Antitrust Law and Regulatory Gaming[dagger]

Article excerpt

Antitrust law promotes competition in the service of economic efficiency. Government regulation may or may not promote either competition or efficiency, depending on the goals of the agency, its competence, and the effects of industry "capture." Antitrust courts have long included regulated industries within their purview, working to ensure that regulated industries cannot use the limits that regulation imposes on the normal competitive process to achieve anticompetitive ends.1 Doing so makes sense; an antitrust law that ignored anticompetitive behavior in any regulated industry would be a law full of holes.

The role of antitrust in policing regulated industries appears to be changing, however. A cluster of Supreme Court decisions in the past decade2 have fundamentally altered the relationship between antitrust and regulation, placing antitrust law in a subordinate relationship that, some have argued, requires it to defer not just to regulatory decisions but perhaps even to the silence of regulatory agencies in their areas of expertise.3 While many of those decisions might be justified on their facts as a matter of antitrust law,4 together they are leading courts and commentators to conclude that antitrust laws are impliedly repealed by government regulation of a particular industry.5 The question arose most recently in Pacific Bell Telephone Co. v. UnkLine Communications, Inc.,6 in which the Supreme Court rejected a claim that a regulated monopoly with franchised rights-of-way violates antitrust law by engaging in a "price squeeze": charging broadband competitors wholesale prices for use of the rights-of-way that exceed the retail prices its own subsidiary charges its customers.7

Absolute antitrust deference to regulatory agencies makes little sense as a matter of either economics or experience. Economic theory teaches that antitrust courts are better equipped than regulators to assure efficient outcomes in many circumstances. Public choice theory and long experience both suggest that agencies that start out trying to limit problematic behavior by industries often end up condoning that behavior and even insulating those industries from market forces. And as history has shown, relying on regulatory oversight alone without the backdrop of antitrust law would leave both temporal and substantive gaps in enforcement, which unscrupulous competitors could exploit to the clear detriment of consumers.8 The mere existence of a competition-conscious regulatory structure cannot guarantee protection against abuses of that structure or against exclusionary behavior that falls just beyond its jurisdiction.9 Indeed - and perhaps ironically - the very regulatory structure that exists to promote competition can create gaming opportunities for competitors bent on achieving anticompetitive goals. Such "regulatory gaining" undermines both the regulatory system itself and the long-standing, complementary relationship between regulatory and antitrust law.

We argue that the risk of regulatory gaming provides an important example of the need for ongoing antitrust oversight of regulated industries. We define "regulatory gaming" as private behavior that harnesses procompetitive or neutral regulations and uses them for exclusionary purposes. Complex regulatory systems - particularly those requiring government approval for market entry - can create opportunities for such gaming by enabling dominant parties to dictate industry standards while delaying entry of competing products. The pharmaceutical industry has witnessed this behavior for years, as branded drug companies have used exclusionary tactics to stay one step ahead of generic entry. In one species of this behavior called "product hopping" - the branded company makes repeated changes in a drug's formulation to prevent generic substitution, rather than to improve the efficacy of the drug product. Product hopping raises difficult questions for antitrust courts. On one hand, product-hopping antitrust suits require courts to inquire into product-design choices, something antitrust judges rightly take pains to avoid; they also raise concerns about courts' secondguessing agencies' and legislators' judgments about how best to balance competition and innovation in regulated markets. …