Person:

Elhauge, Einer

Horizontal shareholdings exist when a common set of investors own significant shares in corporations that are horizontal competitors in a product market. Economic models show that such horizontal shareholdings are likely to anticompetitively raise prices when the owned businesses compete in a concentrated market. Recent empirical work not only confirms the prediction of these models, but also reveals that such horizontal shareholdings are omnipresent in our economy. I show that such horizontal shareholdings can help explain fundamental economic puzzles, including why corporate executives are rewarded for industry performance rather than just individual corporate performance, why corporations have not used recent high profits to expand output and employment, and why economic inequality has risen in recent decades. I also show that stock acquisitions that create such anticompetitive horizontal shareholdings are illegal under current antitrust law, and I recommend antitrust enforcement actions to undo them and their adverse economic effects.

The Supreme Court recently held that in reverse payment settlements of drug patent disputes, anticompetitive effects can be inferred if the reverse payment exceeds the patent holder’s anticipated litigation costs, absent some offsetting justification. Application of this standard is problematic because defendants usually (a) obscure the amount of the reverse payment and (b) claim their settlement was justified by risk aversion. Further, even if a net reverse payment can be proven, it is little help in estimating the period of delay or damages. This Article offers another type of evidence that demonstrates and quantifies anticompetitive effects. An otherwise unexplained bump in the patent holder’s stock price shows that the settlement created new future profits by extending the period without generic competition beyond what the stock market expected. The stock market test has several advantages: it rebuts the risk aversion claim (which cannot explain the stock price rise); it more effectively (though still conservatively) captures damages than the magnitude of the reverse payment; and, finally, it relies on the behavior of objective traders rather than deal makers with well-understood incentives to obscure the presence of a payment. We conduct a stock market event study on one of the early instances of a reverse-payment settlement to illustrate how the method works.

Various arguments attempting to resurrect the single monopoly profit theory of tying have been made, but none are successful. The Seabright claim that it is supported by a lack of empirical proof fails because the single monopoly profit theory is an impossibility theory, and my recommended exception applies to whatever empirical extent the necessary conditions for that theory actually exist. The claim that a lack of empirical proof favors critics of current tying doctrine also fails because it is the critics that favor a categorical rule (of legality either for all ties or for all ties that lack substantial foreclosure) that requires empirical proof across the category. In contrast, current tying doctrine uses no categorical rule, but rather weighs efficiencies against anticompetitive effects in each case and permits ties to whatever extent it turns out to be empirically true that the efficiencies outweigh the anticompetitive effects. Current tying doctrine is thus preferable to the critics’ recommended alternatives whether the standard is consumer welfare or total welfare, and whether one thinks most ties flunk that standard or not.

Seabright also makes the more minor claim that, absent empirical proof that most ties harm welfare, the law should shift the burden of proof on efficiencies away from defendants. But this claim fails because: (1) the burden of empirical proof on legal issues is on those who want to overrule precedent, (2) the fact that defendants have better access to evidence on tying efficiencies favors putting the burden of proof on them regardless of what one assumes about the welfare effects of most ties, (3) the relevant category is not all ties, but ties covered by current doctrine with my exception, a category that excludes ties without market power, ties of items routinely bundled in competitive markets, and fixed ratio ties of products that lack separate utility and create no substantial foreclosure share, and (4) theoretical considerations indicate that ties in the relevant set will usually reduce both consumer welfare (the actual antitrust standard) and ex ante total welfare.

The Crane-Wright claim that bundled discounts cannot credibly threaten unbundled prices that exceed but-for prices conflicts with the facts that: (1) firms can credibly threaten the refusal to sell at any price that is necessary to get buyers to agree to tying and monopoly pricing and (2) in markets with many buyers, buyers have collective action problems that make them price takers.

My conclusions on the subset of ties that are metering ties is confirmed by Nalebuff’s models. However, I think it more accurate to model metering ties by assuming that (1) buyers purchase a whole number of tied units rather than (as he assumes) infinitely divisible fractions of tied units, and (2) buyers have varying valuations rather than (as some of his models assume) the same valuation for tied product usage over the relevant range.

