FEDERAL TRADE COMMISSION
HEARINGS ON GLOBAL AND INNOVATION-BASED COMPETITION
EXCLUSIONARY ACCESS RULES
IN STANDARDS AND NETWORK JOINT VENTURES
Statement of Steven C. Salop(1)
December 1, 1995
I. Introduction
I am pleased to have the opportunity to participate again in the Commission's hearings on Global and Innovation-Based Competition. Today's panel involves the analysis of the benefits and harms of foreclosure from networks and standards. The analysis of vertical foreclosure has been a longstanding interest of mine. I am submitting my joint article with Dennis Carlton along with this report.(2) I will draw heavily on that article in these remarks.
Networks and standards have been the focus of considerable economic and legal analysis in the past decade. However, this area is not new to antitrust. Fashion Originators Guild Association, St. Louis Terminal Railway Association, Associated Press, and Radiant Burners all involve issues of exclusion from (what are now called) networks and standards, as do more recent cases like AT&T, and IBM.
Foreclosure concerns often arise in the context of joint venture access rules. Joint venture access rules cover two main issues -- who can be admitted to the venture and at what price. Access rule disputes often arise in situations where the joint ventures are entities that facilitate vertical integration by its members, what Carlton and I call input joint ventures. The venture provides an input that the members individually use to produce and sell in the output market, often in competition with other members of the venture.
To illustrate, consider the "bubble diagram" illustrated in Figure 1 (attached). The joint venture provides an input exclusively to its members (M1, M2, and M3 in the diagram). Members in principle may compete in the output market with each other, non-members and other products. Non-members may be able to purchase inputs from competing input suppliers. Members may or may not be permitted to buy inputs from competing suppliers, depending on the venture's rules.
For example, in Northwest Stationers, the cooperative was an input joint venture that provided wholesale services to the retail stores that were its members. It denied access to the plaintiff Pacific Stationary by expelling it from membership. Pacific apparently claimed that the expulsion was in retaliation for its entry into the wholesale (input) market. Similarly, in Associated Press, the venture provided non-local news to members as an input into the sale of newspapers. The venture wished to deny admission to certain new applicants who competed with current members.
In this report, I will summarize an economic and legal framework for evaluating exclusionary access rules in joint ventures involving networks or standards. I want to highlight the following eight points.
First, most joint ventures raise no anticompetitive issues under the antitrust laws, instead representing efficient organizational responses to technology and consumer demand. Exclusionary access rules can increase efficiency by reducing costs and by maintaining investment incentives.
Second, exclusionary joint venture access rules can unreasonably restrict competition in some cases. This is most likely for ventures that encompass a large fraction of industry members. Network joint ventures raise particular concerns because network externalities and standardization benefits can lead to barriers to entry and expansion for firms excluded from the network. Exclusionary access rules can lead to anticompetitive exclusion in the input or output market and may be used to support pricing coordination.
Third, I do not favor treating ventures as single firms in evaluating access restraints. Joint venture rules can be used to restrict competition. Single firm restraints also raise other remedy issues that do not plague ventures. The existence of a joint venture demonstrates that cooperative use of property is feasible and economical. Thus, there is no reason to handicap antitrust enforcement by treating ventures as single firms.
Fourth, economic evaluation of competitive harm must focus on the concept of exclusionary market power. Exclusionary market power is the ability to raise prices above the competitive level or maintain supracompetitive prices by raising the costs of rival firms and thereby causing those competitors to reduce their output. The exercise of exclusionary market power can significantly harm consumers by disadvantaging competitors, even if it falls short of forcing the excluded firms to exit from the market. It also may involve preventing prices from falling, rather than raising prices above the initial level. Exclusionary market power may be exercised by a venture with an unconcentrated membership. One test of exclusionary market power involves the competitive evaluation of a hypothetical merger of venture members plus the firms excluded by the access rule under attack, where it is assumed that the no- merger state involves no exclusion either.
