more on harmonious contention, cheating, and antitrustenforcement

[Dave Farber <dave () farber net>]

------ Forwarded Message
From: Gerry Faulhaber <gerry-faulhaber () mchsi com>
Date: Sun, 27 Oct 2002 11:55:47 -0500
To: dave () farber net
Subject: Re: <[IP]> harmonious contention, cheating, and antitrustenforcement

Dave: for IP

An interesting and thoughtful piece, which generally gets it right ... but
gets turned around on some important things.

Berninger gets it right, that in order for competition to work its magic,
rules have to be followed, and that is generally the province of antitrust.
And Berninger generally gets what "cheating" is; his list of cheating
behavior at the end is exactly what has been the focus of antitrust law and
economics for the past 70 years.  However, he is not right when he says
"There
exists no uncertainty about how to label a given action".  There is plenty
of uncertainty, and much of the very extensive economics and law literature
on antitrust has been precisely on how to carefully define such cheating.
When it is clear (which lawyers like), there are per se rules against it.
But usually, it's not clear at all, and requires both extensive evidence and
a "rule of reason" approach, both of which require careful (perhaps
error-prone) judgment.  More to the point, most of the cheating behavior
Berninger identifies has been shown to actually be beneficial to consumers
under certain circumstances (and harmful under other circumstances).  I
would refer the reader to "The Law and Economics of Tying Arrangements" by
William Baxter and Daniel Kessler, in the book "Competition Policy and
Intellectual Property Rights in the Knowledge-Bases Economy, "  1998
(unfortunately now out of print; I cite it because Berninger is an admirer
of Baxter, as am I).  This states how economics and the law has evolved re:
tying (one of the cheats on Berninger's list).  It becomes very obvious that
there is lots of "uncertainty about how to label a given action."  Stating
the principle is very easy; enforcing it in a court of law or regulatory
proceeding is often very difficult.  Those who rail that the FCC or DoJ is
not being vigilant enough in policing injustice would do well to educate
themselves about how the law and economics actually works.

I would be remiss if I did not point out that Berninger gets the concept of
Nash equilibrium wrong.  I don't blame him; although I loved the movie for
its human element, the move got the mathematics/economics wrong, and it is
movie version of Nash that Berninger quotes with his "harmonious
contention:" "the best strategy from an individual player's perspective
corresponds with the one that obtains the greatest value for the group."
Neither Nash nor modern game theory suggests anything of the sort.  In fact,
Nash recognized (as do all game theorists) that there are Nash equilibria in
which all players are worse off than with some other outcome (these are
called "Pareto dominated Nash equilibria").  The most well-known case is the
Prisoner's Dilemma game, in which the only Nash equilibrium has all players
worse off than if they cooperated.  The best text on this topic is "Game
Theory" by Fudenberg and Tirole; best approached with some math and econ
background.

Gerald Faulhaber
Business and Public Policy Department
Wharton School, University of Pennsylvania
Philadephia, PA 19104

----- Original Message -----
From: "Dave Farber" <dave () farber net>
To: "ip" <ip () v2 listbox com>
Sent: Sunday, October 27, 2002 9:29 AM
Subject: <[IP]> harmonious contention, cheating, and antitrustenforcement


> ------ Forwarded Message
> From: Daniel Berninger <dan () PULVER COM>
>
>
> Harmonious Contention, Cheating, and Antitrust Enforcement
>
> The process of determining winners and losers that we call *competition*
has
> two dimensions.  One can cross the finish line first by running faster or
> one can *win* by handicapping opponents.
>
> The former represents harmonious contention and the latter cheating. There
> exists no uncertainty about how to label a given action.  Activities
> directed at improving the value proposition delivered to end users (i.e.
> running faster) represent harmonious contention.  Activities directed at
> reducing (i.e. handicapping) an opponent's value proposition represent
> cheating.
>
> We don't let Johnny cheat on tests.  We don't let Lance Armstrong win the
> Tour de France by slashing his opponents tires.  The antitrust laws exist
to
> prevent cheating in the business sphere.
>
> The antitrust laws don't get engaged until a company achieves a level of
> market power that yields an incentive to cheat.  A market with several
> competitors already limits the utility of cheating.  Individual companies
> likely won't have efficient means to make others suffer and diverting
> energies to injure one opponent risks creating a disadvantage relative to
> others.
>
> John Nash, the Princeton University Professor profiled in the movie
> "Beautiful Mind", won a Noble Prize for working out the mathematics of
this
> idea.  He proved using the framework of game theory that in the absence of
a
> dominance solution (one player stronger than all others), the best
strategy
> from an individual player's perspective corresponds with the one that
> obtains the greatest value for the group.  This does not mean the same
> outcome for everyone, but that all energies go toward building value
rather
> than destroying it - harmonious contention.
>
> The Bell companies remain in pursuit of a dominance strategy.  The present
> problems in telecom follow directly from this reality and the failure of
> effective antitrust or regulatory enforcement to counter it.  Consider the
> extent of Bell company energies directed at handicapping non-ILEC's as
> opposed to their work on the value proposition offered end users.
>
> The FCC seems intent on complying with Bell company pressures to further
> remove regulatory constraints, but this will only make the cheating worse.
> When the Bells claim regulatory changes will serve competition, they have
in
> mind the cheating side of the ledger.  Nothing stops the Bells from
winning
> through harmonious contention today.
>
> Regulations and antitrust laws only limit cheating:
>
> o Refusal to deal - cheating
> o Tying - cheating
> o Collusion - cheating
> o Predatory pricing - cheating
> o Market allocation - cheating
> o Boycotts - cheating
> o Various other exclusionary practices - cheating
>
> The Bells have won regulatory relief on numerous occasions over the years.
> The many concessions did not reduce a single telephone bill or lead to the
> deployment of a single new service.  The historical track record makes it
> clear we should expect the opposite.
>
> The Department of Justice has a woeful record of holding the Bells
> accountable to the antitrust laws except for the historical accidents
> associated with Bill Baxter's tenure as Antitrust Chief that produced the
> MFJ in 1982.  Consider that the DoJ  worked to dilute the MFJ immediately
> after Bill Baxter returned to Stanford.
>
> Telecom suffers dominance more than any other sector of the economy.  Even
> ignoring that the Bells operate as a cartel through the USTA, consider
that
> the twenty largest power companies collectively control only 30% of the
> market.  Bell company economic and political power chills dissent not to
> mention their tendency to threaten litigation.  Raise you hand if you fear
> speaking out against the Bell companies.
>
> Aggressive antitrust (anti-cheating) enforcement represents the only
> antidote.
>
> Daniel Berninger
> http://www.pulver.com/antitrustreport/
>
> * You may redistribute this message freely if you cc: dan () pulver com and
> include this notice.
>
>
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