\\server05\productn\C\CIN\43-1\CIN101.txt Good afternoon. I remember many sessions in this room, all from the other side of the desk, which, I suggest, is the less enjoyable place to be.
First of all, I would like to thank those of you who organized this sympo-sium. Law students do not have a whole lot of extra time on their hands,particularly those who are associated with journals. Time is a very pre-cious commodity, and yet somehow you found time to organize this verycomprehensive symposium.
I hope that you get as much benefit from the session as we who were invited here to speak. Many of us speaking today have known each otherfor years, but we don’t have the opportunity to see each other all that often,which serves to make this event more special. And I have to say that whenyou are associated with as great an institution as Cornell, you certainlyhave a lot of advantages in attracting people to campus, but most assur-edly, geographic location in March is not one of them. So I congratulateyou on the group you have put together and on the size of the audience youhave gathered.
My initial interest in antitrust, and my decision to pursue a career in that area, is the result of interactions with two people who are in the roomtoday. George Hay, who I believe was in his first year of teaching at CornellLaw School, taught me antitrust economics. At that time, Don Baker wasaway as Assistant Attorney General, but when he returned to the lawschool, I took antitrust courses from him as well. In fact, I think more thanone of the courses were held in this room, so it really is coming back homefor me, and I enjoy it very, very much.
Now, today and tomorrow you will hear a lot about various regulatory approaches that different national agencies apply to antitrust. Since I donot want to jump the gun on what other people are going to say, I thoughtit might make more sense for me to take the time to back up and talk aboutsomething more foundational. In a general sense, this symposium is aboutcomparative policies. Probably the two jurisdictions best known for anti-trust enforcement are the United States and Europe, so I will share myviews as to whether these regimes are moving closer together, which is † Kevin J. Arquit is a partner in the law firm of Simpson Thacher & Bartlett LLP and head of the firm’s Competition Law Practice. Mr. Arquit served as Director of theFederal Trade Commission’s (FTC) Bureau of Competition from 1989– 1992 and as theFTC’s General Counsel from 1988– 1989.
43 CORNELL INT’L L.J. 1 (2010) \\server05\productn\C\CIN\43-1\CIN101.txt known as convergence,1 or whether they are drifting apart.
To be sure, this general subject is a very well-traveled road. What I would like to do today is to take a slightly different path. The typicalapproach of United States commentators addressing convergence is, in myview, very U.S.-centric. The question often posed is whether the Europeanantitrust model is moving closer to the United States.2 You never hear thequestion asked: “Is the United States moving closer to Europe?”— Ameri-cans just do not think of the issue in that way.
Of course, the unspoken assumption in asking the question in the conventional way is that the better approach is for Europe to move closer tothe U.S. model.3 And indeed, U.S. government officials have been knownto fly on unsolicited trips to foreign capitals when the European Commis-sion has taken action that is not to their liking. U.S. officials have criti-cized Commission decisions in press conferences, suggesting, in effect,that once Europe gets it right it will adopt the U.S. approach.
Now, in the most general terms, I would like to give you a flavor of the conventional wisdom regarding the different approaches to antitrust. Inthe United States, merger policy has followed a consistent approach since1984, when formal guidelines were implemented.4 Those guidelines, insti-tuted more than twenty-five years ago, are reflective of a fairly stable pol-icy;5 they are very flexible, and they allow for changes around the margins.
The 1984 guidelines reflect a theoretic approach, known as the “Chi- cago School of Economics.”6 The essential premise of the Chicago Schoolis that we do not know an awful lot about how humans actually behave,but we know, basically, how the rational person thinks.7 And so the doc-trine is based on a theory of rational choice. The approach of the mergerguidelines, and the Chicago School, accepts as a premise that individualsand firms will make rational choices.8 And by rational choices, what theymean is that firms, armed with adequate information, will make decisions 1. See Randolph W. Tritell, International Antitrust Convergence: A Positive View, 2005 A.B.A. SEC. ANTITRUST 25, 25 (2005).
2. See, e.g., Todd R. Overton, Substantive Distinctions Between United States Anti- trust Law and the Competition Policy of the European Community: A Comparative Analysisof Divergent Policies, 13 HOUS. J. INT’L L. 315, 320– 22 (1991).
3. See id. at 341 (“The surest method to create such stability is to reach an under- standing between the American government and the EC Commission to ensure that theburgeoning EC laws develop in a direction that makes them compatible with those of theUnited States.”).
4. U.S. DEP’T OF JUSTICE MERGER GUIDELINES (1984), 3 Trade Reg. Rep. (CCH) ¶ 13, 5. See Synopsys Inc./Avant! Corporation, FTC File No. 021-0049, Statement of Commissioner Thomas B. Leary (July 26. 2002), available at (“1984 Merger Guidelines . . . are still authoritative”).
6. See Herbert Hovenkamp, Merger Actions for Damages, 35 HASTINGS L.J. 937, 947 n.43 (1984) (“The 1984 Merger Guidelines are a product of the new economic orienta-tion in antitrust law, if not an outright product of Chicago School economic theories.”).
7. See generally Richard A. Posner, The Chicago School of Antitrust Analysis, 127 U.
\\server05\productn\C\CIN\43-1\CIN101.txt Keynote Address, ILJ 2009 Symposium In other words, firms will make profit-maximizing decisions.10 This is essentially the underpinning of both U.S. merger guidelines and theentirety of U.S. merger analysis.11 What flows from this is the notion thatcompetition12 and free markets provide the best products, the cheapestproducts, the highest quality products, and the most choice.13 There is acorollary to this, that while markets may temporarily suffer from distor-tions, they will quickly self-correct.14 There are those who would charac-terize this as representing a minimalist school of thought.
By extension, government intervention is something that should come about rarely, and, when it does occur, it should be minimal.15 And I thinkthat, even as of a year ago, the majority of commentators would have gener-ally agreed that the United States had gotten it right when it comes to howmergers are analyzed. Judge Richard Posner noted that the intellectualjourney for how we view mergers has basically come to an end and that themerger guidelines offer a modest vindication of the Chicago School.16 Allthis could lead one to conclude that the U.S. approach is one essentially oncruise control, on settled presumptions to bring about the best results.
Without going into great depth, historically, the European approach to antitrust has had different underpinnings.17 At a very basic level, there hasbeen less confidence in Europe that markets always get it right.18 There ismore of a feeling that the government should step in, at least occasionally,and that it is independently important to maintain certain marketstructures.19 In the United States, if you are really a believer in competition, you could end up with a market populated by just one firm if its efficiencycauses all other firms to leave the market. If somebody actually wins therace of competition because they have the better, cheaper product,wouldn’t it be a perverse policy to then turn around and penalize them forbeing the winner? So competition in the United States is focused on creat-ing an environment where parties can start out on an equal playing field, 10. Id.
11. See Alan A. Fisher & Robert H. Lande, Efficiency Considerations in Merger Enforcement, 71 CAL. L. REV. 1580, 1583 (1983).
12. See Herbert Hovenkamp, Post-Chicago Antitrust: A Review and Critique, 2001 COLUM. BUS. L. REV. 257, 266 (2001).
13. See Fisher & Lande, supra note 11, at 1584.
14. See Hovenkamp, Post-Chicago Antitrust, supra note 12, at 266.
15. See Posner, supra note 7, at 948 n.67.
16. RICHARD POSNER, ANTITRUST LAW 132 (2d ed. 2001) (“For the time being, the history of merger doctrine is at an end.”).
17. See Overton, supra note 2, at 316– 17.
18. See id. at 328.
19. See Derek Ridyard, The Commission’s New Horizontal Merger Guidelines: An Eco- nomic Commentary 12– 13 (Global Competition Law Centre, GCLC Working Paper 02/05 2005), available at
\\server05\productn\C\CIN\43-1\CIN101.txt but then let happen what may.20 It is not about fairness.21 And I believe that in Europe— and you will hear from European practi- tioners who will undoubtedly correct me if I am wrong— the approach hasbeen more to assure that a certain number of players exist in the market.22At least at the margins, this can result in different policies between the twojurisdictions.
