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Electronic copy available at: http://ssrn.com/abstract=1009573
Forensic Economics in Competition Law Enforcement
Maarten Pieter schinkel
Amsterdam Center for Law & Economics Working Paper No. 2007-05
The complete Amsterdam Center for Law & Economics Working Paper Series is online at: http://ssrn.acle.nl
For information on the ACLE go to: http://www.acle.nl
Electronic copy available at: http://ssrn.com/abstract=1009573
1
Forensic Economics in Competition Law Enforcement
Maarten Pieter Schinkel1
4 September 2007
forthcoming in the Journal of Competition Law and Economics (March 2008)
Abstract
This paper delineates the specialty field of forensic IO as the application of
theoretical and empirical industrial organization economics in the legal
process of competition law enforcement. Four stages of that process which
can benefit from forensic IO techniques are distinguished: detection and
investigation; case development; decision making and litigation; and
remedies, sanctions and damages. We survey the use of economics in such
aspects as identifying potential forms of anticompetitive behaviour, screening
markets for competition law violations, determining causality, advising on
appropriate remedies and assessing antitrust damages. The paper discusses the
role of expert economic witnesses in competition cases. It calls for an
organization of forensic IO within the context of existing forensic institutes.
Keywords: forensics, antitrust, litigation, competition law
JEL-codes: K21, L44, K41, K42
1 Department of Economics and ACLE, Universiteit van Amsterdam and CEPR. Roetersstraat 11, 1018WB Amsterdam, The Netherlands. E-mail: [email protected]. The papers in this special issue were selected from contributions to the ACLE workshop Forensic Economics in Competition Law Enforcement, held March 17, 2006 at the Universiteit van Amsterdam. John Connor, Andrew I. Gavil and Franklin M. Fisher made outstanding keynote contributions to the event. I am indebted to them, as well as other participants to the workshop, for stimulating discussions. I thank the editors of the Journal of Competition Law and Economics, Damien Geradin and Gregory Sidak, as well as more than twenty anonymous referees for their assistance in the editorial process. Iwan Bos, John Connor, Kati Cseres, Franklin M. Fisher, Andy Gavil, Vivek Ghosal, Jon McNally, Jakob Rüggeberg, Francesco Russo, Daniel Slottje and Jan Tuinstra gave constructive comments to an earlier version of this paper. Norman Bremer and Marie Goppelsroeder provided excellent research assistance. Opinions and errors remain mine.
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1. Introduction
Forensic science is the application of scientific disciplines to the legal process.2
Scientific methods and tools have found productive and popular application in
criminal law enforcement. Techniques such as DNA-profiling, blood spatter
projection and handwriting analysis, are used to establish suspects, methods and
motives in homicide cases. They feature in television and documentary series, such as
Forensic Detectives, which graphically describe the pivotal role of forensic
techniques in police investigations and criminal law proceedings. Forensic tools have
become important in the discovery of crimes, their investigation and presentation in
court, and in establishing causality and damages. The field has its own professional
journals, university curricula, respected national forensic laboratories and institutes.
There exist a wide variety of applied forensic methods. Saukko and Knupfer’s 3
volume Encyclopaedia of Forensic Sciences contains more than two hundred different
alphabetically ordered entries, ranging from Airbag Related Injuries and Deaths to
Wood Analysis. Most methods derive from natural sciences. They include bio-medics
– to determine skeletal trauma, make time-since-death analysis and conduct
morphological age estimation – chemistry and toxicology – including ink analysis in
document forgery and counterfeits – as well as physics – informing enforcers with
ballistics, bloodstain analysis, image processing and forensic IT – and engineering –
understanding fire-scene patterns in buildings and motor vehicle accidents. The three
volumes of the encyclopaedia also describe applications from psychology – such as
criminal profiling, eyewitness reliability and methods to detect lies and deception. In
addition, it has some entries on white-collar crime and forensic computing.
Economics is a science that has methods and tools to offer for application in legal
processes. Insights from the discipline of industrial organization (IO) in particular are
extensively used in the interpretation and the enforcement of the competition laws.
Expert IO economists have made contributions to both the challenge and defence of
mergers that raised competition concerns and alleged antitrust violations. They have
2 Lyle (2004), p.8. The Forensic Science Society defines it similarly as: “the application of science to the law.” See http://www.forensic-science-society.org.uk.
3
assisted in assessing antitrust effects and damages, as well as the identification of new
types of behaviour that could potentially be anticompetitive. Their economic
justifications have been taken into consideration in the judgements of the Supreme
Court of the United States, as well as the European Court of Justice.3
The aim of this special issue on Forensic Economics in Competition Law Enforcement
is to delineate the speciality area of industrial organization economics applied in
various aspects of the legal process of antitrust cases. It is an exciting area of work, in
which a great many industrial economists are active. It generates a considerable turn-
over as well as large likely deterrence benefits. The area has an active international
conference circuit and even its own society journal, the Global Competition Law
Review.4
The area nevertheless lacks a systematic description as a discipline. Saukko and
Knupfer’s Encyclopaedia does not contain a single entry related to economics – not
even on forensic accounting, which is the analysis of financial and economic
transactions for the purpose of assessing their legality. Likewise, there is no
mentioning of topics related to economics in the description of forensic science given
by the Forensic Science Society. 5
The American National Association of Forensic Economics (NAFE), and the Journal
of Forensic Economics (JFE) which it publishes, has had a strong business orientation
since its creation in 1986. In their inaugurating contribution to the JFE, John Ward
and Gerald Olson set the research agenda for the field:
“The primary focus of the research of the forensic economists is
the measurement of market loss (damages) arising from market
failures, contract disputes or Torts.” (Wald and Olson, 1987, p.2)
3 See Adams and Brock (1991) and Kaplow and Shapiro (2007). 4 See Slottje (1999), a collection of essays by leading economists that were active in high-profile antitrust cases and the round-table on expert witness work in antitrust cases in the 2003 spring issue of Antitrust. Contributions to both are discussed in the text below. Baker (2003) and Neven (2006) attempt to quantify the effects of competition law enforcement in the US and Europe respectively, concluding that the gains are likely to far outweigh the costs in either regime. 5 See http://www.forensic-science-society.org.uk. The society publishes the journal Science & Justice.
4
Antitrust is mentioned as a specialization of damage calculation in public interest
disputes, but considered an area of minor importance compared to business
valuation. 6 Indeed, the vast majority of the papers published in the volumes of the JFE
is on the quantification of damages in individual tort cases. Topics include the
appropriate discount rate, expected employment duration and the effects of
progressive taxes in present value calculations of lost earning as a result of personal
injury and wrongful death. Typically, causality in these accident cases is
straightforwardly established and has nothing to do with economics. Only a hand-full
of papers discusses applications of economics to competition cases.7
In a further methodological paper in the Journal of Legal Economics, Ireland (1997a)
recognizes the application of “econometric tests of causality” in antitrust, but keeps it
outside the scope of forensic economics as “this element involves only a minority of
forensic economists” (op. cit., p.7). Emphasis remains on damages assessments.
Finally, Kaufman et al. (2005) define forensic economics as “the application of
economics to litigation” (op. cit., p.xv). The volume of seminal contributions to the
field claims to offer coverage of “all the major topics in this sub-field” (ibid.) but
contains not a single paper on antitrust.
We define the specialty field of ‘forensic IO’– as the application of theoretical and
empirical industrial organization economics in one or more of the various stages of
the legal process of competition law enforcement.8 Apart from antitrust economics,
the area overlaps with law and economics and the economics of law enforcement.
