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CHEAP EXCLUSION
SUSAN A. CREIGHTON
D.
BRUCE HOFFMAN
THOMAS G. KRATTENMAKER
ERNEST A. NAGATA*
* Ms. Creighton is Director of the Bureau of Competition at the Federal Trade Commis-
sion. Mr. Hoffman, a member of the Florida Bar, was formerly Deputy Director of the
Bureau. Mr. Nagata is Deputy Associate Director, and Mr. Krattenmaker is a staff member,
of the Office of Policy and Coordination in the Bureau of Competition. The views expressed
are the authors' alone and are not necessarily the views of the Commission or any Commis-
sioner. We thank Timothy Muris, Alden Abbott, and other current and former colleagues
at the Commission for helpful comments.
I The converse, of course, is equally true; firms may raise market price and then note
that the market will not absorb previous output levels. For brevity, throughout this article
we refer to output reduction as a necessary condition to raising price.
976 ANTITRUST LAW JOURNAL [Vol. 72
2 PolyGram Holding, Inc., FTC Docket No. 9298 (July 24, 2003) (Opinion), available at
http://www.ftc.gov/os/2003/07/polygramopinion.pdf, appeal docketed, Dkt. No. 03-1293
(D.C. Cir).
3Kentucky Household Goods Carriers Assoc., FTC Docket No. 9309 (June 21, 2004)
(Initial Decision), available at http://www.ftc.gov/os/adjpro/d9309/040625initialdecision
.pdf, appeal pending before Commission.
I North Texas Specialty Physicians, FTC Docket No. 9312 (Sept. 16, 2003) (Complaint),
available at http://www.ftc.gov/os/2003/09/ntexasphysicianscomp.pdf.
I Chicago Bridge & Iron Co., FTC Docket No. 9300 (Jan. 6, 2005) (Opinion), available
at http://www.ftc.gov/os/adjpro/d9300/O50106opionpublicrecordversion9300.pdf.
6 By "exclusionary practices," we mean just what the Supreme Court says that term
means in antitrust law-conduct that contributes to the acquisition or maintenance of
market (or monopoly) power by means other than competition on the merits. See Aspen
Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 602 (1985) (the question is
"whether the challenged conduct is fairly characterized as 'exclusionary' or 'anti-
competitive'-to use the words in the trial court's instructions-or 'predatory,' to use a
word that scholars seem to favor."); Verizon Communications, Inc. v. Law Offices of Curtis
V. Trinko, LLP, 540 U.S. 398, 406-08 (2004). We generally use the term "exclusion," but
also use "predation" interchangeably.
7The following discussion of exclusion includes cases involving unilateral conduct and
cases involving collusive conduct. For purposes of determining what constitutes "exclusion-
ary" conduct, there is little or no substantive difference between single and multi-firm
behavior. In this respect, restrictions on others' output are quite different from agreements
by which competing firms agree to restrict their own output. Although a firm's unilateral
decision to restrict its own output is almost never an antitrust concern, agreements whereby
firms collectively agree to restrict their own output are perhaps the most pernicious
form of antitrust violation and are therefore subject to antitrust law's most stringent
proscriptions. In contrast, exclusion typically takes the form of efforts to restrict the output
of competitive firms without reducing the predator's own output (at least until market
power is achieved). This result often can be achieved by either collusive or unilateral
means, but whether that conduct is collusive or unilateral is immaterial to the anticompeti-
tive effect.
8 South Carolina State Bd. of Dentistry, FTC Docket No. 9311 (Sept. 12, 2003) (Com-
plaint), available at http://www.ftc.gov/os/2003/09/socodentistcomp.pdf.
9 Union Oil Co. of Cal., FTC Docket No. 9305 (Mar. 4, 2003) (Complaint), available
at http://www.ftc.gov/os/2003/03/unocalcmp.htm.
20051 CHEAP EXCLUSION
and assuming all other elements are satisfied (such as proof of monopoly
power in a Section 2 case), the antitrust analysis is at an end.
It is these forms of "naked" exclusionary conduct that we have labeled
"cheap exclusion," and that have been the focus of our enforcement
efforts. Indeed, in our view, "cheap exclusion" should be at the core of
an enforcement agenda that challenges exclusionary conduct, in the
same way that actions against naked collusive agreements are a necessary
part of an antitrust enforcement program that challenges collusive con-
duct. In the efficient allocation of always-scarce enforcement resources,
exclusionary conduct that is likely to be common (relative to other forms
of exclusion), and lacks any legitimate competitive benefit, makes an
attractive target. Put differently, when fishing, the best place to fish is
where the fish are plentiful, and the things you catch are likely to be fish.
