[Federal Register Volume 64, Number 193 (Wednesday, October 6, 1999)]
[Notices]
[Pages 54484-54497]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-26032]
[[Page 54483]]
_______________________________________________________________________
Part VI
Federal Trade Commission
_______________________________________________________________________
Request for Views on Draft Antitrust Guidelines for Collaborations
Among Competitors; Notice
Federal Register / Vol. 64, No. 193 / Wednesday, October 6, 1999 /
Notices
[[Page 54484]]
FEDERAL TRADE COMMISSION
REQUEST FOR VIEWS ON DRAFT ANTITRUST GUIDELINES FOR
COLLABORATIONS AMONG COMPETITORS
AGENCY: Federal Trade Commission.
ACTION: Notice.
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SUMMARY: The Federal Trade Commission (``FTC'' or ``Commission''), in
consultation with the Antitrust Division of the U.S. Department of
Justice, has drafted Antitrust Guidelines for Collaborations Among
Competitors. The Guidelines, if adopted in final form by the FTC and
the Department of Justice (``the Agencies''), will state the antitrust
enforcement policy of the Agencies with regard to competition issues
raised by collaborations among competitors. The Guidelines should
enable businesses to evaluate proposed transactions with greater
understanding of possible antitrust implications, thus encouraging
procompetitive collaborations, deterring collaborations likely to harm
competition and consumers, and facilitating the Agencies'
investigations of collaborations. The Agencies are issuing the
Guidelines in draft form to obtain advice and suggestions from
businesses, consumers, and antitrust practitioners that will assist in
ensuring that the Guidelines achieve these goals.
DATES: Views should be submitted in writing as specified below by
January 5, 2000.
ADDRESSES: To facilitate efficient review, all views should be
submitted in written and electronic form. Six hard copies of each
submission should be addressed to Donald S. Clark, Office of the
Secretary, Federal Trade Commission, 600 Pennsylvania Avenue, N.W.,
Washington, D.C. 20580. Submissions should be captioned ``Draft
Antitrust Guidelines for Collaborations Among Competitors--Submission
of Views.'' Electronic submissions may be made in one of two ways. They
may be filed on a 3\1/2\ inch computer disk, with a label on the disk
stating the name of the submitter and the name and version of the word
processing program used to create the document. (Programs based on DOS
or Windows are preferred. Files from other operating systems should be
submitted in ASCII text format.) Alternatively, electronic submissions
may be sent by electronic mail to jventures@ftc.gov.
FOR FURTHER INFORMATION CONTACT: Policy Planning staff at (202) 326-
3712.
SUPPLEMENTARY INFORMATION: The draft Guidelines are a product of the
Joint Venture Project initiated by the Commission to determine whether
antitrust guidance to the business community could be improved through
clarifying and updating antitrust policies regarding joint ventures and
other forms of competitor collaboration. The Commission has provided
opportunity for public input throughout each stage of the project. See
62 FR 22945 (1997) and 62 FR 48660 (1997). If adopted in final form,
the draft Guidelines will state the Agencies' antitrust enforcement
policy with regard to competition issues raised by collaborations among
competitors. They are not intended to create or recognize any legally
enforceable right or defense in any person or to affect the
admissibility of evidence or in any other way to affect the course or
conduct of any present or future litigation.
By direction of the Commission.
Donald S. Clark,
Secretary.
Antitrust Guidelines for Collaborations Among Competitors
Preamble
In order to compete in modern markets, competitors sometimes need
to collaborate. Competitive forces are driving firms toward complex
collaborations to achieve goals such as expanding into foreign markets,
funding expensive innovation efforts, and lowering production and other
costs.
Such collaborations often are not only benign but procompetitive.
Indeed, in the last two decades, the federal antitrust agencies have
brought relatively few civil cases against competitor collaborations.
Nevertheless, a perception that antitrust laws are skeptical about
agreements among actual or potential competitors may deter the
development of procompetitive collaborations.1
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\1\ Congress has protected certain collaborations from full
antitrust liability by passing the National Cooperative Research Act
of 1984 (``NCRA'') and the National Cooperative Research and
Production Act of 1993 (``NCRPA'') (codified together at 15 U.S.C.
Sec. Sec. 4301-06). Relatively few participants in research and
production collaborations have sought to take advantage of the
protections afforded by the NCRA and NCRPA, however.
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To provide guidance to business people, the Federal Trade
Commission (``FTC'') and the U.S. Department of Justice (``DOJ'')
(collectively, ``the Agencies'') previously issued guidelines
addressing several special circumstances in which antitrust issues
related to competitor collaborations may arise.2 But none of
these Guidelines represents a general statement of the Agencies'
analytical approach to competitor collaborations. The increasing
varieties and use of competitor collaborations have yielded requests
for improved clarity regarding their treatment under the antitrust
laws.
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\2\ The Statements of Antitrust Enforcement Policy in Health
Care (``Health Care Statements'') outline the Agencies' approach to
certain health care collaborations, among other things. The
Antitrust Guidelines for the Licensing of Intellectual Property
(``Intellectual Property Guidelines'') outline the Agencies'
enforcement policy with respect to intellectual property licensing
agreements among competitors, among other things. The 1992 DOJ/FTC
Horizontal Merger Guidelines, as amended in 1997 (``Horizontal
Merger Guidelines''), outline the Agencies'' approach to horizontal
mergers and acquisitions, and certain competitor collaborations.
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The new Antitrust Guidelines for Collaborations among Competitors
(``Competitor Collaboration Guidelines'') are intended to explain how
the Agencies analyze certain antitrust issues raised by collaborations
among competitors. Competitor collaborations and the market
circumstances in which they operate vary widely. No set of guidelines
can provide specific answers to every antitrust question that might
arise from a competitor collaboration. These Guidelines describe an
analytical framework to assist businesses in assessing the likelihood
of an antitrust challenge to a collaboration with one or more
competitors. They should enable businesses to evaluate proposed
transactions with greater understanding of possible antitrust
implications, thus encouraging procompetitive collaborations, deterring
collaborations likely to harm competition and consumers, and
facilitating the Agencies' investigations of collaborations.
Section 1: Purpose, Definitions, and Overview
1.1 Purpose and Definitions
These Guidelines state the antitrust enforcement policy of the
Agencies with respect to competitor collaborations. By stating their
general policy, the Agencies hope to assist businesses in assessing
whether the Agencies will challenge a competitor collaboration or any
of the agreements of which it is comprised.3 However, these
Guidelines cannot remove judgment and discretion in antitrust law
enforcement. The Agencies evaluate each case in light of its own facts
and apply the analytical framework set forth in these Guidelines
reasonably and flexibly.4
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\3\ These Guidelines neither describe how the Agencies litigate
cases nor assign burdens of proof or production.
\4\ The analytical framework set forth in these Guidelines is
consistent with the analytical frameworks in the Health Care
Statements and the Intellectual Property Guidelines, which remain in
effect to address issues in their special contexts.
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[[Page 54485]]
A ``competitor collaboration'' comprises a set of one or more
agreements, other than merger agreements, between or among competitors
to engage in economic activity, and the economic activity resulting
therefrom.5 ``Competitors'' include firms that are actual or
potential competitors 6 in a relevant market.7
Competitor collaborations involve one or more business activities, such
as research and development (``R&D''), production, marketing,
distribution, sales or purchasing. Information sharing and various
trade association activities also may take place through competitor
collaborations.
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\5\ These Guidelines do not address the possible exclusionary
effects of agreements among competitors that may foreclose or limit
competition by rivals.
\6\ A firm is treated as a potential competitor if there is
evidence that entry by that firm is reasonably probable in the
absence of the relevant agreement, or that competitively significant
decisions by actual competitors are constrained by concerns that
anticompetitive conduct likely would induce the firm to enter.
\7\ Firms also may be in a buyer-seller or other relationship,
but that does not eliminate the need to examine the competitor
relationship, if present.
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These Guidelines use the terms ``anticompetitive harm,''
``procompetitive benefit,'' and ``overall competitive effect'' in
analyzing the competitive effects of agreements among competitors. All
of these terms include actual and likely competitive effects. The
Guidelines use the term ``anticompetitive harm'' to refer to an
agreement's adverse competitive consequences, without taking account of
offsetting procompetitive benefits. Conversely, the term
``procompetitive benefit'' refers to an agreement's favorable
competitive consequences, without taking account of its anticompetitive
harm. The terms ``overall competitive effect'' or ``competitive
effect'' are used in discussing the combination of an agreement's
anticompetitive harm and procompetitive benefit.
1.2 Overview of Analytical Framework
Two types of analysis are used by the Supreme Court to determine
the lawfulness of an agreement among competitors: per se and rule of
reason.8 Certain types of agreements are so likely to harm
competition and to have no significant procompetitive benefit that they
do not warrant the time and expense required for particularized inquiry
into their effects. Once identified, such agreements are challenged as
per se unlawful.9 All other agreements are evaluated under
the rule of reason, which involves a factual inquiry into an
agreement's overall competitive effect. As the Supreme Court has
explained, rule of reason analysis entails a flexible inquiry and
varies in focus and detail depending on the nature of the agreement and
market circumstances.10
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\8\ See National Soc'y of Prof'l. Eng'rs v. United States, 435
U.S. 679, 692 (1978).
\9\ See FTC v. Superior Court Trial Lawyers Ass'n, 493 U.S. 411,
432-36 (1990).
\10\ See California Dental Ass'n v. FTC, 119 S. Ct. 1604, 1617-
18 (1999); FTC v. Indiana Fed'n of Dentists, 476 U.S. 447, 459-61
(1986); National Collegiate Athletic Ass'n v. Board of Regents of
the Univ. of Okla., 468 U.S. 85, 104-13 (1984).
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This overview briefly sets forth questions and factors that the
Agencies assess in analyzing an agreement among competitors. The rest
of the Guidelines should be consulted for the detailed definitions and
discussion that underlie this analysis.
Agreements Challenged as Per Se Illegal. Agreements of a type that
always or almost always tends to raise price or to reduce output are
per se illegal. The Agencies challenge such agreements, once
identified, as per se illegal. Types of agreements that have been held
per se illegal include agreements among competitors to fix prices or
output, rig bids, or share or divide markets by allocating customers,
suppliers, territories, or lines of commerce. The Department of Justice
prosecutes participants in such hard-core cartel agreements criminally.
