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Vertical mergers in the technology, media and telecom sector – YOO – June 2019 OECD discussion

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This presentation by Christopher YOO, Professor of Law, Communication, and Computer and Information Science at the University of Pennsylvania Law School, was made during the discussion “Vertical mergers in the technology, media and telecom sector” held at the 131st meeting of the OECD Competition Committee on 7 June 2019. More papers and presentations on the topic can be found out at oe.cd/vmtm

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Vertical mergers in the technology, media and telecom sector – YOO – June 2019 OECD discussion

  1. 1. Roundtable on Vertical Mergers in the Technology, Media and Telecom Sector Christopher S. Yoo University of Pennsylvania OECD Competition Committee June 7, 2019
  2. 2. Introduction  Background note: case for blocking vertical mergers is weak  Empirical record: vertical mergers are generally procompetitive  Any enforcement actions should focus on exceptional cases  My goals  Discuss nuances of the ability-incentive-effect framework  Highlight the roles of theory and empirical evidence  Analyze remedies  Explore issues regarding quality, innovation, and regulation 2
  3. 3. Basic Analysis  Traditional methodology: ability-incentive-effects  Remedies as the final step: comparative second best  Roles of the theory and empirical evidence  Should analyze ability-incentive effect for each theory of harm  Should be backed by empirical evidence  Should lead to remedies that address the theory of harm  Example: internal contradictions in the U.S. Microsoft case 3
  4. 4. Analysis of United States v. Microsoft Source: Brennan (2001)  Fundamentally about vertical integration  Combination of browser and operating system  Combination of Microsoft Office and operating system Case Theory Evidence Remedy Plaintiff’s case MS created IE and Windows- specific Java to impede OS entry MS used OEM & ISP contracts to kill Netscape Vertically divide MS into OS and applications cos. 4
  5. 5. Analysis of United States v. Microsoft Case Theory Evidence Remedy MS created IE and Windows- specific Java to impede OS entry MS used OEM & ISP contracts to kill Netscape Vertically divide MS into OS and applications cos. 5
  6. 6. Analysis of United States v. Microsoft Case Theory Evidence Remedy MS created IE and Windows- specific Java to impede OS entry Reducing competition for browsers MS monopolized market for distribution of browsers MS used OEM & ISP contracts to kill Netscape Eliminate/limit exclusivity contracts for browsers Vertically divide MS into OS and applications cos. 6
  7. 7. Analysis of United States v. Microsoft Case Theory Evidence Remedy Protecting OS monopoly MS created IE and Windows- specific Java to impede OS entry Netscape plus Java is the best entry path into OS market Limit MS share of future OS market or require divestiture of IE Reducing competition for browsers MS monopolized market for distribution of browsers MS used OEM & ISP contracts to kill Netscape Eliminate/limit exclusivity contracts for browsers Vertically divide MS into OS and applications cos. 7
  8. 8. Analysis of United States v. Microsoft Case Theory Evidence Remedy Protecting OS monopoly MS created IE and Windows- specific Java to impede OS entry Netscape plus Java is the best entry path into OS market Limit MS share of future OS market or require divestiture of IE Reducing competition for browsers MS monopolized market for distribution of browsers MS used OEM & ISP contracts to kill Netscape Eliminate/limit exclusivity contracts for browsers Preventing applications lock-in Protect Windows by refusing to create Office for Linux or Internet Office is the killer app; MS favored its own applications Vertically divide MS into OS and applications cos. 8
  9. 9. Ability  Generally depends on structural preconditions  Concentration in the primary market  Concentration and entry barriers in the adjacent market  Depends on demand and supply substitution: e.g., video  Cable networks and the growth of short-form video  Online video distributors and the growth long-form video  Exception: sports  Emerging question: data 9
  10. 10. Incentives and the Role of Theory  Generalizing vs. exemplifying theory (Fisher 1989)  Generalizing theory relies on fairly general assumptions to establish broad propositions that apply broadly  Exemplifying theory employs specialized assumptions to show what can happen under particular circumstances  Theory’s primary role as providing possibility theorems  Criticism of the single monopoly profit theory as stylized  Acknowledgement that post-Chicago models are also stylized 10
