Thomas A. Lambert

Appropriate Liability Rules for Tying and Bundled Discounting

Professor Einer Elhauge’s highly acclaimed article, Tying, Bundled Discounts, and the Death of the Single Monopoly Profit Theory, 123 Harv. L. Rev. 397 (Dec. 2009), contests two propositions on which efficiency-minded antitrust scholars have largely agreed: (1) that there should be no tying liability absent substantial tied market foreclosure (a position contrary to the legal status quo), and (2) that courts should recognize a safe harbor for any bundled discount that results in above-cost pricing that could be matched by an equally efficient, single-product rival. Elhauge maintains that tie-ins that do not cause substantial tied market foreclosure may nonetheless occasion adverse “power” effects that the U.S. Supreme Court has properly deemed to be anticompetitive. Those power effects may also result, Elhauge argues, from bundled discounts (even “above-cost” bundled discounts) that involve artificial inflation of the unbundled “linking” product price. These conclusions lead Elhauge to defend prevailing tying doctrine and to advocate a bundled discount rule that eschews price-cost comparisons and instead focuses on whether the discounter has raised the unbundled price of its linking product above but-for levels. This Article asserts a comprehensive response to Elhauge’s provocative arguments. With respect to tying, the Article shows that governing Supreme Court precedent does not deem the non-foreclosure “power” effects of the practice to be anticompetitive and that those effects are unlikely to reduce social welfare in the long run, especially after accounting for dynamic efficiencies. With respect to bundled discounting, the Article shows that Elhauge’s proposed liability rule is both inapposite to consumer harm and inadministrable and that both “linked” market foreclosure and a form of below-cost pricing are necessary for anticompetitive harm and should therefore be prerequisites to antitrust liability.

The Roberts Court and the Limits of Antitrust

Antitrust is back in vogue at the U.S. Supreme Court. Whereas the Rehnquist Court decided few antitrust cases in its latter years (only one from 1993 to 1995, one each year from 1996 through 1999, and none from 2000 to 2003), the Roberts Court issued seven antitrust decisions in its first two years alone. Numerous commentators have characterized the Roberts Court’s antitrust decisions as radical departures that betray a pro-business, anti-consumer bias. While some of the decisions do represent significant changes from past practice (see, e.g., Leegin, which overruled the 1911 Dr. Miles rule of per se illegality for minimum resale price maintenance, and Twombly, which abrogated the infamous “no set of facts” pleading standard set forth in the 1957 Conley v. Gibson decision), the “pro-business/anti-consumer” characterization of the Roberts Court’s antitrust decisions is inaccurate. The characterization - caricature, really - fails to appreciate the fundamental limits of antitrust, a body of law that requires judges and juries to make fine distinctions between procompetitive and anticompetitive behaviors that frequently resemble each other. While false acquittals of anticompetitive conduct may harm consumers, so may false convictions of procompetitive actions. And efforts to eliminate errors in liability judgments are themselves costly. Optimal antitrust rules will therefore aim to minimize the sum of decision costs (the costs of reaching a liability decision) and expected error costs (the social losses from false convictions and false acquittals). Each of the Roberts Court’s antitrust decisions can be defended in light of this “decision-theoretic” approach, an approach calculated to maximize the effectiveness of the antitrust enterprise, to the ultimate benefit of consumers. This Article first describes the fundamental limits of antitrust and the decision-theoretic approach such limits inspire. It then analyzes the Roberts Court’s antitrust decisions, explaining how each coheres with the decision-theoretic model. Finally, it predicts how the Court will address three issues likely to come before it in the future: tying, loyalty rebates, and bundled discounts.

A Decision-Theoretic Rule of Reason for Minimum Resale Price Maintenance

In holding that minimum resale price maintenance (RPM) is not per se illegal but should instead be evaluated under the rule of reason, the Leegin Court directed lower courts to craft a structured liability analysis that will separate pro- from anticompetitive instances of the practice. Thus far, courts, regulators, and commentators have proposed four types of approaches for evaluating instances of RPM: (1) approaches focused on the effects on consumer prices; (2) approaches focused on the identity of the party initiating the RPM (i.e., manufacturer or dealer(s)); (3) approaches focused on whether the product at issue is sold along with dealer services that are susceptible to free-riding; and (4) an approach, favored by the Federal Trade Commission, that mechanically applies factors the Leegin Court deemed to be relevant to the liability question. Reasoning from a decision-theoretic perspective that seeks to minimize the sum of the error costs and decision costs expected to result from the governing liability rule, this article critiques these four sets of proposed approaches. Finding each deficient, the article sets forth an alternative evaluative approach that would minimize the sum of decision and error costs, thereby maximizing the net social benefits of RPM regulation.

