DKT/CASE NO.:P951201
TITLE: HEARINGS ON GLOBAL AND INNOVATION-BASED COMPETITION
C O R R E C T E D C O P Y
Meeting Before the Commission
I N D E X
E X H I B I T S
FEDERAL TRADE COMMISSION
In the Matter of: ) ) ) Docket No.: P951201 HEARINGS ON GLOBAL AND ) INNOVATION-BASED COMPETITION )Tuesday,
The above-entitled matter came on for hearing,
SPEAKERS:
ROBERT PITOFSKY
JANET D. STEIGER
ROSCOE B. STAREK III
CHRISTINE A. VARNEY
SUSAN S. DeSANTI
DEBRA VALENTINE
SPEAKERS (Continued):
WILLIAM BAER
MARK WHITENER
JONATHAN BAKER
WILLIAM E. COHEN
STEPHEN CALKINS
JOHN D. BRIGGS III
ERNEST GELLHORN
THOMAS M. JORDE
ROBERT KATZMANN
WILLIAM KOVACIC
THOMAS B. LEARY
JAMES F. RILL
JUDY WHALLEY
P R O C E E D I N G S
CHAIRMAN PITOFSKY: Good morning, everyone. I'd like to get started on what is our next to last day in this set of hearings. We have an extraordinary group of people here to discuss with us the issues that we have been struggling with now for almost three months.
We have a slightly different format in mind for today's session. There will be prepared statements by three of our panelists who have been following these hearings now for quite some time and have sort of general comments about the methodology of the hearings and the methodology of possible reform.
We will then, however, depart from our usual format. We're going to try to focus discussion on a series of issues. What we have asked is Susan, Debra, and others on the staff, with respect to particular issues, to try to frame the question and then offer the pros and cons that we have heard from many different participants in these hearings over recent months; and then we're going to ask our panelists if they would be willing to discuss the issues as framed by the staff who, in turn, are framing these issues as they have been addressed by previous speakers.
Let me, however, get started by introducing our first set of participants. Leading off is William Kovacic, Professor at George Mason University School of Law where he has taught antitrust, government contracts, and unfair trade practices. He is also an Associate Faculty Member with the Rutgers University Center for Research and Regulated Industries and Of Counsel to Bryan Cave in Washington D.C.
Since 1992, Professor Kovacic has served as an advisor on antitrust and consumer protection issues to the governments of Mongolia, Morocco, Nepal, Russia, Ukraine, and Zimbabwe.
I mean, that's impressive. This is: "Have Sherman Act will travel.
Before joining George Mason in 1986 Professor Kovacic spent three years as an associate with Bryan Cave and four years at the Federal Trade Commission, first with the Bureau of Competition's Planning Office and later as an attorney advisor to Commissioner George Douglas.
It's a pleasure to welcome Bill Kovacic.
MR. KOVACIC: It's a great pleasure to participate in these proceedings.
What I would like to do today is to comment on two basic topics. The first is to suggest a set of evaluative criteria that the Commission might use in examining specific substantive proposals and then to focus on institutional processes for accommodating change in some of the areas in which many witnesses have commented on, on both the Commission's substantive policies and its enforcement processes.
And in doing so, in a sense, I am thinking about some of the types of advice that advisors have been giving to foreign governments. In thinking about the hearings, I've reflected upon the types of guidance that foreign advisors have been giving countries that have been making the transition to a market process and attempting to think about the extent to which the advice that we're giving to foreign governments might be applicable to our own experience and to use as a test of what we should be doing, the kinds of things that we've been proposing that foreign governments take into account.
In the prepared statement that Ernie Gellhorn and I presented, on pages 18 to 21, we lay out a set of evaluative criteria; and I would like to turn to those first.
Among other observations, and looking at the recent and more distant antitrust experience, we suggest six basic ideas for structuring the manner in which enforcement agencies evaluate proposed adjustments in doctrine and policy.
Our first basic observation -- and I think it's consistent with the underlying philosophy of most antitrust -- is that intervention in the market process ordinarily should be the exception rather than the norm and that overenforcement, especially in an environment in which markets tend to be relatively vigorous and durable, tends to be somewhat more of a danger than underenforcement.
A second basic principle that guides our judgment is that, to a large extent, the restraints that public instrumentalities impose on competition continue to be the most serious impediment.
We think about the number of instances in which public enforcement agencies, for example, have confronted respects in which the underlying cause of many market failures, many of the competitive pathologies noticed in the course of litigation, tend to have their roots in a number of public policies.
A third basic observation is that price theory, and in particular transaction costs analysis, deserves careful attention in the evaluation of business behavior, especially collaborative arrangement such as joint ventures and the restrictions by which joint venture members attempt to govern their behavior.
A fourth basic principle is that both substantive rules and guidelines should be measured by a careful assessment of economic theory, empirical experience, and the enforcement experience of the agencies themselves. And here it's striking, in looking at the hearings as whole, the extent to which many witnesses have commented upon the desirability of raising the numerical thresholds in the guidelines themselves and reassessing the relationship of those thresholds to qualitative factors in merger analysis today.
A fifth observation is that the absorption of new economic ideas while very important should proceed cautiously and in particular, to the extent possible, should be tested by subjecting it to continued empirical testing over time.
And, last, a general observation about the approach that the agency might take to reform. And that is the need for willingness to experiment, in many instances, with a loosening, a significant loosening of existing antitrust restrictions.
That is, it seems, as part of an antitrust process generally, it's important to have both the capacity to expand the enforcement and to narrow it. And throughout our history there's been a tendency to regard a narrowing of the focus somewhat suspiciously.
In looking at the past experience of the Commission, especially the experience with the General Motors/Toyota joint venture, we have been struck by the extent to which that transaction aroused enormous concerns, concerns that the Commission had truly lost sight of the appropriate focus for antitrust; and it made a, in many instances, catastrophic policy choice.
It's illuminating to note the degree of hostility that that measure aroused; yet, in hindsight -- and I think a number of witness at these hearings suggested -- the NUMMI joint venture tended to generate genuine benefits. And it's simply a suggestion that, in many instances, the agencies, in order to accomplish some of the substantive goals that have been suggested in the hearings, must have a willingness to experiment, at least in some instances, with a narrowing of the focus of antitrust enforcement.
I want to turn now to several institutional implications that appear in the hearings but suggestions about how the Commission might go about putting some of what its heard in these hearings to effect.
One major focal point of attention is the importance of after-the-fact evaluation. Many of the witnesses at these hearings have identified the importance of a continuing review of the effects of past enforcement programs. In effect, this is a form of competition policy research and development, the willingness of the institution to look back at what it's done in the past as a guide for what it should do in the future.
The theme of many presentations has been that the Commission should use more resources to examine the results of specific enforcement initiatives or to use ex post review as an ingredient of conditional review of specific mergers. Ideally, government agencies would routinely assess the results of past enforcement initiatives. But in practice, there's too little of it. One of the most important reasons I think is a fear that in going back and looking at past enforcement, one might discover things that one doesn't want to see; namely, the possibility that past enforcement measures have been misguided.
In the past, however, the Commission, I think, has done very good work when it's attempted this kind of analysis. Two striking examples come to mind. The first is the set of vertical restraints evaluations that the Commission performed in the late 70's and early 80's. As part of my responsibilities at the Planning Office I observed the development of these evaluations; and they capsulize, I think, the dilemmas that the agency faces in doing this kind of work.
The litigators in the Bureau of Competition were petrified that the Commission was going to go back and look at enforcement episodes that had implications for current cases and future cases. Nonetheless, the Commission decided, in effect, to let the chips fall where they may. And those impact evaluations have yielded perhaps the best single modern data set on the effects of specific non-price and price-related vertical restraints.
The second is an evaluation of the Xerox consent agreement taken in 1975 dealing with exclusionary behavior in the photocopier industry. There again, the Commission's assessment yielded an extremely useful insight into the operation of not only Xerox behavior but insight into licensing exclusionary conduct by dominant firms.
What kind of methodology might be used to do this assessment? First it could be an internal self-assessment that's followed by public disclosure of the results, internal self-assessment that involves collaboration between the operational bureaus and, perhaps, the Office of Policy Planning.
The second is to rely on external audit -- external oversight and disclosure. That was the model for the Bureau of Competition impact evaluations that I just referred to. Basically, going with a small number of funds, we went trolling for hungry but extremely capable recently admitted PhD's, folks now who have a fairly glittering reputation, folks like Tim Bresnahan, Howard Marvel, Sharon Oster. These were the folks who did the work for us, and quite willingly. We looked to outsiders and with a great deal of institutional reluctance we said: You write the studies; we'll do comments; if we're not happy, we'll tell you; but we'll publish the results subject to certain confidentiality requirements. They did excellent work for us, not always things we wanted to hear but I think things we needed to know.
A second institutional adjustment involves experiments with reductions in informational demands. I say this in part recognizing that the Commission has done a number of things in recent years to lessen the burden that it imposes on parties, as part of it, the exercise of its jurisdiction but to attain the same or maybe a higher level of quality in enforcement.
The hearings to date have reflected two criticisms, however. The first is that the Commission engages in a mechanical repetition of boilerplate second requests and that it tends not to learn from case to case and specific industries from past cases what it should do in crafting the future second request.
The focus for new reforms might focus on four basic considerations.
The first is to ask what is routinely used in the course of examining mergers, for example? What materials that come out of the second request do, in fact, the enforcement units of the agency, in fact, rely upon?
Second, of all of the material that's routinely collected, what tends, on a recurring basis, to be most useful? And, as a corollary principle, what material tends to go unread or receive comparatively little attention?
And, last, how do business managers perceive the demands? That involves going out and examining those who are subject to the demands to get a better idea of what it is costing them to assemble the information. And it might be possible to match materials that are relatively costly to generate but tend, ultimately, to be relatively useless or of comparatively smaller value in the evaluation process.
We think this kind of assessment could have an important relationship to substantive policy; that is, in achieving improvements in the rule of reason and establishing information requests and burdens that are carefully calibrated to the Commission's hierarchy of concerns about which elements of the rule of reason should be examined and in what order.
The institutional focus, ultimately, I think should be, in a sense, a healthy competition between the Commission and the Antitrust Division in achieving improvements in informational demands. I think one of the main benefits of having dual enforcement, shared enforcement, having duplication in this area is that it gives two agencies opportunities to explore ways in which they can reduce informational demands without a reduction in enforcement quality.
And if there were an institutional means for Congress to tend toward agencies on the basis on which they make those kinds of improvements, it would be highly desirable as an incentive to encourage agencies to experiment along those lines.
I want to turn to two other institutional concerns as part of this overview.
The first of the last two concerns deals with transparency. A striking theme that comes up throughout the hearings that you've had so far is a request on the part of many who have participated to have greater insight into what motivates the decision to prosecute by the Commission and, I think, indirectly by the Antitrust Division as well.
One of the striking changes in enforcement policy, in practice, I think, of the last 15 years or so has been the increased use of consent decrees to exercise enforcement responsibility and to establish policy.
Why has this happened? Let me mention three reasons.
The first is the maturation of the Hart-Scott-Rodino process and its emphasis on fix-it first solutions to merger transactions.
Second, the Commission and the Division, more and more, are facing antitrust issues that arise at the boundary between competition policy and formally regulated industries. Many more issues that involve access to bottleneck access, for example, in the telecommunications sector, where the solution often will require difficult decisions about how the gate to the network should be opened and what parties should have to pay to get through the gate.
A third concern, I think, is the fact that judicial doctrine and the judiciary as a whole has adopted more conservative antitrust preferences in the last 15 to 20 years. And this means that it is riskier to go into a District Court or to pursue an appeal through the appellate path; that is, there is a greater likelihood that in the close transaction the institution might suffer a defeat. That is a reason to rely more extensively on a consent agreement rather than to press one's chances before the courts.
What problems does this raise? A first problem is that the rationale for the consent is often difficult to determine. Press releases and competitive impact statements tend to give highly stylized statements of the facts that, if I were in the institution -- and I think this is the case -- tend to portray the agency's acts in a comparatively favorable light.
Private parties who are subject to the decrees don't tend to offer much of a rebuttal, don't tend to offer much insight on their own into what took place.
And the data that seeps out, the fuller picture of what happens, occurs informally. There's speeches by agency officials. There's gossip, in effect, by agency officials, participants in the process, and their external advisors.
And this, indirectly, gives an advantage to Washington insiders; that is, part of what Washington lawyers do is to assemble this mosaic of information and to transmit that to their clients and to others about what is taking place.
Now, this phenomenon, I think, accompanies all regulation; that is, all regulation involves the exercise of discretion. And knowledge about how the enforcement official are using their discretion will always be valuable.
But because consent agreements across all government agencies involve a comparatively limited disclosure of why decisions were made and competing considerations that confronted the agency, this exercise of discretion I think is magnified. And the opaqueness of the decision making processes correspondingly increased.
The incomplete nature of the information that accompanies the consent agreements has one other effect; and that is, that it complicates efforts by outsiders to evaluate the merits of agency decisionmaking; and it makes problematic the effort to evaluate the substance of antitrust enforcement.
Compared to trials, for example, which generate a comparatively richer record of information, the record that accompanies the typical consent is much more austere.
What kinds of solutions might be used to this transparency issue? How to provide greater insight? One would be to provide fuller disclosure and impact statements, especially fuller disclosure of the best arguments that the opposing parties made and why the agencies ultimately found these arguments to be unpersuasive.
A second is to rely more on the kind of after-the-fact auditing that I referred to before. After-the-fact assessments of consent agreements to see whether they achieved their effects or whether the agencies diagnosis of a specific problem, in fact, was correct at the time. And to use those insights as a basis for informing future decisionmaking.
The last institutional point that I want to turn to deals with the formation of policy and its coordination within the agency. And here I have two focal points.
The first is, internally within the Commission, one point that many witnesses in these hearings have emphasized is that the generation of many guidelines and notice how many organizations -- and Ernie and I urge this as well, that there be more guidance -- a concern is that with the proliferation of guidance, to use Bob Skitol's term -- there is a tendency for individual guidelines to establish different standards for similar types of conducts.
I think this dictates the development of a greater role within the agency, I would think within the Office of Policy Planning, to ensure, on an ongoing basis, that there is coherence in the guidelines that the agency adopts and to use that evaluation process as a way to incorporate the results of what the agency learns in the course of after-the-fact analysis.
A second suggestion here is that the type of oversight that takes place in these hearings should be routine; that is, to have continuing opportunities on a regular basis for outsiders to meet with the decisionmaking officials face to face and engage in a candid discussion of what the agency is doing well and what it could do better, not to simply have this be the only occasion for the next decade, two decades, in which these types of proceedings take place.
An institutional commitment by the agency to do that regularly, I think, would tend to bind successor administrations to do the same.
The external policy coordination problem -- and I'll finish with this point -- deals with the relationship with other antitrust enforcement institutions.
The most distinctive feature, I think, of the American enforcement mechanism is the extent to which it decentralizes the decision to prosecute. The decision to prosecute is shared by two federal agencies, by private plaintiffs, and by the states attorneys general, a point established by the California Stores decision.
This means that the decision of any one agent in the enforcement process is not necessarily binding on the others unless the courts or Congress establish a uniformed rule of decision that all must follow.
This point, in fact, was punctuated during a visit that we had to the Ukraine roughly a year ago. The foreign enforcement officials tend to be very knowledgeable about what Americans are doing; and one of the Ukrainian Commissioners posed the following question about American enforcement.
He said: Let me see if I understand your merger enforcement process correctly. You have two federal agencies that share responsibilities for enforcing the same substantive merger policy.
I said: That's right.
Private companies can go into court and enforce the same substantive policies.
I said: That's right.
And, even if your federal officials decide not to sue or accept one type of relief, your territorial administrations --
I said: Our states.
Yes, your states. Your states, independently, can go into court and achieve a decision that implicitly undercuts the approach that your federal enforcement officials have reached.
I said: That's correct.
And she stood back and paused for a second because, in many ways they look at Americans as having gotten it right, and was clearly puzzling in her mind, maybe we should be doing what you're doing; but she stopped for a second and said: Isn't that irrational?
And I said: It sure is. It's hard to justify, I think, an enforcement process that gives, for example, individual state enforcement officials the ability, indirectly, to trump the policy decisions that federal officials have made, at least with respect to national competition policy.
The dilemma I think this poses is that, in your hearings you've seen so far, that the state officials who have testified on issues like efficiencies, don't quite share the view of the plethora of witnesses who have come forward and said that efficiency rationales and justification should be given greater weight. I think a difficulty that competition policy officials are going to have to face over time is how to reconcile those two regimes.
Now, among the approaches that one can take are approaches that have been taken: Greater dialogue with the states; greater cooperation with the states.
But I'm skeptical that efforts to develop common methodologies are going to succeed in pulling the states more in the direction of the federal orbit of enforcement preferences and analysis.
And there's likely to be a transaction at some point in the future in which the state, perhaps because tens of thousands of defense jobs are ready to move to another state, is going to intervene to sue essentially because of employment effects; that is, simply to say that the ability to achieve a coherent national policy on issues like efficiencies means that we are going to have to address the divergences that take place as a result of this decentralized enforcement mechanism.
CHAIRMAN PITOFSKY: Well, thank you. You raised a lot of very provocative questions.
Should we hold comments and questions until others have spoken?
All right. Fine.
Our second participant is co-author with Professor Kovacic on a paper for our record. Ernie Gellhorn is the George Mason University Foundation Professor of Law.
Between 1966 and 1985, he taught at law schools at Duke University and the University of Virginia; and he served as dean of three different law schools, Arizona State, Case Western University, and University of Washington.
From 1962 to 1966 and then from 1986 to 1994, Professor Gellhorn was in private practice with the law firm of Jones, Day, Reavis & Pogue. While at Jones, Day, he was regional managing partner of the Washington D.C. and Los Angeles office.
