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[Senate Hearing 106-994]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 106-994

                          ANTITRUST OVERSIGHT

=======================================================================

                                HEARING

                               before the

                       SUBCOMMITTEE ON ANTITRUST,
                    BUSINESS RIGHTS, AND COMPETITION

                                 of the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 22, 2000

                               __________

                          Serial No. J-106-71

                               __________

         Printed for the use of the Committee on the Judiciary

                               ----------

                   U.S. GOVERNMENT PRINTING OFFICE
72-736                     WASHINGTON : 2001

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                       COMMITTEE ON THE JUDICIARY

                     ORRIN G. HATCH, Utah, Chairman
STROM THURMOND, South Carolina       PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa            EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania          JOSEPH R. BIDEN, Jr., Delaware
JON KYL, Arizona                     HERBERT KOHL, Wisconsin
MIKE DeWINE, Ohio                    DIANNE FEINSTEIN, California
JOHN ASHCROFT, Missouri              RUSSELL D. FEINGOLD, Wisconsin
SPENCER ABRAHAM, Michigan            ROBERT G. TORRICELLI, New Jersey
JEFF SESSIONS, Alabama               CHARLES E. SCHUMER, New York
BOB SMITH, New Hampshire
             Manus Cooney, Chief Counsel and Staff Director
                 Bruce A. Cohen, Minority Chief Counsel
                                 ------                                

      Subcommittee on Antitrust, Business Rights, and Competition

                      MIKE DeWINE, Ohio, Chairman
ORRIN G. HATCH, Utah                 HERBERT KOHL, Wisconsin
ARLEN SPECTER, Pennsylvania          ROBERT G. TORRICELLI, New Jersey
STROM THURMOND, South Carolina       PATRICK J. LEAHY, Vermont
             Pete Levitas, Chief Counsel and Staff Director
        Jon Leibowitz, Minority Chief Counsel and Staff Director

                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

DeWine, Hon. Mike, a U.S. Senator from the State of Ohio.........     1
Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa.    27
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin...     3
Leahy, Hon. Partick J., a U.S. Senator from the State of Vermont.     4

                               WITNESSES

Klein, Joel I., Assistant Attorney General, Antitrust Division, 
  U.S. Department of Justice, prepared statement.................     5
Pitofsky, Robert, Chairman, Federal Trade Commission, prepared 
  statement and attachments......................................    12

 
                          ANTITRUST OVERSIGHT

                              ----------                              

                       WEDNESDAY, MARCH 22, 2000

                           U.S. Senate,    
Subcommittee on Antitrust, Business Rights,
                                   and Competition,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:12 p.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Mike DeWine 
(chairman of the subcommittee) presiding.
    Also present: Senators Grassley, Kohl, and Leahy.

OPENING STATEMENT OF HON. MIKE DeWINE, A U.S. SENATOR FROM THE 
                         STATE OF OHIO

    Senator DeWine. Good afternoon. Welcome to the Antitrust, 
Business Rights, and Competition Subcommittee hearing. This 
hearing is the fourth in a series of antitrust oversight 
hearings held by our subcommittee. We are happy to have back 
here today Assistant Attorney General Joel Klein from the 
Antitrust Division and Chairman Pitofsky from the Federal Trade 
Commission. They will testify about antitrust enforcement 
efforts being made by their respective agencies.
    As they are both aware, the merger wave that has engulfed 
our economy for the last several years shows certainly no signs 
of abating. In fact, the mergers seem to be getting larger in 
size and scope all the time. The most recent example is the 
proposed merger between AOL and Time Warner for $185 billion. 
Moreover, as the American economy becomes more and more 
integrated with the economies of other nations, it is likely 
that more companies will propose mergers as a means to 
successfully compete in the global marketplace.
    These trends indicate that the antitrust enforcement 
agencies will continue to play an important role in maintaining 
the competitive environment necessary for our economy to thrive 
both at home and abroad. Indeed, as international trade and 
business contacts escalate, it will be increasingly important 
for the antitrust agencies to carefully police the actions of 
foreign companies to assure that they are playing by the rules 
of fair competition.
    The Antitrust Division has been particularly successful in 
its efforts to fight international price-fixing cartels. In 
fiscal year 1999, the Antitrust Division collected over $1 
billion in criminal fines, most of which were the result of 
prosecution of foreign cartels. The price-fixing activity 
targeted by the Antitrust Division, this particular activity 
would distort markets, undermine competition, and unfairly 
raise prices for consumers, and I commend their vigilance in 
prosecuting these crimes.
    Part of our effort to combat anti-competitive actions 
abroad is the use of antitrust cooperation agreements with 
foreign enforcement agencies. These agreements have been fairly 
successful in some instances, but we have had some problems 
with their implementation in other cases and we continue to 
face significant challenges with regard to international 
enforcement in general.
    Mr. Klein recognized these difficulties, and 2 years ago, 
the Justice Department appointed an advisory committee to 
examine these issues and to offer recommendations. This group, 
the International Competition Policy Advisory Committee, has 
recently issued its report and we look forward to discussing 
some of the recommendations in our hearing today.
    Before I turn to Senator Kohl, I think it is important to 
discuss one particular aspect of the merger wave, and that is 
the increasing consolidation in the entertainment, news, and 
media industries. I have repeatedly expressed my concern that 
increased consolidation in these industries will decrease the 
number of information and entertainment providers and may 
eventually erode competition in the so-called marketplace of 
ideas. I know that this type of discussion is not part of the 
traditional antitrust analysis, but I believe that such mergers 
do raise important public policy and competition issues and I 
would like to discuss some of those issues today.
    On a related point, some have argued that the mergers in 
media industries and other important industries, such as 
telecommunications, oil, railroads, and defense, have gotten to 
the point where we need to rethink our general approach to 
antitrust analysis. Some people have gone so far as to suggest 
that in reviewing the so-called mega-mergers, antitrust 
enforcement agencies should be examining the ripple effect of 
the deal. In other words, even if a particular merger is not 
anticompetitive, the agencies, it is argued, should consider 
whether that particular merger will kick off a mini-wave of 
industry mergers that will decrease competition and ultimately 
harm consumers.
    I discussed this notion several years ago with our 
witnesses, the same witnesses we have today, in the context of 
defense consolidation. Based on my experience as chairman of 
the Antitrust Subcommittee, I believe it is somewhat risky to 
attempt to predict the future based on just one merger, and I 
think there is good reason to maintain the current standard of 
reviewing mergers one deal at a time. Nonetheless, this issue 
deserves some consideration, especially as we look towards a 
world where key industries at the core of daily life are 
controlled by a handful of very large companies.
    This is an exciting and important time in the arena of 
antitrust enforcement. As consolidation increases, it is 
essential that the antitrust agencies be able to handle 
theincreased merger workload while still maintaining their ability to 
detect and prosecute illegal cartel behavior which harms American 
consumers. This subcommittee will continue to work with our witnesses 
to vigorously address these new challenges and ensure that the 
marketplace remains competitive, both at home and throughout the world, 
and I look forward to discussing with both of our witnesses today how 
we can achieve these goals.
    I turn to the ranking minority member of the committee, 
Senator Kohl.

 STATEMENT OF HON. HERBERT KOHL, A U.S. SENATOR FROM THE STATE 
                          OF WISCONSIN

    Senator Kohl. Thank you. Let me start by commending our 
chairman, Mike DeWine, for ensuring the bipartisanship and 
effectiveness that has characterized our subcommittee's work.
    Today, we are privileged to hear from our two witnesses, 
Joel Klein and Bob Pitofsky. We have been very impressed with 
your leadership, gentlemen, and the talent and skills with 
which you and your dedicated staffs, the unsung heroes of 
antitrust, have enforced the antitrust laws and promoted 
competition in our national economy.
    The past several years have been critical times. We have 
witnessed an incredible wave of mergers and acquisitions, 
touching virtually every sector of our economy. In the space of 
just 8 years, from 1991 to 1999, the value of mergers reviewed 
by the antitrust agencies increased tenfold, from $169 billion 
to over $1.8 trillion. Big is not necessarily bad, to be sure, 
but we must always be careful to ensure that increasing levels 
of concentration do not hurt the folks that we represent.
    Application of antitrust laws is not limited to corporate 
mergers, of course. In industries as varied as computers, 
software, airlines, and food processing, your agencies have 
moved swiftly and decisively to prevent anticompetitive conduct 
by companies that harm consumers.
    The resolution of these issues is ultimately for the 
courts, but let me make plain that we are committed to ensuring 
that you have sufficient resources to do your job, and we will 
reject any effort to play politics with your budget in response 
to your action on any specific case.
    The great increase in merger activity has unquestionably 
burdened your agencies with a very heavy workload and we, 
therefore, support sufficient funding for your budgets. But the 
thresholds under which companies enter into mergers and 
acquisitions must report their transactions to the FTC and 
Department of Justice have not been adjusted even for inflation 
since the passage of Hart-Scott-Rodino in 1976. This has led 
the agencies to review far more transactions, many irrelevant, 
at least from an antitrust perspective, than Congress intended.
    So we have authored, with Senators Hatch and DeWine, 
legislation to raise the pre-merger notification thresholds in 
most cases from $15 million to $35 million. This overdue reform 
will enable you to focus your efforts on the deals which are 
most likely to raise competitive concerns. We intend to work 
closely with you to ensure that nothing in the bill weakens 
your ability, Mr. Klein and Mr. Pitofsky, to carry out your 
responsibilities.
    Unfortunately, Senator DeWine and I do not have as much 
confidence in the FCC's ability to get the job done, so we 
intend to move quickly our legislation to put strict time 
limits on the FCC's merger review process.
    In addition, we also have concerns about the increasing 
level of concentration in agriculture, so we intend to focus on 
this issue because we are very concerned that farmers are 
getting the short end of the stick. Senators Daschle, Leahy, 
and I will soon be introducing a bill on this subject and we 
would like for you to work with us on it.
    One more thing. For a long time, I have wondered how we 
ever got to a system where we have two agencies administering 
exactly the same program. In a perfect world governed by the 
efficiencies that your agencies are asked to promote, I ask, 
would it not be better for all concerned if there was a single 
agency charged with guarding against anticompetitive conduct?
    Mr. Chairman, in this era of ever-quicker technological 
change and ever-increasing corporate consolidation, the need 
for vigorous enforcement of our antitrust laws has never been 
greater. Mr. Klein and Mr. Pitofsky, you both have been equal 
to the challenge and we are very fortunate that you are both 
occupying your offices at this critical time.
    Thank you, Mr. Chairman.
    Senator DeWine. Senator Leahy.

  STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE 
                        STATE OF VERMONT

    Senator Leahy. Thank you, Mr. Chairman. I would join in the 
comments of the distinguished Senator from Wisconsin in 
praising the way you have handled this, but I would include him 
in the praise. He was too modest to include himself, but I 
would. I think the both of you have set a fine standard. It has 
been very helpful to all the other Senators who serve on 
Judiciary on both sides of the aisle because of the leadership 
the two of you have given.
    Mr. Klein, I want to thank you for appointing a special 
counsel on agricultural matters. As Senator Kohl mentioned 
about the legislation that he and I and Senator Daschle and 
others will introduce soon, it is intended to enhance 
competition in rural America and protect farmers and ranchers 
from sometimes deceptive and unfair business practices of 
agribusiness.
    One of the difficulties I have had is knowing who has 
bought whom and when and why and how. A lot of companies are 
buying othercompanies for free, in their thought, because they 
have got highly-inflated stock, part of the exuberance, I suppose, that 
Chairman Greenspan speaks of.
    Unfortunately, we start at a point where you have one 
merger, and this is somewhat related to what Senator DeWine 
said, and then you have a string of defensive mergers. A 
company will buy another company to buy another company to stop 
a company from buying them, and all that fueled by high stock 
prices. In the end, you end up with one huge conglomerate and 
nobody can tell who is in charge.
    I sent a letter recently to Mr. Klein about a company that 
is in a buying frenzy, Suisse Foods of Texas. I know you filed 
a complaint against them in Kentucky because you are concerned 
about potential higher school milk prices. In the competitive 
impact statement filed by the Department of Justice in that 
case, you mentioned that Suisse acquired a company with a 
history of school milk bid rigging, Flavoridge, and now you 
suddenly have a new company, but they own the old company that 
did the bid rigging.
    I remember that case well because I had introduced a bill 
to ensure that dairies which are convicted of school lunch bid 
rigging would be debarred from continuing to participate in the 
school lunch program. I did this from the Agriculture Committee 
because we try to fund the school lunch program, but there is 
only so much money and we need competition to make sure that we 
get what we pay for. That bill became the law of the land with 
very strong bipartisan support.
    The dairy farmers in my part of the country are concerned 
about the unyielding market power of Suisse Foods, but I think 
the concern would be any part of the country, whether it is in 
the Midwest, the West, anywhere else. You want to make sure 
that there is still competition.
     Senator John Sherman, who over a century ago did the 
Sherman Antitrust Act, said that we will not endure a king over 
the production, transportation, and sale of any of the 
necessities of life, and I think we all still feel that way.
    Chairman Pitofsky, I am glad you are here. As I mentioned 
to you before we started, the FTC has been quite busy these 
days. Of course, you have superb people over there, which helps 
a lot, and especially with your very hands-on leadership. You 
are going to have the fun of looking at the AOL-Time Warner 
merger, something that we discussed in this committee. But the 
issue at stake is not just what it does for a company's 
shareholders but what kind of choice we as consumers have. Your 
consumer privacy workshops have been very good, and I do want 
to sit down and talk with you at some point about that. 
Finally, I am also interested in the views of both of you on 
the need for reform for the Hart-Scott Rodino Act.
    I have concerns over the limitations in document production 
under the reform bill introduced by Chairman Hatch and Chairman 
DeWine and Senator Kohl, but I agree with them that we should 
increase the size of the transaction thresholds and adjust the 
fee structure, and that is something I want to work more on.
    Thank you very much.
    Senator DeWine. We will turn to our panel. Joel Klein is, 
of course, the Assistant Attorney General for the Antitrust 
Division at the Department of Justice, a post he has held since 
July of 1997. He is certainly a very familiar face at this 
committee's hearings and we welcome you back, Attorney General 
Klein.
    Robert Pitofsky was sworn in as Chairman of the Federal 
Trade Commission in April 1995. He has also testified many 
times before this committee and we welcome him back, as well.
    Mr. Klein, we will start with you this afternoon, if you 
could just make any opening statement that you wish. Your 
written statement, of course, will be made a part of the 
record.

