William Hall served as the economic expert for attorneys from Latham & Watkins and Swidler Berlin Shereff & Friedman as they persuaded the FTC to close its heavily data-intensive investigation of Harrah’s purchase of Horseshoe’s three casinos. Assisted by Senior Vice President Paul Godek and Senior Economist Joel Papke, Hall explained why the acquisition would not permit Harrah’s to reduce competition in the FTC’s geographic area of concern.
Senior Vice President Jonathan Neuberger and Senior Economist Manny Macatangay recently testified on behalf of the defendant in Indiana Michigan Power Co. vs. United States of America at trial in the US Court of Federal Claims in Washington DC. On behalf of the relevant government agency, the US Department of Energy, Dr. Neuberger, who was the government’s key expert, testified with respect to past and future damages claims arising from contract breach, and Dr. Macatangay testified with respect to long-term energy market forecasts as well as empirical methods for energy market analysis. In a decision filed May 21, 2004, US Court of Federal Claims Judge Robert H. Hodges, Jr. ruled that plaintiff’s claims for damages over the relevant past period are unfounded, and that plaintiff’s claims for future damages are disallowed.
In a recent decision, the U.S. District Court in New York City agreed with the analysis of Kent Mikkelsen, EI Senior Vice President, on the suitability of a benchmark for the rate Music Choice should pay BMI for a performing rights license. BMI, a leading performing rights organization, provides licenses to music users to perform works within its repertory. Under terms of a 1994 consent decree with the Department of Justice, royalty disputes between BMI and music users can be brought to U.S. District Court in New York. Music Choice had asked the Court to determine a “reasonable” royalty rate for the performance of music by cable and satellite operators that transmit Music Choice programming to residential subscribers. An earlier decision in this case was remanded to the District Court by the Second Circuit.
Leveraging its extensive industry knowledge with its strong financial modeling and statistical capabilities, Economists, Inc. has begun offering customized risk management solutions to both financial and non-financial corporations. EI’s approach is to determine the individual needs of each company and to tailor our analysis to fit the client’s particular situation. EI thus offers complete and customized solutions to each and every client in order to address their unique risk management needs. EI’s Risk Management Services is led by Jonathan Neuberger, Senior Vice President. For more information
Michael Baumann, Paul Godek and Kent Mikkelsen from EI’s Washington, D.C. office and Jonathan Neuberger from EI’s San Francisco Bay Area office have been promoted to the position of Senior Vice President. Mike Baumann joined EI in 1986, and his experience encompasses the analysis of antitrust matters, mass media regulation, and the calculation of damages. Since joining EI in 1988 Paul Godek has presented numerous written and oral arguments to the antitrust authorities and to various other federal agencies. Kent Mikkelsen joined EI in 1986 and recently testified before the U.S. Senate Commerce Committee on FCC media ownership rules. Jonathan Neuberger, who joined EI in 2002, specializes in financial economics, valuation, and damages analysis.
Barry Harris joins Michael Spence, James Rosse, Roger Noll, Bruce Owen, Peter Greenhalgh, William Myslinski, David Argue, Matthew Wright, and Jonathan Walker on EI’s Board of Directors and will serve as Chairman. Dr. Harris first joined EI in 1985 after having held positions at the US Department of Justice and the Interstate Commerce Commission. In 1992, Dr. Harris took a leave of absence from EI to serve as Chief Economist and Deputy Assistant Attorney General of the Antitrust Division of the US Department of Justice. Dr. Harris returned to EI in 1993 and continues to consult and testify in many antitrust cases.
EI principal, Dr. William C. Myslinski, recently testified on behalf of defendant in Frederick L. Sample, et al., vs. Monsanto Co., et al. at a class certification hearing in the US District Court for the Eastern District of Missouri. Dr. Myslinski testified on behalf of Defendant Monsanto with respect to both the antitrust and tort claims concerning economic impact and common proof. In a decision filed September 30, 2003, US District Court Judge Rodney Sippel denied the plaintiffs’ motion for class certification for the antitrust claims and granted summary judgment in favor of the defendants with respect to the tort claims.
