Econometrics: Legal, Practical and Technical Issues - antitrust law

508 Pages·2005·32.77 MB·English

by  Editors of ABA

T
Econometrics
Legal, Practical, and Technical Issues
/th'
t--^r-l
If sfEicitr oN of I Section of Antitrust Law
l*l
Defending Liberty
Pursuing fustice
This volume should be officially cited as:
ABA SECTION OF ANTITRUST LAW,
EcoNorraErRrcs (2005)
Cover design by ABA Publishing.
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Bar Association or the Section of Antitrust Law unless adopted pursuant to
the bylaws of the Association.
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agreements herein are intended for educational and informational purposes
only.
O 2005 American Bar Association. All rights reserved.
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ISBN: 1-5903 I -5 l7-0
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t2 54
CONTENTS
Foreword """" xv
Preface """"xvii
I
Chapter
Introduction to Econometric Techniques..""""':"""""' """' I
A. The Value of Econometric Evidence........"""' """ I
B. The Advantages of Econometric Evidence """""' 3
l. ...-....... """""""""4
Correlation and Causation
2. Problems in Econometric Analysis """""""" 6
C. Research Design: Model Specification """"" """' 8
1. What Specific Question is the Expert Investigating?:.... .....'..... 8
2. what Model should Be used to Evaluate the Question at
Issue? """"""""' 8
3. Choosing the Dependent Variable """"""""' 9
4. Choosing the Explanatory variable That Is Relevant to
Issue """" 9
the Question at
5. Choosing Additional Explanatory variables ............................. 10
6. Choosing the Functional Fonn of the Multiple
Regression Model """"" 13
7. Choosing Multiple Regression asi a Method of Analysis........... 14
D. Interpreting Vtultipli Regression Results.. """"' 15
l. rMhat Is the Practical, as opposed to the statistical,
Significance of Regression Results? """""" 15
2. Wh"o Should Statistical Tests Be Used? ""' 16
a. What Is the Appropriate Level of Statistical
..-.....
Significance? "' 18
b. should statistical Tests Be One-Tailed or Two.
Tailed? """ 19
Robust?
3. Are the Regression Results """"""20
4. What Evidence Exists That the Explanatory variable
Variable?"""""
Causes Changes in the Dependent ""20
ill
Contents vii
4. Manufacturer Level Data and Analyses........... ...--..'-127
E. Conclusion.......... .. 128
Chapter VI
Justice
Use of Econometrics at the If.S. Department of ... 131
A. Introduction.-....'..' """""""' 131
B. Evaluating Competitive Effects in Mergers: Choosing a
Limitations
Demand Estimation Model Given Data ....... 133
1. Data Requirements and Approaches when Data arc
Limited. ...........133
Z. Test Cases Involving Demand Estimation.......... ......137
Merger
a. L'Oreal/Ivlaybelline - 137
Merger-.
b. Philips/Agilent .......- 139
C. The Proposed Merger of the Philadelphia Stock Exchange '
and Amirican Stock Exchange Options Exchanges:
Significance.....
AssessingFuture Competitive ............... 143
Primestar
D. Data and Modeling Issues Raised in ............... 146
l. Background..'.-....." """'146
2. Issues ......149
Data
Model.
3. Interpretation of the Econometric .. 150
Model
E. EchoStar/DirecTV: The Power of a """152
l. Background..-.-...'... """'t52
Z. Functional-Form Restrictions as a Substitute for Data............ 154
3. Modeling ConsistencY .- 156
4. Statistical Precision .""' 159
F. Recommendations for Counsel ...-..... .""""""" 161
G. Conclusion.......... ..164
Chapter VII
Damages """'167
A. Introduction......... ...............167
Co-
B. Conwood Co. v. U.S. Tobacco "" 168
Litigation...-........
C, In re Industrial Silicon Antitrust .......,.173
D. Conclusion.......... ..177
VIII
Chapter
Certification..........
The Use of Econometrics in Class -..-..179
Contents ix
E' conclusion"""""
'244
Chapter X
.'.........