The Europeans have responded in several ways to the difference in approach. Some have said that our policies are too Darwinian.23 Othersrefer to U.S. antitrust policy as cowboy capitalism.24 And the list of pejora-tives goes on. But nonetheless, through a series of steps over the last ten tofifteen years, it is fair to say that European merger policy has, in fact,moved closer to U.S. merger policy.25 The European Commission now,and has actually for several years, had a set of merger guidelines.26 Theirtest is one that focuses on impediments to effective competition as opposedto just pure dominance.27 They recognize efficiency.28 These are all stepssuggesting increased convergence with the U.S. approach.
The issuance of guidelines in Europe has led no less than the former commissioner of the European Commission, Mario Monti, to say, essen-tially, that the European Commission model has increased its reliance onsolid economic analysis and that it draws upon the American approach.29Thus, at the end of the day, we’ve observed convergence between the tworegimes over the past several years, but with Europe proceeding at a differ-ent pace from the United States. There remain differences, but we havebeen moving in the same direction.
We can debate whether the changes in Europe are the result of regula- tors seeing the light and the brilliance of American ideas or whether it isreally the response to a series of stinging defeats that the Commission suf-fered before the European courts, after blocking some transactions a few 20. See Nicola Giocoli, Competition Versus Property Rights: American Antitrust Law, the Freiburg School, and the Early Years of European Competition Policy, 5 J. COMP. L. &ECON. 747, 756 (2009).
21. See Eleanor M. Fox, Monopolization and Dominance in the United States and the European Community: Efficiency, Opportunity, and Fairness, 61 NOTRE DAME L. REV. 981,983 (1986).
22. See Overton, supra note 2, at 319 (quoting Fox, supra note 21, at 983).
23. See, e.g., Jay Dratler, Jr., Microsoft as an Antitrust Target: IBM in Software?, 25 SW.
U.L. REV. 671, 683 (1996) (“Just as the Darwinian process of natural selection does notcare if individual creatures survive, so long as species grow and evolve, so antitrust lawdoes not care whether individual firms survive, as long as competition itself thrives andprospers.”).
24. See, e.g., J. Bruce McDonald, U.S. Dep’t of Justice, Section 2 and Article 82: Cow- boys and Gentlemen, Remarks before the Global Competition Law Centre Second AnnualConference 2 (June 16, 2005) (describing the competition-based U.S. antitrust system as“cowboy capitalism”). 25. See Tritell, supra note 1, at 1.
26. See generally Council Regulation 139/2004, 2004 O.J. (L 24) 1 (EC).
27. See id. art. 2.
28. See id.
29. See Mario Monti, Eur. Comm’r for Competition Pol’y, Competition for Consum- ers’ Benefit, Address at European Competition Day 5– 6 (Oct. 22, 2004), available at
\\server05\productn\C\CIN\43-1\CIN101.txt Keynote Address, ILJ 2009 Symposium years ago. My own view is that the latter served as the predominant cause.
Regardless, for the remainder of my time today, I will not discuss the paceof European change or where it stands; there are others who will discussthat. I will address some startling changes that recently have taken place inU.S. merger policy.
Indeed, I suggest, that wherever the European regulators are standing on the mountain of the Chicago School, if they look up ahead of them, theyare likely to see the U.S. regulators coming back toward them. And, it isnot as though the U.S. regulators are walking back toward them; they arerunning back at them. Perhaps more surprising, a lot of these develop-ments preceded the change in administration and have nothing to do withthe election of President Obama.
And I think that European practitioners may listen with a sense of irony as they hear a tonal quality coming from U.S. regulators that is verysimilar to statements regarding European policy that the United States’enforcement leadership was so critical of not that long ago.
In the United States, the regulatory question of whether a horizontal merger is allowed to proceed is purely an economic question.30 It is a deci-sion based on pure economics: will the merged firm, either by itself orthrough some type of tacit coordination with other firms in the industry,be able to raise prices above a competitive level?31 It is an analysis that isdesigned solely to look at whether or not the merger creates or enhancesmarket power, which is the ability to raise prices above a competitivelevel.32 It assumes that firms will act rationally.33 It assumes that they are informed and that their preferences are stable, which means that theywould make the same decision on day two that they made on day one aslong as nothing has changed in the interim. The decision of a firm is basedon profit maximization, which, again, is very much of an economic con-cept.34 Because of the purely economic basis underpinning U.S. regulatoryreview, the issue of national champions does not arise— you do not arbi-trarily pick one company and say, “We’re going to pick this one to be thewinner.”35 Similarly, enforcers resist calls, which come from political corners all the time, to engage in merger analysis in a way that, for example, protectssmall business or protects a certain level of jobs in a particular commu-nity.36 Those are all great public policy goals, but they have nothing to dowith economic efficiency. U.S. policies are accused of being Darwinian, 30. See U.S. DEP’T OF JUSTICE AND FED. TRADE COMMISSION, HORIZONTAL MERGER 31. Id.
32. Id.
33. See Posner, supra note 7, at 928.
34. Id.
35. See Deborah Platt Majoras, Chairman, FTC, Remarks at the Int’l Competition Conference/EU Competition Day: National Champions: I Don’t Even Think it SoundsGood 4 (Mar. 26, 2007).
36. See id. at 6; see also Overton, supra note 2, at 317.
\\server05\productn\C\CIN\43-1\CIN101.txt and in many ways they are.37 But that is what it means to have a policythat protects competition, not competitors.38 In a regime where the protec-tion of competition is the overriding objective, those who don’t measure upfail, and those associated with those who don’t measure up fail.
This policy inevitably allows mergers that can result in people getting laid off. Plants will be closed. But U.S. merger policy, at least for the lasttwo decades, has been focused solely on economic efficiency.39 In fact,merging companies sometimes rely on anticipated efficiencies as a reasonfor allowing a merger, arguing that a combination will eliminate redun-dancy. In other words, it will eliminate jobs that are no longer neededbecause they can be done by one person in the combined entity.
To be sure, the situation can result in dislocations, but the Chicago School does not really trouble itself with that because of a belief the endsjustify the means: “Yes, those are bad, but at the end of the day, this iswhat’s best for the most people. This is how we maximize consumer wel-fare.”40 The Chicago School believes that the firm that delivers a producton the cheapest basis available will win the race of competition, and that isthe basis on which the economy should operate.41 Dislocations exist, butthey are unavoidable.
Any other policy, designed to protect some element of inefficiency, would create still other inefficiencies that would harm a greater number ofpeople. That is really the sum and substance of the pure Chicagoapproach. In contrast, under the European model, the focus has been: if wereally want an industry to operate competitively, we have to have a certainnumber of firms operating within it.42 In response, it is argued: it is allwell and good to encourage competition, but then if you have a winner, letthem be the winner.43 I would note that the objectives of the European law are somewhat different from ours. European antitrust law is meant to facilitate integra-tion into the common market.44 This has led some U.S. critics to say, and Ithink largely these are unfounded criticisms, that the Europeans are fondof picking national champions.45 The argument is that the Europeans 37. See ROBERT H. BORK, THE ANTITRUST PARADOX: A POLICY AT WAR WITH ITSELF 118 (Basic Books, Inc., 1978); Dratler, supra note 23.
38. See Overton, supra note 2, at 318.
39. See BORK, supra note 37, at 91; see also Posner, supra note 7, at 931– 32; J.
Thomas Rosch, Comm’r, FTC, Int’l Bar Ass’n Antitrust Section Conference: I SayMonopoly, You Say Dominance: The Continuing Divide on the Treatment of DominantFirms, Is It the Economics? 5– 7 (Sept. 8, 2007).
40. See BORK, supra note 37, at 66, 91; Rosch, supra note 39, at 16 (“Chicago School adherents generally think of ‘consumer welfare’ far more broadly, believing the antitrustlaws should be applied in a way that maximizes society’s wealth as a whole.”).
41. See generally Posner, supra note 7.
43. Id.
44. See id. at 317.
45. See James F. Rill et al., The New European Antitrust Regime: Implications for Mul- tinationals, 13 GEO. MASON L. REV. 269, 275– 76 (2004).
