# Presentation: 213596

## Unilateral Effects

- A Case Study of the
- Role of Economics
- In
- Antitrust Decision Making
- Presentation to the
- Federal Trade Commission/Antitrust Division Merger Workshop
- February 18, 2004
- Washington, D.C.
- Tad Lipsky
- Latham & Watkins LLP
- Washington, D.C.

## Major Themes

- What are the Economic Issues Relevant to Antitrust Decision Making?
- Who Decides These Issues?
- How Effective is the Use of Economics in Antitrust Decision Making?

## Facts, Models and Econometrics

- Facts
*E.g.*, it costs $10,000,000 and takes a year to build a widget factory
- Models
*E.g.*, output is lower and price is higher in highly concentrated industries, *ceteris paribus*
- Statistical Tests
*E.g.*, the evidence justifies the assumption that 4FCR had no effect on  the wholesale price of silicon-based widgets in the U.S. from  1Q 1990 to  4Q 2000 (*i.e.,* the data failed to reject the null hypothesis to the relevant degree of confidence)

## Seldom-Discussed Points about  Models and Statistical Tests

- The values of the estimated parameters and the validity of the statistical tests are contingent on the truth of the underlying model *(I.e*., Garbage In/Garbage Out)
- Example:  concentration/price and concentration/profit correlations – powerfully suggested by oligopoly models once regarded as canonical – demonstrated in a host of  studies now viewed as discredited
- Skepticism regarding the model resulted from “better” analytical work (*e.g.*, Caves & Porter*) *supported by shift in surrounding approaches and attitudes

## Economic Issues in Antitrust

- Decision Makers are Called Upon to Make Specific Findings and Inferences
- Extent of the Market/Market Power
- Procompetitive Justifications and Rationales for Conduct
- Every Litigant Tells a Story, Every Story Has a Model
- “Model”-Based Decisions of the Post-*Sylvania* Era
*Matsushita – *long-term predatory conspiracy
*State Oil v. Kahn* – maximum vertical price agreements
- _But see:_ *Brooke Group *– “oligopolistic disciplinary pricing”

## Economists Don’t Decide

- Under the law, agency officials, judges and/or juries decide.
- There is no existing institution that can resolve contending economic explanations on a time scale relevant to litigation
- Peer reviewed scholarship
- Long-term belief formation based on collective experience
- Until all judges become economists, there will be continuing tension between expert assessments and decision making by non-experts

## Distant Thunder?

- Judicial dissatisfaction with advocacy economics
*Matsushita *– expert report rejected
*Brooke Group* – testimony disregarded
*Daubert Quartet *– although none is an antitrust decision, arguably this series  is extension of antitrust trend
- Justice Breyer
- Remarks to AAAS, AEI regarding need for filtration of expert views – another expression of  tension inherent in legal system where ultimate decisions are for non-expert courts
- Judge Posner
*HFCS, *an explicit plea for use of Rule 706 appointed experts  by lower courts
- Decisions remarking on theory, like *Asahi Glass v. Pentech Pharmaceuticals *and others too numerous to mention.

## Unilateral Effects – A Case Study

- Foundational insight – customers of A can flee to B.  If A merges with B, some A customers need a new escape
- Modeling real markets – assumptions hold numerous variables constant
- In any specific case,  what econometric evidence would be sufficient to change a view suggested by (informed) intuition?
- Under what circumstances are non-expert decision-makers qualified to assess whether econometric evidence should be accepted as outcome-determinative?

## Lessons of Experience

- Judgment on economic issues – market definition, market power, entry, competitive dynamics – is interactive (*see testimony of *Alfred E. Kahn in *New York v. Kraft (Nabisco*)
- “ . . . experience is deceptive, reasoning difficult.” – Hippocrates *Aphorisms*
- Narrow market definitions, focus on isolated time periods and “super slo-mo” dynamics will support theories of competitive harm in broad class of cases
- Tendency of positions to go to extremes – trains passing in the front office

## Alternatives

- Enhanced reliance on “neutral” experts
- Agency consultants – excluded from subsequent advocacy role?
- Rule 706 – is this any way to earn a living?
- Peer review
- Experiments and studies
- I.O. faculties
- Federal Judicial Center?

## Conclusion

*United States v. Topco*: considering justifications throws antitrust and business planners into “the wilds of economic theory.”
- Welcome to the “wilds.”