Forensic IO is much narrower than IO itself, which is only in part applied to antitrust.
This latter part, antitrust economics, in turn is narrower than forensic IO, as it focuses
on the economic interpretation of the competition laws, more than on the techniques
and tools of their enforcement by institutions and courts.
6 This research focus on damages assessments is also maintained in Thornton and Ward (1999) . 7 An interesting early example is Einhorn (1989). There even appears to be some hostility towards antitrust applications. Slottje (1999) was received in the JFE as a “view from Mt. Olympus” (Vernarelli, 2001, p.101). According to this review, the volume had the “mainstream forensic economist” little insight to offer. Instead, the reviewer suggested that “…if, heaven forbid, Professor Slottje were to suffer serious injuries when the car he is driving is hit by a tractor trailer which runs a red light, then he would really learn what forensic economics is all about” (op.cit., p. 103). 8 One of the first references to the term ‘forensic economics’ may be Boudin’s 1984 book review of Fisher et al. (1983), based on the authors’ experience as consultants to IBM in the American IBM case, on which more in Section 4. See also Fisher (2000).
5
In his introductory contribution to this special issue, John Connor traces the use of
forensic economics back to the first written record of an antitrust proceeding in the
Roman Forum, more than 300 years BC. Connor discusses its subsequent role in
modern cartel law enforcement in both the US and Europe. He establishes a
considerably longer modern tradition of applied forensic IO in the US courts, but also
sees an emerging field in Europe resulting from the European appellate courts
increasingly requesting sound economic argumentation and emerging private antitrust
suits before the national courts. The paper focuses on cartels and surveys a number of
methods for the construction of “but for” worlds and the determination of cartel
overcharges.
Forensic IO is not limited, however, to the assessment of damages in antitrust
litigation. It makes some of its most fundamental contributions to competition cases
by assisting to establish causality. Economic analysis can help to determine, for
example, the relationship between a collusive agreement between incumbents to
restrict entry and low product quality due to a resulting lack of effort. Economics can
be applied to identify market power and how it was abused. Its tools can also be used
to value claims of merger-specific efficiencies, as well as to determine the extent to
which intermediaries and final consumers were damaged by the anti-competitively
raised prices of their suppliers.
To determine likely causalities requires a complex process of building a relevant
economic theory, deriving testable hypotheses, and corroborating them with the help
of econometric tests. Precisely this is the scientific method for which academic
experts are consulted to produce objective and reliable truths.9 As a result, it is on
issues of causality that many of the more interesting differences of opinion exist
between experts applying industrial economics to antitrust. In fact, the Daubert-
qualification of admissible scientific expertise – discussed in Section 5 below – is
essentially concerned with the question whether causation has been shown
satisfactorily and by means of accepted scientific methods.
9 On methodology generally, see Chalmers (2004). On economics as a science, see Hands (2001).
6
The relevant elements of the legal processes in which forensic IO can assist should
also be interpreted broadly. To begin with, forensic IO is not restricted to (criminal)
cartel litigation and per se monopolization or abuse cases. In fact, the application of
IO economics is often most powerful in investigations that come under the rule of
reason. The same is true for merger investigations, in which the legality of acts under
the antitrust laws is assessed ex ante. It is in these cases that the causality of economic
effects often is an important part of the analysis.10
Forensic IO is also not limited to litigation. Instead, its tools find application in
investigation, litigation and adjudication, as well as the enforcement of remedies. In
the US, Federal and State courts decide on cases that are prosecuted by the antitrust
agencies. Appeals can reach the U.S. Supreme Court. In Europe, competition law
enforcement is mostly an administrative process in which the agencies take formal
decisions. These decisions can be appealed with the national tribunals and appellate
courts, or, in cases affecting trade between Member States, with the Court of First
Instance and European Court of Justice. Actual legal proceedings are a mixture of the
elements of the court-based and administration-based models.11 The US antitrust
authorities have considerable discretionary powers in deciding to sue or settle cases,
for example. Also, several parts of the European decision making processes involve
litigation-style events, such as oral hearings. Furthermore, the emerging private
antitrust damage actions in Europe are primarily before national courts. Forensic IO
finds application in all of these aspects of competition law enforcement.
Forensic IO is an academic discipline that contributes to the advancement of
economics as a science. The debate over important competition cases in many cases
spreads from competition agencies and the courts to academia. Frequently, the stakes
of the parties in competition cases are high and they are willing to invest in a good
representation of their case. Likewise, the forensic experts testifying to the case in
court have valuable reputations to protect and know that their contributions will be
publicly scrutinized by the opposing side. As a result, the debates are often of very
high quality. Economic reasoning between theory and empirical evidence helps to 10 For example, the contributions on antitrust in a special issue of the Journal of Econometrics on “Statistics and Econometrics in Litigation Support”, edited by Robert Basmann and published March 2003, are concerned with estimation techniques for merger control. See Basmann (2003). 11 See Fingleton (2005), Neven (2006), Section 4 and Borrell (2006).
7
support and sharpen the legal analysis of the facts and circumstances in the case. In
return, the involvement in actual cases provides access to internal corporate
documents that normally would be confidential and unavailable to the academic
economist. The economic principles of landmark cases can so be an inspiration for
academic contributions in the abstract that can be developed beyond the litigation
deadlines and budgets.
As a result of this, in a growing number of competition policy regimes around the
world, IO economics and the interpretation of the competition laws work and develop
in a productive symbioses. Novel business strategies cast up anticompetitive concerns
that subsequently inspire fundamental academic research. The recent software and
credit card cases, for example, stimulated the research area of network economics and
two-sided market theory. 12 At the same time, new economic insights and techniques
are being translated into revisions of guidelines and priorities in enforcement. The
adoption of the efficiency defence in the 2004 EU horizontal merger regulation was
likely influenced by the seminal work of Oliver Williamson. 13 Similarly, leniency
programs have been designed on the basis of a game-theoretical understanding of the
problem of internal cartel stability. Finally, courts have become increasingly open to
considering economic justifications in their rulings.
It is possible to distinguish four (related) stages of the process of competition law
enforcement in which forensic IO has a role: first, detection and investigation, second,
case development, third, decision making and litigation, and fourth, remedies,
sanctions and damages. In the following four sections, each of these roles is discussed
in some depth. Section 6 offers some concluding remarks on forensic IO as a
discipline.
2. Detection and Investigation
Competition law violations are different from more traditional crimes, such as murder
or burglary, in the sense that anticompetitive acts often leave no obvious traces. There
is not necessarily a body, signs of a break- in, or at all a crime scene. The fact that a
12 See Evans et al. (2000), Fisher and Rubinfeld (2001), Shy (2001) and Rochet and Tirole (2006). 13 Williamson (1968). See also the introductory chapter in Ghosal and Stennek (2007).
8
cartel had raised prices, for example, can be difficult to prove with only time-series on
prices and no data on costs. Often, however, cartel damages to society are more
indirect; for example when reduced competition leads to lower quality of goods and
services, less innovation efforts or the suppression of new technologies. Even people
who are close to the cartel conspirators, including in-house counsel and in some cases
higher management, may not know about the illegal practices that are going on in
their organizations. Forensic IO therefore has an important role to play in the
discovery of the very fact that a violation of law was committed, essentially in two
ways.
