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The government’s failure to stop AT&T Inc. from buying Time Warner Inc. shouldn’t lead to a “retreat” in the type of analysis that the Justice Department uses to predict price increases, but its economists will need to explain their findings better, antitrust economists and lawyers said.
U.S. District Court for the District of Columbia Judge Richard Leon didn’t buy the DOJ’s economic models about the AT&T-Time Warner merger that were presented in a bench trial that spanned seven weeks.
That “may suggest a need for economic experts to break down models into even simpler terms when they testify and for adequate time at trial to accomplish that,” Nancy Rose, a former DOJ economist in the antitrust division, told Bloomberg Law. Rose now heads the economics department at the Massachusetts Institute of Technology.
Leon’s June 12 ruling rejected the reasoning of the government’s lead witness. The DOJ’s evidence failed to establish that “the proposed transaction is likely to lessen competition substantially,” Leon said.
Rose and antitrust attorneys told Bloomberg Law that Leon didn’t connect the dots regarding some of the key economic principles in the government’s reasoning. It’s a matter of debate in the antitrust community whether Leon was right in discounting the government’s argument or whether he misunderstood the economic principles involved.
“It is such a fact-intensive opinion that it is tough for an appellate court to conclude Leon committed a legal error,” Fiona Schaeffer, an international antitrust partner at Milbank, Tweed, Hadley & McCloy in New York, told Bloomberg Law.
The government’s case relied on University of California Berkeley economist Carl Shapiro, whose modeling showed that AT&T and Time Warner’s merger would raise costs for pay-TV customers by hundreds of millions of dollars. Shapiro said the new AT&T-Time Warner would be more powerful because it would combine its content service, in Time Warner’s Turner Broadcasting, with provider services in AT&T’s pay-TV service DirecTV. That would allow the merged company to dictate the costs of “must-have” content like HBO and CNN and force other distributors to pay more for channels, in turn raising prices for American consumers. Leon didn’t buy it. He stated at one point during Shapiro’s testimony, “I’m not sure any of it’s intuitive.”
Rose said in a June antitrust conference after the AT&T decision came out, that “the government and its economic expert probably bear some responsibility for not breaking it down into simpler terms that a lay judge could better grasp.”
Now the government needs to reflect on how it can move past such a loss, she said. AT&T and Time Warner formally sealed their $85.4 billion deal June 14. Yet less than two weeks after closing the deal, AT&T raised the costs of its administrative fees, netting an additional $800 million in revenues. Analysts speculate the increased costs are a way for AT&T to pay for Time Warner’s acquisition.
The government is still mulling a possible appeal of Leon’s decision, Bloomberg reported.
Leon’s opinion discounted the crux of Shapiro’s testimony that the combined AT&T and Time Warner would gain significant negotiating power, Rose told Bloomberg Law.
Leon “embraces the notion that AT&T-Time-Warner will maximize their combined profits,” but he discounts that same idea when it comes to AT&T and Time Warner’s new leverage in the negotiating of programming fees. “The judge didn’t seem to understand it’s a package deal,” she said. “It makes no sense to say yes in one case and no in the other.” Hal Singer, principal at Economists Incorporated and adjunct professor at Georgetown University’s business school, said Leon correctly assessed Shapiro’s modeling because he took into account evidence that suggested firms didn’t behave as Shapiro said they would.
Shapiro further crippled his own argument by telling Leon that the bargaining model used in his testimony wasn’t traditionally used to evaluate price effects in this type of merger, Singer said. “If 100 judges saw the same model, my hunch is that 90 percent of them would have come to the same conclusion.”
Whether or not Leon got it right, there is always room for the government to improve its communication techniques in antitrust trials, Jonathan Sallet, an antitrust partner at Steptoe & Johnson LLP, said at the June antitrust conference after the decision came out. “There always needs to be more work on translating antitrust terminology and theories in a very common sense way,” he said.
“It is much easier to tear down analysis that to build it up in general,” Fiona Scott Morton, economics professor at Yale University and former deputy assistant attorney general for economics at the DOJ’s antitrust division, told Bloomberg Law. “The judge seemed enamored with the story, not the economics.”Antitrust attorneys say courts may generally be confused about how to rule on antitrust claims because there’s a lack of guidance from the government about how to analyze mergers. The written guidelines haven’t been updated since 1984.
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