Diana L. Moss

Behavioral Merger Remedies: Evaluation and Implications for Antitrust Enforcement

The 2011 revision to the Antitrust Division Policy Guide to Merger Remedies signals a shift in the Department of Justice’s approach to merger remedies. The earlier Remedies Guide, issued in 2004, emphasized structural remedies such as divestitures as the preferred approach to resolving competitive problems with mergers. In contrast, the 2011 revision is considerably more favorably disposed toward the use of behavioral remedies that proscribe specified anticompetitive behaviors of the merged companies. This apparent policy shift is illustrated by the behavioral remedies employed by the DOJ in three recent merger cases – Ticketmaster-Live Nation, Comcast-NBCU, and Google-ITA. These three cases involve the use of multiple behavioral remedies, ranging from access conditions (e.g., licensing and non-discrimination requirements), firewalls, anti-retaliation provisions, to arbitration requirements, and provide for monitoring and compliance enforcement. The expansive new approach to behavioral remedies raises a number of concerns about their likely operation, effectiveness, and requirements for ongoing government monitoring and compliance enforcement. Many of these issues are similar to problems encountered in traditional industry regulation, ranging from countervailing incentives to implementation costs. Behavioral remedies also pose practical problems for antitrust enforcement. This paper identifies a number of issues that warrant attention and prompt some concern. Based on this early analysis, a number of observations and policy recommendations are offered.

Competition Policy and the Transition to a Low-Carbon, Efficient Electricity Industry

U.S. industries are facing intense pressures to become more energy efficient, driven by the need to lower the carbon footprints of energy-intensive sectors and to achieve energy security. A successful transition to a new era of efficient, low-carbon electricity production and usage will require fundamental changes in the way we plan for, produce, deliver, and price a critically important commodity. The purpose of this article is to explore the importance of competition policy in a transitioning electricity industry. It starts by setting out the important precondition of the new era: market participants have fundamentally different objectives than in the old regime, and these changed objectives need to be recognized in order to fashion appropriate policy. Next, the paper presents some of the major competitive issues that are likely to arise in the new era, including: access and demand response technologies, the design of markets for CO2 emissions allowances, and transmission planning. The paper concludes with a number of recommendations for how competition policy can best promote a successful transition.

Electricity and Market Power: Current Issues for Restructuring Markets (A Survey)

This paper surveys the legal economic literature on market power in electricity over the last 15 years. Many of the market power issues in electricity fit within the broader, long-familiar rubric of antitrust analysis. But electricity also displays special characteristics and complexities that may require a more tailored approach--or even special guidelinesâ014for competition analysis. Most of the current research regarding market power in electricity focuses on five major areas: (1) withholding; (2) measuring market power; (3) market definition; (4) vertical issues; and (5) remedies. Numerous forms of withholding pose novel and serious policy issues, which are confounded by a virtually nonexistent role for antitrust and various impediments to effective regulatory enforcement. Much research has also been devoted to measuring market power, particularly in the aftermath of the California energy crisis. While empirical studies that diagnose and quantify market power are useful, they may also deflect attention from the broader issue of structural reforms that would address market power better than behavioral fixes. Market definition has been a key issue in merger and market-based rate policyâ014revealing the importance of transmission constraints and demand conditions in defining relevant markets. Current modeling approaches are limited in their usefulness, however, thus introducing the debate about the usefulness of simulation models. New vertical issues have also emerged over the last 15 years. New forms of ability to foreclose rivals (e.g., transmission rights and reliability) and incentive (e.g., increased concentration and M&A activity) pose policy challenges in light of renewed interest in the benefits of vertical rebundling. Finally, the research on remedies exposes the tension between structural and behavioral that has polarized antitrust and regulatory approaches to dealing with market power. But outside the realm of merger review, antitrust will likely continue to play a very limited role in electricity, leaving the burden largely on the shoulders of regulators.