Fourth, economic evaluation of the net competitive effect of access rules involves precise identification and careful balancing of specific competitive benefits and anticompetitive harms. As a result, I do not favor giving joint ventures carte blanche to set access rules. Joint ventures may use access rules to achieve anticompetitive goals. Access restraints that raise competitive concerns may or may not be reasonably necessary for valid efficiency goals. Potential efficiency benefits and anticompetitive harms should balanced in light of the evidence. Thus, I generally favor a structured rule of reason approach to evaluating exclusionary access rules.
Sixth, in evaluating competitive harm under the structured rule of reason, I would not require the plaintiff to prove that admission to the venture is essential for its survival. Similarly, in evaluating efficiency benefits, I would not require (though I would, of course, allow) the venture to demonstrate that its access rules are essential to the survival of the venture. Instead, claims of harms and benefits should be weighed and balanced against each other in light of the evidence. In cases in which a high likelihood of significant anticompetitive harm has been established in a dominant network joint venture case, I expect that exclusivity rules seldom will be both reasonably necessary for the overall efficiency of the venture and sufficient to offset those proven competitive harms.
Seventh, standards of per se illegality or per se legality based either on the essentiality of the input to the plaintiff's survival in the market are prone to significant error. More complicated tests of market power, such as collective market share and merger tests, may be useful in a rule of reason evaluation but cannot form the basis for a good per se rule.
II. Potential Efficiency Benefits from Exclusionary Access Rules
Collaboration in the provision of inputs often is efficient.(3) Joint ventures can reduce the costs of production, distribution and transactions. For example, production costs can be reduced by eliminating duplication and permitting economies of scale and scope to be achieved. Joint ventures can reduce transaction costs involving interfirm coordination, such as those relating to standardization, network externalities, complementarities and free riding.
Joint ventures also can lead to the generation of increased investment incentives. If initial investors are unable to protect their intellectual property rights and earn an adequate return on their investments, incentives to invest will be diminished. A joint venture may permit more of these benefits to be captured.(4) Exclusionary access rules can contribute directly to the joint venture's efficiency. Many access restraints are geared towards these goals. These potential efficiencies raise the fundamental question of whether access rules should ever be questioned by the courts. For example, if a single firm develops a new product or is simply successful, it rarely is forced to share its assets with its rivals.
However, antitrust properly gives joint ventures less leeway than single firms. One reason is that a joint venture involves coordination among competing firms and so a concern with lessening of competition arises. Another is a venture's access rules may not be necessary for its efficiency or even contribute positively to it. Inefficient access rules might be selected for their anticompetitive benefits. As discussed later, a third reason is that existence of the venture demonstrates that cooperation is feasible.
Access rules vary greatly and may affect the size of the joint venture, the timing of member entry, the identity of members or with whom the members may deal. For example, concerns that later applicants will free ride on large and risky investments made by the founding members might lead a joint venture to close or increase application fees to new members after such investments have been made. In contrast, free riding issues are less likely to be as important for joint ventures that do not have large and risky investments. Free riding also is less of a concern for ventures whose primary function is to take advantage of network or standardization externalities. Early members of these joint ventures generally benefit from the addition of new members later on.
The claim by the venture that access restraints are necessary to maintain adequate investment incentives for members raises the tension between market power and incentives to invest. If accepted merely on the basis of general plausibility, it has the potential to be used as a justification for a broad array of anticompetitive restraints. Joint ventures are not a substitute for the patent system. The antitrust laws should not permit joint ventures to restrict competition solely to generate supra-competitive profits, just as they do not permit claims about ruinous competition to justify price fixing. Indeed, the sweep of this defense increases the importance of closely scrutinizing such claims.
Important evidence about efficiencies often will come from the operating history of the venture itself or the experience of similar ventures. For example, a claim that a firm cannot be allowed in the venture because it is too hard to protect trade secrets could be tested by observing what happened when this firm or others like it belonged to this or similar ventures. The innovation incentives claim applies better to closed ventures. If the venture has been open, that suggests that the venture has not viewed such protection as key to its success.
