Antitrust Economics and Competition Policy in the Information Technology Sector – a Searle Center Conference Recap

By TAP Guest Blogger

Posted on October 9, 2012

This conference write-up is provided by Erik Hovenkamp.

On September 21-22, 2012, the Northwestern University School of Law hosted the Fifth Annual Searle Center Conference on Antitrust Economics and Competition Policy. The conference provides a forum for leading scholars on the frontier of antitrust research, as well as professional economists in the employ of major corporations or regulatory bodies to present and discuss research relevant to antitrust and competition policy.

Merger analysis is a complex area of antitrust economics, as it is frequently difficult to predict a merger's effects on markets and consumers. Economists frequently attempt to analyze mergers using static models that focus myopically on their short run effects. Prof. Michael Whinston illustrated the potential shortcomings of this approach, developing a dynamic model of mergers and showing that it reaches considerably different policy conclusions. The model also suggests that merger policy may strongly affect firms' investment decisions. (“Internal versus External Growth in Industries with Scale Economies: A Computational Model of Optimal Merger Policy” by Michael Whinston, Mark Satterthewaite, Ben Mermelstein, and Volker Nocke)

This year's conference also featured a number of studies on vertical integration (VI), or the merging of a "downstream" firm with one of its "upstream" suppliers. To begin, Prof. William P. Rogerson argued that VI is likely to injure consumers when the downstream firm retains a significant share of the bargaining power in negotiating the terms of wholesale pricing agreements. (“Vertical Mergers and Bargaining Strength”) Later, Prof. Volker Nocke discussed the effects of VI in market configurations that allow multiple "interlocking" vertical relationships; he argued that VI may lead to the foreclosure of rivals, injuring consumers and reducing social welfare in the process. (“Vertical Integration, Foreclosure and Multilateral Relations with Patrick Rey) Prof. Emanuele Tarantino analyzed VI in situations where the upstream firms sell complementary products rather than substitutes, finding that it may actually lower profits by allowing upstream rivals to charge higher prices to the integrated firm. (“Vertical Integration With Complementary Inputs with Markus Reisinger)

Prof. Susan Athey delivered a keynote address on platform competition, vertical integration and antitrust in the information technology (IT) sector. There has been unprecedented innovation in IT in recent years, and Athey discussed the importance (and difficulty) of establishing effective regulatory directives without stifling innovation. She also addressed the dangers of an overly conservative approach to antitrust, pointing out that IT markets present unique opportunities for anticompetitive conduct. She posed the question of whether platform competition is sufficient to constrain firm behavior in a particular market, such as operating systems or internet search.  She discussed internet search as a multi-sided market, including users, advertisers, and syndication partners, and she described the sources of economies of scale as well as possible antitrust problems on each side of the market. She concluded her talk by highlighting recent trends in vertical and horizontal integration in mobile devices, emphasizing the need for further research.
The competitive effects of various pricing strategies are another important area in antitrust, and a number of scholars addressed pricing issues at this year's conference. Prof. Mark Armstrong analyzed an atypical variety of multi-product bundling in which the bundled products are sold (and priced) by separate firms, possibly non-cooperatively. (“A More General Theory of Commodity Bundling”) Prof. Michael Salinger also addressed bundling; he showed that it may be efficient even when most consumers do not desire all bundled products, citing the bundling of different newspaper sections as an example. He argued that this result may arise when (i) it is costly to sell the bundled products separately, and (ii) consumers have highly diverse tastes. (“Tying and Bundling in a Nearly Contestable Market”) Prof. Yossi Speigel presented a model of predatory pricing - the practice of setting sub-optimally low prices in order to drive a less efficient rival from the market - that focuses on the possibility of reentry over time. ("A Dynamic Model of Predation," with Roy Shalem and Konrad Stahl) Prof. Justin P. Johnson wrapped up the conference with his discussion of agency model pricing, which involves a supplier who sets retail prices and receives a pre-specified share of the sales revenue. This pricing strategy has gained notoriety for its use in eBook sales, where it has largely replaced the standard wholesale pricing model. ("The Agency and Wholesale Models in Electronic Content Markets")

Fiona Scott Morton, Deputy Assistant Attorney General for the Department of Justice, Antitrust Division, gave a keynote address on standard-essential patents, incomplete contracts and platform competition.  Standard-essential patents, or those judged to be essential for the adoption of a standard by a collaboration of firms, are frequently subject to Fair, Reasonable and Nondiscriminatory (FRAND) royalties. As the name suggests, this is a way of ensuring that a producer does not have to pay an unreasonable amount for access to an essential technology. However, Scott Morton points out that FRAND royalty setting is frequently not a well defined concept, and this ambiguity, combined with other features of the licensing market, may lead to incomplete contracts. She argues that non-practicing entities (NPEs) - firms that own patents and charge royalties, but don't produce anything - may take advantage of this ambiguity and demand comparatively larger royalty payments than a practicing entity that cross-licenses. On the other hand, a practicing entity may compete directly with its licensees and therefore charge high royalties to raise rivals’ costs.  NPE's may have some positive effects, such as creating a market for ideas, allowing smalltime innovators to profit from their promising ideas.  When agencies are analyzing patent portfolio acquisitions, an important factor to take into account is the likely change in royalty rates driven by the business model of the acquirer. 

The conference featured a panel on antitrust and competition policy in internet search markets, which was moderated by Prof. Shane Greenstein. Prof. Susan Athey began by discussing the auctions that internet search providers like Google use to price advertisements. Prof. Ben Edelman observed that Google search results frequently feature links to Google services, and that they frequently lie in prominent positions near the top of the page. He and other panelists discussed the extent to which such practices raise antitrust concerns. Google chief economist Hal Varian contended that many of Google's purported victims are actually flourishing. He also argued that the costs of switching away from Google services are very low, and that this should allay many antitrust concerns.

Erik Hovenkamp is a PhD candidate in the Northwestern University Department of Economics.