Price Discrimination in Merger Analysis ------.....'."247
A. Introduction.....-... """""""'247
B. Theory of Price Discrimination.... .-."251
l. rn',troduction......... .........251
2.
Cost-Based Price Differences Versus Price
Discrimination """"""'252
Discrimination
C. Necessary Conditions for Price ..............254
l. Downward Sloping Demand Curve -....---"'254
2. Identifiable Differences in Elasticity of Demand ..-...'....' ------.-255
3. No Arbitrage .......... -..-..256
a' Generat""""""'
In '256
b. Arbitrage May Lead to Equal Prices with Unequal
Margins ..257
Firms.....
D. Mergers of Price Discriminating ----.--258
Discrimination....
E. Empirical Analysis of Price .259
l. Infroduction..-...... """"'259
2. Analysis........-.. ."".260
Econometric
a' In General """"""' "260
b. Marginal Cost Measured with Emor.-.... ..--..-.-.-.-261
c. Price Discrimination Across Geographic Areas. ............... 262
Integration
F. Price Discrimination Given Vertical .............263
l. Introduction......... """"'263
Z. Case...... .265
Test
G. Conclusion.......... "267
)il
Chapter
Merger Simulation.......... """"269
Simulation'-..-...-.-.
A. Introduction to Merger """'269
B. Unilateral Effects Analysis and the Role of Demand
Elasticities......,... .,.271
C. Innoduction to Three Demand Models for Merger
...........
simulation ...............273
D. The Choice of a Demand Model for Merger Simulation........... '---.275
Simulation
E. Alternative Models for Merger ......277
vnr
Econometrics in Antitrust
A. Introduction..........
.l7g
B. Legallssues
.......... lg0
.
1 Demonstrating common proof of Impact and Injury .............. l g3
2. Damages
Proving l9l
............
c.
Legal standards for use of stafistical Analysis in class
Certification.........
............... 195
1. Overview ...;...........
......... 195
2. Impact...
Econometric Analysis of Common ............. 195
a.
standard Applied to Evaruate validity ofMethod............lg7
b. Experts
Battle of the .............. 199
3. Damages.......
Econometric Analysis of ......201
D. Data Analysis in Class Certification Disputes.......,... .......202
l. Evidence.......
Nonstatistical
..........2A3
2. DataAnalysis
Simple ....205
a. Time
Prices Paid at a Point in ........-.....206
b. Time
Price Patterns over ......209
c. Analyses
Margin ....ZIz
d. Comparisons
Benchmark .......213
e. Characteristics
Analysis of Trading .....215
f.
class certification when products and prices vary
Members
Across Class ...........217
g.
Selection of the Relevant price for Analysis......,..............21g
3. Ana1ysis............
Regression ..........220
Chapter D(
Models
Auction
..........225
A. Introduction.........
.ZZ5
B. Auctions.........
Primer on .....226
l. Introduction.,.......
..........226
2. Formats
Auction
............227
3. ............
Values: Common and Private ..........22g
4. Summary
........232
C. Damages
Conspiracies: Detection, Proof, and ...233
l. Introduction.........
..........233
2. Effects
Conspiracy ........2j.4
3. ............
Detection and Proof ..........237
D. Ana1ysis.............
Mergers: Stuctural
...............23g
x
Econometrics in Antitrust
l. Model
Logit
....-277
a. Introduction.........
....277
b. Demand........
Choice Models of Consumer ..,.....277
c.
The Basic Logit Model and the IIA Assumption ..............27g
d. Model
The Antitrust Logit ....2g1
e. A Rationale for Use of the ALM... .......2g5
(l)
The variance-Bias Trade-off and More Flexible
Forms
Functional ............2g6
(2) Demand Curvature and Assumed Functional
Forms
...,.......... ,ZSg
2.
Flexible Demand specification-The ArDS Model
a. Introduction..........
..Zgl
b.
Considerations in Choosirg a Demand System
Specification.........
...Zgl
s. System...
The Almost Ideal Demand -...-2gi
d. Systems
Comparison to Other Demand ..............2g4
e. Empirical Implementation of the AIDS ..............2gs
f. Estimatior.,......;.
Issues in ......2g7
3. PCAIDS
........,,301
a. Introduction..........