"115 U.S.C. 2.
12 Trinko, 540 U.S. at 406-07 (quoting United States v. Grinnell Corp., 384 U.S. 563,
570-71 (1966)).
'3 Id. at 407.
14Timothy J. Muris, The FTC and the Law of Monopolization, 67 ANTITRUST L.J. 693,
723 (2000).
15Sherman Act 1, 15 U.S.C. 1.
2005] CHEAP EXCLUSION
Conduct?, 2003 COLUM. Bus. L. REv. 345 (2003) ("Aggressive, competitive conduct by any
firm, even one with market power, is beneficial to consumers. Courts should prize and
encourage it. Aggressive, exclusionary conduct is deleterious to consumers, and courts
should condemn it. The big problem lies in this: competitive and exclusionary conduct
look alike.").
17This balance can also be described in terms of weighing the risks of Type I vs. Type
II error (a concept adopted from the field of statistics). A Type I error (also called a
false negative) occurs when the analysis incorrectly concludes that the conduct is not
anticompetitive (or that it is efficiency-enhancing), when the opposite is true. A Type I
error results in under-enforcement. A Type II error (also called a false positive) occurs
when the analysis incorrectly concludes that the conduct is exclusionary (anticompetitive),
when in fact it is not harmful. A Type II error results in over-deterrence and can chill
efficiency-enhancing conduct. The possibility of Type IIerror is a particular concern when
the competitive effects of the conduct are ambiguous, as they are in many forms of alleged
monopolization or attempted monopolization. See Trinko, 540 U.S. at 414 ("Under the
best of circumstances, applying the requirements of 2 'can be difficult' because 'the
means of illicit exclusion, like the means of legitimate competition, are myriad.' ... The
cost of false positives counsels against an undue expansion of 2 liability.") (quoting
United States v. Microsoft Corp., 253 F.3d 34, 58 (D.C. Cir. 2001)).
18Phillip Areeda & Donald F. Turner, PredatoryPricing and Related Practices Under Section
2 of the Sherman Act, 88 HARV. L. Rxv. 697 (1975).
19Id. at 698. Some years later, Robert Bork described predation more generally as
conduct that
would not be considered profit maximizing except for the expectation either
that (1) rivals will be driven from the market, leaving the predator with a market
share sufficient to command monopoly profits, or (2) rivals will be chastened
ANTITRUST LAW JOURNAL [Vol. 72
2 E.g., Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 605 n.32 (1985)
(citing 3 PHILIP E. AREEDA & DONALD F. TURNER, ANTITRUST LAW 78 (1978)).
22Aspen Skiing Co., 472 U.S. at 605 (citing BORK, supra note 19, at 138).
23United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966). In other words, the
standard by which conduct is to be judged is shaped by a sense that some kinds of conduct
provide certain kinds of benefits as part of the process of seeking and obtaining a monopoly,
while other kinds do not. These benefits-superior products, greater efficiency, and so
forth-could be viewed as by-products or externalities. One point that should be immedi-
ately apparent from that formulation is that the profitability or costliness of the behavior
is not obviously dispositive of any inquiry framed in these terms, and may not even be
relevant. See Einer Elhauge, Defining Better Monopolization Standards, 56 STAN. L. REv. 253,
268-93 (2003).
24 See, e.g., Elhauge, supra note 23, at 261-68.
ANTITRUST LAW JOURNAL [Vol. 72
25 See, e.g., United States v. Dentsply Int'l, Inc., 399 F.3d 181 (3d Cir. 2005), rev'g 277
F. Supp. 2d 387 (D. Del. 2003).
26 See Parker v. Brown, 317 U.S. 341 (1943).
27 See Eastern R.R. Presidents Conf. v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961);
antitrust observers view cheap exclusion as less central to a proper enforcement agenda
than claims based on behavior, such as bundling or other vertical distribution arrange-
ments, that may produce efficiencies. But just as the asserted efficiency claims raised in
defending a challengedjoint venture arrangement generally are more complex than those
raised in defense of a price-fixing claim, efficiency defenses raised in defending a bundling
claim generally may be more complex than those asserted in a cheap exclusion case. In
neither case does the difference thereby imply that the practice more often accompanied
by efficiencies warrants a greater commitment of agency resources.