Bank Lobbying: Regulatory Capture and Beyond

In this chapter, our goal is to discuss whether and how bank lobbying in the United States leads to regulatory capture. First, we provide an overview of the importance of and motivations behind bank lobbying. Second, we examine the impact of lobbying on banking regulation and supervision by reviewing recent empirical evidence. Third, we discuss the effect of the rising influence of the banking industry on the global financial crisis. Finally, we conclude with policy implications.

Winning Connections? Special Interests and the Sale of Failed Banks

We study how lobbying affects the resolution of failed banks, using a sample of FDIC auctions between 2007 and 2014. We show that bidding banks that lobby regulators have a higher probability of winning an auction. In addition, the FDIC incurs higher costs in such auctions, amounting to 16.4 percent of the total resolution losses. We also find that lobbying winners have worse operating and stock market performance than their non-lobbying counterparts, suggesting that lobbying results in a less efficient allocation of failed banks. Our results provide new insights into the bank resolution process and the role of special interests.

An Austrian analysis of contemporary American business law

This chapter applies Austrian insights relevant to analysis of American business law. Modern corporation and partnership law, perhaps surprisingly, largely coheres with an Austrian theory of the firm, although recent regulations affecting corporate conduct and securities offerings, enacted in the wake of financial scandals, undermine these principles. On the other hand, antitrust law operates under a static view of markets that is inconsistent with Austrian principles, although recent antitrust decisions have been more consistent. We set forth aspects of Austrian thought most relevant to an analysis of American business law. We have shown that this rich body of thought that has proven so useful in analyses of institutions (e.g., the Socialist Calculation debate) and monetary and fiscal policies (e.g., Austrian business cycle theory) has much to offer in the economic analysis of specific legal rules.

Decision Theory and the Case for a Disclosure-Based Insider Trading Regime

Stock trading on the basis of material, nonpublic information (insider trading) is a “mixed bag” in that it can create both social harms and social benefits. Attempts to regulate such mixed bag business practices may err in two directions: They may wrongly permit or encourage socially undesirable instances of the practice at issue, or they may wrongly condemn or deter socially desirable instances. In either case, social welfare suffers (i.e., “error costs” result). Attempts to avoid error in one direction or another by heightening the liability inquiry will tend to increase the administrative costs (“decision costs”) of the regulatory regime. Decision theory therefore calls for regulating mixed bag practices under a regime that “minimizes the sum of error and decision costs.” Adjudged under the decision-theoretic criterion, the current regime for regulating insider trading in the United States fails; it is difficult to administer, and it deters many instances of socially desirable informed trading. The approach apparently favored by the enforcement agencies fares even worse. The laissez-faire, “contractarian” approach favored by many law and economics scholars would represent an improvement over both the legal status quo and the approach favored by the enforcement agencies, but that approach, too, may be suboptimal.This paper advocates an optional, disclosure-based regulatory regime. Under the regime, authorized informed trading would be permitted as long as the trader first disclosed to a centralized, searchable database her insider status, the fact that she was trading on the basis of material, nonpublic in-formation, and the nature of her trade. Such an approach would (1) enhance the market efficiency benefits of insider trading by facilitating “trade decoding,” while (2) reducing potential costs stemming from deliberate mismanagement, disclosure delays, and infringement of informational property rights. By “accentuating the positive” and “eliminating the negative” consequences of informed trading, the proposed approach would perform better than the legal status quo and the leading proposed regulatory alternatives at minimizing the sum of error and decision costs resulting from insider trading restrictions.

Antitrust Analysis of Bundled Discounts

The Third Circuits decision in Lepages v. 3M created a great deal of uncertainty about the legality of so-called bundled discounts - i.e., discounts (or rebates) conditioned upon purchasing multiple products from disparate product markets. This paper, prepared for a joint Department of Justice/Federal Trade Commission hearing on single-firm exclusionary conduct, describes the competitive risk bundled discounts present, summarizes and critiques the six leading approaches courts and commentators have proposed for evaluating the legality of such discounts, and proposes an alternative evaluative approach.