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Innovation and Limits of Antitrust

Innovation and Limits of Antitrust

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Published by GlobalEcon
In “Innovation and the Limits of Antitrust” (Journal of Competition Law & Economics, Vol. 6, No. 1, 2010), Dr. Geoffrey Manne, Director at Global Economics Group, and Dr. Joshua D. Wright apply the analysis of error-cost minimization within the framework of innovation. They challenge the conventional wisdom that the error-cost approach implies that the rule of reason, rather than per se rules, should apply to most forms of business conduct. They identify five ways in which existing economic knowledge can be used to design simple rules that minimize error costs.
In “Innovation and the Limits of Antitrust” (Journal of Competition Law & Economics, Vol. 6, No. 1, 2010), Dr. Geoffrey Manne, Director at Global Economics Group, and Dr. Joshua D. Wright apply the analysis of error-cost minimization within the framework of innovation. They challenge the conventional wisdom that the error-cost approach implies that the rule of reason, rather than per se rules, should apply to most forms of business conduct. They identify five ways in which existing economic knowledge can be used to design simple rules that minimize error costs.

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Published by: GlobalEcon on Mar 16, 2011
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INNOVATION AND THE LIMITS OF ANTITRUST
Geoffrey A. Manne
Ã
& Joshua D. Wright 
† 
ABSTRACTFrank Easterbrook’s seminal analysis of error-cost minimization in
The Limitsof Antitrus
has special relevance to antitrust intervention in markets whereinnovation is a critical dimension of competition. Both product and businessinnovations involve novel practices. Historically, the economics profession hastended initially to rely upon monopoly explanations for such practices. Courtshave reacted with similar hostility. But almost always there has followed a morenuanced economic understanding of the business practice that recognized itsprocompetitive virtues. Antitrust standards have adjusted occasionally to reflectthat new economic learning. This sequence has produced a fundamental linkbetween innovation and antitrust error that transcends the uncontroversialpoint that the probability of false positives and their social costs are bothhigher in the case of innovation and innovative business practices. We discusssome principles for applying Easterbrook’s error-cost framework to innovation.We then discuss the historical relationship between antitrust error and inno-vation. We conclude by challenging the conventional wisdom that the error-cost approach implies that the rule of reason, rather than
per se
rules, shouldapply to most forms of business conduct. We instead identify simple filters toharness existing economic knowledge to design simple rules that minimizeerror costs. We make five such proposals.
JEL 
: B40; B41; K00; K21; L10; L12; L40; L41; L42; O38I. INTRODUCTION
In 1998, the Department of Justice and a number of states brought suitagainst Microsoft for various alleged violations of the antitrust laws involvingthe operating system and browser markets.
1
Even before that landmark anti-trust intervention into the operating system market, antitrust scholars, prac-titioners, and enforcers thoroughly debated the optimal design of competition policy and enforcement in innovative industries, what is often
Ã
International Center for Law and Economics, Lewis and Clark Law School, Portland,Oregon, USA. E-mail: gmanne@laweconcenter.org.
George Mason University School of Law and Department of Economics, InternationalCenter for Law and Economics, Arlington, Virginia, USA. E-mail: jwrightg@gmu.edu. Weare grateful to the participants at the Searle Center on Law, Regulation, and EconomicGrowth Research Roundtable on
The Limits of Antitrust 
Revisited for helpful comments. Wethank Jan Rybnicek and Judd Stone for superb research assistance. All errors are our own.
1
See generally
W
ILLIAM
H. P
AGE
& J
OHN
E.
OPATKA
, T
HE
M
ICROSOFT
C
ASE
:
A
NTITRUST
,H
IGH
T
ECHNOLOGY
,
AND
C
ONSUMER 
W
ELFARE
(Chicago Press 2007).
Journal of Competition Law & Economics, 6(1), 153–202
doi:10.1093/joclec/nhp032
#
The Author (2010). Published by Oxford University Press. All rights reserved.For Permissions, please email: journals.permissions@oxfordjournals.org
  on Ma ,  t  t  p/  /  j  l  e.of  oj  ounal  .ogownl  oae f  om 
 