Because the courts conclusively presume such hard-core cartel
agreements to be illegal, the Department of Justice treats them as such
without inquiring into their claimed business purposes, anticompetitive
harms, procompetitive benefits, or overall competitive effects.
Agreements Analyzed under the Rule of Reason. Agreements not
challenged as per se illegal are analyzed under the rule of reason to
determine their overall competitive effect. These include agreements of
a type that otherwise might be considered per se illegal, provided they
are reasonably related to, and reasonably necessary to achieve
procompetitive benefits from, an efficiency-enhancing integration of
economic activity.
Rule of reason analysis focuses on the state of competition with,
as compared to without, the relevant agreement. The central question is
whether the relevant agreement likely harms competition by increasing
the ability or incentive profitably to raise price above or reduce
output, quality, service, or innovation below what likely would prevail
in the absence of the relevant agreement.
Rule of reason analysis entails a flexible inquiry and varies in
focus and detail depending on the nature of the agreement and market
circumstances. The Agencies focus on only those factors, and undertake
only that factual inquiry, necessary to make a sound determination of
the overall competitive effect of the relevant agreement. Ordinarily,
however, no one factor is dispositive in the analysis.
The Agencies' analysis begins with an examination of the nature of
the relevant agreement. As part of this examination, the Agencies ask
about the business purpose of the agreement and examine whether the
agreement, if already in operation, has caused anticompetitive harm. In
some cases, the nature of the agreement and the absence of market power
together may demonstrate the absence of anticompetitive harm. In such
cases, the Agencies do not challenge the agreement. Alternatively,
where the likelihood of anticompetitive harm is evident from the nature
of the agreement, or anticompetitive harm has resulted from an
agreement already in operation, then, absent overriding benefits that
could offset the anticompetitive harm, the Agencies challenge such
agreements without a detailed market analysis.
If the initial examination of the nature of the agreement indicates
possible competitive concerns, but the agreement is not one that would
be challenged without a detailed market analysis, the Agencies analyze
the agreement in greater depth. The Agencies typically define relevant
markets and calculate market shares and concentration as an initial
step in assessing whether the agreement may create or increase market
power or facilitate its exercise. The Agencies examine the extent to
which the participants and the collaboration have the ability and
incentive to compete independently. The Agencies also evaluate other
market circumstances, e.g. entry, that may foster or prevent
anticompetitive harms.
If the examination of these factors indicates no potential for
anticompetitive harm, the Agencies end the investigation without
considering procompetitive benefits. If investigation indicates
anticompetitive harm, the Agencies examine whether the relevant
agreement is reasonably necessary to achieve procompetitive benefits
that likely would offset anticompetitive harms.
1.3 Competitor Collaborations Distinguished from Mergers
The competitive effects from competitor collaborations may differ
[[Page 54486]]
from those of mergers due to a number of factors. Mergers completely
end competition between the merging parties in the relevant market(s).
By contrast, most competitor collaborations preserve some form of
competition among the participants. This remaining competition may
reduce competitive concerns, but also may raise questions about whether
participants have agreed to anticompetitive restraints on the remaining
competition.
Mergers are designed to be permanent, while competitor
collaborations are more typically of limited duration. Thus,
participants in a collaboration typically remain potential competitors,
even if they are not actual competitors for certain purposes (e.g.,
R&D) during the collaboration. The potential for future competition
between participants in a collaboration requires antitrust scrutiny
different from that required for mergers.
Nonetheless, in some cases, competitor collaborations have
competitive effects identical to those that would arise if the
participants merged in whole or in part. The Agencies treat a
competitor collaboration as a horizontal merger in a relevant market
and analyze the collaboration pursuant to the Horizontal Merger
Guidelines if: (a) The participants are competitors in that relevant
market; (b) the formation of the collaboration involves an efficiency-
enhancing integration of economic activity in the relevant market; (c)
the integration eliminates all competition among the participants in
the relevant market; and (d) the collaboration does not terminate
within a sufficiently limited period 11 by its own specific
and express terms.12 Effects of the collaboration on
competition in other markets are analyzed as appropriate under these
Guidelines or other applicable precedent. See Example 1.13
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\11\ In general, the Agencies use ten years as a term indicating
sufficient permanence to justify treatment of a competitor
collaboration as analogous to a merger. The length of this term may
vary, however, depending on industry-specific circumstances, such as
technology life cycles.
\12\ This definition, however, does not determine obligations
arising under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, 15 U.S.C. Sec. 18a.
\13\ Examples illustrating this and other points set forth in
these Guidelines are included in the Appendix.
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Section 2: General Principles for Evaluating Agreements Among
Competitors
2.1 Potential Procompetitive Benefits
The Agencies recognize that consumers may benefit from competitor
collaborations in a variety of ways. For example, a competitor
collaboration may enable participants to offer goods or services that
are cheaper, more valuable to consumers, or brought to market faster
than would be possible absent the collaboration. A collaboration may
allow its participants to better use existing assets, or may provide
incentives for them to make output-enhancing investments that would not
occur absent the collaboration. The potential efficiencies from
competitor collaborations may be achieved through a variety of
contractual arrangements including joint ventures, trade or
professional associations, licensing arrangements, or strategic
alliances.
Efficiency gains from competitor collaborations often stem from
combinations of different capabilities or resources. For example, one
participant may have special technical expertise that usefully
complements another participant's manufacturing process, allowing the
latter participant to lower its production cost or improve the quality
of its product. In other instances, a collaboration may facilitate the
attainment of scale or scope economies beyond the reach of any single
participant. For example, two firms may be able to combine their
research or marketing activities to lower their cost of bringing their
products to market, or reduce the time needed to develop and begin
commercial sales of new products. Consumers may benefit from these
collaborations as the participants are able to lower prices, improve
quality, or bring new products to market faster.
2.2 Potential Anticompetitive Harms
Competitor collaborations may harm competition and consumers by
increasing the ability or incentive profitably to raise price above or
reduce output, quality, service, or innovation below what likely would
prevail in the absence of the relevant agreement. Such effects may
arise through a variety of mechanisms. Among other things, agreements
may limit independent decision making or combine the control of or
financial interests in production, key assets, or decisions regarding
price, output, or other competitively sensitive variables, or may
otherwise reduce the participants' ability or incentive to compete
independently.
Competitor collaborations also may facilitate explicit or tacit
collusion through facilitating practices such as the exchange or
disclosure of competitively sensitive information or through increased
market concentration. Such collusion may involve the relevant market in
which the collaboration operates or another market in which the
participants in the collaboration are actual or potential competitors.
2.3 Analysis of the Overall Collaboration and the Agreements of
Which It Consists
A competitor collaboration comprises a set of one or more
agreements, other than merger agreements, between or among competitors
to engage in economic activity, and the economic activity resulting
therefrom. In general, the Agencies assess the competitive effects of
the overall collaboration and any individual agreement or set of
agreements within the collaboration that may harm competition. For
purposes of these Guidelines, the phrase ``relevant agreement'' refers
to whichever of these three the evaluating Agency is assessing. Two or
more agreements are assessed together if their procompetitive benefits
or anticompetitive harms are so intertwined that they cannot
meaningfully be isolated and attributed to any individual agreement.
See Example 2.
2.4 Competitive Effects Are Assessed as of the Time of Possible
Harm to Competition
The competitive effects of a relevant agreement may change over
time, depending on changes in circumstances such as internal
reorganization, adoption of new agreements as part of the
collaboration, addition or departure of participants, new market
conditions, or changes in market share. The Agencies assess the
competitive effects of a relevant agreement as of the time of possible
harm to competition, whether at formation of the collaboration or at a
later time, as appropriate. See Example 3. However, an assessment after
a collaboration has been formed is sensitive to the reasonable
expectations of participants whose significant sunk cost investments in
reliance on the relevant agreement were made before it became
anticompetitive.
Section 3: Analytical Framework for Evaluating Agreements Among
Competitors
3.1 Introduction
Section 3 sets forth the analytical framework that the Agencies use
to evaluate the competitive effects of a competitor collaboration and
the agreements of which it consists. Certain types of agreements are so
likely to be harmful to competition and to have no significant benefits
that they do not warrant the time and expense required for
particularized inquiry into their
[[Page 54487]]
effects.14 Once identified, such agreements are challenged
as per se illegal.15
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\14\ See Continental TV, Inc. v. GTE Sylvania Inc., 433 U.S. 36,
50 n.16 (1977).
\15\ See Superior Court Trial Lawyers Ass'n, 493 U.S. at 432-36.
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Agreements not challenged as per se illegal are analyzed under the
rule of reason. Rule of reason analysis focuses on the state of
competition with, as compared to without, the relevant agreement. Under
the rule of reason, the central question is whether the relevant
agreement likely harms competition by increasing the ability or
incentive profitably to raise price above or reduce output, quality,
service, or innovation below what likely would prevail in the absence
of the relevant agreement. Given the great variety of competitor
collaborations, rule of reason analysis entails a flexible inquiry and
varies in focus and detail depending on the nature of the agreement and
market circumstances. Rule of reason analysis focuses on only those
factors, and undertakes only the degree of factual inquiry, necessary
to assess accurately the overall competitive effect of the relevant
agreement.16
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\16\ See California Dental Ass'n, 119 S. Ct. at 1617-18; Indiana
Fed'n of Dentists, 476 U.S. at 459-61; NCAA, 468 U.S. at 104-13.
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The following sections describe in detail the Agencies' analytical
framework.
3.2 Agreements Challenged as Per Se Illegal
Agreements of a type that always or almost always tends to raise
price or reduce output are per se illegal.17 The Agencies
challenge such agreements, once identified, as per se illegal.
Typically these are agreements not to compete on price or output. Types
of agreements that have been held per se illegal include agreements
among competitors to fix prices or output, rig bids, or share or divide
markets by allocating customers, suppliers, territories or lines of
commerce.18 The Department of Justice prosecutes
participants in such hard-core cartel agreements criminally. Because
the courts conclusively presume such hard-core cartel agreements to be
illegal, the Department of Justice treats them as such without
inquiring into their claimed business purposes, anticompetitive harms,
procompetitive benefits, or overall competitive effects.