It can be difficult for outsiders to evaluate the efficiency that results from internal rules of operation. Courts should exercise caution in intervening in the operations of joint ventures. However, this does not mean that every efficiency claim should be blindly accepted. Some justifications are not cognizable under the antitrust laws. Some will not be plausible or logical, and some plausible justifications may conflict with the evidence.
For a justification to be valid, the efficiency benefits must result from the access restraints, not simply from the existence of the joint venture. The fact that it is efficient to permit a joint venture does not imply that every access restraint also is efficient. In short, as in other areas of antitrust, the exclusionary conduct must be demonstrated to be reasonably necessary to achieve the claimed efficiency benefits.
It sometimes is argued that exclusionary access rules protect competition by preventing joint ventures from becoming too large or by preventing collusion with other input suppliers.(5) If a venture combines firms that otherwise would compete more vigorously, then preventing such a combination could benefit consumers. Although this concern may be significant in some cases, such claims by networks raise issues of credibility. After all, this collusion might benefit the venture and its members.
III. Potential Anticompetitive Harms from Exclusionary Access Rules
Exclusionary joint venture access rules can harm competition in unregulated markets by facilitating the exercise of collective market power in three ways:(6) (i) supporting pricing coordination; (ii) input market exclusion; and (iii) output market exclusion. It is important for litigants and courts to distinguish among them.
A. Supporting Pricing Coordination
Joint ventures can directly limit member competition in the output market in order to raise prices and reduce output. A venture might directly control members output prices or output levels and set them at non-competitive levels.(7) A venture also could influence output prices indirectly, by raising input prices or restricting input usage. To illustrate, suppose the input joint venture illustrated in Figure 1 sets a very high price for its inputs. In this case, the high input price will push up the price of the output sold by the members.(8)
Exclusionary joint venture access rules can play a key role in supporting pricing coordination. First, the venture can enforce anticompetitive rules by threatening to terminate the membership of those members that compete too intensely. Second, where the venture's controls on members' output prices or outputs are indirect, an exclusionary access rule requiring that members exclusively use the inputs produced by the venture also may be necessary to facilitate pricing coordination by raising members' costs.
B. Input Market Exclusion: Disadvantaging Input Market Competitors
Joint venture access rules can harm competition by disadvantaging input market competitors. These disadvantages could lead those competitors to forgo entry or reduce their production, thereby decreasing competition in the network input market. These disadvantages could lead to higher input prices, which in turn could lead to higher output prices.(9)
Joint venture access rules can disadvantage input market competitors by imposing exclusivity requirements on members. Exclusivity requirements force members of the venture to make all- or-nothing choices between obtaining their inputs from the venture or obtaining them instead from input market competitors.(10) This can make the decision to obtain inputs from alternative sources more costly and, thus, less likely. As a result, the exclusivity requirement could significantly reduce the potential market available to the input market competitors. Where scale economies are important, it also could raise the costs of the foreclosed input market competitors or deter entry into the input market. Of course, in other situations, exclusivity merely may lead to a realignment of supply arrangements.
C. Output Market Exclusion: Disadvantaging Output Market Competitors
A joint venture access rule can harm competition by raising the costs or otherwise disadvantaging the rivals of its members in the output market.(11) Suppose that the joint venture refuses to admit as new members firms that would compete with current members. This exclusion can reduce output market competition and lead to higher output prices than would occur otherwise.(12)
However, such exclusion could only be a profitable and anticompetitive strategy under certain conditions in the input and output markets. In the input market, harm to excluded firms would occur only if their input costs are increased. Costs would rise, for example, if alternative input suppliers were unavailable, more expensive or less desirable, or if the exclusion would facilitate coordinated pricing by the remaining input suppliers.
In contrast, the strategy would fail to harm competitors if other actual and potential producers could supply the input to rival computer manufacturers at the same price and quality as provided by the venture or if the excluded applicants could efficiently and practically vertically integrate, either unilaterally or by forming equally efficient competing input joint ventures. The result here would be merely a supply realignment.
