Academic journal article The Journal of Consumer Affairs

Product Strategy and Antitrust: A Consumer Choice Perspective

Academic journal article The Journal of Consumer Affairs

Product Strategy and Antitrust: A Consumer Choice Perspective

Article excerpt

Antitrust law has long recognized that the development of a superior product or business model benefits consumers and competition and should not be an antitrust violation even though rival products or even competitors may be driven out of business (U.S. v. Grinnell Corp. 1966, 570-571). Indeed, the late Justice Scalia recently noted that opportunity to acquire monopoly power (lawfully through patents) and charge monopoly prices is "what attracts 'business acumen' in the first place" and "induces risk taking that produces innovation and economic growth" (Verizon Communications, Inc. v. Trinko 2004, 407). Thus, courts are "properly skeptical about claims that competition has been harmed by a dominant firm's product design changes" (U.S. v. Microsoft Corp. 2001, 65). In the United States, the modern antitrust mantra is that antitrust protects competition including product innovation not (individual) competitors.

Yet as they execute new product strategies, market dominating firms face the risk, expense, and uncertainty of antitrust challenges. For example, Google has been accused of favoring its own websites in its search engine results and bundling its own software such as YouTube, Maps, and Chrome with its Android mobile operating system to the disadvantage of rivals (McLaughlin 2015). Similarly, various pharmaceutical firms have been accused of "product hopping" (making slight product changes) in order to thwart generic competition (Royall, Johnson, and McKenney 2013) or of settling questionable patent infringement lawsuits in ways that delay the entry of generic competition (Federal Trade Commission v. Actavis, Inc. 2013). In contrast, another jury found that Apple's introduction of iTunes 7.0 that blocked its music files from competing sites was not an antitrust violation, but rather offered improved security (Wakabayashi 2014).

Most modern antitrust analysis tends to focus on price effects comparing prices to costs and foregone profit opportunities (American Bar Association Section of Antitrust Law 1991). While price competition is important, this paper examines product competition and proposes to augment such traditional economic analysis with a qualitative analysis of anticompetitive restrictions on consumer choice among a variety of products. This approach is consistent with the 2010 Merger Guidelines that recognize upfront that "reduced product quality, reduced product variety, reduced service or diminished innovation" may be the result of enhanced market power from an anticompetitive merger (U.S. Department of Justice and Federal Trade Commission 2010, 2).

Arguably the closest antitrust commentary has gotten to analyzing product strategy per se is the examination of antitrust and innovation, particularly so-called alleged "predatory innovation" (e.g., American Bar Association Section of Antitrust Law 1991, 26-32; Jacobson, Sher, and Holman 2010; Ordover and Willig 1981; Petty 1988). However, this analysis focuses on costs of innovation and foregone profit opportunities of the "innovating" firms. Such a focus on the firm performance seems inconsistent with US antitrust policy, whose goal is the preservation of competition for the benefit of consumers (Dameron 2016; Kirkwood and Lande 2008; U.S. Department of Justice n.d.).

Finally, in its struggle to distinguish pro-competitive from anticompetitive product strategies, antitrust law has created a number of categories or labels for product strategies but has failed to carefully define and consistently use these categories. For example, some cases pled as tying arrangements actually appear to be refusals to deal or exclusive dealing (e.g., Eastman Kodak Co. v. Image Technical Services, Inc. 1992; Jefferson Parish Hosp. Dist. v. Hyde 1984, respectively). This article addresses these limitations by proposing an improved conceptualization for analyzing product strategies that relies on three intuitively straightforward (and admittedly overlapping) meta-categories based on their impact on consumer choice: Lock-Outs, Lock-Ins, and Hold-Ups. …

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