Price Setting Bots Aren’t Price Fixing Bots, and Airline Tariff Publishing is Wrong

On Thursday, March 16, 2017, in a speech at the Bundeskartellamt’s 18th Conference on Competition, European Commissioner for Competition, Margrethe Vestager, discussed the specter of automated price fixing cartels.  She mentioned the Department of Justice suit against the poster vendor on Amazon as well as Google, which apparently prefers its own comparison shopping service over others.  These are very, very different things.  This post will focus on the legal and philosophical issues associated with price fixing bots.  Whatever Google is doing, it’s not price fixing.

Most Anglo-Saxon crimes require a mens rea, a guilty mind, in order for there to be crimes.  Price fixing is interesting in that it is illegal irrespective of the rationale.  Parties wanting a market to charge customers a fair price  are just as guilty as parties wanting to end ruinous competition and make a decent return on investment.  To be guilty of price fixing, however, there does, in fact, have to be an agreement—a bilateral understanding that the parties agree on the minimum price they will charge their customers.  The agreement doesn’t have to be successful in terms of achieving the agreed upon price; but there has to be an agreement.  In short: (1) Attempted price fixing is the same as price fixing, and (2) Parallel conduct and conscious parallelism, without more, is not price fixing and not illegal.

Obviously the number of competitors and potential competitors affects prices. If you were a fish monger and you know the only other place in town one could find fresh salmon is charging $20 a pound, you’ll probably charge around $20 a pound.[1]  On the other hand, if there were so many shops where customers can get fresh salmon, you’d be more likely to price closer to your cost to maximize profits.

Now let’s say you were the fish monger in the smaller market, and you happened to walk past the local grocery store and saw that they had raised the price of their salmon to $25 a pound. Would you be guilty of price fixing if you rushed back to your store and raised your price to $25?  Would you be guilty of price fixing if you saw the manager of the store at the local pub and suggested to him that he raise his price to $25 because you are going to do the same tomorrow?  In the former case, you would likely not be guilty of price fixing.  It’s parallel behavior perhaps facilitated by the concentrated structure of the market.  In the latter, you would.  The latter is an invitation to collude that, if acted on, would be an agreement on price that violates Section 1 of the Sherman Act.

Another important case to consider is Airline Tariff Publishing.  In that case, the airlines used their electronic tariff publishing system to discipline price competition.  Say Braniff Airlines is dominant in the Dallas/Seattle city pair, and PanAm is dominant in the Chicago/Seattle city pair.  Braniff decides to go aggressive in Chicago/Seattle and drops prices by 50%, cutting into PanAm’s profits significantly.  PanAm knows that it can stick it to Braniff on the Dallas/Seattle pair just as Braniff did  to PanAm.  Rather than drop prices, however, PanAm signals a steep discount for flights booked six months in advance.  Braniff sees the potential discount, realizes that its “competition” in Chicago/Seattle will cost it significant profits, and restores pricing in Chicago/Seattle.  Justice did not challenge these signals as per se illegal price fixing.  There wasn’t an agreement on price.  The parties were just taking advantage of an electronic price list which, for the most part, inured to the benefit of consumers, who could compare prices and rates across an entire market.  One might argue, in fact, that in the case of Airline Tariff Publishing, the market was behaving just as one would expect a concentrated market to behave.  Instead of the fish monger posting its aggressive pricing in its window for the public , including the grocery store manager to see, they did it online.  Had the market been unconcentrated, the pricing competition would have resulted in permanently lower prices.

A bot that sets a price based on a competitor’s pricing cannot be evidence of an illegal agreement without more. If a market is concentrated, the bots’ actions will result in higher pricing to consumers.  If it is unconcentrated, the bots will lead to lower prices for consumers.  The bot that prices 25%  above its closest competitor will never work, and the company that deploys that bot deserves its lost sales.  If a product is sufficiently differentiated to merit a 25%  surcharge over its competitor, it is effectively a different product with a different demand curve.  Pricing such a product using the demand curve of an inadequate substitute will result in either lost profits because the price is too low, or lost sales because the price is too high.

