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Zywicki - japan speech

Competition Policy Research Center, Fair Trade Commission of Japan
Inaugural Symposium
How Should Competition Policy Transform Itself?
Designing the New Competition Policy
(November 20, 2003)
Todd J. Zywicki
Director, Office of Policy Planning
Federal Trade Commission, U.S.A.
Competition Policy and Regulatory Reform: Means and Ends
I. Introduction
I would like to thank the JFTC and the Economic and Social Research Institute for inviting me to speak to you today. It is always a pleasure to discuss competition policy andregulatory reform, and I am especially honored to address your Inaugural Symposium onCompetition Policy. The symposium’s title asks “How Should Competition Policy TransformItself.” By bringing together competition officials from around the globe, you have made anexcellent start in answering that question. I applaud Chairman Takeshima and President Kosaifor organizing this symposium. Let me add our customary disclaimer, which is that the viewsexpressed here are my own, and do not necessarily reflect those of the Commission or anyindividual Commissioner.
History has taught us that economic growth and consumer welfare depend on robust competitive markets, and that well-informed competition policy is essential to having robustmarkets. In the United States, we learned this the hard way. During the 1960s and 70s, in myview, American competition policy often had the unintended effects of reducing competition,discouraging new entrants, and protecting producers, not consumers. Those policies contributedto a decade of “stagflation,” in which the economy suffered from low growth (stagnation) andhigh inflation. Innovation and entrepreneurship stagnated. Consumers suffered. Americancompanies became inefficient and unresponsive, and foreign competitors, including, of course,many Japanese firms, gained market share. Global competition eventually forced Americancompanies to improve their performance and helped force American policymakers to undertakecomprehensive regulatory reform. Competition authorities refocused competition policy toprotect the competitive process, not particular competitors, and consumers, not producers. Theyextended efforts to attack public restraints on competition, such as barriers to entry and pricecontrols, as well as private restraints on competition, such as cartels and bid rigging. They usedan array of tools, including research, litigation, and public advocacy, to encourage policymakersto adopt pro-competitive policies. As we’ll see, this refocused competition policy helped revivethe American economy.
In many respects, Japan’s recent history reminds me of the U.S. in the 1970s. Japan has suffered from a decade of slow economic growth. A number of leading Japanese policymakers,from President Kosai to Chairman Takeshima, have courageously noted that regulations here too often have protected producers and discouraged competition, such as during the so-called “DarkAge of the Antimonopoly Act.” As in the U.S., however, Japanese officials are wisely usingcompetition policy to initiate comprehensive regulatory reform. Prime Minister Koizumi isexactly right to say “No growth without structural reform.” Structural reform is a prerequisite tosustained economic growth and effective competition policy is essential for genuine structuralreform. Japan already has had some success. Since President Bush and Prime Minister Koizumiestablished the U.S.-Japan Regulatory Reform and Competition Policy Initiative three yearsago,1 the Japanese government has focused on deregulation and structural reform. The JFTC hasbecome an agency under the Cabinet Office. The Special Zones initiative is starting to showgreat promise. Under Chairman Takeshima’s excellent leadership, the JFTC is seeking toexpand enforcement of the Antimonopoly Act and promote pro-competitive policies with otherministries. As a lifelong baseball fan, I would say that Chairman Takeshima is the HidekiMatsui of regulatory reform.
Based on successes in the U.S., Japan, and also Europe, we now know many of the elements that constitute an effective competition policy. First, competition policy should focuson enhancing competition and consumer welfare, not protecting producers from competition. This focus necessitates targeting both private conduct as well as public policies that interferewith competition. Second, competition authorities should use an array of tools to encouragecompetition, including litigation, advocacy, and research. By using these tools, competitionagencies can help to create a culture of competition in which policymakers, courts, and even thepublic come to understand and support competition policy as a means of protecting consumersand promoting economic growth.
Ends of Competition Policy
A. Consumer
Let me start by discussing the appropriate ends or goals of competition policy. In the past, in both the U.S. and Japan, competition policy has focused on a variety of goals, such asprotecting domestic producers from foreign competition and protecting small competitors frommore efficient large competitors. Over the past 20 years, however, policymakers have come toagree that the single unifying goal of competition policy should be to enhance consumer welfare,and that the best way to enhance consumer welfare is through competition. This consensus restson sound economics, both empirical and theoretical, finding that competition achieves theoptimum mix of products and services in terms of price, quality, and consumer choice. Robust competition also advances economic growth. Competition forces producers to become more efficient and responsive to the marketplace. By enabling the spread of knowledgethrough the economy, competitive markets enable the efficient use of dispersed knowledge.2 As 1 A discussion of this initiative is available at <>.