\\server05\productn\C\CIN\43-1\CIN101.txt Keynote Address, ILJ 2009 Symposium select winners as a means of protecting the common market, and that spe-cific firms are selected and provided breaks that allow them to have a legup when it comes to competing with the rest of the world.46 In short, crit-ics claim that the European system tends to protect competitors more thancompetition,47 whereas, under the U.S. regime, if you protect competition,you let the winners and losers fall where they may.48 Now, these differences, for the most part, do not really impact very many transactions because this is kind of nuance stuff. But, when it doeslead to different results, the fur flies. There have been a couple of circum-stances over the past few years where identical transactions in the UnitedStates and Europe were looked at by both regimes because they were trans-actions with world-wide implications. One of these was the Boeing-McDon-nell Douglas merger.49 The United States took a look at it, and chose not to take any enforce- ment action, even though Boeing and McDonnell Douglas were two of onlythree civilian large aircraft manufacturers.50 The United States’ enforcersreached out and talked to the airlines, only to have the airlines respondthat they did not care about the merger because McDonnell Douglas “canno longer exert competitive influence in the worldwide market for commer-cial aircraft.”51 Note that post-merger, the only remaining player out therewould be Airbus.52 Meanwhile, over in Europe, the European Commissiontook a different view.
Now, there are cynics who say: “well, maybe the only difference is that Boeing and McDonnell Douglas are American companies and Airbus is aEuropean company. That led to the different results on different sides ofthe ocean.”53 The American point of view was that the European Commis-sion was not worried about the merger.54 The European Commission wor-ried about making sure that Airbus would be able to survive in the post-merger world.55 Because Boeing had a series of exclusive contracts with 46. See id.
47. See Gabriele Dara, Antitrust Law in the European Community and the United States: A Comparative Analysis, 47 LA. L. REV. 761, 789– 90 (1986).
48. See BORK, supra note 37, at 118– 22.
49. See generally Thomas L. Boeder & Gary J. Dorman, The Boeing/McDonnell Doug- las Merger: The Economics, Antitrust Law and Politics of the Aerospace Industry, 45 ANTI-TRUST BULL. 119 (2000).
50. See id. at 121.
51. Statement of Chairman Robert Pitofsky et al., In the Matter of The Boeing Co./ McDonnell Douglas Corp., 5 Trade. Reg. Rep. (CCH) ¶ 24,295 (July 1, 1997) (statingthat the Commission interviewed over forty airlines as well as other industry partici-pants); Kathleen Luz, Note, The Boeing-McDonnell Douglas Merger: Competition Law,Parochialism, and the Need For a Globalized Antitrust System, 32 GEO. WASH. J. INT’L L. &ECON. 155, 155– 58 (1999).
52. See Boeder & Dorman, supra note 49, at 131– 32.
53. Id.
54. See Luz, supra note 51, at 168.
55. See Boeder & Dorman, supra note 49, at 124 (“‘[T]he EU [is] most concerned about Boeing and its role as arch-rival to the European aircraft consortium, AirbusIndustrie.’”) (quoting EU Official to Discuss Boeing in Washington, REUTERS FIN. SERV.,Apr. 16, 1997).
\\server05\productn\C\CIN\43-1\CIN101.txt U.S. airplane manufacturers, the Commission determined that because somuch of the market would be tied up and not available to Airbus, themerger could only go through if the exclusivity clauses were lifted to giveAirbus the chance to compete for those contracts.56 In other words, behavioral relief was required by the European Com- mission as a condition for allowing the deal to go through. There was,however, some static at the time— non-trivial static— from the United Statesthat the concerns raised were little more than a device used by the Europe-ans to favor their own national champion as opposed to making a decisionon the competitive merits.57 While one could infer such motives, I believeit is also the case that the European Commission decision is reconcilablewith its precedent.58 The transaction that caused a lot more static, which still reverberates to this day, was the proposed GE-Honeywell combination. General Electricand Honeywell agreed to merge several years ago.59 The only identifiedoverlaps between GE and Honeywell had to do with some fairly minor,smaller aircraft engines.60 And those issues were resolved in the UnitedStates pretty quickly.61 The companies agreed to spin off the overlappingbusiness to somebody else.62 Yet, over in Europe, the European Commission decided to ban the transaction outright.63 In other words, they said, “There’s no fix here.
You’re just not going to do this.” What did they base that result on? Tosome degree their analysis mirrored the U.S. approach.64 But, in additionto that, they saw General Electric as a huge financing operation with all 56. See id.
57. See id. at 142.
58. See id. at 142, 144.
59. See Edmund L. Andrews & Paul Meller, Europe Ends Bid by G.E. for Honeywell: Formal Action Clouds the Future for Mergers, N.Y. TIMES, July 4, 2001, at C1.
60. David S. Evans & Michael Salinger, Competition Thinking at the European Com- mission: Lessons from the Aborted GE/Honeywell Merger, 10 GEO. MASON L. REV. 489, 498(2002) (describing the “little competitive overlap between the two companies” betweenGE and Honeywell).
61. See George Stephanov Georgiev, Bridging the Divide? The European Court of First Instance Judgment in GE/Honeywell, 31 YALE J. INT’L L. 518, 518 (2006) (“The transac-tion— the largest industrial merger to date— had received speedy approval from the Anti-trust Division . . . .”); Press Release, U.S. Dep’t of Justice, Justice Department RequiresDivestitures in Merger Between General Electric and Honeywell (May 2, 2001) [hereinaf-ter DOJ Press Release (May 2, 2001)], available at
62. DOJ Press Release (May 2, 2001), supra note 61, at 1.
63. Commission Decision of 03/07/2001 Declaring a Concentration to be Incom- patible with the Common Market and the EEA Agreement (Case No. COMP/M.2220—General Electric/Honeywell) [hereinafter European Commission Decision], available at
64. See Eleanor M. Fox, Mergers in Global Markets: GE/Honeywell and the Future of Merger Control, 23 U. PA. J. INT’L ECON. L. 457, 463– 64 (2002). Compare EuropeanCommission Decision, supra note 63, at 28– 30, with DOJ Press Release (May 2, 2001),supra note 61, at 1 (both the DOJ and EC discussed MROs in the context of the merger) \\server05\productn\C\CIN\43-1\CIN101.txt Keynote Address, ILJ 2009 Symposium kinds of capital.65 Moreover, GE had a subsidiary that was a big purchaserof airplanes and also a big aircraft engine maker.66 Honeywell makes avi-onics— the instruments that go in the airplanes— as well as landing systemsand the like.67 The United States’ view was that the whole point of the merger was to allow for such efficiencies, fully recognizing that, after the merger, the com-bined entity would very likely be the preferred choice of customers— air-lines.68 The fact that customers would be able to go to one source, topurchase an integrated package that includes engines, airline instruments,landing systems, and the like was seen as the benefit flowing from thetransaction.69 To the Europeans, the likelihood of this occurrence pro-vided the very reason to stop the deal.70 It goes back to the idea aboutdictating market structure versus looking solely at the state of competition.
Frankly, I think that the U.S. criticisms of the Europeans were largely unfounded. Some in the United States had picked up on the public rela-tions value of saying things that made nice sound bites, but which oversim-plified the European analysis. Regardless of which enforcer was right orwrong, it was a common conclusion that as a result of the merger, GEwould be able to offer different mix-and-match packages to itsconsumers.71 The concern in Europe was not that these packages would be forced on consumers— by consumers, I mean the airlines here— but that the air-lines would actually want the packages.72 That is, the airlines would wantthe packages so much that they would no longer have any interest in deal-ing with the stand-alone companies that had theretofore competed with GEand Honeywell.73 The Europeans disapproved of this arrangementbecause the GE offer would be so attractive that airlines would move their 65. See European Commission Decision, supra note 63, at 31– 35 (describing GE’s 66. See id. at 35– 38 (discussing GE Capital Aviation Services (GECAS) and its 67. See id. at 58– 59.
68. See Press Release, U.S. Dep’t of Justice, Statement by Assistant Attorney General Charles A. James on the EU’s Decision Regarding the GE/Honeywell Acquisition (July 3,2001) (“[T]he combined firm could offer better products and services at more attractiveprices than either firm could offer individually.”), available at
69. Id.
70. See European Commission Decision, supra note 63, at 99– 102; Georgiev, supra 71. European Commission Decision, supra note 63, at 86– 88; see Douglas K.
Schnell, Note, All Bundled Up: Bringing the Failed GE/Honeywell Merger in from the Cold,37 CORNELL INT’L L.J. 217, 240– 241 (2004).