Vice President Henry B. McFarland was appointed Vice-Chair of the Communications Industry Committee of the Antitrust Section of the American Bar Association. The Antitrust Section is an organization of over 13,000 antitrust professionals that was formed to promote analysis, debate, and education in the field of antitrust law and policy. Henry is currently responsible for his committee’s listserv and web site.
Dr. Stoner participated as a panelist in the FTC/DOJ Roundtables on Competition and Intellectual Property Law and Policy in the Knowledge-Based Economy, both in Berkeley (February 26, 2002) and in Washington, DC (October 30, 2002). At the Berkeley session, he presented a review of the economic literature on the relationship between patent protection and innovation. His talk included a discussion of the various rationales that have been put forth for patent protection, the theory of optimal patent length and breadth, the notion of patent races, and the growing empirical literature in this area. In the DC session, he participated in a panel discussion, along with a number of prominent scholars and practitioners, on several IP-related topics, including the economic goals of the patent system, the interpretation and application of the obviousness doctrine, the competitive consequences of overly broad patents, the potential abuse of continuations, and whether there should be special recognition of “research tools.”
Barry C. Harris and David A. Argue both testified before the FTC/DOJ Hearings on Health Care and Competition Law and Policy on antitrust issues in hospital and physician transactions. Harris, who spoke at a session on hospital geographic market definition, noted that two common mistakes in applying the Merger Guidelines are a failure to identify a market consistent with the stated method of exercising market power and a failure to consider the impact of firms that do not compete throughout the merging firms’ joint service area in assessing the profitability of a hypothetical price increase. One of Argue’s sessions concerned issues in litigating hospital mergers in which he discussed the agencies’ failure to implement the Merger Guidelines framework in their analyses including issues like internal consistency of theories, dynamic analysis, and proper accounting for the Critical Loss. He also addressed aspects of estimating prices in the FTC hospital retrospectives. In addition, Argue discussed issues in physician market definition for antitrust analyses.
EI President, Jonathan Walker, testified at an arbitration proceeding concerning the enforceability of a non-compete provision against three California investment bankers. Non-competes are generally unenforceable in California, but an exception exists when the non-compete is part of the sale of a business and is necessary to protect the value of the business sold from unfair competition. Dr. Walker’s testimony concerned the competitiveness of the investment banking industry and the impact of the investment bankers’ competition on the value of the firm sold.
Under the Government Performance and Results Act (GPRA), the FTC and DOJ provide estimates of the consumer benefits that result from the agencies’ merger enforcement actions. The article offers a brief overview of the GPRA requirements and describes in detail the FTC and DOJ methodologies in estimating such consumer benefits. The article also provides a comparison and a critical review of the estimation methodologies used by the two agencies.
Principal Stephen E. Siwek who was assisted by Senior Economist Gale Mosteller submitted testimony for directory publishers in two complaints about overcharges for telephone subscriber listings, the first complaints of this type filed under the FCC’s section 208 complaint process. The telephone companies attempted to defend their rates by submitting cost studies that did not adhere to the FCC’s SLI order, 14 FCC Rcd. 15550 (1999), because they failed to justify their rates with credible and verifiable cost data and ignored listings revenues from subscribers that helped to cover the costs of their listings databases. In Yellow Book USA v. Broadwing and Cincinnati Bell Telephone, defendants settled by lowering the rate from 22 cents to 4 cents per listing for base files. In MacLeodUSA Publishing Company v. Wood County Telephone Company, the FCC ordered that Wood County must charge no more than 4 cents per listing for base files, rather than its original rate of 65 cents.
Jonathan Walker testified at an arbitration proceeding in a dispute between AOL / Time Warner and Homestore Inc. concerning alleged breach of contract. The alleged breach concerned a multi-year distribution agreement and network impression carriage plan. The parties ultimately resolved their differences prior to any ruling by the arbitration panel.
On May 22, 2003, EI Vice President Kent Mikkelsen testified before the U.S. Senate Commerce Committee. The hearing was convened to consider current FCC media ownership rules. Mikkelsen testified that the so-called “duopoly” rule and the broadcast-newspaper cross-ownership rules could be eliminated because antitrust enforcement would preserve economic competition and diversity. He further testified that the national television station cap served neither competition nor diversity, since both are determined locally, and that none of the rules effectively promoted “localism.”