My legal conclusions are also generally confirmed by First’s conclusions using a multi-goal approach, but I prefer a welfarist analysis because I find the multi-goal approach and its non-welfarist components conclusory and unpersuasive when they conflict with welfare.

We consider loyalty discounts whereby the seller promises to give buyers who commit to buy from it a lower price than the seller gives to uncommitted buyers. We show that an incumbent seller can use loyalty discounts to soften price competition between itself and a rival, which raises market prices to all buyers. Each individual buyer’s agreement to a loyalty discount externalizes most of the harm of that individual agreement onto all the other buyers. The resulting externality among buyers makes it possible for an incumbent to induce buyers to sign these contracts even if they reduce buyer and total welfare. Thus, if the entrant cost advantage is not too large, we prove that with a sufficient number of buyers, there does not exist any equilibrium in which at least some buyers do not sign loyalty discount contracts, and there exists an equilibrium in which all buyers sign and the rival is foreclosed from entry. As a result, with a sufficient number of buyers, an incumbent can use loyalty discounts to increase its profit and decrease both buyer and total welfare. Further, the necessary number of buyers can be as few as three. These effects occur even in the absence of economies of scale in production and even if the buyers are not intermediaries who compete with each other in a downstream market.

We show that loyalty discounts create an externality among buyers even without economies of scale or downstream competition, and whether or not buyers make any commitment. Each buyer who signs a loyalty discount contract softens competition and raises prices for all buyers. We prove that, provided the entrant’s cost advantage is not too large, with enough buyers, this externality implies that in any equilibrium some buyers sign loyalty discount contracts, reducing total welfare. Moreover, if loyalty discounts require buyers to commit to buy only from the incumbent, there exists an equilibrium in which all buyers sign, foreclosing the rival entirely. As a result, the incumbent can use loyalty discounts to increase its profit and decrease both buyer and total welfare.

Disgorgement of illicitly-gained profits is a legally available remedy, but is rarely sought by antitrust agencies. This piece argues that the main conventional explanation for its rare usage - the availability of private damage remedies - is often unconvincing given obstacles to such suits, and is becoming even less convincing given recent antitrust decisions narrowing private and class action damage suits. Further, because the behavioral and structural remedies otherwise sought by the government are often ineffective in monopolization cases, disgorgement might often be a referable governmental remedy. Finally, if we understood the EC claim for excessive pricing to be a claim for disgorgement of profits earned through the anticompetitive acquisition of a dominant position, we could both make better policy sense of that claim and fill a regulatory gap that EC law would otherwise leave for exclusionary conduct that created a dominant position, but did not abuse existing dominance.

Courts and commentators are sharply divided about how to assess reverse payment patent settlements under antitrust law. The essential problem is that a PTO-issued patent provides only a probabilistic indication that courts would hold the patent is actually valid and infringed, and parties have incentives to structure reverse payment settlements to exclude entry for longer than this patent probability would merit. Some favor comparing the settlement exclusion period to the expected litigation exclusion period, but this requires difficult case-by-case assessments of the probabilities of patent victory. Others instead favor a formal scope of patent test that allows such settlements for non-sham patents if the settlement does not delay entry beyond the patent term, preclude non-infringing products, or delay non-settling entrants. However, the formal scope of patent test excludes entry for longer than merited by the patent strength, and it provides no solution when there is either a significant dispute about infringement or a bottleneck issue delaying other entrants. This paper provides a way out of this dilemma. It proves that when the reverse payment amount exceeds the patent holder’s anticipated litigation costs, then under standard conditions the settlement will, according to the patent holder’s own probability estimate, exclude entry for longer than both the expected litigation exclusion period and the optimal patent exclusion period, which both harms consumer welfare and undermines optimal innovation incentives. Further, whenever a reverse payment is necessary for settlement, it will also have those same anticompetitive effects according to the entrant’s probability estimate. This proof thus provides an easily administrable way to determine when a reverse payment settlement is necessarily anticompetitive, without requiring any inquiry into the patent merits. We also show that, contrary to conventional wisdom, patent settlements without any reverse payment usually (but not always) exceed both the expected litigation exclusion period and the optimal patent exclusion period, and we suggest a procedural solution to resolve such cases.