72. European Commission Decision, supra note 63, at 106– 09 (“[A]s a result of the proposed merger, it can be expected that customers will continue to have a rather lim-ited interest in exercising whatever countervailing power they may have vis-` merged entity’s bundled offers.”); see Schnell, supra note 71, at 241.
73. European Commission Decision, supra note 63, at 107 (“As a result, airlines will have a very limited incentive to exert countervailing buying power since they cannotreally afford to deny themselves short-term benefits even if they are associated withadverse consequences in the foreseeable future . . . .”).
\\server05\productn\C\CIN\43-1\CIN101.txt business to the combined GE-Honeywell firm. As a result, the stand-alonecompanies would not have adequate resources left to engage in researchand development. Ultimately, the other competitors would slowly shrinkinto oblivion, with the result that the market would be left with one domi-nant firm.74 So, the European Commission blocked the deal.75 The decision was appealed through the European courts, and several years later, it wasaffirmed on certain grounds but not others.76 But the relevant point fordiscussion today is that the deal was blocked, notwithstanding the fact thatthe United States had approved it earlier. And, following the EU’s rejection,there was much made of the difference between fairness considerations inEurope versus the pure efficiency approach of the United States.
Hopefully, this discussion has provided some background on the dif- ferences between U.S. and European merger review. For the sake of brev-ity, I have likely over-generalized, but my objective is to make pointsstrongly enough that you can see cleanly what the distinctions are.
I will now describe my view of where the two regimes have been headed recently. In Europe, the movement has consistently, if not slowly,been in the direction of increased emphasis on economic efficiency.77 Icannot say the same for the United States, where economic efficiency isenjoying less prominence at the federal enforcement level.
This is not a statement I would have made until about 2008. Recently, however, there have been actions taken and statements made by U.S. regu-lators, most notably at the FTC, that suggest a dramatic turn of direction. Ishould note that the Justice Department does not have a new head of theAntitrust Division yet.78 Time will tell what happens there, but in light ofstatements made by then-Candidate Obama, it is likely that the Divisionwill be headed by someone with sharply different views from that of thelast Division head of the Bush Administration.79 74. Id. at 109 (“[I]t can be concluded that the merger will result in the creation/ strengthening of a dominant position on the markets for large commercial aircraftengines, large regional jet aircraft engines and corporate jet aircraft engines, as well as onthe markets for avionics and non-avionics products.”).
75. Id. at 130– 31.
76. See, e.g., Case COMP/M. 2220, Commission Decision 2004/134/EC, application for annulment denied, Case T-210/01 (Ct. of First Instance Dec. 14, 2005), available at; Paul Meller, European Court UpholdsVeto of G.E.– Honeywell Deal, N.Y. TIMES, Dec. 15, 2005, at C7.
andez, Iraj Hashi & Marc Jegers, The Implementation of the European Commission’s Merger Regulation 2004: An Empirical Analysis, 4 J. COMP. L.
& ECON. 791, 793 (2008) (characterizing Europe’s shift in merger tests as “aligning theregulations with U.S. standards”).
78. Subsequently, Christine Varney was confirmed as the head of the Justice Depart- ment Antitrust Division. Press Release, U.S. Dep’t of Justice, Attorney General EricHolder Welcomes Assistant Attorneys General for Antitrust, Civil, and Criminal Divi-sions, (April 20, 2009), available at
79. See John B. Kirkwood & Robert H. Lande, The Fundamental Goal of Antitrust: Protecting Consumers, Not Increasing Efficiency, 84 NOTRE DAME L. REV. 191, 194– 95, 194 \\server05\productn\C\CIN\43-1\CIN101.txt Keynote Address, ILJ 2009 Symposium Note the difference in procedure with the FTC, where the commission- ers sit for fixed terms of seven years and the lineup does not necessarilychange much with a change in administration.80 The chairman changesbecause there can only be three commissioners from one party,81 and theincoming president always names one of the sitting commissioners fromhis or her party to be the chair.82 If you think my contention that the United States is moving away from economic efficiency is an overstatement, I would start out by pointing youto a statement made not by one of the Democratic FTC commissioners, butby a Republican commissioner appointed during a Republican administra-tion.83 Within the last month, after observing that two of his heroes— pureChicago School types, Henry Paulson and Alan Greenspan— had boltedand discarded the Chicago School,84 he followed suit. I’ll read you what hesaid, “One thing is clear to me: the orthodox and unvarnished ChicagoSchool of economic thought is on life support, if it is not dead.”85 He went on to say that the change in policy had been so rapid that the FTC website had not even had time to catch up.86 Commissioner Roschwas referring to several quotes on the FTC website, touting that the FTChas “faith in the market.”87 For anyone who follows these agencies at all,the idea that a commissioner— any commissioner, let alone a Republicancommissioner— is apologizing about what is on the FTC website because itreferences faith in the markets is unusual, to say the least. To be clear, theChicago School has been the underpinning of antitrust analysis in thiscountry for the last twenty-five years.88 Chairman Rosch went on to say that “some would even say that [the] Chicago School is ‘out’ and Keynesian economics is ‘in.’”89 Now, I havealready discussed what the Chicago School stands for. In contrast, Keyne-sian economics concerns itself with identifying situations when govern-ment should intervene with spending to stimulate the economy.90 n.9 (2008) (discussing the adherence by Bush administration antitrust officials, includ-ing Thomas Barnett, to the ideas of the Chicago School).
80. 15 U.S.C. § 41 (2006).
81. Id.
82. Id. (“The President shall choose a chairman from the Commission’s 83. 151 CONG. REC. S13969 (daily ed. Dec. 17, 2005).
84. J. Thomas Rosch, Comm’r, Fed. Trade Comm’n, Remarks at the New York Bar Association Annual Dinner 4– 5 (Jan. 29, 2009) [hereinafter Speech by J. ThomasRosch], available at .
85. Id. at 2.
86. See id. at 3.
87. See id; Federal Trade Commission, Bureau of Competition, 88. See TONY A. FREYER, ANTITRUST AND GLOBAL CAPITALISM, 1930– 2004 6 (Cam- bridge Univ. Press 2006) (discussing the shift to the dominance of the Chicago Schoolstarting in the 1970s and continuing into the new century).
89. Speech by J. Thomas Rosch, supra note 84, at 4.
90. See Geoffrey D. Korff, Reviving the Forgotten American Dream, 113 PENN. ST. L.
\\server05\productn\C\CIN\43-1\CIN101.txt According to John Maynard Keynes, there are appropriate times for the gov-ernment to spend and such spending is what fixes markets that are notalways self-correcting (or at least not quickly self-correcting).91 Thesestatements are certainly a far cry from the Posner quote I gave you, madenot that long ago, where he declared the intellectual journey for mergerreview had reached an end, that the key ideological battles had been foughtand won, and that there is now universal consensus on how enforcersshould proceed.
Now, some of you might be thinking that I am, just to be controversial and provocative, picking out one speech and taking a couple of sentencesout of context. After all, anybody, even commissioners, will sometimesstray and say things in order to get the discussion going. That is fairenough, so let me give you a couple further examples in support of myposition.
I should note first that I am really trying to avoid the macro-political scene, that is, the results that will occur strictly because of the election. Tobe sure, people are running all over Washington to distance themselvesfrom the policies of the last eight years simply because of the economicsituation we are in right now. Whether those policies were right or wrong,or a cause or non-cause of where we are, no one is going to embrace them.
Realistically, that is just Washington.
You observe officials like Mary Shapiro, the new head of the SEC, say that her primary initial goal is to reverse the market-driven policies of herpredecessor.92 So, this is not something that is limited to the FTC. But, asnoted, I am not really talking about that aspect of change. I am talkingabout changes that I believe started to occur before the groundswell occa-sioned by the recent election.
Going back to the FTC for a minute, there was a paper submitted recently by the American Antitrust Institute (A AI).93 In a rare moment ofprudence before I criticized the paper, I looked to see who was on the advi-sory board and saw it included Professor Hay. But, as he quickly remindsme, just because you are on the board does not mean you approve of anyparticular paper. The reason I point this out is simply to substantiate thatthis is a legitimate, mainstream operation. The A AI is not the left wing’sresponse to the Cato Institute.
