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American Needle and the End of Competition

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Back in November, I offered a few thoughts on the significance of the Supreme Court decision in American Needle (available today here) for methodological individualist and functionalist theories of the economics of organizations:

The upshot is that social norms can evolve to facilitate group cooperation. These norms, in turn, can play a huge role in promoting health and economic growth. The case of IP licensing by the NFL is an easy example of the economic benefits of cooperation. Competition among the teams for licensing revenue — which I understand is the norm among MLB teams — leads to less social benefit for consumers and less revenue for the league. In many contexts, cooperation creates wealth that competition would destroy.

This is not to say that there is no role for antitrust regulation. The point is that regulators should not rely on the prescription of methodological individualists (including, most notoriously, neoclassical economists) that competition is a uniform good. Neither perfect competition nor perfect cooperation is optimal for a society. We must find a balance in which enough competition is permitted to allow existing relationships to be broken so that new experiments with resources, capital, and people can be tried. But we should remember that these experiments have an opportunity cost of stability and efficiency, which is too expensive when there is no theory tested by the experiments.

Sadly, albeit predictably, the Supreme Court today handed down a poorly theorized and thinly articulated restatement of methodological individualist theory. Consider this passage from the opinion at 13:

As Copperweld exemplifies, “substance, not form, should determine whether a[n] . . . entity is capable of conspiring under §1.” 467 U. S., at 773, n. 21. This inquiry is sometimes described as asking whether the alleged conspirators are a single entity. That is perhaps a misdescription,however, because the question is not whether the defendant is a legally single entity or has a single name; nor is the question whether the parties involved “seem” like one firm or multiple firms in any metaphysical sense. The key is whether the alleged “contract, combination . . . , or conspiracy” is concerted action—that is, whether it joins together separate decisionmakers. The relevant inquiry,therefore, is whether there is a “contract, combination . . . or conspiracy” amongst “separate economic actors pursuing separate economic interests,” id., at 769, such that the agreement “deprives the marketplace of independent centers of decisionmaking,” ibid., and therefore of “diversity of entrepreneurial interests,” . . . and thus of actual or potential competition.

In other words, unless you see your self-interest as opposed — or at best completely orthogonal — to another’s, you can’t agree (even informally!) to work together toward a common goal because that would deprive the sacred market of its quota of wasteful speculators, betting against the outcomes that reasonable and well-informed minds agree would be the best for all stakeholders.

That the Supreme Court believes that a diversity of entrepreneurial interests are best promoted by such rules demonstrates their complete lack of on-the-ground experience with how successful entrepreneurial ventures are formed and operated. Successful entrepreneurs succeed because and when able to convince a plurality of actors whose interests are not otherwise aligned to cooperate.

There is silver lining. First, the reasoning in the opinion is so thin and weak, that it cannot hold up long against the rising tide of evidence and theory that demonstrate the benefits of cooperation in fostering growth and differentiation of products and services. Fortunately, the officials now in charge of the DOJ/FTC are better aware of new economic theory.

Second, and far more importantly in the short-run, the actual basis for the holding appears to be very narrow:

The question whether NFLP decisions can constitute concerted activity covered by §1 is closer than whether decisions made directly by the 32 teams are covered by §1. This is so both because NFLP is a separate corporation with its own management and because the record indicates that most of the revenues generated by NFLP are shared by the teams on an equal basis. Nevertheless we think it clear that for the same reasons the 32 teams’ conduct is covered by §1, NFLP’s actions also are subject to §1, at least with regards to its marketing of property owned by the separate teams. NFLP’s licensing decisions are made by the 32 potential competitors, and each of them actually owns its share of the jointly managed assets. Cf. Sealy, 388 U. S., at 352–354. Apart from their agreement to cooperate in exploiting those assets, including their decisions as the NFLP, there would be nothing to prevent each of the teams from making its own market decisions relating to purchases of apparel and headwear,to the sale of such items, and to the granting of licenses to use its trademarks.

This passage provides a rudimentary prescription for subject-matter-specific patent pools to avoid antitrust liability. First, the Supreme Court acknowledged that this was a close question — helpful to any party that distinguishes itself along the lines that follow. Second, the Supreme Court cited favorably the existence of an independent corporation with independent management, which showed no favor to particular owners (because revenue was shared “on an equal basis”). Third, it is the joint management and marketing of individually-owned assets rather than the management and marketing of assets owned in common that rubbed the Supreme Court the wrong way. Fourth, the Supreme Court pointed to the lack of encumbrances on the individually owned assets (“there would be nothing to prevent each of the teams from making its own market decisions” [apart from their agreement to cooperate]). Fifth, in a later passage, the Supreme Court suggests that limiting shareholder assent to management decisions to a mere majority vote would deflect some scrutiny. (This is particularly poor reasoning, however, since a shareholder majority might be controlled by an even more concentrated group!)

Suppose that a group of universities formed a subject-matter-specific patent pool for the purpose of managing and marketing exclusive rights to HIV/AIDS therapeutics. What this passage suggests is that if the patent pool were formed as a corporation with its own managers, and that if each university owner assigned its patent rights to the patent pool, then the pool might be able to market and license the IP without running into antitrust liability.

Not addressed are the more difficult and complex questions of how the board of directors should be constituted, or whether the universities could grant an unrestricted exclusive license to the patent pool and retain ownership so long as the exclusive license was otherwise unencumbered.

Some day, one can only hope, there will be an explicit recognition of the fact that competition is simply one way among many to get people to cooperate, and that it is cooperation rather than competition that is the source of wealth.

Parting thought: This decision is going to give heartburn to lawyers defending joint ventures that develop and license industry standards, but a boost to aggregators operating in the secondary market.

Written by Michael F. Martin

May 24, 2010 at 10:52 am

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