Essential Facilities and Trinko: Should Antitrust and Regulation be Combined

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Essential Facilities and Trinko Should
Antitrust and Regulation be Combined?

• Tim Brennan
• Professor, Public Policy and Economics, UMBC
• Senior Fellow, Resources for the Future,
  Washington, DC
• brennan_at_umbc.edu
• THE ENDURING LESSONS OF THE BREAKUP OF ATTA
  TWENTY-FIVE YEAR RETROSPECTIVE
• Center for Technology, Innovation, and
  CompetitionUniversity of Pennsylvania Law School
• April 18, 2008

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Outline

• U.S. v. ATT, Verizon v. Trinko same but for
  outcome
• Effective change from plain repugnance standard
• Not just dicta Credit Suisse
• Regulation matters From Baxter to Klein
• Regulation, antitrust as complements, not
  substitutes
• Essential facilities The hypothetical
  regulator test
• EFD, Trinko both gt Same agency does AT,
  regulation
• A good idea?

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The same case, but for the outcome
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Changes in attitudes from 1983

• MCI v. ATT, 708 F.2d 1081, 1102 (7th Circ.,
  1983)
• It is well established, however, that regulated
  industries "are not per se exempt from the
  Sherman Act." Georgia v. Pennsylvania R.R., 324
  U.S. 439, 456 (1945). "Repeal of the antitrust
  laws by implication is not favored and not
  casually to be allowed. Only where there is a
  'plain repugnancy between the antitrust and
  regulatory provisions' will repeal be implied."
  Gordon v. New York Stock Exchange, 422 U.S. 659,
  682 (1975), (quoting United States v.
  Philadelphia National Bank, 374 U.S. 321, 350-51
  (1963). As a further limitation, repeal is to be
  regarded as implied only where necessary to make
  the regulatory scheme work, and even then, only
  to the minimum extent necessary. Silver v. New
  York Stock Exchange, 373 U.S. 341, 357 (1963).
  Citations abbreviated.

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to 2004

• Verizon v. Trinko, 540 U.S. 398, 406 (2004)
• Indeed, a detailed regulatory scheme such as that
  created by the 1996 Act ordinarily raises the
  question whether the regulated entities are not
  shielded from antitrust scrutiny altogether by
  the doctrine of implied immunity. In some
  respects the enforcement scheme set up by the
  1996 Act is a good candidate for implication of
  antitrust immunity, to avoid the real possibility
  of judgments conflicting with the agency's
  regulatory scheme "that might be voiced by courts
  exercising jurisdiction under the antitrust
  laws."
• Congress, however, precluded that interpretation.
  Section 601(b)(1) of the 1996 Act is an
  antitrust-specific saving clause providing that
  "nothing in this Act or the amendments made by
  this Act shall be construed to modify, impair, or
  supersede the applicability of any of the
  antitrust laws." This bars a finding of implied
  immunity. Citations omitted.

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Not just dicta

• Credit Suisse v. Glen Billing, 127 S. Ct. 2383,
  2389, 2394 (2007)
• Where regulatory statutes are silent in respect
  to antitrust, however, courts must determine
  whether, and in what respects, they implicitly
  preclude application of the antitrust laws. Those
  determinations may vary from statute to statute,
  depending upon the relation between the antitrust
  laws and the regulatory program set forth in the
  particular statute, and the relation of the
  specific conduct at issue to both sets of laws.
• to permit antitrust actions such as the present
  one allegations of collusion still threatens
  serious securities-related harm. For one thing,
  an unusually serious legal line-drawing problem
  remains unabated. In the present context only a
  fine, complex, detailed line separates activity
  that the SEC permits or encourages (for which
  respondents must concede antitrust immunity) from
  activity that the SEC must (and inevitably will)
  forbid (and which, on respondents' theory, should
  be open to antitrust attack).

