Friday, March 19, 2010

Economists, Competition and Regulation

The role of economics in antitrust regulation — and the political shifts in regulation under the new administration — was the topic of a great panel early Friday morning at Santa Clara University. It was hosted at the school’s High Tech Law Institute, which is wonderful (and woefully under-appreciated) in running a series of technology seminars for free. (The only other comparable venue is the SVPVS, but those sessions are often too technical for a business audience.)

The formal title was “Antitrust Policy a Year into the Obama Administration: What have we Learned? What's Next?” The main attraction was Carl Shapiro, one of five assistant deputy AGs (and chief economist) of the Antitrust Division of the Department of Justice. Shapiro — the Berkeley economist who co-authored the most famous text on standards competition — has been at DOJ for 12 months, in exactly the same job he held previously in 1995-1996 during the Clinton Administration.

The two other major speakers were (ironically) on the opposite side of the major technology antitrust case of the 1990s, US v. Microsoft. Stanford prof Tim Bresnahan (who held the same job from 1999-2000), while Greg Sivinski is a senior antitrust attroney for Microsoft. (A Santa Clara law school prof made some insightful and succinct insights into standards and antitrust, while a private attorney went on a rant about losing court efforts to destroy Rambus’ patent until the moderator finally shut him down.)

Bresnahan and Shapiro note that there are about 60 antitrust economists in both the DOJ and the Federal Trade Commission. They work alongside the many more lawyers in these divisions: as he joked, when something comes into the division, a spreadsheet goes to the economists and the memoranda goes to the lawyers. Most of the hours are put reviewing large mergers ($63+ million in sales) under the provisions of Hart-Scott Rodino.

Dating to the 1890 Sherman Antitrust Act, the whole idea of competition policy is for the law to prevent anti-competitive behavior. While the lawyers worry about evidence, law and precedent, the economists are necessary to predict whether some future action (such as a merger) will have an anti-competitive effect.

Both Bresnahan and Shapiro note that identifying anti-competitive actions is relatively straightforward for horizontal mergers between discrete 19th century-style industries (such as aluminum cans). It is much more difficult in high tech, Silicon Valley-type industries, where there is a wide range of substitutes, complements, and buyer/seller relationships.

As Bresnahan said, “In high tech industries, it’s quite difficult to figure out what the scope of competition is.” When considering whether a combination is anti-competitive, he said the core question is “if they raise price, reduce quality or innovate more slowly — would there be third firms not involved in the merger who could take that business right over.”

What was most striking about the session was the unanimous agreement that for most antitrust cases, the difference between US administrations — notably Clinton, Bush and Obama — are miniscule compared to the differences between the US and Europe. Shapiro notes that in the name of transparency (and efficiency‚ the ATD is working to update (codify) its written merger guidelines — capturing the policies used across these three administrations.

For example, Bresnahan citied a visit to early Bush-era DOJ lawyer, who complained that firms expected a dramatic switch in policy in the Bush administration. Later on, when an audience member complained about Bush settling US v. Microsoft, Bresnahan quipped: “The Gore administration would have settled it too.”

The one place where elections matter is Section 2 enforcement under the Sherman Act — anti-competitive actions not involving a merger: single-firm anti-competitive behavior. These are much more discretionary, under the control of political appointees.

On the other hand, differences between the US and EU are sizable. Some of it is about priorities and values — e.g. the 1930s era German antitrust law that favors small mom & pop shops.

However, the speakers concluded that the most significant differences are in process. US antitrust regulators are more cautious, because they know they have to convince a third party (a federal judge) that their case meets the written legal requirements. At the European Commission, the DG Competition does not face those constraints, but instead serves as judge, jury and executioner — or, as the Economist termed it last month, is an “Unchained watchdog.”

All the speakers agreed that the problem of multiple jurisdictions is only getting worse. A decade ago, it was only the US and EC, but now many other medium-sized countries think they’re entitled to assert extra-terrirorial jurisdiction over mergers and other actions by US firms. (Witness the various countries piling on to tax Intel.)

I must admit, I’ve been much more impressed with the ideas (if not the practice) of antitrust under Democrats than Republicans over the past 17 years — in no small part due to their use of some of the smartest antitrust economists around to lead their efforts. Shapiro’s boss, Assistant AG Christine Varney, is out giving speeches evangelize American ideas of process transparency, evidence-based enforcement and international cooperation in competition policy. This to me seems like a very good thing.

Illustration by David Simonds, from February 18, 2010 issue of Economist.

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