to stabilize class size and identify enthusiastic applicants. The programs, however, favor students who are wealthier and whiter than their regular decision classmates. This Note applies civil rights and antitrust principles to discuss serious legal concerns raised by early decision programs.
Compatibility and Interconnection Pricing in the Airline Industry: A Proposal for Reform
114 Yale L.J. 405 (2004) Where rival firms compete in a network industry, compatibility among all firms maximizes the size, density, and total value of the network by combining rivals into a single network. Applying network-compatibility theory to the airline industry suggests that major carriers have an incentive to thwart interairline compatibility, which they accomplish by making it prohibitively costly for travelers to combine complementary flights on different airlines into a single itinerary. This Note suggests a regulatory regime that would achieve compatibility among airlines, thereby maximizing the value of the air transportation network and enhancing competition in the market for connecting passengers.
A Missed Opportunity: Nonprofit Antitrust Liability in Virginia Vermiculite, Ltd. v. Historic Green Springs, Inc.
113 Yale L.J. 533 (2003) The antitrust laws are meant to govern and promote competition. But how antitrust law should treat nonprofit organizations, whose objectives lie outside the commercial sphere but whose actions nevertheless have economic consequences, is not settled. The Fourth Circuit recently confronted this issue in Virginia Vermiculite, Ltd. v. Historic Green Springs, Inc., in which Virginia Vermiculite, Ltd. (VVL) sued both a competing vermiculite mining company, W.R. Grace & Co. (Grace), and Historic Green Springs, Inc. (HGSI), a nonprofit dedicated to land preservation, under federal and state antitrust and unfair trade laws. Grace had made a series of land donations to HGSI, which VVL claimed had been intended to exclude it from vermiculite reserves in Virginia. In upholding the district court's summary judgment for HGSI, the Fourth Circuit characterized the transactions as unilateral "gift[s]" that HGSI had passively accepted without exercising any "right or economic power." This Comment argues that the court's approach was mistaken. Although the court may not have wanted to expose a nonprofit to liability, its decision did little to clarify how antitrust law should treat such an entity. Had the court engaged in more complete analysis, rather than focusing on a formal category ("gift"), it would have recognized that Grace's donations constituted concerted action, and not merely a gift. Such analysis would have allowed the court to address more directly whether and how nonprofits may be liable under the antitrust laws. Or, if the court wished to avoid these questions, it should have relied on the facts of the case, which showed that VVL had proven neither anticompetitive effect nor antitrust injury, as required under section 1 of the Sherman Act. Instead, the court's decision both failed to recognize the defendants' concerted action and overlooked the question of competitive effect, thereby missing an opportunity to guide courts and businesses as to the proper scope of the antitrust laws.
Why Above-Cost Price Cuts To Drive Out Entrants Are Not Predatory--and the Implications for Defining Costs and Market Power
112 Yale L.J. 681 (2003) Recently, European and U.S. officials have made surprising moves toward restricting firms from using above-cost price cuts to drive out entrants. This Article argues that these legal developments likely reflect the fact that scholarly critiques of cost-based tests of predatory pricing have never been satisfactorily addressed, and offers a better explanation for why restrictions on reactive above-cost price cuts are undesirable. It begins by concluding that ¿costsî should be defined functionally as whichever cost measure assures that prices above costs cannot deter or drive out equally efficient rivals, and shows how applying that functional benchmark resolves numerous apparent anomalies in current predatory pricing law. It then shows that reactive above-cost price cuts do not necessarily indicate an undesirable protection of market power, but rather can be an efficient response to deviations from the output-maximizing price-discrimination schedule in competitive markets. Even when an incumbent does have market power, restrictions on reactive above-cost price cuts have mainly undesirable effects. They fail to encourage entry and raise post-entry prices in the bulk of cases, where the entrants are (or will predictably become) as efficient as the incumbent or would have entered anyway despite entrant inefficiency. They can only weakly encourage less efficient entry since the restrictions cannot protect less efficient entrants in the long run, and even in such cases they have mixed effects on post-entry prices since they give incumbents perverse incentives to raise post-entry prices to speed the day when the restriction expires. In all cases, they impose wasteful transition costs and losses in productive efficiency, and they lessen incentives to create more efficient incumbents and entrants. These adverse effects are worsened by implementation difficulties that cannot be avoided no matter how the rules are defined, including that possible definitions of the moment of entry or exit either make the restrictions ineffectual or make their adverse effects last far longer than any benefits from entry, that they inefficiently either increase or decrease innovation rates, and that any price floor or output ceiling will cause inefficiencies because of either great uncertainty or inflexibility in the fact of changing market conditions.