First, economics can uncover anticompetitive aspects of behaviour previously not
understood as restrictive of competition. In this sense, economics informs the
interpretation – or even the choice – of competition law rules and standards of
conduct. A business practice is only anticompetitive if it is shown to be restrictive of
competition by some plausible economic argumentation. Sometimes, a new type of
antitrust violation is discovered through independent theoretical and empirical
academic research. An example of this may be the insight pointed out by Steve Salop
that price-matching clauses, although they appear genuinely competitive can in fact
sustain collusion. 14 Another example is the more or less accidental discovery of a
suspicious lack of odd-eight quotes for actively traded NASDAQ securities by
William Christie and Paul Schulz. The research uncovered the market-makers
conspiracy, which led to an antitrust class action that was eventually settled in the late
1990’s.15
Often also, the understanding of possible anticompetitive strategies develops over the
course of an antitrust investigation. A prominent example is the US Microsoft case, in
which the insight was developed, primarily in the testimony of Franklin M. Fisher,
that Microsoft had attempted to levy existing monopoly power from the market for
operating systems to that of internet browsers by means of a predatory tie between the
two products.16 This type of forensic assistance in antitrust cases is highly innovative,
drawing on theoretical and applied developments such as game theory, computer 14 See Salop (1986). Corts (1997) challenges the view that price-matching clauses are anticompetitive. 15 See Christie and Schultz (1994) and In Re NASDAQ Market-Makers Antitrust Litigation , MDL No. 1023, (S.D.N.Y.) (R.W.S. 94 CIV 3996). 16 See Evans et al. (2000).
9
simulation techniques, and experimental economics, thus advancing both competition
law enforcement and academic research.
Second, forensic IO can help find recognized types of antitrust violations by
systematically screening industries and firms. A suspicion of an anticompetitive act
will typically be aroused by some kind of irregular market behaviour. A purchaser, for
example, may be alerted to the presence of a wholesale cartel by a sudden increase in
prices, or, if the cartel has divided the market geographically, by a refusal to supply
all but his local dealer. More sophisticated “tell- tale signs” of complicated abuses of
dominance or collusion may only be detectable by specialized detectives who monitor
markets to find violations.17 Examples may be sudden atypical changes in sales
conditions or product quality captured by the data, a decrease in price volatility over
time, odd bidding behaviour in an auction, or correlated capacity investments.18
Monitoring markets for behavioural patterns indicative of collusion can help target
further inspections of companies that display suspicious behaviour. An emerging
literature develops such ‘live forensics’ methods to systematically screen markets for
antitrust violations, in particular cartels. Practitioners as well as academic economists
contribute to the development of sophisticated antitrust screens.19 They typically
apply a combination of two types of indicators of cartel likelihood: structural and
behavioural indicators.
The first type of indicator is based on structural characteristics of industries and
markets in which theories of collusion predict cartels to be particularly sustainable
and in which cartels were found in the past.20 These characteristics include relatively
stable demand for a low-tech homogenous product sold in large volumes by a
relatively small group of more or less identical suppliers that frequently interact in a
17 Effective collusive markers are suggested by contextual and detailed cartel studies such as Simpson (1993), Griffin (2000), Connor (2001; 2007), Eichenwald (2001) and Mason (2004). 18 See, for example, Porter and Zona (1993) and Bajari and Summers (2002). The US Department of justice publishes a leaflet on its website that advises the public on how to identify collusive schemes. 19 See Porter (2005) and Harrington (2007a; 2007b). The distinction between ‘live’ and ‘dead’ forensics stems from forensic IT. Live forensics takes place in real time and analyses running IT systems in use, whereas dead forensics analyses a conserved snapshot of system. It is more complicated, but less invasive and allows for monitoring industries without the market parties being aware of it. See Volonino (2003) and Adelstein (2003). 20 See Grout and Sonderegger (2007).
10
transparent market. Likewise, relatively little buyer power, or common cross-
ownership may be reason to zoom in on certain industries rather than others. The
second type of indicator uses behavioural screens of the kind discussed above.21 It is
applied to pre- identified high-risk industries in order to systematically identify
potential antitrust concerns.
Forensic IO can assist the antitrust agencies to actively discover and assess the
illegality of certain business strategies. The US Department of Justice Antitrust
Division, for example, has developed ‘cartel profiling’ techniques based on its
experience that cartel activity may take place in markets adjacent to industries under
investigation for collusion, or to merger inquiries.22 The division pre-emptively
monitors industries in which convicted price-fixers are active as “mentors” in “cartel
trees”, or that are vulnerable to cartelization because they have the kind of market
structure characteristics discussed above.
Academic research can provide insights into uncovering such patterns. The paper by
Vivek Ghosal, who worked for the Antitrust Division for several years, focuses on the
genesis and taxonomy of cartel investigations. Ghosal examines the dynamic
interrelationships between civil and criminal investigations. His empirical findings
suggest that prior criminal prosecution of firms and individuals, as well as
information gleaned from merger and monopolization investigations, provide useful
leads for future cartel prosecutions. Ghosal also finds that cartel prosecutions rise
following economic downturns, which he relates to the stability and breakdown of
cartels.
Independent and active detection of antitrust violations is important for an effective
enforcement regime. It allows for an efficient allocation of limited enforcement
budgets over various antitrust priorities. This helps to create a sufficiently high
probability of discovery by the authorities, which in turn is essential to destabilize
active cartels through the leniency programs.23 In their paper in the issue, Hans
Friederiszick and Frank Maier-Rigaud argue that ex officio inspections remain crucial
21 See Harrington (2007b). 22 See Barnett (2007). 23 See Rey (2007).
11
in an era where many cartels apply for leniency. Their contribution reflects a high-
level strategy debate in the European Commission’s Directory General Competition.
Friederiszick and Maier-Rigaud make a strong case for a mixed instruments
methodology in which complementarities in enforcement are exploited.
Another perspective from inside the agencies is offered by Peter van Bergeijk. In his
paper he revisits the Dutch construction cartel, which was a complex and wide
ranging case of collusion that involved nearly all major construction companies in
The Netherlands, which lasted for more than ten years. Van Bergeijk is one of the
people responsible for the Dutch cartel “Paradise Lost” and worked for the
Netherlands Competition Authority (NMa) as an economic expert on the construction
cartel case. His cartel post mortem offers intriguing insight into this Dutch case, as
well as useful suggestions for tell- tale signs of collusion.
Companies take a keen interest in forensic IO methods to detect antitrust violations as
well. To know what collusive markers can trigger an investigation is useful for hard
core repeat cartel offenders of the type the US DoJ profiles. In particular, it can help
them to hinder or even avoid detection. It has been documented how specialized cartel
consulting firms organize secretive meetings, making sure no physical evidence
leaves the smoke-filled room. 24 Allegedly, it is possible to reserve server space in
Switzerland, where the inspection rights of competition authorities are limited, to
store sensitive documents. Just like a sophisticated thief makes sure to wear gloves to
avoid leaving finger prints, so will white collar crime constantly professionalize. It is
crucial that the antitrust agencies make sure to continue to update their use of the
latest detection methods in their struggle to stay ahead of this game of hide-and-seek.