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\17\ See Broadcast Music, Inc. v. Columbia Broadcasting Sys.,
441 U.S. 1, 19-20 (1979).
\18\ See, e.g., Palmer v. BRG of Georgia, Inc., 498 U.S. 46
(1990) (market allocation); United States v. Trenton Potteries Co.,
273 U.S. 392 (1927) (price fixing).
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If, however, participants in an efficiency-enhancing integration of
economic activity enter into an agreement that is reasonably related to
the integration and reasonably necessary to achieve its procompetitive
benefits, the Agencies analyze the agreement under the rule of reason,
even if it is of a type that might otherwise be considered per se
illegal.19 See Example 4. In an efficiency-enhancing
integration, participants collaborate to perform or cause to be
performed (by a joint venture entity created by the collaboration or by
one or more participants or by a third party acting on behalf of other
participants) one or more business functions, such as production,
distribution, or R&D, and thereby benefit, or potentially benefit,
consumers by expanding output, reducing price, or enhancing quality,
service, or innovation. Participants in an efficiency-enhancing
integration typically combine, by contract or otherwise, significant
capital, technology, or other complementary assets to achieve
procompetitive benefits that the participants could not achieve
separately. The mere coordination of decisions on price, output,
customers, territories, and the like is not integration, and cost
savings without integration are not a basis for avoiding per se
condemnation. The integration must promote procompetitive benefits that
are cognizable under the efficiencies analysis set forth in Section
3.36 below. Such procompetitive benefits may enhance the participants'
ability or incentives to compete and thus may offset an agreement's
anticompetitive tendencies. See Examples 5 through 7.
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\19\ See Arizona v. Maricopa County Medical Soc'y, 457 U.S. 332,
339 n.7, 356-57 (1982) (finding no integration).
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An agreement may be ``reasonably necessary'' without being
essential. However, if the participants could achieve an equivalent or
comparable efficiency-enhancing integration through practical,
significantly less restrictive means, then the Agencies conclude that
the agreement is not reasonably necessary.20 In making this
assessment, except in unusual circumstances, the Agencies consider
whether practical, significantly less restrictive means were reasonably
available when the agreement was entered into, but do not search for a
theoretically less restrictive alternative that was not practical given
the business realities.
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\20\ See id. at 352-53 (observing that even if a maximum fee
schedule for physicians' services were desirable, it was not
necessary that the schedule be established by physicians rather than
by insurers); Broadcast Music, 441 U.S. at 20-21 (setting of price
``necessary'' for the blanket license).
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Before accepting a claim that an agreement is reasonably necessary
to achieve procompetitive benefits from an integration of economic
activity, the Agencies undertake a limited factual inquiry to evaluate
the claim.21 Such an inquiry may reveal that efficiencies
from an agreement that are possible in theory are not plausible in the
context of the particular collaboration. Some claims--such as those
premised on the notion that competition itself is unreasonable--are
insufficient as a matter of law,22 and others may be
implausible on their face. In any case, labeling an arrangement a
``joint venture'' will not protect what is merely a device to raise
price or restrict output; 23 the nature of the conduct, not
its designation, is determinative.
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\21\ See Maricopa, 457 U.S. at 352-53, 356-57 (scrutinizing the
defendant medical foundations for indicia of integration and
evaluating the record evidence regarding less restrictive
alternatives).
\22\ See Indiana Fed'n of Dentists, 476 U.S. at 463-64; NCAA,
468 U.S. at 116-17; Prof'l. Eng'rs, 435 U.S. at 693-96. Other
claims, such as an absence of market power, are no defense to per se
illegality. See Superior Court Trial Lawyers Ass'n, 493 U.S. at 434-
36; United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 224-26 &
n.59 (1940).
\23\ See Timken Roller Bearing Co. v. United States, 341 U.S.
593, 598 (1951).
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3.3 Agreements Analyzed Under the Rule of Reason
Agreements not challenged as per se illegal are analyzed under the
rule of reason to determine their overall competitive effect. Rule of
reason analysis focuses on the state of competition with, as compared
to without, the relevant agreement. The central question is whether the
relevant agreement likely harms competition by increasing the ability
or incentive profitably to raise price above or reduce output, quality,
service, or innovation below what likely would prevail in the absence
of the relevant agreement.24
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\24\ In addition, concerns may arise where an agreement
increases the ability or incentive of buyers to exercise monopsony
power. See infra Section 3.31(a).
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Rule of reason analysis entails a flexible inquiry and varies in
focus and detail depending on the nature of the agreement and
marketcircumstances.25 The Agencies focus on only those
factors, and undertake only that factual inquiry, necessary to make a
sound
[[Page 54488]]
determination of the overall competitive effect of the relevant
agreement. Ordinarily, however, no one factor is dispositive in the
analysis.
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\25\ See California Dental Ass'n, 119 S. Ct. at 1612-13, 1617
(``What is required * * * is an enquiry meet for the case, looking
to the circumstances, details, and logic of a restraint.''); NCAA,
468 U.S. 109 n.39 (``the rule of reason can sometimes be applied in
the twinkling of an eye'') (quoting Phillip E. Areeda, The ``Rule of
Reason'' in Antitrust Analysis: General Issues 37-38 (Federal
Judicial Center, June 1981)).
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Under the rule of reason, the Agencies' analysis begins with an
examination of the nature of the relevant agreement, since the nature
of the agreement determines the types of anticompetitive harms that may
be of concern. As part of this examination, the Agencies ask about the
business purpose of the agreement and examine whether the agreement, if
already in operation, has caused anticompetitive harm.26 If
the nature of the agreement and the absence of market power
27 together demonstrate the absence of anticompetitive harm,
the Agencies do not challenge the agreement. See Example 8.
Alternatively, where the likelihood of anticompetitive harm is evident
from the nature of the agreement,28 or anticompetitive harm
has resulted from an agreement already in operation,29 then,
absent overriding benefits that could offset the anticompetitive harm,
the Agencies challenge such agreements without a detailed market
analysis.30
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\26\ See Board of Trade of the City of Chicago v. United States,
246 U.S. 231, 238 (1918).
\27\ That market power is absent may be determined without
defining a relevant market. For example, if no market power is
likely under any plausible market definition, it does not matter
which one is correct.
\28\ See California Dental Ass'n, 119 S. Ct. at 1612-13, 1617
(an ``obvious anticompetitive effect'' would warrant quick
condemnation); Indiana Fed'n of Dentists, 476 U.S. at 459; NCAA, 468
U.S. at 104, 106-10.
\29\ See Indiana Fed'n of Dentists, 476 U.S. at 460-61 (``Since
the purpose of the inquiries into market definition and market power
is to determine whether an arrangement has the potential for genuine
adverse effects on competition, `proof of actual detrimental
effects, such as a reduction of output,' can obviate the need for an
inquiry into market power, which is but a `surrogate for detrimental
effects.' '') (quoting 7 Phillip E. Areeda, Antitrust Law para.
1511, at 424 (1986)); NCAA, 468 U.S. at 104-08, 110 n. 42.
\30\ See Indiana Fed'n of Dentists, 476 U.S. at 459-60
(condemning without ``detailed market analysis'' an agreement to
limit competition by withholding x-rays from patients' insurers
after finding no competitive justification).
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If the initial examination of the nature of the agreement indicates
possible competitive concerns, but the agreement is not one that would
be challenged without a detailed market analysis, the Agencies analyze
the agreement in greater depth. The Agencies typically define relevant
markets and calculate market shares and concentration as an initial
step in assessing whether the agreement may create or increase market
power 31 or facilitate its exercise and thus poses risks to
competition.32 The Agencies examine factors relevant to the
extent to which the participants and the collaboration have the ability
and incentive to compete independently, such as whether an agreement is
exclusive or non-exclusive and its duration.33 The Agencies
also evaluate whether entry would be timely, likely, and sufficient to
deter or counteract any anticompetitive harms. In addition, the
Agencies assess any other market circumstances that may foster or
impede anticompetitive harms.
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\31\ Market power to a seller is the ability profitably to
maintain prices above competitive levels for a significant period of
time. Sellers also may exercise market power with respect to
significant competitive dimensions other than price, such as
quality, service, or innovation. Market power to a buyer is the
ability profitably to depress the price paid for a product below the
competitive level for a significant period of time and thereby
depress output.
\32\ See Eastman Kodak Co. v. Image Technical Services, Inc.,
504 U.S. 451, 464 (1992).
\33\ Compare NCAA, 468 U.S. at 113-15, 119-20 (noting that
colleges were not permitted to televise their own games without
restraint), with Broadcast Music, 441 U.S. at 23-24 (finding no
legal or practical impediment to individual licenses).
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If the examination of these factors indicates no potential for
anticompetitive harm, the Agencies end the investigation without
considering procompetitive benefits. If investigation indicates
anticompetitive harm, the Agencies examine whether the relevant
agreement is reasonably necessary to achieve procompetitive benefits
that likely would offset anticompetitive harms.34
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\34\ See NCAA, 468 U.S. at 113-15 (rejecting efficiency claims
when production was limited, not enhanced); Prof'l. Eng'rs, 435 U.S.
at 696 (dictum) (distinguishing restraints that promote competition
from those that eliminate competition); Chicago Bd. of Trade, 246
U.S. at 238 (same).
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3.31 Nature of the Relevant Agreement: Business Purpose, Operation
in the Marketplace and Possible Competitive Concerns
The nature of the agreement is relevant to whether it may cause
anticompetitive harm. For example, by limiting independent decision
making or combining control over or financial interests in production,
key assets, or decisions on price, output, or other competitively
sensitive variables, an agreement may create or increase market power
or facilitate its exercise by the collaboration, its participants, or
both. An agreement to limit independent decision making or to combine
control or financial interests may reduce the ability or incentive to
compete independently. An agreement also may increase the likelihood of
an exercise of market power by facilitating explicit or tacit
collusion,35 either through facilitating practices such as
an exchange of competitively sensitive information or through increased
market concentration.
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\35\ As used in these Guidelines, ``collusion'' is not limited
to conduct that involves an agreement under the antitrust laws.