In the output market, even assuming that certain rivals' costs would be raised by the strategy, consumers may not be harmed by higher prices. Competition among the firms who are not disadvantaged, including members of the joint venture, perhaps would prevent any upward price effect from occurring. For example, suppose that members of the joint venture face no barriers to expansion in the output market, membership is unconcentrated and the members of the joint venture face intense outside competition. On these facts, competition likely would prevent price from rising above the initial level. Thus, if the allegation involves a claim that prices would rise above the initial level, there could be harm to competitors but not to competition on these facts.
This analysis suggests the importance of distinguishing among different anticompetitive allegations. On the one hand, expulsion of a small current member from a joint venture with low collective market shares in the input and output markets, as just discussed, is unlikely to harm consumers by raising prices. On the other hand, exclusion of more efficient potential applicants from a dominant venture could lead to consumer harm by preventing price decreases that would occur if they were admitted to membership.(13)
IV. Criticism of Current Legal Standards
I will discuss the legal analysis of joint venture access rules mainly in the context of output market exclusion. Many exclusionary access cases involve an allegation of output market exclusion. Moreover, this theory raises, I think, the most controversy and confusion among courts and commentators.
Courts and commentators have proposed a number of per se standards to govern exclusionary access rules. In Northwest Stationers, the Court focuses on market power in two ways. It states that a joint venture cooperative's membership restriction could be held per se illegal under either of two conditions: either the venture "possesses market power" or, the venture has "exclusive access to an element essential to effective competition."(14)
In the recent Visa case, the Tenth Circuit took a very different approach to market power. It adopted standards of per se legality.(15) Under one standard used by the Visa court, proof that the excluded applicant would be able to survive in the market absent access to the joint venture would provide a complete defense. Under another threshold standard, lack of market power in the output market would provide a complete defense and bar the plaintiff from trying to prove anticompetitive effect. The Visa court also gauged market power only by reference to output market concentration, based upon the individual market shares of members, not by reference to the collective market power or collective market share of the venture and its members.
Gauging market power based on the essentiality of the input is problematical. The Northwest standard does not define "essentiality" and, as literally stated, the requirement is not a short cut. If the excluded applicant can demonstrate that the "effectiveness of competition" is reduced, that showing demonstrates anticompetitive effect, by definition. The essentiality standard also is overinclusive. If the standard is taken to mean that the input is essential solely for the excluded applicant, then it erroneously ignores the potential for output market competition from firms other than the excluded applicants. Just because the input is essential for one applicant does not mean that it is essential for all.
The Visa court took the position that if an excluded firm can survive outside the joint venture, the access restriction should be legal. This standard of per se legality is defective in the opposite direction. First, the fact that the excluded applicant can survive in the market does not mean that the competition will be unaffected by the access restraint. Mere survival does not imply effective competition. Second, the rule is backward-looking. It improperly focuses on the viability and success of the excluded applicant in the past, not on the likely impact of the access rule on prices and market competition in the future.
These Courts' per se standards based on threshold tests of market power also are flawed. The Northwest collective market power rule does not state whether the relevant market power concept refers to the input market, the output market or both. The Visa standard, based on the concentration of the individual members of the venture in the output market, ignores the fact that the access restrictions are adopted collectively by the venture.
V. The Role of Exclusionary Market Power
The central problem with this essentiality/market power threshold approach is the failure to account for the nature and importance of exclusionary market power. As a result, these courts are unable to make a proper evaluation of conduct that in fact creates or exercises this type of market power. Courts would reach more accurate results if they would explicitly analyze exclusionary market power in evaluating exclusionary joint venture access rules.