Private-eye antitrust detection also serves a legitimate demand. In larger companies, it
may well be the case that the owners or senior management disapprove of
anticompetitive practices, but have insufficient oversight over their complex
organizations to know of the existence of the latter. Lower managers in subdivisions
or remote parts of the world may use collusive schemes to fix the division targets to
24 Case COMP/E-2/37.857, PO/Organic peroxides. Commission decision of 10 December 2003.
12
which their persona l bonuses are tied, thus leaving the firm with future liabilities.25
Higher management that deals insufficiently with cartel problems may even risk
criminal prosecution. Those involved in cartel conspiracies often even manage to hide
the cartel from in-house counsel, which has a duty to report irregular activity.26
Alternatively, in planned acquisitions or mergers, forensic IO detection methods can
support due diligence inspections by the prospective buyer. Internal audits for
corporate-risk analyses can find potential antitrust problems before the authorities do
and clean them up.27 Leniency programs offer companies a way to resolve their
unwanted antitrust problems, if they manage to discover a cartel in their organization
before anybody else does. Compliance programs can subsequently be put in place to
help prevent future violations.28 As the market for these forensic services develops, so
do the methods of detection available for public policy.
3. Case Development
A second role for forensic economics in competition law enforcement exists in
providing assistance in the development of cases prior to litigation, either on the
agency or prosecutor side, or on the defence side. Partially, this concerns forensics
issues such as collecting physical evidence of monopolization strategies or cartel
meetings, such as paper minutes, e-mail correspondence, or conference call records
that goes beyond initial detection. 29 This type of investigations aims to build a profile
of individuals and their networks similar to the traditional white collar crime forensics
methods mentioned in the introduction. It can benefit from the analysis of information
that is readily available within the business environment through employment records,
expense claims and network data. Forensic accounting and IT techniques can be used
25 On corporate governance issues and corporate crime generally, see Alexander and Cohen (1999), Paul (2000) and Green (2006). Applications to antitrust are offered in Jamieson (1994), Garoupa (2000), Spagnolo (2005), Buccirossi and Spagnolo (2006). 26 Sophisticated methods to hide cartels internally have been revealed in several of the cartel cases recently documented, including the auction houses cartel. See Mason (2004). 27 See Anastasi (2003) for an account of the role of forensics in corporate fraud detection. Internal company data often allow for analysing evidence of personal benefit, such as preferential treatment or bribes, and on-the-job surveillance. The industry has developed highly sophisticated tools, including packages such as ISYS, DTSearch and Attenex that assist in extracting relevant intelligence from background noise. 28 See Beckenstein, Gabel and Roberts (1983) 29 In U.S. vs. Microsoft Corp ., Civil Action No. 98-1232, for example, discovered internal emails on the ‘jihad to win the browser war’ played an important role in establishing the intend to monopolize.
13
to recover deleted files.30 It may further involve covert surveillance, handwriting
analyses and voice recognition to identify responsible individuals and their network.
Forensic IO can advise here on targeting inspections in ‘dawn raids’ on the premises
of companies by identifying the type of suspected antitrust violation and the likely
evidence that it leaves.
The main function of forensic IO, however, is in building the economic logic of a
case. The economics applied in this is closest to the material covered in the IO
textbooks, and so I confine myself here to only a brief discussion. 31 The extent to
which industrial organization economics can be used in a competition case depends
very much on the nature of the case. In merger investigations, structural models and
econometric specification are important in determining post-merger effects and
matching divestitures. IO theory and empirics also underlies monopolization cases in
the US and abuse of dominance cases in Europe. Here economics can point out the
principles that are at work to subvert competition, or the other way around, show how
behaviour that appears anticompetitive really is just genuine competition. In per se
cartel proceedings, the finding of an infringement will be based on direct evidence.
Nevertheless, economics can help determine whether the market structure is
conducive to collusion, whether there is an incentive to collude, or if a cartel could at
all be sustainable.32
In any case of substance, both sides are likely to benefit from employing economic
advisors and both sides typically decide to do so. The standard of economic work in
many antitrust investigations is high, often leading to additional insights and a deeper
understanding of economics. An advanced form of economic consultancy has
developed that applies cutting edge economic techniques, reasoning and evidence.
These competition practices employ PhD’s in economics and industry experts. They
maintain international and academic networks, which allows them to put together
teams of experts with a division of labour that is tailored to the case at hand.
30 See Volonino (2003) on the admis sibility of electronic evidence in computer forensics cases. 31 Tirole (1988), Carlton and Perloff (2006) and Motta (2004). 32 See Milne and Pace III (2003), Werden (2004) and Johnson (2007). An early contribution in the JFE is Einhorn (1989).
14
A number of routine economic analyses, such as application of the SSNIP-test for the
determination of the relevant market, HHI calculations for merger assessments, the
Pivotal-Supply- index (PSI), or the Elzinga-Hogarty-test have become standard
procedure.33 Yet, diversity across industries assures that many competition disputes
have one or the other fundamental issue of general economic interest. In some of the
landmark antitrust cases, such as Microsoft, VISA/Mastercard and Leegin, the
contributions of economists involved have been crucially innovative.34 They
generated important positive externalities for our general understanding of the
workings of these special markets and the potential monopolization, abuse and cartel
strategies to which they are exposed.
The same is true for some of the larger merger investigations. In GE/Honeywell,
which was cleared in the US after thorough investigation, the European Commission
blocked the merger on the basis of a rather adventurous conglomerate merger
theory. 35 It feared that post-merger product bundles of GE and Honeywell would be
so attractive to customers in comparison to the separate components offered by riva ls
that the competition would be forced out of business. The decision caused
considerable debate.36 It further highlighted the uneasy relationship between law and
economics in European competition law enforcement when the Court of First Instance
rejected most of the Commission’s analysis while upholding its decision to block the
merger. Other merger inquiries in which forensic IO made competition law
enforcement history are Staples/Office Depot in the US and Volvo/Scania in Europe.37
In both cases, sophisticated econometric analyses were entered to predict post-merger
market developments to support the challenge of the proposed merger.38
Obviously, in each case the choice of modelling has to go with the structure and type
of competition in the industry and the particular competition concerns at hand. The
33 Bishop and Walker (2002) provides a useful overview of the economics toolkit for European competition cases. 34 In re Visa Check/Master Money Antitrust Litigation, Master File No. CV-96-5238 (E.D.N.Y.) and Leegin Creative Leather Products, Inc. v. PSKS, Inc., No. 06-480, June 28, 2007. 35 General Electric/Honeywell Commission decision 2004/134/EC [2004] OJ L 48/1. 36 See Patterson and Shapiro (2001). See Vickers (2007) on the issue of transatlantic con- and divergence in competition law and economics. 37 Federal Trade Commission v. Staples, Inc., 970 F.Supp. 1066 [1997] and Volvo/Scania Commission decision 2001/403/EC [2001] OJ L 143/74, Case COMP/M.1672. 38 See Baker (1999) and Ivaldi and Verboven (2005).
15
more interesting landmark antitrust cases centre on questions about the specification
of the nature of competition. A theory of harm related to margin squeeze, for
example, requires a dominant wholesaler who is vertically integrated in part of the
retail market. An allegation of price predation would need to be sustained by showing
pricing below long-run average costs, as well as the predator’s likely ability to recoup
initial losses. Crude observations on the industry should fit such model
specifications.39 There is a danger in applying off- the-shelf instruments rather than
bespoke models. In particular this is so in the use of merger simulation models, some
of which are readily available as user- friendly software package with an appearance
of generality, whereas outcomes are very much dependent on the details of structural
and empirical specifications. When the models remain undisclosed to opposing sides,
which often is the case when the algorithms are proprietary to the consultants, they
can obscure rather than enlighten the understanding of merger effects.40
At regular intervals, Jonathan Baker has reviewed the use of empirical methods in
antitrust cases with various co-authors.41 Baker and Bresnahan (2007) emphasises that
difference among industries matter, although similarities with related industries are an
important source of learning. The authors discuss a number of methods tested in past
cases for the measurement of the magnitude of economic relationships and effects.