Stopping Above-Cost Predatory Pricing
111 Yale L.J. 941 (2002) This Essay has refocused the predatory pricing debate on ex ante incentives--i.e., the incentives for entry and limit pricing before the predatory period--instead of the traditional focus of high prices after the predatory period. Ideally, a monopoly incumbent should price reasonably low, and in the event that it prices high, other firms should enter the market. The difficulty arises when the entrants have higher costs than the incumbent and expect to be out-competed upon entry. Consumers would then be worse off than if the monopoly firm did not exist, because they would have to pay higher prices than entrants would charge if they entered. Monopolies that cut prices dramatically in response to entry are exclusionary because the behavior discourages entry. This observation holds even if they are only matching rivals' prices, and even if they are charging prices that exceed their costs. If courts view such behavior as monopolization under section 2 of the Sherman Act, monopolies will price lower than they do now under the Brooke Group rule. Likewise, it is exclusionary for an incumbent monopoly to respond to entry by substantially improving product quality, as when a monopoly airline increases flight frequency. This behavior is no less exclusionary when the product remains priced above cost, as in the AMR Corp. case. If such behavior constitutes monopolization under section 2 of the Sherman Act, monopolies will provide higher-quality products than they do now under the Brooke Group rule. The courts have two choices about how to recognize above-cost price cuts and quality enhancements as exclusionary. The Supreme Court could simply overrule Brooke Group. A more moderate approach in the lower courts would distinguish the monopoly cases at issue in this Essay from oligopoly cases like Brooke Group. As this Essay has pointed out, a monopoly typically has substantial advantages that allow it to drive out entrants without incurring losses, a possibility that is less plausible in oligopoly cases like Brooke Group. This Essay's predation rule essentially makes the market more contestable. A contestable market behaves like a competitive market even when only one incumbent serves the market, because competitors wait in the wings to enter if the incumbent prices high. The great advantage of a contestable market is that low prices are ensured by the decisions of market participants. No regulator needs to know the costs of other firms, and, in fact, firms do not need to know other firms' costs. The market price is never high, because if it were, competitors would enter and drive it down. Certainly, recognizing a new category of above-cost predation would not make markets perfectly contestable, but it would make markets more contestable. This Essay's arguments are strongest in the core case, with homogeneous products, a cost advantage for the incumbent, and a clear understanding of what constitutes substantial entry. Substantial administrative difficulties arise when products are differentiated by quality or other characteristics, when entrants are difficult to identify, or when it is difficult to tell whether the incumbent is reacting after rather than before the entrant has materialized. This Essay only briefly mentioned some of these complexities but suggested as an example that if the overall deal offered by an entrant seems comparable to a twenty percent discount on the incumbent's product, the entrants would qualify as substantial and warrant some protection. Such a standard, however, is easier to state than to implement carefully. The variety of potential administrative difficulties is daunting indeed, but the same is true in other antitrust cases. How is the court to know, for example, whether a merger will or will not be anticompetitive? The Essay has not dealt further with administrative complexities, because to do so in advance would yield limited insights. Such questions are best faced as they come before the courts. Hopefully, this Essay has at least made clear that low prices can harm consumers and also lower total welfare even if prices exceed cost--a possibility that one sees most clearly by focusing on ex ante incentives to enter the market. The principal substantive objection to the rule proposed here is that it protects inefficient entrants. Why would we want inefficient firms in the market, and what business is it of antitrust to protect them? The best answer is that consumers often need inefficient entrants. Recall that the entrant only receives any protection if it is a "substantial entrant," which I suggest operationalizing as one pricing at least twenty percent below the incumbent. Only entrants who provide substantial benefits to consumers receive any protection. From the vantage point of overall wealth maximization, the advantages of this rule are ambiguous if the incumbent does not charge low enough limit prices to bar all entry, because some less efficient firms may enter. Consumer benefits are more certain, however, since limit pricing is encouraged; and at any given incumbent price level, entry is encouraged. Conditional upon entry, the entrant has a strong incentive to price twenty percent below the incumbent instead of ducking just under the monopoly price umbrella. Courts that favor total welfare maximization over maximizing consumer benefits could modify the proposed rule appropriately.