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Is Antitrust about the Present or Cloudy Expectations of the Future? A Consideration of the Comcast – Time Warner Cable Merger

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Introduction

The question posed above lies at the heart of many antitrust decisions. Since these actions, particularly when opposed, often take long periods of time before resolution, any remedies imposed will become operative only in the future. On this account, it is tempting to consider future market conditions before making enforcement decisions.

The problem of course is that “the future is not ours to see.” While we can make guesses about future market conditions, they are often wrong. There are countless examples of industry participants unable to predict future circumstances in their own markets. In that case, it might be better just to stick to the present as an implicit projection of the future.

This question is particularly relevant in high tech industries where innovation and new products are constant themes. Even if antitrust violations in the current marketplace can be demonstrated and reversed, it might not matter if the existing product and services are soon obsolete. As discussed below, this question lies at the heart of the policy debate surrounding the proposed Comcast – Time Warner Cable (TWC) merger.

The Relevant Markets

In its early days, cable television was designed to bring broadcast television signals into places where over-the-air reception was limited. However, it has long surpassed that early purpose. Not only does it now distribute video programming that is only available via cable transmission but also it has become a major conduit of broadband internet services to homes and businesses. With these additional functions, it has become an essential utility in the modern economy.

Although cable companies, such as the merging parties, do not generally compete as service providers in the same local market areas, they are separate buyers of the same video programming channels which are distributed to their customers. For this reason, even if they do not compete as sellers of cable services, they do compete as buyers of video programming.

This point has been challenged by the economists retained by the merging companies. In their report, they argue:

Because Comcast and TWC do not compete for … customers, the combination of the two will not change their demand for programming … [nor] change the supply of programming because there is essentially zero incremental cost for a content provider to sell its programming to both Comcast and TWC relative to selling it to one of the two.[1]

In effect, their argument is that because it costs largely the same for a content provider to sell to either buyer as to both of them, these buyers are not competitors. While that position could be correct in the short run, where the video programming already exists, that is not the case in the longer run where programming costs need to be covered.

In that case, both the amount of the programming that is purchased by individual buyers and the prices that are paid will influence the quantities produced. In this longer run, supply curves are upward sloping and marginal costs are positive; and note this longer run may merely reflect the next season. In this setting, the parties compete as buyers even if not as sellers.[2]

To be sure, the buying side of the market for video programming contains more rivals than the cable companies. Video programming is also distributed by satellite transmitters as well as by some telephone companies over a portion of their systems.[3] Within this larger market, Comcast and TWC together controlled 34% of US video subscribers in 2012. However, this share jumps to 52% in a submarket which excludes the two satellite transmitters. The basis for defining a relevant submarket is that satellite transmission cannot offer programming via the internet because, as acknowledged by the leading satellite transmitter, the technology’s “one-way video delivery service lacks broadband capabilities.” [4] As a result, satellite providers cannot distribute both conventional and internet-based programming which some consumers prefer; a deficit which makes them more distant competitors. [5]

The Presence of Monopsony Power

Suppose hypothetically that a dominant video distributor decides to reduce its quantities by purchasing fewer specialty channels. Because such channels appeal to smaller audiences, producers of specialty channels may not be able to cover the supply price of their programming from the remaining potential viewers. In that case, the specialty channel will exit and the overall quantity of video programming will decline. What all this means for the proposed merger is that a large distributor of video programming, such as a combined Comcast and TWC, could potentially exercise monopsony power in the relevant market.

To be sure, the presence of monopsony power depends on more than merely large market shares. As the economists defending the merger correctly point out, it also requires an upward sloping supply curve along which both prices and quantities are reduced. [6] Turning first to prices, there is surprisingly a direct admission of this result by a Comcast official. In his statement to the FCC, the company’s Chief Financial Officer acknowledged that the merger with TWC will result in sharply lower programming costs.[7] This effect had been noted in prior government reports [8] but this statement may be its first explicit acknowledgment by an industry participant. These savings can be substantial because programming costs account for 37% of Comcast’s total operating costs and 46% of TWC’s total operating costs.[9] While this evidence is not detailed and complete, it suggests that Comcast already pays lower prices for its programming inputs, which can be extended to TWC if the merger proceeds.