These include various ways to identify buyer power substitution and market power,
using different types of tests that are related to structure, conduct and performance.
An important concern in the use of econometric techniques is the quality of the data.
The interpretation of empirical findings is further relative to a proper market
specification. A high market concentration (few firms) in a bidding market, for
example, may not be so much of a concern, whereas it can signal dominance in a
regular production market.
In light of the many degrees of freedom with regards to model specification and data
collection unfolds a discussion on “bright line tests”. Simple tests were called for,
amongst others, by Easterbrook (1984), to help reduce enforcement costs and create
legal certainty. Baker and Bresnahan (2007) suggest that where such tests presently 39 See Wish (2007). 40 See Goppelsroeder and Schinkel (2005) and Walker (2005). 41 See Baker and Bresnahan (1992, 2007) and Baker and Rubinfeld (1999). Bishop and Walker (2002) offers several chapters on the use of empirical methods in European competition cases.
16
do not exist, economics should further categorize generalizations and develop a
standard toolkit that is sufficiently reliable for antitrust enforcers to use. In his
contribution to this issue, Fisher is not so optimistic. Based on his extensive
experience in economic consultancy and as an expert witness in some of the definitive
antitrust cases of our time, Fisher warns against the dangers of giving in to the
pressure from attorneys and judges to oversimplify economics. To do so is likely to
lead to mistakes in antitrust decisions and generally harms the discipline. In his paper,
Fisher gives several examples of this that are both entertaining and alarming.
One particular pitfall in measuring market power that Fisher addresses, here as well as
in his earlier work, is to use evidence on profits. Paul Grout and Anna Zalewska
explore the boundaries for doing so in their paper. Grout and Zalewska carefully
qualify excessive rates of return to confirm they have limited reliability, certainly for
assessing standalone excessive pricing cases. The authors argue, however, that when
handled with care, case specific rate of return measurements can help inform antitrust
decisions.
4. Decision Making and Litigation
The process of discovery and case development is obviously geared towards final
decision making. Competition law is grounded in the economic insight that a
workable competitive process is socially beneficial. As a result, competition law
enforcement is fundamentally based on economic reasoning and evidence. The
agencies apply economic analysis and interested parties will go at great lengths to
present their case in the best possible light, using cutting-edge economic analyses,
often presented by reputable economic expert witnesses.
Differences between the US court-based system and the European administration-
based approach, however, can have important implications for the type and quality of
forensic IO analyses that are applied to a case. In the court-based model, parties
present their case in a public arena before independent judges. Administrative law
17
processes, on the other hand, can be less transparent.42 High quality economic
reasoning and quantitative analyses have historically played a more prominent role in
US antitrust than in European competition law enforcement. European practice is
converging towards American practice, however, with the adoption and promotion of
a “more economic approach” in recent years.43
The quality of the forensic economics submitted is best safeguarded when the
decision making process is fully public. There appear to be at least three reasons for
this. First, an open process reduces the scope for factors other than substantive
arguments to influence decision making. That is, favouritism, lobbying, political
pressuring and corruption are exposed more easily and thereby partly deterred.
Second, an open process allows for all parties involved to learn as case law develops.
Enforcers, firm management, attorneys and judges can improve their understanding of
economics and its application in antitrust. Third, the economists involved in
competition cases can build – and destroy – their reputations. When economic
analyses are available for critical examination by peers, sloppy or fabricated
arguments are exposed. Unscientific analyses are weeded out, and thorough
economics is supported by the possibility to establish a reputation for objective and
high quality work.
The US system of expert economic witnesses in court proceedings is one of the most
open forums of antitrust debate. Expert witnesses submit their testimony, give it in
court and are subsequently cross-examined. In high-profile cases, this creates a
competitive arena for discussion, in which industrial organization economics is truly
put to the test. This is to the benefit of the field.
Posner (1999) summarizes the US law governing the use of expert witnesses.
According to the original Federal Rules of Evidence (FRE), anyone who has relevant
42 The process of decision making in competition cases by the European Commission and many of the Member States does involve elements of an open court system, such as oral hearings, and disclosure of submitted reports. The European appellate courts, in turn, are often restricted in their freedom to consider economic arguments. See Neven (2006). 43 See Vesterdorf (2005), Roeller and Stehmann (2006) and Vickers (2007). DG Competition, and in its wake many national competition authorities in Europe, have created chief economist positions, supported by teams of PhD economists. The goal is to raise the quality of standard of in-house economic analyses, as well as the ability to appraise outside experts’ reports.
18
expertise “by knowledge, skill, experience, training or education” is permitted to be
classified as an expert witness. The expert witness is expressly not a consultant to the
parties, but an independent professional who testifies on the evidence to the courts.44
The expert has a moral and professional obligation to testify honestly to his or her
professional opinion. 45 Posner does note that testifying experts tend to polarize over
time, representing plaintiffs or defendants, but rarely both. This may reflect personal
dispositions, but to the extent that it is a separating equilibrium, it may compromise
objectivity and make it difficult for courts to choose between duelling experts.
The reliability and integrity of the expert’s testimony is safe-guarded by a number of
mechanisms, including professional rules of conduct.46 Members of the NAFE, for
example, are held to work by The Statement of Ethical Principles and Principles of
Professional Practice. It specifies in its first article that:
“1. Engagement
Practitioners of forensic economics should decline involvement in
any litigation when they are asked to assume invalid
representations of facts or alter their methodologies without
foundation or compelling analytical reasons.”
On diligence, it further requires in the third article that:
“Practitioners of forensic economics should employ generally
accepted and/or theoretically sound economic methodologies based
on reliable data. Practitioners of forensic economics should attempt
to provide accurate, fair and reasonable expert opinions. […]”
In addition, the code contains several paragraphs that are to assure transparency of
information, methods and academic debate. The latter is also a legal requirement, as
the expert must make the facts or data which he or she relied upon in forming
opinions available for opposing counsel to cross-examine.
44 See also MacKenzie -Mason (2001). 45 Posner (1999), p. 92. 46 See Piette (1991).
19
In case law, a higher standard for expert testimony to be admissible and sufficient to
show causation developed seminally since the U.S. Supreme Court decision in
Daubert v. Merrell Dow Pharmaceuticals, Inc. in 1993.47 In Daubert, the Supreme
Court considered the question what are ‘reliable’ scientific principles and methods
and who qualifies as a scientific expert. Criteria to answer these fundamental
questions on ‘the scientific method’ were sought in evidence based on falsifiability,
replication, limitations and potential rate of error, peer review, publication and general
acceptance by consensus in the academic community. The case was much debated at
the time – involving several Nobel Prize laureates who in Amicus Briefs pointed out,
amongst other things, the limitations of the peer review system as an indicator of
scientific truth. The implications of the Daubert decision are still discussed today. 48
The methodological debate led to a revision of rule 702 of the FRE in 2000, which
now specifies on expert witnesses qualifications:
“If scientific, technical, or other specialized knowledge will assist
the trier of fact to understand the evidence or to determine a fact in
issue, a witness qualified as an expert by knowledge, skill,
experience, training of education, may testify thereto in the form of
an opinion or otherwise, if (1) the testimony is based upon
sufficient facts or data, (2) the testimony is the product of reliable
principles and methods, and (3) the witness has applied the
principles and methods reliably to the facts of the case.”
