Monospony and the Meaning of Consumer Welfare: A Closer Look at Weyerhaeuser MONOPSONY AND THE MEANING OF "CONSUMER WELFARE": A CLOSER LOOK AT WEYERHAEUSER J. Thomas Rosch* I. Introduction ................................................................ 353 II. Weyerhaeuser Co. v. Ross-Simmons Hardwood Lum ber C o .................................................................. 356 A. The Sherman Act Does Not Protect Buyers and Sellers E qually ..................................................... 359 B. Determining the Appropriate Test for Evaluating Predatory Purchasing/ O ver-bidding ........................................................ 365 I. INTRODUCTION The goals and guiding principles of the U.S. antitrust laws have been debated since the enactment of the Sherman Act (Act) over a hundred years ago. Today, there is at least a consensus over basic terminology. Courts and federal law enforcement officials routinely invoke "consumer welfare" as the guiding principle behind their application of the antitrust laws.' Yet there is continuing debate over what * Commissioner, Federal Trade Commission. The views stated here are my own and do not necessarily reflect the views of the Federal Trade Commission or other Commissioners. I am greatly indebted to my attorney advisor, Kyle Andeer, for his significant contributions to this paper. ' See Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 221 (1993) (referring to the antitrust laws' traditional concern for consumer welfare and price competition); Atlantic Richfield Co. v. USA Petroleum Co., 495 U.S. 328, 340 (1990) ("Low prices benefit consumers regardless of how those prices are set."); Thomas Barnett, Assistant Attorney Gen., Statement Before the Antitrust Modernization Commission (Mar. 21, 2006) ("[Tlhis Commission should reaffirm that consumer welfare is the correct touchstone for competition law and enforcement."); Deborah Platt Majoras, Chairman, Fed. Trade Comm'n, Statement Before the Antitrust Modernization Commission (Mar. 21, 2006) (referring to the COLUMBIA BUSINESS LA W REVIEW consumer welfare means. To some, consumer welfare focuses on the effects of the anticompetitive conduct on consumers in the relevant market. According to this view, antitrust liability ultimately turns on whether the seller will have market power over consumers purchasing the output of the relevant market.2 To others, including many from the Chicago School, consumer welfare is a much broader concept. They believe the antitrust laws should be applied in a way that maximizes society's wealth as a whole or-to use their language-that protects "allocative efficiency." Put differently, when they use the term consumer welfare, they refer not just to the welfare of consumers in the output market, but to the welfare of all consumers in society. recognized goals of modern antitrust law-the protection and enhancement of consumer welfare); Timothy Muris, Looking Forward: The Federal Trade Commission and the Future Development of U.S. Competition Policy, Address Before the Milton Handler Antitrust Annual Review (Dec. 10, 2002) ("The Commission should forestall the greatest threats to consumer welfare. This principle captures the basic direction of FTC practice over the past two decades .... [T]he proposition that FTC antitrust enforcement should be measured by its capacity to improve consumer welfare commands broad assent today."). 2 See Jonathan M. Jacobson & Gary J. Dorman, Monopsony Revisited: A Comment on Blair & Harrison, 37 ANTITRUST BULL. 151, 153 (Spring 1992) [hereinafter Monopsony Revisited]; Jonathan M. Jacobson & Gary J. Dorman, Joint Purchasing, Monopsony, and Antitrust, 36 ANTITRUST BULL. 1 (Spring 1991); Robert H. Lande, Wealth Transfers Should Guide Antitrust, 58 ANTITRUST L.J. 631 (1988); Robert H. Lande, Wealth Transfers as the Original and Primary Concern of Antitrust: The Efficiency Interpretation Challenged, 34 HASTINGS L.J. 65 (1982); Steven C. Salop, Question: What is the Real and Proper Antitrust Welfare Standard? Answer: The True Consumer Welfare Standard (Nov. 4, 2005) (unpublished manuscript, available at http://www.amc.gov/public-studies_ fr28902/exclusconduct pdf/051104_SalopMergers.pdf). 