    STATEMENT OF JOEL I. KLEIN, ASSISTANT ATTORNEY GENERAL, 
         ANTITRUST DIVISION, U.S. DEPARTMENT OF JUSTICE

    Mr. Klein. Thank you very much, Mr. Chairman, Senator Kohl, 
Senator Leahy. I appreciate your kind remarks, and more 
importantly, I want to note that I think the way this 
subcommittee has operated is truly exemplary in terms of 
legislative-executive relationships. Your oversight has been 
tough, it has been constant, it has been vigilant, but it has 
always been fair, and most importantly, I believe the 
commitment of you and Senator Kohl to appropriate antitrust 
enforcement to protect America's consumers, America's 
businesses, and ultimately America's economy, because our 
economy is the strongest in the world in large measure because 
it is the most competitive in the world. And for that, while I 
know on specific cases, like any other matter, we may have a 
difference of views, I think the relationship has really been 
extraordinary and I want to thank both you and the ranking 
member for that, Mr. Chairman.
    Let me just say very briefly, since I think a large part of 
opening remarks actually you already read, so I can be 
mercifully brief here. I do think a lot of great significance 
is going on, both in the American economy--I think this really 
is a watershed time in history. I think one could go back and 
look at the industrial revolution and the agricultural 
revolution and we are now at the third of those great historic 
moments, the technology revolution, coupled with globalization, 
that are related.
    I think the significance of antitrust enforcement to those 
changes is absolutely critical and I think it has now been well 
demonstrated that the role of antitrust in the new economy is 
going to be every bit as important as it was in the old 
economy, and our 100-year history in this endeavor has 
demonstrated to the rest of the world that they have to play 
catch-up, a point that you have noted many times, Mr. Chairman.
    Let me say, with respect to our enforcement efforts, I 
think first and foremost, what has happened in international 
cartel enforcement is truly extraordinary. You mentioned the $1 
billion-plus dollars we brought in in fines last year. That is 
on a criminal enforcement budget that is significantly less 
than $50 million. So those who said we have questioned the 
private market, I propose that we be allowed to take the 
Antitrust Division private. I think those kind of margins would 
do us well.
    More important, we cracked open last year the single 
largest cartel in history, the vitamins cartel, and this has 
had enormous consequence for America's farmers, who have to buy 
these vitamins. These are vitamins they feed to their wildlife. 
What is significant about this is not just that it was such a 
huge conspiracy, but that the hub of this conspiracy, the 
dominant players were all major European companies and it took 
an American enforcement effort to bring down Hoffman-LaRoche, 
BASF, and ultimately Rhone Poulenc, who cooperated with us, and 
I think that has affected a major shift in global attitude.
    Second, last year, as part of our enforcement effort, we 
prosecuted two very high-level executives at the Archer Daniels 
Midland Company, successfully prosecuted, and they are now 
serving time in prison in Illinois, significant prison terms, 
and I think that America has been successful in cartel 
enforcement because we have individual liability and prison 
terms. We currently have two Europeans serving time in American 
prisons in the vitamin cases and those are ongoing 
investigations.
    Second, our civil enforcement program has been, I think, 
very, very robust and I think it raised several key cases with 
respect to monopoly practices, the Microsoft case, the Visa-
MasterCard case, and the American Airlines case, each of which, 
I think, raised important issues about antitrust in the new 
economy. We are enormously gratified by the Federal District 
Court's ruling on findings of fact in the Microsoft case. We 
have a trial scheduled in a couple of months in the Visa-
MasterCard matter, and later toward the end of this year in 
American Airlines.
    I think these cases are going to raise some of the key 
issues about market power in network economies. In each of the 
three cases I have mentioned, what the real barriers to entry 
are all about there are these network effects, these increasing 
returns to scale, which is very different from the kind of 
things we saw during the industrial revolution.
    Finally, you and Senator Kohl have both gone on at some 
length about the merger wave we are experiencing. I do think no 
matter how enormous the numbers are, we cannot fully appreciate 
the real sea change in our economy to see what is going on. We 
have had a strong merger enforcement program. We blocked, as 
you know, Senator DeWine, the Lockheed Martin-Northrup Grumman 
shortly after those hearings we had on defense consolidation, 
and I think that sent an important signal in the defense 
industry.
    You talk about media consolidation. We blocked the 
Primestar acquisition of the Rupert Murdoch assets with respect 
to satellite transmission and we facilitated a close to $2 
billion divestiture of the Internet backbone assets in the 
Worldcom-MCI merger.
    In the farming area, we have had several key cases, one of 
which I would simply mention, the Cargill-Continental case, not 
just because of the significance on farm producers in the 
United States, but also because that is one of two cases we 
brought in the past several months where, for thefirst time in 
a long time, we asserted a buyer power, not a seller power, but a buyer 
power theory. That is, the producers who have to sell to these large 
conglomerates could have been hurt in an anticompetitive fashion, and I 
think that marks a step that reflects our vigilance and concern in this 
area. In addition, we took an action with respect to a tractor merger, 
and finally with respect to two big agribusiness biotechnology issues 
involving the Monsanto Company.
    Lastly, Mr. Chairman, let me just note that your concerns 
about international enforcement and our relationship with our 
trading partners throughout the world continues to be a great 
concern to us. We are analyzing the ICPAC, the Competition 
Policy Advisory Committee's report, and I will say here now we 
have had some success with respect to the Saber matter on a 
positive comity referral and this committee has been tough with 
us on positive comity, but I think your suggestions and your 
recommendations have helped strengthen the process and I want 
to thank you for that, as well.
    Senator DeWine. Mr. Klein, thank you very much.
    [The prepared statement of Mr. Klein follows:]

                  Prepared Statement of Joel I. Klein

    Good afternoon, Mr. Chairman and members of the Subcommittee. It is 
a pleasure for me to appear again before you today on behalf of the 
Antitrust Division of the Department of Justice. I would like to say a 
few words about the current environment in which we enforce the 
antitrust laws, and then highlight some of our recent enforcement 
initiatives.
    As members of this Subcommittee appreciate, sound antitrust 
enforcement is vital to America's economic health. Competition is the 
cornerstone of this country's economic foundation. American consumers 
and businesses all benefit from the kind of robust free-market economy 
that antitrust enforcement promotes and protects. Effective antitrust 
enforcement helps consumers obtain more innovative, high-quality goods 
and services at lower prices, and enhances the competitiveness of 
American businesses in the global marketplace by promoting healthy 
rivalry, encouraging efficiency, and ensuring a full measure of 
opportunity for all competitors.
    Antitrust enforcement has rightly enjoyed substantial bipartisan 
support through the years, and we appreciate the active interest and 
strong support this Subcommittee has shown toward our law enforcement 
mission.
    Our economy is in the midst of dramatic changes, with increased 
globalization and rapid technological innovation, and deregulation 
creating an environment in which many firms are choosing to merge or 
undertake other types of strategic business alliances. While most of 
these arrangements foster efficiency to the benefit of consumers and 
businesses alike, some can result in market power that decreases 
competition. That is why we must look at these arrangements carefully, 
so that we can take appropriate steps to protect American consumers and 
businesses from those that threaten competition.

                    RESPONDING TO CURRENT CHALLENGES

    Before I turn to some of our recent enforcement actions, let me 
talk for a minute about what the changes in the marketplace mean for 
antitrust enforcement, and how we are responding.
Globalization of markets
    We are responding to the fact that we live in a global marketplace. 
Our legal authority under the antitrust laws reaches anticompetitive 
conduct that take place off U.S. soil if it has significant effects 
here, as reaffirmed most recently in the Nippon Paper Industries Co. 
case. But to make effective use of that authority, we often need help 
from foreign competition authorities to obtain crucial evidence. We 
have negotiated numerous mutual assistance agreements with our foreign 
counterparts to facilitate this kind of cooperation, including one 
agreement thus far, with Australia, under the International Antitrust 
Enforcement Assistance Act of 1994, which allows us to share certain 
confidential information under appropriate protections.
    There are an increasing number of mergers that cross international 
boundaries and are subject to review by more than one country's 
antitrust authority. To minimize the burden of multi-jurisdictional 
review on merging parties, and the conflicts that can result from 
differing conclusions regarding a merger, we have worked hard to 
cultivate good relations with foreign enforcers so that we understand 
each other's merger enforcement policies and practices, and to 
coordinate where it makes sense, bearing in mind each country's 
understandable interest in conducting its own review of mergers that 
impact its markets. We learned some valuable lessons from the Boeing/
McDonnell-Douglas merger, where the FTC and the EC reached differing 
conclusions. I believe the more recent MCI/WorldCom and Dresser/
Halliburton mergers are a good model for how close consultation in 
international merger enforcement can and should work. The parties 
agreed to waive confidentiality, enabling us and the EC to share our 
independent analyses as they evolved, and we ultimately reached 
essentially the same conclusions. We've formed a U.S.-EU merger working 
group, along with theFTC, to build on our experiences in these cases.
    At times, due to jurisdictional and practical limitations, it may 
make more sense, if a foreign country's markets are most directly 
affected, for the antitrust authority in that country to investigate a 
matter in the first instance. To that end, we have included so-called 
``positive comity'' provisions in bilateral cooperation agreements with 
several of our major trading partners, including the European Union, 
Canada, Japan, Israel, and Brazil--as well as a special enhanced 
positive comity agreement with the EU. Our one formal positive comity 
experience to date--the referral to the European Commission of possible 
anticompetitive conduct by several European airlines with respect to 
computer reservation systems--has thus far been successful. The 
Subcommittee has played an important constructive role in our thinking 
about how to make positive comity an effective tool in international 
antitrust enforcement.

Rapid technological change
    We have also responded to the challenges posed by the rapid 
technological advances evidenced in many industries. We spend 
significant time and energy developing the expertise needed to 
understand the competitive impact of the new technology. We are mindful 
that technological change can bring industries previously considered 
separate and distinct into the same competitive marketplace. And we 
critically evaluate the increasingly frequent claim by the parties we 
are investigating, that technology is changing their industry so 
rapidly that we should not be concerned. We know, however, that in some 
cases rapid technological change can actually increase barriers to 
entry through network externalities and first mover advantages that may 
cause the market to tip quickly toward a dominant supplier and thereby 
make new entry extremely difficult.
    The more important that innovation becomes to society, the more 
important it is to preserve economic incentives to innovate. Timely and 
effective antitrust enforcement may be essential to preserving the kind 
of environment in which companies new and old, large and small, can be 
confident that there will be no anticompetitive barriers to bringing 
their new products and services to market.

Deregulation and the introduction of competition
    In recent decades, legislative and regulatory changes in the United 
States have reversed a generation of pervasive government regulation 
and deregulated such basic industries as telecommunications, energy, 
financial services, and transportation. As competition displaces 
regulation as the industry norm, antitrust enforcement becomes 
important to ensuring that the procompetitive goals of deregulation can 
be achieved. In telecommunications, we are seeing the effects of the 
1996 Act unfold. When successfully implemented, that Act will 
significantly restructure the industry and bring enormous competitive 
benefits to consumers and the economy; but bringing competition to 
segments of an industry in which regulated monopolies have long held 
sway will not be fully accomplished overnight. In addition the role we 
play in advising the Federal Communications Commission on section 271 
long-distance entry applications, helping to ensure that the local 
market is open to competition before long distance entry is granted, we 
are also paying close attention to mergers and alliances being 
undertaken in response to deregulation, to ensure that competition is 
able to spread and flourish.
    For example, we challenged the proposed acquisition by Primestar, a 
joint venture controlled by five of the largest cable companies in the 
U.S., of the direct broadcast satellite assets of News Corp. and MCI, 
because we were concerned that it would allow those cable companies to 
prolong their monopoly in multi-channel video programming distribution. 
The assets in question included a satellite at the last orbital slot 
available to independent DBS firms for reaching the entire continental 
U.S., and allowing it to be transferred to the dominant cable companies 
would have eliminated one of the most important avenues of new 
competition to cable. In the face of our challenge, Primestar abandoned 
the acquisition.
    The electric power industry is beginning to follow a similar path 
from regulation to competition, and we and others in the Administration 
look forward to working with Congress to ensure that regulatory 
restructuring at the federal level is consistent with fundamental 
competitive principles, and that competition is protected and nurtured 
as restructuring in the industry proceeds.

                     RECENT ENFORCEMENT INITIATIVES

    I would not like to highlight a few of our important enforcement 
initiatives over the past year or so, first in criminal enforcement, 
then in merger enforcement, and finally in civil non-merger 
enforcement.

Criminal enforcement
    In the area of criminal enforcement, we are continuing to more 
forcefully against hard-core antitrust violations such as price-fixing 
and market allocation. In the past few years, a significant number of 
our prosecutions have been against international price-fixing cartels 
that have directly impacted substantial volumes of U.S. commerce. We 
have found that many of these international price-fixing cartels were 
highly sophisticated, involved leading firms in the industry, and 
affected a wide variety of goods sold to business and individual 
consumers. Theyare also often particularly brazen.
    The past fiscal year set yet another new record in terms of 
criminal antitrust fines secured, on top of several previous record-
breaking years--a total of $1.1 billion. One single fine, the $500 
million fine against Swiss pharmaceutical giant F. Hoffman La Roche in 
relation to the international vitamin cartel, was the largest criminal 
fine in the entire history of the Department of Justice, antitrust or 
otherwise.
    You should not presume that we will continue breaking records every 
year. The order of magnitude of criminal antitrust fines since fiscal 
year 1997 is unprecedented--in the previous decade, they averaged $29 
million annually, and that average was itself higher than previous 
periods. In fact, the amount of fines obtained since fiscal year 1997 
is many multiples higher than the sum total of all criminal fines 
imposed previously for violations of the Sherman Act, dating all the 
way back to the Act's inception in 1890. The fiscal year 1999 record 
was itself an almost four-fold leap over the record set the previous 
year. But the recent fine levels are a direct result of our sustained 
effort to crack not just domestic price-fixing schemes, but also to 
focus our resources on the biggest international cartels that victimize 
American consumers and businesses, to bring the violators to justice, 
and to send a strong deterrent message throughout the world--and effort 
that we will continue.
    International cartels typically pose an even greater threat to 
American businesses and consumers than domestic conspiracies, because 
they tend to be extremely broad in geographic scope and amount of 
commerce affected, as well as highly sophisticated, characterized by 
precise and elaborate agreements among the conspirators to carve up the 
world market by allocating sales volumes among themselves and agreeing 
on what prices would be charged to customers around the world, 
including in the United States.
    International cartels victimize a broad spectrum of U.S. commerce, 
costing American businesses and consumers hundreds of millions of 
dollars a year.
    The record-setting fine I mentioned a minute ago resulted from a 
major investigation into an international cartel organized to fix 
prices and allocate market shares for vitamins. The conspiracy affected 
$5 billion in U.S. commerce, involving vitamins used not only as 
nutritional supplements and food additives, but also as important 
additives in animal feed; it may well be the most harmful conspiracy we 
have ever uncovered. The victims who purchased directly from the cartel 
members included companies with household names such as General Mills, 
Kellogg, Coca-Cola, Tyson Foods, and Proctor and Gamble. As a result, 
for nearly a decade, every American consumer--anyone who took a 
vitamin, drank a glass of milk, had a bowl of cereal, or ate a steak--
ended up paying more so that conspirators could reap hundreds of 
millions of dollars in additional, ill-gotten revenues.
    Last May, two firms, F. Hoffman-La Roche and a German firm, BASF 
Aktiengesellschaft, agreed to plead guilty, with Hoffman-La Roche to 
pay a fine of $500 million and BASF to pay a fine of $225 million. 
These prosecutions are part of an ongoing investigation of the 
worldwide vitamin industry in which there have been 14 prosecutions to 
date. It has resulted thus far in convictions against Swiss, German, 
Canadian, and Japanese firms, with over $875 million in criminal fines 
against the corporate defendants, and in convictions against seven 
American and foreign executives who are now serving time in federal 
prison or awaiting potential jail sentences along with heavy fines.
    Other industries where we have brought major criminal prosecutions 
recently, in addition to vitamins, include: graphic electrodes used in 
electric arc furnaces in steel mills to melt scrap steel; sorbates used 
as chemical preservatives to prevent mold in cheese, baked goods, and 
other food products; marine construction and transportation services; 
point-of purchase display materials such as plastic and neon signs; the 
livestock feed additive lysine; citric acid; the industrial cleaner 
sodium gluconate; commercial explosives; real estate foreclosure 
auctions; and metal buildings insulation.
    International enforcement of our criminal antitrust laws is a top 
priority of the Antitrust Division. At present, more than 35 sitting 
U.S. antitrust grand juries are looking into suspected international 
cartel activity. We are determined that international cartels not be 
permitted to prey on American businesses and consumers with impunity. 
An equally important goal is to ensure that every business person 
around the world who contemplates price-fixing behavior that could 
adversely impact American businesses and consumers will choose to forgo 
such illegal activity because of concern that we will find out about it 
and prosecute to the full extent of the law. Our efforts to achieve 
that goal will continue unabated this year and for years to come.