Professor Gellhorn is the author of approximately 75 articles and four books on antitrust and administrative law.
Ernie Gellhorn.
MR. GELLHORN: Thank you very much.
Mr. Chairman and members of the Commission, staff, I'm pleased to be here, particularly since I think some of my comments -- as well as Bill's, as well as perhaps some of my past writings have been quite critical of the Commission -- I'd like to start out by saying I have something favorable to say. And that is, I want to applaud you for returning, perhaps, to your original mission and to looking at whether you can provide guidance to the business and operational community as to how to live and work with the antitrust laws to make them increasingly rational and coherent, to worry about the process whereby they may not be working effectively and to respond to changing events which was, of course, the original focus of the Commission.
And I think this is an opportunity that ultimately can be seized by the Commission. The question is: How to do it most effectively?
In many respects, I guess after listening to Bill Kovacic, I really just want to applaud and say, I agree. I'm not certain I can add an awful lot. But I've got, as always, two or three points that may be a little bit distinctive and somewhat focus on a couple of different areas.
One thing that our paper seeks to point out is that, at least from our perspective, an awful lot of antitrust law is simply outmoded and has not taken account of developments in economic analysis over the last 10 or 15 years.
Now, part of the problem is, frankly, the Supreme Court. Every time it seems to get it right, another case comes along and they get it just dead wrong. And you're stuck with doctrine that's very hard to put together. And it's hard not to find an opinion where one can't be ultimately very critical. One of the difficulties is, well, what does an inferior agency in this hierarchy do in that circumstance?
And our view, as we suggest in the papers, is that you can do a lot. Just as the Merger Guidelines -- like Nelson at Trafalgar put the telescope to the blind eye and then wrote their own rules since 1968, likewise, I would suggest that there are areas in which the Commission can try to spell out, through guidelines, what the rules ought to be and how they ought to be interpreted.
For example, under the S&H decision of the Supreme Court in 1973, I believe, the Commission can do almost anything it wants under section 5. At least as articulated in that opinion, there are very few constraints. But that doesn't mean that the Commission has, will, or should reach that far.
And here, I would suggest -- and one of the things that we propose in our paper -- is that the Commission develop a series of guidelines to fill in, to explain, to articulate and provide a rational foundation for some fundamental policies. And two in particular come to mind.
One is the section 5 authority of the Commission. And here we suggest that the Commission ought to articulate bases on which it would or would not act.
Is there any ground in which the Commission would foresee that section 5 authority should be used beyond the scope of section 1 and section 2 of the Sherman Act?
Just as the Commission did in its articulation of the unfairness doctrine in 70's, which has been the basis of its consumer protection philosophy in this area ever since, we would urge that the Commission look to its section 5 authority and spell out what it will do and what it won't do. And, perhaps, the higher course would be to state areas where they will not proceed rather than where they will.
The concern, of course, always is that if we spell our the boundaries, we are boxed in in the future on the one hand or we encourage people to go to the line on the other.
And it seems to me that neither is particularly appropriate where we already have a body of law that spells out those activities which are per se illegal which we will enforce criminally and people don't dare to go to the line, areas where rule of reason analysis will be applied and competitive effects become particularly important and so on.
A second area where we would suggest that the Commission would be well advised to try to develop and articulate some very careful guidelines, a gap that has not been filled since it began in 1914, an omission in the doctrine, really since 1911, of course, is the rule of reason, which is an opportunity for anybody to argue almost anything they wish.
Now, increasingly, there are in the cases and in the literature suggestions as to how to structure the rule of reason. We are not suggesting that we have any particular guidance to go beyond what is in the literature. But I think it would be important to have a formal statement of the Commission that sets forth a structure for evaluation under the rule of reason, borrowing from the Commission's opinion in Massachusetts Board of Registration of Optometry, borrowing from the thoughts, for example, of Judge Easterbrook on the use of market power screens which have been pretty much incorporated into several Supreme Court decisions, borrowing from the competitive effects analysis of Broadcast Music.
In considering those suggestions, we would also urge that the Commission make use of its rule-making authority which it fought so hard back in the early 1970's -- and, Mr. Chairman, you and I were involved in that fight together -- to utilize that authority.
Now, I think that rule-making in this particular instance would not necessarily be legislative rule-making and would not bind the institution in the same fashion that legislative rule-making does or bind the public. This would be really interpretive rule-making. But the Administrative Procedure Act has been expansively read, and agencies have commonly utilized rule-making process to develop policy.
The advantages of notice in common rule-making, I would suggest, are many. They bring the issue to the public fora. They force the agency to utilize a discipline to think through itself in advance of announcing a proposal. They put its proposal on the public record, give the public a chance to provide input and then give the agency a chance to formulate its policy after that input in a way in which it can live, hopefully, with the policy in the future.
A second area where we would suggest that the Commission ought to focus its effort should be to address specifically out-dated law.
For example, much of the law on joint ventures is base upon a series of cases where, I would argue at least, the Supreme Court began from a misunderstanding of the facts and built a series of cases with rules that are difficult to follow and, in fact, have little rationality. I have previously testified that some of the requirements of integration and risk sharing in joint ventures which don't necessarily have any connection with competitive effects ought to be abandoned. But there are many other areas where it is hard to identify the law as being persuasive as crafted and not in need of additional action.
The third area which I would offer is to urge the Commission to seek coherence in antitrust law and enforcement in areas we tend not to pay, sometimes, an awful lot of attention.
One, for example, is the area of state action. As Bill Kovacic has noted, we have a rule which allows states to act on merger law where it seems that there ought to be no state action. And yet we have almost total deference to states when it comes forward to state regulation, which is the antithesis of antitrust enforcement.
Now, much of this comes from a doctrine of federalism and a concern about substantive due process and a historical constitutional battle which I'm sure the Commission does not want to reopen or get in the middle of.
On the other hand, the Commission's advocacy role, it seems to me, is an opportunity here to follow up on this action; but there are also many doctrines out there which could be helpfully addressed by the Commission.
For example, in the area of standard setting, the law has developed, primarily through the Ninth Circuit -- I would argue through an erroneous decision -- that if a public agency adopts a private standard that no antitrust enforcement is possible because there is no antitrust injury separate from the government action.
I think that goes way beyond what the Supreme Court intended in Parker v. Brown and amplified all the way through Allied II and that the rule, which the Ninth Circuit adopted in the Sessions case has foreclosed from antitrust scrutiny, an area in which government barriers have been extensive and the opportunity for innovation and competition often interrupted.
In conclusion, I would note a couple of comments that we made in the conclusion of our paper. First of all, we would urge that the Commission take great skepticism towards the recommendations offered to it by everyone, including ourselves. There still is an enormous advantage of rent seeking before the Commission, and we are as subject to it as anybody else so that while you're hearing a lot of ideas, I would urge that you recognize that public choice theory does have a foundation and that we may be seeking some advantage, and somewhat on the other side.
We would urge that the ideas of this hearing not be relegated to the dustbin, not following the views of many hearings and be forgotten. We would urge that the Commission, following these hearings, set itself an agenda, announce that agenda, and then proceed to address it.
You may decide, for example -- to take a suggestion that we offer -- to seek to craft a set of guidelines on how the scope of section 5 or, alternatively, the meaning of the rule of reason. It is no shame, however, to have attempted that and then abandon the project after a few months if you decide you can't complete it.
In other words, the measure of success is not always the articulation of new policy. It is to set the task before yourselves, to attempt to address it, and see which ones you can come you with in addition to the policy, so that we would not measure what you have done by, ultimately, the number of pages you produce but by, rather, the quality of the results that you announce.
Thank you very much.
CHAIRMAN PITOFSKY: Well, thank you very much.
Our last speaker before we turn to focused issues is Bob Katzmann who has been involved in this process from the very beginning and helped us to organize the agenda for these hearings in the first place.
Bob is Walsh Professor of Government, Professor of Law, Professor of Public Policy at Georgetown University. He is also President of the Governance Institute and a Visiting Fellow in the government studies program at Brookings. After clerking on the First Circuit Court of Appeals, he joined Brookings and since 1981 has been an associate and fellow there.
He's the author of several books, including Regulatory Bureaucracy: The Federal Trade Commission and Antitrust Policy and has written numerous articles on such subjects as regulation, administrative process, and antitrust policy.
Professor Katzmann served as co-chair of the FTC transition team for the incoming Clinton administration.
Bob Katzmann.
MR. KATZMANN: Thank you very much. If my voice gives out a bit, it's because I'm a bit under the weather.
It's a privilege to have this opportunity to testify before you. My respect for the FTC runs deep, and my personal and professional admiration for both Chairman Pitofsky and Janet Steiger knows no bounds, as well as my great friendships with many of you around the table, Bill Baer, Jonathan Baker, and others.
These two months of hearings hearken back, it seems to me, to the words of the old T.S. Eliot poem, that is to say that we have to return to place where we started to know it for the first time.
And these hearings, it seems to me, hearken back to the agency's roots, to the investigatory role of gathering data about competition and the workings of industry.
Congress, as Chairman Pitofsky reminded us at the outset of these hearings, clearly envisioned such an investigatory and reporting responsibility. And history has a number of examples in the 81-year history of the Federal Trade Commission in which the Federal Trade Commission has undertaken inquiries upon which Congress would rely directly or indirectly in the lawmaking process.
I have this in more detail in my statement.
In the spirit of that investigatory tradition, these hearings on global competition and innovation have provided a wide range of views from business, government, academia, in the effort to assess the extent to which the law and its enforcement is sensible in view of present day circumstance.
As I approached my task for today, I reviewed the history of investigatory studies, not just with respect to the Federal Trade Commission but with respect to a number of governmental bodies. And what one finds is that the record is replete with various kinds of investigations. The purposes of such inquiries are varied. For example, some such as the Temporary National Economic Committee represent serious efforts to study and analyze problems. Many others are fueled by issue avoidance, deferring an often politically difficult decision by creating a Commission or investigation to study.
Some are prompted by crisis management. For instance, Blue Ribbon Commissions to study such things as the Shuttle Challenger accident. Still others are promotional exercises to advance courses of actions for which commitments have already been made.
Studies are also launched as part of a long-range education effort to tackle a complex set of problems. Some are undertaken to restore public confidence in institutions under a cloud. And still others are undertaken as part of a political agreement in which typically support for legislation is secured with a promise of the creation of an investigatory study to assess the full dimensions of a problem.
Having read much of the prepared testimony of the FTC hearings on global and innovation-based competition, I believe that the Commission's examination will be among those rare inquiries, those which create a venue to analyze complex problems, contribute to both short-term and long-range thinking, and promote consideration of practical modifications in the present and immediate future.
And I'm certainly grateful to be a witness to this unfolding work.
Now the principle purpose, as I understand it, of today's session is to sift from the hearings and determine what kinds of changes in approach or modifications in approach might be warranted in a substantive sense. These questions are of utmost importance. In essence, they are the bottom-line questions.
The mere raising of them, however, summons other questions relating to the past two months of the hearings themselves, and they go really to the point that Professor Gellhorn raised at the end of his inquiry. And that is to say that if you look at the history of most investigatory bodies, what you find is that while they're very good at securing the record, oftentimes the pitfall runs with respect to what do you do once that record is secured?
The questions raised here, therefore, are:
Having engaged in a thorough investigation of various perspectives, what next for the Commission?
To what uses shall these hearings be put in the months and years ahead?
How shall their substance be absorbed and digested?
By what process will the wealth of material in the hearings be mined, changes in thinking approached, and even law enforcement priorities identified?
I take as my premise the idea that in policymaking, means matter often as much as ends. They often matter more.
So I would like, in just a couple of minutes, to outline some questions that I would raise, more than answers, about how a process might be constructed in the aftermath of December 13th to preserve the freshness and vitality of the fruits of these past two months.
Now, it seems to me as we consider uses of the hearings, we might do well to go back and think about purposes, for how those purposes are defined may instruct matters of process.
It seems to me there are a variety of conceivable purposes which come to mind as we think about the richness of these past two months:
The first is the stated purpose of gathering information with the objective of stimulating discussion about global and innovation-based competition;
second, to stimulate thinking within the Commission itself as to how to approach policy and enforcement issues;
third, to foster thinking which may involve collaborative efforts with other governmental bodies, for example, the Department of Justice; and
fourth, to inform Congress about the products of these hearings, perhaps, but not necessarily, leading to legislative modification.
Depending on the purposes pursued, the nature of the Commission's procedural course may vary as may the interested and affected audiences, the audience being the Commission itself, Antitrust Bar, industry, consumer groups, the executive branch, Congress, academia.
Now, the first purpose -- gathering information with the end of stimulating discussion about global and innovation-based competition -- I think, in large measure, has largely been achieved. As I understand it, the testimony in the transcripts will be fully available on-line and should be a rich resource for all audiences. And I would hope that, of course, a hard copy would be disseminated to governmental depositories and university libraries.
And I would assume that professional associations and sections -- for example, the ABA Antitrust Section -- will no doubt make use of these hearings as venues for further discussion.
It might also be desirable to send notice of these hearings in their hard-line or on-line form to other audiences outside D.C.
As a way of highlighting the Commission's work, it might be worth considering making the papers available for publication in professional journals or special volumes. The question which the Commission may have to wrestle with is whether it should determine which papers are to be made available to those professional journals or whether it should leave to the journals themselves the choice of what to publish. If the Commission picks and chooses what to publish -- presumably after having determined its selection criteria and process, then its choice may be taken as a signal of the agency's thinking. The latter option, leaving it to the professional journals themselves, frees the Commission of the potential problem of having its selections interpreted as signifying its policy.
The second purpose -- to stimulate thinking within the Commission as to how to approach policy and enforcement issues -- suggests that a process be developed to absorb and digest the hearings for the Commission's own use. And here my understanding is that the staff will undertake a report. And it is, of course, up to you to decide what guidance should be given to the staff, how the report should be substantively organized. And it is for the Commission to determine the nature of it's involvement in reviewing, modifying, and approving the document itself. My review of many reports of other fact-finding policy-oriented bodies suggests, however, some organizational ingredients;
first, a summary of the various hearings and perspectives, if not day by day, certainly by theme;
second, a presentation of various proposed modifications with respect to, A, those which involve changes achievable by the Commission alone and ramifications for priorities as applicable; B, those which involve collaborative efforts with other entities, for example, the Department of Justice; and, C, those which may involve Congress.
As to each of these components in two, it might be useful to set out the pros and cons of each proposed modification as well as a carefully delineated rationale as to the desired means of such modification, be it policy statement, guidelines, legislation, or some other means.
A third possible purpose -- to stimulate thinking which may involve collaborative efforts with such other organizations, as DOJ -- raises questions of timing and sequence. At what point does it make sense to undertake discussions with the Department of Justice? And what form should those discussions take?
Perhaps it would be advisable during some point of the Commission report or following the release of the Commission report to approach DOJ about the possibility of creating joint task forces to explore specific issues.
A fourth possible purpose -- to inform Congress as to the product of its hearings, perhaps but not necessarily leading to proposals for legislative action -- I think could also be easily accomplished. And here, I would propose considering informal briefings for members and staff about the two months of hearings with the venue either being the Commission or the Hill. The full record of the hearings should be made available to the Hill, whether or not specific legislative modifications arise from the hearings, I would think that the Hill would welcome input from the Commission exercising its reporting function.
More than 55 years ago, after all, Congress authorized the creation of the Temporary National Economic Committee consisting of Members of Congress, the FTC, the Department of Justice, the Department of Labor, the Department of Treasury, the Department of Commerce and the Securities and Exchange Commission to make a complete study and investigation with respect to the concentration of economic power and financial control over production and distribution of goods and services. And the fruits of that were published actually as a Committee Print that the Senate Committee adopted.
Now, in another time, the FTC's hearings have the promise of contributing to our understanding of policy in a much different world.
So I have raised issues which perhaps might best be considered in a post-December 13th environment but I think, as we think about specific substantive issues, the question of whether the hearings might have some value.
Thank you.
CHAIRMAN PITOFSKY: Well, thank you. You've raised just the sort of questions that I think we need to address at the conclusion of these hearings.
Joining our three principal speakers now are Judy Whalley, John Briggs, Tom Jorde, Tom Leary, and Jim Rill, all of whom have been introduced for our record previously because they have appeared previously on panels.
However, I will ask the court reporter to insert the introductions of these participants into the record at this point so that those reading the record in the future will know their backgrounds.
Judy Whalley is a member of the firm of Howrey & Simon. Prior to joining that law firm, she spent 15 years with the Antitrust Division, serving as a trial attorney, Assistant Chief of the Special Litigation Section, Chief of the Chicago Field Office, Deputy Director of the Office of Operations, and, finally, Deputy Assistant Attorney General for Litigation.
In 1988, President Bush named Ms. Whalley Distinguished Rank Executive, the highest award bestowed on senior government executives. She has written and lectured extensively on antitrust issues and teaches antitrust as an adjunct faculty member at Georgetown University Law School.
John Briggs is a partner also at Howrey & Simon. For the past 20 years, his practice has focused substantially on antitrust, trade regulation, and competition matters. He has represented more than 40 domestic and foreign corporations in antitrust and competition matters.
Mr. Briggs has written numerous articles on various aspects of antitrust and trade regulation. He currently serves as Chairman of the Section of Antitrust Law of the American Bar Association.
Mr. Briggs is one of the organizers of The Conference Board's annual March antitrust program in New York City and frequently has delivered the "Antitrust Update" address at the event. He is also a member of the Advisory Board of the Bureau of national Affairs' Antitrust and Trade Regulation Reporter.
Tom Jorde is a member of the faculty of the University of California at Berkeley School of Law and co-founder of the school's Law and Technology/Intellectual Property Program. He is also founder and President of the Law & Economics Consulting Group, Inc.