In any event, a merger recently was proposed between Pfizer and 91. See id.
92. See Stephen Labaton, S.E.C. Chief Pursues Reversal of Years of Lax Enforcement, N.Y. TIMES, Feb. 23, 2009, at B1 (“Less than a month after becoming the head of the[SEC], Mary L. Shapiro is moving swiftly to reverse major decisions by herpredecessor. . .”).
93. See Letter from Albert A. Foer, President, Am. Antitrust Inst., to Eric Holder et al., Attorney Gen., U.S. Dep’t of Justice (Feb. 11, 2009) [hereinafter Foer Letter], availa-ble at AI%20memo.
2.11.09_021420090933.pdf; Memorandum from William S. Comanor & F.M. Scherer,Am. Antitrust Ins., to the Attorney Gen. and U.S. Fed. Trade Comm’n 1 (Feb. 11, 2009)[hereinafter Memorandum from A AI], available at AI%20memo.2.11.09_021420090933.pdf.
\\server05\productn\C\CIN\43-1\CIN101.txt Keynote Address, ILJ 2009 Symposium Wyeth.94 As a disclaimer, I should note that my firm represents Wyeth,but my comments are not relevant to that representation. A AI submitted apaper, touting that it had been written by two former heads of the FTCBureau of Economics.95 One of them was the head when I was in highschool— trust me that was long time ago. And the more recent of them wasat the FTC 30 years ago.96 I think it takes a bit of base stealing to implythat these are recent policy makers.
Essentially, Wyeth/Pfizer is, from an antitrust standpoint, a standard pharmaceutical merger.97 Each of these companies makes a lot of prod-ucts.98 There are some areas where there is a therapeutic overlap, and thegovernment is presumably going to look at those, make decisions aboutwhat the competition looks like before and after the merger, and determinewhether any relief is required as a condition to being allowed to close thedeal.99 But the A AI authors, Professors Comanor and Scherer, believe thisthinking is way too small; instead, they unabashedly advocate a mode ofanalysis, which they themselves characterize as beyond the conventionalscope under the antitrust laws.100 So why would they have the FTC block this merger? First of all, they object on macroeconomic theory grounds.101 They are also concernedthat some TARP money was used to finance this transaction and that thecompanies are relying on banks for financing.102 That happens in any bigmerger. So, what is the issue with the banks using TARP money? Thepaper argues the following, in sequence: that the funds will end up in thehands of the shareholders;103 everybody knows that shareholders arewealthy people; wealthy people do not spend money, they save money.
This means that TARP money is going to go into wealthy people’s savingaccounts instead of being used for job-expansion opportunities.104 Theyargue that this provides a reason to block the merger.105 The authors refer-ence conventional analysis as well but only to buttress their other reason- 94. See Matt Herper, Will Pfizer’s Merger Hurt Innovation?, FORBES, Jan. 26, 2009.
95. See Foer Letter, supra note 93.
96. See UCLA Faculty: William S. Comanor Biography, bio_comanor.asp (last visited Feb. 26, 2010).
97. Cf. Patricia M. Danzon et al., Mergers and Acquisitions in the Pharmaceutical and Biotech Industries 7 (University of Pennsylvania, The Wharton School, Working Paper,Sept. 2003), available at
pdf (finding that all but three of the top pharmaceutical companies in the United Stateshave been involved in “major horizontal acquisitions” in the past fifteen years).
98. See All Products,; Pfizer Pharmaceutical Prod- ucts,
99. See Thomas B. Marcotullio, The Battle Against Drug-Makers: An Analysis of Euro- pean Union and United States Merger Enforcement in the Pharmaceutical Industry 1995-1999, 32 LAW & POL’Y INT’L BUS. 449, 458 (2001).
100. See Memorandum from A AI, supra note 93, at 2.
101. Id.
102. See id.
103. See id. at 3.
104. See id.
105. See id. at 15.
\\server05\productn\C\CIN\43-1\CIN101.txt ing,106 which they believe counsels against permitting the merger.107There is no discussion of market power, of economics, or of the effect onconsumers.108 The paper’s discussion relates to industrial policy and theuse of TARP money.109 The authors go on to argue that these are two really big pharmaceuti- cal companies and, if they are allowed to merge, Pfizer, in particular, isgoing to have fewer incentives to acquire some of these smaller biotechcompanies.110 The paper argues that it is these smaller biotech companiesthat really come up with better ideas when it comes to R&D.111 The paperconcludes that, if one wants to see innovation in the pharmaceutical indus-try, the two companies should not be allowed to merge because that willcrowd out the acquisitions that Pfizer otherwise would have made from thesmaller companies.112 Now, you tell me what the limiting principle is with this concept: the idea that you stop a merger not because it raises any competitive issueitself, but because of the hope or expectation that some other undefinedmerger would occur at some unknown time down the road?113 Again,what is this other than industrial policy? It has nothing to do with main-stream antitrust enforcement. Now, we might ignore this because after all,this is just a proposal being made to the Federal Trade Commission. Butwe have some specific examples at the FTC to talk about as well.114 U.S. enforcers appear to be moving away from the precision of the Chicago School (accepting, as we must, that it is not perfect, can get thingswrong, and can be very harsh). But, to my way of thinking, the shift is fromthe Chicago School’s economically objective analysis to an undefined stan-dard, which is, to say the least, unhinged and has no limiting parameters.
Where do you draw the line and start or stop this shift? First I want to talk about the FTC’s Ovation Pharmaceutical case.115 This was a situation with, apparently, very bad facts, and as they say, badfacts make for bad law. The matter involved a drug called Indocin, which,among other things, is used to treat congenital heart defects in prematureinfants.116 Rights to the drug were owned by Merck.117 Ovation, whichpreviously was not in this market (it was not a pharmaceutical company 106. See id. at 4– 5.
107. See id. at 5.
108. See id. at 4, 15.
109. See id.
110. See id. at 8– 9.
111. See id. at 7– 8.
112. See id. at 8– 9.
113. See id.
114. See Jonathan Gleklen, The Emerging Antitrust Philosophy of FTC Commissioner Rosch, 23 ANTITRUST 46, 46– 47 (2009) (discussing Commissioner Rosch’s similarapproach in other cases).
115. See generally Thomas B. Leary, Antitrust Scrutiny of a Pure Conglomerate Merger: The Ovation Case, 23 ANTITRUST 74 (2009).
116. See id. at 74.
117. See id. \\server05\productn\C\CIN\43-1\CIN101.txt Keynote Address, ILJ 2009 Symposium and had no R&D), bought the rights to Indocin from Merck.118 There wasno antitrust concern with the purchase because it was not a horizontalmerger;119 it was just a straight transfer of assets to an entity that was not acompetitor.120 After the sale, however, Ovation approached Abbott Labs,which had a similar drug in the pipeline— one that was going through theFDA process and that ultimately would compete with Indocin.121 In otherwords, Abbott’s drug, NeoProfen, would also likely be indicated for treat-ment of this congenital heart defect in premature babies.122 Ovation ulti-mately acquired Abbott’s rights to NeoProfen.123 The transaction fellbelow the mandatory reporting threshold, so there was no obligation toprovide the government pre-merger notification.124 Assuming the accuracy of the allegations in the FTC Complaint, the company deserves an “A” for stupidity for their next move, which was toraise the price of the product from $36.00 to $500.00 per vial.125 Thatamounts to a price increase of 1300%.126 Inasmuch as market power isdefined by the ability to raise prices above a competitive level, and the gov-ernment considers a 5– 10% increase in price as significant evidence of thefact, it is hardly surprising that the FTC moved aggressively when theylearned of the situation and insisted on unwinding the transaction bywhich they obtained NeoProfen. The government had a compelling argu-ment that the acquisition of the potentially competing product was prob-lematic because of the increased price flexibility it afforded Ovation.
Challenging the NeoProfen deal was a no-brainer.
The FTC went further, actually, seeking disgorgement of profits in fed- eral court.127 My guess is they are going to get it, assuming disgorgementis something available to the FTC as a statutory matter— the latter issuebeing a subject for another day.
However, two of the commissioners took the position that, not only was it correct for the FTC to challenge Ovation’s acquisition of Neoprofenfrom Abbott, but that the FTC should also have gone back and challengedOvation’s initial acquisition of Indocin from Merck.128 Now, what wastheir argument? After all, that transaction was not between two competi- 118. See Gleklen, supra note 114, at 46.