A literature developed on expert economic testimony in antitrust cases. Beyond the
fundamental question whether there is sufficient consensus in the economics
profession at all for it to satisfy the Daubert-test, Slottje (1999) collects expert witness
account to provide insight into the “nuts and bolts of what forensic economists
actually do” (op. cit., p. ix). In the same year appeared the Spring issue of the Journal
of Economic Perspectives that includes Posner (1999). Gavil (2000) is an early 47 U.S. Supreme Court, Daubert v. Merrel Dow Pharmaceuticals Inc., 509 U.S. 579 (1993). 48 See Solomon and Hackett (1996) for an insightful review of Daubert from the point of view of philosophy of science. See Bernstein (1996) for a general critique. Ireland (1997b) introduces a special issue of the JFE on the Daubert decision.
20
detailed legal study. The Spring 2003 issue of Antitrust on “Working with Economic
Experts” contains various relevant contributions as well, including Mile and Pace III
(2003) on successful and unsuccessful expert witness testimony in alleged cartel
conspiracies. Werden et al. (2004) discusses the use of economic models in assessing
the competitive effects of mergers in the context of the Daubert-criteria. Werden
(2007) surveys the admissibility of expert economic testimony in antitrust cases.
In his critique to “bright- line tests” in this issue of the Journal of Competition Law
and Economics, Franklin M. Fisher draws on his extensive experience as an expert
witness in antitrust cases. In the process, Fisher gives various insights into how to be
an effective expert economic witness. Several other leading economists had done so
before in Slottje (1999), making for entertaining reading. The first contribution to the
book is by Hendrik Houthakker, and largely about his involvement for the DoJ in the
landmark United States v. IBM, which was filed in 1969.49 In this case, Fisher was the
opposing principal economic witness to IBM. It ran for more than 10 years before the
DoJ withdrew it as “without merit”.
Houthakker describes how he was instrumental in advising the DoJ to “go after” IBM,
“with its 70% market share in computers,” as a top priority in 1967. In his later role of
witness, IBM’s counsel failed to intimidate him, because the lawyer who cross-
examined him paled in comparison to the Gestapo tactics he had faced in his youth as
a prisoner of war. Houthakker resigned as a witness when the DoJ scheduled his
testimony during fall classes in 1977, a few years before the DoJ “threw in the towel.”
According to Houthakker, the government’s decision to stop pursuing the case was
political, and he criticizes the account of Fisher et al. (1983) that the allegations
against IBM had been a mistake from the start. Houthakker experienced the
adversarial element that litigation introduces into otherwise “generally peaceful”
academia as not necessarily productive, which was a reason for him to select only few
cases to get involved in since.
William Baumol’s account is brief but no less insightful, with several examples of
how consulting experience contributed directly to his academic output, including
49 United States v. IBM, 69 Civ. 200 (S.D.N.Y. 1969).
21
contestable market theory. Top-level consulting allowed him to meet key players,
Baumol says, and see things that otherwise would never have been disclosed.
Frederic Scherer’s expert witness account is most instructive and amusing. He too
acknowledged a cross-fertilization between research and litigation consulting. To that
end, he accepted cases with substantial “precedential interest” and avoided cases in
which he would be “reluctant to submit my testimony to critical judgement by my
economist peers” (op.cit., p.132). Scherer would further not testify on behalf of firms
that were likely to have committed per se law violations and only in cases that
concerned a limited number of industries that he knew well.
Scherer distils some valuable lessons from “surviving” roughly 40 years in “a blood
sport” (op.cit., p. 129). The first is: “Know thy subject matter thoroughly.” This
lesson Scherer explains he learned the hard way: being cross-examined in the IBM
case. Good preparations include reading everything, but also visiting production
facilities, talking to product users and preparing a chronology of key events. The
second rule is: “Admit your mistakes and get on with the show.” Third is not to try to
deny the significant weaknesses in your client’s case, as it may discredit the entire
testimony. Fourth, “search one’s prior writings for statements that might be construed
as conflicting with impeding testimony.” Such potential contradictions should be
explainable and: “Altering views for specific testimony is not recommended.” Finally,
Scherer advises to: “always tell the truth, as best you know it.” (ibid.)
A key concern with all the contributing experts is to guarantee independence and
objectivity – or to avoid the “whose bread I eat, his song I sing”-attack, as Scherer
calls it (op. cit., p.130).50 The NAFE-code forbids forensic economists to accept
contingency fees, or fees that relate to the size of the court award or settlement. The
large amounts of work that competition cases often are, are normally compensated on
the basis of hourly fees, which may in part be paid into faculty funds. MacKie-Mason
and Pfau (1999) offers an extensive discussion on advocacy issues, motives and
pitfalls of the expert witness. The authors point out that since expert witnesses are
repeat players there is a market mechanism that induces professionals to guard their 50 See also Meier (1986) and Mandel (1999). The latter discusses “the booming market for expert testimony” and calls for ethical standards to regulate it that include full disclosure by academic economists on the cases in which they are or have been involved, and a protocol to avoid conflicts with academic objectivity.
22
reputation for professional honesty and integrity, as these credentials – more so
possibly than winning the case – generate future work. Whilst professional interests
and collegial reputation may further help to encourage objectivity, experts should
watch out for ego, obliga tion to the client, a deceptive team spirit and the risk of
getting locked into position.
In MacKie-Mason and Pfau (1999), various pieces of advice to steer clear of these
problems are given, including tips on how to choose a case and research it wisely. The
authors recommend to provide lots of quantitative evidence, tie testimony to a
publication commitment, and be conservative in drawing conclusions in the sense of
trying to “err on the low side” (op.cit., p.218). In all of this, an open relationship with
the attorneys is important to be able to discuss reservations and doubts. First and
foremost, however, the authors advise due diligence in deciding to accept a case. They
developed a two-stage approach to case selection based on the difference between
testifying and non-testifying experts.51 In the first stage, it is agreed that initial
research is done as a consulting expert, and not yet as a testifying expert, at a separate
fee. Only on the outcome of that research does the expert decide to testify in the case
or not. This approach leaves an exit option and no up front commitment. The client
benefits as well, in that the initial report and the materials shown to the non-testifying
expert are not discoverable by the other parties and can be suppressed if they do not
support the case.
For practicing lawyers, working with expert witnesses has become a speciality area in
itself. Handbooks and consultants advise on trial techniques for how to select and
present expert witnesses and prepare them to explain economics to jurors and judges.
The expert can expect close scrutiny of his or her testimony and needs special skills
and training to prepare for intense cross-examination. For that purpose, court sessions
are sometimes extensively rehearsed. The detailed accounts in Slottje (1999) by
Dennis Carlton and Hal Sider on Toys R Us, and by Lawrence White on the FTC’s
challenge of the 1986 merger between Coca-Cola and Dr Pepper contain various 51 See Posner (1999), p.92. The requirements on discoverability of information shown to non-testifying expert are lower than to testifying experts. As a result, a division of labour has developed between testifying expert witnesses and their associates who help prepare the testimony. The latter are sometimes given a great deal of independency to avoid that irrelevant information or intermediate draft reports are discoverable by the other party. This, in turn, had led to case law in extreme cases on the question of who effectively is giving testimony. See also Keyte (2003).
23
details on their preparation for trial and deposition. The aspiring expert witness can
furthermore consult Nolo’s Deposition Handbook or Smith and Bace’s 2002 Guide to
Forensic Testimony: The Art and Practice of Presenting Testimony as an Expert
Technical Witness. The latter draws extensively on U.S. v. Microsoft Corporation, and
critically analyzes the video recordings of the deposition of Bill Gates, which the
government released in April 1999.