Before joining the law school faculty, Professor Jorde served as a law clerk for Justice William J. Brennan, Jr., United States Supreme Court; and for Judge Stanley A. Weigel, United States District Court, Northern District of California. He has also served as a Special Assistant to the FTC's Bureau of Competition and has practiced law as a litigator in San Francisco.
Professor Jorde has published extensively in the areas of antitrust, intellectual property, and civil procedure. He is co-editor of Antitrust, Innovation, and Competitiveness and co-author of two new casebooks on intellectual property and legal protection for computer technology.
Tom Leary is a partner at the law firm of Hogan & Hartson, practicing principally in the area of antitrust and trade regulation. Before coming to Hogan & Hartson, from 1971 to 1983, he served as Attorney-in-Charge of Antitrust and Assistant General Counsel with overall responsibility for antitrust and commercial law matters at General Motors Corporation.
Before joining GM, Mr. Leary was a partner in the New York law firm of White and Case from 1968 to 1971.
Mr. Leary is a former member of the Council of the Antitrust Section of the American Bar Association and of the Council of the Antitrust Section of the New York State Bar Association.
He currently serves on the Advisory Board of the BNA Antitrust & Trade Regulation Report.
Jim Rill is a partner with the law firm of Collier, Shannon, Rill & Scott. He joined the firm in 1959 and has been a partner there since 1963. He is heavily involved in domestic and international mergers, acquisitions, and strategic alliances and complex antitrust litigation.
Mr. Rill was appointed Assistant Attorney General for the Antitrust Division of the U.S. Department of Justice by President Bush in 1989 and he served until May 1992.
While at the Department of Justice, Mr. Rill was the architect of the 1992 Merger Guidelines, the first to be issued jointly by the Federal Trade Commission and the Department of Justice.
From 1987 to 1988, Mr. Rill was the Chairman of the American Bar Association Section of Antitrust Law and the founder of the Section's Special Committee to Study the Federal Trade Commission.
Currently, Jim is Co-Chairman of the American Bar Association Section of Antitrust Law, Antitrust and the Global Economy Task Force.
I think we are ready to move on to a more focused discussion, and I'd like to turn the program over at this point to Susan DeSanti.
MS. DeSANTI: And I will, in turn, turn the program over at this point to Debra Valentine who is going to take the global market issues that we started with in one of the first weeks of the hearings and give us an overview of what we heard in the testimony on those issues.
MS. VALENTINE: This is very much an effort to move from the sublime of T.S. Eliot and the principles of how to approach antitrust change, or lack thereof, and try to elicit from this group some thoughts as to whether we do move forward by FTC's informal or internal statements, by changes in the Merger Guidelines, by proposed legislation on a range of issues; and we're going to be starting with the geographic markets issue which was the first issue we really began our hearings with.
We began with the proposition that global competition may significantly affect the definition of relevant product markets and the identification of market participants and potential entrants.
The fundamental question in the hearings was whether the current Guidelines provide the proper framework and adequate guidance for assessing accurately the role of foreign producers when defining and analyzing geographic markets.
As everyone at this table knows, section 1.43 of the Guidelines states quite simply that market shares will be assigned to foreign competitors in the same way in which they are assigned to domestic firms.
The Guidelines set forth only three special factors for foreign firms dealing with situations where exchange rates fluctuate significantly, where import quotas exist, or where a group of foreign firms acts in coordination.
The proposals that we received with respect to whether the FTC should issue a more detailed assessment of foreign competition and market definition and market power determination and what factors might be relevant thereto fell into roughly three categories.
And I hope I am not over prescribing, Bob, in terms of selecting out. We've done a relatively serious review of everyone's statements.
The first group advocated simply staying with the status quo. Their position was that the relatively abstract and general terms in which the Guidelines are couched is, in fact, precisely the sort of approach needed in the fact-specific predictive merger area.
The generality of the Guidelines language allows parties and the agency to approach cases and develop law in this area in an accretive common law fashion.
Some in this camp also believe that the factors relevant to assessing foreign firms' likely supply responses to any post-merger price increase are conceptually the same as for domestic firms.
Indeed, according to some, not only are the differences between foreign and domestic firms ones of degree, not kind, but they also believed that most data relevant to assessing the likely role of imports in disciplining any price increase would be discoverable from U.S. sources in large part.
Another group was of the view that the Guidelines are unduly terse with respect to the foreign imports and market definition and that more guidance, perhaps along the lines of the Canadian ones, would be appropriate.
According to this perspective, the issuance of a more detailed assessment of the role of foreign competition in market definition and market power determinations would, at a minimum, give the merging parties practical guidance on the agency's views and allow the parties to marshal the pertinent facts more efficiently. Such a detailed assessment would also promote further critical debate on the appropriate factors to be taken into account in assessing future imports, promote a more focused discussion of legitimate offshore evidentiary needs and permit a more systematic assessment of the relative ease of access to the relevant evidence as between the parties.
For such an approach to be adopted -- and this is certainly one that we would like to consider this morning -- we would first need to determine what factors merit consideration, either in terms of undermining or enhancing the likely future competitiveness of foreign firms.
A perspective shared by all was that hard and fast rules make no sense in this area. Thus, assuming that where imports constitute 5 percent of the relative product market, all foreign capacity should be taken into account, or relying on shipments data to the exclusion of other structural characteristics was advocated by no one.
Moreover, one reason articulated for amplifying on how to assess foreign supply responses was that most of the earlier writing and thinking in this area has focused on manufactured goods markets, whereas the most important future international market issues may well involve intellectual property and access to networks or interface standards. And here political barriers may be even more important relative to economic barriers than they were in the past.
Two other aspects of articulating more guidance on the role of foreign imports in market definition are, quite evidently, who bears the burden of obtaining the evidence and in what form should any guidance be expressed?
Who bears the burden of obtaining the evidence also entails a determination of who bears the consequences of failing to obtain that evidence. Notwithstanding some scholarly comment that merging parties should bear the burden of demonstrating any market broader than the U.S., some strongly believed that the government was far better positioned to obtain most relevant evidence abroad.
Moreover, some believed that if parties bore the consequences of failure to obtain evidence from abroad -- assuming, of course, good faith efforts on their part -- this would tip the scale towards blocking beneficial transactions.
As to the issue of in what form to express guidance on how to analyze the role of imports -- in informal or formal agency statements in guidelines or in Commissioners' speeches -- few firm opinions emerged.
A third approach also was proposed which, in effect, blended a substantive and an evidentiary perspective. According to this view -- and its author can speak out if he disagrees -- in the absence of information about a foreign firm's future intentions or divertible capacity, certain presumptions could be adopted.
Those presumptions were based, in part, on substantive factors that likely would affect the future competitive role of the foreign firms who currently were market participants who were likely uncommitted entrants or who might be committed entrants.
First, with respect to foreign firms already in the U.S. market,there should be some presumption that each of their shares of a homogeneous product market should be deemed larger than their existing shares and that the FTC would have the burden of showing how much or how little additional capacity should be added.
Second, with respect to uncommitted foreign entrants, there should be something of a presumption, again in homogeneous goods markets, that at least some, perhaps a non-trivial amount, of their capacity should be included, again with the burden going to the FTC to show why little or none of that capacity should be included.
And third, with respect to committed foreign entrants, the burden should be on the merging parties to show the likelihood, timeliness, and sufficiency of any foreign firm's entry.
As you can see, with many of the issues that we studied in these hearings, it was apparent that substantive issues and evidentiary issues are tightly linked in assessing the role of foreign firms and market definition and market power issues.
Two quick final issues before we open up the discussion. There was some thinking, taking off from some of Michael Porter's work on the intense rivalry that one often finds when firms cluster in geographic areas, that we should begin examining more closely the effects that such clusters of localized competition may have on our broader market analysis.
There also was a suggestion that in light of the paucity of evidence that may underlie particular conclusions about broader or global market definitions that this may be an area where conditional or phased-in remedies are quite appropriate.
Thus, if any consent decree or finding of violation was based on conclusions about the future role of that turned out to be unduly pessimistic, aspects of the remedy could be phased out or altered.
So with this relatively brief, but hopefully relative comprehensive, overview of the various comments that we perceived, I would very much like to open up the discussion.
And perhaps, John Briggs, since you did participate in some of these days of the hearings and did some, obviously, very thoughtful thinking before -- and I know you have to leave at 11:00 -- we might start with you.
And then, Jim Rill, I'm sure you also have lots to offer.
MR. BRIGGS: Well, thank you, Debra. I don't have any prepared comments. I can only, first of all, react to this.
I shan't repeat what I said back, I guess, what is called Day 2 other than to say that it does seem to me that in the area as perhaps the only member of what I think you characterized as the third group, that I would refer people to the paper. But it does seem to me that the issues are not, as I said then, horribly, intensively important in any given transaction; but where there is an absence of data, then it becomes very important and the entire process of delineating geographic market and the presumptions one brings to it can, indeed, be outcome determinative.
So given that I may have to leave around 11:00 -- although I hope to stay until maybe even noon now -- I may take the opportunity to digress a little bit from the precise subject of geographic market, if I may, and comment, at least for a moment, on a couple of things that were mentioned by the three previous speakers.
In particular, in the area of urging the Commission to think broadly through these hearings, not only in the area of geographic market and process issues, but along the entire spectrum of competition law, to think in terms of potential legislative actions in addition to, or perhaps, even in lieu of the sorts of guidelines mentioned by Professor Gellhorn or Bill Kovacic, and particularly along the lines of the sorts of legislative presentations mentioned by Bob Katzmann.
It strikes me that there is a small number of terribly important things that are worthy of this endeavor and that can flow directly out of these hearings in respect of the following issues:
Number one, the role of the competition law in this country as it has evolved in the last 30 years has become very different from the role of competition law in other countries.
And the process of divergence and harmonization that has been talked about much and little done about it in recent years is something that can only be cured legislatively. It cannot be something that happens as a result of Commission guidelines.
I mean specifically here the kinds of policy conundrums that are presented by Bill Kovacic or anybody else, whether it's Chairman Pitofsky or Jim Rill, who has to explain American competition policy either in the Ukraine, in Canada or in Mexico. Only legislative change can give primacy to federal policymakers and take it away from subordinate entities.
Secondly, the private action itself could be kept in place in part but controlled and cabined in in a sensible way if private actions were limited to private actions that were either brought right before this Commission and tried before the Administrative Law Judges -- which is the Mexican model now and also the model in certain other countries -- or, alternatively, if private actions had to be in some fashion approved by the Federal Trade Commission before they could be brought so that the Commission itself could be a policy screen of sorts that would prevent the proliferation of private actions including, particularly, class actions.
And, third, there is a fairly significant policy problem, it seems to me, at the trade competition law interface, most especially in this country, whereas in Europe the competition law increasingly has become the regulator between cross-border trade under the Treaty of Rome and its various procedural nuances that have attended its development. But under NAFTA we still have a competing regime of trade law and competition law that is, at the policy level, most assuredly not reconcilable.
The trade bar is a protectionist bar and it serves protectionist interests without regard to competition principles; and the competition principles that are brought into play in the trade zone tend to suffer as a result. And in that area, a solution to which would be heroic, indeed, there seems no alternative but a legislative solution.
And last and not least and related to these other points, perhaps, the question of merger control and whether private actions should survive federal agency approval of a merger is one that is at least worthy of consideration at a high level of policy.
And I'm speaking both of private actions for damages as to which, under the law today, there is no statute of limitations and also private actions for injunctive relief as to which the states and even private parties have those rights that have been accorded to them by the Supreme Court.
So it seems at least in those four areas, and certainly among others, that there is room for, and a need for, some serious consideration to be given to the desirability of legislative change that would, in the end, strengthen not only the Commission but strengthen competition law and policy and in the process make it more understandable, more stable, and more reliable to the benefit of social welfare and to the benefit of those companies that have intercourse with the antitrust laws and with competition policy.
I'm happy to go back to the subject, Debra, that you addressed, to the extent that it may be desirable; but I'm going to pass this to Jim Rill right now.
MS. DeSANTI: Before you do that, John, I'm just wondering if you could respond, federal agencies have not typically been the source of a lot of proposals for legislative change. And I'm wondering about an agenda that you seem to be setting for the agency that would focus on legislative changes rather than changes that might be more easily within the agency's grasp.
MR. BRIGGS: I don't know, for a second, pretend that legislative change is necessarily realistic in the short term; but that doesn't make it undesirable.
And I certainly agree that internal change -- and I very much agree with Bob Katzmann's hierarchy of four ways of bringing changes about internally, externally, through collaboration, through legislation and otherwise.
But I think that some of the more intractable policy problems, as a practical matter, cannot be fully or most satisfyingly addressed in the absence of legislative change. And the force for that must come from somewhere, and it may have more credibility coming from this agency, which itself enjoys extraordinary credibility, in my judgment, than it would if it came from elsewhere.
MR. RILL: Thank you very much. I will initially address the comments that Debra made.
I think I'm closer to the Briggs's approach on global markets than perhaps John even realizes.
I think that the Merger Guidelines, even the 92 Guidelines, are unduly cautious with respect to global markets and tend to produce a rigidity of analysis that -- and this may be true outside the global field as well -- a rigidity of analysis that does not take into account the inherent dynamics of global markets and the glacial effect -- and by that I mean powerful effect of global responses -- that might not take place within the intended-to-be flexible time limitations prescribed in the Guidelines.
Having said that, let me suggest that dealing in burdens of proof, I think, is inconsistent with a guideline approach. I think they tend to put the analysis in a litigation-type context and, therefore, are not particularly illuminating to the public. I think that any guidelines should contemplate an analytical blueprint rather then a litigator's handbook.
Having said that, I think in the international field there's much to be said in favor of broader latitude, whether through presumptions or otherwise, that would include international either supply responders or committed entrants much more broadly than the current Guidelines suggest and that the capacity for international trade, to be diverted to U.S. markets, should be more broadly valued than they are now.
I think in that connection that the time Guidelines, the one-year and two-year Guidelines for uncommitted and committed entry, are probably too narrow.
And in this context, I want to endorse the Kovacic-Gellhorn notion -- and I could never get right what is Type I and Type II error -- the notion that probably the worst kind of error is condemning that which turns out to be legal. And I think in the seismic developments of global competition in the last few decades, there were many opportunities, most fortunately ducked, to make those kinds of mistakes.
I think one- and two-year time limitations, looking at overseas supply response and overseas entry, could well be too narrow. And this is, to go on, a particular area in which I think a retrospective-type of analysis suggested by Gellhorn and Kovacic might be very useful, a Bureau of Economics, perhaps, study of time frames and impacts of imports and capacity diversion to the United States markets might be a very worthwhile study to test whether the time frames that are set out in the Guidelines really do apply in the context of global markets and what are the touchstones for finding the existence of global markets?
Let me turn, for a second to some of the comments that John made. I personally -- in talking also about Dr. Katzmann's suggestions -- I think in the context of global competition, I'll be very candid, opening that up to legislation, in the current climate at least, does not thrill me. The legislative proposals that have been existent in this area have exhibited significant bipartisan shortcomings, I suppose is the nicest way I could put it.
And we have proposals -- I guess we could talk about people who have retired with some minimal safety -- the Metzenbaum proposals to reverse Matsushita -- co-sponsored, I'd hastened to add by some sitting Senators -- are the sorts of things that might be extruded from any kind of legislative proposal, however generated.
It seems to me that doesn't suggest that the Commission or the Bar or the Division should sit on its hands. There is much to be done in the area of convergence and cooperation and global competition.
I think if the antitrust world -- and by that I mean the Commission and the Bar and the Division and academics who care about consumer welfare in this country and the agencies and others elsewhere -- don't take effective action to assure that competition policy is defined broadly under the rubric of consumer welfare as the touchstone of our competition policy guiding our countries, we're going to find increasingly that the game is going to be controlled by what John calls -- this way I can avoid the reprobation of my partners -- what John calls the protectionist elements of the trade-driven academics and enforcers and policymakers.
The WTO is moving in this area. The leadership of the EU wants to move the WTO in this area. I have serious misgivings that the WTO is competent now, currently staffed, to work in this area. And I think it's incumbent on the Commission, the Department of Justice, and all of the rest of us who have an interest to use the OECD as a forum for policymaking and convergence in this area.
I think it needs to move to the forefront. The United States pays -- plays -- pays was a Freudian slip -- plays a major role in the dimensions of the OECD and it is a strong force for cooperation. I think the use of greater bilateral agreements, the recently updated and revised Canadian agreement is a good paradigm, holds out great hopes for more sensible approaches to global competition policy; increasing use of bilaterals is very important; increasing cooperation, the use of the IAEAA -- I'm one of the few people in the country who can get that out -- is extremely important.
Finally, John raises, as has been raised by others, the important question of: Well, what about private actions? And I can only strongly endorse the same reaction, I'm sure, that Chairman Steiger would share and that we went over to Europe and explained to all the people that do antitrust in the United States, the reaction was: You do what?
The private action issue is one that is difficult but not intractable in our global competition convergence efforts.
To suggest that the Congress is going to somehow seriously limit the action to private actions, it seems to me, at this point, is a bit whimsical. There may be some treble damage reform -- indeed, I would hope there would be -- but that's probably the farthest out that one could reach. I know that, Mr. Chairman, you did a lot of work in that area with Dr. Salop some time ago; and I think that was probably one of the more enlightening pieces done on the treble damage remedy and showed that it wasn't, perhaps, the horror of all times; but it is a serious problem with convergence.
I would suggest that in bilateral agreements, the United States undertake, where it has determined that comity principles should apply or that an offense is not shown out, should undertake in those agreements to make its views known in court in the United States where a private action has been filed.
The United States has done that.