Merger enforcement
    We are in the midst of a continuing merger wave throughout our 
economy. A record $1.4 trillion in U.S. merger transactions took place 
in 1999. In each of the last two fiscal years, more than 4600 
transactions were reported to us under the Hart-Scott-Rodino Act, the 
most in our history, and more than double the number being filed per 
year just a few years ago. And in the first five months of fiscal year 
2000 there have been more than 2000 reported transactions, an 
approximately 18-percent jump over the same period in the previous 
fiscal year.
    We have devoted tremendous energy to staying on top of this merger 
wave, so that we can challenge the mergers that would harm competition 
while minimizing any delays and disruptions in competitively beneficial 
or benign business combinations, which constitute the overwhelmingly 
majority.
    In the last fiscal year, we brought 47 merger challenges, the 
highest level of merger enforcement in our history. So far this fiscal 
year, we have brought 12 more. While most of our merger challenges have 
been resolved by consent decrees, we have not hesitated to seek to 
block transactions in their entirety when necessary to preserve 
competition. Both the Lockheed Martin/Northrop Grumman and the 
Primestar transactions were abandoned after we filed complaints and 
were well into discovery, and parties have abandoned other 
transactions, such as Monsanto/Delta & Pine Land, after learning of our 
intention to sue. Since July 1, 1997, we have gone to court nine times 
to full-stop block merger transactions; and on seven other occasions we 
have been prepared to go to court to full-stop block a merger, but the 
parties abandoned the transaction prior to our filing a lawsuit.
    Our important merger enforcement actions of the past year include 
the Cargill/Continental Grain merger, where we insisted on divestitures 
in a number of grain storage facilities throughout the Midwest and in 
the West, as well as in the Texas Gulf, to protect competitive options 
for grain and soybean producers and to protect competition in the 
delivery points for the corn and soybean futures markets. This was a 
particularly important case in that it demonstrates that antitrust 
enforcement is concerned not only with market power in the possession 
of sellers, but so-called ``monopsony'' power in the possession of 
buyers. In this case, the concerns that led to our challenge had to do 
entirely with the creation of monopsony power in the mergers firm as 
buyers of grain and soybeans.
    In addition to Cargill/Continental and Primestar, other recent 
merger challenges include:
     Lockheed/Northrup Grumman, where the merger would have 
resulted in unprecedented vertical and horizontal concentration in the 
defense industry, substantially lessening and in some cases outright 
eliminating competition in major product markets critical to our 
national defense. In the face of our challenge, the parties abandoned 
the merger.
     Northwest/Continental, where the proposed transaction 
would allow Northwest to acquire voting control over Continental, 
substantially diminishing the incentives for the two airlines--the 
nation's fourth and fifth largest--to compete against each other. This 
case is pending and is currently scheduled for trial in October.
     Monsanto/Dekalb Genetics, where the merger as proposed 
would have substantially lessened competition in biotechnological 
innovation in corn. Monsanto agreed to spin off claims to an important 
cutting-edge technology used to introduce new genetic traits into corn 
seed, and to license its proprietary Holden's corn germplasm, to 
numerous seed companies so they could develop their own special 
hybrids.

Civil non-merger enforcement
    Civil non-merger enforcement has become especially important in 
this era of rapid technological change and the growth of network 
industries, and we have also been very active in this area to ensure 
that antitrust enforcement keeps up with these changes to protect 
competition in a variety of industries important to our economy.
    Perhaps our best-known recent civil non-merger case is our pending 
case against Microsoft under sections 1 and 2 of the Sherman Act for 
its efforts to use exclusionary practices to protect its monopoly in 
personal computer operating systems and to extend its monopoly power 
into the Internet browser market. As you know, Judge Jackson issued 
findings of fact in November, the parties have filed briefs as to 
proposed conclusions of law and concluded oral arguments, and we are 
now awaiting the court's conclusions of law.
    The Microsoft case is obviously one of our top priorities, and we 
consider it to be very important for our economy. But let me turn 
briefly to a few of our other important civil non-merger cases.
    First let me say a few words about our pending case against 
American Airlines under section 2 of the Sherman Act for monopolizing 
airline passenger service on routes emanating from its hub at Dallas/
Ft. Worth International Airport. As the complaint we filed sets forth 
in detail, American repeatedly sought to drive small, start-up airlines 
out of DFW by saturating their routes with additional flights and cut-
rate fares. After it succeeded in driving out the new entrant, American 
would re-establish high fares and reduce service. Passenger traffic 
surged when the low-cost airline began operations and more people could 
afford to fly, and then fell back dramatically after American had 
driven out the upstart and resumed monopoly pricing. American knew this 
strategy was a money-loser in the short term, but expected to make that 
up by preserving its ability to set fares at monopoly levels.
    American, like anyone else in our capitalist economy, is free to 
compete, and compete aggressively. But is crossed a fundamental line 
into predation. This is the first predation case brought against an 
airline by the Antitrust Division sincethe industry was deregulated in 
1979. I think it will be tremendously important for our traveling 
public throughout the country, who deserve the lower fares and expanded 
choices available in a competitive airline marketplace.
    Out case against VISA/MasterCard is also an important civil non-
merger enforcement action. We are charging VISA and MasterCard, the two 
dominant general purpose credit card networks, with restraining 
competition among themselves through overlapping governance 
arrangements among the large banks that own and control them, as well 
as adopting rules to prevent their member banks from dealing with other 
credit card networks. The result is that competition and innovation are 
severely impaired. This case is also pending, and trial is expected 
this summer.
    A third civil non-merger case I'll mention is our case against 
Dentsply International for unlawfully maintaining a monopoly in the 
market for artificial teeth in the U.S. Dentsply entered into 
restrictive dealing arrangements with more than 80 percent of the 
nation's tooth distributors, preventing them from selling products made 
by its competitors. Dentsply's efforts to deprive its rivals of an 
effective distribution network have resulted in increased prices for 
artificial teeth; they have reduced innovation; they have prevented 
other firms from competing effectively; and they have deterred new 
entry into the market. Trial in this case is expected sometime this 
year.

                 ANTITRUST DIVISION BUDGET AND STAFFING

    As you can see, our workload is expanding, its complexity is 
increasing, and its importance to American businesses and consumers has 
never been greater. To continue to effectively carry out our mission, 
we need increased resources.
    For the current fiscal year, the Antitrust Division's budget is 
$110 million, providing for an appropriated staffing level of 
approximately 360 attorneys. In light of our tremendous ongoing 
workload and its projected expansion, the President's fiscal year 2001 
budget request for the Antitrust Division is $134 million, which 
includes increases to handle cost-of-living expenses as well as to hire 
additional attorneys, economists, paralegals, economic research 
assistants, and other critical support. This increase is needed in 
light of our increasing workload and the clear importance of 
competition to the nation's economic health and prosperity. It will for 
the first time in 20 years enable us to bring our staffing level back 
to where it was in 1980, a time when the economy was significantly 
smaller, less complex, and less globalized. I can assure you that we 
will put the additional resources to productive and cost-effective use.

                               CONCLUSION

    The Supreme Court has described the Sherman Act as the ``Magna 
Carta'' of the free enterprise system. The responsibility we are given 
to enforce it is one we take very seriously. We are working hard to 
carry out our enforcement mission to protect competition in the 
marketplace against private efforts to thwart it. We are not in the 
business of picking winners and losers. In a free market economy, that 
responsibility falls to consumers, who make that determination through 
their purchasing decisions. The job of the antitrust enforcement is to 
ensure that the benefits of the competitive process are not blocked by 
private anticompetitive conduct. We look forward to meeting the ongoing 
challenge to ensure that businesses can compete on a level playing 
field and that consumers and businesses are benefited by competition 
that produces low prices, high quality, and innovative goods and 
services.

    Senator DeWine. Chairman Pitofsky, thank you very much for 
joining us.

     STATEMENT OF ROBERT PITOFSKY, CHAIRMAN, FEDERAL TRADE 
                           COMMISSION

    Mr. Pitofsky. Thank you, Mr. Chairman.
    Senator DeWine. We are glad to have you back.
    Mr. Pitofsky. Thank you very much. Senator Kohl, Senator 
Grassley, as always, I am very pleased to appear before this 
committee to discuss the FTC's activities in antitrust 
enforcement.
    In my years at the agency, we have worked in an 
exceptionally constructive way with members of this committee 
and I want to echo what my friend Joel Klein just said, that we 
appreciate the support and the guidance that we have received 
in the oversight process. In my experience, I have not seen as 
fine a relationship between an oversight committee and a 
regulatory agency than we have seen with this group.
    This is an unusually interesting time to be engaged in 
antitrust enforcement. There have been several mentions already 
of the merger wave, and I am sure we will come back to that; 
rapid globalization of trade, which changes the nature of 
measurement of market power; rapid expansion of the high-tech 
sector of the economy, which means you have to be careful in 
applying old precedent to very new structures; deregulation of 
vast sectors of the economy, including telecommunications and 
electricity; and finally from our point of view, because we are 
so committed to enforcement in this area, a distribution 
revolution which has opened up markets to access and consumers 
to greater opportunities for choice. I have in mind principally 
the online commerce sector, which was $15 billion this year and 
is predicted to be $78 billion by 2003.
    The challenge is to take this 19th century discipline which 
has served this country so well and apply it to 21st century 
problems. I know that we have to adjust in applying precedent 
in this area and I hope we are in the process of doing so.
    I would like to single out just three areas of the many 
that we are involved in for a statement. First, the merger 
wave, 3 times as many filings in 1999 as 1991, and now we find 
this year filings are up another 18 percent. One cannot help 
asking where this will all end, 10 or 11 times as many assets 
scooped up in mergers as 10 years ago.
    My own view is that the merger wave is not the problem. It 
is primarily a consequence, an inevitable consequence, of the 
most dynamic economy this country has seen in a generation. The 
problem is, the mega-mergers that we see now, some of which are 
exceeding $100 billion in value, among firms that already have 
great market power and sometimes between firms that are direct 
competitors with each other.
    Nevertheless, the fact is that we thoroughly investigate 
only 3 percent of the mergers that are filed. We challenge a 
little over 1 percent. Ninety-eight or 99 percent of these 
mergers go through, but the ones that do not, I think deserve 
very aggressive review.
    On distribution, my own view is that the United States has 
the most open wholesaling and retail sector of its economy of 
any country in the world. I think it has served the country 
well and I believe that one of the success stories of antitrust 
is the way it has kept distribution open.
    But now we find new challenges. For example, I mentioned 
online distribution. One of the more interesting cases in the 
last year involved a pattern of behavior in which 25 
conventional Chrysler dealers went to the Chrysler Company and 
said, there is somebody selling cars on the Internet at a very 
low price. Do something about that company. Cut them back. Cut 
them down. Chrysler referred their complaint to us and we 
entered into a consent order preventing that kind of behavior. 
It was a fairly conventional boycott. I hope that our action in 
that area will convince other brick-and-mortar distributors 
that that is not an appropriate way to deal with the new 
competition offered on the Internet.
    We challenged a proposed vertical merger between Barnesand 
Noble, the number one book-selling chain in the United States, and 
Ingram, the number one retailer, because we were concerned that small 
booksellers and new entrants in the Internet sector of book selling 
would not have a secure wholesale source of supply. That deal was 
abandoned before we got to court, but it seems to me, again, it was an 
effort to keep markets open.
    Finally, just a few weeks ago, we settled a case with 
McCormick spice company. Our complaint alleged that they were 
providing discriminatory discounts in the nature of slotting 
allowances, shelf space allowances, conditioned on the chain 
giving McCormick spice 70 or 80 percent of the shelf space in 
the store, injuring smaller competitors in the spice market, 
disadvantaging smaller chains and independents who did not 
receive the discount.
    I believe the case was important. I am even more 
enthusiastic about the fact that we will hold a workshop at the 
FTC in a month or two in which we will invite private sector 
people, consumer people, academics, to discuss the role of 
slotting allowances in the modern economy. I think that is in 
the tradition of my agency, which is not supposed to be just a 
law enforcement agency but is supposed to anticipate commercial 
problems and report findings to Congress.
    Finally, very briefly, we spend a lot of our resources on 
the health care market because inflation in that area seems to 
be quite pronounced, the usual merger concerns among 
pharmaceutical firms. We have a case in court now in which the 
allegation is that Mylan, a genetic pharmaceutical firm, 
cornered the market, allegedly, on a key ingredient for their 
product, and having cornered the market, raised the price in 
January 1998, from $11.36 for 500 capsules to $377, and this 
was a product needed by many people who are on rather fixed 
incomes. An unusual aspect of the case is that we are seeking 
not just the conduct remedy, but disgorgement of allegedly ill-
gotten profits.
    Finally, we brought a case just--well, two cases came up 
just 2 weeks ago, one we settled and one we are going to be in 
court on, involving rather similar conduct, and that is a 
situation in which a branded pharmaceutical, as it sees its 
patent winding down and is threatened by a challenge by a 
generic, enters into an agreement with the generic firm, paying 
millions of dollars per month for the generic firm to stay out 
of the market or to delay its entry into the market. We settled 
one case and we will litigate the other. The question of 
competition between branded pharmaceuticals and generics is one 
that we are paying a lot of attention to at the present time.
    Let me simply conclude where you started, Mr. Chairman. We 
are extremely busy. I think we can handle the merger wave by 
reassigning people from one part of our agency to the other. I 
do worry that there are conduct cases that are not being 
handled as aggressively and as promptly as they should be 
because our resources have been moved so much in the direction 
of merger review.
    Thank you very much, and I look forward to answering your 
questions.
    Senator DeWine. Mr. Chairman, thank you very much.
    [The prepared statement of Mr. Pitofsky follows:]

                 Prepared Statement of Robert Pitofsky

    Mr. Chairman and Members of the Subcommittee, I am pleased to 
appear before you to present testimony of the Federal Trade Commission 
that will provide an overview of our antitrust enforcement activities. 
Today I will review the Commission's activities since I last testified 
for general antitrust oversight purposes. The Commission is charged 
with the enormous responsibility of ensuring that consumers receive the 
benefits of a competitive marketplace, a mission that we share with the 
U.S. Department of Justice. We welcome that responsibility and believe 
that we are fulfilling our obligation.
    The Commission strongly believes in the bedrock principle that 
protecting competition by preventing improper creation, acquisition, or 
exercise of market power enhances the welfare of consumers. Congress 
decided long ago that a competitive economy is vastly preferable to an 
economy reliant on government regulation of the conduct of firms with 
market power. Competition is the best way to ensure that consumers 
receive the benefits of lower prices, higher quality and quantity of 
goods and services, and greater innovation. That approach has been 
validated throughout the past hundred and ten years of antitrust 
enforcement.
    These are dynamic times for the economy, and with these changes 
come many challenges for the antitrust agencies. The economy is rapidly 
being reshaped, and markets are being created or redefined, by numerous 
forces operating at the same time, including: the explosion of 
electronic commerce; deregulation of critical industries such as 
telecommunications, financial services and electricity; convergence of 
technologies and, indeed, of markets; and globalization. These forces 
result in a fast-changing, more complex economy, even with respect to 
basic sectors of the economy such as electricity. While these changes 
carry the promise of tremendous benefits for consumers, some may also 
create incentives and opportunities for anticompetitivebehavior. The 
challenge for us, apart from the sheer magnitude of the amount of 
activity, is to understand these changes and to know when antitrust 
intervention is appropriate.
    The Commission's approach to antitrust enforcement is guided by two 
important principles. First, we seek to enforce the antitrust laws with 
vigor, and protect consumers from abuses of market power in whatever 
form. It is the Commission's responsibility to protect consumers from 
anticompetitive consequences of private agreements, the abuse of 
monopoly power, or illegal mergers. The Commission also recognizes, 
however, the costs that government intervention can place on private 
parties. For this reason, our second guiding principle is to avoid 
unnecessary intrusions and to minimize, to the extent possible, the 
burdens placed on businesses by our efforts to protect consumers. We 
have an important responsibility to ensure that antitrust policy makes 
sense and is sensibly and effectively applied.
    I will begin this overview with a topic that is not new news, but 
is still big news--the astounding level of merger activity. We are 
busier than ever on that front. I will review some recent merger 
enforcement actions that have had particularly immediate significance 
for consumers. I will then cover several other areas that receive our 
close attention: competitor collaborations, retailing, and health care 
markets.

