Economics Institute for Competition Officials

Transcription

1 Global Antitrust Institute Economics Institute for Competition Officials November 2015

2 Predatory Pricing and Bundled Discounts Bruce H. Kobayashi, Professor of Law and Director, Global Antitrust Institute

3 A revolution in predatory pricing law based largely upon an analysis of error costs In particular, courts responded to evidence in economic literature showing apparent low probability of false negatives and intuitively large cost of false positives from preventing low prices

4 Error Cost Matrix for Predatory Pricing Antitrust Liability Based Upon Predatory Pricing No Antitrust Liability Based Upon Predatory Pricing Truly Anticompetitive Correct Positive (Liability) False Negative Error (failure to address predatory pricing) Truly Procompetitive False Positive (condemn procompetitive pricing behavior) Correct Negative Outcome (No Liability)

5 The Economics of Predatory Pricing Basic Predation Theory: pricing at a level designed to drive out competitors until one can effectively charge the monopoly price or charge it for a longer period of time. The following assumptions underlie this theory in its basic form: - Rival has little or no access to capital markets - There are substantial barriers to entry - Rivals have limited counterstrategies These problems have caused some commentators and courts to be very skeptical about predatory pricing

6 Matsushita: Is Predation Rational? Costs Now, Benefit in the Future Asymmetric Costs that disfavor predator Future Benefits speculative

7 Cost of Predation Monopoly Profits (π M per period) time t=0 Non Predation Profits (π D per period) time

8 Cost of Predation Monopoly Profits (π M per period) time t=0 Non Predation Profits (π D per period) time

9 Monopoly Profits (π M per period) time Cost of Predation t=0 Non Predation Profits (π D per period) time

10 Cost of Predation Monopoly Profits (π M per period) Non Predation Profits (π D ) time t=0 Non Predation Profits (π D per period) time

11 Brooke Group Price below relevant measure of cost Dangerous probability of recoupment: Rule of reason style analysis focusing on market conditions: barriers to entry, concentration, financial strength, pricing incentives

12 Areeda-Turner Test and Above Cost Safe Harbor The basic economic logic of the first prong of the Areeda-Turner test is that observing single product pricing below cost raises some questions about the motivation of the pricing strategy.

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18 Areeda-Turner Test and Above Cost Safe Harbor The basic economic logic of the first prong of the Areeda-Turner test is that observing single product pricing below cost raises some questions about the motivation of the pricing strategy. Rules versus Standards Per Se Illegal Rule of Reason Per Se Legality

19 Montana 1995 to 1999 No Fixed Daytime Speed Limit De Facto Limits Reasonable and Prudent held to be unconsitutionally vague (State v. Stanko)

20 Pure Bundling

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22 Marketing Bundle Mixed Bundling

23 Discount attribution test (aka HEEC Test): after allocating all discounts and rebates attributable to the entire bundle of products to the competitive product, the defendant sold the competitive product below its incremental cost for the competitive product. $225 + $54 = $279 Bundled Discount $279 - $165 = $114 Brooke Group test: $165 > incremental cost of producing the bundle

24 U.S. v Loew s Block booking leverages market power in picture 1 (GWTW) to picture 2 (GGG). Compel TV station that wants GWTW to buy valueless GGG. But if GWTW is valued at 10K and GGG valued at 0K, what does such leveraging achieve?

25 Block Booking A would pay 8K for GWTW, 2.5K for GGG B would pay 7K for GWTW, 3K for GGG Priced individually: Pgwtw = 7K, Revenue = 14K Pggg = 2.5K, Revenue = 5K Total revenue = 19K

26 Sell Bundle of GWTW and GGG: Bundle Price = 10K A would be willing to pay 10.5K for bundle (= 8K + 2.5K) B would be willing to pay 10K for bundle (=7K + 3K) Total Revenue = 20K Negative correlation in demand results in more uniform demand for block (A has higher than average demand for GWTW and lower than average demand for GGG, while B has the opposite). Aggregation allows for extraction of more of the revenue than selling the films separately.

27 Block Booking and Bundling Efficiency DeBeers/Loew s (lowered information costs) BMI/ASCAP (lowered transactions costs) Hazeltine Research (block license of 570 patents and 200 patent applications) Automatic Radio Mfg. v. Hazeltine Research, 339 U.S. 827 (1950) (not unlawful, convenient mode of operation). Zenith v. Hazeltine, 395 U.S. 100 (1969) (% of sales royalty patent misuse).