described as the “New Economy”characterized by innovation, dynamiccompetition, multisided platforms, the potential for network effects andlock-in, and novel business models or marketing techniques. Much haschanged in the monopolization landscape since the
Microsoft 
decision over adecade ago: the U.S. Department of Justice has held hearings on the appro-priate scope of Section 2 and issued a report (and then repudiated it); theEuropean Commission has risen as a leader in single-firm conduct enforce-ment by bringing abuse of dominance actions and assessing heavy finesagainst firms including Qualcomm, Intel, and Microsoft; China has passedits own antitrust law and become an important stakeholder in debates overthe future of international antitrust.In the United States, the changed landscape has resulted in a new enfor-cement approach that is remarkably direct and honest in identifying itstargets, honing in on high-tech markets, innovative industries, and innova-tive practices. Indeed, large firms in markets involving innovation, intellec-tual property, standard setting, or the possibility of network effects havebeen put on notice of potential antitrust actions. Google has become themost discussed potential antitrust target, often bandied about by techies,bloggers, and business writers.
2
This is not without adequate cause.Consider the “warning shot” fired in Google’s general direction by AssistantAttorney General Varney. Analogizing the need for antitrust enforcement tothe Department of Justice’s successful monopolization suit against Microsoftin the 1990s, Varney remarked:
Microsoft is so last century. They are not the problem. I think we’re going to continuallysee a problem potentially with Google, who I think so far has acquired a monopoly ininternet, online advertising lawfully. I do not think that they have done anything otherthan be a spectacular and innovative company.
. . .
I think that this is a classic area toexplore how do you apply [sic] section 2 in a highly innovative, highly networked, not ter-ribly competitive environment.
. . .
2
See, e.g.
, Steve Lohr,
Google, Zen Master of Market 
, N.Y. T
IMES
, May 17, 2009,
available at 
http://www.nytimes.com/2008/07/07/technology/07google.html?pagewanted=print; Steve Lohr& Miguel Helft,
New Mood in Antitrust May Target Google
, N.Y. T
IMES
, May 17, 2009,
available a
http://www.nytimes.com/2009/05/18/technology/companies/18antitrust.html;Daniel Lyons,
They Might Be a Little Evil: Why Google Faces Antitrust Scrutiny
, N
EWSWEEK 
,May 23, 2009,
available at 
http://www.newsweek.com/id/198855; Farhad Manjoo,
The CaseAgainst the Case Against Google The Department of Justice Should Take a Hint from theMicrosoft Suit: No More Antirust Actions Against Tech Companies
, S
LATE
, July 28, 2009,
available at 
http://www.slate.com/id/2223755; Declan McCullagh,
In D.C. Antitrust Circles,How Google Became the Hunted 
, CNET N
EWS
, Sept. 9, 2008,
available at 
http://news.cnet.com/8301-13578_3-10036948-38.html; Declan McCullagh,
On Antitrust, Is Google theNext Microsoft 
, ZDN
ET
N
EWS
, July 23, 2007,
available at 
http://news.zdnet.com/2100-9588_22-152610.html; James Rowley,
Antitrust Pick Varney Saw Google as New Microsof
,B
LOOMBERG
.
COM
,
Feb. 17, 2009,
available at 
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aG9B5.J3Bl1w; Posting of Erick Schonfeld to TechCrunch, http://www.techcrunch.com/ (May 11, 2009); Fred Vogelstein,
Why Is Obama’s Top Antitrust Cop Gunning for Google?
, W
IRED
, July 20, 2009,
available at 
http://www.wired.com/techbiz/it/magazine/17-08/mf_googlopoly; WSJ Law Blog, http://blogs.wsj.com/law/ (May 8, 2009, 9:22 EST).
154
Journal of Competition Law & Economics
  on Ma ,  t  t  p/  /  j  l  e.of  oj  ounal  .ogownl  oae f  om 
 
Now I think youre going to see the same repeat of Microsoft, there will becompanies that will begin to allege that Google is discriminating, that it is notallowing their products to interoperate with the Google products, and I think thatwe ought to have learned from the Microsoft experience, what the right standards are,and the problem that we had with Microsoft, I think, as a government we went intoo late.
3
Like Microsoft before it, Google has become the paradigmatic potentialantitrust defendant in the context of the new approach taking aim at suc-cessful, innovative firms. There has been much debate in the antitrust com-munity over the merits of this new approach.
4
In some ways, these debatesbring back to the surface unresolved questions concerning the substantivemerits of antitrust enforcement actions against Microsoftand whether anappropriate lesson to be drawn from the
Microsoft 
case is that vigorous andsystematic intervention into innovative industries is an improvement relativeto the
status quo
or other feasible policy alternatives from a consumer welfareperspective.
5
The new approach does offer some certainty and clarity to firms in inno-vative industries: they have been duly warned. Whatever the merits of fulldisclosure of the potential antitrust exposure facing firms in the NewEconomy, this unambiguous new approach certainly lacks humility. Thisapproach, of course, has a variety of advocates and has been presented to avariety of degrees. Unfortunately, now Assistant Attorney General Varneyhas articulated one extreme and provocative variant of this new approach inan earlier speech in which she declared that “there is no such thing as a falsepositive.”
6
Varney’s statement further suggests that enforcement decisionswill proceed without regard to the cost to consumers of mistakenly wieldingthe antitrust hammer against innovative firms, suggesting that “the morepeople in the bars start rejecting this idea of false positives the better off we’re going to be.
7
Less than a year after the Supreme Court reinforcedthat error costs were a central component of monopolization doctrine, thesoon to be chief antitrust enforcer offered a dramatically differentandopposingview of the role of error costs in future antitrust enforcementdecisions.
8
3
Christine Varney, Remarks Before the American Antitrust Institute (Feb. 11, 2008),
availableat 
http://www.antitrustinstitute.org/Archives/Varney.ashx.
4
See, e.g.
, Posting of Matthew Karnitschnig to Deal Journal, http://blogs.wsj.com/deals/2009/05/12/putting-the-anti-back-into-antitrust-enforcement/ (May 12, 2009, 16:21 EST); RichardEpstein,
A Giant Step Backward in Antitrust Law
, F
ORBES
, May 19, 2009,
available at 
http://www.forbes.com/2009/05/18/christine-varney-antitrust-opinions-columnists-law.html.
5
See, e.g.
, P
AGE
&
OPATKA
,
supra
note 1.
6
Varney,
supra
note 3.
7
Id 
.
8
Pac. Bel. Tel. Co. v. linkLine Commc’ns, Inc., 129 S. Ct. 1109, 1113–14 (2009)(“Recognizing a price-squeeze claim where the defendant’s retail price remains above costwould invite the precise harm we sought to avoid in
Brooke Group
: Firms might raise their
Innovation and the Limits of Antitrust 
155
  on Ma ,  t  t  p/  /  j  l  e.of  oj  ounal  .ogownl  oae f  om 

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