This extensive industry of specialised and high-paid employment raises questions on
the economic efficiency of the system. Apart from the public good of just law
enforcement and fair compensation, a cost-benefit analysis of the competition law
enforcement process is essentially a comparison between legal transaction costs and
deterrence benefits. A key factor in this is the quality of decision making. In antitrust
regimes that are open to erroneous judgements in the form of either false positives or
false negatives, the incidence of competition law violations may be higher in
anticipation, as shown in Schinkel and Tuinstra (2006). An improved quality of
competition law decision making therefore has an efficiency effect as well.
Competition and reputation help to sustain neutrality and a high quality of work.52 To
stimulate both, several reviewers of the expert economic witness system have
proposed further disclosure of expert witness assignments. Posner (1999) suggested
that the American Economic Association could maintain a public file of the
involvements of its members in antitrust cases, including electronic links to the
testimony. Such improved transparency would help to maintain high professional
standards and thereby guard the reputation of the profession as a whole. In addition,
Posner and others have urged the courts to make greater use of their ability to appoint
their own independent experts. They could help decide in cases in which reasonable
economic expert witnesses disagree in their findings.53
52 Interestingly enough, in the more traditional forensic disciplines, models of competition are studied as a means to improve quality. Such competitive self-regulation for police forensics and forensic labs is discussed in Koppl (2005). 53 Scherer (1999) and Baker and Bresnahan (2007). In Australian courts, it is possible to have all experts on the stand at once and questioning each other in the presence of the judge. A version of this ‘hot-tub’ model is a meeting of the expert witnesses of opposing sides prior to the trial, in which they are to agree on their disagreements before giving testimony before the court. This latter version was used, allegedly quite effectively, in court proceedings following claims by Seven Network, an Australian television network, of anticompetitive conduct against a number of competing network. The Federal Court in Sydney dismissed these claims end of July 2007.
24
Most of the above accounts and best practice rules relate to the US antitrust practice.
As remarked already, the European process of competition law enforcement can be
less transparent than the US court-based model. In his contribution to the issue,
Andrew Gavil relates the American experiences with the use of economic expert
witnesses and the Daubert-rule to lessons for European enforcement. Gavil practises
US antitrust law and teaches at Howard University School of Law. In his paper, he
examines the preference expressed in the European Commission’s Green Paper on
Damages Actions for court-appointed experts over party-retained testifying experts.54
Gavil questions some of the assumptions that underlie that preference and posits that
reliance solely on court-appointed experts may be insufficient to realize the Green
Paper's principal objective of promoting private enforcement of competition laws. He
concludes that additional procedural tools to facilitate the development and
presentation of economic evidence, including party-retained experts, may be
necessary.
Currently, there does not seem to exist an association or a common code of ethics for
expert economic witnesses to the European courts or agencies. Nevertheless, the role
of academic economists in the EU competition law is growing, as the revolving-door
position of Chief Competition Economist at the European Commission exemplifies.
Other functions, such as those of the Economic Advisory Group on Competition
Policy, also seem to have similarities to non-testifying experts’ work. The members of
this group are all leading academics, who publish reports on competition issues in
subgroups that influence decisions in a major way. 55 The national competition
authorities in Europe increasingly add (part-time and/or temporary) academic
economists to their advisory boards and staff. In addition, there is a large pool of
competition consultants available to assist the parties. Furthermore, various policy
makers have argued for court-appointed experts in recent contributions and an
increasing number of judges specialize in competition matters and receive economic
training and advise.56 The role and quality of forensic IO in Europe is therefore likely
to increase in the decades to come.
54 Commission of the European Communities (2005). 55 See http://ec.europa.eu/dgs/competit ion/eagcp.htm. 56 Fingleton (2005) and Neven (2006).
25
5. Remedies, Sanctions and Damages
The fourth aspect of the process of competition law enforcement in which forensic IO
can assist is in determining appropriate remedies in cases in which an antitrust
concern or an infringement has been established. Parties found to have breached the
competition laws face a number of possible consequences, including interventions in
the structure of the firm, disciplinary actions against management, and obligations to
pay corporate fines and private damages. In merger control, competition concerns
with the agencies can be overcome when the merging parties divest sufficiently large
parts of their business to competitors or new entrants in the market.
The principles that underlie punishment relate primarily to concepts such as fairness,
vindication and compensation, which are in the domain of law, more so than of
economics. Yet in antitrust, the law and economics approach of sanctioning in order
to deter and prevent lawbreaking has had a strong influence on the way in which
competition authorities have designed their sentencing guidelines and other remedies.
In addition, economics can inform how to remediate harm and repair competition.
Therefore, industrial organization economics plays an important role in advising on
effective remedies. The same kind of analyses that helped to identify competition
problems can assist in stopping and further avoiding them. Forensic IO therefore has
an important preventative role.
Economists play an essential role in devising strategies for restoring competition,
especially in cases of exclusionary conduct. In some cases, the obstacle to workable
competition is structural and can be removed. An early case in which this was
believed to be possible is US v. AT&T, which led to the ordained break-up of the
company in the early 1980’s.57 The structural intervention aimed at reducing the
company’s ability to monopolize the telephone industry by erecting artificial barriers
to entry and fighting entrants out of the market through predatory pricing. 58 Many
smaller and independent telephone companies would compete more forcefully,
reducing prices and stimulating innovation.
57 United States v. American Telephone & Telegraph Co., 552 F.Supp. 131 [1982]. 58 See Evans (1983).
26
Similarly and more recently, the power of Microsoft Corporation to monopolize the
platform market has been argued to relate to the company’s exclusive intellectual
property right on its popular operating system and network software, refusing to
disclose the source code to competitors. This makes it difficult for rivals to produce a
viable alternative to Microsoft’s products that is compatible with the installed base of
application software and can induce Microsoft clients to switch. As a result,
competition is stifled and innovation with it.59 The original proposals to split up
Microsoft in a systems and an application software company were in part inspired by
the idea that this would force the systems company to reveal all application interfaces.
On the same logic, the European Commission has ordained Microsoft in its official
decision to untie some of its software bundles and make its source code information
publicly available to other software writers.60
Structural remedy negotiations are more common in merger control. As noted in
Section 3, Phase II merger inquiries involve extensive economic analyses. They are
often cleared only with considerable structural remedies. Large merger investigations
include advanced simulation models that combine oligopoly theory and econometric
estimations. The models help ex ante assessments of the likely effects of the proposed
mergers. As a result – and with all the caveats pointed out earlier – they can also
advise on structural remedies on which the merger can conditionally be cleared, in
particular the divestment of parts of the merging firms’ capacity. The detailed
numerical scenarios that these merger models allow for can support divestiture
negotiations between the agencies and the merging parties. The result is essentially a
design of a post-merger market structure in which the competition concerns raised by
the merger are reduced to a sufficient extent.
In the case of hard-core cartel violations or flagrant abuses of dominance, the law
specifies what should be the appropriate sanction. For corporate fines, however, both
US and European agencies have in recent years committed themselves in guidelines to
59 See Fisher (2000). 60 See Evans et al. (2000).
27
punishing antitrust fines.61 The calculation methods implied by these guidelines relate
the effective fine to the volume of sales that was affected by the antitrust violation,
with is further fine-tuned on the basis of several multiplicative factors that relate to
the gravity of the infringement and mitigating circumstances. While crude and
imperfect, this is a reasonable approach to setting fines with a bite – although more so
for cartels than for abuses of dominance.62 Forensic IO techniques can be used to
estimate the appropriate base amount of the fine, which is not obvious in complex
organizations.