2 F. A. Hayek, The Use of Knowledge in Society, 45 American Econ. Rev. 519-30 (Sept. 1945).
Joseph Schumpeter famously observed, competition is a process of “creative destruction.”3 Competition overturns the established order, but also provides the means and incentives forprogress.4 Protecting producers from the rigors of competition may help them in the short run,but in the long run, protection ultimately leads to those producers’ stagnation and decline. Targeting Both Private and Public Restraints
For these reasons, competition policy should play an essential role in regulatory reform. Competition policy is more than enforcement – it’s an organizing principle for our economy. Competition policy helps to shape our markets, our institutions, and often our very attitudestoward business and government. In this sense, competition policy is a form of regulation thatcompetes with other regulatory structures, many of which are hostile to free markets. Competition agencies must represent the interests of dispersed consumers, who benefit fromcompetition, against concentrated economic interests that can apply pressure to limitcompetition.
A successful competition policy must target threats to competition from two fronts. One front involves purely private efforts to undermine competition, such as price-fixing and bidrigging. The other, often more subtle, front involves private efforts to convince governments tosuppress competition – in other words, rent seeking. As long as governments have existed,interested businesses have asked government officials to give them an advantage over theircompetitors.5 These efforts have often succeeded. Typically promulgated under the banner ofconsumer protection, or the “public or national interest,” many regulations artificially reduce thenumber of competitors and limit the ability of existing companies to compete. Public restraintsoften can harm consumers for far longer than private restraints. Cartels inevitably fall apart overtime, but anticompetitive laws can last indefinitely. Public restraints can be open and notoriousand are far easier to enforce. While private cartelists may cheat on their agreements, publiccartels may be enforced through the government.
Attempting to protect competition by focusing solely on private restraints is like trying to stop the flow of water at a fork in a stream by blocking only one of the channels. Unless youblock both channels, you are not likely to even slow, much less stop, the flow. Eventually, allthe water will flow toward the unblocked channel. The same is true of antitrust enforcement. Ifyou create a system in which private price fixing results in a jail sentence, but accomplishing thesame objective through government regulation is always legal, you have not completelyaddressed the competitive problem. You have simply dictated the form that it will take. It is a 3 Joseph A. Schumpeter, CAPITALISM, SOCIALISM AND DEMOCRACY 82-85 (Harper, 1975) (orig. pub. 1942).
4 F. A. Hayek, Competition as a Discovery Procedure, in The Essence of Hayek 254 (Chiaki Nishiyama and Kurt R.
Leube eds., 1984).
5 See generally Mancur Olson, THE RISE AND DECLINE OF NATIONS 75-117 (1982).
hollow victory to break a price-fixing cartel if its members successfully lobby for a government-granted authority to set prices collectively.
Means of Competition Policy
This brings me to the question of how best to promote competition policy. Law enforcement and litigation are, of course, important tools. We have also found, however, thatcompetition advocacy can play as useful a role as litigation in promoting competition. Byencouraging policymakers to adopt pro-competitive rules in the first instance, competitionagencies can promote competition in entire sectors of the economy, especially whengovernments are making major policy changes. Through advocacy, research, and litigation,competition agencies can spread the gospel of competition to the widest possible audience.
A. Advocacy
Of these three tools, competition advocacy in particular can help advance the cause of comprehensive regulatory reform.6 By competition advocacy, I mean promoting pro-competitivelaws and regulations with legislatures, local officials, regulators of particular economic sectors,and other policymakers. Advocacy can include studies, reports, testimony, informal discussions,and speeches. In Japan, for example, the Council for Regulatory Reform has been a strong andvocal advocate for comprehensive regulatory reform. Competition authorities are uniquely well-positioned to represent the competitive process itself. Although every consumer benefits from robust competition, each benefits only a little. Thus, they have little incentive to advocate competition as a virtue in itself. By contrast, everyproducer is ready to explain why he or his industry should be exempt from competition. Giventhese dynamics, competition agencies have a responsibility to articulate the value of competitionas a value in and of itself.
In the U.S., our competition agencies typically provide comments to other government entities if those entities specifically invite us to comment on something specific, such as aproposed bill or regulation, or if they invite comments from the general public. We alsogenerally push for greater competition informally with other government entities and in variouspublic forums. For instance, currently we are contacting state attorneys general to discusscompetition in the professions. In the recent past, we have worked with many federal agenciesto persuade them to adopt pro-competitive rules. While their tasks are undeniably important, inthese settings we must remind them that competition and consumer choice are the economy’sbaseline principles, and that they should remember these values in pursuing their mission.