The Internet facilitates information exchange—it makes information more easily available to more people. More information should generally inure to the benefit of consumers.[2]  Consumers can see more producers at different prices and pick the one that best addresses its needs.  That could be in speed of acquisition (the guy down the street) or on price (the cheapest guy who’s across the country).  The internet adds participants to local geographic markets —the metes and bounds of which are defined by how far the consumer is willing to travel for the product.  I might buy from a seller in Seattle, but I’m not going to fly there.  On the other hand, I might realize that there is a car dealer in Pennsylvania that has the particular make and model I’m looking for at a good price.  I’d be willing to drive a little father for that car than I would had I not  utilized the internet.

It’s also entirely possible for markets that are otherwise susceptible to conscious parallelism, but are competitive because they lack a policing mechanism to behave oligopolistically as a result of the Internet. This is what happened in Airline Tariff Publishing.  Absent Sabre, the parties couldn’t readily police each other’s pricing behavior.  Bots offer the same advantage.

Posters is an important case because it actually attacks a bot created to support an underlying anticompetitive agreement, rather than parallel behavior that was facilitated by an advance in technology.  For the most part, the presence of a comparison shopping or other pricing bots should, by and large, result in lower prices.  It would be wrong to conclude that the market is necessarily behaving anticompetitively.

The most you can say is that if prices are harmonizing at some level above marginal cost, the market may be behaving anticompetitively. This possibility should be sufficient to merit an investigation, but not a conviction.  Only if one could show an actual agreement between parties (and then tie that agreement to the actual code of the bots) then I think one has a case.  One cannot infer an agreement to set price from a bot coded to set price at what a competitor is pricing no more than one could infer an agreement, without more, in the real world.

[1] Depending on advantages or disadvantages you offer customers such as freshness of your salmon, location of your store, etc.

[2] Before the Internet, figuring out what a firm’s price was for a particular good or service required some meaningful effort.  Estimating the “market price” required even more effort.   A general tenant of competition theory is that firms obtain market power due to consumers’ incomplete information about prices and qualities.  If a firm raises prices and consumers know the prices of other competitors the decline in the sales of the price raiser will be significantly greater than if consumers are unaware of the existence (and prices) of other firms.  The internet provides consumers with information and, thus, increases competition.  In other words, the internet reduces market power derived from consumer ignorance.

 

Bill MacLeod’s Message From The Chair (Fifty Countries and Counting, Sixty Sessions and More – at Spring Meeting)

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Bill MacLeod is serving as the ABA Section of Antitrust Law’s 2016-2017 Chair. Below is his most recent message as posted on the ABA website:

Fifty Countries and Counting, Sixty Sessions and More – at Spring Meeting

Competition and consumer protection are convening in Washington for an early spring this year.  Officials from Europe, Asia, Africa and the Americas, along with practitioners from over fifty countries will descend on D.C. for the one event that antitrust, advertising and privacy lawyers can’t miss:  The Spring Meeting of the Section of Antitrust Law, March 29 – 31.

On the agenda are more programs than ever before – fireside chats with foreign agency heads, major pronouncements from featured enforcers, deep dives into dozens of subjects, and dinner with General David Petraeus, an expert without peer on security, diplomacy, intelligence and economics.  Wondering about world prospects?  The General will take our questions.

Continue reading on the ABA website.

William MacLeod, Chair, ABA Section of Antitrust Law, Provides Introductory Note to the 2017 Presidential Transition Report

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Bill MacLeod, chair of the American Bar Association’s Antitrust Section and Kelley Drye partner, addressed the Section with an introductory note to their eighth sequential Presidential Transition Report. The 2017 Presidential Transition Report offers a retrospective of current state and federal antitrust and consumer protection law and policy, as well as recommendations for ways the new Trump administration might consider further strengthening policy and enforcement to deal with new antitrust challenges on the horizon. In his note, Mr. MacLeod calls out some highlights in the report including recommendations for policy in health care, vertical mergers and privacy, calls for more transparency and consistency in investigations, and analysis of controversial issues at the intersection of antitrust and intellectual property.