...301
b. Estimation............
....302
c.
Deviations from Proportionality-pcAlDs with
Nests
.........305
d. PCAIDS
Using .........307
)ilI
Chapter
Merger Simulation: Additional Methods .............31 I
A. Introduction..........
...311
B. Demand
Residual ..31 I
l. Introduction.........
............3l I
2.
Identiffing, Estimating and Interpreting Residual
Functions............
Demand ...........3l l
3. A Laboratory for Econometric specification Tests ...31g
4. Conclusion..........
............320
C. Measuring and Using Economic profit Margins in
Analysis..........
Competition .3Zl
t. Introduction.........
.........321
Contents xi
Margins.
2. lnterpretation of Economic Profit ........-.-...321
a. Index .""""'321
Lerner
b. Elasticity and Market Power ...............324
3. Role in Quantitative Analysis of Competition Issues ..............324
Trade.
4. Quantitative Analysis of Restaints of ...........325
Analysis
5. Merger .........-.325
a. Methods for Measuring Economic Profit Margins. ...........329
(l) Introduction... ..329
Costs
(2) Accounting Data for Variable ............330
Costs......
(3) Econometric Analysis of Other ,...330
Depreciation...
(4) .331
(5) Financial Opportunity Cost of Facilities and
Capital...
Working .'.....'..331
Options
(6) Employee Stock ..............332
Advertising
(7) ....-.332
Products.....,.....
(8) Allocation of Costs to -..-....332
Taxes............................
(9) .-333
b. Fisher and McGowan's Critique of Accounting Data. .-....334
c. Conclusion.......... ...334
I
Appendix
studies.. ....,...,.,,.r.
case ............337
A. Introduction......... .......,...... .337
WorldCom
B. Case Study: United States v. .........338
l. Introduction......... .,......,...r.. .........338
2. Description of the Transactibn.......... .'-..'...338
3.
Alternative Methodologies . i - --..-... -...
a. AIDS .......i.....Fr ....,.339
(l) Stage
Issues in Estimation .....'......339
Facts
(2) The Market "...'.-...339
Consideration$...........
(3) Data ...--.-.-.-34A
Mdde1...........
(4) An Econometric ......341
Choice
(a) PIC .......'......-343
Demand
(b) Conditional Mihutes ..............-344
(5) Estimated Own- and Cross-Price Elasticities .............345
Step.......
(6) Issues in the Simuldtion -346
b. Price-Cost Model .'.-347
Econometrics in Antitrust
c. Mode1.........:.........
Antitrust Logit ........350
Stap1es.............
C. Case Study: FTC v.
....351
l. Infoduction.........
........... 351
2.
Market Definition Cases Using Econometrics....... ....352
3. Staples.............
Role of Econometrics in ....353
4. Background..........
Staples Case ....355
5. Evidence
Non-Econometric .........356
6. Trial......
Economekic Issues Addressed at .35g
Introduction..........
a. ..35g
b. Cross-Section vs. Fixed Effects Estimates in panel
Data
..........35g
Index.....
c. Construction ofthe Price .......362
d. Econometric Model and Resu1ts........... ..,..........,363
(l) Competition
Measuring Level of ...364
(a) Defendants' Measure of Local Competition........366
(b) Govemment's Measure of Local
Competition.........
......367
(c) Evaluation of Competing Measures of Local
Competition..........
....36g
(2) Geographic Inclusiveness of Models .......................... 3 6 g
(3) Calculating Consumer Harm .........369
7. Trial...
Econometric lssues Not Addressed in ............371
8.
The use of Econometrics in staples: concrusion....... .............372
D. Mergers.
Case Study: ILEC ..373
l. Introduction..........
..........373
2, ILECs....
Mergers Between ..........374
3. Theory
Review of the FCC's Footprint .......376
a. Mergers and External Effects of Discrimination .376
b.
Evaluation of Assumptions underrying the Footprint
Theory
......37g
4- Econometric Evaluation of the "Footprinf'Theory. ..37g
a. Introduction..........
...37g
b. Framework...........