                        LEVEL OF MERGER ACTIVITY

    The number of mergers reported to the FTC and the Justice 
Department pursuant to the Hart-Scott-Rodino Act has more than tripled 
over the past decade, from 1,529 transactions in fiscal year 1991 to 
4,642 transactions in fiscal 1999. Thus far in fiscal year 2000, 
filings are at a record pace; if this continues, filings for the year 
will be approximately 18% above the record set in fiscal 1998.
    Currently, more than two-thirds of our competition resources are 
dedicated to merger enforcement, compared to an historical average of 
closer to 50 percent. The merger wave strains the FTC resources to the 
breaking point. The Washington Post recently characterized the merger 
wave as a ``frenzy of merger madness, capping a dramatic wave of 
corporate consolidation that has been gaining momentum through much of 
the decade.'' \1\ The article quotes merger experts who note that a key 
force driving merger activity is the new world of electronic commerce.
---------------------------------------------------------------------------
    \1\ Sandra Sugawara, Merger Wave Accelerated '98: Economy, Internet 
Driving Acquisition, Wash. Post, Dec. 31, 1999 at El.
---------------------------------------------------------------------------
    While the number of merger filings has more than tripled in the 
past decade, the dollar value of commerce affected by these mergers 
rises on an even steeper trajectory, increasing an astounding eleven-
fold during the past decade.\2\ But mere numbers do not fully capture 
the complexity and the challenge of the current merger wave. Today's 
merger transactions not only are larger, but often raise novel or 
complex competitive issues requiring more detailed analysis. In the 
past year alone, companies filed notifications for 273 mergers with a 
transaction size of one billion dollars or more, and many of these 
mergers involved overlaps in several products or services.
---------------------------------------------------------------------------
    \2\ See Attachment 1.
---------------------------------------------------------------------------
    There are many reasons for the current merger wave. A large 
percentage of these transactions appear to be a strategic response to 
an increasingly global economy. Many are in response to new economic 
conditions produced by deregulation (e.g. telecommunications, financial 
services, and electric utilities). Still others result from the desire 
to reduce overcapacity in more mature industries. The rapidly evolving 
world of electronic commerce has a substantial impact on the merger 
wave, because consolidations often quickly follow the emergence of a 
new marketplace. These factors indicate that the merger wave reflects a 
dynamic economy, which on the whole is a positive phenomenon. But some 
mergers, as well as some other forms of potentially anticompetitive 
conduct, may be designed to stifle competition in important sectors of 
this dynamic economy.
    Out of necessity, our scarce resources are directed at preserving 
competition in the most important areas of the economy. The Commission 
dedicates the bulk of its antitrust enforcement to sectors that are 
critical to our everyday lives, such as health care, pharmaceuticals, 
retailing, information and technology, energy, and other consumer and 
intermediate goods. Rather than recite a litany of cases, I will focus 
on some cases that underscore the importance of the Commission's 
antitrust enforcement as we move forward in this new century.

                           MERGER ENFORCEMENT

    In the last two fiscal years and fiscal 2000 to date, the 
Commission has brought over 60 enforcement actions in industries 
ranging from food retailing to basic industrial products.\3\ Retailing, 
energy, and pharmaceuticals commanded the most enforcement 
resources.\4\
---------------------------------------------------------------------------
    \3\ In addition, 19 merger filings were withdrawn before the 
Commission's investigation was completed.
    \4\ Telecommunications, especially in the areas of cable and video 
programming, also has been, and continues to be, an area of substantial 
activity. See Prepared Statement of the Federal Trade Commission, 
Presented by Robert Pitofsky, Chairman, Before The Committee on 
Commerce, Science, and Transportation, United States Senate, November 
8, 1999.
---------------------------------------------------------------------------
    The Commission has committed considerable resources to addressing 
the wave of consolidation in the petroleum and gasoline industry. In 
fiscal years 1999 and 2000 to date, the FTC's Bureau of Competition 
used a staggering one-third of its enforcement budget to address issues 
in energy industries. In February of this year, we filed an action in 
federal district court in San Francisco seeking a preliminary 
injunction against the proposed merger of BP Amoco p.l.c. and Atlantic 
Richfield Company (``ARCO'').\5\ The complaint alleges that the merger 
would combine the two largest firms exploring for and producing crude 
oil on the North Slope in Alaska; that BP already exercises market 
power in the sale of crude oil on the West Coast; and that by acquiring 
ARCO, BP would eliminate as an independent competitor the firm most 
likely to threaten BP's market power. ARCO, the pioneer on the North 
Slope, has been the most aggressive explorer for oil in Alaska's 
history.\6\ The Commission's suit has been joined by suits filed by the 
States of California, Oregon, and Washington. This is the latest of a 
number of enforcement actions in which the Commission worked with 
various states in pursuit of our common interest in protecting American 
consumers. Last week, the Commission, the states and the parties 
obtained an order from the Court adjourning the preliminary injunction 
hearing while the Commission evaluates the parties' proposal to sell 
all of ARCO's Alaska operations to Phillips Petroleum Co.
---------------------------------------------------------------------------
    \5\ Federal Trade Commission v. BP Amoco, p.l.c., Civ. No C 000416 
(SI) (N.D. Cal. Feb. 4, 2000) (complaint).
    \6\ The complaint also alleges that the combination of BP's and 
ARCO's pipeline and oil storage facilities in and around Cushing, 
Oklahoma, a major crude oil trading center, would enable the combined 
firm to manipulate the market for crude oil futures contracts traded on 
the New York Mercantile Exchange. Those contracts involve crude oil 
designated for delivery in Cushing. The complaint alleges that the 
combination of BP's futures trading business and existing pipeline and 
terminal facilities with ARCO's pipelines, oil storage infrastructure, 
and inline transfer business would increase BP's ability to manipulate 
crude oil futures trading by giving it access to information and 
control over pipelines and other essential facilities.
---------------------------------------------------------------------------
    The BP/ARCO case comes on the heels of the Commission's 
investigation of the merger between Exxon and Mobil. After an extensive 
review, from oil fields to the gas pump, theCommission required the 
largest retail divestiture in FTC history--the sale or assignment of 
2,431 Exxon and Mobil gas stations in the Northeast and Mid-Atlantic, 
and California, Texas and Guam.\7\ The Commission also ordered the 
divestiture of Exxon's Benicia refinery in California; light petroleum 
terminals in Boston, Massachusetts, Manassas, Virginia, and Guam; a 
pipeline interest in the Southeast; Mobil's interest in the Trans-
Alaska Pipeline; Exxon's jet turbine oil business; and a volume of 
paraffinic lubricant base oil equivalent to Mobil's production. The 
Commission coordinated its investigation with the Attorneys General of 
several states and with the European Commission (about 60 percent of 
the merged firm's assets are located outside the United States).
---------------------------------------------------------------------------
    \7\ Exxon Corp., FTC File No. 991 0077 (Nov. 30, 1999) (proposed 
consent order).
---------------------------------------------------------------------------
    There are several particularly noteworthy aspects of the Exxon/
Mobil settlement. First, the divestiture requirements eliminated all of 
the overlaps in areas in which the Commission had evidence of 
competitive concerns. Second, while several different purchasers may 
end up buying divested assets, each will purchase a major group of 
assets constituting a business unit. This is likely to replicate, as 
nearly as possible, the scale of operations and competitive incentives 
that were present for each of these asset groups prior to the merger. 
Third, these divestitures, while extensive, represent a small part of 
the overall transaction. The majority of the transaction did not 
involve significant competitive overlaps. In sum, we were able to 
resolve the competitive concerns presented by this massive merger 
without litigation.
    The Commission also required divestitures in the merger between BP 
and Amoco,\8\ and in a joint venture combining the refining and 
marketing businesses of Shell, Texaco and Star Enterprises to create at 
the time the largest refining and marketing company in the United 
States.\9\
---------------------------------------------------------------------------
    \8\ British Petroleum Company p.l.c., C-3868 (April 19, 1999) 
(consent order). BP/Amoco involved very large companies but relatively 
few significant competitive overlaps. The Commission ordered 
divestitures and other relief to preserve competition in the 
wholesaling of gasoline in 30 cities or metropolitan areas in the 
eastern and southeastern United States, and in the terminaling of 
gasoline and other light petroleum products in nine geographic markets.
    \9\ Shell Oil Co., C-3803 (April 21, 1998) (consent order). The 
Shell/Texaco transaction raised competitive concerns in markets for 
gasoline and other refined petroleum products in the Pacific Northwest 
(Oregon and Washington), California, and Hawaii, for crude oil in 
California, and in the transportation of refined light petroleum 
products to several southeastern states. The Commission required the 
divestiture of a refinery in Washington, a terminal on the island of 
Oahu, Hawaii, retail gasoline stations in Hawaii and California, and a 
pipeline interest in the Southeast.
---------------------------------------------------------------------------
    The Commission challenged potentially anticompetitive mergers in 
other energy industries as well. Three recent matters served to protect 
emerging competition in electric power generation. Two of these cases 
were so-called ``convergence mergers,'' where an electric power company 
proposed to acquire a key supplier of fuel used to generate 
electricity. One involved PacifiCorp's proposed acquisition of The 
Energy Group PLC and its subsidiary, Peabody Coal. PacifiCorp's control 
of certain Peabody coal mines allegedly would have enabled it to raise 
the fuel costs of its rival generating companies and raise the 
wholesale price of electricity during certain peak demand periods. The 
Commission secured a consent agreement to divest the coal mines, but 
the transaction was later abandoned by the parties.\10\ In another 
case, Dominion Resources, an electric utility that accounted for more 
than 70 percent of the electric power generation capacity in the 
Commonwealth of Virginia, proposed to acquire Consolidated Natural Gas 
(``CNG''), the primary distributor of natural gas in southeastern 
Virginia and the only likely supplier to any new gas-fueled electricity 
generating plants in that region. Dominion allegedly could have raised 
the cost of entry and power generation for new electricity competitors. 
Working closely with Commonwealth officials, the Commission required 
the divestiture of Virginia Natural Gas, a subsidiary of CNG.\11\ In a 
third matter, the Commission challenged CMS Energy Corporation's 
proposed acquisition of two natural gas pipelines.\12\ CMS itself was a 
transporter of natural gas, whose customers could purchase the gas from 
other suppliers, either for their own use or to generate electricity. 
The Commission alleged that the acquisition would have enabled CMS to 
raise the cost of transportation for its gas and electric generation 
customers. This case did not require divestitures, but the Commission's 
consent order assures that CMS cannot restrict access to its pipeline 
network, thus allowing new entry that should maintain a competitive 
market.
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    \10\ PacifiCorp, FTC File No. 971 0091 (consent order accepted for 
public comment, Feb. 17, 1998). This order was withdrawn when the 
parties abandoned the transaction.
    \11\ Dominion Resources, Inc., C-3901 (Dec. 9, 1999) (consent 
order).
    \12\ CMS Energy Corp., C-3877 (June 2, 1999 (consent order).
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    Another highlight from the past two years is the Commission's 
successful challenge to the proposed mergers of the nation's four 
largest drug wholesalers into two firms. McKesson Corp. proposed to 
acquire AmeriSource Health Corp., and Cardinal Health, Inc. proposed to 
acquire Bergen Brunswig Corp. The two surviving firms would have 
controlled over 80% of the prescription drugs sold through wholesalers. 
These mergers allegedly would have increased costs to these 
wholesalers' customers--thousands of pharmacies and hospitals. These 
two cases were among the few that have led to litigation in recent 
years (although many more had to be prepared for trial). The district 
court granted a preliminary injunction against both mergers, and the 
transactions were later abandoned.\13\ Another significant aspect of 
these two cases is that the district court's thoughtful and well-
articulated opinion helped to update merger case law in several 
respects, including market definition and analysis of entry conditions, 
competitive effects, and efficiencies. This helps make antitrust law 
more transparent, and provides more guidance to the business community. 
The court's analysis is consistent with the Commission's analytical 
approach under the 1992 Horizontal Merger Guidelines, issued jointly by 
the Commission and the U.S. Department of Justice.\14\
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    \13\ FTC v. Cardinal Health, Inc., 12 F. Supp.2d 34 (D.D.C. 1998).
    \14\ 1992 U.S. Dep't of Justice and Federal Trade Commission 
Horizontal Merger Guidelines, reprinted in 4 Trade Reg. Rep. (CCH) 
para.13,104 (April 2, 1992; as amended, April 8, 1997).
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    Food retailing is another sector that is experiencing a period of 
consolidation. The number of supermarket mergers has increased 
dramatically just in the last three years. While the Commission has not 
challenged geographic expansion mergers, many mergers among direct 
local competitors have raised competitive concerns. The Commission has 
taken enforcement action where appropriate. Last June, for example, the 
Commission took steps to prevent undue market concentration resulting 
from Albertson's acquisition of American Stores--combining the second 
and fourth largest supermarket chains in the United States.\15\ In 
Albertson's the Commission required the divestiture of over 140 stores 
in California, Nevada and Arizona--at the time, the largest retail 
divestiture in Commission history (but now surpassed by the Exxon/Mobil 
divestiture). In the last four years alone the Commission has brought 
more than 10 enforcement actions involving supermarket mergers, 
requiring divestiture of nearly 300 stores in order to maintain 
competition in local markets across the United States.
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    \15\ Albertson's, Inc., FTC File No. 981 0339 (consent agreement 
accepted for public comment, June 21, 1999). The Commission has also 
challenged a number of other supermarket mergers. E.g., Albertson's, 
Inc., C-3838 (Dec. 8, 1998) (consent order) (acquisition of Buttrey 
Food and Drug Store Co.); Koninklijke Ahold N.V., C-3861 (April 14, 
1999) (consent order) (acquisition of Giant Food, Inc.).
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    Another major transaction the agency reviewed last year was Barnes 
& Noble's attempted acquisition of Ingram Book Group. Barnes & Noble 
was the largest book retailing chain in the United States, and Ingram 
was by far the largest wholesaler of books in the United States. Thus, 
it was largely a vertical transaction. While many vertical transactions 
are likely to be efficiency-enhancing, and therefore few are 
challenged, the Commission staff saw the Barnes & Noble/Ingram 
transaction as a serious competitive threat to thousands of independent 
book retailers. The acquisition of an important upstream supplier such 
as Ingram might have enabled Barnes & Noble to raise the costs of its 
bookselling rivals by foreclosing access to Ingram's services, or 
denying access on competitive terms.\16\ If rivals become less able to 
compete, Barnes & Noble could have increased its profits at the retail 
level or prevented its profits from being eroded by competition from 
new business forms such as Internet retailing. The Commission did not 
take formal action on this merger, because the parties abandoned the 
transaction before the staff made a final recommendation.
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    \16\ The merged firm might have been able to do so in a number of 
ways, including strategies short of an outright refusal to sell to the 
non-Barnes & Noble bookstores. For example, Barnes & Noble/Ingram could 
have chosen to (1) sell to non-Barnes & Noble bookstores at higher 
prices; (2) slow down book shipments to rivals; (3) restrict access to 
hot titles; (4) restrict access to Ingram's extended inventory of older 
titles; or (5) price services higher or discontinue or reduce services.
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    We have also challenged a number of other large mergers involving 
products and services that are highly important to consumers, including 
pharmaceutical products,\17\ medical devices,\18\ household 
products,\19\ and insurance services.\20\ In each of these cases, our 
goal has been to protect consumers from the potential exercise of 
market power by the merged firm, either unilaterally or in combination 
with others. Under the methodology we use to determine consumer savings 
pursuant to the Government Performance and Results Act, we estimate 
that the Commission's merger enforcement actions in fiscal year 1999 
saved consumers from paying $1.2 billion in higher prices.\21\ In 
contrast, the Commission's budget for the competition mission in fiscal 
1999 was only $55.7 million.
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    \17\ E.g., Hoechst AG, FTC File 991 0071 (consent agreement 
accepted for public comment, Dec. 2, 1999) (acquisition of Rhone-
Poulenc S.A.; direct thrombin inhibitor drug); Zeneca Group PLC, C-3880 
(June 7, 1999) (consent order) (acquisition of Astra AB; long-lasting 
local anesthetic); Roche Holdings Ltd., C-3809 (May 22, 1998) (consent 
order) (acquisition of Corange Ltd.; cardiac thrombolytic agents and 
chemical used to detect the presence of illegal substances). The 
Commission also took action to prevent competitive harm from a 
pharmaceutical manufacturer's acquisition of a company providing 
services as a pharmacy benefits manager. Merck & Co., Inc., C-3853 
(Feb. 18, 1999) (consent order) (acquisition of Merck-Medco Managed 
Care, LLC).
    \18\ SNIA S.p.A., C-3889 (July 28, 1999) (consent order) (heart and 
lung machines); Medtronic, Inc., C-3880 (June 3, 1999) (consent order) 
(non-occlusive arterial pumps); Medtronic, Inc., C-3842 (Dec. 21, 1998) 
(consent order) (automated external defibrillator).
    \19\ Reckitt & Colman plc, C-3918 (Jan. 18, 2000) (consent order) 
(household cleaning products); Nortek, Inc., C-3831 (Oct. 8, 1998) 
(consent order) (residential intercoms); S.C. Johnson & Son, Inc. C-
3802 (May 20, 1998) (consent order) (soil and stain removers); CUC 
Int'l. C-3805 (May 4, 1998) (consent order) (timeshare exchange 
services).
    \20\ Fidelity National Financial, Inc., C-3929 (Feb. 25, 2000) 
(consent order) (title information services); Unum Corp., C-3894 (Sept. 
29, 1999) (consent order) (data for disability insurance); Commonwealth 
Land Title Insurance Co., C-3834 (Nov. 10, 1998) (consent order) (title 
insurance); Landamerica Financial Group, Inc. C-3808 (May 20, 1998) 
(consent order) (title operations).
    \21\ The figure includes transactions that were withdrawn before 
the Commission's investigation was completed. Under the GPRA 
methodology, consumer savings estimates are based on the volume of 
commerce in the markets adversely affected by a merger, the percentage 
increase in price that likely would have resulted from the merger, and 
the likely duration of the anticompetitive price increase. In the 
absence of case-specific evidence that indicates higher or lower 
figures, conservative default parameters are applied to the volume of 
commerce: a one percent price increase for two years.
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    We have taken steps to ensure that these consumer savings are in 
fact realized, by implementing changes that result in better remedies. 
Last year, the staff completed a major study of merger remedies based 
on the Commission's merger cases in the early 1990s.\22\ The study 
found that while most of the cases settled through divestitures 
resulted in the establishment of a new competitor to replace the one 
lost through the merger, there were some ways in which merger remedies 
could be improved to avoid potential problems. One of the steps we have 
taken is to require, in a greater number of cases, that the merging 
parties bring us qualified purchasers for the divestiture assets before 
the transaction may be consummated. This procedure, referred to as the 
``up-front buyer'' requirement, requires the merging parties to find a 
suitable purchaser before the Commission accepts a settlement 
agreement. This procedure has several benefits for consumers: we know 
before accepting a divestiture settlement that a suitable buyer exists 
and that the divestiture package is an appropriate one, and we can 
restore the lost competition more quickly and with greater confidence 
that the divestiture will succeed. It also reduces the burden of 
uncertainty on the merging parties, because they know up front that 
they have an acceptable candidate, and they can then devote their full 
attention to their newly merged business.
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    \22\ Staff of the FTC Bureau of Competition, A study of the 
Commission's Divestiture Process (1999).
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    While we are on the subject of mergers, we would like to offer a 
few observations about Senate bill S. 1854, which seeks to amend 
various provisions concerning the Hart-Scott-Rodino (HSR) process. 
First, the Commission supports efforts to raise the size-of-transaction 
threshold for HSR reporting from $15 million to $35 million. Although 
the threshold would be higher, however, the fee structure proposed in 
the bill is unlikely to meet the funding needs of the Commission in 
future years, and therefore it would need adjustment to account for 
future funding needs. Second, while the Commission agrees with the 
burden-reduction goals of S. 1854, we have serious concerns about the 
procedures contemplated by the bill. We believe they are impractical, 
would themselves cause substantial delay in the process, and would 
seriously hinder our efforts to protect consumers from anticompetitive 
mergers.
    The extent of burdens on the parties needs to be put into an 
appropriate perspective. The vast majority of merger filings are 
cleared within 20 days. Fewer than 3 percent of reported transactions 
receive a request for additional information (the so-called ``second 
request''). The issuance of a second request is not undertaken lightly, 
and the care we take in choosing when to issue them is illustrated by 
the fact that a large majority of those transactions that receive 
second requests result in some form of enforcement action. In addition, 
most second request investigations are resolved without major document 
production. Over 60 percent of the investigations result in productions 
of fewer than 20 boxes of responsive documents, and over 85 percent of 
thesecond request investigations are resolved without the parties' 
having to complete their document production (i.e., ``substantially 
comply'' with the second request).\23\
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     \23\ Many companies indicate a willingness to settle a case before 
completing their document production. Other companies work with staff 
from the Commission or Department of Justice (``DOJ'') to determine 
some subset of documents that will enable a ``quick look'' at certain 
issues, so that resources can be focused on the topics of greatest 
debate.
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    Nevertheless, we believe that there can be significant improvements 
in this process. Thus, we are engaged in a dialogue with members of the 
private antitrust bar, business representatives, and Members of 
Congress on how to reduce burdens by streamlining the process. We 
believe this can be done without legislation. Both antitrust agencies 
and the private bar have a long history of cooperating in this fashion. 
Cooperation will lead to effective reforms that will meet the worthy 
goals sought by the proposed legislation, without the delays and 
impediments to thorough investigation that could result from the 
procedures contemplated by the legislation. Indeed, the FTC has already 
undertaken a number of internal reforms to expedite merger 
investigations and to provide parties with more complete information on 
the issues that give rise to an investigation. We will continue our 
efforts to make the process as efficient as possible and work with the 
business community to address their concerns.
    In sum, we can all agree that the process can be improved, and we 
acknowledge the concerns of Senators Hatch, DeWine and Kohl that are 
reflected in the proposed legislation. Over the past several months we 
have been working with Congress, the business community and members of 
the private bar to find common ground for improving the process. We 
continue to believe that the issues can and should be resolved without 
legislation.