Competition advocacy can also help to educate the public about the benefits of competition. Competition ultimately cannot flourish if the public is convinced that sound 6 A list of recent advocacy comments is available on the FTC’s website at <>.
economic policy involves protecting producers. Public support for bad policy translates into badpolicy. In Japan, it appears that some people still believe in the old system of governmentsupport and protection. Genuine structural reform likely cannot occur until and unless the publiccomes to understand that competition alone can improve the Japanese economy. Competitionshould be as popular as Morning Musume.
1. Transportation
In the United States, we repeatedly have seen the benefits of successful competition advocacy. Return to the year 1974. The U.S. economy was suffering from stagflation, thepernicious double whammy of stagnating growth coupled with high inflation. In the fall of thatyear, the Chairman of the Federal Trade Commission, Lewis Engman, gave a speech to financialanalysts in which he tied the country’s macroeconomic problems to its competition policy. Inparticular, Engman argued that burdensome federal transportation regulations contributed to theproblem of slow growth. Engman explained that the Civil Aeronautics Board raised prices bylimiting the entry of new carriers and controlling the distribution of airline routes. He noted thatthe Interstate Commerce Commission effectively sanctioned price fixing among truckingcompanies. Engman then concluded that the country’s lack of sound competition policy led tohigher transportation costs, which in turn hurt the overall U.S. economy.
Engman’s speech may be considered one of the first contemporary examples of successful competition advocacy. Because his speech presented competition policy as a meansof addressing the country’s pressing economic problems, the speech received substantialcoverage in the popular press. The New York Times covered the speech on its front page.
Engman’s speech also helped to convince companies that they would have the chance to benefitfrom deregulation. Deregulation was not a zero-sum game.7 Transportation companies wouldhave the opportunity to expand the market, not just their market share, and downstreamcompanies would have the chance to benefit from lower prices.
The speech caused new interest in deregulating transportation. During the next decade, the Commission aggressively pursued competition advocacy to deregulate airlines, railroads,trucking, and inter-city buses. This advocacy used speeches and formal written submissions toregulatory agencies and legislators. Scholars estimate that transportation deregulation improvedconsumer welfare by tens of billions of dollars annually.8 Although we cannot quantify the 7 See generally Todd Zywicki, Environmental Externalities and Political Externalities: The Political Economy ofEnvironmental Regulation and Reform, 73 Tulane L. Rev. 845, 910-17 (1999).
8 See generally Robert Crandall & Jerry Ellig, ECONOMIC DEREGULATION AND CUSTOMER CHOICE:LESSONS FOR THE ELECTRIC INDUSTRY (1997); Robert W. Hahn & John A. Hird, The Costs and Benefits ofRegulation: Review and Synthesis, 8 Yale J. On Reg. 233 (1991); Steven A. Morrison & Clifford Winston,Enhancing the Performance of the Deregulated Air Transportation System, in Brookings Papers on EconomicActivity: Microeconomics 61 (Martin Neil Baily & Clifford Winston eds., 1989) (airline deregulation benefits equal$19.4 billion per year); C.C. Barnekov & A.N. Kleit, The Efficiency Effects of Railroad Deregulation in the UnitedStates, 17 Int'l J. Transport Econ. 21 (1990) (railroad deregulation benefits equal $9.7 to $16.2 billion per year); John impact of competition advocacy, I believe it’s fair to say that the Commission’s advocacy, laterjoined by the Antitrust Division of the Department of Justice, helped create a policy climate inthe 1970s and early 1980s that favored liberalizing transport regulation.
A large part of competition advocacy involves convincing other policymakers, sometimes including the courts, of the benefits of competition. This happened in our telecommunicationsindustry. In 1982, the Justice Department and AT&T entered into a consent decree thatseparated AT&T from its local phone companies. In addition to breaking up AT&T, the consentdecree prevented the local phone companies from manufacturing telephone equipment orproviding long-distance or information services.
Over the next few years, the federal court overseeing the consent decree repeatedly rejected the local companies’ requests to provide these services. The Justice Department decidedto reexamine them in a comprehensive manner. It hired Peter Huber, an engineer and lawyer, toanalyze the competitive framework of the telecommunications industry. In a massive reporttitled The Geodesic Network, Huber argued that there was no economic or technological reasonfor any element of the network to remain a monopoly.