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The role of regulation From Baxter to Klein

• Bill Baxter, regarding U.S. v. IBM
• The IBM case is without merit and should be
  dismissed. Jan. 8, 1982 (Christopher Byron,
  Time, Jan. 18, 1982)
• Same date as announcement of divestiture
  settlement in U.S. v. ATT
• Joel Klein, supporting (then) accepted proposed
  divestiture in U.S. v. Microsoft
• I don't want to make light of it, it's a big
  thing, but it is a one-time division that will
  then enable the companies to grow and move on. If
  you think about it -- think about the ATT
  breakup again. You know how long they tried to
  regulate ATT (NewsHour, PBS, June 8, 2000)
• Unfortunately, Microsoft not regulated

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Regulation, antitrust as complements

• Why does antitrust matter more in regulated
  sectors?
• Regulation constrains profit at monopoly level
• Incentive to evade through normally benign
  vertical integration
• Discrimination Tying unregulated service to
  regulated service
• Cross-subsidization Misallocating costs to
  drive up regulated rates, capture profit
  elsewhere
• Otherwise incredible predatory threats become
  credible
• Baxters rationale Regulation shifts out
  antitrust demand curve
• But who should do antitrust in regulated
  industries?

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That brings us to essential facilities

• Trinko gets that rightat least outside
  regulation
• But how do we know when a facility is essential?
• The long-standing Section 2 market power
  conundrum
• Price, elasticity doesnt work Cellophane
  fallacy
• Theory asks What would a firm do facing a small
  but significant, non-transitory reduction in
  price?
• No market power Reduce output
• Market power Increase output
• Hypothetical regulator implementation problems
• Data on exogenous price limit rarely if ever
  present
• Puts regulatory cart before EF horse

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EFD, Trinkos common institutional implication

• EFD Antitrust agencies should be price
  regulators
• The only remedy is regulation
• Hypothetical regulation needed to identify EF
• Trinko Regulatory agencies should enforce
  antitrust laws
• Only a savings clause precluded simple implied
  immunity
• The regulator can do it, if authority in place
• Supported by Credit Suisse
• Both say, So, lets put them together!

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Is combining roles a good idea?

• It could be, after all
• Complementarity gt potential virtues in
  coordination
• Nature of the Firm
• On the other side The culture clash
• Do we want antitrust agencies thinking about
  central planning rather than markets as an
  option?
• Do we want regulators responsible for policing
  competitive performance in unregulated markets?
• The debate surely will go on

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Read more about it?

• Why Regulated Firms Should Be Kept Out Of
  Unregulated Markets Understanding the
  Divestiture in U.S. v. ATT, Antitrust Bulletin
  32 (1987) 741-93.
• Does the Theory Behind U.S. v. ATT Still Apply
  Today? Antitrust Bulletin 40 (1995) 45582.
• Making Sense of the Telecommunications Act of
  1996, Industrial and Corporate Change 5 (1996)
  94161.
• Promoting Telephone Competition A Simpler Way?
  in Gillete, Susan and Ingo Vogelsang (eds.),
  Competition, Regulation, and Convergence Current
  Trends in Telecommunications Policy Research
  (Mahwah, NJ Lawrence Erlbaum, 1999) 85103.
• Do Easy Cases Make Bad Law? Antitrust Innovation
  or Missed Opportunities in U.S. v. Microsoft,
  George Washington Law Review 69 (2001)
  1042-1102.
• Regulation and Competition as Complements, in
  Crew, Michael and Menahem Spiegel (eds.),
  Obtaining the Best from Regulation and
  Competition (Norwell, MA Kluwer Academic Press,
  2004) 1-20.
• Trinko v. Baxter The Demise of U.S. v. ATT,
  Antitrust Bulletin 50 (2006) 635-64.
• 2006 in Competition Policy and Enforcement An
  Economic Perspective (with Alan Gunderson),
  Canadian Competition Record 22, no. 4 (Summer
  2007) 67-93.