                    COLLABORATIONS AMONG COMPETITORS

    Let us now shift gears and briefly discuss conduct in which 
competitors do not merge, but instead collaborate with each other. In 
today's markets, competitive forces are driving firms toward complex 
collaborations to achieve goals such as expanding into foreign markets, 
funding expensive innovation efforts, and lowering production and other 
costs. Most of these collaborations are procompetitive business 
arrangements that will benefit consumers; some, however, are not. Last 
October, the Federal Trade Commission and the Antitrust Division of the 
Department of Justice jointly issued draft ``Competitor Collaboration 
Guidelines,'' which describe an analytical framework to assist 
businesses in assessing the likelihood of an antitrust challenge to a 
collaboration among two or more competitors. The draft Guidelines were 
placed on the public record for comment, and they have received praise 
from sources as diverse as the Chamber of Commerce; \24\ antitrust's 
leading treatise author, Professor Herbert Hovenkamp; \25\ and 
practitioners, who found that ``[b]y synthesizing the existing cases 
into an analytical framework, the Federal Trade Commission and the 
Department of Justice will have made antitrust analysis vastly more 
accessible to smaller law firms and their clients.'' \26\ At the same 
time, useful suggestions have been made for clarifications and other 
changes to the Guidelines. The agencies are now considering those 
suggestions before issuing final Guidelines.
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    \24\ ``[The Guidelines] no doubt will make a net positive 
contribution as a statement of agency thinking in this complex area of 
law.'' Comments of Chamber of Commerce at 2.
    \25\ ``[The Guidelines] are quite good overall.'' Hovenkamp Comment 
at 1.
    \26\ Comment of Thomas F. Purcell, Lindquist & Vennum, St. Paul, 
Minnesota, at 1.
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                               RETAILING

    As a result of global and innovation-based changes, consumers are 
becoming aware that a ``retail revolution'' is underway. To remain 
competitive, retailers--whether brick-and-mortar or online--are seeking 
new ways to market new and old products. This dynamic is leading to 
much pro-consumer innovation in retailing. For example, the Internet 
has changed traditional sales and distribution patterns for products of 
all types, providing faster, cheaper, and more efficient ways to 
deliver goods and services. A market study by Jupiter Communications 
estimates that annual consumer sales on the Internet will explode from 
$15 billion in 1999 to $78 billion by 2003. There appears to be 
tremendous demand for Internet-based services.
    However, whenever there is great upheaval in the marketplace, 
traditional retailers sometimes respond by trying to forestall new 
forms of competition. Some of those actions may be legitimate defensive 
maneuvers, but when conduct steps over the lines of the antitrust laws, 
enforcement action is needed to ensure that anticompetitive practices 
do not deter development or procompetitive innovations.\27\ In 1998, 
for example, the FTC charged 25 Chrysler dealers with an illegal 
boycott designed to limit sales by a car dealer that marketed on the 
Internet. These brick-and-mortar dealers allegedly had planned to 
boycott Chrysler if it did not change its distribution of vehicles in 
ways that would disadvantage Internet retailers. The competitive danger 
of such a tactic is obvious: a successful boycott could have limited 
the use of the Internet to promote price competition and reduced 
consumers' ability to shop from dealers serving a wider geographic area 
via the Internet. An FTC consent order prohibits the dealers from 
engaging in such boycotts in the future.\28\
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    \27\ In addition, on the consumer protection side, we must maintain 
vigilance to protect consumers from fraudulent practices by the few 
unscrupulous providers of such services. Since the agency's first 
Internet case in 1994, the FTC, primarily through its Bureau of 
Consumer Protection, has bought over 100 Internet-related cases 
involving over 300 defendants. The Commission has obtained injunctions 
stopping illegal schemes, collected over $20 million in redress for 
victims, and obtained orders freezing another $65 million in cases that 
are still in litigation. Most of these cases have involved the 
migration to the Internet of traditional kinds of fraud, such as 
business opportunity schemes, credit repair scams, pyramid schemes, and 
false claims for health-related products, to name a few.
    \28\ Fair Allocation System, Inc., C-3832 (Oct. 30, 1998) (consent 
order).
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    The Internet is not the only place where we have seen popular new 
forms of retailing. Another example involves the Commission enforcement 
action against Toys ``R'' Us, the nation's largest toy retailer, 
alleging abuse of market power. As alleged by the Commission, Toys 
``R'' Us used its market power to try to stop warehouse clubs, such as 
Costco, from selling popular toys such as Barbie dolls in ways that 
allowed consumers to make comparisons to the prices charged by Toys 
``R'' Us. Warehouse clubs, as you know, are a relatively new retailing 
format that has grown significantly in the past decade. Toys ``R'' Us's 
concern was that warehouse clubs were selling some toys at lower prices 
and beginning to take market share away from traditional toy retailers. 
In response, Toys ``R'' Us allegedly pressured toy manufacturers to 
deny popular toys to warehouse clubs, or to sell them on less favorable 
terms. The FTC issued an administrative order to stop these practices, 
and the matter is now on appeal to the U.S. Court of Appeals for the 
Seventh Circuit.\29\ Although the products were toys, and the rivalry 
was between two different kinds of brick-and-mortar firms, the 
enforcement principles underlying the Commission's action apply with 
equal--and perhaps even greater--force to the new world of online 
retailing.
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    \29\ Toys ``R'' Us, Inc., Docket No. 9278 (1998), appeal docketed, 
No. 98-417 (7th Cir. Apr. 16, 1999).
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    Of course, even more traditional retailing practices can raise 
competitive concerns. Earlier this month the FTC and the Attorneys 
General from 56 U.S. states, territories, commonwealths, and 
possessions settled charges that Nine West, one of the country's 
largest suppliers of women's shoes, engaged in resale price 
maintenance, resulting in higher prices for many popular lines of 
shoes. To settle the charges with the states, Nine West agreed to pay 
$34 million, which will be used to fund women's health, vocational, 
educational, and safety programs.
    Slotting allowances are another retailing-related topic of current 
interest at the Commission. The term ``slotting allowance'' typically 
refers to a lump-sum, up-front payment that a supplier, such as a food 
manufacturer, might pay to a retailer, such as a supermarket, for 
access to its shelves.\30\ These allowances can amount to tens or 
hundreds of thousands of dollars. Slotting allowances can be either 
beneficial or harmful. They can be beneficial if they fairly reimburse 
retailers for the costs and risks of taking on an unproven new product, 
or when they result in lower prices to consumers. On the other hand, 
slotting allowances can be harmful if they permit one manufacturer to 
acquire a degree of exclusivity, across many retail outlets, sufficient 
to prevent other firms from becoming effective competitors. Still other 
situations fall in an intermediate grey area. To sharpen our 
understanding of the circumstances under which slotting allowances can 
be beneficial or harmful to competition and to consumers, the 
Commission will hold a two-day workshop in May 31 and June 1. This 
session will bring together people from manufacturing, retailing, 
economics, and other relevant disciplines to discuss the issues 
involved in this very complex subject.
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    \30\ See ``Slotting: Fair for Small Businesses and Consumers?'' 
Hearing before the Committee on Small Business, United States Senate 
(Sept. 14, 1999).
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    The Commission recently examined charges of price discrimination in 
a related retailing context. By majority vote, the Commission charged 
McCormick & Company, the world's largest spice company and by far the 
leading supplier in the United States, with engaging in unlawful price 
discrimination in the sale of spice and seasoning products. Some 
retailers allegedly were charged substantially higher net prices than 
were others, and discounts to favored chains allegedly were conditioned 
on an agreement to devote all or a substantial portion of shelf space 
to McCormick products. McCormick agreed to settle the charges by 
accepting an order that would prohibit the selling of spices at 
different prices to different retailers, except when permitted by the 
Robinson-Patman Act.

