Identifying Exclusionary Conduct

William E. Cohen

Deputy General Counsel

U.S. Federal Trade Commission

Views expressed are those of the speaker and are not necessarily the views of the Commission or any individual

Commissioner

The Challenge Posed by Single-Firm Conduct

• Core Belief that Competition tends to Produce the Best Products at Lowest Prices and Greatest Quantity

• But, “The successful competitor, having been urged to compete, must not be turned upon when it wins.’

Judge Learned Hand, U.S. v. Alcoa (1945)

The Core U.S. Statute: Section 2 of the Sherman Act

• Reaches “[e]very person who shall monopolize, or combine or conspire with any other person or persons to monopolize, any part of the trade or commerce among the several States, or with foreign nations”

What Does it Mean to Monopolize?

• Size alone is no offense.

• “the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct”

Verizon v. Trinko (2004)

What Does it Mean to Monopolize?

• Charging a monopoly price is no offense.

“The mere possession of monopoly power and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system. . . . The opportunity to charge monopoly prices – at least for a short period – is what attracts ‘business acumen’ in the first place: it induces risk taking that produces innovation and economic growth.” Trinko (2004)

The Monopolization Offense

• Two Distinct Elements

1. Monopoly Power

2. Anticompetitive Conduct – Exclusionary or Predatory

Hearings on Single-Firm Conduct under Section 2 of the Sherman Act

• Joint undertaking by FTC and DOJ

• 29 hearing sessions with approximately 120 panelists (2006-2007)

• Panels on individual forms of conduct, cross-conduct issues, and international perspectives

Challenge Posed by the Conduct Element

• “The law directs itself not against conduct that is competitive, even severely so, but against conduct which unfairly tends to destroy competition itself.” Spectrum Sports v. McQuillan (1993)

Key Requirement: harm to competition, not competitors

BUT

Aggressive competition and exclusion often look alike.

The same single-firm conduct often generates both efficiencies and exclusion.

Traditional Standards

• Grinnell (1966)

defines prohibited conduct as “the willful acquisition or maintenance of [monopoly] power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident”

yet virtually all conduct is undertaken willfully

Traditional Standards

• Aspen Skiing (1985)

“attempting to exclude rivals on some basis other than efficiency”

were there “valid business reasons”?

Traditional Standards

• Aspen/Areeda and Hovenkamp (Treatise)

“behavior that not only (1) tends to impair the opportunities of rivals but also (2) either does not further competition on the merits or does so in an unnecessarily restrictive way”

Shortcomings of the Traditional Standards

• Lack of Guidance for the Courts

False Positives and False Negatives

• Lack of Guidance for Businesses

Need for Clarity in Real Time

• Discouraging Procompetitive Conduct --

Chilling

Search for a Universal Test: Profit Sacrifice/No Economic Sense

Has the monopolist sacrificed short-run profits in the expectation of recouping those profits in the future after its rivals have exited the market?

Would the conduct make no economic sense for the defendant but for its tendency to eliminate or lessen competition?

Search for a Universal Test/Equally Efficient Competitor

• Is the challenged practice likely under the circumstances to exclude from the defendant’s market an equally or more efficient competitor?

Search for a Universal Test: Rule of Reason/Balancing

• Plaintiff must first establish that the conduct had an anticompetitive harm

• Defendant then must show a procompetitive business justification

• Plaintiff then must either rebut defendant’s claim or show the anticompetitive harm outweighs (or is disproportionate to) the benefits

Conduct-Specific Tests

• Potential for clear and objective guidance tailored to particular concerns raised

• May generate dispute over categories

Predatory Pricing: Brooke Group Test

• Price must fall below an appropriate measure of cost

• Recoupment must be likely

Exclusive Dealing: Foreclosure and Rule of Reason

• Foreclosure – 30-40%

• Numerous other factors

Refusal to Deal with Rivals

• A severe challenge with identifying the conduct -- a refusal to deal at what price?

Change of practice

Discriminatory practices

Misleading and Deceptive Conduct

• Stay Tuned.

A Source for Further Exploration• www.ftc.gov/os/section2hearings/index.shtm