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In examining the nature of the relevant agreement, the Agencies
take into account inferences about business purposes for the agreement
that can be drawn from objective facts. The Agencies also consider
evidence of the subjective intent of the participants to the extent
that it sheds light on competitive effects.36 The Agencies
do not undertake a full analysis of procompetitive benefits pursuant to
Section 3.36 below, however, unless an anticompetitive harm appears
likely. The Agencies also examine whether an agreement already in
operation has caused anticompetitive harm.37 Anticompetitive
harm may be observed, for example, if a competitor collaboration
successfully mandates new, anticompetitive conduct or successfully
eliminates procompetitive pre-collaboration conduct, such as
withholding services that were desired by consumers when offered in a
competitive market. If anticompetitive harm is found, examination of
market power ordinarily is not required. In some cases, however, a
determination of anticompetitive harm may be informed by consideration
of market power.
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\36\ Anticompetitive intent alone does not establish an
antitrust violation, and procompetitive intent does not preclude a
violation. See, e.g., Chicago Bd. of Trade, 246 U.S. at 238. But
extrinsic evidence of intent may aid in evaluating market power, the
likelihood of anticompetitive harm, and claimed procompetitive
justifications where an agreement's effects are otherwise ambiguous.
\37\ See id.
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The following sections illustrate competitive concerns that may
arise from the nature of particular types of competitor collaborations.
This list is not exhaustive. In addition, where these sections address
agreements of a type that otherwise might be considered per se illegal,
such as agreements on price, the discussion assumes that the agreements
already have been determined to be subject to rule of reason analysis
because they are reasonably related to, and reasonably necessary to
achieve procompetitive benefits from, an efficiency-enhancing
integration of economic activity. See supra Section 3.2.
3.31(a) Relevant Agreements That Limit Independent Decision Making
or Combine Control or Financial Interests
The following is intended to illustrate but not exhaust the types
of agreements that might harm competition by eliminating independent
decision
[[Page 54489]]
making or combining control or financial interests.
Production Collaborations. Competitor collaborations may involve
agreements jointly to produce a product sold to others or used by the
participants as an input. Such agreements are often
procompetitive.38 Participants may combine complementary
technologies, know-how, or other assets to enable the collaboration to
produce a good more efficiently or to produce a good that no one
participant alone could produce. However, production collaborations may
involve agreements on the level of output or the use of key assets, or
on the price at which the product will be marketed by the
collaboration, or on other competitively significant variables, such as
quality, service, or promotional strategies, that can result in
anticompetitive harm. Such agreements can create or increase market
power or facilitate its exercise by limiting independent decision
making or by combining in the collaboration, or in certain
participants, the control over some or all production or key assets or
decisions about key competitive variables that otherwise would be
controlled independently.39 Such agreements could reduce
individual participants' control over assets necessary to compete and
thereby reduce their ability to compete independently, combine
financial interests in ways that undermine incentives to compete
independently, or both.
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\38\ The NCRPA accords rule of reason treatment to certain
production collaborations. However, the statute permits per se
challenges, in appropriate circumstances, to a variety of
activities, including agreements to jointly market the goods or
services produced or to limit the participants' independent sale of
goods or services produced outside the collaboration. NCRPA, 15
U.S.C. Secs. 4301-02.
\39\ For example, where output resulting from a collaboration is
transferred to participants for independent marketing,
anticompetitive harm could result if that output is restricted or if
the transfer takes place at a supracompetitive price. Such conduct
could raise participants' marginal costs through inflated per-unit
charges on the transfer of the collaboration's output.
Anticompetitive harm could occur even if there is vigorous
competition among collaboration participants in the output market,
since all the participants would have paid the same inflated
transfer price.
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Marketing Collaborations. Competitor collaborations may involve
agreements jointly to sell, distribute, or promote goods or services
that are either jointly or individually produced. Such agreements may
be procompetitive, for example, where a combination of complementary
assets enables products more quickly and efficiently to reach the
marketplace. However, marketing collaborations may involve agreements
on price, output, or other competitively significant variables, or on
the use of competitively significant assets, such as an extensive
distribution network, that can result in anticompetitive harm. Such
agreements can create or increase market power or facilitate its
exercise by limiting independent decision making; by combining in the
collaboration, or in certain participants, control over competitively
significant assets or decisions about competitively significant
variables that otherwise would be controlled independently; or by
combining financial interests in ways that undermine incentives to
compete independently. For example, joint promotion might reduce or
eliminate comparative advertising, thus harming competition by
restricting information to consumers on price and other competitively
significant variables.
Buying Collaborations. Competitor collaborations may involve
agreements jointly to purchase necessary inputs. Many such agreements
do not raise antitrust concerns and indeed may be procompetitive.
Purchasing collaborations, for example, may enable participants to
centralize ordering, to combine warehousing or distribution functions
more efficiently, or to achieve other efficiencies. However, such
agreements can create or increase market power (which, in the case of
buyers, is called ``monopsony power'') or facilitate its exercise by
increasing the ability or incentive to drive the price of the purchased
product, and thereby depress output, below what likely would prevail in
the absence of the relevant agreement. Buying collaborations also may
facilitate collusion by standardizing participants' costs or by
enhancing the ability to project or monitor a participant's output
level through knowledge of its input purchases.
Research & Development Collaborations. Competitor collaborations
may involve agreements to engage in joint research and development
(``R&D''). Most such agreements are procompetitive, and they typically
are analyzed under the rule of reason.40 Through the
combination of complementary assets, technology, or know-how, an R&D
collaboration may enable participants more quickly or more efficiently
to research and develop new or improved goods, services, or production
processes. Joint R&D agreements, however, can create or increase market
power or facilitate its exercise by limiting independent decision
making or by combining in the collaboration, or in certain
participants, control over competitively significant assets or all or a
portion of participants' individual competitive R&D efforts. Although
R&D collaborations also may facilitate tacit collusion on R&D efforts,
achieving, monitoring, and punishing departures from collusion is
sometimes difficult in the R&D context.
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\40\ See NCRPA, 15 U.S.C. Secs. 4301-02. However, the statute
permits per se challenges, in appropriate circumstances, to a
variety of activities, including agreements to jointly market the
fruits of collaborative R&D or to limit the participants'
independent R&D or their sale or licensing of goods, services, or
processes developed outside the collaboration. Id.
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An exercise of market power may injure consumers by reducing
innovation below the level that otherwise would prevail, leading to
fewer or no products for consumers to choose from, lower quality
products, or products that reach consumers more slowly than they
otherwise would. An exercise of market power also may injure consumers
by reducing the number of independent competitors in the market for the
goods, services, or production processes derived from the R&D
collaboration, leading to higher prices or reduced output, quality, or
service. A central question is whether the agreement increases the
ability or incentive anticompetitively to reduce R&D efforts pursued
independently or through the collaboration, for example, by slowing the
pace at which R&D efforts are pursued. Other considerations being
equal, R&D agreements are more likely to raise competitive concerns
when the collaboration or its participants already possess a secure
source of market power over an existing product and the new R&D efforts
might cannibalize their supracompetitive earnings. In addition,
anticompetitive harm generally is more likely when R&D competition is
confined to firms with specialized characteristics or assets, such as
intellectual property, or when a regulatory approval process limits the
ability of late-comers to catch up with competitors already engaged in
the R&D.
3.31(b) Relevant Agreements That May Facilitate Collusion
Each of the types of competitor collaborations outlined above can
facilitate collusion. Competitor collaborations may provide an
opportunity for participants to discuss and agree on anticompetitive
terms, or otherwise to collude anticompetitively, as well as a greater
ability to detect and punish deviations that would undermine the
collusion. Certain marketing, production, and buying collaborations,
for example, may provide opportunities for their participants to
collude on price, output,
[[Page 54490]]
customers, territories, or other competitively sensitive variables. R&D
collaborations, however, may be less likely to facilitate collusion
regarding R&D activities since R&D often is conducted in secret, and it
thus may be difficult to monitor an agreement to coordinate R&D. In
addition, collaborations can increase concentration in a relevant
market and thus increase the likelihood of collusion among all firms,
including the collaboration and its participants.
Agreements that facilitate collusion sometimes involve the exchange
or disclosure of information. The Agencies recognize that the sharing
of information among competitors may be procompetitive and is often
reasonably necessary to achieve the procompetitive benefits of certain
collaborations; for example, sharing certain technology, know-how, or
other intellectual property may be essential to achieve the
procompetitive benefits of an R&D collaboration. Nevertheless, in some
cases, the sharing of information related to a market in which the
collaboration operates or in which the participants are actual or
potential competitors may increase the likelihood of collusion on
matters such as price, output, or other competitively sensitive
variables. The competitive concern depends on the nature of the
information shared. Other things being equal, the sharing of
information relating to price, output, costs, or strategic planning is
more likely to raise competitive concern than the sharing of
information relating to less competitively sensitive variables.
Similarly, other things being equal, the sharing of information on
current operating and future business plans is more likely to raise
concerns than the sharing of historical information. Finally, other
things being equal, the sharing of individual company data is more
likely to raise concern than the sharing of aggregated data that does
not permit recipients to identify individual firm data.
3.32 Relevant Markets Affected by the Collaboration
The Agencies typically identify and assess competitive effects in
all of the relevant product and geographic markets in which competition
may be affected by a competitor collaboration, although in some cases
it may be possible to assess competitive effects directly without
defining a particular relevant market(s). Markets affected by a
competitor collaboration include all markets in which the economic
integration of the participants' operations occurs or in which the
collaboration operates or will operate, 41 and may also
include additional markets in which any participant is an actual or
potential competitor.42
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\41\ For example, where a production joint venture buys inputs
from an upstream market to incorporate in products to be sold in a
downstream market, both upstream and downstream markets may be
``markets affected by a competitor collaboration.''
\42\ Participation in the collaboration may change the
participants' behavior in this third category of markets, for
example, by altering incentives and available information, or by
providing an opportunity to form additional agreements among
participants.