3 See ROBERT H. BORK, THE ANTITRUST PARADOx 66 (1978); Kenneth Heyer, Welfare Standards and Merger Analysis: Why Not the Best?, 2 COMPETITION POL'Y INT'L 2 (Autumn 2006) (advocating the use of a total welfare standard in merger analysis); Charles F. (Rick) Rule & David Meyer, An Antitrust Enforcement Policy to Maximize the Economic Wealth of All Consumers, 33 ANTITRUST BULL. 677 (1988); Charles F. (Rick) Rule, Consumer Welfare, Efficiencies, and Mergers, Statement Before the Antitrust Modernization Commission (Nov. 17, 2005), available at http://www.amc.gov/commission-hearings/pdf/Statement-Rule.pdf. [Vol, 2007 Finally, there are those that argue that this is largely an academic debate with no real world impact because there is very little difference between the two standards.4 The debate over the meaning of consumer welfare has been revived over the last year. Last fall, the Antitrust Mod- ernization Commission solicited testimony on the topic when it discussed the role of efficiencies in merger analysis.5 Further, the Supreme Court will have an opportunity to weigh in on the debate when it decides Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co. later this term.' To date, the Court's position has been opaque. It has been almost thirty years since the Supreme Court described the antitrust laws as a "consumer welfare prescription" in Reiter v. Sonotone Corp.7 The Court borrowed the phrase from Judge Robert Bork, a preeminent Chicago School scholar. Yet it is unclear whether the Court also adopted the philosophy behind Judge Bork's use of the phrase. Judge Bork, like other Chicago School adherents, believed that consumer welfare could only be maximized when total (societal) surplus was maximized." In his view, antitrust policy and rules should guard against all practices and transactions creating allocative inefficiencies; thus, the antitrust laws could and would facilitate the maximization of consumer wealth in the aggregate without regard to its distribution. 4 See Thomas 0. Barnett, Substantial Lessening of Competition-The Section 7 Standard, 2005 COLUM. Bus. L. REV. 293, 297 (2005) ("[Tlhe consumer welfare and total welfare standards can diverge, although I think it is a rare case in practice."). Antitrust Modernization Commission, Hearings on the Treatment of Efficiencies in Merger Enforcement (Nov. 17, 2005) (transcript, available at http://www.amc.gov/commission-hearings/merger-enforcement.htm). 6 Confederated Tribes of Siletz Indians of Or. v. Weyerhaeuser Co., 411 F.3d 1030 (9th Cir. 2005), cert. granted, Weyerhaeuser Co. v. Ross- Simmons Hardwood Lumber Co., 126 S. Ct. 2965 (2006). 7 Reiter v. Sonotone Corp., 442 U.S. 330, 343 (1979). ' See BORK, supra note 3. See also Oliver E. Williamson, Economies as an Antitrust Defense: The Welfare Tradeoffs, 58 AM. ECON. REV. 18 (1968); Oliver E. Williamson, Economies as an Antitrust Defense Revisited, 125 U. PA. L. REV. 699 (1977). No. 2:353] MONOPSONY AND "CONSUMER WELFARE" The plaintiffs in Reiter, however, were consumers in the output market. Thus, it is by no means clear that the Court's description of the antitrust laws as a "consumer welfare prescription" went beyond the view of distinguished economists like Salop and Lande-the view that the primary concern of antitrust should be to prevent conduct and transactions that transfer wealth from consumers of the output in the relevant market to those who produce that output. II. WEYERHAEUSER CO. V. ROSS-SIMMONS HARDWOOD LUMBER CO. In Weyerhaeuser, the Supreme Court will have an opportunity to clarify what it meant by "consumer welfare prescription" in Reiter. In this case, plaintiff Ross-Simmons, a saw mill in the Pacific Northwest, claimed that competitor Weyerhaeuser engaged in a variety of anticompetitive conduct in the late 1990s in an effort to monopolize the relevant lumber market.9 One allegation was that Weyerhaeuser had purposely overpaid for inputs (alder sawlogs) and bought more than it needed in an effort to increase its rivals' costs and drive them out of business. 10 The jury returned a verdict for Ross-Simmons, despite finding that Ross-Simmons had failed to prove that alder lumber was a distinct product market from all hardwood lumber. In the hardwood lumber market, Weyerhaeuser had less than a 10% market share and the jury, in a special verdict, found that Weyerhaeuser lacked market power in that market. Nonetheless, the jury awarded damages to Ross-Simmons because it found, in accordance with the district court's instructions, that Weyerhaeuser had purchased more alder sawlogs than "necessary," paid a higher price than "needed," and prevented plaintiff from obtaining logs at a "fair price."" ' Confederated Tribes of Siletz Indians of Or. v. Weyerhaeuser, 411 F.3d 1030, 1034-35 (9th Cir. 2005). 10 Id. " Id. at 1037 n.8. COL UMBIA BUSINESS LA W RE VIE W [Vol. 2007 MONOPSONY AND "CONSUMER WELFARE" The Ninth Circuit affirmed the verdict on the grounds that the instructions "provided sufficient guidance regarding how to determine whether conduct was anticompetitive. " 2 It rejected Weyerhaeuser's argument that the verdict was unsupportable because the plaintiff had not been required to show that (1) Weyerhaeuser paid so much for the logs that its price for finished lumber did not cover its costs and (2) that Weyerhaeuser had a dangerous probability of recouping the losses it incurred during the period of predation.13 In both of their briefs urging the Supreme Court to grant a writ of certiorari and their briefs on the merits, the petitioners and the Solicitor General framed the question in terms of the appropriate standard for evaluating a claim of "predatory bidding" brought under Section 2 of the Sherman Act.'4 However, lurking beneath that question is the much more fundamental and cosmic question as to what consumer welfare means. More specifically, the petitioners and the Solicitor Gen- eral advocated the adoption and application of the Brooke Group standard, which is used to evaluate a claim of predatory selling, to a claim of predatory buying. 