Unlocking Antitrust: Tying & Monopoly Leveraging

FILL ME IN…

Last fall staffers on the House Judiciary Antitrust Subcommittee released a long-anticipated report outlining a series of recommendations intended to rewrite our country’s antitrust laws. The majority staff report, while initially intended to focus on four tech companies, makes a series of erroneous policy conclusions that if implemented would wield government control over the entire U.S. economy, hampering growth, and innovation to the detriment of consumers.

As part of the staff report’s recommendations, the staff proposes per se liability for tying (i.e., conditioning access to a product or service on the purchase or use of a separate product or service) by a firm with market power. Per se liability means automatically prohibiting and punishing condition without requiring evidence of harm to competition or consumers.

The staff report recommends:

“[T]hat Congress consider clarifying that conditioning access to a product or service in which a firm has market power to the purchase or use of a separate product or service is anticompetitive under Section 2, as held by the Supreme Court in Jefferson Parish Hosp. Dist. v. Hyde.”

Setting aside the fact that the recommendation misinterprets the Supreme Court case it cites, the goal here it to place a hard prohibition in allowing firms from engaging in often beneficial and efficient conduct. The government mandating a company offer its products separately can be costly for firms, resulting in prices raised or fewer options in the market. Where such costs exceed the benefits to consumers, requiring firms to sell products separately is likely to make consumers worse off.

The staff report also recommends:

“Overriding the legal requirement that monopoly leveraging “actually monopolize” the second market, as set out in Spectrum Sports, Inc. v. McQuillan.”

Here the staff report proposes overturning Supreme Court case law in order to make it easier for plaintiffs to bring “monopoly leveraging” claims. “Monopoly leveraging” refers to the use of monopoly power in one market as leverage to obtain a competitive advantage in a separate market. This recommendation eliminates the social science of economics as a foundation of antitrust, thereby punishing conduct without evidence of harmful, or even probable, effects.

TYING: WHAT’S THE PROBLEM?

Tying is when a seller requires buyers to purchase a second product when they buy the first. Examples include selling a pair of shoes, cars with stereos, hotels rooms with breakfast, etc. Although some people may prefer to purchase the items separately (e.g., after market car stereos ), selling them together can lower transaction costs for buyers, make the seller’s offering more attractive, and protect the seller’s reputation by ensuring that the separate products work together seamlessly.

Per se liability is a drastic approach, currently reserved for hard-core conduct like engaging in a cartel. This proposal would subject firms to treble damages (in private litigation) for engaging in commonplace and often procompetitive conduct.

Antitrust analyzes tying under an effects-based approach that requires evidence of harm to competition (this approach is known as the “rule of reason”). A rule of reason approach is consistent with modern economic learning, which recognizes that, in many instances, tying and bundling generate substantial efficiencies such as economies of scope in production or reductions in transaction and information costs, which benefit the seller, the buyer, or both. The staff report’s proposal would ignore economic learnings and take us back to pre-1970s antitrust law before we had the benefit of rigorous empirical and theoretical research. In short, such an approach would ignore the social science of economics leaving the government to engineer outcomes in the market.

MONOPOLY LEVERAGING: WHAT’S THE PROBLEM?

A successful “monopoly leveraging” claim requires evidence that a company with monopoly power in one market engaged in predatory or anticompetitive conduct that resulted in it either (1) achieving a monopoly in a second market, or (2) dangerously threatens to do so. In other words, merely intending to leverage the success a company has achieved from one market into another is not sufficient to establish an antitrust violation. Rather, there must be evidence of either successfully achieving the monopoly in a second market, or at least evidence of a dangerous probability of success.

OUR TAKE…

The approaches taken by antitrust is correct and economically-sound. These approaches take into account the robust body of economic literature demonstrating that conduct such as tying is generally procompetitive or benign and that, at the very least, a dangerous probability of monopolizing a second market is a necessary requirement for a monopoly leveraging claim.

For more on antitrust, check out other posts here.

About the authors

Sean Heather

Sean Heather is Senior Vice President for International Regulatory Affairs and Antitrust.

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