  11. 11. Incentives and the Role of Empirical Evidence  Theory takes the form of “If P, then Q”  Good at demonstrating possibilities  Likelihood of outcome depends on whether P is true  Theoretical models must be parameterized  Example: Whinston’s tying model (1990)  Example: raising rivals’ costs 11
  12. 12. Analysis of Whinston on Tying (Yoo 2008)  Some buyers (b) want B, but do not want A  Market for B has minimum efficient scale (s)  Tying A and B can provide monopoly power over b  s must be larger than b  Duopoly breaks the effect 12 Firm 1 = 60 units Firm 1 = 60 units Firm 1 = 20 units Minimum efficient scale (s) = 25 Market for A Market for B Monopoly Case Firm 1 = 30 units Firm 1 = 30 units available for Firm 2 = 50 units Minimum efficient scale (s) = 25 Market for A Market for B Duopoly Case Firm 2 = 30 units
  13. 13. Analysis of Raising Rivals’ Costs (FTC 1990)  RRC assumes dominant firm will tie up an input  RRC models assume dominant firm will pay pre-tie up price  But if input supplier waits, can benefit from price increase  Provides incentive to hold out  Provides incentive to defect  Lewis (1992): will not work with large numbers  No empirical support that benefits > costs; hypotheses that undercut RRC are also plausible (Hovenkamp 1987) 13
  14. 14. Effects  Many models do not assess efficiencies: Whinston (1990)  Footnote 9 of the background note points out the ambiguity  TMT market structure often makes efficiencies plausible  Quality externalities often favor vertical integration  Particularly likely for platforms  Bresnahan & Trajtenberg (1995) on general purpose technologies  “Must have” content does not by itself lead to consumer harm  Event studies provide the best empirical evidence 14
  15. 15. The Difficulty Incorporating Innovation  Two competing conjectures  Arrow: small companies are more innovative  Schumpeter : large companies are more innovative  Inconclusiveness of the empirical literature  Danger of false positives  The failure of innovation markets (Gilbert & Sunshine 1995)  Greater difficulty for creative content than for inventions  Dynamic consequences of limiting profitability (finsyn) 15
  16. 16. Remedies  Behavioral/access remedies  General problems of administrability  Particular problems when quality varies  Requirement of merger specificity  Non-merger specificity of certain efficiencies: hold up, eliminating double marginalization, price discrimination  Uncertainty around vertical restraints: debate over Fisher Body  Comparative second-best analysis 16
  17. 17. Role of Regulation  All agree evasion of regulation can provide a theory of harm  EU law now sees competition law and regulation as complements  U.S. law sees competition law and regulation as substitutes  Presence of regulation weakens the need for antitrust liability  Agencies are better equipped to supervise access remedies  Typical example: price squeezes 17
  18. 18. Quibbles  Differences in the HHI thresholds for horizontal and vertical mergers (p. 12)  Court of Appeals’s correction of corporate profit maximization (pp. 16, 17)  Ambiguity of input substitution (p. 28) 18
  19. 19. Conclusions  Ability-incentive-effects model should include remedies  Cases must have coherent theories that are consistently applied  Theories must be backed by evidence  Economic theory has not yet fully incorporated innovation  Regulation plays an ambiguous role 19
  20. 20. Sources Timothy J. Brennan, Do Easy Cases Make Bad Law? Antitrust Innovations or Missed Opportunities in United States v. Microsoft, 69 GEO. WASH. L. REV. 1042 (2001). Timothy F. Bresnahan & M. Trajtenberg, General Purpose Technologies: “Engines of Growth”?, 65 J. ECONOMETRICS 83 (1995). Malcolm B. Coate & Andrew N. Kleit, Exclusion, Collusion or Confusion?: The Underpinnings of Raising Rivals’ Costs (FTC Bureau of Economics Working Paper No. 179, 1990). Franklin M. Fisher, Games Economists Play: A Noncooperative View, 20 RAND J. ECON. 113 (1989). Richard J. Gilbert & Steven C. Sunshine, Incorporating Dynamic Efficiency Concerns in Merger Analysis: The Use of Innovation Markets, 63 ANTITRUST L.J. 569 (1995). Herbert Hovenkamp, Antitrust Policy, Restricted Distribution, and the Market for Exclusionary Rights, 71 MINN. L. REV. 1293 (1987). Tracy R. Lewis, Preemption, Divestiture, and Forward Contracting in a Market Dominated by a Single Firm, 73 AM. ECON. REV. 1092 (1983). Michael D. Whinston, Tying, Foreclosure, and Exclusion, 80 AM. ECON. REV. 837 (1990). Christopher S. Yoo, Network Neutrality, Consumers, and Innovation, 2008 U. CHI. LEGAL F. 179 (2008). 20

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