Read Bill’s introduction here and the full report here

American Bar Association Section of Antitrust Law, PRESIDENTIAL TRANSITION REPORT: THE STATE OF ANTITRUST ENFORCEMENT 2017

HSR: Newly Expanded 4(c) and 4(d) Requirements

The Premerger Notification Office of the Federal Trade Commission announced on November 28, 2016, that they were revoking previous informal advice regarding the scope of Items 4(c) and 4(d) of the HSR Form.  In the past, the PNO has taken the position that documents that would otherwise be responsive to Items 4(c) and 4(d) but discuss only foreign markets would not have to be submitted.  Effective November 28, filers may no longer exclude such documents.

The change in interpretation is likely not going to have any substantive effect on compliance.  The FTC offers two examples, the first of which provides:

The transaction involves the acquisition of a manufacturer of Chemical X. A board presentation regarding the transaction discusses the location and capacity, including shares, of all manufacturers of Chemical X, none of which is located in the United States. Under the PNO’s current informal guidance, this document could be excluded from the filing, even though it may be highly relevant to an initial competitive analysis of the U.S. market for Chemical X.

The problem with the old rule, at least as it is described in this blog post, is that it assumed that one had to have a physical presence in the United States to sell product here.  One could very well take the position that even though the manufacturers of Chemical X were not physically located in the United States, they could sell in or into the United States.  The relevant geographic market (as opposed to the physical presence) in this situation would not be exclusively foreign.  Under this view, the reporting person could not exclude the document.

I suspect that in practice only a handful of documents were excluded on the old basis.  A prudent practitioner would have likely included them lest risk a bounce.  As such, this post, which has gotten some press, will not make much of a difference in the vast majority of filings, and should not be the basis of any meaningful concern.

The Antitrust Forecast

It’s not that hard to predict. If you want to factor the antitrust forecast into your business plans, you have two weather patterns looming.  We can assess the first one quite accurately already.  And notwithstanding all the speculation, we can get a pretty good feel for the second front as well.

Forget about the first 100 days. The first phase of the new antitrust era will last a good six months, and could stretch out longer.  The immediate outlook?  More of the same.  If you are responding to an investigation, if you have a deal pending, the wind is hardly going to shift.  Your encounter next week or next month will remind you of your last meeting. If you have negotiated a deal with the staff, don’t expect them to change their mind.  And don’t expect them to postpone the proceeding.  Virtually all the officials who are looking at your matter today will be handling it this winter, and probably next spring.  That goes from bottom to top.

I’ve worked through the last five transitions at FTC and DOJ (inside the agencies during one), and I don’t recall a single administration that had its full antitrust team in place before the cherry blossoms staged their show. We may know who the new agency heads will be by next spring, but how they operate will remain to be seen.  New FTC Commissioners and Assistant Attorneys General must be nominated by the President confirmed by the Senate.  (Of course, a sitting FTC Commissioner could be given the Chair and an acting head could be named at DOJ’s Antitrust Division).  These decisions typically do not come in the first wave of appointments.

Once the new heads are announced, confirmed and sworn in, the first thing they will do is assemble their teams.   It takes time to recruit bureau directors, deputy assistant attorneys general and front office personnel.  It takes more time to coordinate and deploy them.  Meanwhile, the career civil servants, who occupy all but a few positions at the agencies, will continue to do the daily work of law enforcement.

Sometime next summer the second phase will probably begin, but we won’t notice it right away. We will hear about it in speeches, and some of us may experience it first-hand with investigative  requests, but it will take another year or two before most businesses feel its effects.  The reason is simple.  Every new administration inherits the pipeline of the last one, and right now at the antitrust agencies that pipeline is full.  It takes months for an agency to devise new strategies and much longer to convert them into enforcement initiatives.   We should not expect to see the results of new approaches until year two or three of the administration.

What might we see in the way of a course correction? Don’t expect a pirouette.  The history of transitions in the last three decades suggests that antitrust enforcement in the future will look remarkably like it does today.  The debate over enforcement today (and there was a debate in the campaign) does not portend the end of that history. Ironically, most of the criticism of current enforcement has come from advocates of more, not less, regulation than the current administration imposed.  By and large, there is consensus about the policies at FTC and DOJ.

One more factor suggests that the antitrust we know today is a good barometer of the antitrust we’ll face tomorrow. Antitrust is, after all, law enforcement.  The agencies don’t get to make the law they enforce.  It comes from century-old statutes that Congress is not likely to change.  The interpretation of those statutes is in the hands of federal judges, whose decisions have placed limits on the agencies’ options.  We know they are not going anywhere soon.