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3.32(a) Goods Markets
In general, for goods 43 markets affected by a
competitor collaboration, the Agencies approach relevant market
definition as described in Section 1 of the Horizontal Merger
Guidelines. To determine the relevant market, the Agencies generally
consider the likely reaction of buyers to a price increase and
typically ask, among other things, how buyers would respond to
increases over prevailing price levels. However, when circumstances
strongly suggest that the prevailing price exceeds what likely would
have prevailed absent the relevant agreement, the Agencies use a price
more reflective of the price that likely would have prevailed. Once a
market has been defined, market shares are assigned both to firms
currently in the relevant market and to firms that are able to make
``uncommitted'' supply responses. See Sections 1.31 and 1.32 of the
Horizontal Merger Guidelines.
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\43\ The term ``goods'' also includes services.
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3.32(b) Technology Markets
When rights to intellectual property are marketed separately from
the products in which they are used, the Agencies may define technology
markets in assessing the competitive effects of a competitor
collaboration that includes an agreement to license intellectual
property. Technology markets consist of the intellectual property that
is licensed and its close substitutes; that is, the technologies or
goods that are close enough substitutes significantly to constrain the
exercise of market power with respect to the intellectual property that
is licensed. The Agencies approach the definition of a relevant
technology market and the measurement of market share as described in
Section 3.2.2 of the Intellectual Property Guidelines.
3.32(c) Research and Development: Innovation Markets
In many cases, an agreement's competitive effects on innovation are
analyzed as a separate competitive effect in a relevant goods market.
However, if a competitor collaboration may have competitive effects on
innovation that cannot be adequately addressed through the analysis of
goods or technology markets, the Agencies may define and analyze an
innovation market as described in Section 3.2.3 of the Intellectual
Property Guidelines. An innovation market consists of the research and
development directed to particular new or improved goods or processes
and the close substitutes for that research and development. The
Agencies define an innovation market only when the capabilities to
engage in the relevant research and development can be associated with
specialized assets or characteristics of specific firms.
3.33 Market Shares and Market Concentration
Market share and market concentration affect the likelihood that
the relevant agreement will create or increase market power or
facilitate its exercise. The creation, increase, or facilitation of
market power will likely increase the ability and incentive profitably
to raise price above or reduce output, quality, service, or innovation
below what likely would prevail in the absence of the relevant
agreement.
Other things being equal, market share affects the extent to which
participants or the collaboration must restrict their own output in
order to achieve anticompetitive effects in a relevant market. The
smaller the percentage of total supply that a firm controls, the more
severely it must restrict its own output in order to produce a given
price increase, and the less likely it is that an output restriction
will be profitable. In assessing whether an agreement may cause
anticompetitive harm, the Agencies typically calculate the market
shares of the participants and of the collaboration.44 The
Agencies assign a range of market shares to the collaboration. The high
end of that range is the sum of the market shares of the collaboration
and its participants. The low end is the share of the collaboration in
isolation. In general, the Agencies approach the calculation of market
share as set forth in Section 1.4 of the Horizontal Merger Guidelines.
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\44\ When the competitive concern is that a limitation on
independent decision making or a combination of control or financial
interests may yield an anticompetitive reduction of research and
development, the Agencies typically frame their inquiries more
generally, looking to the strength, scope, and number of competing
R&D efforts and their close substitutes. See supra Sections 3.31(a)
and 3.32(c).
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Other things being equal, market concentration affects the
difficulties and
[[Page 54491]]
costs of achieving and enforcing collusion in a relevant market.
Accordingly, in assessing whether an agreement may increase the
likelihood of collusion, the Agencies calculate market concentration.
In general, the Agencies approach the calculation of market
concentration as set forth in Section 1.5 of the Horizontal Merger
Guidelines, ascribing to the competitor collaboration the same range of
market shares described above.
Market share and market concentration provide only a starting point
for evaluating the competitive effect of the relevant agreement. The
Agencies also examine other factors outlined in the Horizontal Merger
Guidelines as set forth below:
The Agencies consider whether factors such as those discussed in
Section 1.52 of the Horizontal Merger Guidelines indicate that market
share and concentration data overstate or understate the likely
competitive significance of participants and their collaboration.
In assessing whether anticompetitive harm may arise from an
agreement that combines control over or financial interests in assets
or otherwise limits independent decision making, the Agencies consider
whether factors such as those discussed in Section 2.2 of the
Horizontal Merger Guidelines suggest that anticompetitive harm is more
or less likely.
In assessing whether anticompetitive harms may arise from an
agreement that may increase the likelihood of collusion, the Agencies
consider whether factors such as those discussed in Section 2.1 of the
Horizontal Merger Guidelines suggest that anticompetitive harm is more
or less likely.
In evaluating the significance of market share and market
concentration data and interpreting the range of market shares ascribed
to the collaboration, the Agencies also examine factors beyond those
set forth in the Horizontal Merger Guidelines. The following section
describes which factors are relevant and the issues that the Agencies
examine in evaluating those factors.
3.34 Factors Relevant to the Ability and Incentive of the
Participants and the Collaboration to Compete
Competitor collaborations sometimes do not end competition among
the participants and the collaboration. Participants may continue to
compete against each other and their collaboration, either through
separate, independent business operations or through membership in
other collaborations. Collaborations may be managed by decision makers
independent of the individual participants. Control over key
competitive variables may remain outside the collaboration, such as
where participants independently market and set prices for the
collaboration's output.
Sometimes, however, competition among the participants and the
collaboration may be restrained through explicit contractual terms or
through financial or other provisions that reduce or eliminate the
incentive to compete. The Agencies look to the competitive benefits and
harms of the relevant agreement, not merely the formal terms of
agreements among the participants.
Where the nature of the agreement and market share and market
concentration data reveal a likelihood of anticompetitive harm, the
Agencies more closely examine the extent to which the participants and
the collaboration have the ability and incentive to compete independent
of each other. The Agencies are likely to focus on six factors: (a) The
extent to which the relevant agreement is non-exclusive in that
participants are likely to continue to compete independently outside
the collaboration in the market in which the collaboration operates;
(b) the extent to which participants retain independent control of
assets necessary to compete; (c) the nature and extent of participants'
financial interests in the collaboration or in each other; (d) the
control of the collaboration's competitively significant decision
making; (e) the likelihood of anticompetitive information sharing; and
(f) the duration of the collaboration.
Each of these factors is discussed in further detail below.
Consideration of these factors may reduce or increase competitive
concern. The analysis necessarily is flexible: the relevance and
significance of each factor depends upon the facts and circumstances of
each case, and any additional factors pertinent under the circumstances
are considered. For example, when an agreement is examined subsequent
to formation of the collaboration, the Agencies also examine factual
evidence concerning participants' actual conduct.
3.34(a) Exclusivity
The Agencies consider whether, to what extent, and in what manner
the relevant agreement permits participants to continue to compete
against each other and their collaboration, either through separate,
independent business operations or through membership in other
collaborations. The Agencies inquire whether a collaboration is non-
exclusive in fact as well as in name and consider any costs or other
impediments to competing with the collaboration. In assessing
exclusivity when an agreement already is in operation, the Agencies
examine whether, to what extent, and in what manner participants
actually have continued to compete against each other and the
collaboration. In general, competitive concern likely is reduced to the
extent that participants actually have continued to compete, either
through separate, independent business operations or through membership
in other collaborations, or are permitted to do so.
3.34(b) Control Over Assets
The Agencies ask whether the relevant agreement requires
participants to contribute to the collaboration significant assets that
previously have enabled or likely would enable participants to be
effective independent competitors in markets affected by the
collaboration. If such resources must be contributed to the
collaboration and are specialized in that they cannot readily be
replaced, the participants may have lost all or some of their ability
to compete against each other and their collaboration, even if they
retain the contractual right to do so.45 In general, the
greater the contribution of specialized assets to the collaboration
that is required, the less the participants may be relied upon to
provide independent competition.
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\45\ For example, if participants in a production collaboration
must contribute most of their productive capacity to the
collaboration, the collaboration may impair the ability of its
participants to remain effective independent competitors regardless
of the terms of the agreement.
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3.34(c) Financial Interests in the Collaboration or in Other
Participants
The Agencies assess each participant's financial interest in the
collaboration and its potential impact on the participant's incentive
to compete independently with the collaboration. The potential impact
may vary depending on the size and nature of the financial interest
(e.g., whether the financial interest is debt or equity). In general,
the greater the financial interest in the collaboration, the less
likely is the participant to compete with the
collaboration.46 The Agencies also assess direct equity
investments between or among the participants. Such investments may
reduce the incentives of the participants to compete with each other.
In either case, the analysis is sensitive to the level of financial
interest in the collaboration or in another participant relative to the
[[Page 54492]]
level of the participant's investment in its independent business
operations in the markets affected by the collaboration.
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\46\ Similarly, a collaboration's financial interest in a
participant may diminish the collaboration's incentive to compete
with that participant.
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3.34(d) Control of the Collaboration's Competitively Significant
Decision Making
The Agencies consider the manner in which a collaboration is
organized and governed in assessing the extent to which participants
and their collaboration have the ability and incentive to compete
independently. Thus, the Agencies consider the extent to which the
collaboration's governance structure enables the collaboration to act
as an independent decision maker. For example, the Agencies ask whether
participants are allowed to appoint members of a board of directors for
the collaboration, if incorporated, or otherwise to exercise
significant control over the operations of the collaboration. In
general, the collaboration is less likely to compete independently as
participants gain greater control over the collaboration's price,
output, and other competitively significant decisions.47
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\47\ Control may diverge from financial interests. For example,
a small equity investment may be coupled with a right to veto large
capital expenditures and, thereby, to effectively limit output. The
Agencies examine a collaboration's actual governance structure in
assessing issues of control.
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To the extent that the collaboration's decision making is subject
to the participants' control, the Agencies consider whether that
control could be exercised jointly. Joint control over the
collaboration's price and output levels could create or increase market
power and raise competitive concerns. Depending on the nature of the
collaboration, competitive concern also may arise due to joint control
over other competitively significant decisions, such as the level and
scope of R&D efforts and investment. In contrast, to the extent that
participants independently set the price and quantity 48 of
their share of a collaboration's output and independently control other
competitively significant decisions, an agreement's likely
anticompetitive harm is reduced.49
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\48\ Even if prices to consumers are set independently,
anticompetitive harms may still occur if participants jointly set
the collaboration's level of output. For example, participants may
effectively coordinate price increases by reducing the
collaboration's level of output and collecting their profits through
high transfer prices, i.e., through the amounts that participants
contribute to the collaboration in exchange for each unit of the
collaboration's output. Where a transfer price is determined by
reference to an objective measure not under the control of the
participants, (e.g., average price in a different unconcentrated
geographic market), competitive concern may be less likely.
