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Antitrust Challenges for the Obama Administration

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By Steven Pearlstein
Sunday, May 17, 2009

With the impending retirement of Supreme Court Justice David Souter, Washington is gearing up for yet another noisy battle over abortion. To my mind, that's a missed opportunity. For rather than spending all our time trying to ferret out the nominee's stance on Roe v. Wade, we could be grilling her on her views on Verizon v. Trinko.

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Never heard of Trinko? That's the case in which Justice Antonin Scalia, writing for a unanimous court, effectively stomped all over decades of antitrust precedent and enshrined in case law the view of Chicago school economists that monopolies are actually good for consumers because they attract the money and talent necessary for innovation.

In fact, those who favor active and aggressive application of the antitrust laws haven't won a victory in the Supreme Court in 16 years. During much of that time, the idea took hold in the courts and in the enforcement agencies that markets could generally be relied on to correct their own excesses. Now that the Wall Street meltdown has exposed that fantasy and eroded public faith in unregulated markets, President Obama has a golden opportunity to put antitrust enforcement back on the public agenda.

Even with the political winds at his back, however, it won't be easy.

Last week, Christine Varney, the Justice Department's new antitrust chief, took the unusual step of rescinding guidelines on predatory conduct by dominant firms that the Bush administration had issued only months before. The guidelines had reassured firms with large market shares that the government would go after only the most brazen business practices designed to crush competitors or to keep new companies from entering the market -- and then only if consumer harm substantially outweighed the benefits. Varney said that on her watch, the onus would be on dominant firms to show that exclusionary or restrictive practices were not anticompetitive.

This approach will get its first test soon when the Federal Trade Commission -- which has similar and weirdly overlapping antitrust responsibility -- will decide whether Intel's practice of offering big volume discounts on its computer chips is nothing more than a kickback meant to throttle competitors. Last week, the European Union concluded that the discounts and other practices were anticompetitive and slapped Intel with a record $1.7 billion fine. But while European law focuses much more on maintaining competition, American antitrust law focuses on prices and whether a practice or a merger will cause direct harm to consumers. And since Intel's volume discounts lower prices rather than raise them, the burden is on the FTC to show why they should be barred.

To do so, the FTC may have to convince the courts that the economics of high-tech industries such as software and computer chips are significantly different from those of the "old economy" and require new and different tests for predatory behavior. And that's where things become difficult, because the FTC then runs up against the natural disinclination of many judges to engage in a bit of judicial activism, stretching old precedents or creating new ones.

High-tech cases often rest on the proposition that a particular practice, or a merger, will lessen the number of rivals in a market and thereby lessen the intensity of the competition to create new products. It is well established in economic theory that anything that weakens competition in this "market for innovation" will eventually raise prices or reduce the speed at which they decline. But because it is usually not possible to predict the extent of these effects with any precision, such cases demand the kind of speculation that judges are often loath to engage in.

Think of it this way: Show a judge a study by a reputable economist concluding that a merger will raise retail prices 10 percent in the market for office supplies, and you've got a slam-dunk case. But ask a judge to bar a merger of two drug companies that will reduce costs by billions of dollars a year, solely because the merger might reduce the number of labs working on ovarian cancer and possibly delay the day when a cure is found, and you've got an uphill legal battle on your hands.

Varney will soon get a chance to test some of these antitrust theories and demonstrate her enforcement mettle if the Justice Department moves to block the merger of Ticketmaster, the country's biggest seller of tickets to rock concerts and sporting events, with Live Nation, the largest manager of music talent and music venues. It is almost certain that it will. Ticketmaster, after all, has a history of predatory behavior that has helped drive up ticket prices, winning the enmity of a number of big-name entertainers. And Live Nation's recent entry into the ticket business had offered the best challenge in years to Ticketmaster's market dominance.

Best of all, U.S. v. Ticketmaster would give Varney the opportunity to stand arm in arm with Bruce Springsteen and Pearl Jam and offer a generation of Americans a lesson about antitrust law and another good reason for caring about who sits on the Supreme Court.

pearlsteins@washpost.com


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