119. See id.
120. See id.
121. See Leary, supra note 115, at 74.
122. See id.
123. See id.
124. See id.
125. Complaint at 2, F.T.C. v. Ovation Pharmaceuticals, Inc., No. 8 Civ. 6379 (D.
126. See Jon Leibowitz, Concurring Statement of Commissioner Leibowitz: Federal Trade Commission v. Ovation Pharmaceuticals, Inc. (Dec. 16, 2008) [hereinafter Leibo-witz Statement],
127. Id. at 11.
128. See id.; Leary, supra note 115, at 74; J. Thomas Rosch, Concurring Statement of Commissioner J. Thomas Rosch: Federal Trade Commission v. Ovation Pharmaceuti-cals, Inc. (Dec. 16, 2008) [hereinafter Rosch Statement], available at
\\server05\productn\C\CIN\43-1\CIN101.txt tors, actual or potential. It was a simple change in ownership. There wasno overlap in research and development, and no change in the state ofcompetition in the market from the day before the transaction to the dayafter.129 One of those who would have challenged the Indocin purchase is the now chairman of the FTC, Jon Leibowitz,130 one of the more thoughtfulpeople you will come across. However, the antitrust rationale behind hisreasoning in arguing the FTC should have challenged the Indocin purchasefrom Merck eludes me. Chairman Leibowitz first declares profiteering isimmoral and illegal.131 I am unaware of legal precedent basing antitrustmerger policy on what’s moral or immoral. The Chairman goes on to notethat the transaction serves as a stark reminder of the need for universalhealth care.132 That serves as a very strong statement of public policy, but, first, I do not see the connection between that observation and the application ofantitrust merger law. To me, these statements are like saying it is warmerin the summer than it is in the country— a non-sequitur.
One next looks for guidance as to the antitrust foundation for chal- lenging the initial acquisition in Commissioner Rosch’s concurring state-ment. The Commissioner concludes that when Merck owned these assets,they did not and would not charge the price the market would bear.133Merck was charging five dollars, but Ovation raised prices by a hugeamount after purchasing rights to the drug.134 He posits that Merck,which has a good reputation and sells products across the board, did notwant to take the hit to its image that would result if Merck started exploit-ing its pricing power on a treatment for premature babies with heartdefects.135 So, concludes Commissioner Rosch, while in the hands ofMerck, with its broader product portfolio, the product was handledresponsibly.136 In contrast, opines the Commissioner, Ovation is a single-product company whose incentives simply are to make as much money as it can onsales of the product.137 Thus, both Commissioners challenged the initialacquisition by a single-product company because it did not have the sameincentives to keep prices down as was the case with Merck, with its reputa-tional concerns.138 As a matter of industrial policy or public policy, thiscould be considered a fantastic result. But in either statement is there anyreliance on competition laws— the laws these Commissioners are empow- 129. See Complaint, supra note 125, ¶ 18.
130. Jon Leibowitz, Chairman (Mar. 2, 2009), 131. See Leibowitz Statement, supra note 126, at 1.
132. Id.
133. See Rosch Statement, supra note 128, at 1.
134. Id.
135. Id.
136. Id.
137. See Leibowitz Statement, supra note 126, at 1.
138. See id.; Rosch Statement, supra note 128, at 1.
\\server05\productn\C\CIN\43-1\CIN101.txt Keynote Address, ILJ 2009 Symposium ered to enforce? Even if a thread to antitrust law could be discerned, whatpossible standard could be articulated for making determinations as towhen a single-product company should be able to engage in acquisitionsand when not? It is often said that we are a nation of entrepreneurs. Must an entity own a portfolio of products before it is permitted to merge with anothercompany? Where is the limiting factor? I do not see one. I think thesestatements are reflective of pure industrial policy. How could the matterbe resolved relying on the thinking of the Chicago School? For better or forworse, the Chicago School doesn’t take moral positions.139 Some wouldsay for worse, but the Chicago School instructs that monopoly profits actu-ally spur innovation, a conclusion that the Supreme Court echoed asrecently as two days ago.140 The reasoning behind that view is that monopoly profits encourage others to weigh in with efforts to create an even better solution.141 Andthis case actually supports the theory. Abbott had a product in the pipe-line, and the price of the existing product was low. When did Ovationraise the price? It was at the point where they got control of both prod-ucts.142 So the proponents of Chicago School could argue that, prior toacquisition of the Abbott product, the market was already bringing disci-pline to the situation.
The theory underpinning Chicago School thought is that the higher the reward, the more it encourages further innovation. Ovation is a toughcase with which to be defending the Chicago School, because the matterpresents very unattractive facts, and my point here simply is that it isn’tpossible to reconcile the statements of Chairman Leibowitz and Commis-sioner Rosch with any kind of Chicago School analysis. Indeed, the legalprecedent relied upon in the statements is thin, consisting largely of adated and obscure Seventh Circuit case.143 The other precedent— and I think, to long-time antitrust practitioners, this will come as somewhat of a surprise— is the oft-maligned Procter &Gamble case, perhaps best known as serving to block a conglomeratemerger in 1967 because it was too efficient.144 I noted a footnote in Com-missioner Rosch’s concurrence acknowledging the existence of a view that 139. MARC ALLEN EISNER, ANTITRUST AND THE TRIUMPH OF ECONOMICS 116 (1991) (“For most Chicagoans, the use of antitrust to realize grand political, social, and evenmacroeconomic objectives was nothing short of perverse.”).
140. See Pacific Bell Tel. Co. v. Linkline Commc’ns, Inc., 129 S. Ct. 1109, 1122 141. See, e.g., Gregory K. Price et al., Size and Distribution of Market Benefits from Adopting Biotech Crops, 1906 U.S.D.A TECH. BULL. 9 (2003) (“Monopoly profits help theinnovator to recover research and development expenditures . . . . Without these profits,few incentives to develop these technologies would exist.”).
142. See Complaint, supra note 125, ¶¶ 22– 24.
143. See Rosch Statement, supra note 128, at 2 (citing EKCO Prods. Co. v. F.T.C., 347 F.2d 745, 753, 745 (7th Cir. 1965)).
144. See id. (citing FTC v. Proctor & Gamble Co., 386 U.S. 568, 577 (1967)); Gunnar Niels & Adriaan ten Kate, Introduction: Antitrust in the U.S. and the EU – Converging orDiverging Paths?, 49 ANTITRUST BULL. 1, 8 (2004).
\\server05\productn\C\CIN\43-1\CIN101.txt the Procter and Gamble case does not reflect the present state of economicthinking or the case law.145 I think Ovation is Exhibit A for the proposition that bad facts make for bad law. Even accepting the proposition that straying from a pure eco-nomic analysis can be justified, how does a regulator determine whether acompany is a “good company” or “bad company,” and what standard isused for making a decision on that basis? Is that the sole parameter to beused? It is the only factor that seems to have been relied upon in the con-curring opinions for the conclusion that the FTC should have blocked theoriginal Indocin acquisition.146 If the Chicago School is being abandoned, this leaves open the ques- tion of what is replacing it as the mode of analysis. The school of thoughtappearing to gain currency at the FTC right now is known as “behavioraleconomics.”147 What are the guiding standards of the behavioralist school? At the risk of over-simplification, whereas the Chicago School applies rules basedon an assumption of rational behavior, behavioral economists dismiss anyassumption that rational people act rationally. Instead, they would basedecisions on actual observed behavior. Let us look at how people really actand make our decisions based on that.148 Who could argue with that proposition? It sounds terrific. And if I could find someone who could predict actual, as opposed to rationalbehavior, she would probably be a successful investment advisor, not work-ing in the bowels of academia or a government bureaucracy. But the fact ofthe matter is that people simply do not know how to do that for the mostpart. Note also the Chicago School has never stood for the proposition thatit can predict human behavior perfectly. So while there is still clear theo-retical room for improvement, what justifies a leap to theories like behav-ioral economics? One feature of the Chicago School is relative simplicity.149 Propo- nents will acknowledge they do not always get it right, but it is still betterthan any other system. They also believe Chicago School theory explainshuman behavior better, in the aggregate, than any theory that attempts toidentify behavioral idiosyncrasy. In Eastman Kodak Co. v. Image TechnicalServices, Inc.,150 the majority opinion included a discussion of whetherpeople who buy photocopiers actually think through what the cost of 145. See FTC. v. Procter & Gamble, 386 U.S. at 588 n.6 (Harlan, J., concurring).