It is always fun to speculate about the storms that might sweep through antitrust. But we have no basis to predict abnormal weather patterns in the seasons ahead.   We know where the trouble is likely to arise, and we should be able to avoid it.  It makes perfect sense to plan now for an uneventful voyage.

Bill MacLeod is the Chair of the Antitrust and Competition Section at Kelley Drye & Warren.  For 2016-17, he also Chairs the Antitrust Section of the American Bar Association.  These views are his own.

Antitrust in a Clinton Administration

Regardless of your political affiliation, it is worth understanding the potential changes to antitrust enforcement in the next administration.  We will take a look at how antitrust might be handled by each of the two major party candidates.  This week, we’ll take a look at a possible Clinton administration.

The Clinton Campaign has released an economic manifesto of sorts that discusses, among other things, what her vision of antitrust enforcement would be if she were elected President.  This paper represents the third statement on antitrust made by the Campaign or its surrogates.  The first, an op-ed from October 2015, was a high level piece discussing the need for vigorous enforcement.  The second, in the form of a speech by Elizabeth Warren, was more radical.  It too insisted on aggressive enforcement.  The speech did raise at least some issues, like a revision to the vertical merger guidelines, that seemed a bit far afield from current thought, both conservative and liberal.  The most recent is a more balanced and practical statement of what the administration plans to do, and as such I think serves as a very good barometer for what antitrust could look like with Mrs. Clinton at the helm.  Of course, the proof will be in the pudding.  Who President Clinton nominates to run the Agencies, as well as how much funding she can secure for them, will tell you a lot about whether she truly does wish to or even can invigorate the antitrust laws.

It is simply impossible today to just turn on antitrust enforcement and deconcentrate large numbers of markets and break up monopolies.  Chicago school economics permeate the jurisprudence, the biases of academics and the views of most enforcers, both conservative and liberal.  The courts have significantly reduced what sort of behavior violates the antitrust laws.  And with the adoption of the 2010 Merger Guidelines, the Agencies have significantly reduced the number of mergers that they feel are worth investigating.  Simply bringing more merger challenges will not result in more mergers being stopped.  The case law simply cannot support that.  Moreover, bringing more cases without having a clear plan and theory will result in more bad decisions for enforcers, further contracting the jurisprudence, the opposite of reinvigorating enforcement.

What really needs to be done is either create a whole new antitrust regime where behaviors that are presently excusable are condemned or engage an anti-Chicago insurgency where the tenants of the Chicago school are systematically tested and debunked and the case law is overturned.  But that is a long and slow process and it may be impossible with a split Congress.

Enforcers are not helpless, however.  What the Agencies can do is increase the scope and scale of their investigations.  They need to look at more behaviors and look at them more deeply.  And through those investigations develop a new antitrust lexicon, a set of analytical tools economists, courts and future enforcers can use to tackle problematic behaviors.  With compulsory process, the Agencies have a unique ability to look at an industry in depth.  And with their stature and importance in our economy, they have the ability to engage the brightest minds to understand and articulate the potential harms.  Mrs. Clinton’s last paper seems to invoke this notion.

From a purely practical standpoint, the first thing the Agencies need to do to “reinvigorate antitrust” is to redefine what an agency “success” is.  In recent years, the Agencies have been expressing pride at the fact that the vast majority of second requests result in some remedy.  The feeling is that that high ratio means that they are enforcing efficiently and effectively.  It is likely true that those investigations were warranted, but the other way to look at that statistic is that a great deal of borderline cases were not investigated and that perhaps some violations were in fact missed.  A true enforcement-oriented regime would not shy away from investigating a borderline case but would embrace it.  False positives in a Clinton regime would impose added expense on some businesses, but the law and theory of antitrust would have the opportunity to bloom again.

And with that in mind, here are my top 5 predictions for a Clinton Administration.

  1. Civil non-merger investigations increase by 20%. Settlements increase by 10%.  Suits remain relatively stable.
  2. Second requests increase by 20%. Settlements increase by 10%.  Suits remain relatively stable.
  3. Merger retrospectives increase by 30%. Settlements increase by 10%.
  4. Industry studies increase by 30%.
  5. Commission papers increase by 30%.