28 Blanket Licensing BMI v. CBS, 441 U.S. 1 (1979) CBS files antitrust suit against BMI alleging that the use of blanket licenses to perform copyrighted musical compositions was illegal price fixing that was per se unlawful under the antitrust laws. Court reversed court of appeals and held that the issuance by ASCAP and BMI of blanket licenses does not constitute price fixing per se unlawful under the antitrust laws The blanket license is not a "naked restrain[t] of trade with no purpose except stifling of competition"

29 Performing Rights Organizations as Coasian 37 Organizations BMI, ASCAP, SESAC Organizations are a market response to copyright problems caused by high transactions costs. Number of users of copyrighted music makes individual negotiations with individual copyright holders to acquire performance rights infeasible." (Landes and Posner (1989)) PROs eliminate the costs of individual market transactions with blanket licenses to entire repertoire. Are responsible for distributing license fees net of costs to songwriters or publisher that holds the copyright to the musical work

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32 Performance Rights Organizations (not involving digital audio transmission) in U.S. License and collect performance royalties for publishers and songwriters Do not collect songwriters/publishers mechanical royalties (some are collected by organizations such as the Harry Fox Agency) Do not collect digital performance royalties (collected in the U.S. by SoundExchange) In other countries a single copyright collectives collects multiple performance royalties (for composition and sound recording) or performance and mechanical royalties.

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34 Antitrust and Consent Decrees Antitrust Decrees entered into in 1941 with BMI and ASCAP (but not SESAC) oversee the rates charged: Require that ASCAP and BMI to license all similarly situated users of music under the same rates and standards Rate Court oversight (currently SDNY) to determine reasonable rates when voluntarily negotiations between PRO and music licensee do not result in an agreement Last modified in 2001 (ASCAP) and 1994 (BMI) Congressional Hearings and DOJ Consent Decree Review Allow ASCAP and BMI to expand beyond current business model and license rights other than rights to public performance Replace rate courts with mandatory arbitration Allow ASCAP and BMI to allow rights holders to withdraw rights for some types of users

35 Digital Performance Right in Sound Recordings Act of 1995 (DPRA) 17 U.S.C. 106(6), Owners of copyright in sound recordings have an exclusive right to public performance by means of a digital audio transmission Non subscription broadcast transmissions (e.g., terrestrial radio stations) exempt Non-interactive internet transmissions required to pay a statutory license established by the Copyright Royalty Board (Pandora, Web Radio, Satellite Radio), administered by Sound Exchange Interactive Internet transmission services must negotiate a license agreement with the copyright holder (YouTube) Payments are in addition to those paid for public performance or the musical composition

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37 SOUND RECORDING RIGHTS MUSICAL COMPOSITION RIGHTS

38 Withdrawal of Digital Rights from BMI/ASCAP EMI announces intent to withdrawal from ASCAP in 2010 Compendium modification by ASCAP to allow partial withdrawals of performance rights from ASCAP EMI, Sony and UMPG announce intention to withdraw of new media rights from ASCAP Direct negotiations with large new media entites (including noninteractive services such as Pandora and itunes radio) Rate Court holds that partial withdrawals are not allowed under modified consent decrees Pandora v. ASCAP Pandora v. BMI

39 SOUND RECORDING RIGHTS MUSICAL COMPOSITION RIGHTS: PRO FULL REPERTOIRE PRO PARTIAL REPERTOIRE PUBLISHER DIRECT

40 Coase 1937 and the Rate Court s Hobson s Choice Technological change and changes to the copyright laws has changed the nature of transactions costs that determined the nature of the PROs One would expect PROs to adapt to these changes, or face obsolescence when that copyright holders choose to use alternative mechanisms to appropriate the royalties from public performances. Indeed, this is what we have observed, with integrated music publisher (owning copyrights to performances and sound recordings) attempting to withdraw their digital rights from both ASCAP and BMI. The rate court s creation of a Hobson s choice in an attempt to continue the application of the antitrust consent decrees will: Speed the demise of traditional PROs Raise transactions costs for the traditional users of works that remain in ASCAP and BMI Prevent use of potentially more efficient alternative to price determination through consent decree

41 SOUND RECORDING RIGHTS : MUSICAL COMPOSITION RIGHTS : PRO FULL REPERTOIRE PRO PARTIAL REPERTOIRE PUBLISHER DIRECT