Changes in market conditions, including divestiture of ownership of some CRSs and expansion of the use of the Internet to make air transportation bookings, have changed the dynamics of CRS competition but have not obviated the need for CRS regulations.
CRS regulations, including those governing bias, functionality, and the relationships among airlines, CRSs, and travel agent subscribers, continue to provide an important framework that is necessary to prevent anticompetitive and discriminatory conduct that would harm airlines not affiliated with CRSs (particularly smaller airlines), to preserve airline competition, and thereby to benefit consumers in terms of prices and services.
Two CRS rules that DOT proposes to eliminate-the mandatory participation and non-discriminatory booking fee rules-should be maintained, extended to affiliated airlines, and applied to all entities that are the functional equivalent of CRSs. These rules remain necessary to protect airline and CRS competition, particularly for consumers and smaller airlines.
The two rules provide essential protection for consumers and airlines that are not affiliated with CRSs (particularly smaller airlines) from competition-distorting behavior that is likely to occur absent regulation (and in fact did occur prior to enactment of the rules). Mandatory participation rules preclude airline owners1 of CRSs from withholding participation in, or inventories from, competing CRSs in order to disadvantage these CRSs in competition for travel agent subscribers. Non-discriminatory pricing rules preclude airline owners of CRSs from charging rival airlines higher fees for bookings and preclude major airlines from negotiating such arrangements with CRSs to the comparative disadvantage of non-owner airlines, particularly smaller airlines. Because the potential for discriminatory and anticompetitive conduct continues, these rules remain necessary.
Elimination of the mandatory participation and non-discriminatory pricing rules would pose substantial risks to competition. Their elimination would provide opportunities for the resurgence of higher charges for smaller airline competitors, which would increase their costs relative to those of larger airlines and disadvantage them in competition with larger airlines. Moreover, elimination of mandatory participation rules could provide opportunities for airlines affiliated with CRSs to withhold inventories from competing CRSs, thereby potentially reducing inter-CRS competition to the detriment of consumers and airlines.
The competitive risks identified by DOT in its initial imposition of these two rules remain, and indeed may be somewhat enhanced by current marketplace developments. Marketplace changes have reduced neither the incentives nor the ability of affiliated CRSs and airlines to engage in anticompetitive behavior. Rather they may have increased the ability of airline-owned CRSs profitably to withhold inventories from competing CRSs. These competitive risks relate both to current CRS arrangements as well as to prospective ones, particularly those that involve airline owners.
Practical experience demonstrates that these two rules have not inhibited the ability of major airlines effectively to negotiate and obtain both new services and improved pricing from CRSs. CRSs that account for over 60% of bookings in the U.S. have announced substantial reductions in booking fees as a result of recent negotiations with major airlines.
While some larger airlines have argued that elimination of these two rules is required to stimulate inter-CRS competition on booking fees, empirical evidence supports the conclusion that with these important protections in place, competition for and reduction of booking fees are occurring in the marketplace at the present time. CRSs, travel agents, and airlines have begun to develop pricing mechanisms that alleviate the structural issues in the industry that historically may have inhibited the effectiveness of price competition in the setting of booking fees. Moreover, the benefits of successful negotiations by the large airlines are available to all airlines-including smaller airlines-because of the non-discriminatory pricing provision.
Claims about high booking fee levels or the relative costs of distribution through CRSs as compared to online channels should not be used as a basis for elimination of the mandatory participation or non-discrimination rules. In particular, estimates of changes in booking fees over time tend to overstate the increases in fees relative to system functionality, and, specifically, do not account for underlying improvements in CRS services and technology or the increasing complexity of fares. Examination of trends also shows that booking fees are constrained substantially by non-discrimination regulation and competitive pressures.