\49\ Anticompetitive harm also is less likely if individual
participants may independently increase the overall output of the
collaboration.
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3.34(e) Likelihood of Anticompetitive Information Sharing
The Agencies evaluate the extent to which competitively sensitive
information concerning markets affected by the collaboration likely
would be disclosed. This likelihood depends on, among other things, the
nature of the collaboration, its organization and governance, and
safeguards implemented to prevent or minimize such disclosure. For
example, participants might refrain from assigning marketing personnel
to an R&D collaboration, or, in a marketing collaboration, participants
might limit access to competitively sensitive information regarding
their respective operations to only certain individuals or to an
independent third party. Similarly, a buying collaboration might use an
independent third party to handle negotiations in which its
participants' input requirements or other competitively sensitive
information could be revealed. In general, it is less likely that the
collaboration will facilitate collusion on competitively sensitive
variables if appropriate safeguards governing information sharing are
in place.
3.34(f) Duration of the Collaboration
The Agencies consider the duration of the collaboration in
assessing whether participants retain the ability and incentive to
compete against each other and their collaboration. In general, the
shorter the duration, the more likely participants are to compete
against each other and their collaboration.
3.35 Entry
Easy entry may deter or prevent profitably maintaining price above,
or output, quality, service or innovation below, what likely would
prevail in the absence of the relevant agreement. Where the nature of
the agreement and market share and concentration data suggest a
likelihood of anticompetitive harm that is not sufficiently mitigated
by any continuing competition identified through the analysis in
Section 3.34, the Agencies inquire whether entry would be timely,
likely, and sufficient in its magnitude, character and scope to deter
or counteract the anticompetitive harm of concern. If so, the relevant
agreement ordinarily requires no further analysis.
As a general matter, the Agencies assess timeliness, likelihood,
and sufficiency of committed entry under principles set forth in
Section 3 of the Horizontal Merger Guidelines.50 However,
unlike mergers, competitor collaborations often restrict only certain
business activities, while preserving competition among participants in
other respects, and they may be designed to terminate after a limited
duration. Consequently, the extent to which an agreement creates
opportunities that would induce entry and the conditions under which
ease of entry may deter or counteract anticompetitive harms may be more
complex and less direct than for mergers and will vary somewhat
according to the nature of the relevant agreement. For example, the
likelihood of entry may be affected by what potential entrants believe
about the probable duration of an anticompetitive agreement. Other
things being equal, the shorter the anticipated duration of an
anticompetitive agreement, the smaller the profit opportunities for
potential entrants, and the lower the likelihood that it will induce
committed entry. Examples of other differences are set forth below.
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\50\ Committed entry is defined as new competition that requires
expenditure of significant sunk costs of entry and exit. See Section
3.0 of the Horizontal Merger Guidelines.
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For certain collaborations, sufficiency of entry may be affected by
the possibility that entrants will participate in the anticompetitive
agreement. To the extent that such participation raises the amount of
entry needed to deter or counteract anticompetitive harms, and assets
required for entry are not adequately available for entrants to respond
fully to their sales opportunities, or otherwise renders entry
inadequate in magnitude, character or scope, sufficient entry may be
more difficult to achieve.51
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\51\ Under the same principles applied to production and
marketing collaborations, the exercise of monopsony power by a
buying collaboration may be deterred or counteracted by the entry of
new purchasers. To the extent that collaborators reduce their
purchases, they may create an opportunity for new buyers to make
purchases without forcing the price of the input above pre-relevant
agreement levels. Committed purchasing entry, defined as new
purchasing competition that requires expenditure of significant sunk
costs of entry and exit--such as a new steel factory built in
response to a reduction in the price of iron ore--is analyzed under
principles analogous to those articulated in Section 3 of the
Horizontal Merger Guidelines. Under that analysis, the Agencies
assess whether a monopsonistic price reduction is likely to attract
committed purchasing entry, profitable at pre-relevant agreement
prices, that would not have occurred before the relevant agreement
at those same prices. (Uncommitted new buyers are identified as
participants in the relevant market if their demand responses to a
price decrease are likely to occur within one year and without the
expenditure of significant sunk costs of entry and exit. See id. at
Sections 1.32 and 1.41.)
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[[Page 54493]]
In the context of research and development collaborations,
widespread availability of R&D capabilities and the large gains that
may accrue to successful innovators often suggest a high likelihood
that entry will deter or counteract anticompetitive reductions of R&D
efforts. Nonetheless, such conditions do not always pertain, and the
Agencies ask whether entry may deter or counteract anticompetitive R&D
reductions, taking into account the following:
Where market participants typically can observe the level and type
of R&D efforts within a market, the principles of Section 3 of the
Horizontal Merger Guidelines may be applied flexibly to determine
whether entry is likely to deter or counteract a lessening of the
quality, diversity, or pace of research and development. To be timely,
entry must be sufficiently prompt to deter or counteract such harms.
The Agencies evaluate the likelihood of entry based on the extent to
which potential entrants have (1) core competencies (and the ability to
acquire any necessary specialized assets) that give them the ability to
enter into competing R&D and (2) incentives to enter into competing R&D
in response to a post-collaboration reduction in R&D efforts. The
sufficiency of entry depends on whether the character and scope of the
entrants' R&D efforts are close enough to the reduced R&D efforts to be
likely to achieve similar innovations in the same time frame or
otherwise to render a collaborative reduction of R&D unprofitable.
Where market participants typically cannot observe the level and
type of R&D efforts by others within a market, there may be significant
questions as to whether entry would occur in response to a
collaborative lessening of the quality, diversity, or pace of research
and development, since such effects would not likely be observed. In
such cases, the Agencies may conclude that entry would not deter or
counteract anticompetitive harms.
3.36 Identifying Procompetitive Benefits of the Collaboration
Competition usually spurs firms to achieve efficiencies internally.
Nevertheless, as explained above, competitor collaborations have the
potential to generate significant efficiencies that benefit consumers
in a variety of ways. For example, a competitor collaboration may
enable firms to offer goods or services that are cheaper, more valuable
to consumers, or brought to market faster than would otherwise be
possible. Efficiency gains from competitor collaborations often stem
from combinations of different capabilities or resources. See supra
Section 2.1. Indeed, the primary benefit of competitor collaborations
to the economy is their potential to generate such efficiencies.
Efficiencies generated through a competitor collaboration can
enhance the ability and incentive of the collaboration and its
participants to compete, which may result in lower prices, improved
quality, enhanced service, or new products. For example, through
collaboration, competitors may be able to produce an input more
efficiently than any one participant could individually; such
collaboration-generated efficiencies may enhance competition by
permitting two or more ineffective (e.g., high cost) participants to
become more effective, lower cost competitors. Even when efficiencies
generated through a competitor collaboration enhance the
collaboration's or the participants' ability to compete, however, a
competitor collaboration may have other effects that may lessen
competition and ultimately may make the relevant agreement
anticompetitive.
If the Agencies conclude that the relevant agreement has caused, or
is likely to cause, anticompetitive harm, they consider whether the
agreement is reasonably necessary to achieve ``cognizable
efficiencies.'' ``Cognizable efficiencies'' are efficiencies that have
been verified by the Agencies, that do not arise from anticompetitive
reductions in output or service, and that cannot be achieved through
practical, significantly less restrictive means. See infra Sections
3.36(a) and 3.36(b). Cognizable efficiencies are assessed net of costs
produced by the competitor collaboration or incurred in achieving those
efficiencies.
3.36(a) Cognizable Efficiencies Must Be Verifiable and Potentially
Procompetitive
Efficiencies are difficult to verify and quantify, in part because
much of the information relating to efficiencies is uniquely in the
possession of the collaboration's participants. Moreover, efficiencies
projected reasonably and in good faith by the participants may not be
realized. Therefore, the participants must substantiate efficiency
claims so that the Agencies can verify by reasonable means the
likelihood and magnitude of each asserted efficiency; how and when each
would be achieved; any costs of doing so; how each would enhance the
collaboration's or its participants' ability and incentive to compete;
and why the relevant agreement is reasonably necessary to achieve the
claimed efficiencies (see Section 3.36 (b)). Efficiency claims are not
considered if they are vague or speculative or otherwise cannot be
verified by reasonable means.
Moreover, cognizable efficiencies must be potentially
procompetitive. Some asserted efficiencies, such as those premised on
the notion that competition itself is unreasonable, are insufficient as
a matter of law. Similarly, cost savings that arise from
anticompetitive output or service reductions are not treated as
cognizable efficiencies. See Example 9.
3.36(b) Reasonable Necessity and Less Restrictive Alternatives
The Agencies consider only those efficiencies for which the
relevant agreement is reasonably necessary. An agreement may be
``reasonably necessary'' without being essential. However, if the
participants could have achieved or could achieve similar efficiencies
by practical, significantly less restrictive means, then the Agencies
conclude that the relevant agreement is not reasonably necessary to
their achievement. In making this assessment, the Agencies consider
only alternatives that are practical in the business situation faced by
the participants; the Agencies do not search for a theoretically less
restrictive alternative that is not realistic given business realities.
The reasonable necessity of an agreement may depend upon the market
context and upon the duration of the agreement. An agreement that may
be justified by the needs of a new entrant, for example, may not be
reasonably necessary to achieve cognizable efficiencies in different
market circumstances. The reasonable necessity of an agreement also may
depend on whether it deters individual participants from undertaking
free riding or other opportunistic conduct that could reduce
significantly the ability of the collaboration to achieve cognizable
efficiencies. Collaborations sometimes include agreements to discourage
any one participant from appropriating an undue share of the fruits of
the collaboration or to align participants' incentives to encourage
cooperation in achieving the efficiency goals of the collaboration. The
Agencies assess whether such agreements are reasonably necessary to
deter opportunistic conduct that otherwise would likely prevent the
achievement of cognizable efficiencies. See Example 10.