5 The premise of their position was that the antitrust laws protected sellers and buyers equally. Reasoning from that premise, they contended that using the same standard in both predatory buying cases and predatory selling cases was appropriate. 16 12 Id. at 1040. 13 Id. at 1036. 14 Brief for the United States as Amicus Curiae Supporting Petitioner, Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., 126 S. Ct. 2965 (2006) (No. 05-381); see also Brief for the United States as Amicus Curiae, Weyerhaeuser, 126 S. Ct. 2965 (No. 05-381) (in support of certiorari). 15 Brief for the United States as Amicus Curiae Supporting Petitioner, supra note 14, at 15; Brief for the United States as Amicus Curiae, supra note 14, at 12. 16 Brief for the United States as Amicus Curiae Supporting Petitioner, supra note 14, at 15; Brief for the United States as Amicus Curiae, supra note 14, at 12 ("The Sherman Act 'does not confine its protection to consumers or to purchasers, or competitors, or to sellers'; to the contrary, No. 2:353] That premise, in turn, was rooted in the view that buyers who exercise monopsony power, by initially paying supra- competitive input prices to eliminate competitive buyers and then later paying sub-competitive input prices once the competitive buyers have been eliminated, create allocative inefficiencies just as sellers do when they exercise monopoly power by initially charging sub-competitive prices to eliminate competitive sellers. Judge Bork holds this view of consumer welfare-namely, that the antitrust laws should prevent conduct that creates allocative inefficiencies and thereby inhibits the maximization of the wealth of society as a whole.17 The Federal Trade Commission (FTC) joined the Solicitor General's amicus briefs. I voted against joining those briefs. '[t]he Act is comprehensive in its terms and coverage, protecting all who are made victims of the forbidden practices[,] by whomever they may be perpetrated."') (quoting Mandeville Farms, Inc. v. Am. Sugar Co., 334 U.S. 219 (1948)). 17 Another rationale that is sometimes offered for attacking an exercise of monopsony power under the antitrust laws is that the exercise of that power results in a wealth transfer from the seller to the buyer. In other words, the buyer's profits are increased (since it pays less than it should) and the seller's profits are diminished (since it sells for less than it should). Some argue that the antitrust laws should not distinguish between the welfare of buyers and sellers-if we are concerned about market power that leads to the transfer of surpluses from buyers to sellers, then we should be equally concerned about the inverse as well. See Heyer, supra note 3, at 42; Rule & Meyer, supra note 3, at 684. Indeed, this notion is reflected in some passages of the Solicitor General's briefs. Brief for the United States as Amicus Curiae Supporting Petitioner, supra note 14, at 15-17; see also Brief for the United States as Amicus Curiae, supra note 14, at 15-17. Concern about the welfare of consumers as buyers is, to be sure, based on actual or threatened transfers of wealth from them to sellers. However, that does not mean that the antitrust laws should be equally concerned about wealth transfers from sellers to consumers or other buyers. Vigorous antitrust enforcement depends on the support of the public, most of whom are consumers. Sellers (including large blocks of sellers such as farmers and employees) are arguably not as critical to the public support that is vital to antitrust law enforcement. Moreover, those who profess to be concerned about wealth transfers from sellers to buyers are among the staunchest critics of the Robinson-Patman Act (which is largely concerned with wealth transfers to power buyers). COL UMIA B USINESS LA W RE VIE W [Vol. 2007 It was not that I thought the Ninth Circuit was right-as a matter of fact, I thought the appellate court was dead wrong. The jury instruction blessed by the Ninth Circuit was amorphous and created a substantial risk of false positives. However, I disagreed with the Solicitor General's premise that the antitrust laws protect buyers and sellers equally, the views of consumer welfare underlying that premise, and the conclusion flowing from that premise that the rules for predatory buying cases ought to be the same as the rules for predatory selling cases. A. The Sherman