The Justice Department used Huber’s report to argue that the court needed to take a more flexible approach to the waiver requests. Over the short term, the court did take a more flexibleapproach, such as allowing the local companies to provide voice mail. Over the long term,Huber’s report helped pave the way for significant policy changes in the telecom sector,including the Telecommunications Act of 1996. While specific provisions of this Act are oftencriticized, the 1996 Act represents an important watershed: for the first time, the United Statesgovernment stated unequivocally that competition is possible and desirable in all segments of thetelecommunications industry.
The results have been profound. Consumers can buy products that were hard to imagine even a decade ago, such as ever-shrinking cell phones. Between 1988 and 1998, long distancetelephone traffic more than doubled. Between 1996 and 2001, competitive local carriersinvested over $50 billion and their revenues increased from $3 billion to about $10 billion.9 Ibelieve it is fair to say that much of the growth flows from effective competition advocacy.
3. Regulated
As this example suggests, competition advocacy best succeeds when there is supporting Richard Felton, The Costs and Benefits of Motor Truck Regulation, 18 Q. Rev. Econ. & Bus. 7, 15-17 (1978)(trucking deregulation benefits equal about $10 billion per year). 9 Jon Huntsman, Deputy U.S. Trade Representative, “Putting Sacred Cows to Pasture in the Year of the Horse:Structural and Regulatory Reform as a Prerequisite for Growth,” (speech delivered in Tokyo on Jan. 24, 2002).
empirical research. For example, we have exhaustively studied gasoline markets and pricing,and these studies have helped us convince many state legislatures to defeat price-control bills. Another active area, both in the U.S. and Europe, are the regulated professions. Regulatorybodies and practitioners continually attempt to restrict advertising, proscribe relationships withcommercial firms, and expand the list of services that only professionals can provide.
Under the leadership of Commissioner Monti, the European Union recently completed a study of several professions, including architects and engineers. The study evaluatedcompetitive restrictions across various Member States. This comprehensive, empirical analysisprovides an excellent resource for policymakers and can generate support for easing overlystringent rules.10 In the US, we have also examined licensing's costs and benefits. We have found that licensing restricts the supply of professional and thereby tends to raise prices. In the dentistryfield, studies find that licensing increases prices from 4 to 15 percent.11 Another study found thatstate restrictions on the use of dental hygienists and assistants cost consumers about $700 millionin fees.12 In eye care, studies find price increases from 5 to 33 percent from a variety ofadvertising and commercial practice restrictions.13 On the other hand, the studies find anambiguous effect on overall quality.14 While licensing typically leads to higher competence forthose allowed to practice, the higher prices can lead to lower consumption.
During the past few years, U.S. competition authorities have encouraged the states to adopt pro-competitive professional regulations. For example, we worked with Connecticut’sattorney general in commenting before the state opticians board, which was considering whetherto require stand-alone sellers of contact lens to obtain state optician licenses.15 We recentlyencouraged three states to reject proposals that would prevent nonlawyers from competing with 10 See Mario Monti, Commissioner for Competition, European Commission, Competition in Professional Services:New Light and New Challenges, Prepared Remarks for Bundesanwaltskammer, Berlin, Germany (Mar. 21, 2003)available at < comm/competition/speeches/text/sp2003_007_en.pdf>.
11 See Carolyn Cox & Susan Foster, FTC Staff Report, The Costs and Benefits of Occupational Regulation at 31(Oct. 1990) (hereinafter “Cox and Foster”); Morris Kleiner and Robert Kudrle, Does Regulation Affect EconomicOutcomes?: The Case of Dentistry, The Journal of Law and Economics (Oct. 2000), at 547-82.
12 J. Nellie Liang and Jonathan D. Ogur, Restrictions on Dental Auxiliaries, Bureau of Economics Staff Report to theFederal Trade Commission (May 1987), at 2. 15 See Comments of the Staff of the Federal Trade Commission, Intervenor, before the Connecticut Board ofExaminers for Opticians (Mar. 27, 2002) available at < be/v020007.htm>. lawyers to handle real estate closings.16 We argued that the proposals could prevent competitionfrom out-of-state and Internet lenders and force consumers to pay more.
In each instance, our comments had more persuasive force because we were able to point to objective, empirical economic evidence supporting the benefits of competition. Oftentimes,the state officials had not fully considered the competitive impact of the policy proposals. Whenwe enter the debate on a proposed regulation, we often can sway policymakers through actualevidence, and through our independence and expertise. Our professional licensing studies gaveus the credibility to comment on state proposals affecting numerous professions.
