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Out-of-Market Efficiencies in Competition Enforcement – CRANE – December 2023 OECD discussion

This presentation by Daniel CRANE, Richard W. Pogue Professor of Law, University of Michigan, was made during the discussion “Out-of-Market Efficiencies in Competition Enforcement” held at the 141st meeting of the OECD Competition Committee on 6 December 2023. More papers and presentations on the topic can be found out at oe.cd/omee. This presentation was uploaded with the author’s consent.

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OUT-OF-MARKET
EFFICIENCIES: A U.S.
PERSPECTIVE
Dan Crane, University of Michigan
December 6, 2023
Legal doctrine
■ U.S. v. Philadelphia National Bank (1963)
– Supreme Court prohibits use of efficiencies in one market
(commercial banking) to justify anticompetitive effects in
another market (retail banking).
■ Relatively few lower court opinions since, although generally
rejecting cross-market balancing as a formal proposition.
■ NCAA v. Alston (2021).
– “[T]he student-athletes do not question that the NCAA may
permissibly seek to justify its restraints in the labor market
by pointing to procompetitive effects they produce in the
consumer market.”
Agency practice
■ Historically, FTC and DOJ have taken a flexible approach in their
prosecutorial discretion.
– 2010 HMG fn 14:
■ “In some cases [] the Agencies in their prosecutorial
discretion will consider efficiencies not strictly in the
relevant market, but so inextricably linked with it that a
partial divestiture or other remedy could not feasibly
eliminate the anticompetitive effect in the relevant
market without sacrificing the efficiencies in the other
market(s).”
■ That language is gone from the draft 2023 Merger Guidelines.
Practical difficulties
■ Elevating importance of formal market definition:
– In both 2010 HMG and draft 2023 Merger Guidelines, agencies
seek approaches to identifying anticompetitive effects that do not
rely on formal market definition.
– Many economists are frustrated with formal market definition as too
confining and an impediment to merger enforcement.
– Without market definition, one can’t determine whether efficiencies
are “in market” or “out of market.”
■ Allocating system-wide efficiencies to particular markets:
– E.g. Sprint/T-Mobile (S.D.N.Y. 2020):
■ Court determines relevant geographic markets local;
■ Also finds large aggregate efficiencies from merger;
■ Difficult to allocate nationwide efficiencies to particular local
markets.
What’s the principle?
■ Formal principle: Each distinct product must be judged on its own.
– But why? Consumers often buy multiple products, and would prefer the
aggregate lowest price for the basket of products they purchase.
■ Example: Kottaras v. Whole Foods (D.D.C. 2012): Considering effect on
overall prices in consumer shopping basket—i.e., price increases in some
food items offset by price decreases in others.
■ Functional principle: One group should not be exploited through market power so
that another group can benefit.
– Example: Retail households in Philadelphia should not pay more for banking so
that large Philadelphia businesses can have cheaper access to credit.
– Problem: Antitrust analysis frequently considers trade-offs within a market.
■ E.g., generic pharmaceutical entry leads to lower prices for most
consumers, even though it increases prices for the branded version (bc of
price discrimination).
■ If we’re willing to consider trade-offs within a market, why not across
markets?
Alternative principle
■ Anticompetitive effects and efficiencies should not be traded off
either within a market or across markets when that would lead to
exploitation of economically vulnerable groups or otherwise regressive
or unjust reallocations of wealth.
■ Example:
– Proposed supermarket merger involves plans for merged entity to
move “upscale,” closing Store A in a poorer neighborhood but
opening new Store B in a richer neighborhood.
■ Scenario 1: Stores A and B are deemed geographically in the
same relevant market.
■ Scenario 2: Stores A and B are deemed geographically in
different relevant markets.
– Question: Should the analysis differ for Scenarios 1 and 2?

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Out-of-Market Efficiencies in Competition Enforcement – CRANE – December 2023 OECD discussion

  • 1. OUT-OF-MARKET EFFICIENCIES: A U.S. PERSPECTIVE Dan Crane, University of Michigan December 6, 2023
  • 2. Legal doctrine ■ U.S. v. Philadelphia National Bank (1963) – Supreme Court prohibits use of efficiencies in one market (commercial banking) to justify anticompetitive effects in another market (retail banking). ■ Relatively few lower court opinions since, although generally rejecting cross-market balancing as a formal proposition. ■ NCAA v. Alston (2021). – “[T]he student-athletes do not question that the NCAA may permissibly seek to justify its restraints in the labor market by pointing to procompetitive effects they produce in the consumer market.”
  • 3. Agency practice ■ Historically, FTC and DOJ have taken a flexible approach in their prosecutorial discretion. – 2010 HMG fn 14: ■ “In some cases [] the Agencies in their prosecutorial discretion will consider efficiencies not strictly in the relevant market, but so inextricably linked with it that a partial divestiture or other remedy could not feasibly eliminate the anticompetitive effect in the relevant market without sacrificing the efficiencies in the other market(s).” ■ That language is gone from the draft 2023 Merger Guidelines.
  • 4. Practical difficulties ■ Elevating importance of formal market definition: – In both 2010 HMG and draft 2023 Merger Guidelines, agencies seek approaches to identifying anticompetitive effects that do not rely on formal market definition. – Many economists are frustrated with formal market definition as too confining and an impediment to merger enforcement. – Without market definition, one can’t determine whether efficiencies are “in market” or “out of market.” ■ Allocating system-wide efficiencies to particular markets: – E.g. Sprint/T-Mobile (S.D.N.Y. 2020): ■ Court determines relevant geographic markets local; ■ Also finds large aggregate efficiencies from merger; ■ Difficult to allocate nationwide efficiencies to particular local markets.
  • 5. What’s the principle? ■ Formal principle: Each distinct product must be judged on its own. – But why? Consumers often buy multiple products, and would prefer the aggregate lowest price for the basket of products they purchase. ■ Example: Kottaras v. Whole Foods (D.D.C. 2012): Considering effect on overall prices in consumer shopping basket—i.e., price increases in some food items offset by price decreases in others. ■ Functional principle: One group should not be exploited through market power so that another group can benefit. – Example: Retail households in Philadelphia should not pay more for banking so that large Philadelphia businesses can have cheaper access to credit. – Problem: Antitrust analysis frequently considers trade-offs within a market. ■ E.g., generic pharmaceutical entry leads to lower prices for most consumers, even though it increases prices for the branded version (bc of price discrimination). ■ If we’re willing to consider trade-offs within a market, why not across markets?
  • 6. Alternative principle ■ Anticompetitive effects and efficiencies should not be traded off either within a market or across markets when that would lead to exploitation of economically vulnerable groups or otherwise regressive or unjust reallocations of wealth. ■ Example: – Proposed supermarket merger involves plans for merged entity to move “upscale,” closing Store A in a poorer neighborhood but opening new Store B in a richer neighborhood. ■ Scenario 1: Stores A and B are deemed geographically in the same relevant market. ■ Scenario 2: Stores A and B are deemed geographically in different relevant markets. – Question: Should the analysis differ for Scenarios 1 and 2?