Act Does Not Protect Buyers and Sellers Equally First, I do not agree that the antitrust laws protect buyers or sellers. In my view, the antitrust laws protect consumers-and by "consumers" I mean consumers who buy the output in the relevant market. Having practiced antitrust law for more than forty years, I yield to no one in my belief in the value and benefits of the Sherman Act. But, I do not think the Act is supposed to cure all societal ills by preventing allocative inefficiencies. Moreover, whatever attraction "total welfare" may have as a theoretical matter, I think it is an impractical theory of antitrust liability in the real world, where liability must be based on findings of fact that are frequently made by lay juries. 8 To me, consumer welfare means just that-the welfare of those who are confronted by actual or threatened exercises of seller market power in the output market. I think that my views on consumer welfare generally and on the way the antitrust laws apply to an exercise of monopsony power specifically are " Assuming that an exercise of monopsony power may lead to inefficient allocation of scarce resources, antitrust rules that turn on whether or not those inefficiencies have occurred or are likely to occur would be very difficult to administer. Indeed, it is arguable that even if the enforcement agencies with their large staffs of economists could do so in exercising their prosecutorial discretion, it would be impossible to make such determinations in the rough and tumble of courtroom litigation. See Joseph Farrell & Michael L. Katz, The Economics of Welfare Standards in Antitrust, 2 COMPETITION POL'Y INT'L 2 (Autumn 2006). No. 2:353] MONOPSONY AND "CONSUMER WELFARE" COLUMBIA BUSINESS LAW REVIEW consistent with the Horizontal Merger Guidelines (Merger Guidelines) adopted by both the Department of Justice (DOJ) and the FTC. 9 Section 0.1 of the 1992 Horizontal Merger Guidelines provides that the likelihood that a merger will result in buy- side market power, also known as monopsony power, may be pernicious in certain circumstances." However, the Merger Guidelines do not suggest that those circumstances exist anytime that monopsony power may distort allocative efficiency. To the contrary, the only provisions of the Merger Guidelines bearing on the meaning of consumer welfare are the provisions dealing with efficiency claims. Those provi- sions require that cognizable efficiencies be passed along in whole or in part to consumers purchasing post-transaction output in the relevant market. 2' This suggests that the "consumer" whose welfare the Merger Guidelines are concerned about are the consumers in the output market. The DOJ and the FTC's Guidelines for Collaborations Among Competitors identify three situations where buy-side agreements can have that effect where each threatens injury to consumers. 22 The first is where the buyers enjoy mo- 19 The DOJ and the FTC, and more importantly the courts, focus on the price and quantity effects in the output market of the allegedly anticompetitive conduct. A move away from this consumer welfare standard to a total welfare standard could make a big difference in some cases. For example, under a total welfare standard, one might approve a merger that results in higher prices and reductions in input if the merger also results in costs savings to the monopolist (or the cartel) that outweighed those harms. See Oliver E. Williamson, Economies as an Antitrust Defense: The Welfare Tradeoffs, 58 AM. ECON. REV. 18 (1968); see also Salop, supra note 2. As Professor Salop has observed, that result is hardly consistent with the Supreme Court's oft-repeated declaration that "the antitrust laws are designed to protect competition." Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 488 (1977). 20 See U.S. DEP'T OF JUSTICE & FED. TRADE COMM'N, HORIZONTAL MERGER GUIDELINES § 0.1 (1992), reprinted in 4 Trade Reg. Rep. (CCH) 13,104. 21 Id. § 4.0. 22 See U.S. DEP'T OF JUSTICE & FED. TRADE COMM'N, GUIDELINES FOR COLLABORATIONS AMONG COMPETITORS § 3.31(a) (2000), reprinted in 4 Trade Reg. Rep. (CCH) 13,160. [Vol. 2007 MONOPSONY AND "CONSUMER WELFARE" nopsony power such that their buying agreement can depress output and thereby produce supra-competitive prices in the long run (to the detriment of consumers of the market's output). The second is where the buy-side agreement can standardize costs of an input that is so important in output prices that it can effectively fix sell-side prices (again to the detriment of consumers of the market's output). The third is where the buy-side agreement will enable participants to monitor important input prices so as to facilitate prediction of competitor production levels and thereby influence output and pricing decisions on the sell-side (to the detriment of consumers of the market's output). The DOJ and the FTC's Health Care Guidelines