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AT&T-Time Warner ruling belongs back in the disco era

AT&T-Time Warner ruling belongs back in the disco era
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What happens when the government doesn’t bring a single vertical merger case in 40 years?

Now that the Department of Justice (DOJ) has brought such a case, we have the answer. When you wait 40 years to bring a case, you may get a judge who writes an opinion that reflects antitrust law as it was 40 years ago. Back in the disco era.

I guess that should come as no surprise. It is the price of long-standing agency timidity and making law through consent decrees and press releases. And you have to start somewhere, so I won’t fault Judge Leon too much for what he ended up ruling.

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He’s not an economist, and for the most part, he doesn’t pretend to be one. He is, moreover, an entertaining writer and an experienced judge. However, the decision is in essence a throw-back to the late 1970s and early 1980s.

It has some pernicious elements that could set back the antitrust analysis of vertical deals, which, in fact, has come a long way since then.

Forty years ago, Robert Bork published his influential book "The Antitrust Paradox." The thesis of the book was that the courts, and particularly the Supreme Court, had made an incoherent mush of antitrust law. The book was a brilliant diatribe written by a brilliant and contentious law professor who later became a judge.

Its thesis was simple: Courts were interpreting the antitrust laws in ways that made no sense from the standpoint of modern economics. Instead of helping consumers, the courts were favoring inefficient companies over more efficient ones and condemning conduct and mergers that were intended to strengthen business efficiency.

The book, in my judgment, was meant to be a corrective. It was meant to inject modern economics into the legal analysis of antitrust cases and to criticize, from the standpoint of economics as it existed in the late 1970s, what the courts were doing.

Bork’s critique was hugely successful and much has changed since 1978. The agencies rethought their approaches to mergers. And as cases were brought, the Supreme Court rethought its approach to business practices and the law changed accordingly.

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In the wake of Bork’s critique, in 1982 and 1984, the antitrust agencies issued guidelines for horizontal and vertical mergers.

The horizontal guidelines were revised several times, most notably in 1992 and again in 2010. Thus, they kept pace with the economics and the agencies’ thinking and what the courts were doing in actual cases.

The vertical guidelines, by contrast, were soon outdated and by the 1990s, they no longer reflected how the agencies actually analyzed vertical mergers.

Since no vertical mergers were challenged in court, however, the vertical guidelines just sat harmlessly on the shelf. No one paid them any mind until Judge Leon resurrected them on page 55 of his opinion.

Bork’s view in 1978 was that vertical mergers were almost always efficient and rarely if ever anticompetitive. That view has changed as economists have continued to study vertical mergers. The “almost always efficient” prong holds true in a narrower set of circumstances than Bork imagined.

Several retrospective studies have shown that even in those circumstances, the promised efficiencies at times do not materialize or are not passed along to consumers.

Similarly, the “rarely if ever anticompetitive” prong turns out to be wrong for a set of mergers in which the parties are able to raise their rivals’ costs — and then turn around and raise their own prices. Consumers are hurt when that happens.

The mathematics of modeling vertical mergers has developed to the point where there are now ways to simulate a merger’s outcome and to model bargaining behavior.

Like his resurrection of the vertical guidelines, Judge Leon’s reaction to the government’s presentation of an economic bargaining model during the trial is telling. He called the model a “Rube Goldberg” contraption, invoking the wacky contraptions that Rube Goldberg invented to do common tasks.

Since Judge Leon and I are about the same age, my guess is that he, like me, grew up with Rube Goldberg-inspired toy models that were fun brain-teasers. I wish I still had them.

But as strange as it may seem to someone not immersed in the current antitrust world, the “Rube Goldberg” economic model presented by the government actually reflects advances in economics since the Bork era.

So if you are really going to be true to the spirit of Bork in the sense of injecting advances in economics into antitrust law, these economic models deserve more attention and less skepticism than the judge gave them.  

By my count, AT&T had at least four major law firms with economically sophisticated lawyers working on the trial in some capacity. It also had a testifying economist, Dennis Carlton, who has been at DOJ and knows quite well how vertical mergers are analyzed there.

Perhaps as a matter of trial strategy, AT&T gave the lead role at trial to a lawyer who said in open court that he did not know very much about antitrust. The end result was an opinion that shares the rhetoric, but not the spirit, of Robert Bork. As a matter of antitrust law and economics, it is a relic of the past. It is deeply flawed.

Two final thoughts. First, it seems clear that the government’s lead expert, Carl Shapiro, was careful not to overstate his conclusions and also was willing to admit weaknesses and mistakes. It is a topsy-turvy world indeed when a judge finds such an expert to lack credibility.

Second, Judge Leon suggested not-too-subtly that the government should not appeal his decision. But we live in a world of checks and balances, and one of those checks and balances is the D.C Circuit Court of Appeals. Judge Leon has had the first word, but perhaps not the last.

Allen Grunes spent more than a decade at the DOJ Antitrust Division and is the co-founder of The Konkurrenz Group in Washington, D.C., which advises small businesses, Fortune 500 firms, consumer advocacy groups and governments on issues of competition, privacy and consumer protection law.