20051 CHEAP EXCLUSION
Cheap exclusion as defined here does not raise the same concerns
about distinguishing procompetitive behavior that arise with other possi-
ble forms of behavior. Moreover, these cases are not likely to be rare
outliers in firms' exclusionary efforts, but rather, because they are cheap
(or even profitable) whether or not they generate market power, will be
relatively more common than types of costly predation (such as predatory
pricing) that have been treated more extensively in the literature. And
the stakes are high: in the cases that follow, the alleged consumer harm
often has run into the hundreds of millions of dollars annually.
17Bristol-Myers Squibb Co., FTC Docket No. C-4076 (Apr. 14, 2003) (consent order),
available at http://www.ftc.gov/os/2003/03/bristolmyersconsent.pdf.
8 Union Oil Co. of Cal., FTC Docket No. 9305 (Mar. 4, 2003) (Complaint), available
at http://www.ftc.gov/os/2OO3/O3/unocalcmp.htm. Our comments are limited to the alle-
gations of the complaint because the case is in litigation.
39These examples of cheap exclusion underscore the problem with attempting to use
a "profit sacrifice" test as a necessary (rather than sufficient) standard for all forms of
predation. In determining whether conduct should be deemed exclusionary, it is often
helpful to try to ascertain whether it appears to be "economically irrational" but for its
exclusionary effect, and more narrowly, whether the conduct appears unprofitable (except
for the profits gained by exclusion). But profitability, economic rationality, or cost may
not be very useful metrics for cheap exclusion, either because costs are low, zero, or
ANTITRUST LAW JOURNAL [Vol. 72
indeterminate, or because the "profits" involved may not result from efficient conduct.
Indeed, the well-worn phrase "legitimate business reason or justification" used to describe
appropriate forms of conduct implies that not all business reasons or justifications are
legitimate.
Thus, false Orange Book certification or other false regulatory filings that have exclusion-
ary effects due to the operation of extrinsic legal schemes may have minimal costs (certainly
relative to the exclusionary impact). But false regulatory filings can be profitable even if
they do not create or maintain monopoly power, by harming competitors and generating
profits for the filing firms without bestowing monopoly power. Yet this "profitability" tells
us nothing about whether the false filing is efficiency-enhancing. This situation can be
even more pronounced when the costs of regulatory participation are largely sunk, as
may have been the case in Unocal. For example, if the firm would have engaged in the
regulatory activity in any event, the "exclusionary" component of the cost may be very
small, if even measurable.
40This discussion draws on the analysis in Timothy J. Muris, Opportunistic Behavior and
the Law of Contracts, 65 MINN. L. REv. 521 (1981), and the literature discussed therein.
SeealsoBenjamin Klein, RobertG. Crawford &ArmenAlchian, VerticalIntegration,Appropria-
ble Rents, and the Competitive ContractingProcess, 21 J.L. & EcON. 297 (1978); Oliver William-
son, Transaction Cost Economics: The Governance of Contractual Relations, 22 J.L. & EcON.
233 (1979).
41The refiners could perhaps have avoided the exclusionary effect of Unocal's deception
of CARB had they not been similarly misled.
2005] CHEAP EXCLUSION
also durable: again, in the case of the Orange Book, by force of law,
and in the case of CARB, by the force of law combined with the costs
and time required to undo the damage Unocal inflicted. Indeed-and
this appears to be a common characteristic of cheap exclusion that preys
on governmental processes-the very factors that made the exclusionary
strategy cheap, i.e., the existence of regulatory structures vulnerable to
inexpensive gaming, also tend to make the resulting monopoly power
durable.
A. OPPORTUNISTIC BEHAVIOR
(E.G., ABUSE OF A STANDARD-SETTING PROCESS)
of those cases, the alleged conduct did not create wealth but simply
transferred it, and so had no possible claim to efficiency. Second, the
conduct was cheap (in some cases, almost costless) to the firm engaging
in it. Third, the returns from successfully transforming the exclusionary
conduct into monopoly profits were large in proportion to the costs of
trying. In Allied Tube, for example, the opportunistic forum-packing cost
the defendant only $100,000 to recruit 155 new members, and other
steel interests similarly recruited and paid for the expenses of another
75 new voters. In contrast, the jury awarded $3.8 million in damages
(before trebling).
Finally, the cheap exploitation of opportunism occurred where a
handy source of durable market power already existed. In Allied Tube
and Hydrolevel (and as alleged in the complaint in Rambus), respected
private standard-setting organizations had the power to confer market
power by choosing one party's processes or by excluding another's. Thus,
the opportunistic behavior was not only cheap to the excluding firm
and inefficient in the marketplace, but had a great ability to inflict real
harm to consumer welfare.