146. See Rosch Statement, supra note 128, at 2 (citing EKCO Prods. Co. v. F.T.C., 347 F.2d 745, 753, 745 (7th Cir. 1965)).
148. See, e.g., Craig Lambert, The Marketplace of Perceptions, HARV. MAG. 50, 50 (Mar.-Apr. 2006) (discussing the preference for the actual human rather than the “Eco-nomic Man”).
149. See Posner, supra note 7, at 928 (discussing how Aaron Director’s antitrust the- ory was derived from simple price theory).
\\server05\productn\C\CIN\43-1\CIN101.txt Keynote Address, ILJ 2009 Symposium repair and of buying a replacement— the so-called “life costs”— and factorall that in when they pay the initial purchase price.151 Justice Scalia, indissent, acknowledged that not all purchasers look at the price of“aftermarket support,” but noted that notwithstanding the “occasional,irrational consumers[,] . . . we have never before premised the applicationof antitrust doctrine on the lowest common denominator of consumer.”152 In other words, antitrust law does not protect every consumer, no mat- ter how lazy, uninformed, or stupid. What it protects is the rational con-sumer because it is the best available surrogate and it is the only modelthat also provides a structured regime with any semblance of predictabil-ity.153 I would speculate that behavioral economists point to ChicagoSchool policy as being a substantial cause of the present economic down-turn and question its credibility as a normative model, saying, in effect,“You had your shot, now give us ours.”154 And at some level, that observa-tion is likely to provoke some sympathy.
Let us take an example. Try to think of a market that best approxi- mates perfect competition— a market where there is instant information,lots of buyers and sellers, and the ability to enter and exit at will. Let’s lookat the stock market, which comes as close to a perfectly competitive marketas you can imagine. Yet, on Tuesday it went down 251 points, and the nextday, with no real difference in the news, it went up 236 points. Do thebehavioralists have a point after all? I do not have expertise in this area, but from what I have reviewed, behavioral economists have actually shown quite convincingly that peopledo respond to the same stimuli in different ways under different circum-stances and make different presumptions and different decisions.155 Oneexample often cited is the employee coffee wagon. Apparently the honorsystem works a lot better in a small company than it does in a big company.
The employees in a big company are a lot more likely to cheat the coffeewagon than those in a small company.
This, and similar examples, cause critics of rational choice theory to argue: “What reason is there for assuming that people always make deci-sions based on profit maximization?”156 There are just some good peopleout there who make decisions on one basis, and others who reach differentresults. Why else, for example, would a rational person visiting a strange 151. Id. at 469– 71 .
152. Id. at 495– 96 (Scalia, J., dissenting).
153. See, e.g., Neil W. Averitt & Robert H. Lande, Consumer Sovereignty: A Unified Theory of Antitrust and Consumer Protection Law, 65 ANTITRUST L.J. 713, 733– 34 (1997)(discussing how consumer protection laws, and not antitrust laws, are designed to pro-tect against lack of information and other “inside the head” market failures).
154. See, e.g., Russell B. Korobkin & Thomas S. Ulen, Law and Behavioral Science: Removing the Rationality Assumption from Law and Economics, 88 CAL. L. REV. 1051,1143– 44 (2000) (noting that rational choice theories are flawed and that law and eco-nomics should be transformed into “law and behavioral science”).
155. See infra notes 158– 60 and accompanying text for specific examples and more 156. See, e.g., Korobkin & Ulen, supra note 154, at 1143.
\\server05\productn\C\CIN\43-1\CIN101.txt town she is never going to see again, leave a tip? Why would a rationalperson participate in a blood drive? People needing a transfusion aren’trejected for never having donated blood. These instances point to what Isee as a difficulty facing proponents of Chicago School: it is based ontough love and is Darwinian in the way it works, so politically it can be avery hard doctrine to sell.157 Behavioral economists have also engaged in more systematic analysis.
For example, they have demonstrated a penchant for loss aversion: peopleare much more concerned about a given loss than the positive prospect ofthat same gain,158 and people tend to be over-optimistic— more willing toaccept good news than bad. Similarly, they have observed an overconfi-dence bias: people think that good things are going to happen more oftenthan bad things.159 Framing the issue can make a difference: if somethingis seen as a sure gain as opposed to an avoidance of loss, people will reactdifferently to the exact same fact pattern.160 There is much more to be said about behavioral economics, and I sus- pect we will be hearing more about it over time. However, I will, in theinterest of time, now leave the topic to discuss other instances where Ibelieve the government has deviated in the antitrust context from pure Chi-cago School economics. I suppose, given the present ubiquity of the phrase“too big to fail,” that it was only a matter of time before an antitrust regula-tor sought to find its intersection with competition law. Indeed, at leastone FTC commissioner has suggested a separate blocking screen for merg-ers that would create entities that are “too big to fail.”161 The idea behind “too big to fail” is that some companies are entitled to a government bailout, to stave off failure that would cause a catastrophichit on our economy and the nation’s financial system. Well, maybe so, buta lot of companies can become too big to fail under this theory and stillpass a traditional Section 7 antitrust analysis.162 Some of the banks thatreceived bailout money are ones that were created as the result of a merger, 157. Alon Brav, J.B. Heaton & Alexander Rosenberg, The Rational-Behavioral Debate in Financial Economics 9 (Duke University, Working Paper, Mar. 3, 2009) (noting thatMilton Friedman’s rationality theory resembles Darwin’s theory in some respects).
158. See Colin F. Camerer & George Lowenstein, Behavioral Economics: Past, Present & Future, in ADVANCES IN BEHAVIORAL ECONOMICS 3, 4 (Camerer et al, eds., 2003).
159. See, e.g., S. Mullainathan & R.H. Thaler, Behavioral Economics, in INTERNATIONAL ENCYCLOPEDIA OF THE SOCIAL & BEHAVIORAL SCIENCES 1094, 1095 (Neil J. Smelser & PaulB. Baltes, eds., 2002).
160. See Robert J. Schiller, Behavioral Economics and Institutional Innovation 4 (Cowles Found. for Research in Econ. Yale Univ., Discussion Paper No. 1499, 2005) (discussingthe centrality of the concept of framing to behavioral economics).
161. See Speech by J. Thomas Rosch, supra note 84, at 8 (discussing how mergers should be analyzed with regards to whether they would create entities “too big to fail”).
162. See, e.g., Memorandum from the Republican Staff of the Committee on Oversight and Government Reform to Republican Members of the Committee on Oversight andGovernment Reform, Full Committee Hearing: “Bank of American and Merrill Lynch:How Did a Private Deal Turn Into a Federal Bailout?” – Part II (June 25, 2009) (discuss-ing the merger of Bank of America and Merrill Lynch without mention of Section 7analysis).
\\server05\productn\C\CIN\43-1\CIN101.txt Keynote Address, ILJ 2009 Symposium and they passed Section 7 analysis.163 Indeed, in any particular industry,there may be more than one player that is too big to fail, which in and ofitself suggests there is not a one-to-one relationship between an entity thatis too big to fail and traditional antitrust analysis.164 Another FTC Commissioner-generated suggestion for post-Chicago School merger analysis applies when the two companies in question oper-ate in two completely different industries. The putative basis for a chal-lenge would be if substantial leveraging and financing resulted in themerged entity being too weak to compete effectively with a strong competi-tor in either of the predecessor industries.165 Again, while the conceptmight have superficial appeal, it is far more attuned to an economy withcentral planning than one based on competition. How do you analyzethat? I do not know.