However, there is also the quantity dimension of monopsony power. On this point, see the FCC-provided evidence below on the number of channels of programming carried on Comcast’s medium-tier packages along with those carried by other wireline distributors [10]:

2012

2013

Comcast

160 channels

160 channels

Time Warner Cable

NA

200 channels

Cox

236 channels

280 channels

Verizon VOS

285 channels

290 channels

Charter

NA

NA

AT&T U-verse

270 channels

270 channels

Cablevision

NA

NA

BendBroadband

196 channels

NA

While these data are incomplete and requires confirmation, they suggest that Comcast cable systems offer fewer programming channels than its rivals do to most of their subscribers, which is consistent with its exercise of monopsony power.

Before concluding this section, it is important to recall a well-known economic result that is often missed. When a monopsonist pays lower prices for its inputs, these prices do not lead to lower output prices but rather the reverse. Because reduced input quantities are involved, they lead to reduced output quantities as well, and thereby higher output prices.[11] To the extent that the proposed merger promotes enhanced monopsony power, we would expect to find higher and not lower prices charged to consumers of cable services.

An Antitrust Judgment

From this evidence, so long as it can be confirmed with more detailed data, there are strong grounds to block the merger. However, before taking that step, one must also confront the question posed in the title of this piece. Does this evidence from the present offer a likely description of the future for this market? And here, commentators raise some relevant issues.

See the following statement in the press:

As buyers of content, they (the cable companies) face an expanding universe of rivals – Amazon, Netflix, Google and Apple, not to mention emerging wireless content players like Sprint, AT&T and Verizon. In today’s technological world, content producers don’t even need a distribution partner to reach consumers – they can offer their shows directly to viewers over the Internet. [12]

The suggestion here is that the future may be so different from the present that it may not be worthwhile to bring an antitrust action intended to block the merger.

This is a serious critique and one that should be faced before a decision is taken. Should a reporter’s projection of the future be sufficient to alter what otherwise might be a strong antitrust action? Should forecasts of the future be added to the many burdens already faced by antitrust plaintiffs? While these projections could be correct, they could also be quite wrong. Even recognizing that future competitive factors can sometimes correct for monopolistic abuses in the present, legal actions require convincing evidence, which means they must rest on facts and data which are available only for the present. The future is unknown and should therefore play a more limited role in policy decisions.

___________________________

I am grateful for the helpful comments and suggestions of H.E. Frech and Ellen Stutzman in the preparation of this article.

[1] Gregory l. Rosston and Michael D. Topper, An Economic Analysis of the Proposed Comcast Transactions with TWC and Charter In Response to Comments and Petitions, September 20, 2014, p. 21.

[2] Roger D. Blair and Jeffrey L. Harrison, Monopsony Antitrust Law and Economics, Princeton University Press, 1993, p. 82.

[3] According to AT&T’s CEO, “Due to technology and economic limitations, we can offer video in only a small portion of the country – less than a quarter of American households.” Randall Stephenson, Statement before the Subcommittee on Regulatory Reform, Commercial and Antitrust Law, US House of Representatives, June 24, 2014, p. 2.

[4] AT&T-Direct TV Application to the FCC, Description of Transaction, Pubic Interest Showing, and Related Demonstrations, redacted version, June 11, 2014. [5] This position is also taken in Michael Katz, An Economic Assessment of AT&T’s Proposed Acquisition of Direct TV, June 11, 2014, pp. 7-8.

[6] Gregory l. Rosston and Michael D. Topper, An Economic Analysis of the Proposed Comcast Transactions with TWC and Charter In Response to Comments and Petitions, September 20, 2014, p. 21.