"Exclusionary" market power can be defined as the ability of a firm (or group of firms) to raise price profitably above the competitive level or to prevent price from falling to a lower, more competitive level, by acting in ways that raise the costs of rival firms and thereby cause those competitors to restrain their output. In such circumstances, the actions of the first firm (or group of firms) have effectively excluded competition by rival firms by rendering that competition less effective, with resulting harm to consumers.(16) Exclusionary market power contrasts with the "classical" market power that is exercised when a firm (or group of firms) is able to raise price profitably above the competitive level by directly restraining their own output. Classical market power is exercised in circumstances where firms can increase profits simply by reducing the volume of their own output.(17)
In Visa, for example, the Tenth Circuit failed to understand the nature and anticompetitive potential of exclusionary market power. As a result, the court adopted an unjustifiably narrow view of what constitutes market power, holding that unless a joint venture's exclusionary conduct deprives the plaintiff of access to "essential facilities" that results in the complete ouster of the plaintiff from the relevant market, then the challenged practices cannot constitute an exercise of collective market power. Moreover, the court treated the existence of market power (narrowly defined in this way) as a threshold test in determining whether a viable Section 1 claim exists.
Ignoring the concept of exclusionary market power can lead courts into four distinct legal errors.
First, in requiring evidence that prices were increased above some initial or previous level, courts do not take proper account of exclusionary market power when they fail to appreciate that, in cases of exclusionary market power, the competitive harm is often the prevention of prices from falling to new, lower levels. Focusing solely on classical market power to raise price in analyzing such exclusionary conduct is to fall victim to the Cellophane Fallacy.(18)
Preventing price declines is precisely the kind of anticompetitive effect that is often intended and achieved by exclusionary conduct, and the harm to consumers may be just as significant in markets where higher prices are maintained as in other markets where prices are increased by exclusionary conduct. Indeed, this is particularly likely in network joint venture matters, where vastly improved technology has created sharp decreases in input costs, but exclusionary conduct can delay or prevent prices from falling by preventing the entry or raising the costs of more efficient or aggressive potential competitors.
Second, some courts and commentators fail to appreciate that restraining the expansion of a rival can harm consumers when if the rival remains a viable, but less effective, competitor in the market. Whether or not the challenged practice is intended to or succeeds in entirely excluding the plaintiff from the relevant market, the practice may impose a substantial competitive disadvantage upon the plaintiff and other competitors by raising their costs. Thus, applying a strong test of essentiality based on the ability of the excluded applicant to survive in the market can immunize exclusionary conduct that significantly harms consumers.
Third, courts often treat classical market power as a threshold inquiry that is to be addressed in isolation before considering the probable anticompetitive effects of the challenged conduct. This decision-making sequence might be proper for certain cases (e.g., mergers) that involve only classical market power, but it plainly is not adequate in cases that involve exclusionary market power. As just discussed, this procedure can lead to the Cellophane Fallacy. The exercise of exclusionary market power can take a great many forms, and its existence cannot generally be revealed except by a careful evaluation of the conduct by which it is exercised. In these cases, furthermore, it is the exclusionary conduct that creates the market power being evaluated, not the other way around.
Fourth, courts should not improperly focus on the atomistic structure of the joint venture's membership, rather than considering the members' collective market share and other factors that bear upon their collective market power. Again, consideration of the concept of exclusionary market power reveals this error. When a joint venture excludes rivals in order to prevent prices from falling, atomistic membership structure is irrelevant to the likelihood of anticompetitive harm. This is because the ability of members to raise prices through tacit price collusion is not at issue. By contrast, the venture's large collective market share, and other evidence of its collective ability to disadvantage efficient and aggressive competitors by excluding them, are highly relevant to the evaluation of exclusionary market power that can prevent price decreases in the output market.
Where market structure is used to gauge a venture's ability to raise or maintain price through collective exclusionary action, such a test must focus on collective rather than individual market power. It also must focus on the impact of exclusion. One such structural test is a "merger test" proposed in the Carlton-Salop paper, which focuses on the competitive effects of a hypothetical merger of all the actual members of a venture plus all those firms excluded from the venture, on the assumption that absent the merger, those firms nonetheless would be members of the venture.(19) If the competition that would remain after such a merger is so effective that there is no price effect from the merger, then it can be presumed that the venture has neither exclusionary nor classical market power.(20)
Some courts and the enforcement agencies have used a "collective market share" test.(21) Such a test would recognize the fact that a joint venture can control its members' costs and conduct even if the membership is atomistic in structure. This collective market share test is easier to administer than a merger test. However, this market share test would permit certain exercises of market power that the Carlton-Salop merger test would not.