                              HEALTH CARE

    Health care is an increasing part of overall consumer expenditures, 
and the significant rise in health care costs is felt by all consumers. 
For many years, the Commission has been at the forefront in bringing 
enforcement actions to protect the competitive process in all types of 
health care markets, including services provided by hospitals and 
health care professionals as well as products provided by the 
pharmaceutical and medical equipment industries. In the past two years 
alone, the Commission has brought more than a dozen enforcement actions 
involving health care, pharmaceuticals, and medical devices.
    In one of these cases the Commission, jointly with several states, 
sued Mylan Laboratories, one of the nation's largest generic 
pharmaceutical manufacturers, charging Mylan and other companies with 
monopolization, attempted monopolization and conspiracy to eliminate 
much of Mylan's competition by tying up the key active ingredients for 
two widely-prescribed drugs, used by millions of patients.\31\ The 
FTC's complaint charged that Mylan's agreements allowed it to impose 
enormous price increases--over 25 times the initial price level for one 
drug, and more than 30 times for the other. For example, in January 
1998, Mylan raised the wholesale price of clorazepate from $11.36 to 
approximately $377.00 per bottle of 500 tablets, and in March 1998, the 
wholesale price of lorazepam went from $7.30 for a bottle of 500 
tablets to approximately $190.00. In total, the price increases 
resulting from Mylan's agreements allegedly cost American consumers 
more than $120 million in excess charges. The Commission filed this 
case in federal court under Section 13(b) of the FTC Act seeking 
injunctive and other equitable relief, including disgorgement of ill-
gotten profits. In July of last year the district court upheld the 
FTC's authority to seek disgorgement and restitution for antitrust 
violations. Trial is set for the Spring of 2001.
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    \31\ FTC v. Mylan Laboratories, Inc., CV-98-3115 (D.D.C., filed 
December 22, 1998; amended complaint filed February 8, 1999). The drugs 
in question are used for treatment of anxiety.
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    Just last week, the Commission charged four other companies with 
entering into anticompetitive agreements that allegedly delayed the 
entry of generic drug competition, potentially costing consumers 
hundreds of millions of dollars a year. The administrative complaint 
issued against Hoechst Marion Roussel (now Aventis) and Andrx 
Corporation charges that Hoechst, the maker of Cardizem CD, a widely 
prescribed drug for treatment of hypertension and angina, agreed to pay 
Andrx millions of dollars to delay bringing its competing generic drug, 
or any other non-infringing version, to market while Hoechst sued Andrx 
for alleged patent infringement.\32\ Cardizem CD is a form of 
diltiazem, and Hoechst accounts for about 70% of the sales of once-a-
day diltiazem products in the United States. Hoechst's Cardizem sales 
in 1998 exceeded $700 million (over 12 million prescriptions). The 
complaint further alleges that, because the Hatch-Waxman Act \33\ 
grants an exclusive 180-day marketing right to Andrx, Andrx's agreement 
not to market its product was also intended to delay the entry of other 
generic drug competitors.
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    \32\ Hoechst Marion Roussel, Inc., Docket No. 9293 (complaint, 
March 16, 2000).
    \33\ Under the Hatch-Waxman Act, the first company to file an 
Abbreviated New Drug Application (ANDA) with the FDA for a generic drug 
(in this case, Andrx) has an exclusive right to market its generic drug 
for 180 days. Under the alleged Hoechst-Andrx agreement, Andrx could 
not give up that exclusivity right. Thus, by allegedly agreeing not to 
market its drug, Andrx prevented the 180-day exclusivity period from 
beginning to run, so that other sellers of generic versions of Cardizem 
CD also could not enter the market.
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    The complaint against two other companies, Abbott Laboratories and 
Geneva Pharmaceuticals, Inc, which the companies agreed to settle, 
involved allegations of similar conduct in connection with a 
proprietary drug--called Hytrin--that Abbott manufactures, and a 
generic version that Geneva prepared to introduce.\34\ Hytrin is used 
to treat hypertension and benign prostatic hyperplasia (BPH or enlarged 
prostate)--chronic conditions that affect millions of Americans each 
year, many of them senior citizens. BPH alone afflicts at least 50% of 
men over age 60. In 1998, Abbott's sales of Hytrin amounted to $542 
million (over 8 million prescriptions) in the United States. The 
complaint alleges that Abbott paid Geneva approximately $4.5 million 
per month to keep Geneva's generic version of the drug off the U.S. 
market. This agreement also allegedly delayed the entry of other 
generic versions of Hytrin because of Geneva's 180-day exclusively 
rights under the Hatch-Waxman Act. Abbott was charged with 
monopolization of the market, and both companies were charged with 
conspiracy to monopolize. The proposed consent order enjoins such 
practices.
---------------------------------------------------------------------------
    \34\ Abbott Laboratories, FTC File No. 981 0395 (proposed consent 
order, March 16, 2000); Geneva Pharmaceuticals, Inc., FTC File No. 981 
0395 (proposed consent order, March 16, 2000).
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    Another recent enforcement effort was directed at an 
anticompetitive patent pool between Summit Technology, Inc. and VISX, 
Inc. Summit and VISX compete in the market for equipment and technology 
employed in laser vision correction. Most of the approximately 140 
million people in the United States with vision problems correct their 
vision with contact lenses or eyeglasses, but an increasing number are 
turning to laser techniques. Until recently, VISX and Summit were the 
only firms with FDA approval to market the laser equipment used for 
this surgery. The complaint charged that the two companies eliminated 
competition between themselves by placing their competing patents in a 
patent pool and agreeing to charge doctors a uniform $250-per-procedure 
fee every time a Summit or VISX laser was used. In essence, this was 
price-fixing under the guise of a patent cross-licensing arrangement. 
After the Commission issued an administrative complaint charging that 
the patent pool and related agreements were unlawful, the companies 
dissolved the patent pool and settled this portion of the case in 
August 1998, with an agreement not to enter into such agreements in the 
future.\35\ The per-procedure fees charged by VISX and Summit did not 
immediately change as a result of the settlement--an example of 
``stickiness'' of prices in a tight oligopoly--but competition 
eventually prevailed. Last month, VISX announced that it would reduce 
its per-procedure fee from $250 to $100 per eye, and Summit announced 
that it too would reduce its fee for one of its laser products.\36\ Had 
the Commission not taken action, the millions of consumers using this 
procedure likely would still be paying substantially higher fees.
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    \35\ Summit Technology, Inc. and VISX, Inc., D. 9286 (Feb. 23, 
1999) (consent order).
    \36\ CBS Market Watch, Visx gets black eye from price cuts, Feb. 
23, 2000 (/cbs.marketwatch. com/archive>).
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    The Commission also plays an important role in studying the 
changing health care marketplace. Last year the FTC's Bureau of 
Economics issued a detailed report on the rapidly evolving 
pharmaceutical industry.\37\ The report found that developments in 
information technology, federal legislation, and the emergence of 
market institutions such as health maintenance organizations and 
pharmacy benefit managers have accelerated change in this industry. The 
report attempts to provide a more complete understanding of the 
competitive dynamics of this market and discusses possible competitive 
problems and procompetitive explanations for pricing strategies and 
other industry practices. These kinds of studies help inform 
regulators, enforcers, and Congress on the important public policy 
issues involving health care.
---------------------------------------------------------------------------
    \37\ FTC Bureau of Economics Staff Report, The Pharmaceutical 
Industry: A Discussion of Competitive and Antitrust Issues in an 
Environment of Change (March 1999).
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                               CONCLUSION

    In closing, we believe that antitrust enforcement by the Commission 
has demonstrable benefits for consumers--benefits that for outweigh the 
resources allocated to our maintaining competition mission. We are 
concerned, however, that our growing workload--largely the result of 
the continuing merger wave--has outstripped our ability to keep pace. 
Over the past decade, the FTC has performed its mission in the face of 
a rapidly changing marketplace, with staffing at about half the size it 
was in 1979. We have done so primarily by stretching our resources, 
streamlining our processes, and simply doing more with less. In no 
small measure, that is attributable to our dedicated, hard-working 
staff. We have also shifted resources from non merger enforcement to 
mergers as a stop-gap measure. That has left us understaffed in 
nonmerger matters, but still not at full strength in mergers. If we are 
to keep up with the growing demands that will be imposed by the 21st 
Century marketplace, we need significantly more resources. The 
President's proposed budget for fiscal year 2001 asks for an additional 
69 workyear, over the current fiscal year, for our antitrust 
enforcement efforts.\38\ We ask the Committee's support for additional 
resources for this important mission.
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    \38\ The President's proposed budget also includes additional 
resources for the FTC's consumer protection mission.
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    Mr. Chairman and Members of the Subcommittee, we appreciate this 
opportunity to provide an overview of the Commission's efforts to 
maintain a competitive marketplace for American businesses and 
consumers. We would be pleased to respond to any questions you may 
have.

[GRAPHIC] [TIFF OMITTED] T2736.001

[GRAPHIC] [TIFF OMITTED] T2736.002

    Senator DeWine. Before we move to the questions, I am going 
to at this point call on Senator Grassley for any opening 
statement that he would like to make.

STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR FROM THE 
                         STATE OF IOWA

    Senator Grassley. What I want to do, because I have to go 
to a three o'clock meeting with a large farm group that has 
come from my State, is submit for the record my statement, and 
then to each of you, I would have a series of questions.
    But I would like to take just a couple of minutes outside 
of my comments and my questions to visit with my colleagues 
here as well as with Mr. Klein about a bill that I introduced. 
The reason I am a little bit uncomfortable visiting with you 
about it, Mr. Klein, is because you have been responsive to our 
concerns about agribusiness mergers and you have put a person 
on staff to look into those, and then you see that I introduced 
the bill that I have introduced and you might think, well, I do 
not think that you are at all concerned about what is going on 
in rural America, and I feel that you have tried hard to get an 
understanding of that and even to respond to it in some way.
    So I have introduced the Agricultural Competition 
Enhancement Act and I see it as a starting point, hopefully to 
begin a constructive dialogue with both the Justice Department 
and the Federal Trade Commission, as well as the Department of 
Agriculture, about the best way to address farmers' concerns. 
There are other members, in fact, I understand that before I 
got here that Senator Leahy had addressed this issue, and so 
there are going to be bills put in by other members, and so I 
would like to work with Senator Kohl and I would like to work 
with Chairman DeWine on this issue.
    But most importantly, to Mr. Klein, we do not substantively 
amend the antitrust laws. We do not change any of the powers of 
the Justice Department. We do put the U.S. Department of 
Agriculture at the table in those instances where it affects 
the family farm, and probably the one thing you will not like 
about the bill is that if through the regular process of 
considering mergers the Department of Justice would decide that 
they should not be challenged, we would allow, if the 
Agriculture Department feels disagreement with the Department 
of Justice after they have made their decision, to allow the 
U.S. Department of Agriculture, through special counsel, to go 
into court in narrow instances. The process is a fairly 
dramatic departure from the practice of the last 110 years, but 
I do not believe that the antitrust laws are substantively 
changed in my legislation.
    So I just throw that out for consideration to my 
colleagues, because I believe you felt the concerns of famers 
in September when you were in Iowa. It is still there, and I 
think even if economic times get better, it will still be there 
because there is just a feeling that there is just a lack of 
competition and too much concentration. So I just throw this 
out to you and to my colleagues for your consideration. I 
intend to move ahead with the bill, but I also know that the 
reality of it is that there are a lot of other ideas that are 
here regarding agriculture concentration, as well, and then 
probably a lot of people that think that nothing needs to be 
done. But I feel strongly that something needs to be done.
    Thank you, Mr. Chairman.
    Senator DeWine. Senator Grassley, thank you very much. Of 
course, your full statement will be made a part of the record, 
as will your questions, and they will be submitted to the two 
witnesses.
    Let me also state that I intend to look at your bill, 
Senator Grassley. I am anxious to take a good look at that, as 
well as Senator Leahy's bill.
    [The questions and answers of Senator Grassley were not 
received at presstime.]
    [The prepared statement of Senator Grassley follows:]

                 Prepared Statement of Senator Grassley

    Chairman DeWine, thank you for holding this hearing today. As you 
know, I've been very interested in antitrust matters and how they 
impact my constituents, such as whether the high price of airline 
tickets for Iowans is the result of anti-competitive business 
practices, or whether mergers and acquisitions in agribusiness are not 
being reviewed as carefully as they should. In particular, I've been 
following the merger mania trend, because so many of my constituents 
are concerned about rapid consolidation in a number of industries, and 
the impact mergers have on rural America. I've received phone calls and 
letters on practically every industry experiencing consolidation. From 
telecommunications to railroads, banking to meat packing, airlines to 
the entertainment industry, you name it, I've gotten constituent 
communication expressing concern. I am the first to say that mergers 
and acquisitions can be beneficial, bringing efficiencies, innovation, 
and other benefits to our economy and to consumers. But these 
transactions need to be reviewed carefully to make sure they do not 
stifle competition. I know that we have the antitrust laws to ensure 
that the market functions properly, bad actors are stopped, and 
consumers are not harmed. But many of my constituents are concerned 
that either the antitrust laws are not being enforced, or they are not 
producing effective outcomes. Farmers and small independent producers 
are particularly concerned about this issue, because they believe that 
vertical and horizontal mergers and acquisitions occurring in agri-
business are not being reviewed appropriately for all possible 
ramifications in the marketplace.
    Earlier this week, I introduced a bill addressing agriculture 
competition issues, and enhancing USDA's role in reviewing and 
challenging agri-business transactions. The Agriculture Competition 
Enhancement Act, the ``ACE'' Act, is just a starting point, hopefully 
to begin a constructive dialogue with both the Justice Department and 
Federal Trade Commission, as well as the Department of Agriculture, 
about what is the best way to address farmers' concerns. Other members 
are working on agriculture competition proposals, so I'd also like to 
express my desire to work with Chairman DeWine and Senator Kohl, as 
well as other interested members of the Judiciary Committee, on this 
important matter.
    I look forward to hearing from the Justice Department and Federal 
Trade Commission about their efforts to enforce the antitrust laws and 
to ensure competition is not harmed by anti-competitive behavior or by 
bad mergers and acquisitions. I am interested in hearing from Mr. Klein 
and Mr. Pitofsky about the concerns my constituents have, and how they 
are being addressed. Thank you.