On the other side, in insurance case, I think with significant effect, it might well do it in instances of deference where it determines that the antitrust interest of the United States are affected, in the face of a private action, should not be reluctant to make those views, in fact should agree to make those views known in court where positive comity has proven that deference is appropriate, then the United States should run the risk of going to courts and saying so. I think that would be a big step towards gaining confidence of our sister states in the extension of probable possibilities, and it's an action that can be undertaken now. It doesn't require submission to the vicissitudes of legislation -- although, it may bring an oversight hearing or two -- but would be, I think, a strong step towards greater global harmonization.
Thanks very much.
CHAIRMAN PITOFSKY: Can I press each of the speakers on the narrow question that we started with. I agree with so much of your broader comments. But let's go back to measuring market power in a domestic market that consists of a combination of domestic producers and foreign producers.
We all agree that current imports would be taken into account. There's a little bit of dissent there that they are so interruptable that they should be discounted that I don't believe the agencies are acting that way.
The question is: If prices went up as a result of some transaction, how much of divertible foreign production should be taken into account?
I thought one of the great contributions of the 92 Guidelines, which Jim Rill had so much to do with, was emphasizing that in taking supply substitution into account, the standard was "would," not might, not could, not speculation.
Now, do I hear either of you backing away from that and suggesting that where foreign production is involved, the excess capacity abroad or the divertible production would be taken into account in measuring market power here to a greater extent than you would take into account domestic production?
MR. RILL: Well, all right. I'll just throw out the notion that I think the problem has been not that it should be taken into account to a greater extent but that it's not taken into account, in practice, to an equal extent.
If the Guideline analysis produces the result that there is, in fact, a global market, then is there any reason to treat foreign producers any differently, as I stated in my earlier testimony, from producers on the West Coast who are included in a market with producers on the East Coast?
And in those circumstances, it seems to me, then, the total -- literally the total capacity, as it would be if it were a single market, should be included in that market analysis.
Where the market does not reach global proportions, I think that a more flexible view towards what is divertible would be entirely appropriate.
We're dealing with incentives, and we don't often have the luxury of having an absolute test. But where those tests have been available, we find in, for example, a past transaction that we looked at, that the foreign divertibility is a great deal more than traditional approaches have suggested.
But back to the basic point, where there's a global market, why should it be any different than if there's a United States market? Why should foreign producers be treated any differently in a global market than West Coast producers in a national market?
MR. BRIGGS: I think I agree with Jim; although, I would express it differently.
One of the questions that we were looking at during the hearings was not exactly is there a global market, but how do we a account for foreign producers? Which sort of suggests that the producer may or may not be in the affected market, whether we call it global or otherwise.
And I often grow confused when I hear the phrase "global market," because I never know if it's a conclusion or if it's asking a question. I'm assuming it's really more asking a question. And the question really is: Which foreign producers should we be taking into account either as to their actual participation in the United States market or in any market affected by the transaction under review?
And if so, if they are to be taken into account, then to what extent should they be taken into account?
I think the first answer to your question, Mr. Chairman, is that the answer is, no. Are we backing away from "would" as opposed to some softer presumption, I think the answer to that is clearly, no. Except maybe in those very narrow subset of cases where there are no data available about the foreign firm; and then we're looking at this whole matrix that I was looking at of, on the one hand, committed and uncommitted entrants, and on the other hand, homogeneous products and heterogeneous products. But in general, I think the answer is, most assuredly, no
There is a conundrum here of sorts that has an analog in the conundrum that existed for a while as between Illinois Brick and Hanover Shoe. In the case of looking at potential competition as a potential defense, if you will, to a merger, potential competition as a shield, we seem, in general, in the antitrust bar, to apply a rather different standard to the potentiality, actual or perceived, of that competition than we do when we're looking at the question of whether an acquisition or merger involving a potential competitor is, in fact, unlawful.
And one of the things that seems a little bit out of kilter, therefore, is that the analysis of potential competition in general has somewhat died at the Commission since BAT, of course; and it hasn't been much around for 10 years; but the curious thing about it is that it lives on as a defense. And the very same companies and people and scholars who condemned it as an offensive weapon embrace it as security blank and a shield. And I think that suggests that one has to be cautious in evaluating non-existent but potential competition when it is abroad and when it is invoked as a reason to view differently market shares and levels in concentration that seem to exist in an otherwise domestic market.
CHAIRMAN PITOFSKY: Thank you.
We have other speakers and other issues, but I think at this point we will take a 10-minute break.
(Whereupon, a brief recess was taken.)
CHAIRMAN PITOFSKY: Okay. Could we resume.
With your permission, what I think we would like to do is aim to run a little beyond 12 o'clock, maybe 12:15 or even 12:30. There is much to discuss and much that we can learn from this group.
What I'd like to do is keep open the issue of geographic markets briefly and hear from others who have not spoken. And then we're going to try to frame and discuss the pros and cons of the issues relating to innovation markets.
But let's continue with geographic markets.
Who would like to -- Tom?
MR. LEARY: I would just like to say, I kind of come down on an Option 1 Modified simply because, as I've said before here, I think the effort to achieve precision and calculation of market shares, concentration ratios, and, therefore, market definition is ultimately futile.
The notion that you can have across the board presumptions about the significance of concentration in one industry that applies with equal force to another industry is spurious.
And to the degree that you focus in framing guidelines on trying to achieve greater and greater precision in doing this, you are simply lending more and more emphasis to an inquiry that I think you ought to continue deemphasizing. And I think the trend of the last 15 years or so has been, with each successive iteration of the Guidelines, to further deemphasize concentration ratios. And I applaud that, and I think you ought to continue it. And, therefore, I think it would be retrograde to try to get too precise.
Having said that, I think you also -- and this is a theme that a couple of other speakers have urged -- you ought to do more to educate the Bar as to how you actually decide cases, not only the cases that you decide to take a decree but also you've got to find some way to tell people why you did not decide to attack in a situation that might facially have a very, very high concentration. And we all know, we've all had personal experience with situations where that has happened. We all know that the staff is a lot more sophisticated than the Guidelines would give them credit for, that they do a much better job in many cases, particularly when the inquiry, as Jim Rill suggested, is viewed as an educational process. If, as a practicing lawyer, I approach pre-merging notification as an investigation in which it behooves me to hold cards close to the chest and put the burden of proof wherever I can on my adversary, I will do badly. I guarantee you.
If I treat the people in the agencies as fellow learners, if you will -- we are participating in a process here; we're trying to find out what's going on -- I think we will do better.
And so, therefore, my bottom line is I would urge you to be as general in the Guidelines recognizing that you cannot write guidelines that are meaningful across the board.
There are some industries where an increase in concentration from 2000 to 4000 is totally meaningless. There are other industries where it may be you can be more precisely focused. And, therefore, general guidelines, plus some common law learning, if you will, I think would be very helpful.
I just wanted to say a couple of things in addition. I'll pick up on a comment that I think Ernie Gellhorn made. I think you have to recognize that at least in the merger area and perhaps some others, quite candidly, you are acting as regulators. You are not enforcing a law quote, unquote, in any real sense of word. You are regulating.
And, you know, there is an awful lot of agencies that engage in regulation, have to engage in regulation after disclosure of an immense record and blah, blah, the protections of the Administrative Procedure Act and so forth. For obvious reasons, particularly in the merger area, you can't do that because you have to maintain confidentiality.
But I think you should recognize as your obligation to inform your consuming public out there as to what you are doing. It would be helpful if you realized and recognized, quite candidly, that what you are doing is engaging in regulation.
And, as I think Bob said in his opening remarks, if you read the legislative history of the Federal Trade Commission, the Congress did not contemplate that the Federal Trade Commission was going to be a law enforcement body. It contemplated that the Federal Trade Commission was going to be a body that would inform the business community about what conduct fell on one side of the line and on what conduct fell on the other side of the line. And I think we'd all benefit if you were increasingly mindful of your original mission.
That's it. Thank you.
CHAIRMAN PITOFSKY: Judy Whalley?
MS. WHALLEY: I'd like to follow up on that last point and maybe bring a slightly different perspective and a concern that I have that I really didn't see voiced as I looked through the testimony.
And that is a tension that is created by the fact that, unlike in the European Union, in the United States, the enforcement agencies are not regulatory bodies and are required, in order to prevent anti-competitive conduct, to go to court and win, whether that court is a Federal District Court or is the Administrative Law Judge and the Commission itself sitting as an adjudicative body.
And that decision -- which personally I don't think it would be appropriate to revisit and probably not possible to revisit -- has to affect the way that the Commission looks at various of these issues.
I, too, would be a strong advocate for future increased transparency because of particular concerns I have about the Washington in-crowd and the lack of information about decisions to inform business decisionmaking sort of outside the Beltway.
On the other hand, the reality is the agencies are enforcement agencies. And in order to prevail in preventing what they see as anti-competitive conduct, they have to win. They can't make the decision standing alone. And even in the merger context -- where probably what? 85 percent of the time -- if the agencies decide to challenge a transaction, the parties go away and don't do it. Nonetheless, the risk is always there, and the agencies are forced to be prepared to do that, to defend their position in court.
That drives transparency in large part, it drives the enormously burdensome approach of the second requests. With CID's I think it necessarily has to inform the decision about the question of what you do with foreign capacities, because the burden is going to be on the government, ultimately, to prove the role of foreign capacity and foreign sales in the market.
And in looking through the testimony, I really didn't really see anybody espousing that tension or talking about that tension and how it has to affect the decisionmaking of the agency, perhaps because it's not necessary to do so, it's such an intrinsic part of agency decisionmaking. But I thought it was important to have it be a part of the record as well, because, as much as everyone would like to see improved transparency, would like to see the burden of the second request limited, would like to see less burden on the private bar and private industry, decisions have to be made with this litigation aspect in mind.
And that is going to compel the agencies to be at least at a point along the spectrum where maybe we all wish they could be further towards disclosure, towards lesser burdens.
But until that rule changes and the agencies truly become regulatory agencies, litigation concerns are going to have to affect decisionmaking.
CHAIRMAN PITOFSKY: Tom?
MR. JORDE: I had a few comments that I think are appropriate at this point on global markets to think about.
There is some relationship in thinking about the geographic side of market definition to some of the product issues and some of the questions that more generally I have focused on in terms of innovation and technology.
And I think that alone is worth saying, too, there is a real relationship on the product and geographic side, and there are parallels.
I agree with Jim, I think if one is looking at the Merger Guidelines themselves, we'd want to be careful not to apply those in a rather wooden fashion when it comes to time periods. And my sense is the agencies and the Department of Justice don't do that anyway. The Guidelines themselves give the agencies flexibility to tweak those time periods. And I think it's important to do that with trade flows.
This is a really hard area, trying to think about what should be included with respect to foreign production. I think the most important thing is that the agency focus on hard evidence and not take what I think might be an easier but possibly erroneous route of simply adding capacity as it exists in some worldwide way.
Whether one would add capacity as a whole as opposed to trade that's actually in international flows I think will vary an awful lot industry to industry. And I don't think there's an easy way around that other than with very careful fact-specific inquiry into a particular merger or joint venture transaction, or for that matter, a rule of reason kind of analysis where market definition is being considered.
With respect to looking at trade that's in international flows right now, I think it's also important to recognize that those trade flows don't have to be just coming into the United States. Sometimes we say as a shorthand, well, where are the imports and what's been coming in?
I think a more important question is: What is being traded? And where does it go?
If you've got a bunch of parts on a ship on its way to Tokyo, that ship can be turned pretty much mid course and brought back to San Francisco without a lot of difficulty.
The real question is that, given the other firms that are producing, what is the amount that those firms historically -- and to the extent we can garner it, but I think it's very difficult looking into the future -- are likely to keep in play in a trade sense?
That seems to me to suggest that those firms, in the end, are probably a little different than our domestic firms in the way that they may contractually commit certain amounts of goods to the home country. I mean, I think the behavior is probably different.
So I would want to look at flows that were being traded, not just flows that were going back to the United States.
A couple of other quick points. And that is, when the products in question change and they move from manufactured goods to goods that have more of the characteristics of large components of innovation or intellectual property, as you move upstream, it seems to me that markets do, in fact, become more global and that trading is, in fact, easier.
A lot of products will trade, in a sense, on the Internet and don't require ships on the way to Tokyo. And that is just another way of saying that we need to be very fact-specific and product-oriented to the transaction that is at hand rather than, I think, trying to make more general guideline-type statements.
I fear that an effort along more guideline-type statements can't do much better than the guidelines have already tried. And while one wishes to have greater certainty sometimes or more detail, the detail comes in the individual transactions, which if I can use that just as a little segue to come back to such a common theme on communication. Some call it transparency and so forth.
And I think Judy is right about there is a clear tension with being an enforcement agency and being charged with actually the job of enforcing the antitrust laws which actually means bringing cases and wanting to give clarity and certainty.
It seems to be an easy way, though, to at least approach that initially; and many have already picked up on this. It's to at least let us know more clearly what has gone on behind a consent so that we have more than that bare bones complaint that comes out there.
And there are different ways of doing this, of course, and speeches are very helpful. But the agencies, in these cases -- and people in this audience are familiar to a certain extent more with one case than another -- but if you've been involved in one of these cases where a consent has come out, you know how much careful attention and analysis has gone on. You know that part of this learning process that you were talking about, Tom, how much of that has unfolded, often in an iterative fashion, back and forth between the parties and the Commission and Commission staff.
It would be nice to communicate what some of those points were and what carried the day and where there was a deficiency in the evidence and why it was, in the end, that this fix-it formula was seen to be important.
Does that compromise bringing the next case as an enforcement agency? Maybe. But at least here you've got hard facts and it's not a general set of propositions that one might be fear having just out there in the open.
One last and final point. And that is, geographic market definition is incredibly important for other reasons, because as we define markets, there will be an overflow into safe harbor analysis. That's an obvious point. But you'll find a lot of general agreement, and the materials that I was asked to review, showed remarkable agreement, in fact, of sort of wanting to see safe harbors in a lot of rule of reason analysis. But we do need to recognize that the safe harbor itself is intimately dependent on the market that is being defined.
When that market tends to be global in its reach and when it tends toward technology-oriented, intellectual-oriented products, then we're looking at safe harbors that, while we may say they are 20, 25 percent market share, we need to recognize that that's covering an awful lot of territory.
And I certainly recognize that in my own writing, and I think I've been honest about that. But there is a real relationship between how the market is defined and then what we carve out later for safer harbors.
MR. GELLHORN: One of the interesting things of the hearings like this, is I always tend to be persuaded by the last speaker even though they violently disagreed with the prior one.
And I want to suggest that there isn't, perhaps, the division between the Tom's and Jim and John that might appear in terms of geographic market definition because, it seem to me, the Tom's were saying there's some real skepticism as to how valid or valuable this market definition and precision is in our actual application. Well, nobody's going to disagree with that.
I thought Tom Leary was saying, I worry about the process because it's leading us down the wrong path. I would suggest that, nonetheless what Jim Rill and John Briggs was suggesting, is still ultimately where I would come out and be persuaded because of the importance of engaging in that analysis and providing guidelines because of the rigor that it gives to the analytical process and, ultimately, terribly important from Tom Leary's suggestion. And also, then, in terms of defining safe harbors, which is where Tom Jorde ended up; and I thought he was absolutely right.
But I also think, to indicate another area of possible disagreement, that while everybody is urging transparency and clarification and guidance to the community that is being advised by consent decrees, it could end up being terribly burdensome for the agency to try to provide an explanation for each and every consent decree and to explain it more effectively. And I think that's an impractical suggestion, and I didn't at least want our paper seen as suggesting that, that instead, what it seems to me, would be better is for the Commission to do what Bill Kovacic was saying, is do some studies of some consent decrees and draw some stuff out of it which is not necessarily so fact-specific but is rather more generic in its direction and approach. That way you provide, A, more reliable guidance, I would think, particularly if it's done by others who are reviewing the work; but, B, lessens the burden and makes it practical for the agency.
CHAIRMAN PITOFSKY: Thank you.
John?
MR. BRIGGS: Just one point on that, I guess, and two other very short points on other related things.
I think it makes a great deal of sense -- and I think Judy and Ernie Gellhorn are saying partly the same thing -- that the transparency problem is exacerbated not only by the role of the FTC as enforcer; but there's also just a sort of prurient curiosity out here in the bar that we like to know everything about everything. And it's probably not prurient, but it's certainly intense. And it's not necessarily relevant. It may have to do with the rent seeking mission that Washington lawyers have to do and little else.
But the second thing is that it does strike me that cases such as Dell -- which, if I'm remembering it correctly -- was just a section 5 case; and it didn't mention any other statute. And if I also recall, it has gotten, so far as I know, no publicity for that reason.
In fact it seems to have gotten not a whole lot of publicity at all; and it's a case which I found, as someone who knew nothing about it other than reading the press release and the complaint, to be full of fascinating implications. And in that particular area, when, in the face of a number of speeches made by the Chairman that indicated something to the effect that section 5 would not often, or perhaps ever, be interpreted as going beyond the metes and bounds of other Sherman Act or other antitrust laws, then we suddenly see a complaint and a consent decree that has no reference to other statutes; and it doesn't seem, when looked at closely, to implicate necessarily, in any visible way, other statutes. So it looks like an enforcement action that is a standalone section 5 action that could not survive otherwise if it were brought either here or in court.
So in perhaps unique cases like that, there is, perhaps, a need to explain a little bit more or even to sort of highlight the fact that there's no other statute involved here.
Third -- and this is almost more a process question that flows out of the complexity and the difficulty of product and geographic market issues within the setting of Hart-Scott-Rodino -- in my own autobiographical experience it has been frustrating that many times a second request issues, in the face of circumstances where the agency and the party both wish that the 30-day period could be extended somewhat; but by virtue of statutory language and ambiguity, it's unclear whether the parties are capable of agreeing to extend that period of time; and, therefore, the agencies don't extend it; and, therefore, the second request issues and parties end up getting into a mode of activity that is not necessarily conducive to an optimal resolution of the problem. That is to say, it's not conducive to an early consent decree or something like that if such something is possible.