3.37 Overall Competitive Effect
If the relevant agreement is reasonably necessary to achieve
cognizable
[[Page 54494]]
efficiencies, the Agencies assess the likelihood and magnitude of
cognizable efficiencies and anticompetitive harms to determine the
agreement's overall actual or likely effect on competition in the
relevant market. To make the requisite determination, the Agencies
consider whether cognizable efficiencies likely would be sufficient to
offset the potential of the agreement to harm consumers in the relevant
market, for example, by preventing price increases.52
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\52\ In most cases, the Agencies' enforcement decisions depend
on their analysis of the overall effect of the relevant agreement
over the short term. The Agencies also will consider the effects of
cognizable efficiencies with no short-term, direct effect on prices
in the relevant market. Delayed benefits from the efficiencies (due
to delay in the achievement of, or the realization of consumer
benefits from, the efficiencies) will be given less weight because
they are less proximate and more difficult to predict.
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The Agencies' comparison of cognizable efficiencies and
anticompetitive harms is necessarily an approximate judgment. In
assessing the overall competitive effect of an agreement, the Agencies
consider the magnitude and likelihood of both the anticompetitive harms
and cognizable efficiencies from the relevant agreement. The likelihood
and magnitude of anticompetitive harms in a particular case may be
insignificant compared to the expected cognizable efficiencies, or vice
versa. As the expected anticompetitive harm of the agreement increases,
the Agencies require evidence establishing a greater level of expected
cognizable efficiencies in order to avoid the conclusion that the
agreement will have an anticompetitive effect overall. When the
anticompetitive harm of the agreement is likely to be particularly
large, extraordinarily great cognizable efficiencies would be necessary
to prevent the agreement from having an anticompetitive effect overall.
Section 4: Antitrust Safety Zones
4.1 Overview
Because competitor collaborations are often procompetitive, the
Agencies believe that ``safety zones'' are useful in order to encourage
such activity. The safety zones set out below are designed to provide
participants in a competitor collaboration with a degree of certainty
in those situations in which anticompetitive effects are so unlikely
that the Agencies presume the arrangements to be lawful without
inquiring into particular circumstances. They are not intended to
discourage competitor collaborations that fall outside the safety
zones.
The Agencies emphasize that competitor collaborations are not
anticompetitive merely because they fall outside the safety zones.
Indeed, many competitor collaborations falling outside the safety zones
are procompetitive or competitively neutral. The Agencies analyze
arrangements outside the safety zones based on the principles outlined
in Section 3 above.
The following sections articulate two safety zones. Section 4.2
sets out a general safety zone applicable to any competitor
collaboration.53 Section 4.3 establishes a safety zone
applicable to research and development collaborations whose competitive
effects are analyzed within an innovation market. These safety zones
are intended to supplement safety zone provisions in the Agencies'
other guidelines and statements of enforcement policy.54
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\53\ See Sections 1.1 and 1.3 above.
\54\ The Agencies have articulated antitrust safety zones in
Health Care Statements 7 & 8 and the Intellectual Property
Guidelines, as well as in the Horizontal Merger Guidelines. The
antitrust safety zones in these other guidelines relate to
particular facts in a specific industry or to particular types of
transactions.
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4.2 Safety Zone for Competitor Collaborations in General
Absent extraordinary circumstances, the Agencies do not challenge a
competitor collaboration when the market shares of the collaboration
and its participants collectively account for no more than twenty
percent of each relevant market in which competition may be
affected.55 The safety zone, however, does not apply to
agreements that are per se illegal, or that would be challenged without
a detailed market analysis,56 or to competitor
collaborations to which a merger analysis is applied.57
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\55\ For purposes of the safety zone, the Agencies consider the
combined market shares of the participants and the collaboration.
For example, with a collaboration among two competitors where each
participant individually holds a 6 percent market share in the
relevant market and the collaboration separately holds a 3 percent
market share in the relevant market, the combined market share in
the relevant market for purposes of the safety zone would be 15
percent. This collaboration, therefore, would fall within the safety
zone. However, if the collaboration involved three competitors, each
with a 6 percent market share in the relevant market, the combined
market share in the relevant market for purposes of the safety zone
would be 21 percent, and the collaboration would fall outside the
safety zone. Including market shares of the participants takes into
account possible spillover effects on competition within the
relevant market among the participants and their collaboration.
\56\ See supra notes 28-30 and accompanying text in Section 3.3.
\57\ See Section 1.3 above.
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4.3 Safety Zone for Research and Development Competition Analyzed
in Terms of Innovation Markets
Absent extraordinary circumstances, the Agencies do not challenge a
competitor collaboration on the basis of effects on competition in an
innovation market where three or more independently controlled research
efforts in addition to those of the collaboration possess the required
specialized assets or characteristics and the incentive to engage in
R&D that is a close substitute for the R&D activity of the
collaboration. In determining whether independently controlled R&D
efforts are close substitutes, the Agencies consider, among other
things, the nature, scope, and magnitude of the R&D efforts; their
access to financial support; their access to intellectual property,
skilled personnel, or other specialized assets; their timing; and their
ability, either acting alone or through others, to successfully
commercialize innovations. The antitrust safety zone does not apply to
agreements that are per se illegal, or that would be challenged without
a detailed market analysis,58 or to competitor
collaborations to which a merger analysis is applied.59
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\58\ See supra notes 28-30 and accompanying text in Section 3.3.
\59\ See Section 1.3 above.
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Appendix
Section 1.3
Example 1 (Competitor Collaboration/Merger)
Facts
Two oil companies agree to integrate all of their refining and
refined product marketing operations. Under terms of the agreement, the
collaboration will expire after twelve years; prior to that expiration
date, it may be terminated by either participant on six months' prior
notice. The two oil companies maintain separate crude oil production
operations.
Analysis
The formation of the collaboration involves an efficiency-enhancing
integration of operations in the refining and refined product markets,
and the integration eliminates all competition between the participants
in those markets. The evaluating Agency likely would conclude that
expiration after twelve years does not constitute termination ``within
a sufficiently limited period.'' The participants'' entitlement to
terminate the collaboration at any time after giving prior notice is
not termination by the
[[Page 54495]]
collaboration's ``own specific and express terms.'' Based on the facts
presented, the evaluating Agency likely would analyze the collaboration
under the Horizontal Merger Guidelines, rather than as a competitor
collaboration under these Guidelines. Any agreements restricting
competition on crude oil production would be analyzed under these
Guidelines.
Section 2.3
Example 2 (Analysis of Individual Agreements/Set of Agreements)
Facts
Two firms enter a joint venture to develop and produce a new
software product to be sold independently by the participants. The
product will be useful in two areas, biotechnology research and
pharmaceuticals research, but doing business with each of the two
classes of purchasers would require a different distribution network
and a separate marketing campaign. Successful penetration of one market
is likely to stimulate sales in the other by enhancing the reputation
of the software and by facilitating the ability of biotechnology and
pharmaceutical researchers to use the fruits of each other's efforts.
Although the software is to be marketed independently by the
participants rather than by the joint venture, the participants agree
that one will sell only to biotechnology researchers and the other will
sell only to pharmaceutical researchers. The participants also agree to
fix the maximum price that either firm may charge. The parties assert
that the combination of these two requirements is necessary for the
successful marketing of the new product. They argue that the market
allocation provides each participant with adequate incentives to
commercialize the product in its sector without fear that the other
participant will free-ride on its efforts and that the maximum price
prevents either participant from unduly exploiting its sector of the
market to the detriment of sales efforts in the other sector.
Analysis
The evaluating Agency would assess overall competitive effects
associated with the collaboration in its entirety and with individual
agreements, such as the agreement to allocate markets, the agreement to
fix maximum prices, and any of the sundry other agreements associated
with joint development and production and independent marketing of the
software. From the facts presented, it appears that the agreements to
allocate markets and to fix maximum prices may be so intertwined that
their benefits and harms ``cannot meaningfully be isolated.'' The two
agreements arguably operate together to ensure a particular blend of
incentives to achieve the potential procompetitive benefits of
successful commercialization of the new product. Moreover, the effects
of the agreement to fix maximum prices may mitigate the price effects
of the agreement to allocate markets. Based on the facts presented, the
evaluating Agency likely would conclude that the agreements to allocate
markets and to fix maximum prices should be analyzed as a whole.
Section 2.4
Example 3 (Time of Possible Harm to Competition)
Facts
A group of 25 small-to-mid-size banks formed a joint venture to
establish an automatic teller machine network. To ensure sufficient
business to justify launching the venture, the joint venture agreement
specified that participants would not participate in any other ATM
networks. Numerous other ATM networks were forming in roughly the same
time period.
Over time, the joint venture expanded by adding more and more
banks, and the number of its competitors fell. Now, ten years after
formation, the joint venture has 900 member banks and controls 60% of
the ATM outlets in a relevant geographic market. Following complaints
from consumers that ATM fees have rapidly escalated, the evaluating
Agency assesses the rule barring participation in other ATM networks,
which now binds 900 banks.
Analysis
The circumstances in which the venture operates have changed over
time, and the evaluating Agency would determine whether the exclusivity
rule now harms competition. In assessing the exclusivity rule's
competitive effect, the evaluating Agency would take account of the
collaboration's substantial current market share and any procompetitive
benefits of exclusivity under present circumstances, along with other
factors discussed in Section 3.
Section 3.2
Example 4 (Agreement Not to Compete on Price)
Facts
Net-Business and Net-Company are two start-up companies. Each has
developed and begun sales of software for the networks that link users
within a particular business to each other and, in some cases, to
entities outside the business. Both Net-Business and Net-Company were
formed by computer specialists with no prior business expertise, and
they are having trouble implementing marketing strategies, distributing
their inventory, and managing their sales forces. The two companies
decide to form a partnership joint venture, NET-FIRM, whose sole
function will be to market and distribute the network software products
of Net-Business and Net-Company. NET-FIRM will be the exclusive
marketer of network software produced by Net-Business and Net-Company.
Net-Business and Net-Company will each have 50% control of NET-FIRM,
but each will derive profits from NET-FIRM in proportion to the
revenues from sales of that partner's products. The documents setting
up NET-FIRM specify that Net-Business and Net-Company will agree on the
prices for the products that NET-FIRM will sell.