Analytical
..............3g0
c. Theory
Empirical Evaluation of Footprint .........,3gl
(t) CLEC Activiry After SBC/pacTeI......... ....... 3S I
(2) CLEC Activity in Areas Served by Merged
Elsewhere..........
ILECs and ...,.......3g3
I
Contents xiii
(3) Changes in CLEC ActMty in the Merged
Tenitories.............
ILECs' .....'....'.386
(4) CLEC Activity in LATAs Served by
............
Independent ILECs ...........391
5. Additional Regression Results..........' ....'..- 393
II
Appendix
Regression........
Basics of Multiple -......397
A. Introduction......... .........,.-...397
Variables.............
B. Correlations Between Two -.397
.........
C. Multiple Regression -.399
1. Introduction......... .........399
2. Regression..........
OLS -399
3 - The Simple Model with one Explanatory variabIe................. 400
4. -..........-
Additional Independent Variables -402
5. The Regression Residual .-.--.------402
Resu1ts...........
D. Interpreting Regression -.....--.....403
Results
E. The Precision of Regression ...-.....'.r... -404
1. Introduction......... ......-...404
2.
Standard Errors of the Coefficients and t-Statistics.................404
3. Goodness-of-Fit ...........408
4. Sensitivity of Least-Squares Regression Results ......409
F. Reading Multiple Regression Computer Output ....................'-.-....41 1
G. Forecasting............ ......"-.-...413
III
Appendix
Methods
Advanced Econometrics .--.'-..415
A- Introduction ---...'-. '415
Model
B. Morimum-Likelihood Estimation, The Logit ......415
l. Inhoduction.........
......,."415
2. Maximum-Likelihood Estimation...-.' ....-...415
3. The Logit Model -.......-.417
4. Marimum-Likelihood Estimation of the Logit Model ...........,417
C. AIDS..... ...............418
l. Model....
Description ofthe AIDS .............418
a. Specification......... -418
b. Testing the Assumptions of consumer Demand............ ...419
xlv E<: onometr ic s in Antitnnt
c.
d.
D.
E.
F,
Appendix fV
Issues In Scanner I)ata "''"""""431
A. Introductiorl......'-,. "431
B. Issues'..- """"'434
Data
l. Features "'434
Scanner Data
2. Issues."""""" """""'437
General Aggregation
a. Channil Algregation......... ""'437
b. Aggregati* Ou"t Time """" 438
c. Aggrelation Across Product Sizes and Varieties--....-... -...439
3. Price Si"Jin"otion and Aggregation """"' "M0
4. Issues """""444
Estimaiion
a. Endogeneity-.....-. ""444
b. Inference "'447
5. Using Retail Price Data to Analyze Mergers of
Manufacturers """"""" 451
a. Derived Dernand Elasticities """""' ""'452
b. Nonlinear Palmrent Schedules""""""' "457
C. Conclusion..-....... "'461
cases -............463
Table of
Index..... """"475
FOREWORD
The Section of Antitrust Law is pleased to publish Econometrics:
Legal, Practical, and Technical Issues. The economic expert has
become a central figure in virtually every antitrust litigation or merger
matter, and the importance of econometrics has increased significantly.
A basic understanding of econometric principles has now become almost
essential to the serious antitrust practitioner. This volume is designed to
introduce lawyers to the theoretical and practical issues of econometrics,
providing necessary tools for working effectively with economic experts
on both sides of a mafier.
The Antitrust Section is grateful to the many talented lawyers and
economists who worked to bring this exceptional book to publication.
The Section is especially grateful for the outstanding work of John D.
Harkrider, who oversaw the project and was its driving force from
beginning to end. He was assisted by Daniel Rubinfeld, who served as
co-editor. Their insight, diligence, ffid devotion axe responsible for the
quahty of konometrics. As recounted in the Preface, many others
contributed significantly to the book. The Section extends special thanks
in this regard to Jennifer Vanderhart, Greg Werden, Lawrence Wu,
Russell Steinthal, Jonathan Jacobson, ffid Anthony Swisher for their
particular contributions.
Richard J. Wallis
Chair, Section of Antitrust Law
American Bar Association
2004-200s