Bill MacLeod’s Message From The Chair

macleod_william

Bill MacLeod is serving as the ABA Section of Antitrust Law’s 2016-2017 Chair. Below is his most recent message as posted on the ABA website:

Competition, Disruption and Transition: The Future of Enforcement at Fall Forum

Nobody I know in the competition or consumer protection bar can remember when more investigations, more complaints, and more trials were targeting major sectors of the economy. Officials and practitioners from Canada, the Americas and the EU say the same, and nobody sees the trend tapering off.

Continue reading on the ABA website.

Fortiline LLC: Invitations to Collude in Dual Distribution Systems

Fortiline LLC distributes ductile iron pipe. It competes with the manufacturer which somewhat regularly undercuts its distributor in the market.  Fortiline on several occasions asked the manufacturer not to do so.  Fortiline emailed the manufacturer complaining that the manufacturer was not keeping its numbers up compared to other manufacturers.  Fortiline also stated that “[w]ith this approach we will be at a .22 [margin] soon instead of a needed .42.” Fortiline later complained that the manufacturer was pricing at a 0.31 margin, “20% below market.”

The FTC sued under Section 5 of the FTC Act, and Fortiline entered into a consent agreement. The FTC alleged that Fortiline had invited the manufacturer to collude in price to the end consumers.  The consent prohibits Fortiline from attempting to enter into an agreement to fix prices among other things. It allows Fortiline to discuss “procompetitive aspects” of the manufacturer-distributor relationship The order lasts for 20 years.  Commissioner Ohlhausen dissented.

With regard to that “exception,” the Order states:

PROVIDED, HOWEVER, that it shall not, of itself, constitute a violation of Paragraph II. of this Order for Respondent to engage in any conduct that is (1) reasonably related to a lawful manufacturer-distributor relationship, lawful joint venture agreement, or lawful merger, acquisition or sale agreement; and (2) reasonably necessary to achieve the procompetitive benefits of such manufacturer-distributor relationship or of such agreement. For the avoidance of doubt, it shall not constitute a violation of Paragraph II of this Order for Respondent: (i) to communicate with a Manufacturer regarding Respondent’s desire to receive prices or rates (including rebates and discounts) at least as favorable as those granted by that Manufacturer to a Competitor or Contractor; (ii) to request, negotiate, or enter into an agreement with a Manufacturer under which Respondent shall be that Manufacturer’s exclusive or quasi-exclusive distributor; or (iii) to request or enter into an agreement with a Manufacturer under which Respondent distributes that Manufacturer’s ductile iron pipe to a Contractor previously or potentially served by that Manufacturer.

[Emphasis mine.] A “Manufacturer” is “any Person engaged in the business of manufacturing or fabricating ductile iron pipe, and any such Person’s employees, agents, and representatives.”

Fortiline sells the manufacturers’ product. It is invested in understanding and promoting the product and developing the brand.  This is a case where Fortiline’s own vendor is free riding off Fortiline’s investment in the local market.  It is outrageous to think that Fortiline would have to sit by and take that.  And the consent itself embraces this fundamental circularity.  The exception allows the very behavior the complaint condemns.  The only thing this complaint achieves is to raise Fortiline’s costs by imposing a regulatory burden on it that no other competitor otherwise has.  It also causes them to incur needless legal fees as they will assuredly have to pass by their lawyers each missive they write to the manufacturer.  If anything this process has distorted this market.

The real lesson from this case is never enter into an agreement where your supplier can target the market directly. As soon as you complain about their free riding, you’ll be sued by the FTC.

Causality and Diluting Trademarks Through Online Searches: What the FTC Missed in 1800Contacts

The FTC sued 1800Contacts for entering into a series of agreements with competitors that limited the competitors’ ability to bid on certain trademarked terms as search terms in online search term auctions.