For these reasons, we are pleased to see that Japan has sought to increase competition for legal services by amending the Special Measures Law Concerning the Handling of LegalBusiness by Foreign Lawyers. These measures would substantially eliminate limits on thefreedom of association between foreign lawyers and Japanese lawyers. Consumers of legalservices, including many Japanese businesses, would benefit from increased competition.
4. Advertising
Many competition issues, including licensing, involve an overlap between competition policy and consumer protection concerns, such as protecting consumers against fraud ormisrepresentations. In these instances, competition agencies can help policymakers find theappropriate balance between protecting consumers and promoting competition. Advertising is aprime example. Certain advertising regulations, of course, help consumers. Governmentsshould prohibit false or deceptive advertising. The Diet recently revised the Act AgainstUnjustifiable Premiums and Misleading Representations, which rightly requires companies tohave rational evidence to support their advertising claims. Many advertising restrictions, however, stop truthful advertising of price and quality, including comparative ads and ads that trumpet past success. Some governments reduce the flowof information in other ways. For example, some states prohibit lawyers from ads that are“undignified,” because such ads allegedly undermine respect for the legal profession. Theevidence shows that truthful advertising provides valuable information and encourages firms tocompete. Professional advertising leads to lower prices without lowering quality, while 16 FTC/DOJ Letter to the Standing Committee on the Unlicensed Practice of Law, State Bar of Georgia (Mar. 20,2003) available at <>; FTC/DOJ Letter to the President of the North CarolinaState Bar re: Proposed North Carolina State Bar Opinions Concerning Non-Attorneys’ Involvement in Real EstateTransactions (July 11, 2002) available at < 2002/07/non-attorneyinvolvment.pdf>; FTC/DOJLetter to the Ethics Committee of the North Carolina State Bar re: State Bar Opinions Restricting Involvement ofNon-Attorneys in Real Estate Closings and Refinancing Transactions (Dec. 14, 2001) available at< v020006.htm>; FTC/DOJ Letter to the Rhode Island House of Representatives re: ProposedRestrictions on Competition From Non-Attorneys in Real Estate Closing Activities (Mar. 28, 2003) available at<>; FTC/DOJ Letter to the Rhode Island House of Representatives re: BillRestricting Competition from Non-Attorneys in Real Estate Closing Activities (Mar. 29, 2002) available at< v020013.pdf>. advertising restrictions tend to raise prices without raising quality. Advertising also facilitatesthe entry of new competitors by letting potential clients know that they have additional choices.17 Relation to Sectoral Regulators
One question that arises is the relationship between agencies that regulate competition, such as the FTC, and agencies that regulated particular sectors of the economy, such as the FCC, FDA, or Department of Transportation. Who should be responsible for primary regulatoryoversight of a given industry? There is no single correct answer to the proper division of responsibilities. Sectoral regulators have greater expertise in a given area, but competition agencies may have a betterappreciation of the social and economic benefits of competition. Sectoral regulators may lack abackground in competition policy and may view industry, rather than the consumer and thecompetitive process, as their client. Even if they want to promote competition, sectoralregulators may be subject to intense pressure from the industries that they oversee and from thelegislators that oversee them, a problem of regulatory capture. Sectoral regulators may also beinclined, by disposition and training, toward the status quo, which is predictable and maintainstheir human capital. Moreover, almost every economic sector can plausibly claim that it is somehow “different” and should be exempt from the competitive process. Based on their experience andbreadth of interest, competition authorities may distinguish legitimate from illegitimate claimsfor preferential treatment. Sectoral regulation may be appropriate in certain, limitedapplications, but as FTC Chairman Muris has noted, sectoral regulation often has harmedconsumers by imposing needless controls on entry, pricing, and new product development.18 In the U.S., we have found that several techniques help us maintain an appropriate balance with our sectoral colleagues. We often initiate discussions informally rather thanpublicly. This allows sectoral regulators to discuss policy issues with us freely, rather thandefensively. Oftentimes, we submit public comments at the request of the sectoral regulators. U.S. legislation often includes clauses requiring that sectoral regulators consult the competitionagencies as they develop new regulations. Finally, and as I will discuss next, we have been most 17 See Pauline M. Ippolito & Alan D. Mathios, FTC Staff Report, Health Claims in Advertising and Labeling: AStudy of the Cereal Market (1989); Timothy J. Muris, Chairman, Federal Trade Commission, The Federal TradeCommission and the Future Development of U.S. Consumer Protection Policy, Prepared Remarks for the AspenSummit, Cyberspace and the American Dream, the Progress and Freedom Foundation, Aspen, CO at 9-10 (Aug. 19,2003) available at <>.