Analysis
Net-Business and Net-Company will agree on the prices at which NET-
FIRM will sell their individually-produced software. The agreement is
one ``not to compete on price,'' and it is of a type that always or
almost always tends to raise price or reduce output. The agreement to
jointly set price may be challenged as per se illegal, unless it is
reasonably related to, and reasonably necessary to achieve
procompetitive benefits from, an efficiency-enhancing integration of
economic activity.
Example 5 (Specialization without Integration)
Facts
Firm A and Firm B are two of only three producers of automobile
carburetors. Minor engine variations from year to year, even within
given models of a particular automobile manufacturer, require re-design
of each year's carburetor and re-tooling for carburetor production.
Firms A and B meet and agree that henceforth Firm A will design and
produce carburetors only for automobile models of even-numbered years
and Firm B will design and produce carburetors only for automobile
models of odd-numbered years. Some design and re-tooling costs would be
saved, but automobile manufacturers would face only two suppliers each
year, rather than three.
Analysis
The agreement allocates sales by automobile model year and
constitutes an agreement ``not to compete on * * * output.'' The
participants do not combine production; rather, the
[[Page 54496]]
collaboration consists solely of an agreement not to produce certain
carburetors. The mere coordination of decisions on output is not
integration, and cost-savings without integration, such as the costs
saved by refraining from design and production for any given model
year, are not a basis for avoiding per se condemnation. The agreement
is of a type so likely to harm competition and to have no significant
benefits that particularized inquiry into its competitive effect is
deemed by the antitrust laws not to be worth the time and expense that
would be required. Consequently, the evaluating Agency likely would
conclude that the agreement is per se illegal.
Example 6 (Efficiency-Enhancing Integration Present)
Facts
Compu-Max and Compu-Pro are two major producers of a variety of
computer software. Each has a large, world-wide sales department. Each
firm has developed and sold its own word-processing software. However,
despite all efforts to develop a strong market presence in word
processing, each firm has achieved only slightly more than a 10% market
share, and neither is a major competitor to the two firms that dominate
the word-processing software market.
Compu-Max and Compu-Pro determine that in light of their
complementary areas of design expertise they could develop a markedly
better word-processing program together than either can produce on its
own. Compu-Max and Compu-Pro form a joint venture, WORD-FIRM, to
jointly develop and market a new word-processing program, with expenses
and profits to be split equally. Compu-Max and Compu-Pro both
contribute to WORD-FIRM software developers experienced with word
processing.
Analysis
Compu-Max and Compu-Pro have combined their word-processing design
efforts, reflecting complementary areas of design expertise, in a
common endeavor to develop new word-processing software that they could
not have developed separately. Each participant has contributed
significant assets--the time and know-how of its word-processing
software developers--to the joint effort. Consequently, the evaluating
Agency likely would conclude that the joint word-processing software
development project is an efficiency-enhancing integration of economic
activity that promotes procompetitive benefits.
Example 7 (Efficiency-Enhancing Integration Absent)
Facts
Each of the three major producers of flashlight batteries has a
patent on a process for manufacturing a revolutionary new flashlight
battery--the Century Battery--that would last 100 years without
requiring recharging or replacement. There is little chance that
another firm could produce such a battery without infringing one of the
patents. Based on consumer surveys, each firm believes that aggregate
profits will be less if all three sold the Century Battery than if all
three sold only conventional batteries, but that any one firm could
maximize profits by being the first to introduce a Century Battery. All
three are capable of introducing the Century Battery within two years,
although it is uncertain who would be first to market.
One component in all conventional batteries is a copper widget. An
essential element in each producers' Century Battery would be a zinc,
rather than a copper widget. Instead of introducing the Century
Battery, the three producers agree that their batteries will use only
copper widgets. Adherence to the agreement precludes any of the
producers from introducing a Century Battery.
Analysis
The agreement to use only copper widgets is merely an agreement not
to produce any zinc-based batteries, in particular, the Century
Battery. It is ``an agreement not to compete on * * * output'' and is
``of a type that always or almost always tends to raise price or reduce
output.'' The participants do not collaborate to perform any business
functions, and there are no procompetitive benefits from an efficiency-
enhancing integration of economic activity. The evaluating Agency
likely would challenge the agreement to use only copper widgets as per
se illegal.
Section 3.3
Example 8 (Rule-of-Reason: Agreement Quickly Exculpated)
Facts
Under the facts of Example 4, Net-Business and Net-Company jointly
market their independently-produced network software products through
NET-FIRM. Those facts are changed in one respect: rather than jointly
setting the prices of their products, Net-Business and Net-Company will
each independently specify the prices at which its products are to be
sold by NET-FIRM. The participants explicitly agree that each company
will decide on the prices for its own software independently of the
other company. The collaboration also includes a requirement that NET-
FIRM compile and transmit to each participant quarterly reports
summarizing any comments received from customers in the course of NET-
FIRM's marketing efforts regarding the desirable/undesirable features
of and desirable improvements to (1) that participant's product and (2)
network software in general. Sufficient provisions are included to
prevent the company-specific information reported to one participant
from being disclosed to the other, and those provisions are followed.
The information pertaining to network software in general is to be
reported simultaneously to both participants.
Analysis
Under these revised facts, there is no agreement ``not to compete
on price or output.'' Absent any agreement of a type that always or
almost always tends to raise price or reduce output, and absent any
subsequent conduct suggesting that the firms did not follow their
explicit agreement to set prices independently, no aspect of the
partnership arrangement might be subjected to per se analysis. Analysis
would continue under the rule of reason.
The information disclosure arrangements provide for the sharing of
a very limited category of information: customer-response data
pertaining to network software in general. Collection and sharing of
information of this nature is unlikely to increase the ability or
incentive of Net-Business or Net-Company to raise price or reduce
output, quality, service, or innovation. There is no evidence that the
disclosure arrangements have caused anticompetitive harm and no
evidence that the prohibitions against disclosure of firm-specific
information have been violated. Under any plausible relevant market
definition, Net-Business and Net-Company have small market shares, and
there is no other evidence to suggest that they have market power. In
light of these facts, the evaluating Agency would refrain from further
investigation.
Section 3.36(a)
Example 9 (Cost Savings from Anticompetitive Output or Service
Reductions)
Facts
Two widget manufacturers enter a marketing collaboration. Each will
continue to manufacture and set the
[[Page 54497]]
price for its own widget, but the widgets will be promoted by a joint
sales force. The two manufacturers conclude that through this
collaboration they can increase their profits using only half of their
aggregate pre-collaboration sales forces by (1) taking advantage of
economies of scale--presenting both widgets during the same customer
call--and (2) refraining from time-consuming demonstrations
highlighting the relative advantages of one manufacturer's widgets over
the other manufacturer's widgets. Prior to their collaboration, both
manufacturers had engaged in the demonstrations.
Analysis
The savings attributable to economies of scale would be cognizable
efficiencies. In contrast, eliminating demonstrations that highlight
the relative advantages of one manufacturer's widgets over the other
manufacturer's widgets deprives customers of information useful to
their decision making. Cost savings from this source arise from an
anticompetitive output or service reduction and would not be cognizable
efficiencies.
Section 3.36(b)
Example 10 (Efficiencies From Restrictions on Competitive
Independence)
Facts
Under the facts of Example 6, Compu-Max and Compu-Pro decide to
collaborate on developing and marketing word-processing software. The
firms agree that neither one will engage in R&D for designing word-
processing software outside of their WORD-FIRM joint venture. Compu-Max
papers drafted during the negotiations cite the concern that absent a
restriction on outside word-processing R&D, Compu-Pro might withhold
its best ideas, use the joint venture to learn Compu-Max's approaches
to design problems, and then use that information to design an improved
word-processing software product on its own. Compu-Pro's files contain
similar documents regarding Compu-Max.
Compu-Max and Compu-Pro further agree that neither will sell its
previously designed word-processing program once their jointly
developed product is ready to be introduced. Papers in both firms'
files, dating from the time of the negotiations, state that this latter
restraint was designed to foster greater trust between the participants
and thereby enable the collaboration to function more smoothly. As
further support, the parties point to a recent failed collaboration
involving other firms who sought to collaborate on developing and
selling a new spread-sheet program while independently marketing their
older spread-sheet software.
Analysis
The restraints on outside R&D efforts and on outside sales both
restrict the competitive independence of the participants and could
cause competitive harm. The evaluating Agency would inquire whether
each restraint is reasonably necessary to achieve cognizable
efficiencies. In the given context, that inquiry would entail an
assessment of whether, by aligning the participants' incentives, the
restraints in fact are reasonably necessary to deter opportunistic
conduct that otherwise would likely prevent achieving cognizable
efficiency goals of the collaboration.
With respect to the limitation on independent R&D efforts, possible
alternatives might include agreements specifying the level and quality
of each participant's R&D contributions to WORD-FIRM or requiring the
sharing of all relevant R&D. The evaluating Agency would assess whether
any alternatives would permit each participant to adequately monitor
the scope and quality of the other's R&D contributions and whether they
would effectively prevent the misappropriation of the other
participant's know-how. In some circumstances, there may be no
``practical, significantly less restrictive'' alternative.
Although the agreement prohibiting outside sales might be
challenged as per se illegal if not reasonably necessary for achieving
the procompetitive benefits of the integration discussed in Example 6,
the evaluating Agency likely would analyze the agreement under the rule
of reason if it could not adequately assess the claim of reasonable
necessity through limited factual inquiry. As a general matter,
participants' contributions of marketing assets to the collaboration
could more readily be monitored than their contributions of know-how,
and neither participant may be capable of misappropriating the other's
marketing contributions as readily as it could misappropriate know-how.
Consequently, the specification and monitoring of each participant's
marketing contributions could be a ``practical, significantly less
restrictive'' alternative to prohibiting outside sales of pre-existing
products. The evaluating Agency, however, would examine the experiences
of the failed spread-sheet collaboration and any other facts presented
by the parties to better assess whether such specification and
monitoring would likely enable the achievement of cognizable
efficiencies.
[FR Doc. 99-26032 Filed 10-5-99; 8:45 am]
BILLING CODE 6750-01-P