[7] Declaration of Michael J. Angelakis, Before the Federal Communications Commission, MB docket No. 14-57, April 7, 2014, p. 4.

[8] US Government Accounting Office, Video Marketplace Competition is Evolving and Government Reporting Should Be Reevaluated, GAO-13-576, June 2013, p. 22 and Federal Communications Commission, Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, July 22, 2013, p. 34.

[9] Comcast Corporation, form 10K; and Time Warner Cable, form 10K.

[10] Federal Communications Commission, Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, July 20, 2012, p 58; and July 22, 2013, p 59.

[11] Blair and Harrison conclude: “When the monopsonist has marekt power in its output market, the reduced input prices translate into higher output prices.” p. 42.

[12] Holman W. Jenkins, “On Comcast and Jimmy Carter,” Wall Street Journal, October 4, 2014, p. A13.

‘Procedural Rights in EU Administrative Competition Proceedings: Ex Ante Mergers’ by Anca Chirita

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This contribution, available on SSRN, has two inter-related purposes: first, to analyse the context and legal framework of procedural rights in EU competition law, in particular, the administrative notification of mergers, and second, to critically review any perceived flaws in the substantive, institutional design or exercise of these procedural rights in practice, thereby offering proposals for institutional reform.

The first and second sections provide an overview of the purpose and scope of application of the EU Merger Control Regulation 139/2004, including its Implementing Regulation 1269/2013, highlighting the major principles underpinning the informal stage, Phase I and II investigations, and procedural deadlines. The third section goes on to question why procedural rights in mergers are contestable and offers constructive reviews of the criticism of the current system. This section questions primarily whether there should be social responsibility for corporations’ procedural rights as is the case under the ECHR regime. Since the administrative procedure of notification of mergers aims to protect the public choice of individual consumers before the corporatist intentions to merge and expand, the EU Merger Regulation produces a contrasting ‘vertical’ rather than ‘horizontal’ effect (supra-national competition law protecting the public, not the individual citizen). The section also prepares the ground for the fourth section, which thoroughly examines whether a human rights inspired catalogue is also feasible for corporations in merger proceedings.

The fourth section offers a comparative analysis of the ECHR system to distinguish ‘original’ or ‘express’ procedural rights in mergers, such as the right to good administration of justice, namely, the right to a fair hearing, within a reasonable time, and before an independent and impartial tribunal; ‘implied’ rights, such as the right to due process, including the right to a fair presentation of evidence through the sending of the statement of objections, the right to an adversarial hearing by replying to the statement of objections, the right to have access to one’s file, and the right to a reasoned decision; and ‘derived’ rights, such as the right not to give evidence against oneself. The most heated debate concerns the independence of the European Commission as public administration and the decision-making process in merger cases, which demands institutional reform, both from inside because of a strongly hierarchical administration of justice, thus combining both investigative and prosecutorial functions, and from outside because of the perception of politicisation of economic merger decisions by the College of Commissioners and by the mandate of the Commissioner for Competition. The paper argues in favour of a de-centralisation of such internal and external administrative competences, including a Public Hearing Office.

4.1.1.   Independence and impartiality from outside: the case against policitisation of the Directorate-General for Competition