Fifth, the failure to appreciate the significance of exclusionary market power also can contribute to a court's failure to scrutinize efficiency claims more carefully and skeptically. For example, instead of requiring proof that a joint venture's exclusionary conduct reasonably contributes to its efficiency, courts might improperly accept the premise that pursuing profits by disadvantaging rivals is merely vigorous competition that ought to be protected by the antitrust laws. Courts must recognize the key distinction between pursuing profits by competing efficiently and pursuing profits by limiting the effectiveness of rivals' competition.
VI. The Structured Rule of Reason
The advantage of per se rules is that, properly applied, they can lead to swift and relatively error-free decisions. However, per se rules in most joint venture exclusion cases will be neither simple nor relatively error-free, for three main reasons.
First, many cases of access restrictions that raise anticompetitive concerns also will raise at least plausible efficiency justifications that qualify the case for quick look or rule of reason evaluation.
Second, some proposed per se rules may not really involve much of a reduction in the needed amount of analysis. For example, determining that a hypothetical merger would not harm competition can be quite complicated.
Third, certain other proposed per se standards could entail significant error costs. For example, because they do not focus on exclusionary market power, I see no role for per se standards based on strong definitions of essentiality or viability. Depending on their exact definitions, these concepts may be highly probative for evaluating competitive impact of certain allegations. However, they should not by themselves form the basis for per se standards.
Similarly, per se standards that use a measure of concentration based on individual market shares can fail to identify collective market power and can lead to error in many cases. For example, the test is not relevant for evaluating allegations that the exclusion of new applicants will prevent price decreases.
For most cases, the economic framework set out here is best applied to a structured rule of reason standard that contains three elements. First, the plaintiff must state a specific claim of antitrust harm and antitrust injury that is both logically consistent and plausible.(22) Second, the court should determine whether the anticompetitive harm is likely to be significant, using the framework and the concept of exclusionary market power reviewed here. Third, the court should evaluate the magnitude of any efficiency or other competitive benefits claimed for the access restrictions and balance them against the magnitude and likelihood of any anticompetitive harm.
The decision-making sequence, burden of persuasion, and the proper standard used to balance the likelihood and magnitude of efficiency benefits against anticompetitive harms depends on the difficulty of evaluating each issue by each party, how error prone a decision is likely to be and the welfare consequences of potential errors.(23) The cost of error may include the precedential effect of the decision on the operation of other ventures as well as its effect on the venture at issue. It also includes the likelihood that the market will quickly correct judicial error through entry.(24)
In those cases in which there is credible and valid evidence of a significant likelihood of competitive harm and a significant likelihood of efficiency benefits from the exclusionary access rule, these conflicting forces would need to be balanced according to the proper antitrust welfare standard. As discussed earlier, I would not advocate requiring the plaintiff to demonstrate that admission to the venture is essential for its survival. I similarly would not advocate requiring every venture to demonstrate that its exclusionary rules are essential to the viability of the venture. However, in dominant network joint venture cases in which a significant likelihood of anticompetitive harms has been established, I expect that exclusivity seldom will be both reasonably necessary for the overall efficiency of the joint venture and sufficient to offset the demonstrated competitive harms.
Analysis under a structured rule of reason based on the concept of exclusionary market power should not mean that every joint venture access matter will involve endless fact finding, as might be imagined from the exhaustive and unstructured list of factors set out in Chicago Board of Trade.(25) Instead, the inquiry should be focused and structured around specific theories of competitive harm and efficiency benefits. Moreover, balancing often sometimes may be unnecessary. Courts can establish reasonable minimum burdens that claimed benefits or harms must meet before requiring balancing. As in the quick-look procedure, certain efficiency claims may be rejected without much analysis. Similarly, it will be easy to reject anticompetitive allegations for certain market structures. For example, if a closed venture with 5% of the input and output market expels one of five equal- sized members or refuses entry to one equally efficient applicant, a price effect is highly unlikely. In short, the structured rule of reason sometimes can be carried out in Professor Areeda's now- proverbial "twinkling of an eye."