likewise treat threats to consumer welfare as the defining characteristic of buy-side agreements that should be condemned and challenged.23 In short, there is nothing in the government's Merger, Collaborations Among Competi- tors, and Health Care Guidelines to suggest that we should be concerned about the welfare of the seller (rather than consumers of the output in the relevant market), much less to support the sweeping assertion made in the amicus briefs that the antitrust laws are designed to protect sellers and buyers equally. Several arguments have been advanced to support the position that the Sherman Act applies equally to sellers and buyers, and they deserve serious attention. First, the Solicitor General cited the Supreme Court's decision in Mandeville Island Farms v. Am. Crystal Sugar Co. as support for the argument that the Sherman Act does not distinguish between buyers and sellers.24 Mandeville Farms does not compel that conclusion, however. Mandeville Farms is nearly a half-century old, and the language quoted was written long before consumer welfare became the lodestar of antitrust analysis for the courts (including the Supreme 23 See U.S. DEP'T OF JUSTICE & FED. TRADE COMM'N, STATEMENTS OF ANTITRUST ENFORCEMENT POLICY IN HEALTH CARE (1996), reprinted in 4 Trade Reg. Rep. (CCH) 1 13,153. 24 Mandeville Farms, Inc. v. Am. Sugar Co., 334 U.S. 219 (1948). No. 2:3531 COLUMBIA BUSINESS LAW REVIEW Court) and commentators.25 Moreover, the Supreme Court stated in its analysis of the facts that the defendant sugar beet processors enjoyed monopsony power on the buy-side and market power on the sell-side, so that their buy-side agreement had the potential to impact sell-side prices (and thus injure consumers in the output market).26 Additionally, Mandeville Farms was a Section 1 case in which concerted conduct was alleged. Weyerhaeuser is a single firm conduct 2 To be fair, the broad language cited by the Solicitor General has been cited and relied on in some recent lower court decisions. See Telecor Commc'ns, Inc. v. Southwestern Bell Tel. Co., 305 F.3d 1124, 1133 (10th Cir. 2002) ("The Supreme Court's treatment of monopsony cases strongly suggests that suppliers ... are protected by antitrust laws even when the anticompetitive activity does not harm end users."); Reazin v. Blue Cross & Blue Shield of Kan., Inc., 899 F.2d 951, 962 (10th Cir. 1990) (rejecting a monopsony defendant's argument that injury to sellers without injury to end users is not a cognizable antitrust injury). 26 Mandeville Farms, 334 U.S. at 240-41. Other civil cases cited by the parties and various amici here contain allegations of both market power on the buy-side and the sell-side. See, e.g., Houser v. Fox Theatres Mgmt. Corp., 845 F.2d 1225 (3d Cir. 1988) (Plaintiffs alleged their com- petitor in the first-run movie theater market had overbooked its two first- run theaters in an effort to prevent their entry into that market.); Betaseed, Inc. v. U&I, Inc., 681 F.2d 1203, 1221 (9th Cir. 1982) (U&I sold seeds to farmers and bought sugar beets from farmers. It was the sole processor in the area and used that position to its advantage in the sale of seeds.). The petitioners and the Solicitor General also cite several consent decrees that outline concerns in the input market; however, in most instances there were also concerns in the output market. See United States v. UnitedHealth Group, 71 Fed. Reg. 13,991 (Mar. 20, 2006) (The DOJ had concerns over the merged firm's ability to exert market power in the sale of HMOs (output market) and the purchase of physician services (input market) in Tucson. The DOJ also required divestitures in Boulder, Colorado because of concerns about market power in the purchase of physician services (input market).); United States v. Aetna, Inc., 64 Fed. Reg. 44,946 (Aug. 18, 1999) (The DOJ alleged that the transaction would (1) create market power in the sale of HMO and HMO-based point-of- service health plans and (2) create market power in the purchase of physician services.). The one exception was United States v. Cargill; however, congressional concerns over farmers may have driven that decision. See United States v. Cargill, Inc., 64 Fed. Reg. 44,054 (Aug. 12, 1999); Antitrust Enforcement in the Agricultural Marketplace: Hearing before the S. Comm. on the Judiciary, 108th Cong. (2003) (statement of R. Hewitt Pate, Assistant Attorney General, Antitrust Division). [Vol. 2007 MONOPSONY AND "'CONSUMER WELFARE" case. Thus, there is no reason for the Solicitor General or the Court to determine what the analysis should be when alleged buy-side predatory conduct is concerted; that being so, the reliance on Mandeville Farms is doubly misplaced. The Solicitor General's brief asserted, however, that unless the antitrust laws protect sellers and buyers equally, the DOJ would be foreclosed from criminal prosecution