And it does strike me that just given the very complexity of the problems that these hearings have focused on and the fact that the scholarship is itself becoming more complex, that some kind of flexibility along those lines, which probably requires legislative change again, is warranted and that something like that ought to be thought about. It could save tremendous resources, I would think.
CHAIRMAN PITOFSKY: Let's leave all these issues on the table, okay, and just add one more.
I spoke earlier this morning at a breakfast meeting and announced what I thought the bumper stickers ought to say about these hearings. There were two bumper stickers. One was: "It's innovation, stupid."
And you have to come tomorrow to hear what the other bumper sticker was.
But, in any event, Bill Cohen has been taking the lead in developing our hearings and our thinking about innovation. So let's, once again, try to frame the issue, offer the pros and cons that we've heard over these months of hearings, and then continue our discussion.
MR. COHEN: These hearings have focused, in part, on how antitrust analysis has taken and should take innovation into account.
To begin with, antitrust enforcers must ensure that market definitions appropriately include a consideration of innovation-related issues.
To address such questions, the hearings focused on innovation issues relating to the definition of product markets and of markets for the development of future products.
Let me begin with a summary of the discussion relating to markets for currently available products. Under the FTC-DOJ Horizontal Merger Guidelines, a relevant product market product is defined as a product or group of products over which a hypothetical monopolist likely would impose a small but significant and non-transitory price increase, usually 5 percent.
Also under the Merger Guidelines, the antitrust agencies ask whether new entry would be timely, likely, and sufficient to deter or counteract any merger-related anti-competitive effects.
In general, the agencies will consider timely only those committed entry alternatives that can be achieved within two years from initial planning to significant market impact.
Two issues were raised concerning whether such standards are adequate in the context of product markets subject to technological innovation.
The first issue relates to the notion that for such products some or all customers may value product attributes more than price. One commentator argued that where product attributes, not price, are the focus of competition, the test for product market definition, similarly, should be based on performance characteristics, not price.
Others responded that the current product market definition approach is effective since there is always a price-quality trade-off and that a market definition test based on performance characteristics would add an unnecessary complexity and uncertainty to product market definition. For example, how could one determine what a 25 percent reduction in quality was?
The second issue relates to the notion that a product lifecycle provides windows of opportunity for entry. One commentator argued that if entry occurs with new product generations, then entry should be considered easy. On that basis, this commentator proposed that the two-year entry standard be replaced by a standard equal in length to the of the product lifecycle.
Other presenters countered that tying the entry period to product lifecycle would miss the underlying purpose of merger enforcement, which is to deter the exercise of market power.
Now, let me turn to testimony that we received on how to assess merger-related anti-competitive effects and innovation for products or services still under development. I will begin with a little background.
Recently the Commission has challenged several transactions based on alleged anti-competitive effects in markets where products are still under development. All of those cases have been resolved through consent decrees.
The Antitrust Division, similarly, has challenged transactions involving innovation issues. These transactions were abandoned before trial.
The recently promulgated DOJ-FTC Antitrust Guidelines for the Licensing of Intellectual Property are the first agency guidelines explicitly to address innovation markets. Those guidelines define an innovation market as consisting of the research and development directed to particular new or improved goods or processes and the close substitutes for that research and development.
Close substitutes may include other research and development efforts, technologies, and goods that substantially constrain the power of any innovation market participant to retard the pace or limit the scope of research and development, either unilaterally or collusively.
The Guidelines caution that innovation markets may be analyzed when competitive effects cannot be adequately assessed by analyzing existing goods or technologies markets -- for example, if a licensing agreement involved research and development efforts for a novel product not yet on the market -- and that developing product markets will be delineated only when the capabilities to engage in the relevant research and development can be associated with specialized assets or characteristics of specific firms.
One section of the Guidelines provides a safety zone in which licensing arrangements generally will not be challenged if (1) the restraint is not facially anti-competitive and (2) the licensor and its licensees collectively account for no more than 20 percent of each relevant market significantly affected by the transaction.
The innovation market approach, as articulated so far, has stirred some controversy, as was evident in the discussions at the hearings. A first-order issue was whether there were sufficient empirical and theoretical economic underpinnings for assuming a connection between market concentration and output of research and development.
For at least one presenter, empirical and theoretical economics provide insufficient reason ever to believe that a reduction in research and development, even to a monopoly level, necessarily would be anti-competitive.
Most others agreed that economics would indicate that, in some circumstances, a merger could result in an anti-competitive reduction of innovation.
Some possible anti-competitive effects would include a delay in getting a new product to market, a reduction in the diversity of research, a decreased likelihood of finding a successful innovation, and a reduction in the quality of the research undertaken and its results.
For some presenters, however, the difficulties in distinguishing the circumstances in which such effects would occur counseled against any attempts by antitrust agencies to take enforcement action to prevent such anti-competitive effects. The concern was that there would be too many "false positives," in which the agencies would block mergers that, in fact, would not reduce competition and innovation.
Other presenters believed that the agencies could successfully identify those situations in which anti-competitive effects were likely and that it was important to do so.
One example of such a circumstance would be where a merger of the only two future competitors in a product market was planned and regulatory barriers would prevent the entry of any substitute product for several years.
However, even presenters who believed that the antitrust agencies should act to prevent anti-competitive reductions in innovation efforts were divided as to the best analytical approach to use. Several suggested that the potential competition doctrine should be used rather than an innovation markets approach.
There was some difference of opinion on whether the potential competition doctrine, which addresses the possible entry of competitors into product markets, should focus on existing product markets or future product markets. Some argued that any innovation-related concerns should be addressed in the context of potential competition for existing product markets.
Others asserted that, rather than focusing on a possible reduction in R&D, the antitrust concern should be whether the number of competitors in future product markets might be reduced and that the potential competition doctrine best captured this concern.
Some expressed doubt about the applicability of the potential competition doctrine to such circumstances, however, since the doctrine was not developed to address the types of innovation-related issues that were the focus of this discussion.
There was some consensus that coordinated interaction in research and development was less likely than unilateral effects; although, some cautioned that collusive effects, although rare, were possible. The difficulties with coordinated interaction related primarily to the difficulties in monitoring a cartel and punishing anyone who cheated on the cartel, although it was pointed out that punishment might occur in a market other than the research and development market.
Unilateral effects were considered possible if, for example, the merged firm would have the ability and the incentive to reduce the speed of innovation. The circumstances under which entry might occur to deter or counteract any anti-competitive effects were not discussed in detail, but one commentator pointed out that entry into innovation may be drastic, as opposed to incremental, and that it may come from unanticipated sources.
For most commentators, however, the possibility of such drastic entry alone was not considered sufficient to warrant an abandonment of agency enforcement efforts in this area.
Finally, several commentators suggested that a safe harbor approach would be sensible here, given the apparent consensus that appropriate cases for an innovation market analysis were likely relatively rare.
Others countered that it could well be premature to define safe harbors. Setting up safe harbors now might result in a failure to prosecute significant anti-competitive reductions in innovation competition.
CHAIRMAN PITOFSKY: Thank you, Bill.
Well, as I say, we just add that to the roster of questions we have been already discussing; and the floor is open.
Judy?
MS. WHALLEY: Having been one of the presenters before related to innovation markets, let me make a point related to that but tie it back to one of the broader issues that we have been talking about.
And that is to say, the primary thrust of what I said when I was here before talking about innovation markets, was that, yes, antitrust should be concerned about the impact of mergers and other transactions and other behavior on innovation and that it seemed to me that the innovation market approach was a creative way to capture the issues that were presented, but that the Commission should be cautious in this area because the empirical and analytical work that had been done trying to tie reductions in innovation to increases in concentration was ambiguous.
And so the focus of the agency in evaluating potential impacts on innovation, particularly for mergers but from conduct as well, should be in those areas where the clearest case could be made.
And I argued that focusing on potential unilateral effects, where a clear case of how the harm would come about, was the best way to take that on and was an appropriate -- whether it would be a guideline or simply a policy adopted within the agency -- the clearest way to do that until there was better information about what the risks to innovation were and if the enforcement should be expanded upon that clearer area.
I would reiterate that position. But I would also suggest that perhaps the Commission ought to be using that as a touchstone for going back and evaluating coordinated effects in mergers generally.
And picking up on something that Tom Leary was saying about the risks that come from guidelines and approaches that focus on numbers, on concentration values, on statistics, that are often, at their base -- at least at the fringe -- ambiguous. This is not to argue in any way that we ought to throw out a concern about coordinated effects in mergers generally, but simply to say maybe it's time to take a step back to -- and the Commission is particularly well suited to do this, given its broader than enforcement agency authorization -- to look at, again, the literature concerning coordinated effects in product markets and service markets and look at how the guidelines have been applied.
One of the great advances in the 82 Guidelines, 84 Guidelines, and then 92 Guidelines was to try and say: This is not a numbers game. Merger analysis has to be qualitative instead of quantitative. And we need to be looking at what the real likelihood of a anti-competitive effect occurring would be post-merger.
And hopefully it has moved beyond simply looking at concentration ratios and saying, well, there is going to be a presumption of competitive harm as concentration goes up, to saying, well there's enough of a concern here that we need to look at it very carefully; but let's go beyond those numbers and determine what the real likely competitive outcome would be.
We see other merger jurisdictions in particular not looking at coordinated effects, and yet it's not clear to me that we see their economies as a result behaving in a less competitive fashion.
Does that mean that we ought to abandon coordinated effects? I certainly would not argue for that. But I am arguing for, perhaps, going to that aspect, too, and doing some evaluation as to what are the conditions in which coordinated effects are more likely to occur, sufficiently likely that the agencies ought to be taking enforcement activity.
Maybe it's time to step back and do some comparative analyses across jurisdictions, to do some of the retrospective-kind of analysis that was suggested earlier this morning by Ernie Gellhorn and Bill Kovacic and open up that issue as well to whether there is a way to fine-tune and make clearer when anti-competitive effects are likely to result from coordinated interaction outside the innovation area.
CHAIRMAN PITOFSKY: Jim. And then Ernie.
MR. RILL: I think that we don't have to go quite so far as Judy would go in suggesting that the coordinated effects information, the body of the literature, the body of analysis out there doesn't give us confidence that in product markets and service markets coordinated effects remains a real concern. I think it does remain a real concern.
The question is: Are the levels right? And maybe that's what you're saying. I'm not sure I know where the levels came from, but certainly one needs to go no farther to the left than Dennis Carlton to understand that there's a rich body of academic thought based on empirical evidence out there that suggests that coordinated effects is and remains a real concern in those markets.
I think the real contribution that Judy has made in the R&D market area is to -- perhaps carrying it a little farther than she would want to go -- to point out that the Merger Guidelines simply don't work in the R&D innovation market merger area. They don't work at all, with the possible exception of a clear cut case of unilateral effects.
And if one wants to take a close look at the unilateral effects provisions of the guidelines, one would realize that there has to be a lot there to be sure that there is really a unilateral effect, other than there are two big players and one buys the other. There has to be a next-best substitute analysis taken into account that's provable by evidence.
If one wants to put it into a R&D market context, I think the researcher with the product out there and the only other person with a product in the pipeline subject to government approval that could come on the market with the next five years might fit.
But beyond that, I don't have any confidence -- I don't have any confidence that anything else in the merger guideline context fits.
Am I advocating R&D Merger Guidelines, Innovation Market Merger Guidelines? No. We've talked a lot about the desirability of guidelines. Guidelines are only desirable when they can accurately capture a rich body of academic thought and empirical evidence out there that make the Guidelines realistic.
And these agencies, the FTC and the Department of Justice, have broken their spear a number of times on guidelines that weren't based on that kind of foundation. There are many who think, for example, that the 1984 Non-Price Vertical Restraint Guidelines fall into that category, a number in this room.
There's probably virtually unanimous thought that the Commission's escapade into the specialized Merger Guidelines for the cement industry, the food distribution industry, the food manufacturing industry, from the days of Willard Mueller, probably were not one of the most well advised forays of the Commission's guideline efforts.
I don't think we know enough about innovation markets to justify guidelines at this point. I think there is a need for research, for testing, for work by the Commission to determine what has been retrospectively the effect of mergers in the R&D area.
I think that, like most other speakers, I would recommend extreme caution in this area; and then, to bridge into another subject, transparency is exceptionally important. I don't know that anybody can read much into a complaint that says: Company A and Company B are among a relatively few number of firms who happen to be out there doing R&D on Widgets.
I don't know whether Company A and Company B are 2 out of 20, 2 out of 3. I don't know whether people doing research on Gidgets are going to produce something that's going to bust the Widget cartel sky high. And I certainly don't get anything out of the Commission complaints or, in fairness, the Department of Justice complaints that tell me.
So if you're going to stay in this area, it's essential to be cautious and tell us what you're doing. But I think it's more important, before a major effort in this area, to conduct the studies that will truly answer, if you can, the questions of whether greater concentration limits R&D and how in the world R&D markets ought to be defined.
CHAIRMAN PITOFSKY: Okay.
Ernie?
MR. GELLHORN: Well, Jim really stole my thunder. I guess I want to just applaud because I think he's absolutely right on the point that this is the kind of experimentation that I think is more fraught with danger and peril than it is with the likelihood of success.
But there is another thing that he mentioned that has also run throughout the hearings that I think needs to be emphasized; and we sought to put it in one part of our paper. And that is, if you're going to look for potential clogs on competition in this area, inevitably, invariably, I would look for government as a great contributor to it, often inadvertently.
To me, the best illustration today is the supposed dominance of Microsoft on operating systems, for which the best explanation I can find traces itself to the forcing of this kind of technology into copyright protection rather than patent protection. And copyright protection is not designed to ensure competition. It has a very different purpose because it's based on the idea that disclosure is inevitable, but disclosure is not the foundation of operating systems. They, in fact, hide it.
So the copyrights rules of look and feel, prohibiting reverse engineering, and the life of the author plus 50 years, make absolutely no sense; and yet, they seem to me to be the foundation of a major block on innovation in a major industry in the country which, indeed, I would think the innovation market idea is sort of getting at indirectly. And so I would urge that it's really misdirected.
Indeed, I have a lot of trouble with the concept of an innovation market, as did a lot of people in the hearings; and that I think it belongs with a lot of ideas that are interesting, worth pursuing, as Jim Rill suggests, but not the basis of a serious Commission effort, particularly when there's so many fundamental foundational areas in which I think the Commission can make a significant contribution and ultimately have an impact on innovation markets, if there are such things.
CHAIRMAN PITOFSKY: Let me follow up on that.
Let's assume we all take Judy Whalley's advice about caution and that you don't plunge aggressively into the area. And let's assume we're talking about unilateral effects and there are three companies doing research, which, if and when they accomplish their research, will lead to a product that is a separate market -- it might be in the drug business, or it might be in software or something like that -- and the three of them merge.
There's no product right now, but the three of them are the only three who are doing research aiming towards some discreet product area.
When you say you have trouble with the concept -- and remember, we're talking unilateral effects no coordinated effects -- you say you have trouble with the concept of an innovation market.
I address this to you, Ernie, and to all because it's been a perplexing issue and a constant theme in these hearings.
Why?
MR. GELLHORN: But I would take your illustration and say you're saying they're all focused on a discreet product area. I would analyze it in that product area rather than focusing on their ability to innovate, which may go into directions we don't know.
CHAIRMAN PITOFSKY: All right. Now, let me -- all right. Let's assume if there's going to be a product, it's going to be three years from now; and let's also assume that it's awfully difficult to impose a remedy down the road.
One of the problems with innovation competition is if somebody gets way out ahead of the pack and they scramble the assets, it's hard to do anything about it and it's hard for the pack to catch up. Now, should we be taking that into account and perhaps proceed against the innovation market cautiously?
MR. GELLHORN: Just quickly, to follow up, inevitably you pose in there some counter concerns. The product is three years away from market. It may never make it to market. Are the antitrust enforcement agencies going to provide some compensation for that discount? They can't.
And the second thing is: What else is out there that would allow people to work their way around this market?
There are very few products and services for which there are no alternatives. Microsoft thought they had one, and now all of a sudden the Internet is there creating all sorts of problems. They are showing tremendous ingenuity in coming back, which causes a lot of concern for other people in the market.
The stock market is telling us, however, that they're not going to be able to put the lock on it that they thought they would. So I guess the skepticism overcomes, it seems to me, any concerns, because it seems to me, at least, the remedy, whatever you devise, is worse than the cure.
MR. RILL: Bob, let me follow up on that, too.
CHAIRMAN PITOFSKY: Well, let Tom. And then you.
MR. LEARY: Well, I just want to follow up. I agree with what I've just heard. I just wanted to raise one other caution. And that is, I assume we're going to talk about research joint ventures and so on in the third paper; but I think if you are going to talk about innovation markets, you've got to be very, very careful that you don't have spillover effects into some kind of a market analysis applied to pure research joint ventures that could be very damaging.
You have postulated a particular very, very limited kind of innovation. Innovation is a very, very broad word that encompasses a great many things. And we can talk about that more in detail later. But I just wanted to caution about that.
I have something that I'd like to say on the very first part of this issue and that has to do with the importance of non-price competition and perhaps some heightened recognition in the Guidelines of the significance of non-price competition.
I think one of your earlier witnesses said that in some cases it may be as significant as entry and so on and should be given greater dignity. I am not, repeat, not suggesting percentages. I don't like the percentages that are in there. I don't like the years that are in there. Because, again, I think all of that is spurious and not applied in practice by your own staff.
But I think you really ought to consider whether or not there's some way to give greater dignity to the non-price competition.