In addition, enforcement regimes increasingly dispose of possibilities for criminal
sanctions against individuals responsible for anticompetitive acts.63 These sanctions
can be more effective than punishing the company when they are targeted at the right
decision makers within the organizations. Organizational economics in combination
with more traditional forensic techniques discussed above in the context of cartel
audits can have a role in this, laying out the de facto corporate governance structures.
Similarly, economics can advise on the design of incentive compatible corporate
compliance programs that can help prevent antitrust violations. Such programs can
only be credible if combined with managerial incentive scheme, such as bonuses and
stock option plans, that have safeguards against individuals seeking illegal profits.
These are largely unexplored areas of corporate governance theory, which are only
recently attracting attention as a result of several recent corporate frauds.64 These
issues have direct application in antitrust and, for example in combination with
private antitrust detection, hold a promise for increasing deterrence.
Finally, forensic IO techniques are often used in the context of antitrust damages
actions. This is the area in which members of the NAFE are most active, as discussed
above. Part of the debate is on methods for quantifying damages and the design of an
effective private enforcement practice. The latter includes questions such as whether
61 See, respectively, The United States Sentencing Guidelines, last amendments effective November 1, 2007 at http://www.ussc.gov/GUIDELIN.HTM., and Commission of the European Communities, “Guidelines on the method of setting fines imposed pursuant to Article 23(2)(a) of Regulation No 1/2003,” Official Journal of the European Union , 1.9.2006, C 210/2. 62 See Bos and Schinkel (2006) on the implied method for calculating fines of the European Commission. 63 See Cseres et al. (2006). 64 See Denis et al. (2006).
28
or not class actions are possible and in what form, whether the pass-on defence should
be available, or whe ther punitive damages are an appropriate mechanism. 65 For the
most part, however, the quantification of antitrust damages is involved practical work
in preparing calculations for court proceedings or to support settlement negotiations.66
An essential part of assessing antitrust damages is to determine what would have been
the market situation absent of the anticompetitive acts – sometimes referred to as the
‘but-for’ world. The most basic aspect of this question is what would have been the
price level if the industry would have been competitive. More complicated issues are
what kind of industry dynamics – entry, exit and acquisitions – would have unfolded
if not for the antitrust violation, what product quality and safety improvements would
have been generated or what forms of innovation flourished. To reconstruct a but- for
world with a sufficient degree of reliability requires an economic model of the market,
in combination with a thorough econometric analysis of the relevant data – in the but-
for price question, usually time-series of prices. With the qualification and
quantification of the but- for world based on economic reasoning, the subsequent
determination of the antitrust damage total is essentially an accounting exercise, but
one that can turn on complex issues of discounting and probability calculus.
In their contributions to this issue, Connor, Fisher and Gavil cover several aspects of
private antitrust damages actions. Connor surveys various methods to assess damages,
including the before-and-after-method, the yardstick-method and cost-based
approached. He draws amongst other cases on the Vitamins litigation. Fisher explains
the case development and litigation aspects of the Visa Check/MasterMoney antitrust
litigation, a private damage case in which he also was responsible for assessing the
damage total that led to a landmark out-of-court settlement award.67 Andrew Gavil
discusses elements for the design of an effective private enforcement regime in
Europe, where the practice is in its infancy and in need of further development.
6. Forensic IO as a Discipline: Concluding Remarks
65 See Rüggeberg and Schinkel (2006). 66 See Hall and Lazear (1994). 67 See http://www.inrevisacheckmastermoneyantitrustlitigation.com.
29
The application of industrial organization economics to competition law enforcement
is sufficiently multifaceted to be a speciality discipline of its own. The market for
expert economic advise on competition issues and complementary forensic IO skills is
highly specialized. Often the skills and knowledge necessary to address all issues in
even a single antitrust case require the assistance of multiple experts. This necessitates
considerable coordination and project management work. The market for competition
advice is large and sustains an oligopoly of just a few advanced consulting firms.
They employ economists trained in IO theory and econometrics at the best schools,
highly specialized industry expertise and a broad experience. The various sides in
competition law disputes, interested parties as well as the antitrust agencies, rely on
the economic consulting firms for assistance. These firms produce institutional
reports, but importantly also they form a platform for independent academic
economists, who work with them on selected cases and on a freelance basis.68 For
reasons of identifiable reputation, the testifying individual expert witness remains
central – although still much more so in the US than in Europe – and the consulting
firms often act as non-testifying experts or sophisticated back-offices in the
preparation of their eventual testimony.
Universities can supply the discipline with graduates trained in the relevant economic
disciplines. Most universities offer theory and econometrics courses. In addition, a
few have specialized courses in forensic economics. Slenick and Tinari (2001), in the
Journal of Forensic Economics, survey forensic economics taught in university
curricula. They report very few organized programs on the topic – mainly their own –
and a just a few isolated individual courses, or elements of forensic economics
introduced in traditional economics classes. The emphasis in the curriculum elements
the authors found is firmly on damages assessment in tort litigation. An exception,
which their study did not include, is a semester course ‘Forensic Economics’ that John
Connor teaches at Purdue University, which is entirely on antitrust.
Antitrust agencies have forensic IO skills available at various levels within their
organizations. Cartel and merger units each have their own specialists. As said, more
and more competition authorities in Europe follow the US example of having a chief
68 See Short and Sattler (1996).
30
economist office. However, there presently does not seem to exist a public institution
or other form of centralized organization of forensic IO. At best, agencies have a
forensic IT unit. The more traditional forensic sciences, however, are organized in
national institutes for the forensic sciences.69 These governmental laboratories are
typically part of the national departments of justice. They maintain close relationships
with academia, having prominent scientific boards with renowned scientists from
various disciplines. University professors closely cooperate with the institutes, are
called upon to assist in particular investigations and teach in specialized masters
programs on forensic science.70 The institutes publish best-practice manuals, accredit
independent experts and organize conferences, expert working groups and other
platforms to advance the discipline.
It appears that the practice of forensic IO could benefit from a similar type of
organization, for example on a European level. The agencies and the courts could rely
on such an institute of society for expert advice in complex competition cases directly.
It could further be a reference source to reputable specialists. If such an entity was set
up as an economics division of existing national forensic institutions, there are
obvious synergies across the sciences. The ideal team of forensic skills, including
forensic IT and data analysts, could be put together around forensic IO specialists to
solve complicated competition cases.
The traditional forensic sciences seemingly owe much of their popularity to suspense
novels, drama series and television documentaries. Although it is likely that capital
crime will remain more appealing to a broader audience, antitrust acts can be just as
shocking and suspenseful. In fact, several internal cartel cases have inspired best-
selling courtroom/law suspense novels.71 The footage of the Lysine cartel members
meeting in hotel rooms, which the FBI managed to obtain with cameras hidden in
table lamps, shows just how exciting white collar antitrust crimes are. Lysine, just like
the latest cartel decision of the European Commission in Dutch Beers, contain enough
69 Examples are the US Federal Bureau of Investigation (FBI), the National Institute of Forensic Science in Australia, and the Forensic Science Service in England. See European Network of Forensic Science Institutes 70 Key societies are the American Academy of Forensic Sciences (http://www.aafs.org) and the European Academy of Forensic Science (http://www.enfsi.org). 71 See Eichenwald (2001) and Mason (2004).
31
thriller and script for several episodes of Forensic Detectives.72 To attract the
attention of the public in that way would not only make for effective marketing for the
specialty discipline, but could also raise awareness of the serious harm that is often
caused by competition law violations.
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