VII. Remedy Analysis
One remedy for anticompetitive exclusionary access restraints by a network joint venture would be to mandate admission of the expelled members or excluded applicants. This remedy would undo the anticompetitive conduct and, thus, the likely anticompetitive effects.
This remedy raises a number of possibly controversial policy issues. Suppose there were a unilateral refusal to deal by a single firm. First, mandating access forces independent firms to cooperate. Such cooperation may not be feasible or practical. For example, a court would be quite reluctant to force a manufacturer to share its factory.(26) Second, if admission is mandated, the court may have to set an access charge. Courts generally do not like to set prices. Moreover, if the access price is set too low, incentives for creating new and risky joint ventures may be compromised.
Although a court should be sensitive to these issues in joint venture cases, they do not destroy the appropriateness of the remedy. Resolving these issues is more difficult when a court contemplates mandated access to the facilities of a single firm.(27) The fact that members are involved in a joint venture proves that cooperation is feasible. The joint venture already has membership fees that may be applied to the excluded applicants. A risk adjustment factor sometimes may be needed to account for large and risky investments by members who created the venture or invested earlier. However, in other cases, the network joint venture may remain open to all but the excluded applicants and expelled members, suggesting that a special risk adjustment over and above the fees charged to other new members is unnecessary.
I similarly disagree with those commentators who advocate treating joint ventures as single firms for antitrust analysis.(28) Although joint ventures may provide an input cooperatively, the input joint venture structure raises consumer welfare by having members continue to compete in the output market. Similarly, remedies that may be difficult to implement in the single firm context can be mandated in the joint venture context.
(1) Professor of Economics and Law, Georgetown University Law Center, and Special Consultant, Charles River Associates. I consulted with Dean Witter in the Visa case discussed below. I would like to thank Dennis Carlton for helpful comments and conversations. However, the opinions expressed here are my own and do not necessarily reflect his views or those of Dean Witter.
(2) Carlton and Salop, You Keep on Knocking But You Can't Come In: Evaluating Restrictions on Access to Input Joint Ventures (U. Chi. Working Paper No, 111 (1995)
(3) For a sampling of the many articles discussing efficiency benefits from joint ventures, see Joseph F. Brodley, Joint Ventures and Antitrust Policy, 95 HARV. L. REV. 1521 (1982); Carlton and Klamer, The Need for Coordination Among Firms, with Special Reference to Network Industries, 50 UNIV. OF CHICAGO L.R. 446 (1983); Grossman and Shapiro, Research Joint Ventures: An Antitrust Analysis, 2 J.L. ECONOMICS & ORGANIZATION 315 (1986); Kattan, Antitrust Analysis of Technology Joint Ventures: Allocative Efficiency and the Rewards of Innovation, 61 ANTITRUST L. J. 937 (1993).
(4) Of course, limiting competition in order to increase investment returns may lead to significant anticompetitive effects that outweigh the benefits of increased investment incentives.
(5) For example, see SCLC, ILC, Inc. v. VISA U.S.A., Inc., 36 F.3d 958 (10 Cir. 1994).
(6) Regulated input joint ventures also may structure themselves in order to evade regulation. I will not discuss that issue here. See Riordan and Salop, Evaluating Vertical Mergers: A Post-Chicago Approach, 63 ANTITRUST L.J. 513 (1995).
(7) For example, see National Collegiate Athletic Ass'n v. Board of Regents of the University of Oklahoma, 468 U.S. 85 (1984); U.S. v. Fashion Originators Guild Association, 312 U.S. 457,462.
(8) In this case, the profits are taken upstream in the input market rather than in the output market. See Shapiro & Willig, On the Antitrust Treatment of Production Joint Ventures, 4 J. ECON. PERSPECTIVES 113 (1990).