Delivering the Benefits? Efficiencies and Airline Mergers

The merger of US Airways and American – a deal that will create the largest domestic passenger airline – will be a watershed for antitrust enforcement involving commercial aviation. It is the first contested case in which arguments that the merger would be likely to adversely affect competition and consumers drew upon direct evidence of higher fares and service cutbacks in previous airline mergers. This evidence bolstered the case made by the U.S. Department of Justice (DOJ), along with seven states and the District of Columbia, to enjoin the merger.2 US Airways-American, on the other hand, focused much of their response to the government’s Complaint on how the combination would produce substantial efficiencies, in the form of cost savings and consumer (“network”) benefits.Now that a settlement between the DOJ and the airlines has been reached, the opportunity for the court to explore US Airways-American efficiencies “defense” has passed. That process would likely have relied, in part, on direct evidence of whether promised efficiencies in previous airline mergers actually materialized.4 Indeed, if prior mergers had produced the predicted cost savings and network benefits, other things being equal, airline fares should be lower and consumers the beneficiaries of greater “connectivity.” But mounting evidence indicates that this is not the case.5 Moreover, public backlash to previous mergers is significant, as reflected in criticism of protracted system integrations, service cutbacks, and the deteriorating quality of commercial passenger service.This AAI White Paper explores these issues by examining the record on efficiencies that were promised in previous airline mergers. It goes the extra step to ask whether past mergers created inefficiencies that impose costs on consumers. The paper begins with a brief overview of how efficiencies are treated under the recently revised, 2010 U.S. Department of Justice (DOJ)/Federal Trade Commission (FTC) HORIZONTAL MERGER GUIDELINES (GUIDELINES).6 Next is an analysis of the types of efficiencies that are typically projected in airline mergers. The paper then frames and answers a number of key questions: (1) How do the actual costs of integrating systems in previous mergers of hub-and-spoke network airlines compare to predicted costs? (2) What can be said about whether network benefits such as increased “connectivity” projected in previous mergers have materialized? (3) Do mergers of large hub-and-spoke network airlines produce inefficiencies that impose costs on consumers? The final section draws conclusions and offers some insight into the implications of the recent US Airways-American settlement for airline efficiencies analysis. Major themes that emerge from the analysis include: Skepticism about projected efficiencies has likely caused airlines to load most of their projected efficiencies onto consumer (network) benefits, which are harder for antitrust enforcers to verify. System integration (e.g., integrating reservation and IT systems and combining workforces) in some past mergers has been difficult, protracted, and more costly than what was predicted by the airlines. Promises of network benefits involving increased “connectivity” in past mergers appear not to have fully materialized. Airlines cut airport-pairs from their systems after their mergers. Changes in carrier-caused delays since the last wave of airline consolidation emphasize the importance of further examining whether more intensive, merger-induced “hubbing” has exacerbated congestion. Expensive system integrations, loss of connectivity, and increased network congestion in the wake of previous airline mergers imply that promised efficiencies were overestimated, have not materialized as predicted, and potentially create inefficiencies. These effects limit cost savings and the potential for lower fares, shrink consumer benefits, and impose additional costs on consumers. In the event future airline mergers are proposed, antitrust enforcers should significantly discount predicted efficiencies and “net” estimated merger- induced inefficiencies from the carrier’s predictions.

The Proposed Merger of US Airways and American Airlines: The Rush to Closed Airline Systems