18 See, e.g., Timothy J. Muris, Chairman, FTC, Looking Forward: The Federal Trade Commission and the FutureDevelopment of U.S. Competition Policy, Remarks before the Milton Handler Annual Antitrust Review, New York,NY, December 10, 2002, available at <>; Paul L. Joskow & NancyL. Rose, The Effects of Economic Regulation, in II Handbook of Industrial Organization 1449, 1479-82 (RichardSchmalensee & Robert D. Willig, eds. 1989) (describing U.S. experience with regulation of airlines and trucking).
effective in persuading sectoral regulators when we have actual empirical evidence regarding theparticular industry.
B. Research
A successful competition agency must commit itself to thorough conceptual and empirical analysis. I applaud Chairman Takeshima for creating the Competition Policy ResearchCenter and for integrating economic analysis into enforcement efforts. Empirical analysis givesan agency more credibility with the public, the courts, and policymakers. Oftentimes theagency’s empirical knowledge provides the only sound basis for the agency to inject its viewsinto a particular policy debate. In that debate, empirical evidence will help to trump thearguments of those who seek to limit competition for their own self-interest.
Empirical work also benefits the agency itself. Thorough empirical work will prevent competition agencies from committing resources to ill-conceived theories that may havesuperficial appeal. In the last century, U.S. competition agencies often based their actions onassumptions and theories that sounded plausible but lacked empirical support. At various times,competition officials severely overestimated the prevalence of predatory pricing, ignored mergerefficiencies, and adopted some theories, such as the theory of the “shared monopoly,” that lackeda sound economic basis. Rigorous empirical work keeps a competition agency focused on thoseprivate practices and public policies that have the greatest impact on consumers.
In the past few years, the FTC has completed several research projects designed to influence the policy debate. We have studied pharmaceutical drugs, intellectual property, andenergy markets, among many other issues. One recent project involves e-commerce. TheInternet lets consumers purchase an unprecedented array of goods from the convenience of theirhomes. Moreover, perhaps for the first time, consumers can also purchase a wide array ofservices from distant sources, including legal and medical advice and even an education. Inmany instances, these consumers may find lower prices and a greater variety online.
Many states, however, have adopted regulations that may unduly interfere with consumers’ ability to buy goods and services online. In some instances, the regulations are anappropriate response to new regulatory challenges, such as online fraud perpetrated by distantvendors. In other instances, they may be an ill-advised and mechanical application of existingregulations. Still others arise from the efforts of traditional companies to protect themselvesfrom this new form of competition. According to some researchers, these regulations also maycost consumers several billion dollars annually.19 Japan, of course, faces similar barriers to e-commerce. In our Annual Recommendations to the Government of Japan under the Competition Policy Initiative, we called for Japan toremove barriers in existing laws and regulations that hinder e-commerce, such as requirements 19 See Robert D. Atkinson, The Revenge of the Disintermediated: How the Middleman Is Fighting E-Commerce andHurting Consumers at 7 (Jan. 2001) available at <>.
for face-to-face or paper-based transactions. As in the U.S., these types of barriers harmconsumers and hamstring competitors.
In October 2002, the FTC held a workshop to study these issues. Over three days, Commission staff heard testimony on possible anticompetitive barriers to e-commerce in manydifferent industries, including cars, contact lenses, legal services, and even funeral caskets. Foreach industry, we gathered evidence from many different perspectives, including onlinecompanies, bricks-and-mortar businesses, consumer groups, academics, and state officials.20 For many of these industries, however, we found that there was little empirical evidence available to policymakers. Policymakers were enacting regulations in a near vacuum. Wedecided that, as a competition agency, we could best promote competition by conductingempirical research. Our staff economists studied a local market to evaluate the effects ofrestrictive state laws on the wine market, a product that was fairly easy to study. The studyconcluded that consumers find substantially lower prices and greater choices over the Internet. We canvassed the states that allow Internet sales of wine and found that most reported few or noproblems with online sales to underage drinkers, which had been the strongest argument againstInternet sales.21 Partially because we were the first to provide empirical evidence, our report garnered enormous attention from both the press and policymakers. Our leading newspapers, includingthe Washington Post and New York Times, published stories about our findings. Televisionnetworks covered debates that focused on the report. As far as policymakers, several statesasked us to submit copies of our report to them as they considered changes to their laws, andCongress itself held a hearing devoted to our report. As a result, we believe that our report willhelp to persuade policymakers of the benefits of Internet competition in wine and otherindustries.