(9) This theory of input market foreclosure corresponds to the analysis of "customer foreclosure" in vertical mergers. See Riordan and Salop, supra note 6. See also Rasmussen, Ransmeyer & Wiley, Naked Exclusion, 81 AMER. ECON. REV. 1137 (1991).
(10) For example, see the allegation in Northwest Wholesale Stationers, Inc. v. Pacific Stationary and Printing, Co., 472 U.S. 284, 296 (1985).
(11) This theory of output market exclusion corresponds to the analysis of "input foreclosure" in vertical mergers. See Riordan and Salop, supra note 6.
(12) For example, the input Radiant Burners was unable to obtain was the AGA certification that it needed to market its burner. Radiant Burners, Inc. v. People's Gas Light & Coke Co., 364 U.S. 656 (1961). In Associated Press, the government essentially complained
that the members of the association were denying rival newspapers access to non-local news that would disadvantage or raise barriers to entry to these competitors. U.S. v. Associated Press, 326 U.S. 1 (1945).
(13) This distinction is discussed in more detail in Section V.
(14) Northwest Wholesale Stationers, Inc. v. Pacific Stationary & Printing, Co., supra note 10.
(15) Visa, supra note 5.
(16) See, Krattenmaker, Lande and Salop, Monopoly Power and Market Power in Antitrust Law, 76 GEO L.J. 241 (1987).. See also Bain, INDUSTRIAL ORGANIZATION 324-30 (1959); Bork, THE ANTITRUST PARADOX 156 (1978).
(17) W. Landes & R. Posner, Market Power in Antitrust Cases, 94 HARV L. REV. 937 (1981).
(18) For example, see Krattenmaker, Lande and Salop, supra note 16.
(19) Carlton and Salop, supra note 2. For example, if giving access to low cost applicants would reduce prices, the venture would fail this merger test because it would eliminate the competition that those applicants would induce. Jorde and Teece propose a different merger test that does not gauge exclusionary market power. See Jorde and Teece, Rule of Reason Analysis of Horizontal Arrangements: Agreements Designed to Advance Innovation and Commercialize Technology, 61 ANTITRUST L. J. 579 (1993).
(20) Note that failing this merger test would not prove by itself that an exclusionary access rule is anticompetitive. This is because the exclusion is not equivalent to the hypothetical merger.
(21) Rothery Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210. See also U.S. Dep't of Justice & FTC, Statements of Enforcement Policy and Analytical Principles Relating to Health Care and Antitrust; U.S. Dep't of Justice & FTC, Antitrust Guidelines for the Licensing of Intellectual Property.
(22) This suggestion, that the plaintiff be required to state its claims of anticompetitive effect with specificity, may seem obvious, but it is so often ignored that it is worth emphasizing. In order for courts and the agencies to streamline litigation, eliminate frivolous cases and carry out a proper and focused analysis, they require knowledge of the particular anticompetitive theory being claimed. In order to specify the proof needed, it is necessary that the allegations be well stated.
(23) Erlich and Posner, An Economic Analysis of Legal Rulemaking, 3 J. Legal Stud. 257 (1974); Beckner and Salop, Issue Sequencing, Summary Disposition and Optimal Legal Procedure (October 1995).
(24) For this latter reason, courts may choose to tip the balance towards legality in close cases that satisfy this condition. However, a particular concern with the network joint ventures is that many have economies of scale and sunk costs that reduce the likelihood of entry by rival networks.
(25) Board of Trade of City of Chicago v. United States, 246 U.S. 231, 238 (1918).
(26) See Baker, Compulsory Access to Network Joint Ventures Under the Sherman Act: Rules of Roulette, 1993 UTAH L. REV. 999 (1993).
(27) See Areeda, Essential Facilities: An Epithet in Need of Limiting Principles, 58 ANTITRUST L.J. 841 (1990).
(28) Baker, supra note 26; Schmalensee and Evans, Economic Aspects of Payment Card Systems and Antitrust Policy Towards Joint Ventures, 63 ANTITRUST L. J. 861 (1995).