    Senator DeWine. Let me move, if I could at this point, to 
the questions. This first question will be to either of you or 
both of you. A recent Washington Post article mentioned a study 
that analyzed the 700 most expensive mergers during the past 3 
years and found that 83 percent of these mergers failed to 
increase shareholder value and more than half had reduced 
shareholder value.
    Now, we certainly understand that shareholder gain in and 
of itself is not the focus of antitrust review, but does this 
statistic indicate that some merging parties may be overselling 
the efficiencies to be gained from their deals, and if so, how 
should these types of concerns be addressed, if at all, during 
merger reviews? Mr. Klein, Mr. Chairman, either one.
    Mr. Klein. I think the way----
    Senator DeWine. It is an interesting statistic.
    Mr. Klein. It is an interesting statistic. It is also a 
little hard to know how you measure post-merger shareholder 
value versus what it would have been had the company stayed 
separately. There is no control group.
    Senator DeWine. That is true.
    Mr. Klein. But having said that, I certainly take the point 
in the following sense. From our point of view, Mr. Chairman, 
the focus of our inquiry, first and foremost, is on the 
anticompetitive effect. In other words, we look to see where 
the action is. Now, in that process, we do look at efficiency 
claims, but I have actually spoken to this and we and the 
Federal Trade Commission together actually adopted some 
efficiency guidelines.
    We know the minds of lawyers and the minds of economists 
can be quite imaginative in the merger process, and so we are 
pretty tough in analyzing efficiency claims. I would say, on a 
transaction, we might get claims that there will be $100 
million or $200 million, and much more often than not, we cut 
those down in our assessment significantly. But even then, what 
we look at first and foremost is if there is any significant 
anticompetitive effect, that is what drives the analysis. It is 
only when you see a very small anticompetitive effect and 
potentially significant efficiencies that you are likely to 
come out the other way.
    The second point I would make in terms of that study, Mr. 
Chairman, is whether there are efficiencies or not, in a lot of 
mergers where there is no anticompetitive effect, the merger 
may not take. The new company may not work well with the old 
company and management styles may be different, particularly 
now when we are seeing such dramatic stuff.
    And so a lot of times, even though mergers have no 
competitive impact in any significant way, in terms of 
shareholder value or company benefit, they do not work out 
particularly well. That is not an antitrust problem, that is 
really a kind of a business problem.
    Mr. Pitofsky. I agree with that. I, too, at times wonder 
about some of the deals that we see going by. Someone mentioned 
inflated stock and inflated value of the acquired asset. I know 
it has been said that there is some irrational exuberance in 
the stock market. I sometimes think there is irrational 
exuberance in the capital market, as well.
    I take courage from the fact that a very similar thing 
happened in the 1980's. That conglomerate merger frenzy in the 
early and mid-1980's, in which everybody seemed to be buying 
one of everything, but subsequent studies showed that about, I 
think it was about two-thirds of those mergers came apart.
    Senator DeWine. How many? I am sorry.
    Mr. Pitofsky. I think it was about two-thirds. I can get 
the number. Mike Sherer's book discusses this matter. But if 
they are a bad idea, then the market will exact its vengeance 
over foolish corporate acquisitions.
    I do not think the government should be blocking mergers 
because they are a bad idea. I think the government should be 
alert to blocking mergers that have an anticompetitive or an 
anti-consumer effect, and that is where I think we ought to be 
putting our resources.
    Senator DeWine. Let me follow up to something that Senator 
Leahy said and Senator Grassley said. Mr. Klein, I also am very 
glad to see that you appointed a counsel, special counsel to 
focus on the antitrust issues involving the agriculture 
industry. I wonder if this, in your opinion, has this 
appointment been useful and what type concerns does the 
division have in this area that need to be addressed?
    Mr. Klein. Well, first of all, I do think the appointment 
is useful. I think we have a very distinguished lawyer with a 
lot of prosecutorial experience.
    Senator DeWine. And that appointment was made how long ago?
    Mr. Klein. I would say probably 3 months ago now.
    Senator DeWine. Three months ago?
    Mr. Klein. And he has already had the opportunity to travel 
out to the Midwest, a number of States, meet with affected 
groups. A number of the groups that have been in town over the 
last several weeks have had the opportunity to talk with Doug. 
He is a very seasoned and distinguished lawyer with very long-
term ties to the State Attorneys General organization, which he 
worked with, as well, which is obviously a critical liaison for 
us in that regard.
    So I am delighted, and really, the Senate Agriculture 
Committee as well as this committee encouraged this actionand I 
am pleased that we did it.
    I think this is an important area in a variety of ways, and 
I just want to sort of make a few comments, because a number of 
members of the subcommittee have raised the issue. I personally 
have been very concerned, and I think Senator Grassley alluded 
to the fact, I had the privilege to accompany him and Senator 
Harkin out to Iowa to meet with a large group of farmers. I had 
the opportunity to go, as well, to Minnesota and meet with a 
large group of farmers, and I have been privileged to have a 
large number of these farm groups visit with me in my office 
here in Washington.
    There are a mixture of concerns, some of which are 
antitrust related, a lot of which have to do with other 
phenomena and other factors in the global market. Some of the 
Asian crisis had a huge impact on demand for U.S. farm 
products. There are other issues about the economy that are not 
antitrust issues.
    Having said that, I think, and the Attorney General has 
said this, I think it is appropriate for the Department to 
focus on these concerns. Agriculture has been a mainstay of 
antitrust concern and enforcement. As people have pointed out, 
if you go back to the original Sherman Act, these issues were 
part of the genesis of why we are here today.
    I think, from our point of view, we have had a very, very 
powerful enforcement effort. I mentioned Continental-Cargill, 
in which the farm community supported us strongly for the tough 
monopsony action we took. We took a similar--I remember being 
told at one of these meetings that there were going to be--
first, there were red tractors, then yellow tractors and green 
tractors, and now it looked like the red and the green are 
going to merge and we are going to have turquoise tractors and 
this and that, and we did something significant on that merger, 
as well.
    I think on cotton seeds and corn seeds, two very, very 
critical products for farmers, we took strong actions with 
respect to Monsanto acquisitions, one of which, the Delta and 
Pine Land matter, which was an important cotton seed matter. 
Actually, the parties abandoned the transaction in the face of 
our efforts.
    The other point we have made clear is from the Archer 
Daniels Midland through the vitamins cartel cases that we have 
dealt with, we are dealing with farm products in which there 
are inflated prices, which is an input that farmers have to 
bear the cost and suck it in on. So I think that we have done a 
lot, but I have personally said that given the concerns, I want 
to make sure every stone is unturned. That is why we appointed 
Doug. That is why my chief of staff, Adam Golodna, has probably 
devoted more time to agriculture issues than any other issue in 
the division, and that is why I personally have promised the 
Attorney General that we are going to stay alert in these 
matters. We will gladly review Senator Leahy's bill, Senator 
Grassley's bill, and engage on that, as well.
    Senator DeWine. We certainly would appreciate that.
    Mr. Klein, have you put together internally any kind of 
document that would summarize what you have done in the 
antitrust area in regard to agriculture, or is there something 
you could supply this committee that we could make a part of 
the record of this hearing?
    Mr. Klein. I would be delighted to do that, Senator.
    Senator DeWine. Thank you very much.
    Senator Kohl.
    Senator Kohl. Thank you, Senator DeWine.
    Mr. Klein, an antitrust issue that has been the focus of 
enormous public attention, as you know, is the government's 
lawsuit against Microsoft. I recognize that you are limited as 
to what you can say regarding a pending court case, but this is 
a matter of high public concern, so if I can, I would just like 
to pose a few questions to you.
    First, do you believe it is likely or possible that you 
will be able to reach an out-of-court settlement with 
Microsoft, or do you have some sense of the possibility of 
this?
    Mr. Klein. Senator, with respect to that particular 
question, I think, as you may know, we are in the middle of a 
mediation process and that is governed by the strictest of 
confidentiality rules, and as an officer of the court, I would 
not comment on the prospects.
    What I can say is two things. I believe the District 
Court's findings in this case reveal what the Department had 
asserted, which was that Microsoft had engaged in a serious 
pattern of anticompetitive practices, and I think that a remedy 
ought to be commensurate with those practices. It has always 
been my view and the Department's view that settlement is 
better than litigation, but the settlement would have to be, of 
course, appropriate to deal with the concerns that the court 
documented in its opinion.
    Senator Kohl. I will ask, and I hope you can make a 
comment, is there any possibility of a resolution short of a 
structural solution?
    Mr. Klein. Again, I think with the matter pending at this 
point, I think it would be better for me not to comment on it. 
I think there are special sensitivities about a mediation 
process, and actually, this process, although there have been 
occasional breaches, has been remarkably confidential. So I 
think it would be better at this point for me to observe those 
rules, Senator.
    Senator Kohl. All right. Mr. Klein and Chairman Pitofsky, I 
would like to turn to another issue that has been the subject 
of much public interest, namely the airlinecompetition. In our 
subcommittee, we continue to be concerned about competition in the 
industry. For example, start-up carriers face serious obstacles in 
establishing competing service to the incumbent carriers. We plan to 
hold a hearing shortly on how to improve competitive conditions in this 
industry.
    But, Mr. Klein, consumers in the upper Midwest have been 
suffering from limited choice for much of their air travel due 
to the dominance of Northwest Airlines in this upper Midwest 
area. As I understand it, you are still investigating 
Northwest's conduct and practices. If you conclude that 
Northwest has engaged in anticompetitive practices, will you 
bring an enforcement action to stop this conduct?
    Mr. Klein. Yes, we will, Senator. If we reach such a 
conclusion. Indeed, the proof of that is that we investigated 
American Airlines' conduct in the Dallas hub and did, indeed, 
bring a monopoly action challenging American with respect to 
its practices and the way that it essentially tackled these new 
low-cost carriers in Dallas. So we are, as you say, continuing 
our investigation on Northwest and obviously that will be 
decided on the merits of the investigation. But if we determine 
there is a violation, I assure you we will proceed.
    Senator Kohl. It may be that the conduct engaged in by 
Northwest or other major airlines does not meet the legal 
definition of illegal conduct under the antitrust laws or the 
technical requirements to make out a predatory pricing case, 
but as you know, the Transportation Act also authorizes the 
Department of Transportation to prevent ``unfair, deceptive, 
predatory, or anticompetitive practices in air 
transportation.'' So, do you not think that the Transportation 
Department could, if it wishes, use its statutory authority to 
prevent anticompetitive practices to curb the unfair but 
otherwise legal conduct that some airlines may perhaps be 
engaging in?
    Mr. Klein. There is no question, Senator, that they do have 
the statutory power, and I think they are continuing to look at 
an appropriate response. Let me just say, though, I think 
something significant has happened. I think the case against 
American Airlines, which is scheduled to go to trial, I think 
is a watershed case because I think that this will be one that 
has a real opportunity to set the rules nationally. I 
acknowledge what you said, so-called predatory pricing or 
predatory capacity cases are tough cases in the antitrust laws, 
but I think this is a strong and a meritorious case. Of course, 
that will be ultimately for the court to decide.
    But I think this case will have significance. This is the 
first case since deregulation in which any Antitrust Division 
has challenged these kinds of practices and they go to the 
heart of the concerns that you are articulating, which is that, 
given the opportunity for these new low-cost carriers to grow 
and develop and create real competition in the United States, 
we can see instead of a single hub dominance structure, we 
could see multi-carriers providing real choices throughout the 
United States.
    I think that this American Airlines case could give us some 
real guidance on that. That is not to say there is not an 
appropriate role for DOT, but I think this is a major event, 
even though I understand right now we are focusing on one 
airline, but this will have national repercussions, I have no 
doubt.
    Senator Kohl. Talking about the telecommunications 
industry, gentlemen, Chairman Pitofsky, you have been eloquent 
in the past expressing your view, which I share, that when 
dealing with mergers in the media, unlike mergers in other 
industries, such as cereal companies, banks, or oil companies, 
for example, we must give them a different type of scrutiny 
because these media mergers affect competition in the 
marketplace of ideas so central to the First Amendment.
    Are you worried, Chairman Pitofsky, that the level of 
consolidation in the media is beginning to threaten these 
values by reducing the number of major sources of information 
available to the American public?
    Mr. Pitofsky. I am concerned about concentration in the 
media. We were concerned about it when we reviewed Time-Warner, 
Turner, TCI about 4 or 5 years ago, and we insisted upon an 
order in that case designed to preserve access for smaller 
companies and new entrants. Now, there are some major mergers 
going on in this industry, but there is also innovation in the 
form of the Internet, extension of cable resources to many 
homes.
    So whether there is more concentration right now or less 
concentration, I am not exactly sure. I do look at each of 
these mergers, and especially the mega-mergers, with heightened 
concern. There is no question in my mind that we should give 
these transactions the most careful review.
    Senator Kohl. Mr. Klein, with all the consolidation we have 
seen, are you concerned that we are in danger of a very few 
companies controlling the broad band delivery of the Internet?
    Mr. Klein. Well, we have got some investigations ongoing 
into those issues right now. What I think is the following on 
this, Senator Kohl, that it is very early in the process of 
broad band rollout and there are going to be some very 
interesting and tricky developments with respect to both the 
cable modem, the DSL on the telephone lines, satellite, and 
other forms of delivery.
    What I think is encouraging for the first time is because 
of digitalization, we now have the possibility that instead of 
having a single cable pipe--that always worried me much more, a 
single telephone line, because if you control the means of 
distribution, whether you force access or not, the consumer 
still only has one means of distribution.
    And my own view, the model that I have really cared for and 
we made a big dent in it, not a complete solution, in the 
Primestar case is let us get lots of means of access to the 
home so that then, through digitalization, you can bring voice, 
you can bring data. The cable modem, for example, can now, 
instead of just bringing you cable TV, can bring you voice, can 
bring you Internet access, can bring you data, and then you 
want to see that happen on the other means of access to the 
home or to the business.
    Once that happens, if there are three or four pipes and 
digital transmission and broad band, we will see competition 
that we have not seen in any of these media. If anything, I am 
going forward more encouraged because my hope is that through 
the multiplicity of pipes, we are going to see something that 
we have not seen, which was one copper wire or one cable into 
the home.
    I agree with the chairman, of course, that I think these 
mega-mergers in the media deserve very, very careful and 
thorough scrutiny and both agencies, and we consult a lot about 
this because we are both involved in it, but both agencies, I 
believe they are getting that thorough scrutiny.
    Senator Kohl. Chairman Pitofsky, we have heard complaints 
from small medical device manufacturers about the conduct of 
large buying organizations that buy medical supplies for 
hospitals, the group purchasing organizations. The small 
medical device manufacturers claim that hospitals will not buy 
their products because these products are not on the approved 
lists of devices kept by the GPO's. They claim that hospitals 
will not buy products which are not on the GPO list because 
hospitals would lose the significant discounts they get for 
buying products which are on the approved list.
    We understand that buying medical devices through GPO's 
lowers hospital costs generally, but could there be a problem 
here, namely that the smaller medical device manufacturers are 
insulated from competition, and just as important, will you 
commit to looking at this, and if necessary, revisiting your 
health care guidelines which permit GPO's?
    Mr. Pitofsky. Yes, I certainly would commit to do that, and 
I think you framed the question exactly right. On the one hand, 
you want these joint buying organizations to have the advantage 
of introducing efficiencies, especially, or primarily, when 
they are passed on to consumers in one way or the other.
    On the other hand, these joint organizations do raise the 
question of whether or not they can be a device to exclude 
smaller competitors or new entrants, and you are trading that 
sort of thing off constantly. We have some matters in this 
area. The health care guidelines address it. Our new draft 
joint venture guidelines address some of these issues, and we 
certainly will keep a very careful eye on the issue that you 
raise.
    Senator Kohl. Do you have a view on that, Mr. Klein?
    Mr. Klein. I agree with Chairman Pitofsky.
    Senator Kohl. Thank you, Senator DeWine.
