# Presentation: 514699

## Department of Justice/ Federal Trade Commission

- Senior Vice President

- March 28, 2007

- Hearings on Single-Firm Conduct:
- Remedies in Section 2 Cases

## Section 2 Injunction Relief:  Can We Learn Anything from the Merger Context?

- Injunctive Relief – Structural vs. Behavioral
- Policy towards remedies well developed in merger context
- Antitrust Division Policy Guide to Merger Remedies (October 2004)
- What is different about Section 2 Cases?

## Prohibiting Unlawful Conduct is Easy... Not Really

- Restore competition through divestiture or “break up”
- Possible insurmountable organization design problems – mistakes cannot be remedied.
- Prohibit unlawful Exclusive Dealing Contracts.
- Could be easy to prohibit contractually, but what about practices that mimic exclusive dealing?
- Prohibit the tie.
- Again could be easy, but mistake may risk loss of substantial integration efficiencies.
- Prohibit the predatory pricing?
- Remedy itself could easily be anticompetitive.
- Cease and desist orders; revision of relationships between customers or competitors.

## Merger Remedies

- Single Goal:  not to enhance competition, but to restore competition.
- Structural remedy strongly preferred.
- Preserves Efficiencies.

- 	“... restoring competition is the only appropriate goal with respect to crafting merger remedies.”

- – Antitrust Division Policy Guide to Merger Remedies (October 2004)

## Structural Remedy In Mergers Preferred, Conduct Remedy Discouraged

- Preference for structural remedy is stated in terms of problems with conduct remedies:
- Direct Costs of Monitoring.
- Indirect Coasts of efforts to evade the spirit of a decree, while not violating its letter.
- Could constrain procompetitive behavior.
- Constrains firms from responding efficiently to changing market conditions.

## Positive case for Structural Remedy in Mergers

- Mergers are about changing structure – removing competition between rivals.
- Competition that leads to lower prices, improved quality, and more innovation is lost.
- For example, remedies such as price protection cannot reproduce the multiple dimensions over which competition occurs.
- Benefits of competition not restored; remedy can be easy to evade, and evasion hard to monitor.

## Positive Case for Structural Remedies in Mergers (Cont.)

- One purpose of HSR is to allow assets to be divested before the “eggs are scrambled.”
- Preference is for an existing business entity, already well-defined that has both the ability, and incentive to compete.

## There has been a “Market” Test

- The organizational design has already been done in may cases.
- The ability of the assets to compete may have been tested in the pre-merger world.
- Even so, FTC divestiture study (1999) found significant problems.
- Divestitures of ongoing business were more successful.

## Removing Existing Monopoly Power

- In a single firm conduct case, the conduct often arises from the existing monopoly power.
- Thus, relief could change the firm’s structure, such that it no longer has the future ability and incentive to restrain competition.
- Tied to conduct at issue in the case.
- Does that mean looking for a “But For” market structure?

## Appropriate Divisional Lines May Not Exist

- Single firm not necessarily drawn neatly in a way that could satisfy a horizontal divestiture.
- Necessary assets, including intellectual property, to create an immediate going concern where none existed before is a substantial hurdle.  Risk of failure appears higher than in a merger case.
- Rare cases of horizontal separate operating entities that would allow a divestiture of “hard” assets (Exception:  Standard Oil, American Tobacco).
- Rejected in United Shoe Machinery, later in Microsoft.

## Goal in Some Cases Could be to Create Conditions that Change Incentives through Vertical Divestiture

- Vertical Divestitures possibly less costly?
- AT&T (1984) was broken up along operating company lines.
- Even with structural relief required, substantial ongoing monitoring BOC lines of business and interconnection.
- Microsoft – not obvious that Operating System and Applications could be split along clear operating unit lines without huge losses in efficiencies.
- Ongoing monitoring of interaction between divested entities would be required.

## Will the Predicted Market Structure Emerge?	

- Assumes that the market would create the hoped for new structure that theory would predict.
- But the market could have easily returned to its existing through acquisition and internal innovation – ultimately the result of network effects.
- No practical experience (unlike in mergers) regarding what assets are needed to compete effectively.

## Cost/Benefit Balance:  Section 2 vs. Mergers

- Benefits of structural remedy is high in merger context – a market already exists.
- Costs are likely to be low as divestiture can often be accomplished while permitting efficiencies.  Where efficiencies cannot be retained with divestitures, case for divestiture may be weaker.
- Absent any experience with competition benefits of divestiture are more uncertain in the case of monopoly.
- Competitive process is not necessarily enhanced if market could easily revert to monopoly.
- If “But For” market structure is sought, can be difficult to determine appropriate competitive structure.
- Costs could be high in terms of undoing efficiencies derived from a firm’s internal structure.
- May still require ongoing monitoring.

## Behavioral Remedies in Section 2

- Biggest problem is recurrence through evasion.
- Exclusive dealing, tying, bundled discounts, etc. can be prohibited broadly.
- Focuses on the effect of entry as a less costly remedy.
- Broad prohibitions may favor rivals (imposing efficiency costs), but cost seems lower relative to uncertain results of divestiture.
- Favors the competitive process at lower cost by facilitating entry.
- US vs. Dentsply – prohibition on exclusive contracts.
- Post-remedy incentives are clear – benefits potentially excluded rivals through enhancing ability to compete.

## Caveat:  Predatory Pricing

- US vs. American Airlines:  An irremediable violation?
- Prohibition on lowering prices seems anticompetitive.
- Limiting magnitude of price cuts, or require price cuts to be maintained for a certain period, or limit capacity expansions after market entry.
- Break up the airline?  Not clear that hub competition would survive for any length of time.
- Network effects again.
- Fines may be the only remaining remedy.
- If there is no remedy, is there a case?

## Conclusion

- Merger remedies guides point to structural remedies as a preferred outcome.
- The case for divestiture remedies weaker in Section 2 Cases.
- Incidence of the divestiture remedy has been very limited.