of real estate brokers or antique dealers who secretly conspire to fix the prices at which their products and services are sold. This is a straw man concern. A secret conspiracy of this sort makes it difficult, if not impossible, to detect the buy-side conduct, much less to subject it to the kind of inquiry into anticompetitive effects that is appropriate. The conduct can therefore be properly condemned as per se illegal. Open and transparent concerted purchasing activity (like group purchasing arrangements) does not pose such a threat, and thus can-and should-be tested using the same analysis that is applicable to unilateral conduct. Indeed, such is the way that transparent group purchasing activity is treated under the Health Care and Collaborations Among Competitors Guidelines.27 Again, however, there is no reason to address this matter in the Weyerhaeuser case. Second, a number of economists believe that monopsony is merely the mirror image of monopoly and, therefore, there is little reason to treat the two differently under the law. They support their position on the basis of Judge Bork's view of consumer welfare, arguing that market inefficiencies created by anticompetitive restraints on input markets can "distort" those markets and produce a "deadweight" loss to 27 Judge (now Justice) Breyer's opinion in Kartell v. Blue Shield of Mass., Inc., 749 F.2d 922 (1st Cir. 1984) appears to endorse this approach as well. In Kartell, doctors complained that Blue Shield, which represented over 70% of the Massachusetts residents relying on private (non-governmental) health care, used its market power to obtain "lower than competitive" prices from doctors. The doctors felt that they had no choice but to accept Blue Shield's terms because the company represented so many potential customers. The First Circuit rejected the doctors' argument. In part the opinion was grounded in the assumption that Blue Shield would pass on its lower input costs to its customers in the form of lower insurance premiums. Id. at 928. No. 2:353] COLUMBIA BUSINESS LA W REVIEW total welfare.2" More specifically, these economists contend that some producers of the input product will either produce less or cease production altogether, resulting in less-than- optimal output of the product or service. 29 But other economists disagree, pointing out that the antitrust laws protect the welfare of consumers in output markets, not total welfare, and the welfare of those consumers is rarely harmed by an exercise of monopsony power in input markets.'O Indeed, in Brooke Group, the Supreme Court's concern was explicitly for the welfare of consumers in the output market, not total welfare or the risk of some theoretical "deadweight" loss.3 Third, another argument advanced in support of the position staked out by the petitioners and the Solicitor General is that the Sherman Act's drafters were concerned that sellers could be harmed by firms exercising monopsony power. Yet others take issue with this interpretation of the legislative history. 2 Indeed, Judge Frank Easterbrook has noted that "[tihe choice [Congress] saw was between leaving consumers at the mercy of trusts and authorizing the judges 28 See, e.g., ROGER D. BLAIR & JEFFREY L. HARRISON, MONOPSONY: ANTITRUST LAW AND ECONOMICS 36-43 (1993); Roger Noll, "Buyer Power" and Economic Policy, 72 ANTITRUST L.J. 2 (2005); Charles F. (Rick) Rule, Consumer Welfare, Efficiencies, and Mergers, Statement Before the Antitrust Modernization Commission (Nov. 17, 2005), available at http://www.amc.gov/commission-hearings/pdf/Statement-Rule.pdf ("[E]x- ercises of monopsony power like exercises of monopoly power typically reduce output in the market and cause allocative inefficiency, and even the proponents of a consumer surplus standard recognize that no sensible antitrust policy would ignore agreements that have that effect."). ' See BLAIR & HARRISON, supra note 28, at 42-43, 72. 30 See Jacobson & Dorman, Monopsony Revisited, supra note 2, at 153. 31 See Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 224 (1993) ("Although unsuccessful predatory pricing may encourage some inefficient substitution toward the product being sold at less than its cost, unsuccessful predation is in general a boon to consumers."). 32 Robert H. Lande, Chicago's False Foundation: Wealth Transfers (Not Just Efficiency) Should Guide Antitrust, 58 ANTITRUST L.J. 631, 636 n.27-637 (1989) (citing Senator Sherman's characterization of monopoly overcharges as "extorted wealth"). [Vol. 2007 MONOPSONY AND "CONSUMER WELFARE" to protect consumers. However you slice the legislative history, the dominant theme is the protection of consumers from overcharges." 