    Senator DeWine. Senator Kohl, thank you very much.
    Senator Hatch is in a meeting at the present time with 
Attorney General Reno, and he has asked me to express his 
regrets to both of our witnesses for not being able to be here 
today. But he has requested that on his behalf I pose to you 
the following two questions. So assuming that I can read the 
honorable Senator's writing, I will read the questions to you. 
These are Senator Hatch's questions.
    Mr. Klein, as you well know, our antitrust laws allow for 
extraterritorial prosecution of anticompetitive acts abroad. In 
recent years, you have used this extraterritorial jurisdiction 
to prosecute anticompetitive behavior, such as those in the 
Bilkington Glass matter, and you have done this to the benefit 
of U.S. consumers and I want to commend you for that.
    Now, we are all aware of the recent increases in gasoline 
prices at the pumps. Much of this is attributable to the 
anticompetitive restrictions on oil production by OPEC and by 
the OPEC countries. My question is this. I would like to know 
if you have examined the possibility of applying our antitrust 
laws to examine any anticompetitive behavior on the part of 
foreign oil producers, that is, whether these producers are 
private actors or government bodies acting in a commercial 
capacity, which, as I understand, will not afford them 
protection under our foreign sovereign immunity laws. Do you 
believe this might be an avenue the administration, through 
trade negotiations, might address?
    Mr. Klein. Senator, you can tell my friend, Senator Hatch, 
that this is actually an area in which the Federal Trade 
Commission has taken the lead, so----
    Senator DeWine. Would you like to defer the question?
    Mr. Klein. I would like to have Chairman Pitofsky respond.
    Senator DeWine. All right.
    Mr. Pitofsky. What an unusual honor. Let me say that I want 
to answer the question, because I notice I was quotedin the 
paper this morning as saying that we have opened an investigation of 
the antitrust aspects of the OPEC cartel. Not quite true. Not quite 
true.
    We have been asked to testify, and our bureau director will 
testify next week before a House committee, and we have been 
asked to address the question of whether or not the antitrust 
laws could apply to OPEC. I am aware that there are some old 
cases, one in the Ninth Circuit about 15 years ago that said 
OPEC was protected by the state action doctrine.
    So we are looking at this question and we are reviewing the 
old cases. We want to see how they would apply to the modern 
situation with respect to the international oil industry, and 
Rich Parker, our bureau director, will testify next week. But 
we have not opened a formal investigation, but we will look at 
these questions.
    Senator DeWine. And you have not opened a formal 
investigation, why? Why have you not done that?
    Mr. Pitofsky. I think, given the history of antitrust 
enforcement in this area, we really have to take the measure of 
these older cases, the state action doctrine. I know the state 
action doctrine has been interpreted by the Supreme Court in 
recent years in the non-oil context, so before we fire off with 
anything approaching an investigation, we want to do our 
research and answer the questions that are put to us by the 
Congress.
    Senator DeWine. Mr. Chairman, let me ask you the second 
question. Now, this one is directed at you, but if you want to 
send this over to Mr. Klein, I am sure that would be more than 
fair. This is Senator Hatch's second question.
    The administration has asked for substantial increases for 
the budget of both the Antitrust Division as well as the FTC. 
The administration proposed to pay the requested increases with 
significant increases in HSR antitrust filing fees. The 
justification for the increases are yet to be provided, and 
both this committee and the appropriators will determine the 
appropriate funding level in due course.
    What I want to address, Senator Hatch continues, is the 
FTC's funding in general, and specifically the funding of the 
FTC's worthy but non-antitrust activities with antitrust fees 
imposed on those in the business community. Do you believe it 
is justified to fund the FTC's expanding non-antitrust 
functions with increased fees imposed on merger parties as the 
President proposes, or should we begin to consider other 
appropriate avenues for funding the Commission?
    Mr. Pitofsky. A very interesting question because, until 
recently, merger fees covered our antitrust mission, but the 
Treasury covered our non-antitrust mission. It is only in the 
last few years that our entire budget has been covered by 
merger fees. It is a call that is made by Congress and our 
appropriators rather than appropriate for me. There is enough 
money right now in merger fees to cover our entire budget, and 
if we amend the merger filing fee approach, which I know 
Senator Hatch has proposed and each of you has supported, then 
there would be enough money to cover even an expanded operation 
at the FTC.
    I support a sliding scale and raising the threshold amount. 
I can only say that whether it should cover only our antitrust 
function or all of our functions is a question that I am going 
to leave to Congress to decide.
    Senator DeWine. This is my question. Mr. Chairman, let me 
ask you one additional question. As you know, this subcommittee 
held a hearing in 1998 concerning the BP-Amoco merger and what 
its impact would be within the petroleum industry. At that 
time, we anticipated the BP-Amoco merger was the beginning of a 
wave of consolidation, and in fact, we have seen a good deal of 
consolidation since then.
    At that time, however, some representatives in the industry 
asserted that larger oil companies would be in a much better 
position to compete in the global market for oil production, 
and/or oil exploration. Is there any evidence thus far that 
this has been the case, and have you seen any other benefits to 
consumers as a result of mergers in the oil industry, or is it 
too early to tell?
    Mr. Pitofsky. We have struggled with the question of 
whether or not oil companies in this country and around the 
world are not large enough to achieve all the efficiencies that 
they possibly could. I have always been very skeptical about 
the argument that you need to be larger and larger and larger 
to be better. I have heard the quote from Steve Case, actually, 
of AOL, that larger is not better, better is better, and I 
think that is exactly right.
    As to these particular mergers, and BP-Amoco is the second 
in the string, then Exxon-Mobil and then BP-ARCO, we have been 
presented with contentions, claims that these mergers will 
reduce costs. We never were required to address that issue in 
Exxon-Mobil because the company agreed in a clean sweep to 
divest great amounts of assets that overlapped. So having 
eliminated what we felt was the competitive problem, we did not 
have to get to the efficiency issue.
    I think it is quite possible in an international, in a 
global oil market, that some of these mergers would lead to 
significant efficiencies. We have just never gotten to the 
point in any of our enforcement efforts where we had to argue 
pro and con on that issue. I think it is possible, but I would 
not take it sort of as given that you have to be larger in 
order to be more efficient. By and large, myexperience is that 
is not the case.
    Senator DeWine. I appreciate your answer. At the hearing 
that we held, the proponents of the mergers were adamant about 
this particular point, that they had to be this big in order to 
be able to sustain the production and the exploration. I had 
some questions about it at the time, and I guess time will tell 
and maybe give us a better idea whether they are correct in 
that area or not.
    Let me address this question to both of you, or either one 
of you. The increasing importance of the world market means 
that companies need the capacity and ability to compete 
globally. An effective international enforcement of the 
antitrust laws is essential to enable U.S. businesses to 
compete fairly.
    In this setting, the agreements and cooperation we have 
with foreign governments are certainly a critical aspect of 
maintaining competition in the global marketplace. We have seen 
advances during the past several years, especially with regard 
to our work with the Canadian and the European enforcement 
agencies, but we seem to be having less success, certainly a 
lot less success in other markets, such as the Japanese flat 
glass market. What are your thoughts on the overall progress of 
international enforcement and what steps are you taking to 
improve that enforcement?
    And second, a related question, we have signed a positive 
comity agreement with the Japanese government. Article 8 of the 
agreement provides a mechanism under which you are able to 
consult with the Japanese enforcement agencies on a yearly 
basis on a variety of antitrust and competition issues. Are you 
willing to use that provision to continue discussion with the 
Japanese government on the flat glass issue? Mr. Klein.
    Mr. Klein. Sure. I think it is a very important question, 
and I think, as you know, really prompted by comments that you 
and other members of the subcommittee have made, the Attorney 
General, on my recommendation, appointed the International 
Advisory Committee and they issued its report and addressed 
some of the front-end issues you asked about, Mr. Chairman.
    But my general sense is that you are right, that this 
progress in terms of international cooperation is really at its 
height with respect to our work with Europe and Canada and is 
really at very beginning stages in many ways with respect to 
the Pacific Rim, Japan, Korea.
    I thought we took a major step last year in signing this 
cooperation agreement. It took many, many years. But there is a 
very long-term view in Japan about antitrust enforcement. Until 
quite recently, they did not even review global mergers outside 
their borders. They have really not been, I think, a major 
player in the same way that the Europeans and Canadians have.
    Having said that, I think this new cooperation agreement is 
a very important first step. We have in the past consulted at 
our annual consultations with the Japan Fair Trade Commission 
respecting flat glass. We made inquiries not only during 
consultation time, but separate inquiries, and we have met 
numerous times and will continue to meet, I personally, my 
principal deputy who I charged with making sure that we took 
extra efforts in this area, to work with the parties to see 
what actions are appropriate, and I will certainly in our next 
bilateral consultation raise our concerns with respect to this 
matter again, Mr. Chairman.
    Senator DeWine. Mr. Klein, last month, Senator Kohl and I 
announced the results of a General Accounting Office, GAO, 
study that we sponsored, and this had to do with the 
development of competition in local telephone markets. The 
report concluded that local telephone markets are becoming 
increasingly competitive, but that incumbent local telephone 
providers still have 97 percent market share in the local 
markets.
    When we announced the study results, we knew the continuing 
importance of competitor access to the local network. This 
issue was raised yet again in a recent dispute between Bell 
Atlantic and local competitors in New York. Specifically, Bell 
Atlantic had some problems handling orders submitted by 
competing local phone companies and had to pay $13 million in 
fines. As you know, Bell Atlantic was the first company to 
fulfill the requirements of Section 271 of the 
Telecommunications Act of 1996, and we hope to see others do so 
in the near future.
    Specifically, Mr. Attorney General, what steps can be taken 
to ensure that we do not have similar problems in other local 
markets, and more generally, what is your assessment of the 
progress in competition among local telephone service providers 
under the Telecommunications Act? Why have we not seen more 
applications under section 271?
    Mr. Klein. Again, it is a series of very important 
questions. Let me just say, I think the principal problem we 
had with 271 and why it took a while before we saw our first 
successful application in Bell Atlantic was arguments over the 
price of access. When you have one company competing with 
another over the same copper wire, then the charge that the one 
company makes to the other can be very critical, and there was 
a lot of litigation that the local incumbents brought to 
challenge the pricing and, indeed, ultimately the 
constitutionality of the Act. We won all those cases, in 
essence and substantially, and I think we are now back on 
track.
    As a result, we saw the Bell Atlantic application. We have 
an advisory role in that process and we were concerned about 
Bell Atlantic. We thought they were very close to the finish 
line, but were not over the finish line, and we communicated 
that view in the 271 process.
    The Commission did grant their application and it was a 
tough call. It was one where I thought reasonable people could 
disagree on. But I think it is very important, Mr. Chairman, to 
make sure that all the ``i''s are dotted and ``t''s are crossed 
so that we do not have the kind of post-entry problems we had 
in Bell Atlantic.
    As a result, we had another application quite recently by 
SBC out of Texas, and again, this application is a serious 
application in that it reflects real progress and the 
beginnings of some real competition in Texas. But we still 
thought, while SBC had gone a long way, it had not gone over 
the finish line and we came in with a clear recommendation 
against the FCC approving that, because I do think, again, in 
order for this to stick--it is easy to get the application in, 
but in order to make competition stick, we need to do it.
    I am optimistic about this for two reasons, Mr. Chairman. I 
think what I said to Senator Kohl before, because of what we 
are seeing with respect to digitalization, there may be 
alternative pipes that can conduct telephony. AT&T is now in 
the process of rolling out and developing a roll-out plan for 
telephone over cable, and there is going to be obviously 
Internet telephony that is going to be expanded.
    I think the solution will become that much better when we 
have multiple means of access so that consumers can choose 
different pipes. Until then, we will continue to work with the 
FCC to ensure tough measures so that when people get in there, 
we will see greater competition.
    I want to say, we have seen tremendous success on the 
business side. It has been a true success story in terms of 
local competition. In large measure, that has been because the 
businesses are typically in concentrated areas. You can lay 
your own fiber. The competitive people can. But we are 
beginning to see, and it is small but it is significant, we are 
beginning to see 5, 6, some States 7, 8, 9 percent competition 
in local markets.
    Three years ago in this Congress, or 3\1/2\ years ago when 
the Congress passed the Act, or 4 years ago, there was zero. So 
we are moving in the right direction and it is going to move 
more rapidly in the years to come. I have always said that this 
is going to take some patience, but we are on the right track, 
and I think that is being borne out.
    Senator DeWine. Mr. Klein, I understand that you are 
currently reviewing the application of American Airlines to 
join in an alliance with Swiss Air and Sabina as a replacement 
for Delta Airlines. My understanding is that the immunity for 
alliances between KLM, Northwest, and United-Lufthansa are both 
past the 5-year expiration and, therefore, eligible for review, 
as well.
    Now, without taking a position on the competitive merits of 
any of these alliances, does it make sense to review one in a 
vacuum without examining the entire array of alliances 
currently in existence?
    Mr. Klein. I think this is an issue we have been doing some 
thinking about at the Antitrust Division in the following 
sense, Mr. Chairman. These antitrust immunity agreements--we do 
not favor antitrust immunity as a rule. We are in the 
enforcement business, not the immunity business. These immunity 
agreements come out of the fact that these deals are negotiated 
on a bilateral basis with our trading partners throughout the 
world in terms of issues of market access and the like. And so 
often, in order to get open skies agreements, which still 
increase competition, the Department of Transportation confers 
antitrust immunity.
    We are now moving into a new area. There are some important 
policy considerations as we, shall we say, enter this next 
phase, and I think we will certainly be taking a hard look and 
meeting with our colleagues at the Department of Transportation 
to talk about how to think about the second phase and what 
changes might or might not be appropriate.
    Senator DeWine. I want to thank our panel. Again, as 
always, you both have been very eloquent and very helpful to 
this committee and I think to the American people. I think that 
today's hearing has made it clear that antitrust enforcement is 
very important in today's economy, especially given the 
increasingly global economy and the continuing impact of 
mergers here at home.
    Both our witnesses have been doing an excellent job to help 
promote antitrust enforcement. Their testimony here today has 
been very useful to this committee as we continue to work to 
improve the competitive environment for businesses and 
consumers in this country.
    Let me conclude, though, by making two specific points 
regarding issues that were raised during today's hearing. 
First, with regard to the Hart-Scott-Rodino pre-merger 
notification law, I think it is important that we continue our 
efforts to reform it. The law has not been substantially 
modified since it was enacted in 1976 and it is clear from our 
discussions with the business community and members of the 
antitrust bar that reform is long overdue. I look forward to 
working with our witnesses, along with Senator Hatch and 
Senator Kohl, to address this very important issue.
    Second, I am also very concerned about the state of 
competition in the Japanese flat glass market. I appreciate the 
efforts of Mr. Klein and others at the Antitrust Division to 
engage their counterparts in the Japanese enforcement agencies 
on this issue, and I am hopeful that those efforts will succeed 
in opening the market in Japan.
    But I must say that my patience is wearing thin. American 
businesses have been unfairly excluded from the Japanese flat 
glass market for years and I am beginning to wonder if our 
enforcement agencies have enough tools currently at their 
disposal. If we do not see progress in the near future, I will 
consider legislation to remedy this problem. For global trade 
and commerce to flourish, we must have fair access to markets 
all over the world, and the flat glass market in Japan is most 
certainly not open to fair competition today. I will be 
watching carefully to see if this changes.
    Again, let me thank both of our witnesses for joining us 
here today in what I think has been a very productive hearing. 
The subcommittee is adjourned.
    [Whereupon, at 3:31 p.m., the subcommittee was adjourned.]

                                
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