4"See, e.g., United States v. Microsoft Corp., 253 F.3d 34, 76-77 (D.C. Cir. 2001) (decep-
tion aimed at blocking development of a competing product).
-0 See also Int'l Travel Arrangers, Inc. v. Western Airlines, Inc. 623 F.2d 1255 (8th Cir.
1980) (false, misleading, and deceptive advertising). See also Elhague, supra note 23, at
280-82 (collecting authorities); Brookside Ambulance Serv., Inc. v. Walker Ambulance
Serv., Inc. 39 F.3d 1181 (table), No. 93-4135, 1994 WL 592941 at * 8 (6th Cir. Oct. 26,
1994) (providing false information); Conwood Co. v. U.S. Tobacco Co., 290 F.3d 768 (6th
Cir. 2002) (misrepresentations, destroying competitors' facilities, abuse of trust by misusing
category manager position); Taylor Publ'g Co. v. Jostens, Inc., 216 F.3d 465, 480-82
(5th Cir. 2000) (tortiously inducing rivals' employees to violate non-compete clauses);
Caribbean Broadcasting Sys., Ltd. v. Cable & Wireless PLC, 148 F.3d 1080 (D.C. Cir. 1998)
(misrepresentations, sham objections to competitors' license applications).
ANTITRUST LAW JOURNAL [Vol. 72
51See, e.g.,David T. Scheffman & Richard S. Higgins, 20 Years of Raising Rivals' Costs:
History, Assessment, and Future (discussion paper), available at http://www.ftc.gov/be/
RRCGMU.pdf.
52 Take, for example, a hypothetical in which competitor A has its agents destroy competi-
tor B's product displays at the point of sale. This may be very cheap for competitor A.
The behavior also may be profitable without reference to any contribution to monopoly
power. Assume that A and B each have a 10% share of an unconcentrated market, and
A's conduct succeeds in transferring one quarter of B's sales to A and one quarter to all
other competitors. A's market share rises to 12.5%-hardly the stuff of which a monopoly
claim is made. And the conduct is profitable. It is profitable because it transfers some of
B's sales to A, but that is true of all successful competitive conduct. It adds nothing to
the analysis to say that in determining whether A's conduct "makes economic sense" we
should discount the profits A receives because the manner by which it transferred B's
profits is wrong. That requires a normative judgment concerning whether A's form of
competition is "appropriate" by some standard unrelated to either its profitability or its
contribution to monopoly. And if we can make that judgment, what does assessing profit-
ability add? The more important fact here is that A's conduct is unambiguously anticompeti-
tive in the sense that no one's efficiency is enhanced, no benefits-short or long-term-
flow to consumers, and the only economic effects are that wealth is transferred to A, and
B either loses wealth or has to expend resources unproductively in preventing or remedying
A's conduct.
Antitrust law should not, of course, come into play under this hypothetical, because
antitrust condemns monopolization and that is not threatened here. But if A's conduct
actually succeeds in monopolizing, or poses a "dangerous probability" of such success,
the fact that A also made money by destroying its competitor's displays should not shield
A's conduct from antitrust liability.
3 BORK, supra note 19, at 159.
2005] CHEAP EXCLUSION
51See Walker Process Equip., Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172 (1965);
see also Am. Cyanamid Co., 72 F.T.C. 623, 684 (1967) (respondent's conduct before the
patent office at the very least amounted to "unclean hands," "inequitableness" and "bad
faith"), aff'd, Charles Pfizer & Co. v. FTC, 401 F.2d 574 (6th Cir. 1968).
55See supra Part II.
56 See generally IMPROVING HEALTH CARE: A DOSE OF COMPETITION, A REPORT BY THE
FEDERAL TRADE COMMISSION AND THE DEPARTMENT OF JUSTICE (July 2004), available at
http://www.ftc.gov/reports/healthcare/O40723healthcarerpt.pdf
11For an example of research in this area, see Thomas W. Hazlett & George S. Ford,
The Fallacy of Regulatory Symmetry: An Economic Analysis of the "Level Playing Field" in Cable TV
FranchisingStatutes, 3 Bus. & POL. 21 (2001) (arguing that "level playing field" requirements
contained in some cable TV franchising statutes can cause entrants to bear higher burdens
than did the incumbent).