C. Litigation
When persuasion fails, our third tool to promote competition is enforcement. Our counterparts in Japan have done a particularly good job in this area. I commend ChairmanTakeshima for seeking to increase enforcement of the Antitrust Monopoly Act. By all accounts,Chairman Takeshima is helping to establish the JFTC as an institution that demands the attentionand respect of Japanese corporations. I applaud your success.
In the U.S., as in Japan, competition agencies typically bring enforcement actions against private parties engaged in private anticompetitive conduct. Under Chairman Muris, we are also 20 See Agenda for FTC Workshop, available at <>.
21 See FTC Staff, Possible Anticompetitive Barriers to E-Commerce: Wine (July 2003), available at<>.
using litigation to advance the cause of regulatory reform. We have brought law enforcementactions against quasi-governmental entities that try to suppress competition. We have filedamicus curiae briefs – friend of the court briefs – in private lawsuits to persuade courts to writedecisions that uphold the letter and spirit of our competition laws. Through litigation, we hopeto remedy specific instances of anticompetitive conduct, but also to create legal precedent thatwill expand the scope of competition law and confine exemptions and immunities to their properscope. Our efforts track the efforts of our Japanese counterparts, who have sought to minimizecartel exemptions and other exemptions from the purview of the Antimonopoly Act.
Currently, we are exploring antitrust review of state and local regulation. In a 1943 decision, our Supreme Court held that states have immunity from the antitrust laws when theyexercise their sovereign power.22 State legislatures have the authority to displace competitionand consumer choice, but if they do, they must “clearly articulate” the policy and “activelysupervise” the policy's implementation to ensure that the policy conforms with the legislature’sstated goals. These rules are known as the state action doctrine. There are some similaritieswith the European Court of Justice’s decision last year in Arduino, which clarified that MemberStates can regulate a profession if they retain decision-making powers and establish sufficientcontrol.23 In the U.S., unfortunately, some courts have failed to impose the safeguards of the state action doctrine. Some courts insulate conduct from antitrust without carefully examining thestate legislature’s intent. Other courts grant broad immunity to quasi-official entities that haveonly a tenuous link to the state, such as professional licensing boards dominated by members ofthe profession. The American Bar Association concluded that the state action doctrine, alongwith other antitrust exemptions, created a large hole in U.S. competition policy.24 As a result, we re-examined the state action doctrine to promote competition more effectively. In a lengthy report analyzing the doctrine and case law, we identified severalrecommendations to moor the clear articulation and active supervision requirements to theiroriginal intent.25 Many of these recommendations would require state and local governments toconsider the full competitive impact of any regulations, and to closely monitor any quasi-governmental entities that sought to limit competition. Based on our analysis, we have brought 22 Parker v. Brown, 317 U.S. 341 (1943).
23 See Arduino, Case C-35/99, Judgment of the Court of First Instance, 19 Feb. 2002, available at!celexplus!prod!CELEXnumdoc&lg=en&numdoc=61999J0035.
24 American Bar Association, Section of Antitrust Law, The State of Federal Antitrust Enforcement – 2001, A Reportof the Task Force on the Federal Antitrust Agencies – 2001.
25 Report of the State Action Task Force (Sept. 23, 2003), available at<>.
several enforcement actions to force states to comply with the competition laws.
South Carolina Board of Dentistry
For example, we recently files an administrative complaint against the South Carolina Board of Dentistry. The South Carolina legislature created the Board to supervise the practice ofdentistry and dental hygiene. According to the complaint, the Board unlawfully restrainedcompetition by issuing an “emergency” regulation that had the effect of unreasonably restrictingthe ability of dental hygienists to deliver preventive services, including cleanings and fluoridetreatments, to children in South Carolina schools. This had the effect of denying dental servicesto thousands of school-age, mainly poor children. Not surprisingly, most of the Board’smembers are dentists.26 Household Goods Movers Cases
We have also challenged the public analog of bid rigging – joint rate setting of prices. In the state of Indiana, an association of 70 household goods movers prepares and files tariffs onbehalf of its members with a state agency. We alleged that the association established collectiverates for its members, and we ultimately entered into a consent order with it. The order prohibitsthe association from knowingly preparing or filing collective rate tariffs, facilitatingcommunications between members concerning rates, or suggesting that members file or adhereto any rate. Our consent order also identified several elements that the FTC would consider indetermining whether the state was satisfying the state action doctrine’s active supervisionrequirement.27 With this and similar consent orders, we encouraged the states to take specificsteps to ensure that they did not facilitate anticompetitive conduct.