The EC’s Guidance on the procedures of an HO assigns to the HO the role of ‘guardian of fair proceedings before the EC’.[1] To respond to earlier concerns and criticisms, the EC has strengthened the HO’s role to guarantee the independence and the transparency of the whole procedure.[2] Unfortunately, this effort at institutional improvement is still insufficient to warrant giving the HO the prestige of a prosecutorial Hearing Office. The strongly hierarchical structure within DG COMP misses, again, the same institutional ‘independence’ target, both inside, since case handlers and investigation units are subordinated to divisions and directorates, and outside, since directorates are hierarchically controlled by the Commissioner for Competition, who is subordinate to the College of Commissioners. Two critical propositions can be abstracted here: the stronger the internal hierarchy, the more likely is the perception of subordination bias to emerge from the former, while the outside colour of the College of Commissioners triggers the perception of politicisation. This is obvious from the dramatic changes brought about by every single mandate of the Commissioner for Competition and the infusion of different and unpredictable goals and targets. Nevertheless, without its politicisation from outside, the DG COMP could also too easily become stagnant, more predictable, and even less dynamic in the absence of any political interference, be it for better or for worse. This means that the exigency of absolute independence in the decision-making involving mergers can be met only by removing the College of Commissioners from the institutional landscape of DG COMP and by recognising the latter’s status as an independent competition authority of the EC.

The national merger review is recognised primarily as private litigation by legal persons against the administrative competition authority. In contrast, the judicial review undertaken by the ECJ has to be understood in the supra-national context in which it has to be performed. The institutional setting requires the EC as a collegiate body to issue a decision on the compatibility of the proposed merger with the internal market. After the EC has consulted the Advisory Committee, it prepares the final decision, which the Commissioner for Competition presents to the College of Commissioners for adoption in an oral procedure; a written procedure is also possible. However, in practice, prior to the presentation to the College of Commissioners, the draft decision is defended by a member of the Cabinet of the Commissioner for Competition in a meeting with his/her colleagues from the cabinets of other Commissioners.[3] Representatives of DG COMP and the EC’s Legal Service will also be in attendance. Upon adoption, the General Secretariat of the EC notifies the parties of the decision.

This administrative procedure is of a sui generis nature and provides a strong argument favouring the view that merger decisions are essentially political-economic decisions. It is difficult to reconcile their nature with the guarantees of the independence and non-subordination of political appointees,[4] such as the College of Commissioners, who do not bear democratic legitimacy due to them being part of the executive. This political bias also explains why the ‘judge-led system’ plays an essential role in safeguarding the principle of check and balance between the same investigative and quasi prosecutorial administrative function. This has to respect the rule of law and the principle of legal certainty to perform the judicial review of the administrative decision.


[1] The HO’s independence from those investigating breaches of the competition rules is also reflected in his mandate. For the criticism that the mandate is inadequate to ensure the HO’s independence and impartiality, see e.g. Celli et al., ‘Transparency and Process: Do We Need a New Mandate for the Hearing Officer?’ Eur Comp J (2010), 475.

[2] See EC decision 23 May 2001 on the terms of reference of Hearing Officers in certain competition proceedings, [2001] OJ L 162/21.

[3] Navarro et al., cited above, para 1391, 392.

[4] See also B Holles, ‘The Hearing Officer: Thirty Years Protecting the Right to Be Heard’ 36 World Comp (2013) 1, 16.

“Penalizing cartels: the case for basing penalties on price overcharge” by Y. Katsoulacos, E. Motchenkova and D. Ulph

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In this paper we set out the welfare economics based case for imposing cartel penalties on the cartel overcharge rather than on the more conventional bases of revenue or profits (illegal gains). To do this we undertake a systematic comparison of a penalty based on the cartel overcharge with three other penalty regimes: fixed penalties; penalties based on revenue, and penalties based on profits. Our analysis is the first to compare these regimes in terms of their impact on both (i) the prices charged by those cartels that do form; and (ii) the number of stable cartels that form (deterrence). We show that the class of penalties based on profits is identical to the class of fixed penalties in all welfare-relevant respects. For the other three types of penalty we show that, for those cartels that do form, penalties based on the overcharge produce lower prices than those based on profit) while penalties based on revenue produce the highest prices. Further, in conjunction with the above result, our analysis of cartel stability (and thus deterrence), shows that penalties based on the overcharge out-perform those based on profits, which in turn out-perform those based on revenue in terms of their impact on each of the following welfare criteria: (a) average overcharge; (b) average consumer surplus; (c) average total welfare.