Should US Airways make a bid for American Airlines, currently in bankruptcy proceedings, the deal could present a conundrum for antitrust authorities. The transaction would create the largest domestic airline, reducing the number of legacy mega-carriers to three – Delta Air Lines (Delta), United Continental, and US Airways-American Airlines (US Airways-American). This consolidation would occur against an industry backdrop marked by a dwindling fringe of low-cost carriers (LCCs) and growing questions as to whether legacy look-alike Southwest Airlines-AirTran Airways (Southwest) exerts any significant competitive discipline in the industry. The merger could therefore hasten a troubling metamorphosis of the domestic airline industry from one in which hub airports were designed to accommodate multiple, competing airlines to a few large, closed systems that are virtually impermeable to competition and create a hostile environment in which LCCs and regional airlines have difficulty thriving and expanding.This White Paper, produced jointly by the American Antitrust Institute (AAI) and Business Travel Coalition (BTC), asks: What competitive issues should be the focus of antitrust investigators in reviewing the proposed merger of US Airways and American?The paper takes the position that a U.S. Department of Justice (DOJ) investigation into the proposed merger of US Airways and American should be informed by mounting evidence on the effects of previous airline mergers, namely Delta-Northwest and United- Continental. The White Paper presents a brief analysis of these combinations and highlights a number of preliminary observations that deserve a more in-depth look. These range from the effects of previous mergers on creating costly post-merger integration problems, substantially reducing rivalry on important routes, producing above-average fare increases, and driving traffic to major hubs and away from smaller communities.The White Paper continues on to evaluate key competitive issues raised by the proposed merger of US Airways and American that deserve some attention in an antitrust investigation. One is the expected outcome – similar to previous legacy mergers – that the proposed combination could eliminate competition on a number of important overlap routes, creating very high levels of concentration and potential harm to consumers. The risk that the proposed merger could adversely affect small communities through reduced levels of, or lower quality, air service is also worth a close look. Another observation is that the merger is unlikely to be one of complementary networks (as might be argued) and could instead create regional strongholds and solidify US Airways-American’s control over key airports. Any arguments that the merger is necessary to create another “equal-size” competitor to the existing Big 3 systems are also not compelling. The analysis concludes by examining the potential effect of the merger on buyer market power and disclosure of information regarding ancillary service fees.The joint AAI/BTC White Paper offers a number of concluding observations and recommendations. Among them is that our analysis of the US Airways-American merger– coupled with potential warning signs from previous legacy mergers – indicates that there may be enough smoke surrounding the proposed combination to indicate a potential fire. The merging parties therefore bear a heavy burden is demonstrating that their merger would not be harmful to competition and consumers.

Competition and Transgenic Seed Systems

The transgenic seed industry provides an ideal case study of major competition policy and antitrust enforcement questions associated with systems. These systems consist, at a minimum, of upstream markets for genetic traits (e.g., herbicide-tolerance and insect-resistance) and downstream markets for traited seeds. Corn, soybeans, and cotton are particularly important crops on which transgenic innovations have had an impact. The article begins by discussing the remarkable nature of the transgenic seed revolution, the role of innovation, and the importance of patent protection. It moves on to examine how rapid consolidation has created systems with significant vertical and horizontal integration. These sections help establish the framework for examining two major types of systems—open and closed. Such systems are defined primarily by whether the combinations or “stacks” of genetic traits contained in traited seed involve the technology of a single firm or multiple firms. They give rise to two major modalities of competition—intrasystem and intersystem rivalry. In transgenic seed, the presence of a dominant firm has arguably had a major influence on the evolution of these modalities, particularly through licensing policies for patented technology. The article highlights the difficult questions associated with the nexus between intellectual property law and antitrust law. Some progress is evident, however, as illustrated by landmark antitrust enforcement actions that address system issues.

Healthcare Intermediaries: Competition and Healthcare Policy at Loggerheads?

