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Slide 1
The Strategic Abuse
of the
Antitrust Laws
R. Preston McAfee
Dec 6, 2006
Slide 2
VeriSign
-
Official registrar of .com and .net
- Sep 2003: redirects mistyped addresses to its own advertising site (sitefinder.com)
- ISPs object, ask ICANN to stop.
- VeriSign sued, contending ICANN’s decision was an illegal conspiracy
- Judge: so deficient not to merit a trial
Slide 3
The VeriSign Plot Thickens
- Popular Enterprises buys expired domains and redirects them to its own advertising site
- Popular sued alleging the existence of sitefinder.com violated the antitrust laws
- Suit is continuing
Slide 4
Roadmap
-
Examples
- Purposes
- Incentives to sue
- Government as strategic player
Slide 5
Colorado Chiropractic Council
- Sent 30 hospitals requests for privileges
- Nine did not admit CCCN
- These hospitals sued for restraint of trade
- Judge: “Completely without merit…completely lacking substance as the basis of an antitrust claim.”
Slide 6
Next Generation Realty
- Entrant in Iowa real estateEntrant in Iowa real estate
- Sought commission--sharing from incumbent Iowa Realty
- But Next Gen itself did not share
- Iowa Realty refused as not reciprocal
- Next Gen filed antitrust suit
- Iowa Supreme Court: “without merit”
Slide 7
Private Action
- Outnumber government suits nine to one
- Both Sherman Act (1890, sec 7) and Clayton Act (1914, sec 4) permit private antitrust suits
- Canada’s 1889 Combines Investigation Acts didn’t permit private litigation until 1976
Slide 8
General Idea
- Incentives for private antitrust litigation are not guided by consumer welfare
- What are the motives of firms engaged in private antitrust litigation?
- How can law be used strategically?
- How can the antitrust laws be crafted to minimize damage?
Slide 9
Strategic Use
- Antitrust can be used to
- Harassment and harm can be used to induce cooperation
- Often cheaper to sue than to defend
- Extortion reduces returns to investment
Slide 10
Reasons for Private Litigation
- Extort funds from a successful rival
- Walmart vs MC, Visa,
- Microsoft
- Change the terms of the contract
- Texaco & price discrimination
- Punish non--cooperative behavior
Slide 11
Reasons for Private Litigation
- Respond to an existing lawsuit
- Prevent a hostile takeover
- Discourage the entry of a rival
- Prevent a successful firm from competing vigorously
Slide 12 Prevent Vigorous Competition: Digital v. Intel
- Digital Alpha versus Intel Pentium
- Market dominance of Pentium
- Digital threatened litigation, labeling Intel a monopoly
- FTC starts inquiry
- Intel purchases Digital facilities, provides advantageous terms for Pentium
Slide 13
Who Profits?
- Actions can be either
- pro--competitive (cost reducing) or
- anti--competitive (rival’s cost raising)
- Examine incentive to sue in an economic model
Slide 11
Main Result
- Gain from preventing a pro--competitive action is larger than preventing an anti--competitive actions if
- Firm has a smaller share
- Market is dispersed
- Loss from pro--competitive rival action is increasing in number of firms
- Loss from anti--competitive action is decreasing in number of firms
Slide 11
Conclusion
- Antitrust laws often distorted to reduce competition
- Very undesirable side effect
- Outright ban on private antitrust litigation would solve that problem
- At cost of stopping some legitimate suits
- Encouraging more anti--competitive behavior
Slide 11
Conclusion, Continued
- Alternative models may provide best of both worlds
- Agency “gate--keeper” for private litigation
- Agency amicus curiae for private litigation
- Private financial support for agency litigation
- Decoupling damages and awards
- Providing experts to courts to reduce uncertainty
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