Search engines like Google sell search terms. An advertiser will bid for a search term.  If it wins, its advertisement will be listed as an “advertisement” above the search results whenever someone types that search term into the search engine.  Google allows companies to bid for search terms that are trademarked by others.  So, a company that is not 1800Contacts that sells contacts on line bids for and wins the search term “1800Contacts.”  When someone searches for that term, the company’s ad will appear first in the list of results before the results from the search.  The mere acquisition of an AdWord that is trademarked by another company is not a trademark violation, according to the courts.  How the acquiring entity uses that trademarked name in the advertisement that appears in the search results can be, however.

Key to this case is going to be the relevant product market and what role advertising placement in response to online search plays in the acquisition of contacts. Do customers buy online and from bricks-and-mortar stores?  Is search, and in fact is ad placement first in the list responses, key to how consumers locate and purchase contacts, or is it one of many ways?  Absent isolating online sales as a relevant market, and proving that the majority of customers locate contact vendors through search and do so by clicking on the first ad they see, the Commission is going to have a hard time proving the agreements have negatively affected competition.  Intuitively, there appears to be many ways to acquire contacts.  I can call 1800Contacts.  I can go to Costco.  I believe my ophthalmologist and optometrist sells them as well.  I might also search for “contacts” online.  I doubt I would search for “1800Contacts” unless I specifically wanted to buy from them.  The more avenues I have, the lesser the influence of search on my product acquisition.  And if I can recognize that the first selection is an advertisement, the role of AdWords acquisition plays an even more attenuated role in my decision making.  Ultimately, the Commission has to show an effect in a relevant market.  For there to be that effect, search as well as ad click through has to be the critical method by which consumers acquire contact lenses.  Otherwise, these agreements have no effect on competition.

The other way the Commission could back into liability would be for them to claim that there is no procompetitive rationale for the restraint. Since there is no procompetitive value and potential anticompetitive effect, the restraint should be condemned.  The way they win there is the general notion that simply buying a competitor’s trademark as an AdWord is not infringement, and therefore not a protectable interest.  Absent that interest, the restraint is naked and condemnable.

But just because there is no trademark violation doesn’t mean that there is no commercial harm or protectable business interest. If I enter “1800Contacts” into a search engine, at least intuitively, it seems like I would be looking for that company.  Even though there is a graphic that says “ad,” if I weren’t a sophisticated user of the Internet, I might very well think I’m getting service from that company where I might not in fact be.  Moreover, Google’s process of selling trademarked AdWords to anyone who wants to buy them may in fact be diluting the marks.  A person who searches 1800Contacts and is shown a variety of different competitors might come to think that that term is generic and will pick up any contact seller.  It would be improper of an antitrust court to conclude that because a trademark holder does not suffer trademark infringement it cannot be otherwise harmed.  Protecting its brand from become generic in the minds of users and ensuring that folks who want to buy on line can find their products could very well have value to a company, value that it is entitled to protect.  Given the ostensibly inconsequent role search plays in the ability of purchases to locate contacts, that benefit may very well be sufficient to support legality.

This case is a solution in search of a problem.

Didi Acquires UberChina

Uber Technologies Co. announced today that it was selling its Chinese affiliate to rival Didi Chuxing Technology Co.  The Wall Street Journal reports that the sale is the end of a three-year effort by Uber to penetrate the Chinese market.  In the end, Uber had approximately 10.1 million riders to Didi’s 42.1 million.  Didi merged with another rival in 2015, Kuaidi Dache, effectively extinguishing the Kuaidi brand post consummation.  Uber will be taking a sizeable stake in Didi in exchange for its business.

From an American antitrust standpoint, this deal could have drawn significant investigative interest.  While not faring nearly as well as its local rival, Uber had invested a great deal of time and effort into developing a Chinese presence.  Indeed, it had developed a base of over 10 million riders.  By most measures, Uber is not an insignificant competitor and would not be considered “failing” or even “flailing.”  Indeed, one might even see them as a classic maverick.

A particularly aggressive enforcer might also take a hard look at what was actually promised in the negotiations between Uber and Didi.  Uber is taking a large chunk of Didi’s stock in exchange for exiting the market.  The noncompete will also be of particular interest.

But this is China.  Their anti-monopoly law is relatively new, and they bring few actual challenges to transactions.  Didi is also a national champion in the high tech space, a place where very few companies worldwide successfully challenge American supremacy.

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