ANTITRUST LAW JOURNAL [Vol. 72
D. ABUSIVE LITIGATION
58 South Carolina State Bd. of Dentistry, FTC Docket No. 9311 (Sept. 12, 2003) (Com-
plaint), available at http://www.ftc.gov/os/2003/09/socodentistcomp.pdf. Our comments
are limited to the allegations of the complaint.
59See Handgards, Inc. v. Ethicon, Inc., 601 F.2d 986 (9th Cir. 1979) (en banc) (bad-faith
prosecution of infringement actions); AMERCO and U-Haul Int'l, Inc., 109 F.T.C. 135
(1987) (Consent Order; complaint alleged that U-Haul and its parent AMERCO attempted
to monopolize the market for rental moving equipment by engaging in a series of anticom-
petitive acts against a competitor in a Chapter 11 reorganization proceeding). Claims of
Noerr immunity are a potential obstacle to antitrust prosecution in some of these cases,
but immunity should not be available to abusive repetitive litigation or similar conduct.
See California Motor Transport Co. v. Trucking Unltd., 404 U.S. 508, 512-13 (1972);
PrimeTime 24 Joint Venture v. NBC, 219 F.3d 92, 100-01 (2d Cir. 2000); USS-POSCO
20051 CHEAP EXCLUSION
and can cause costly delay that harms the rival. For example, there are
substantial cost asymmetries in repetitive sham litigation; the incremental
cost of filing an additional sham complaint is negligible, but the cost
of defending against the complaint is high in comparison. 0 The cost
asymmetry may be particularly acute when the sham litigation is against
a rival's customers, who may lack both the resources and the incentives
necessary to defend against the suit. In nonrepetitive sham litigation
cases, costs borne by the two parties may be roughly comparable, but
they will nevertheless usually be proportionally larger for the victim in
relation to its share of market or expected profits from entry.
Further, strategies of this sort can work well-from the predator's
perspective-in conjunction with a strategy to abuse government entry
barriers, e.g., by commencing litigation following, or in anticipation of,
the eventual authorization of entry. This can be effective even if limited
to threats (thus avoiding the cost of litigation), and may be particularly
effective if directed at the government entity, such as a licensing board
that maintains the entry barriers rather than the prospective entrant
(especially if the government entity involved is small or resource-
constrained). The reason for targeting the government is to take advan-
tage of the resulting cost/benefit asymmetries: such lawsuits (or threats)
cause the government agency in question to incur potentially significant
costs, in a setting where it will likely have no direct stake in the outcome.
Indus. v. Contra Costa County Bldg. & Constr. Trades Council, 31 F.3d 800, 810-11 (9th
Cir. 1994). We discuss Noerr in some more detail infra at Part IV.
60 See Michael J. Meurer, Controlling Opportunistic and Anti-Competitive Intellectual Property
Litigation, 44 B.C. L. REv. 509, 515-16, 521-25 (2003).
ANTITRUST LAW JOURNAL [Vol. 72
1For a more detailed analysis of the mismatch in incentives, motives, and remedies
between standard-setting organizations hold-up victims and consumers, see Alden F. Abbott
& Theodore A. Gebhard, Standard-SettingDisclosure Policies:EvaluatingAntitrust Concerns in
Light of Rambus, ANTITRUST, Summer 2002, at 29.
62See Eastern R.R. Presidents Conf. v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961);
United Mine Workers of Am. v. Pennington, 381 U.S. 657 (1965).
63See Parker v. Brown, 317 U.S. 341 (1943)
64
FEDERAL TRADE COMMISSION, OFFICE OF POLICY AND PLANNING, REPORT OF THE
Thus, limiting Noerr's and Parker's effect to the core articulated by the
Supreme Court is crucial to an effective strategy for antitrust enforcement
directed against cheap exclusion. If, as we believe, cheap exclusion lies
at the center of a proper enforcement agenda, the undue expansion of
these immunities (as documented, for example, in the State Action
Report) is not simply a concern at the periphery of antitrust, but rather
goes directly to the heart of the agencies' ability to engage in effective
antitrust enforcement.
V. CONCLUSION
Antitrust enforcement policy should have, as one of its key premises,
the understanding that "cheap" forms of exclusion-if not deterred
by vigilant, effective antitrust enforcement-are particularly attractive
vehicles for acquiring or maintaining market power, either by a single
firm or a group of firms acting collectively. The preceding examples
from the Commission and the federal courts show that "cheap" exclusion
is far from an isolated occurrence. To the contrary, we believe it is likely
far more common than more costly, financially risky forms of exclusion.
If our experience of the past three years is a guide, the FTC has been
fishing in fertile waters.