3 This is not to say that I believe that monopsony power never distorts competition or that it should never be condemned. However, I disagree with the premise that the antitrust laws protect sellers in input markets equally with consumers in output markets, with the assumption that Mandeville Farms supports that proposition, and with the definition of consumer welfare that underlies it. B. Determining the Appropriate Test for Evaluating Predatory Purchasing/Over-bidding As previously discussed, the petitioners and their amici, including the Solicitor General, argue that Brooke Group should apply foursquare to buyer cases alleging predatory buying in input markets as well as to seller cases alleging predatory pricing in output markets. 4 I also disagree with that conclusion for several reasons. First, the risk of false positives is not the same in buy- side cases involving input markets as it is in sell-side cases involving output markets. In both cases, there is a predation period and a harvest period. However, the resemblance ends there. In sell-side cases involving output markets, there is a real risk of false positives; during the predation period, defendants sell at low prices, and if unwarranted challenges chill low pricing, consumers will be injured. That is the 3' Frank Easterbrook, Workable Antitrust Policy, 84 MICH. L. REV. 1696, 1702-03 (1986). 14 Applying Brooke Group in other contexts has been tried and has failed. For example, the Third Circuit Court of Appeals rejected the defendant's argument that it should apply to bundled discounts. LePage's Inc. v. 3M, 324 F.3d 141, 147-52 (3d Cir. 2003). I agree with those who are skeptical that any "one size fits all" rule is appropriate for Section 2 cases. See Deborah Platt Majoras, Chairman, Fed. Trade Comm'n, The Consumer Reigns: Using Section 2 to Ensure a "Competitive Kingdom," Remarks at Opening Session, Joint DOJ/FTC Hearings on Section 2 of the Sherman Act (June 20, 2006), available at http://www.ftc.gov/speeches/ majoras/060620revisedhearingonsection2.pdf. No. 2:353] heart of the Supreme Court's Brooke Group opinion and analysis." However, the same thing cannot be said of buy- side cases involving an input market if the defendant lacks market power in the output market. During the predation period, a defendant buys inputs at high prices in an effort to drive its competitors out of business, but it cannot pass that increased cost to consumers if the output market is competitive. Conversely, during the harvest period, the defendant buys inputs at sub-competitive prices in an effort to recoup its losses from the predation period. However, competition in the output market creates incentives and pressures to pass those lower costs on to consumers in the form of lower prices. Second, applying the Brooke Group test in a predatory buying case when market power in the output market is lacking may actually deter conduct that benefits consumers. As the Health Care Guidelines state, efforts by a defendant (or defendants-i.e., a buying group) to reduce buy-side input prices is potentially beneficial to consumers in those circumstances because the buy-side savings are apt to be lost through competition. 6 As stated above, there is a school of thought (e.g., Blair and Harrison's) that theorizes that a unilateral or collective exercise of monopsony power "distorts" the operation of the input market to the detriment of sellers in that market and/or others associated with those sellers.37 But whether and when input prices are "artifi- cially" high or low is speculative at best, and there is a very real risk that a false finding of artificiality will deprive consumers of low prices in the output market. Indeed, if the analysis focuses on whether buy-side prices will distort " Brooke Group, 509 U.S. at 224 ("Even if the ultimate effect of the cut is to induce or reestablish supra-competitive pricing, discouraging a price cut and forcing firms to maintain supra-competitive prices, thus depriving consumers of the benefits of lower prices in the interim, does not constitute sound antitrust policy."). 36 U.S. DEP'T OF JUSTICE & FED. TRADE COMM'N, STATEMENTS OF ANTITRUST ENFORCEMENT POLICY IN HEALTH CARE (1996), reprinted in 4 Trade Reg. Rep. (CCH) 13,153. 37 See BLAIR & HARRISON, supra note 28. COL UMBIA B USINESS LA W RE VIE W [Vol. 2007 allocative efficiencies and thereby impair the welfare of all consumers (or society as whole), there must be a determination of whether buy-side prices are "artificially" high or low, or above or below a "market clearing" price. Those who argue that the antitrust laws should protect "total welfare" can hardly fault the instruction to the jury in Weyerhaeuser to focus on whether the defendant paid too much for the input product." Third, the Brooke Group test would be particularly difficult and cumbersome in buy-side input market cases. For example, the Brooke Group analysis focuses on whether there is a likelihood of recoupment. However, that is a determination that cannot be made without first determining whether and by how much the defendant "overpaid" for the input product during its predation period. 