I was thinking the other day -- we were considering going to the movies over the weekend; and if you look at the page in the Washington Post that contains the movies that are being shown all over this city over the weekend, there are very few of those ads that even mention the price that you're going to pay in that theater. Why? Because price is presumably a very secondary consideration for customers. They're interested in what the movie is, where is the theater located, how comfortable are the seats, is it well air conditioned in the summer, all kinds of factors and, price, I'm not saying is totally unimportant, because we like to go to the movies on Saturday afternoon when it's cheap; but that is not the major factor.
I think as the world evolves -- and you say, well, great, you're talking about entertainment, discretionary dollars and all this kind of stuff -- as the world evolves, I think you're going to get more and more and more products for which price is relatively insignificant or less significant than it is for sugar or for fungible commodities; and I think that that's something that you need to keep in mind.
CHAIRMAN PITOFSKY: Yes. Certainly the witnesses in these hearings have made that point again and again, including some of the Sloan Foundation studies that we were lucky enough to have access to.
MR. RILL: Bob, just listening to Tom's comment on the movies, I suspect there are few enough of us in the room that use the senior citizen discount, though, so there is some price element still there.
Bob, I was thinking about trying to draft a complaint around your hypothetical. And I think it sort of amusing that the complaint would read: These are the only three companies in the world doing research on Gidgets, that there are no other companies out there doing research on Widgets that could have an influence on the ultimate Gidget product market for which there are no reasonable substitutes and not likely to be any within X time frame.
Now, if you have a case that will be circumscribed by that complaint, I suspect there would not be a great deal of disagreement with an innovation product market challenge. I haven't seen that in your complaints.
CHAIRMAN PITOFSKY: Fair enough. Fair enough.
MS. WHALLEY: Bob, if I could just add onto that and also follow up on Ernie Gellhorn's comments, I think what this points up is not we ought to walk away from innovation markets, but we ought to very carefully define what is required to be a participant in an innovation market.
One of the things I found most attractive in the Sunshine and Gilbert article was their definition of a participant in an innovation market, and I will not remember the exact words, but to the effect that someone must have access to unique assets required for conducting innovation before they are defined as being within an innovation market. And I think that element -- which may be satisfied very rarely -- is a way of capturing this notion that there must be something unique about the companies being positioned to do the innovation.
When I first heard about the "GM-Zf case, my reaction was: You've got to be kidding -- as you know, because we talked about this in the class we team taught -- you know, how can you ever constrain innovation? You know, it could be at MIT; it could be at Cal Poly; it could be in France at the Sorbonne; it could be in any number of companies.
And perhaps one of the greatest arguments for transparency was the fact that when the Gilbert and Sunshine article came out and I looked at how they were defining innovation markets, it began to make much more sense. And having that article out there I think has been a great advance over just being able to see complaints, which are bare bones and don't give you much information. That provides an analytical framework and helps one to understand why an innovation market might make sense.
So, again, I would argue you need to be very careful in defining the market and who's a participant. But I don't think you necessarily need to abandon the concept.
MS. DeSANTI: I just want to add one more element to this discussion of transparency, particularly in the context of consent. And that's the aspect of third-party confidentiality. Because in a lot of cases, what the agencies are confronting is the issue of: How can they disclose information that is really not theirs to disclose?
So I'm wondering if you could -- you know, those of you commenting on this issue in the future could add some comments on, if you have ideas for how to encourage third-parties to give up that information or agree to make it public, we would like to know about it; but that is an issue that would need to be addressed in order to give greater transparency.
MR. JORDE: I want to, if I can, to follow up a little bit on the -- not on that topic right now, but back to the innovation markets area and then, perhaps, to make a comment as well on non-price, performance-based competition.
With respect to innovation markets -- and I did try to read through most of the papers that were written in that area; and I've gotten even a couple of my fellow colleagues at Berkeley on two ends of this, Gilbert on one and Teece on the other. And I'm not sure in the end how wide that gap is, though.
It seems to me that the gap that most people focused on was one of -- and I think it's important to focus on it -- is one of perception and how rare a specific case might be where a pure innovation-based market covers territory that can't be picked up logically from more common tools of merger analysis.
And we end up, I think, inevitably getting to the hypotheticals of the sort, Bob, that you came up with or the GM-Zf case as it's narrowly analyzed by the Department of Justice. And so you get this case -- and my real fear -- and I must say, Judy, I reacted exactly the same way when I first saw -- because all we saw was the complaint. Then you get a little more information in the article. You get a bigger sense of what the department was looking at or where it saw its problems.
But even in the end, I found myself left with the split feelings, one, is that I have total confidence that people like Rich Gilbert will be able to properly use that concept and people who work with him or people who work with the Bureau of Economics here.
That's a very different notion than the signal that's sort of given to the world at large about what is the agency's view towards innovation? And that seemed to me to be the biggest negative problem. Here we are, a bunch of us thinking innovation is really important, making sure that as best we can that it's taken into account in rule of reason analysis, pretty much along the line of trying to assure that agencies won't stand in the way of things that could have such an important impact with respect to future generation products.
And then all of a sudden this appears to turn this on its head and say, oh, but watch out; we now see this as a double edged sword. And the question is: How often do we raise the other edge?
And so the perception part, I think, really started to weigh in -- at least my sense in talking to lawyers and to some general counsel -- is: Well that there is now uncertainty in this area where there wasn't before, that the cases that have sort of focused on this seem to raise more questions about how the tool is being used. In a few speeches here and there, I suppose, more detail on a complaint might be helpful.
Again, let me be clear about one of the concerns. One of the concerns that some people now are articulating out there in the world where innovation is practiced is, are the agencies saying that the standards are more heightened? That it's harder to merge with market shares here than if we were in traditional product markets?
I don't think that's what anybody intends at all. But the concerns like that do come up.
Finally, just to shift subjects real quickly on the non-price attribute competition kind of question and how that folds into market definition. I know I have been a co-author of at least one effort to try to focus a little bit rigorously -- and, Tom, I must confess that we erred on the side there of trying to use numbers. But the fact is the use there of numbers was more to make, I think, a basic point of just focusing attention to places other than just price. And I wouldn't disagree at all that careful market definition fundamentally has got to ask the question: Are people really competing with one another and not getting hung up on a 5 percent test or something else.
And here, in the area of technology, it's just extremely important that alternative technologies are considered. I think the agencies are doing that.
And I think it would be hard to write precise guidelines, but I would welcome, as I think Jim Rill was saying something along this line -- one might welcome a specific indication that clearly non-price competitive factors were being taken into account; we know that; don't worry. The 5 percent test captures a lot, but in this particular market, it doesn't.
CHAIRMAN PITOFSKY: Well, there's no really convenient point to stop a fascinating exchange, but let's have just one more comment here from Bill; and then we'll break and resume our discussion after lunch.
Bill.
MR. KOVACIC: A couple of thoughts about approaches to deciding how expansive the enforcement approach ought to be.
One thought that comes out of the discussion -- and I think out of the previous testimony -- a major concern is the difficulty of the judgments that have to be made to apply the tests carefully.
To use the Chairman's example before, to assess that situation correctly, you have to make a difficult judgment about who plays in the market currently, what their capabilities are, and whether entry hurdles are such that others can't come in, and in a market setting, perhaps, in which those judgments are harder to make than in other markets. So you have to get that right.
Second, you have to have confidence that the remedy you're choosing is appropriate. Do you want to preserve two players, three players, or more than three players?
And we're operating there that -- would the remedy be to preserve three independent centers of activity or more than three? We're not guided by a lot of information about what the right choice is to make there, yet another difficult judgment.
I think a question that in the sense is implicit in Tom's comment is, ideally, I know people I'd have confidence in to make those judgments correctly again and again and again; but I get more nervous in asking, in the generality of cases, are the institutional mechanisms there to make them well? Perhaps they are. But are we making assumptions about institutional capabilities that may be exaggerated?
If we assume that the answers to those questions are, yes, that we have the capability, I think it does place a premium on institutional mechanisms for pure assessment and evaluation after the fact. I come back to the ex post evaluation point.
And a last question that I have -- and it does deal with the way in which this concept was rolled out -- is part of the problem here that when the idea was addressed originally it was oversold. It was overdramatized. And that what we have here in part is, in its introduction, we have an agency attempting to claim credit for an innovation to establish its own stature and posture in ways that give the concept more momentum that create perceptions that perhaps are unwarranted, and that's a source of the problem.
I remember the press release that announced the GM transmission opinion; and if I remember the language correctly, there is talk about how it was path breaking, how it was innovative.
Those are the kinds of suggestions that suggest a broad-based roll out of a policy that perhaps should have been introduced as a prototype and qualified more carefully from the beginning. And I wonder whether that method of policy of introduction and elaboration creates the kinds of concerns that make people wonder whether the implementation and application is going to be too broad based.
CHAIRMAN PITOFSKY: Well, this morning's session is all that we could have hoped for. And let's adjourn until 2 o'clock, and then we will resume with some additional questions.
Thank you.
(Whereupon, at 12:20 p.m., the hearing was recessed, to reconvene at 2:00 p.m., this same day.)
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A F T E R N O O N S E S S I O N
2:06 p.m.
CHAIRMAN PITOFSKY: I think we are ready to resume.
There are, of course, many questions still on the table from this morning's discussion. We can come back and explore those. But just to get all of the issues out that we had hoped to address, I'm going to ask Susan DeSanti to do the same thing with our joint venture discussion that was done earlier with innovation, and that is to frame the issue and summarize the pros and cons as we have heard them in these hearings.
Susan?
MS. DeSANTI: I'm going to focus on collaboration to achieve innovation efficiencies.
These hearings have focused, in part, on how antitrust enforcement has viewed and should view businesses' attempts jointly to innovate and achieve innovation efficiencies.
Currently, the Commission's analysis of legitimate collaborations -- that is, those that are not naked attempts at price fixing or other per se restraints -- takes place under a rule of reason rubric as most recently articulated in Massachusetts Board of Optometry.
If the collaboration takes the form of a merger, it is analyzed under the FTC-DOJ Horizontal Merger Guidelines. In these hearings, we have used the term "innovation efficiencies" broadly to encompass efforts aimed at producing innovations, which may include new products or combinations of products, new services, new production methods, new routines, or improvements in management, organization, or distribution.
One central question for the hearings was whether collaboration to achieve such innovation efficiencies is taking new and different directions as the economy changes. Another central question was whether antitrust enforcement was, in fact, or was perceived as, a help or a hindrance to such collaborations or of no help at all.
With respect to the first question, we heard a fair amount from a variety of businesses about why it may be necessary or simply may make business sense to collaborate with other firms in order to innovate.
Looking at innovation most broadly defined, a number of firm representatives told us that joint ventures are required in order to expand their distribution systems into foreign markets.
We heard repeatedly that many more firms are routinely engaging in more complex international inter-firm alliances than was previously the case. Some firm representatives discussed the collaboration with customers that they found necessary in order to keep up with the competition in developing new products.
For example, one company defined innovation as the process of discovering their customers' unarticulated needs. That company described an innovation process, in which technical people spent time with the end customer, assessing what problems the company's technology could solve for that customer.
Other testimony described horizontal joint ventures in which competitors with complementary assets needed to collaborate in order to use those assets to develop and/or produce a new product. Such assets may be in the form of intellectual property or production techniques or distribution acumen.
We also heard reports that in some industries the investment required for and the risks of failure associated with innovation-related research and development are so great that collaboration is necessary in order for critical breakthrough R&D to take place.
Indeed, some testimony reported on collaborations that certain universities are fostering in industries made up of small businesses in order to encourage joint research and development.
Overall, the testimony has appeared to confirm that innovation has become more of an iterative, simultaneous process typically involving a large variety of players, including customers, rather than an orderly, sequential process in which research, development, manufacturing, and marketing takes place in a set sequence.
At least one of our participants has written extensively on this.
With respect to the second question, there were very few suggestions that antitrust had unnecessarily prevented the formation of collaborative arrangements intended to result in innovation.
The testimony, in general, recognized that the federal antitrust agencies have rarely initiated any type of antitrust enforcement against innovation-related joint ventures in the last two decades.
However, two related concerns were expressed. One concern was that businesses still did not understand that federal antitrust enforcers generally have viewed innovation-related collaborations favorably. Because businesses may have an inaccurate sense of likely federal antitrust enforcement intentions, they may be overly reluctant to engage in collaborative, innovation-related activity.
Although this concern was expressed for large, sophisticated firms, it was most emphasized with respect to small businesses, which, the testimony indicated, often still do not know about the provisions of the National Cooperative Research and Production Act that specifically affords rule of reason treatment and single damages for registered joint ventures.
Indeed, there was a general consensus that the NCRA and NCRPA have been underutilized, with a vast majority of NCRA registrations taking place in the fields of telecommunications, computers, and automobiles.
Some suggestions for handling these concerns were directed at how better to communicate the Federal Government's viewpoint on these issues, including using the Internet for more communication with businesses of all sizes.
A second major concern was that the antitrust analysis of joint ventures is still subject to too much uncertainty and requires further clarification.
Some testimony asserted, in essence, that rule of reason analysis takes into account so many variables that it does not provide clear guidance for the most likely antitrust analysis of any particular joint venture.
Some commentators further argued that the differences in articulation between a rule of reason analysis and the Commission's Mass Board precedent only exacerbated this uncertainty.
One of the most frequently repeated suggestions for dealing with the issue of uncertainty was that a safe harbor for joint ventures be established based on a market power screen. A rationale was that such a safe harbor would eliminate at least some of the uncertainty regarding how antitrust would be applied to certain joint ventures.
However, since the discussion of this proposal did not fully address whether markets and market shares could be easily assessed, especially for ventures involving new products, it would be useful for today's discussion to address some of the issues associated with market definition in connection with innovation-related joint ventures.
The safe harbor proposal dovetailed with another proposal, which was to align the treatment of mergers and joint ventures so that the same analysis would apply to both types of transactions. This proposal reflected concerns that antitrust analysis for mergers and joint ventures differed somewhat and that considerations of which antitrust framework might apply could unduly influence a company's choice of transaction. One suggestion was to use the basic framework of the FTC-DOJ Horizontal Merger Guidelines for the analysis of both merges and joint ventures.
By contrast, another contract recommended the issuance of separate guidelines on how to analyze joint ventures. Along similar lines was a proposal for use of a structured rule of reason approach when a collaboration promotes innovation or allows commercialization innovation.
This proposal emphasized that markets should be defined in a way to capture dynamic performance in high technology areas and that a showing of market power should be required for a finding of anti-competitive harm.
Both of these proposals also suggested an expanded treatment of efficiencies: one, advocating that financial integration should not be the sole talisman of legitimate efficiencies, since that could force merger where one would not otherwise be required; the other, advocating that potential efficiency justifications should include the need to collaborate to appropriate innovation returns in the face of weak intellectual property rights, to gain economies of scale or scope, to get products to market quickly in the face of technological advance, or to compete with other groups of firms.
On the other hand, some testimony focused on the potential for anti-competitive harm through collaborations. Some of the dangers identified included the potential for cartel facilitation through the sharing of intellectual property rights, the possibility of tacit or explicit collusion in the product market, the loss of incentives to compete for first-mover advantages, and the possibility of other spillover effects.
With respect to appropriability as an efficiency rationale, there was concern that for a joint venture to turn non-appropriable into appropriable innovations, the joint venture would have to reduce competition and erect entry barriers.
Some of the testimony also focused on issues of when access to the membership in or the fruits of a joint venture should be mandated and when joint ventures should be encouraged in order to facilitate standard setting.
Some testimony argued that antitrust should favorably view joint ventures formed by smaller firms to compete better with a dominant firm and that antitrust policy should not mandate overly broad participation in joint ventures.
Arguing that open, as opposed to proprietary, standards for interoperability facilitate competition, one commentator suggested the collaborations to support open interface specifications or compatibility standards should fall within the protections of the NCRPA. Others cautioned, however, that standard setting by a joint venture could be used for anti-competitive purposes.
Now, as this litany reflects, there were a large variety of proposals with relatively little consensus around any single proposal with a possible exception of the safe harbor proposal. There was a reasonable consensus that federal antitrust enforcement has been quite favorable to collaborations to achieve innovation efficiencies, and appropriately so.
There was also a fair degree of concern that the uncertainties of private antitrust enforcement had a significant chilling effect on innovation-related collaborations.
Some advocated allocating all review of collaborations to the antitrust agencies and providing immunity from private suits for joint ventures that had been approved by the agencies. Others appeared to believe that joint venture guidelines or other clarifications of joint venture analysis would be sufficient to ameliorate the perceived problem.
In any case, for purposes of today's discussion, it would seem most useful, first, to focus on the extent to which it would be advisable for the Commission to consider proposals for better communication of existing joint venture standards and then to discuss the possibilities for expanded articulations of joint venture standards and amendments to those standards.
CHAIRMAN PITOFSKY: Thank you, Susan.
Tom, you had asked to be heard on this morning, so maybe now is the time.
MR. LEARY: Yes. Well, picking up first on your last paragraph on whether or not to better communicate existing standards or to promulgate some new standards, one of the problems, as I pointed out in that short paper that I submitted for today, is that the existing standards, as spelled out in the legislative history of the Cooperative Research Act of 1984 are not, in fact, followed.
And the reason they are not followed, I think, is because there are sweeping statements in there about the importance of determining R&D markets and the level of concentration in R&D markets with it being implicit in the discussion that an HHI in excess of 2000 is problematical, when we all know that perfectly benign joint ventures have been formed and have been notified and are up and running with apparent HHI's far higher than that; and they have not been challenged, and I doubt very much that they will be challenged or should be challenged.