Competitive concerns in the U.S. healthcare industry have focused largely to date on providers, such as large hospital and managed care organizations. Recent attention has been drawn, however, to potential competitive concerns in other important parts of the supply chain, namely intermediaries or “middlemen.” Of particular interest are Pharmacy Benefit Managers (PBMs) and buying groups such as Group Purchasing Organizations (GPOs) and Physician Buying Groups (PBGs). Healthcare intermediaries can enhance economic efficiency by achieving scale and scope economies through access to larger product portfolios and multiple distribution networks. Buying group intermediaries can also reduce transactions costs by negotiating prices on behalf of multiple buyers, thus aggregating demand and leveraging buying power to obtain more favorable pricing for health plans, hospitals, and physician practices. In doing so, buying groups can potentially counteract the exercise of seller market power elsewhere in the supply chain. Intermediaries thus offer, at least in principle, benefits to competition and consumers.Intermediary markets, however, have undergone fundamental changes, and those changes may provide a powerful motivation for re-examining the conventional wisdom. For example, mergers of intermediaries drive higher levels of market concentration and create dominant firms. Vertical integration also extends the influence of some intermediaries to other levels in the supply chain. Some intermediary markets may therefore be conducive to anticompetitive outcomes that are not outweighed by claimed efficiencies. Yet federal antitrust authorities generally have not challenged intermediary conduct or consolidation, much like the merger approved by the Federal Trade Commission (FTC) in April 2012 between the two largest PBMs, Express Scripts and Medco. The foregoing developments in intermediary markets lay the groundwork for growing competitive concerns, including exclusionary practices and anticompetitive agreements. Anticompetitive practices impair beneficial vertical and horizontal competition while unduly influencing outcomes in markets upstream and downstream of intermediaries, many of which are highly concentrated. A complex overlay of legislated safe harbors, antitrust exemptions, and tailored antitrust policies governing the evaluation of healthcare intermediaries exacerbate competitive concerns. Intermediary conduct that is potentially designed to constrain competition affects a number of participants in the healthcare supply chain. Smaller manufacturers of pharmaceuticals, medical devices, and medical supplies, smaller distributors, and independent pharmacies are particularly exposed. Intermediate consumers of medical products (e.g., hospitals and physician practices) bear the adverse effects of antitcompetitive practices, which are passed on to insurers and, in turn, to the ultimate consumer or patient. The potential harm that flows from exclusionary practices is reflected in the traditional antitrust metrics of higher prices, restricted output, lower quality, less choice, barriers to entry, and slower innovation.But it is also apparent in more indirect ways that threaten to impair the achievement of healthcare policy goals such as affordable healthcare, choice in medical products, a stable supply chain, and diversity of supply. This American Antitrust Institute (AAI) White Paper examines the competitive role of healthcare intermediaries. These entities have become increasingly powerful and entrenched in the supply chain, a fact that has not escaped the attention of Congress, regulators, and state antitrust enforcers. The White Paper does not conclude that intermediary practices are anticompetitive – only thorough antitrust investigations can do that. However, it does articulate, using examples, the reasons that the conduct of certain healthcare intermediaries may be potentially detrimental to competition and consumers. Section II examines major features of intermediaries that are relevant to the analysis. Section III examines the intersection between public policy concerns and competition issues in healthcare. Section IV gives a brief overview of antitrust enforcement issues and the state of the law involving bundled discounts and exclusive contracts. To illustrate potential competitive and public policy concerns, Section V presents three case studies of healthcare intermediaries: (1) pediatric vaccines and PBGs, (2) drug shortages and GPOs, and (3) pharmacy choice and PBMs. Section VI concludes with policy recommendations and suggestions for further study.

Promoting Competition in the U.S. Electricity Industry: What Are the Big Policy Issues?

Abstract Among the author’s recommendations: remedies should be focused first on market structure, and only then on market conduct. Also, regional electricity markets must be identified, and changes in market structure carefully tracked.

Entrepreneurship and Antitrust

Despite the importance of entrepreneurship to innovation and economic growth, measures of business startups and other indications of entrepreneurial activity remain below historic norms. Consequently, growing interest resides at the intersection of antitrust and entrepreneurship. This special issue of the Antitrust Bulletin examines the nature and importance of entrepreneurship to the economy, the challenges that entrepreneurial activity poses for antitrust policy and analysis, and solutions intended to address those challenges.

Passing the Torch How Bert Foer Paved the Way for the Next Generation of Competition Advocates

During the past eighteen years, the American Antitrust Institute (AAI) has grown into the flagship competition advocacy organization in the United States. In handing off the leadership to his successor, AAI’s founder and first president, Bert Foer, leaves a legacy rich in the ideology of progressive antitrust. His successor, Diana Moss, discusses the challenges of making AAI into a durable institution moving forward, and she recaps the unique contributions to this special tribute issue by Harry First and Eleanor Fox, Robert Skitol, David Lawsky, and Bill Kovacic.