While some airlines have alleged that significant increases in booking fees have occurred since the 1980s, the statistics typically cited fail to take into account that booking fee levels and changes are driven by a number of factors, including changes in the services offered and purchased by participating airlines. As increasingly enhanced services are offered and purchased by more airlines, the average price paid for these services will increase (although not all service enhancements have been accompanied by fee increases). Content and processing have changed dramatically in recent years with the dramatic proliferation of fares in the CRS databases (including special fares for corporations and web fares) and the expansion of suppliers. In addition, CRSs have substantial investments in technology and service enhancements. Review of recent negotiations and the fees charged to both larger and smaller airlines shows that booking fees are subject to important competitive constraints. Finally, comparisons of pre-regulation and post-regulation booking fees are inherently flawed because pre-regulation, airlines that owned CRSs were likely able to earn supracompetitive profits on their sales of air transportation and thereby subsidize their booking fees.
The DOT should not prohibit or regulate productivity payments. On balance, these payments are serving as an important means of competition among CRSs for travel agent subscribers.
Review of productivity payments practices shows that productivity payments are, on balance, pro-competitive and provide an important means by which CRSs-particularly non-airline owned CRSs-can expand market share. Productivity payments do not appear to decrease travel agents’ use of the Internet or other alternatives to CRSs. Moreover, there is no supporting evidence for certain airlines’ allegations that productivity payments have adversely affected the level of booking fees.
During a period of dramatic change, development of new technologies, and formation of new business ventures, it is particularly important that entities that are performing the functions of a CRS be included in the regulatory structure and be regulated by the same standards as traditional CRSs. There is no basis for, and indeed substantial competitive risks associated with, not regulating such entities.
The CRS rules are crafted as a set of competitive principles of conduct that apply to entities that meet the specific criteria for regulation. This has served well over the course of 20 years of regulation to adapt to a wide variety of marketplace changes and to preserve and promote airline competition to the benefit of consumers. In some ways new technologies may exacerbate, not reduce, the competitive issues underlying the need for regulation in the CRS industry. In addition, differences in technology may require that the DOT examine carefully how best to apply particular regulations to different technologies to achieve the common goals of the regulation, including unbiased displays, access to comparable functionalities, and non-discriminatory treatment of unaffiliated airlines, particularly, smaller airlines.
The announced sale of Worldspan to non-airline owners does not fundamentally alter the need for continued CRS regulation or mitigate the need for maintaining regulations such as mandatory participation and non-discriminatory pricing. The Worldspan transaction, if successfully concluded, would result in the divestiture of Worldspan from its airline owners. However, there remains the prospect that affiliated airlines-i.e., those having marketing or other financial or operating affiliations with a CRS-would have the incentive and ability to engage in actions that would distort airline competition if unregulated. This potential increase in affiliations, in fact, strengthens the need to extend mandatory participation to affiliated carriers.
Review of marketplace conditions and the rationale for regulation demonstrates that no fundamental changes should be made in the CRS rules. Basic regulations continue to be required to protect both consumers and non-owner (unaffiliated) airlines. Airlines have recently demonstrated their ability to negotiate reduced booking fees from CRSs under the current regulatory scheme, including the mandatory participation and non-discrimination rules. The fundamental principles of regulation should continue to govern traditional CRSs and their relationships with other market participants and should also be applied to evolving entities that are the functional equivalent of CRSs and therefore have the capability to engage in the types of anticompetitive behavior that the CRS regulations seek to deter.”
Advance Auto Parts and other auto parts retailers were sued under the Robinson-Patman Act for allegedly soliciting discounts from their suppliers that were not made available to other “mom and pop” distributors. Seeking to establish that defendants knew they were getting “discriminatory” discounts, plaintiffs argued that defendants could infer plaintiffs’ acquisition costs from observing plaintiffs’ prices. Kent Mikkelsen testified about the factors affecting a firm’s price, and that due to variations in those factors there is no simple relationship across firms between price and acquisition cost. Defendants prevailed in this jury trial.
Principal John R. Morris was appointed Chair of the Antitrust Committee of the Energy Bar Association. The Energy Bar Association is an organization of over 2,000 professionals that was formed to promote the proper administration of laws relating to the production, development, conservation, delivery, consumption, and economic regulation of energy. The Antitrust Committee keeps the EBA informed of the latest antitrust rulings that relate to energy industries. Dr. Morris will oversee the e-mail distribution of the latest antitrust decisions, seminars on antitrust issues, and the annual review of antitrust developments published in the Energy Law Journal.
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