I think the reason for the problem is that there are joint ventures and there are innovation joint ventures and innovations joint ventures. They cannot be considered as, you know, similar entities. There is the paradigm, or the notion, that a research joint venture consists of a bunch of people in a laboratory exploring, in a very secret way, the frontiers of new knowledge. It does apply to some research, but it doesn't apply to all.
I mentioned in the paper that I presented that I happen to advise a joint venture where if you looked at the HHI of that joint venture, it would be very high, indeed. But a great deal of their activity simply involves collecting existing information that's out there in the world. There is an enormous amount of technical information, and it's growing all the time and to access that in an organized way and present it in an organized way for the benefit of your members and, indeed, for the general public, is a tremendously burdensome job. And that's what this joint venture does, in large measure.
And I've said, and I believe it firmly, the Antitrust Law Section of the ABA is a research joint venture -- that's what it is; that's what it does -- for the benefit of the Antitrust Bar. And I doubt that there's anyone in this room that feels that a concentration measure would tell you anything about whether or not the Antitrust Section of the ABA is anti-competitive.
So I would suggest to you that the initial focus of your inquiry in trying to shape some type of safe harbor should be: What is the purpose of the venture? What is it that the venture is going to do? That should be the first question.
And for some of them, I think it will be apparent that there is no need whatever to worry about trying to define a market or trying to decide what percentage of that market that this venture occupies.
So I would just urge you that -- I'm all in favor of safe harbors, but I would urge you to consider the purpose of the venture, number one. What is it that this venture is going to do? Then you can consider other things, I think, that are also a great deal more important than market shares, like ancillary agreements and possible spillover effects and things of that kind, more traditional, the kind of stuff, before Bill Baxter got his hands on this in 1984, that I think the Research Joint Venture Guidelines that were published in, I guess it was the late 70's, had emphasis -- I would suggest to you, you might go back and look at those because they were much more focused on the quality of the venture and less on market share analysis.
The only other thing I would like to say on this subject is that I think there are some cases, there are some cases where it might be important to look at market shares and joint innovative activity; but I think you should be extremely careful in publicizing or speaking about what you're going to do, not to create the impression out there in the business community that this is some new initiative, that this is something very important, this is something that people need to worry about that they didn't worry about before.
One of the problems we had -- it was referred to this morning -- there seems to be some kind of a bureaucratic imperative in this town that people in the antitrust agencies have to tell the world that they are doing something new. And I'm not being critical of this administration. Jim Rill did the same thing, and his predecessor did the same thing.
And every time, I guarantee you, you get calls from clients: What does this mean? What does this mean? Does this mean, now, I've got to worry about things I didn't worry about before?
And the answer is usually: Oh, no, that's just the usual bloviating that takes place in Washington; don't worry about it.
MR. RILL: But you got the call, didn't you?
MR. LEARY: That's right.
So I would suggest that you don't oversell what you're going to do. I would suggest that we really don't know a great deal -- and many, many, other people have said this in great eloquence and detail -- we really do not know much about research joint venture markets and what concentration may or may not mean.
I personally cannot think of a single example, in my experience, of collusion to suppress research. Before people worry about this as an academic exercise, I would like someone to identify somewhere an example of where it's happened because I don't know any example of it.
That's all I have to say for the moment.
CHAIRMAN PITOFSKY: Jim.
MR. RILL: I'm not sure what "bloviate" means. And as far as the ABA as a research joint venture, it's a perfectly contestable market, so you shouldn't worry about it.
I think that if I were to suggest a priority list for projects that might come out of these hearings, this would not be -- looking at research joint ventures would not be high on the priority list. And I agree practically with everything that Tom has said. So far as I know there's only been one case against a research joint venture, and that was a project challenged, I think, back in the Johnson administration, challenged by Ed Zimmerman, under which it was alleged that the auto manufacturers got together to suppress research with respect to exhaust emissions equipment.
When the Bush administration undertook to expand the National Cooperative Research Act to add "production" -- what was a broad-based effort, somewhat more modest than proposed by Dr. Jorde -- we took a look at, well, what was the experience under the Research Act?
And it didn't take us long to discover that there really wasn't any and that there had been some looks that -- filed research joint ventures. None of them seemed to cause any problem. If there's cartel behavior that the research joint venture is masking, you can go after it as cartel behavior. You don't need guidelines to do that. I think there are a lot more important things that the Commission can do out of this very worthwhile effort, one of which is to take another look at efficiencies in the Merger Guidelines and efficiencies more broadly, that I hope that I will have a little bit of a chance to talk about today.
But I don't think that being concerned about research and development joint ventures is one of the issues that's screaming out for antitrust attention today.
MR. KOVACIC: I wanted to mention a couple of observations that come out of my own reading of the witnesses' earlier statements, to embellish Susan's summary of the discussion.
One theme that I found interesting was the repeated statement by a number of witnesses about the difficulties of managing a research joint venture or any joint venture. The number of witnesses who observed, talked about the centrifugal forces that tend to pull joint ventures apart and diminish their effectiveness.
And it suggested, perhaps, the usefulness of reevaluating the approach that antitrust law now takes to analyzing ancillary restraints.
One of the problems that the venturers typically have to deal with are differing incentives and the possibility that any one joint venturer might be tempted to free ride on the contributions of another. For example, in the history of the NCC joint venture in Austin, Texas, the discussion of Sematech that was contained in the hearings, one concern that the joint venturers had is that, I'm going to send my best engineers, but you're going to send the deadwood whom you just want to get out of the office; I'm going to contribute all of the know how that I have, but you're going to hold back.
One problem that the venturer has to overcome to be effective is to commit everyone to contribute their best talent to the endeavor. And one concern that several witnesses also mentioned is, I'm going to give you my best people, but you're going to give me comparatively weaker people; you'll take my good information and you'll appropriate it and apply it to other projects; and you'll keep your good people working on projects whose returns you alone can appropriate.
A possible solution to this is to include ancillary restraints that serve the purpose of increasing incentives to commit effort to the venture itself, for example, by prohibiting venture members from engaging in projects that compete with the venturers' projects. Now, historically, that has tended to raise antitrust flags. That is, it's usually been seen as desirable to allow venturers to work on competing projects. But it's the fact of competing projects that may increase incentives to free ride on the contribution of others.
Thus, I think one issue that comes out of the hearings is the desirability, perhaps, of a reassessment of ancillary restrictions that might serve the purpose of increasing the efficacy of the venture by discouraging people from free riding on the contributions of others and, thus, increasing the confidence of venturers that partners will participate effectively.
The other observation -- and I think it's related to the difficulty of organizing a joint venture -- is whether or not, in fact, joint ventures are a desirable alternative to mergers in many settings.
I think it was a question that Susan posed to Norm Augustine that pointed this out. I think, Susan, if I recall the summary of the transcript, you asked Augustine: Why would you prefer a merger to a joint venture?
And the answer I think Augustine gave was that it decreases the difficulty of managing my relationship with the enterprise I have acquired. If I operate through a joint venture I face all of these transactional difficulties that can be costly to solve. A merger allows me, in Williamsonian terms, to impose a hierarchy and to manage the acquired entity with hierarchical direction rather having to write and enforce a contract that might be difficult to apply.
A joint venture, historically, has been seen as less competitively dangerous than a merger because it is less permanent and, thus, might have fewer enduring effects.
But the competitive trade-off that I think emerges from the testimony in the hearings is that the joint venture might also be less effective in accomplishing pro-competitive ends because it entails a greater number of transitional difficulties.
Thus, the extent to which historically we've assumed that a joint venture, a priori, might be less competitively hazardous than a merger, perhaps deserves some reevaluation to the extent that a merger might be more effective where there are efficiency gains to be had in accomplishing the efficiency ends.
CHAIRMAN PITOFSKY: I know Jon Baker wants to follow up on this. But, Ross, did you have a question?
Jon?
MR. BAKER: Yeah. You raised exactly a problem that I wanted to follow up on when you posed the idea that the joint venture might be less threatening than a merger but at the same time less competitive, less able to achieve the efficiencies.
And so the question -- we've had a lot of discussion about safe harbors in analyzing joint ventures and in mergers and a general feeling by many that joint ventures and mergers ought to be treated as just points on the same continuum with a similar sort of analysis to both and some discussion of safe harbors in both settings.
When we talk about safe harbors in the joint venture context, I think we tend to focus on the market power concern; and we then take the view that probably as integration increases and as greater concentration -- well, that a safe harbor for a joint venture that's close to the merger -- I'm sorry -- a joint venture that's close to the merger would be more threatening.
The safe harbor, therefore, for a merger ought to be at a lower place than for a joint venture, would be the implication of that analysis.
On the other hand, when we think about the safe harbors in the merger context, some at least view them as related to the achievement of efficiencies that might be -- that we would want to grandfather in with the merger. Some of the people in these hearings have suggested that the safe harbor concentration levels ought to be raised as a substitute for doing some tinkering with efficiencies, for example, in what Jim Rill and I agreed earlier on today should be called from now on the "Blessed 1992 Merger Guidelines."
Isn't there a tension here? That would tend to suggest -- that way of thinking would tend to suggest that the safe harbors for mergers ought to be set -- be more generous, because you're more likely to get the efficiencies. Whereas, on the market power thinking from the joint venture would tend to suggest that the safe harbors on mergers ought to be less generous because you're more worried about market power.
Is there really a tension there? And how would you come out on how we should handle this if we were to proceed down the road of a fuller articulation of the standards for the market power screen.
That's to Bill really, but for anyone who wants to take a stab at it, too.
MR. KOVACIC: I mean one question that my earlier comment raises as well is whether we allow participants in joint ventures to encumber themselves in ways that make the joint venture look like a virtual merger.
And to the extent that one does that, for example, by taking a more permissive view of what ancillary restraints are permissible, it seems like a parallel set of standards or a comparable set of standards would be appropriate.
I think that if you allow more restrictive ancillary restraints, there's a rationale for treating the joint venture and the merger really as being almost the same analytically. I would see less of a need for a difference in setting safe harbor levels in analytical approaches.
MR. JORDE: Let me follow up on that, Jon, because I want to agree and then just separate the question a little bit.
I think that you're really looking at two different questions and two different ways of analyzing mergers and joint ventures.
One question -- and I take this one to be maybe the more simple one, although, there no doubt will be disagreement among different commentators -- is: Should joint ventures and mergers be treated pretty much alike? And, of course, that's a position that I've taken, is that joint ventures -- and I go further than that, as you know -- and say contractual relationships -- it doesn't have to be a formal joint venture mechanism -- among horizontal competitors, ought to be treated no less well than a merger. So that's just kind of sort of giving minimum beginning points, and I take that to fold more into a safe harbor notion of, where is the line below which we are not going to be concerned, that we're going to tell, with some clarity, the outside world that they can get together, whether it's by merger or joint venture or by contract.
The point there is similarity, and one can turn to the 92 Guidelines to use that as a framework, if you'd like; or one could turn to rule of reason and use market definition principles there that parallel the guidelines, if you'd like.
That, I think, is a different question than the other one you're alluding to that some commentators have focused on, and that is: Should we simply raise the HHI thresholds as an alternative to a more elaborate inquiry about efficiencies, which would be more case-oriented and so forth.
I think that's quite a different question. I have not, myself, been in the camp that has said: Raise the thresholds and forget about the efficiency analysis. I'd prefer the thresholds more in the neighborhood where they are.
I mean, I wouldn't disagree with Jim that they could easily be raised some or perhaps even moved to a two-tier sort of segmentation rather than the three that we have now. I'd probably fall in the camp of not putting a lot of weight on the presumption that follows when you're above a particular threshold and turn more to case-by-case analysis that gets into a full look at efficiencies.
I'd rather look at the efficiencies and really study them and work hard at them rather than say, by raising the thresholds we capture what we need, let's move on; they're above or below. So I think you can look at those as different things.
On appropriability, if you come back to my original point, which is that of treating joint ventures or contractual arrangements among horizontal competitors as one would a merger among horizontal competitors, then I think the point Bill makes about appropriability questions is quite an important one and one with which I agree, that is that many of the contractual or ancillary restraints that one finds in the agreement are, I think, fairly looked at are designed to make sure that the venture works well without the hierarchical structure of a merger.
And then, finally -- and we can keep coming back to these points -- but as to the -- I don't know whether you're really sneaking up on this purposely or not, Bill; but it was almost the idea that perhaps the agency ought to concern itself about whether the merger is a more efficient way to capture efficiencies than a joint venture which may produce some transaction costs and related managerial kinds of difficulties.
I'm in the camp that doesn't think that's an agency question. I think the whole point from an agency enforcement perspective is that the form of the transaction ought not to dominate, that business in the markets ought to decide whether a hierarchical structure or a contractual structure is more efficient for a particular product, a particular industry, a particular point in time. I don't know.
But, you know, saying that we ought to put a thumb on the scale for mergers instead of what business thinks would work better under a certain circumstance of contractual arrangements, I don't think is a policy choice that the agency would want to make.
MR. KOVACIC: Yeah, I mentioned that only because it seems to me -- and in routinely reading cases and commentary -- there seems to be an assumption as the starting point that a joint venture is a, in some sense, more competitively benign form of collaboration or form of organization than the merger because it is less permanent, because it is less binding.
And I'm not sure that that type of assumption is appropriate to the extent that one is looking, for example, and thinking are these efficiencies specific to this transaction? Are there less anti-competitive ways of accomplishing these objectives? To assume, automatically, that a joint venture would be preferred is a decisionmaking bias that might not be warranted.
CHAIRMAN PITOFSKY: Judy?
MS. WHALLEY: I would like to follow up on that point and also go back briefly to Susan's first question about getting the information out.
But on what we've just been talking about, it strikes me that the issue that you're looking at, Jonathan, is going to vary depending on what the joint venture is going to do.
Going back to what Tom Leary was saying, that maybe a starting point would be to evaluate what the purpose of the joint venture is, how much integrating the total efforts of the parties and that may make a difference in what kinds of standards or safe harbors that you would have. A research and development joint venture, it strikes me, might well tolerate a much higher standard above what the Merger Guidelines would provide for than a joint venture that's effectively the integration of production and marketing of the businesses where you might want to just go back to the Merger Guidelines standard.
I'm not sure you want to write guidelines that look at different kinds of joint ventures and have different standards. But it may well be possible to articulate a principle, a paradigm, that ranks hierarchically the different kinds of joint ventures and their levels of integration and a potential for lessening competition and applies a similar kind of hierarchy of standards to it.
I can't, sitting here, think about how you would do it. But it strikes me that you could formulate such a hierarchy. And that you would really need to do that because if you look at the testimony and you look at the discussion we have here today, we're talking about a lot of apples and oranges and very different potential competitive effects; and it's easy to fall into the rubric of joint venture standards and forget that joint ventures are very different animals. I mean, the one thing about mergers is they tend to be the same sort of animal so that you can adopt a single set of guidelines.
Going back to Susan's point, one thing that always struck me in the antitrust agencies' effort to sort of get out the word, whether it was about new merger guidelines or how research and development joint ventures are handled or where the per se rule and criminal prosecution line is drawn is that that information flows to other attorneys; and it flows primarily to antitrust attorneys.
The agencies have not been effective at getting around that bottleneck, if you will, and getting out to the business community itself. And it strikes me that one appropriate initiative would be for the agencies to focus on how can they get the information more directly to the business community?
And one thing that was mentioned was use of the Internet, and I think having a home page is wonderful. I mean, that I think has been a major step forward. But it may be possible also to focus on speaking opportunities that reach business community organizations as opposed to just lawyers, or writing and publishing speeches in trade journals as opposed to legal journals to, again, try to reach the business community. Because I think there's a tremendous amount of misinformation about antitrust enforcement that may well be chilling pro-competitive conduct in transactions.
And it's not necessarily so that business people will go to lawyers and ask the right questions. They may simply decide they cannot do a transaction without ever seeking antitrust advice or getting good antitrust advice. And that falls disproportionately on the small business community.
So that may be an approach to deal with getting information out better.
CHAIRMAN PITOFSKY: Jim.
MR. RILL: Let me just react to the notion of whether or not there should be separate guidelines or some other form of guidance procedures for joint ventures and then perhaps touch upon another issue that was raised by Tom Jorde.
It seems to me, without having conducted any kind of statistical analysis, that a very, very high percentage of joint ventures, particularly production or service joint ventures, can fit very comfortably within the analysis laid out by the Merger Guidelines properly construed as a full analytical blueprint.
In fact, I would go so far to say that almost any production or service -- and I put research to one side -- production or service joint venture that isn't simply a naked restraint -- a la Appalachian Coals -- could fit comfortably within the framework of the analytical trail laid out by the Merger Guidelines.
You may recall that the -- I believe the Commission of the European Union undertook to do joint venture guidelines, and they decided, well, we'll call one set of joint ventures "concentrative joint ventures" and another set of joint ventures "collaborative joint ventures." And they never really got beyond trying to define which is which.
Please don't do that to the United States.
CHAIRMAN PITOFSKY: I understand that's being abandoned in the EC.
MR. RILL: It should be.
With respect to those that do not fit comfortably, if you will, naked cartels that masquerade or attempt to adopt the joint venture, sue 'em, deal with 'em.
And actually the Commission has done quite a bit of good work in attempting to identify where a joint venture will cross the line: in its Mass Board decision; I think very much in speeches -- not to leave anybody out -- I think of a speech by Janet Steiger on benchmarking, which is a form of joint venture. To attempt to identify to those who watch where a cooperative effort labeled a joint venture can cross the line.
To attempt to identify that line, though, in guidelines, separate and apart from the guts of a particular fact situation, I think may be taking on more than you really want to handle and more than you would really produce by way of illumination for business and the Bar.
So I think joint ventures guidelines aren't a great idea. I think simply saying 99 percent of joint ventures come under the Horizontal Merger Guideline analytical framework; we'll look at them that way; if they cross over that line, we're going to sue them as cartels. And we've said a lot about what a cartel is. I think that's enough.
