Lower Court’s Inconsistent Application Of Economic Principles Is A Fundamental Error Justifying Remand And Retrial
For Immediate Release
Contact: Ted Hearn
PITTSBURGH, August 14, 2018 – The American Cable Association (ACA) and Professor William Rogerson, a leading figure in antitrust economics, yesterday filed an amicus brief with the federal court hearing the AT&T-Time Warner merger appeal seeking a reversal of the lower court ruling and a new trial based on the trial court’s flawed application of fundamental economic principles. ACA-Rogerson argued that the lower court’s inconsistent (and internally contradictory) application of these economic principles was so out of line with precedent, and so infected the evidence the court allowed the Department of Justice (DOJ) to present, that a new trial was essential.
On August 6, 2018, the DOJ filed its brief in its appeal of the U.S. District Court’s ruling permitting the AT&T-Time Warner merger to go forward. The DOJ argued that the lower court’s opinion rested on “two fundamental analytical errors: It discarded the economics of bargaining, and it failed to apply the foundational principle of corporate-wide profit maximization.” As a result, DOJ submitted that “these errors colored the court’s view of the facts, leading to a decision that is clearly erroneous in light of the evidence presented at trial.”
ACA-Rogerson agree with the DOJ that the lower court applied these economic principles erroneously, but their amicus brief adds the crucial point that the lower court applied these basic economic principles inconsistently. Resting a judgment on reasoning that is internally inconsistent, ACA-Rogerson contend, is an abuse of discretion warranting a reversal.
The lower court’s first inconsistent use of basic economic principles involved how prices are set through bargaining. In economics, it is generally accepted that an increase in the cost of providing a good (whether increased opportunity costs or otherwise) will ordinarily cause a provider to demand more compensation for the good and increase the price as a result.
At one point in the court’s opinion, it rejected the DOJ’s submission that the principle, known as Nash bargaining, applied to increases in fees for programming that Time Warner would charge AT&T’s distribution rivals. But at another point, it applied exactly that same Nash bargaining principle to support AT&T’s contention that a decrease in AT&T’s advertising fees, as a result of digital advertising competition, had resulted in an increase in fees charged to distributors. At no time did the court recognize the contradiction or make any effort to explain it.
The lower court also contradicted itself in evaluating a foundational question about firm behavior. In general, economic theory assumes that firms act to maximize the profits of the firm as a whole. When evaluating potential anticompetitive effects from the AT&T-Time Warner combination, the lower court rejected that theory. In its view, the Time Warner unit of the merged company would seek to maximize only its divisional profits. But later in the opinion, when analyzing pro-competitive efficiencies, the lower court took the opposite approach and found that AT&T-Time Warner would maximize its profits as a whole, at the corporate level. Again, the lower court made no effort to identify, let alone resolve, these contradictions.
“The inconsistencies in the district court’s decision warrant reversal. The appeals court has repeatedly recognized that inconsistent economic reasoning undermines the whole decision and justifies reversal,” ACA President and CEO Matthew M. Polka said. “Just because a major media deal has been approved by a single court does not foreclose injured parties from seeking necessary and important judicial relief.”
If the appeals court grants ACA-Rogerson request and the case is retried, it would set the stage for the lower court to find that the AT&T-Time Warner combination would raise programming acquisition costs for competing multichannel video programming distributors, substantially lessening competition among pay-TV providers in violation of anti-trust law.
U.S. Judge Richard Leon approved the AT&T-Time Warner transaction on June 12 after a contentious trial following the Department of Justice’s decision to file an anti-trust suit last October.
Professor William Rogerson is the Charles E. and Emma H. Morrison Professor of Economics at Northwestern
University. Among his roles, he serves as the Research Director for Competition, Antitrust, and Regulation at the Searle Center on Law, Regulation, and Economic Growth. He was formerly Chief Economist at the Federal Communication Commission. He was the Senior Economist supervising the FCC’s economic analysis of the Comcast/Time Warner Cable, AT&T/DirecTV, and Charter/Time Warner Cable mergers.
About the American Cable Association: Based in Pittsburgh, the American Cable Association is a trade organization representing about 800 smaller and medium-sized, independent companies that provide broadband, phone and video services to nearly 8 million customers primarily located in rural and smaller suburban markets across America. Through active participation in the regulatory and legislative process in Washington, D.C., ACA’s members work together to advance the interests of their customers and ensure the future competitiveness and viability of their business. For more information, visit: https://acaconnects.org/