9 38 Confederated Tribes of Siletz Indians of Or. v. Weyerhaeuser Co., 411 F.3d 1030, 1037 n.8 (9th Cir. 2005). 3 As Professor Hovenkamp has observed: On administrative grounds, a price/cost test is more difficult to defend if the input in question constitutes only a small percentage of the cost of the finished product. For example, suppose that hardwood saw blades were in short supply and Weyerhaeuser acquired them by bidding up the price. Suppose that a saw blade is a variable cost item because it wears out and its cost amortizes at less than 1/2 percent of the total cost of the finished lumber. Even if the defendant paid double the market price for saw blades, the difference is likely to be within its margins. It would be almost impossible to show that overpaying for saw blades drove the defendant's price below its costs. In such case, courts might need to look for other hard evidence of exclusionary behavior. For example, the defendant might have purchased saw blades and stockpiled them for very long periods or even destroyed them, simply to deny access to rival sawmills. However, even here courts must be careful. For example, stockpiling of inventories in times of anticipated shortages is perfectly pro-competitive behavior. A firm that has a reasonable expectation at the time of purchase that it actually will use an input in its own production should never be condemned for behaving predatorily. In any event, the fact findings here were that Weyerhaeuser was reselling the finished lumber in a No. 2:353] MONOPSONY AND "CONSUMER WELFARE" The jury instruction blessed by the Ninth Circuit in Weyerhaeuser essentially focused on that issue. As the Solicitor General asserts, that instruction is too amorphous and difficult to apply.4" If the jury gets that wrong, the error costs can be high. Fourth, and finally, a much easier liability test is available. It is one that would screen out all predatory buying claims where the defendant lacks market power in the output market.41 This analysis could be conveyed to a lay jury by instructions that are simple as well as familiar, since juries in Section 1 Rule of Reason and Section 2 cases are currently instructed that market power is an essential element of the claim and then instructed on how to determine whether the defendant has market power. Beyond that, this kind of analysis, which focuses on whether the defendant has used exclusionary conduct to create or maintain market power in the output market, is precisely the Section 2 analysis that was used in United States v. Microsoft.42 If, but only if, the trier of fact finds that the competitive market. In that case, it could have sold all it wanted at the competitive price. For the same reason, such a firm would have no incentive to overbuy and destroy the excess-in a competitive resale market there would be no excess. Herbert Hovenkamp, The Law of Exclusionary Pricing, 2 COMPETITION POL'Y INT'L 21, 38 (2006). 40 See Verizon Commc'ns, Inc. v. Trinko, 540 U.S. 398, 408 (2004) (rejecting an analysis that "requires antitrust courts to act as central planners, identifying the proper price, quantity, and other terms of dealing-a role for which they are ill suited"). "' I am not alone in endorsing a standard that requires proof of market power in the output market. See Jacobson & Dorman, Monopsony Revisited, supra note 2; see also KaminefBesicorp Allegany L.P. v. Roches- ter Gas & Elec. Corp., 908 F. Supp. 1194, 1203 (W.D.N.Y. 1995) (A monopsony is not actionable unless it "injure[s] consumers by forcing up the price of the end product. Where the risk of that happening is slight or nonexistent, however, monopsony power per se does not create an antitrust concern."); Addamax Corp. v. Open Software Found., Inc., 888 F. Supp. 274, 280 (D. Mass. 1995) (noting that "[o]nly with control of a downstream market can the monopsonist decrease output and raise prices"). 42 United States v. Microsoft Corp., 253 F.3d 34 (D.D.C. 2001). COL UMBIA B USINESS LA W RE VIE W [Vol. 2007 No. 2:353] MONOPSONYAND "CONSUMER WELFARE" 369 defendant enjoys market power in the output market would it be necessary to determine whether this was the result of the defendant's exercising monopsony (or oligopsony) power vis-A-vis the input market. This test would dispose of the "predatory bidding" claims in Weyerhaeuser. As previously stated, the jury found that Weyerhaeuser did not have market power in the downstream, or output, market. In my view, that fact was dispositive. Given my conviction that the antitrust laws are supposed to protect consumers in that market, I do not believe Section 2 liability should attach to predatory bidding if that bidding does not create or maintain monopoly power in the downstream market or dangerously increase the probability of creating such power.