It would be one thing if the ideas emanating from the FTC were, for the moment, mere musings in a speech, but the situation has progressedbeyond that. A recent illustrative case is Fresenius/Daiichi. Fresenius ownsdialysis centers.166 One of the treatments provided at dialysis centers is foriron deficiency.167 Fresenius sought to purchase the manufacturer of aproduct for the treatment of iron deficiency.168 This was a purely verticalmerger because a downstream supplier was buying the purchaser of aninput.169 Fresenius did not make the drug before the acquisition, andDaiichi did not own dialysis centers.170 The owner of iron deficiency dial-ysis centers, sought to purchase the manufacturer of an upstream prod-uct.171 But the concern, at least as stated by the government in a consentdecree regulating the transaction, did not rely upon typical vertical foreclo-sure theory.172 Traditional vertical foreclosure theory applies if, as the result of acquir- ing an upstream input, a purchase can effectively deny that input to com-petitors downstream. The theory of harm derives from the chokeholdcreated. But no such claim was made here. The argument relied upon bythe FTC was that the acquisition by Fresenius was undertaken to game theMedicare system.173 Dialysis centers are reimbursed based on average 163. Id.
164. See, e.g., Speech by J. Thomas Rosch, supra note 84, at 5 (providing examples of several companies in one industry— banking— that were all too big to fail).
165. See id.
166. Federal Trade Commission, Analysis of Agreement Containing Consent Order to Aid Public Comment 2 (Sep. 15, 2008),
167. Id.
168. See id. at 1.
169. See EISNER, supra note 139, at 130.
170. See FTC, Analysis of Agreement, supra note 166, at 2.
171. See Complaint at 3, In re Fresenius Med. Care AG & Co. KGaA and Daiichi Sankyo Co., Ltd., No. C-4236 (F.T.C. Sep. 15, 2008), available at
172. See FTC, Analysis of Agreement, supra note 166, at 3– 4.
173. See Fresenius Complaint, supra note 171, at 4.
\\server05\productn\C\CIN\43-1\CIN101.txt sales price.174 And so, according to the FTC, if Fresenius purchases therights to an iron drug, it will then raise the internal transfer price to its owndialysis centers, which in turn, will raise the national average sales price,with the result being that not only Fresenius, but competing dialysis cen-ters as well, are going to get higher rates of reimbursement for Medicare.175 As with some of the other examples I have spoken about, the FTC action may lead to a terrific public policy result, but what does it have todo with application of competition law? The FTC’s theory appears evenmore anomalous when the FTC’s solution is examined. The FTC imposedrate caps for the period of time in which the merged entity could conceiva-bly engage in regulatory evasion.176 Again, it may be hard to criticize theresult from a public policy standpoint, but, one has to ask, where is theantitrust analysis? Lest you think deviations from well-settled antitrust doctrine are just occurring at the FTC, there are signs of its looming presence in the courtsas well. A transaction you may have heard of recently involved two storesthat sell premium, natural, organic foods: Whole Foods and Wild Oats.177 The FTC concluded that if these two players were to merge, competi- tion would be eliminated in the market for premium, natural, organicstores.178 More specifically, in eighteen locations, the merger would elimi-nate the only organic stores.179 So, the FTC moved to block the transac-tion.180 The District Court properly asked the conventional question inthis situation: if prices are increased at all organic stores by a certainamount— five percent— will consumers accept the price increase or wouldthe increase be unprofitable because sufficient numbers would shift theirpurchases to a conventional store?181 If a sufficient number of consumers would switch so as to render the price increase unprofitable, one could conclude the relevant product mar-ket extends beyond organic stores to also encompass conventional super-markets.182 The District Court observed that when Whole Foodsdetermined its prices, it was done across an entire region. In other words,Whole Foods did not historically set its prices at a different level in thoseareas with a Wild Oats store.183 Moreover, Whole Foods, when conductingits pricing research, compared itself with conventional supermarkets andothers.184 The District Court concluded on this evidence that the FTC 174. See id.
175. See id.
176. See FTC, Analysis of Agreement, supra note 166, at 3– 4.
177. FTC v. Whole Foods Mkt. Inc. [Whole Foods I], 502 F. Supp.2d 1 (D.C. 2007), rev’d, 548 F.3d 1028 (D.C. Cir. 2008).
178. See Complaint at 1, Whole Foods I, 502 F. Supp. 2d 1 (No. 1:07-cv-01021), availa- ble at
179. See Whole Foods I, 502 F. Supp. 2d at 16.
180. See id.
181. See id.
182. See id. at 34.
183. See id. at 39.
184. See id. at 29.
\\server05\productn\C\CIN\43-1\CIN101.txt Keynote Address, ILJ 2009 Symposium could not meet its burden that Whole Foods/Wild Oats would profitablybe able to raise prices post merger.185 Therefore, the preliminary injunc-tion was denied.186 On appeal, the D.C. Circuit Court of Appeals began its discussion with the gratuitous observation that the District Court did a fabulous job in itsreasoning187 and that the FTC did a really lousy job— a statement that wasboth gratuitous, and in my view, incorrect.188 But the D.C. Circuit thenproceeded to reverse the District Court because it reached the wrong con-clusion189 by erroneously focusing on the so-called marginal consumer.190 The marginal consumer is the one who is the most sensitive to a price change.191 The D.C. Circuit reasoned that all consumers are protected bythe antitrust laws, not just the marginal consumer.192 And the D.C. Circuitis absolutely right about that. But the D.C. Circuit missed the point offocusing on the marginal consumer. The fact is that traditional antitrustanalysis does look at the marginal consumer to ascertain whether enoughof them will defect in response to a price hike to make that action unprofit-able. The exercise of looking at the marginal consumer is undertaken forthe very reason that it identifies those situations where a merger canadversely affect all consumers. If the price hike would be unprofitable, themerged entity will not impose it.193 And when the merged entity keepsprices at the status quo, both the core customers and the marginal custom-ers are protected.
On the other hand, if the marginal customers are not going to switch away, then the price increase is profitable, the merger would be prohibitedas violating Section 7 of the Clayton Act, and all consumers would be pro-tected.194 So the District Court, I would submit to you, was completelyright.
Also notably, the D.C. Circuit relied for its reasoning on a 1965 Supreme Court case, Brown Shoe, which stands for the dubious propositionthat rigorous analytical market study is not required to establish marketdefinition.195 Instead it is sufficient to pose a series of qualitative ques-tions: How is the industry perceived?196 How does the public look at theindustry? Are the products viewed as unique? The idea is that if you throwall these observations together and really think they suggest products arein the same or separate markets, that’s enough.197 It may be a little over- 185. See id. at 35.
186. See id. at 50.
187. See FTC v. Whole Foods Mkt., Inc. [Whole Foods II], 548 F.3d 1028, 1032 (D.C.
188. See id.
189. See id.
190. See id.
191. See Whole Foods I, 502 F. Supp. 2d at 17.
192. See Whole Foods II, 548 F.3d at 1037.
193. See Whole Foods I, 502 F. Supp. 2d at 35.
194. See id. at 19, 22.
195. See Brown Shoe Co. v. United States, 370 U.S. 294, 325 (1962).
196. See id.
197. See id.
\\server05\productn\C\CIN\43-1\CIN101.txt stated to call Brown Shoe the worst antitrust decision ever written, but itcertainly ranks high on the list and out-ranks several other worthycandidates.198 Regardless of its merits, or lack thereof, Brown Shoe simply is not a case that recently, prior to the D.C. Circuit decision, was thought to beinstructive on the issue of market definition in this day and age.199 Reli-ance on the case generally meant some allowance to raise qualitative fac-tors, but only in conjunction with a quantitative assessment of marketdefinition and product substitutability. To my mind, the D.C. Circuitalmost entirely disregarded the steady and careful development over thelast twenty-five years of the application of economic principles to the ques-tion of market definition, falling back instead on an undisciplined, qualita-tive form of analysis, and making the majority opinion a relic of a bygoneera when antitrust laws were divorced from basic economic principles.200 In my view, the dissenting opinion was correct. I think the more inter- esting— and valid— question is whether the decision of the D.C. Circuit issimply a relic of the past or a precursor of things to come. At the very least,it serves as a wake-up call for those who have been confidently claimingvictory for the Chicago School when it comes to the proper methodologyfor antitrust for merger review.
Thank you very much for being here and for allowing me the honor of 198. See Tim Wu, The Copyright Paradox 8 (Stanford Law and Economics Olin Work- ing Paper No. 317, 2006), available at
199. See BORK, supra note 37, at 210.
200. See Whole Foods II, 548 F.3d 1028, 1063 (D.C. Cir. 2008).


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