Coercion vs. Incentivizing: A Way Out of the Section 2 Impasse? Ken Glazer April 1, 2004 April 1, 2004

Summary  Two ways of achieving “exclusivity” :  Refusal to sell ("coercion")  Financial incentives ("incentivizing")  That distinction is critical  Coercive conduct should be presumed illegal  Incentivizing conduct should be tested under predatory pricing rules

I. The Context A. Vertical Microsoft Microsoft LePage’s LePage’s Dentsply Dentsply RJ Reynolds RJ Reynolds Concord Boat Concord Boat Hill-Rom Hill-Rom B. Not Horizontal Aspen Skiing Aspen Skiing Trinko Trinko Classic essential facilities Classic essential facilities

II. The Distinction A. “Coercion” 1. What is it?  R efusal to sell a “necessary” product unless customer confers exclusivity  E ither express  O r implicit through manipulation of p pricing L Lorain Journal D Dentsply  C lassic tying case 2. Why is it bad?  A ctual use of monopoly power  C ustomer given no choice

Original Price Price to Resisting Customer Price to Accepting Customer “Coercion” Scenerio $2.00/unit$3.00/unit$2.00/unit “Incentivizing” Scenerio $2.00/unit$2.00/unit$1.00/unit

II. The Distinction B. Incentivizing 1. What is it? Use of incentives to induce customer behavior Not a refusal to deal RJ Reynolds Concord Boat

II. The Distinction B. Incentivizing (cont.) 2. Why is it not bad? Not a use of monopoly power at all Customer has a choice  O r had a choice at the time contract was formed  B eing locked into a contract ≠ coercion Money in customer’s pocket Does not preclude competitors from countering the incentive

III. Practical Significance of Distinction A. Coercion is presumptively illegal  Presumption of illegality because Lorain type conduct is plainly anticompetitive  Application to Dentsply

III. Practical Significance of Distinction B. Incentivizing conduct should be tested under Brooke Group  Must be below cost  Otherwise we are just shielding competitors from having to dig into their own pockets  Bad intent doesn’t matter  But incentives on Product A can be “attributed” to Product B  Le Page’s

IV. Objections A. Distinction isn’t important  Objection: Why distinguish if outcome is same – customer tied up?  Response:  Outcome is not the same, only the superficial appearance  In any event, antitrust law often distinguishes between two different means of achieving the same end  Price fixing vs. lawful merger  Collusion vs. oligopoly

IV. Objections B. Distinction isn’t real  Objection: Too hard to tell difference between coercive penalty and “penalty” resulting from loss of incentive  Response:  Not true. Look at whether the “unencumbered” price went up  In any event, even if hard in some cases, at least it’s the right distinction

IV. Objections C. Too hard on coercion  Objection: We shouldn’t automatically condemn Lorain type conduct  Response:  Not automatic. Presumption can be overcome  But it should be presumed illegal

IV. Objections D. Too soft on incentivizing  Objection: Even non-predatory incentives can harm competition  Response:  Persuade the Supreme Court  Counselors need a bright line

V. Conclusion A. Coercive conduct very different from incentivizing conduct B. This framework may supply the long- sought test