On the efficiencies question that Tom raised, I think there's a good case to be made for reevaluating the thresholds, the safe harbor thresholds, and the presumption threshold. And I think a presumption, by the way, is just that in the Guidelines, it requires you only to go through to the next step carrying it with the analysis. It doesn't create any overwhelming propensity to sue.
I think, though, it's important also to deal with the efficiencies issue. As I said when the hearings started, we really didn't get to that for a whole variety of reasons, some good, some not so good, like the clock on the wall.
I think it is time to get to that. I think now is, in fact, the ideal time to get to that because you, Mr. Chairman, can deal with it with a great deal of credibility. You've done a lot of work in the academic field on this issue. You've written on the subject before you came to office. I think there's some receptivity at the Department for a full-blown analysis.
I know that there are those who think that merger analysis -- and I think this is Bill Baxter's view -- merger analysis properly done under the current Guidelines will adequately account for efficiencies. I'm not sure that's right.
Even if it were right, I think the, frankly, wrong treatment of efficiencies, the overly narrow treatment of efficiencies, for which I bear non-trivial responsibility -- as the economists would say -- discourages parties, merger and joint venture parties, from fully developing, exploiting and examining an efficiencies argument, efficiencies information to be presented to the Commission or for that matter to the Department. I don't think you want to do that. And I think the current Guidelines do. And I think you're well situated right now to deal with those Guidelines and to expand -- and I think they need expanding -- the issue of efficiencies.
My colleague on my right may want to rebut.
The only other thing I would say to that is, should you choose to attack this issue as a Guideline matter with the Department, let me urge you not -- it's difficult to say, as a tactical matter -- to try and reach consensus from day one. Challenge the people -- she won't disagree with that. Challenge the people who want to see a different efficiencies paradigm set up in the guidelines to draft one and let that be put on the table, and then try and reach your consensus.
If you try and reach your consensus from day one, you're going to have an inherent tension between, frankly, lawyers and economists, litigators and analysts, private bar and agency. And you're not going to get off the threshold. Tell a group to do it, tell a group to do it that you know may come in with the most expansive proposal that you can get in writing and work with that.
Now, maybe we didn't plan it that way, but that's sort of how the 92 Guidelines got started; and I think a lot of good came out of it that way.
So that's my nickel on that issue as well. Thank you.
CHAIRMAN PITOFSKY: Judy, do you want to --
MS. WHALLEY: Let me just make a conceptual statement without getting into the details of mechanics of how one might want to evaluate efficiencies, because I know a lot of very interesting testimony came in on that, and that will be a topic for another summery day.
But it does strike me that two anomalies developed in the merger law with respect to efficiencies.
The first and most obvious is that notwithstanding the movement in the case law in the agreement area and monopoly area and virtually every other area of the antitrust law is to take account of efficiencies for a long time and still, arguably, in the case law itself efficiencies don't exist for mergers. That clearly is wrong headed and has been changed at the agencies and is being changed in the courts as that thinking process works its way through.
But another anomaly that I think is now coming to the forefront is that there is a tendency, in my view, to want to overly specify efficiencies in mergers. We're sort of swinging to the other end of the spectrum, that now there is discussion about, let's start calculating deadweight loss and, you know, what exactly gets counted in the efficiencies? Is the consumer overcharged or just the deadweight loss? And what do you balance that against?
And my reaction is, at the end of the day, the agencies and the courts aren't going to be able to do that. I mean, I think the Canadian experience is educational on that perspective. They are still struggling with this, and they have a very mechanical formula, arguably, to use.
The way that efficiencies are treated in the other parts of the antitrust law is to look at whether, on balance, the result of the efficiency means that this conduct is pro-competitive. That a la BMI, NCAA, Rothery, I mean, you can run down the spectrum of cases, what the courts are saying is: This will make the combined entity, whether it's a merged entity or a joint venture or some other horizontal group, better able to compete, will make them a more effective competitor and bring that strengthening of competition to the forefront. That, to me, is the appropriate question to ask.
Now, it's easy to get lost in the: Will the efficiencies be passed onto consumers? Do we count deadweight loss? Do we count consumer overcharges?
I think, at the risk of general principles being hard to apply in specific fact situations, the underlying question ought to be: Are these efficiencies real? And will these efficiencies enable the new merged entity to be a more effective competitor?
If the answer to that question is, yes, then I don't think the merger is anti-competitive; and I think the case law should not treat it as anti-competitive, concentration numbers, market share numbers, whatever, notwithstanding.
So that would be my pitch on efficiencies.
MR. JORDE: I have a caveat to add. Maybe you'll accept it, maybe not.
And that is, in thinking about efficiencies, I don't know if I heard you correctly, Judy, that you seemed to be coming down on the side that if the efficiencies were there and for the merged parties or the JV parties, if that made that entity post-merger, post-joint venture, more competitive, then that's the end of the analysis.
It seems to me that that has to be balanced before it's the end of the analysis against the market power concentration harms that you thought were there to begin with that got you deeply into the efficiencies analysis.
MS. WHALLEY: No, I would agree with that. I think in terms of making them more competitive, that notion is encompassed.
MR. JORDE: Okay. Then what I want to add -- and here's the caveat part -- and that is that we all need to be careful, those of us who are doing such analyses, to make sure that we don't fall into this trap that Williamson did in his first article on this, which was to look at the efficiencies which tend to be firm-specific, whereas the market power pricing problems are often industry-cartel specific or oligopoly-specific.
So the welfare harm to society can be quite large compared to the individual efficiency gain of the merged firm. That's a much more difficult trade-off; but at least, theoretically, I think it's the right one to make. Which, again, as a balancing -- I mean, I'm glad we have an agency to do that and you and I don't have to.
But it does make the balancing part a complicated exercise, which may push some folks to saying, don't do this on a case-by-case basis; raise the thresholds up and hope we capture all the efficiencies within those.
MS. WHALLEY: Now, I would just underline what you have said, that "notion" here to me -- which sometimes is being characterized as passing the savings on to consumers.
The notion really is that the outcome of this transaction, because of the efficiencies when considered in light of the potential risk of competitive harm, is that the competitive harm is not going to come to pass when, in fact, what is going to happen is the new company is going to be more able to compete, and the market will remain competitive as a result or perhaps even become more competitive.
CHAIRMAN PITOFSKY: Bill?
MR. BAER: I just wanted to see if I could get from Judy and Tom whether, in light of what you said, you embrace Jim Rill's notion that probably we do need to articulate more clearly in the Guidelines how we're going to handle efficiencies.
I understand your point that it may be we may not want to identify specifically which efficiencies count and don't count, that that may be an exercise that leads to no where quickly.
But do you both embrace the notion that where we are today, at least in the terms of the "Beloved 92 Guidelines," as far as they went --
MR. BAKER: "Blessed."
MR. BAKER: "Blessed." Excuse me. "Blessed" whatever.
But, obviously, they're limited.
MR. BAKER: Not in the Bureau of Economics.
MR. BAER: Whether, in fact, we ought to try, as part of the outcome of these hearings, to develop a different articulation of how we're going to account for efficiencies both during our internal review and whether this is a concept that we ought to basically embrace when we go to court as well, that these are things that we're going to invite the court to weigh as well.
MS. WHALLEY: I think that that needs to be done.
As Jim indicated, partly the clock ran out and partly there were just sort of irreconcilable differences among the various people involved in the final decisionmaking that led everybody to say: Let's just leave it alone for now and we'll come back to it later. And this is a good time to come back to it and revisit that.
I think that definitely identifying the types of efficiencies that would be considered is valuable, and probably an easier thing to do, on balance. I think the more difficult question is the paradigm for the balance and how that should be articulated. And maybe it will prove impossible to reach consensus on.
But someone said earlier that the most important thing is to try, even if you're unable to accomplish the goal; and I think that would be valuable. Because even just trying is going to inform agency decisionmaking and thinking in the future.
MR. JORDE: Again, I agree. I suspect if you follow Jim's idea of having people actually try to help draft such guidelines, I suspect that they will be appropriately general.
And I think, to me, the risk in this area is there will be, perhaps, some pressure to be too narrow to have the view that we know ahead of time that certain things shouldn't count as much. I'm not sure that we ought to have that level of confidence.
The lists I see people proposing tends to leave things out, like, well, we don't count administrative-type efficiencies. Why not? I'm not sure why that's so.
If it's a difficult problem to measure, is it any more difficult than trying to measure productive efficiencies that's supposed to occur two years from now. I don't know why. And I don't know why the same sort of expert opinion or industry expertise that's brought to bear for one type of efficiency couldn't be the subject of evidence and testimony for another type.
So I would be quite wary of a limiting list. And if I were going to speak about efficiencies at all, I think, given the number of commentators and folks around who have tossed around, I think rather lightly, the idea, we'll only look at consumer efficiencies, that is the welfare triangle, things passed along in the form of lower prices, is just mistaken.
The antitrust laws are to capture efficiency which includes productive efficiencies. And eventually if productive efficiencies are worth what we think they are, that will drive price. If it doesn't drive price, it will put more quality features under the exact same priced unit of something. So you may not see a change in price, but you'll see a change in quality. And that comes from productive efficiencies.
So I believe, as it seems like everyone else does in this room, too, it is really -- that is the other outside commentators -- it is important to be welcoming of efficiencies. And then I'd sort of step back after a period of a number of years and see how this has gone. Maybe then we'll have some more learning to say that we shouldn't waste our time with this type. Our experience over a hundred mergers has shown us that they are not provable, not that we deny them there -- we shouldn't all take our time there. But I don't think we know that now.
CHAIRMAN PITOFSKY: Any other questions?
Tom?
MR. LEARY: Yeah, I just want to say a couple of things on this subject of efficiencies and guideline process generally.
I endorse what people have said about not only being liberal in hearing evidence of efficiencies but also not trying to be too specific about weighing various kinds of efficiencies in the balance.
Everybody talks about how difficult it is to prove and how uncertain efficiencies are to predict and, indeed, that's true. But most efficiency arguments I've seen are a whale of a lot more certain and predictable than arguments based on the dangers of further concentration, which is totally pie in the sky. And so the Guidelines, by requiring people to demonstrate efficiencies with precision and incorporating presumptions that are, themselves, completely nebulous already have a certain imbalance; and I think that further correction would be desirable.
I guess I just want to go back to something I've said a number of times and a number of people have said. The advantages of some kind of case-by-case learning and some kind of skepticism about the ability to codify with any kind of precision is not too surprising that we hear people saying that. Every single lawyer in this room was trained in a common law tradition. We were not trained in Napoleonic code tradition. And we find it extremely difficult to codify things in our society.
When I say that, I don't, in any way, want to denigrate the efforts that have gone into issuing guidelines by the agencies. Going back to Don Turner in 1968 when he had these guidelines that seem extremely primitive today but were a great act of moral courage at that time in the teeth of Supreme Court jurisprudence as it existed at that time, for a prosecutor to issue guidelines like that was an extraordinary thing, and remind us that at that time efficiencies were considered affirmatively harmful because you would acquire a competitive advantage.
We've certainly come a long way from that kind of thing. So I don't want to discount the value of guidelines; but, on the other hand, we now have had several iterations of them; and we even hear today that the 1992 Guidelines require some further tweaking and so on. Those guidelines, if I recall right, consumed an immense amount of internal energy --
MR. RILL: Anguish.
MR. LEARY: -- on both agencies.
Guidelines are not easy. We heard earlier today how, perhaps, presentation of some more case-by-case analysis in some kind of an acceptable format would impose a burden. Sure it would.
I suggest to you that trying to tweak guidelines with some precision might impose an even greater burden and we're going to be back here three years from now talking about what's wrong with the 1996 Guidelines.
So I want to urge you, to the extent you're going to fool around with guidelines, make them more rather than less general, less statistical rather than more statistical, and do something, either by way of anonymous communications or something to give people better guidance on how your guidelines are currently actually being enforced.
I guarantee you, your staff members right now sit and listen to efficiency and weigh efficiency claims that are prohibited by your guidelines. And they do it not under the rubric of an efficiencies defense; but when you walk in to explain the transaction and try to explain to them why, for one reason or another, the HHI figures don't mean a thing here and you shouldn't pay any attention to them, you talk about efficiencies, and you talk about what you expect to be able to achieve and you are heard and it is effective.
And so I think that t's important to take that into consideration.
Thank you.
CHAIRMAN PITOFSKY: Thank you.
Susan has a way of sort of focusing the concluding part of our discussion. I'm going to turn it over to her.
I also want to offer Bob Katzmann, if he wants it, as one of our most involved participants, an opportunity to sum up his thoughts about today's session.
But, Susan, why don't you go first.
MS. DeSANTI: All right. We are going to tread on your goodwill yet one more time. All of you have been so gracious with your time and your wisdom.
What we would like to do is ask each of you to write down on a slip of paper, without consultation with your neighbor, if you had to choose one of the many proposals that we have out here on the table, what you think would be most important for the Commission to follow up on in this process following these hearings, what would it be?
Now, I should have said this to begin with. I'm a former elementary school teacher.
COMMISSIONER VARNEY: Is this anonymous, Susan? Or do they sign them.
MS. DeSANTI: No. In fact, you should not sign it. Anonymity is an objective here.
COMMISSIONER VARNEY: Do I get to write one, too?
MS. DeSANTI: No, you do not get to write one. That's because you get to vote later on.
MR. RILL: Not now, Christine.
MS. DeSANTI: That's right. We will exclude the Commissioners and the staff. They get to put their chips down on the table later. But this should be 10 words or less. When we collect all of them, I will read them out.
And Bob Katzmann went along with this idea. So I did get at least one of the participants to agree that this would not be a terrible thing to do.
I'll read them all out. You will each get to vote for two of them, assuming that each of you is going to vote for your own one and that will take care of one vote right there.
And we'll just see if there is any sort of consensus that is emerging.
MR. LEARY: How many ideas do we write down? One or two?
MS. DeSANTI: One idea in 10 words or less.
MR. BAKER: Can we try this at Commission meetings?
MR. BAER: That's one of the ideas they are writing down.
(Pause in proceedings.)
MS. DeSANTI: I should note for the record that this is, obviously, a very unfair exercise because there are a huge number of tremendously important and valuable ideas on this record.
MR. RILL: Susan, you can say that this has probably been the first time that any of us has ever felt truly uneasy.
(Pause in proceedings.)
MS. DeSANTI: All right. We have here the "December 12 Top 6" list of ideas.
MR. BAER: From the home office in Des Moines.
MS. DeSANTI: Not from the home office in Des Moines. From Glens Falls, New York.
First idea, clarification of rule of reason analysis, which would include market definition and safe harbors.
Second idea, move guidelines and analysis farther away from structure, more toward actual effect.
Third idea, better articulation of efficiencies factors in antitrust analysis.
Fourth idea, greater published guidance, for example, case studies, speeches, et cetera, on merger and joint venture standards.
Fifth idea, strengthen processes for ex post evaluation of completed enforcement initiatives.
And last, number six, hold hearings on the difference between Type 1 and Type II errors.
All right. Now you may each vote for two of these ideas.
Okay. Who votes for number one, clarification of rule of reason analysis.
MS. WHALLEY: You have to give us a minute to think about it.
MS. DeSANTI: Oh, all right.
Bob Katzmann, do you have anything you want to conclude with?
MR. KATZMANN: This is a lot of fun. I'll just wait.
(Pause in proceedings.)
MS. DeSANTI: Yes? Are we ready?
Number one, clarification of rule of reason analysis. How many votes?
One vote.
MS. WHALLEY: No. Three.
MS. DeSANTI: Oh, I'm sorry. I apologize.
MR. BAER: Lot of support for Judy's idea. I mean --
MS. DeSANTI: Okay. Number two, move guidelines and analysis farther away from structure, more toward actual effect.
One vote.
Number three, better articulation of efficiencies factors in antitrust analysis.
Two votes.
Number four, greater published guidance on merger and joint venture standards through speeches and case studies, et cetera.
One vote.
Number five, strengthen processes for ex post evaluation of completed enforcement initiatives.
Four votes.
MR. KOVACIC: Do I get to vote for Ernie, too?
MS. DeSANTI: No.
And, number six, hold hearings on the difference between Type 1 and Type II errors.
One vote.
Well, I think there actually was some consensus.
CHAIRMAN PITOFSKY: It's an upset, in my view.
Bob, any last words? Any last thoughts?
MR. KATZMANN: Well, on the theory that less is more, I'll try to say as little as possible.
First of all, I think that this format has been exactly the right format for eliciting ideas, rather than having -- I often attend these final sessions of meetings where you have set speeches; and I think that this is really the way to go; that is, summarize what's gone on up to now and then to get people's reaction.
I think the trick now as, in the future, is to figure out how to translate some of these notions into a process, both in terms of sharpening our understanding of law enforcement priorities in a more specific sense but also figuring out how more generally what this all means in terms of policy.
And to that I would simply return to some of the thoughts that I was pushing in the beginning and don't need to reiterate them now, but reinforce them.
Thank you.
CHAIRMAN PITOFSKY: Well, I want to, again, thank all of you for what was a super session, exactly what we hoped for and really outstanding contributions on all sides.
Thank you for coming.
(Whereupon, at 3:21 p.m., the hearing was concluded.)
C E R T I F I C A T E
DOCKET/FILE NUMBER: P951201
CASE TITLE: GLOBAL AND INNOVATION-BASED COMPETITION
HEARING DATE: December 12, 1995
I HEREBY CERTIFY that the transcript contained herein is a full and accurate transcript of the notes taken by me at the hearing on the above cause before the FEDERAL TRADE COMMISSION to the best of my knowledge and belief.
DATED: December 12, 1995
SIGNATURE OF REPORTER
GREGG J. POSS
(NAME OF REPORTER - TYPED)