2. Noerr-Pennington
We are also re-examining another antitrust immunity. The Noerr-Pennington doctrine immunizes individuals petitioning the government, whether through lobbying, administrativeprocesses, or litigation. As originally conceived, this doctrine sensibly reserved a narrow sphereof political activity from antitrust. In the Noerr case, for example, a group of railroadsconducted a public relations campaign to advance anti-trucking legislation. The Supreme Courtproperly found this type of petitioning immune from antitrust.28 Some courts, however, have immunized abusive tactics, such as repetitive lawsuits and 26 See South Carolina State Board of Dentistry, Docket No. 9311 (Sept. 12, 2003) (complaint), available at<>.
27 See Indiana Household Movers and Warehousemen, Inc., Docket No. C-4077, at ¶ II. (Apr. 25, 2003) (consentorder) available at <>.
28 See Eastern R.R. Presidents Conf. v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961); United Mine Workers ofAmerica v. Pennington, 381 U.S. 657 (1965).
misrepresentations, that were clearly intended to delay a competitor's entry or raise its costs,rather than legitimate efforts to petition the government. We have challenged this conduct in thepharmaceutical industry when branded drug manufacturers have used the drug approval processto delay competition from generic drug manufacturers. For example, branded manufacturershave brought meritless patent infringement lawsuits and have deceived the Patent and TrademarkOffice to obtain unwarranted patent protection. This conduct can cost consumers hundreds ofmillions of dollars. We have filed complaints, and agreed to several consent orders, thatprohibited the offending companies from abusing governmental processes.29 3. Amicus
Finally, we will also promote competition policy by participating as amicus curiae in private litigation. Through amicus briefs, we can advise courts of our views on competition lawwithout becoming a party to the litigation. Amicus briefs help the cause of regulatory reformbecause courts often decide important issues of competition law in lawsuits between privateparties, such as whether a specific entity is entitled to immunity from the antitrust laws. Moreover, amicus briefs consume fewer resources than bringing an enforcement action, and wecan limit our involvement to the appellate level, which helps to shape the law for the future. Along with the Department of Justice, we have filed several amicus briefs in cases that implicated regulatory reform. For example, we filed a brief in an Oklahoma case where thecourt was considering whether the state had the constitutional authority to ban Internet sales ofcaskets.30 In another case, a branded drug manufacturer argued that it was entitled to immunityfrom the antitrust laws, even though it had misrepresented important facts to the Food and DrugAdministration. We filed an amicus brief arguing that the court should refuse to immunize suchconduct, and the court agreed.31 In both cases, our amicus briefs promoted regulatory reform.
IV. Conclusion
I began this speech by describing the role that competition policy has played in recent history. Although the struggle continues, competition advocates have won many victories overthe last few decades. We have largely won the intellectual debate: Economists and legalscholars around the globe now recognize the benefits of competition to consumers and theeconomy. We are winning the legal debate: Courts now recognize the importance of efficiencyand robust price competition in evaluating mergers and business conduct. Lastly, and perhapsmost critically, we are starting to win the policy debate: From airlines to telecommunications, 29 See Timothy J. Muris, Prepared Statement of the FTC Before the United States Senate Committee on Judiciary(June 17, 2003), available at <>.
30 Memorandum of Law of Amicus Curiae Federal Trade Commission, Powers v. Harris, Case No. CIV-01-445-F(W.D. Okla. Sept. 5, 2002), available at <>.
31 See In re Buspirone Patent Litigation/In re Buspirone Antitrust Litigation, 185 F. Supp. 2d 363 (S.D.N.Y. 2002).
industry after industry has been privatized or liberalized. By using a mix of advocacy, research,and litigation, a competition agency can find the right tool for the job. Legislators often turn tocompetition policy, rather than to more burdensome forms of regulation, to create a freemarketplace. In most cases, the public now recognizes that competition is the path to growth andprosperity.
I am extremely pleased to see that competition advocates are also starting to win the policy debate here. Prime Minister Koizumi has wisely committed himself and his governmentto structural reform. Under Chairman Takeshima, the JFTC is seeking to increase enforcementof the Antimonopoly Act. We applaud these efforts and hope that the JFTC will play an evenlarger role in the deregulation process going forward. As we all recognize, greater competitionwill benefit our economies, our consumers, and our countries, regardless of which side of thePacific they happen to lie.


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