Maureen is a Partner at Baker Botts. She is Former Acting Chair and Commissioner of the Federal Trade Commission. Carl is Professor of Economics at the University of California at Berkeley. He served twice as Deputy Assistant Attorney General at the Department of Justice.
After Maureen and Carl present their papers, we will have a free-flowing conversation with five of the leading thinkers on the future of antitrust and other topics related to that. We are going to hear from Bill Kovacic, Professor of Law and Policy at The George Washington University. Bill is a former Chair and Commissioner of the Federal Trade Commission and currently serves as the Non-Executive Director with the United Kingdom’s Competition and Markets Authority (CMA). Fiona Scott Morton is Professor of Economics at Yale. Fiona also served as Deputy Assistant Attorney General for Economics at the Department of Justice. Rich Parker is a Partner at Gibson Dunn in Washington. Rich is a former Director of the Bureau of Competition at the Federal Trade Commission. Sandeep Vaheesan is Legal Director at the Open Markets Institute. Sandeep served as Regulations Counsel of the Consumer Financial Protection Bureau (CFPB). Christine Wilson is a current Commissioner at the Federal Trade Commission.
I intend to have a free-flowing conversation today. I have several open-ended questions that I have assigned, but I encourage anyone to comment on any of the questions. The answers are unscripted and they are unrehearsed. No one knows what anyone else may say. Maureen and Carl are free to chime in, but they will have time later to comment as well, and then, finally, each participant will be able to share their thoughts at the end.
Let’s begin. I will turn it over to Maureen.
MAUREEN OHLHAUSEN: Thanks, Gary, and to all the panelists. I am delighted to be here.
When Gary asked me last summer to do a paper that laid out the array of antitrust proposals and positions, what I did was try to organize it into how the positions appeared to me, which was as three big groups. My paper is called “Liberty, Equality & Fraternity: Evolution or Revolution in Antitrust?” The world of antitrust is no stranger to contrasting views and vigorous debate, but in these last few years the usual skirmishes have given way to an insurgency that argues that the current system of antitrust enforcement simply does not work the way that it should and that tinkering around the edges is not going to be sufficient.
There has been a gathering storm of events giving rise to populist movements on both sides of the political aisle, each of which were angling for dramatic antitrust reform, for their own reasons, but largely converging on intense scrutiny of four so-called “tech titans.” Caught between those two populist camps were yet another two factions: Those who might share some concerns about increasing concentration but prefer not to abandon the consumer welfare standard as the core goal of antitrust law; and those who see decades of hard-won progress in scholarly understanding in the courts under a threat of being overrun at the barricades.
In this battle to shape the future of antitrust, the position of entrenched incumbent belongs to the Chicago-Harvard School, which I deem the “liberty advocates.” Those in this camp believe in an approach to antitrust that relies on free markets rather than government-designed markets to produce the best outcomes, driven by a conviction that misguided intervention could do far more harm than good to the economy. This conviction is underpinned by a set of principles that have gained wide adoption across the landscape of U.S. antitrust law.
First, the principle that the overriding goal of antitrust should be to maximize consumer welfare and that consumer welfare should be measured empirically using econometric tools.
Second, the belief that free markets unencumbered by excessive regulation generally lead to the best outcomes for society over time and have the capacity to self-correct most anticompetitive or monopolistic behavior by inviting and rewarding fresh competition.
Finally, a concern that even well-intentioned government intervention is not self-corrective and may result in reduced benefits to consumers.
The Chicago-Harvard School is largely credited with having won the last revolution—or evolution—in American antitrust in the 1970s, and even current proponents of significant antitrust reform appear to agree that this focus on economic evidence and the discarding of untenable presumptions and standards, such as the per se prohibition on vertical restraints, was a positive development in antitrust law.
And equally well-established is the notion that the focus of that inquiry should be on consumer welfare, which is a broad concept that encompasses certainly the prices that consumers pay, but also the quality of the products or services they buy, and that can include a wide variety of factors.
The second precept of the Chicago-Harvard School, and one that has come under considerably more fire of late, is their confidence in the power of free markets to self-correct. Recent critics of this particular tenet argue that companies with market power may be far more successful at artificially maintaining entry barriers than the Chicago-Harvard theories would suggest.
Finally, a concern about administrability of legal rules and the capacity of courts and antitrust agencies to implement them is the signal contribution of the Harvard School. Unlike markets that can make swift adjustments in response to innovation and changes in consumer demand, enforcers can only take delayed action based on their perception of problems interrupting the competitive process and regulators only have blunt instruments at their disposal based on necessarily imperfect information. These observations lead members of the liberty camp to embrace a philosophy geared towards avoiding false positives, which they see as particularly risky, given that government intervention cannot be reversed by the same market forces that would come to bear on attempted anticompetitive conduct.
While the Chicago-Harvard School emphasized the risk of overactive enforcement, the movement for reform has coalesced around the belief that underactive enforcement has led to significant increases in market concentration and a shifting of surplus from consumers as increasing market power drives monopoly profits across the economy. I deem this group the equality group. Many in this category also assert that there is a regressive nature in this shift in wealth away from the average consumer and in favor of large corporations and their shareholders, who tend to be wealthier than the average citizen, which, in turn, helps to fuel populism.
Equality advocates seek what they see as a rebalancing of the scales to counteract some of the advantages held by entrenched firms in all sectors, but with a particular ire reserved for technology platforms. Many reform proposals in this camp seek to level the playing field by mandating access to competitors’ digital facilities and assets, particularly if that competitor is one of the disfavored alleged tech titans.
Several recent developments provide useful examples of the motivations behind and reforms contemplated by the equality cohort, which I will describe briefly. The Equitable Growth Report lays out a three-pronged proposal for restoring competition: (1) congressional action in the form of new antitrust legislation; (2) action by U.S. enforcement agencies to optimize deterrence; and (3) Executive Branch action to coordinate antitrust policy across the federal government. The report takes aim at certain recent court decisions, arguing that courts have been overly reliant on economic assumptions that the authors believe to be inaccurate or outdated, including requiring an elaborate analysis of indirect evidence of market definition, market share, and market power, rather than accepting direct evidence of competitive harm.
The report’s proposed solution is legislative reform that explicitly vacates specific court decisions and spells out elements sufficient to establish an antitrust violation as precisely as possible, which is a much different approach than the common-law-driven process of antitrust law in the United States. The report’s recommendation to the new Biden administration is to be less fearful of losses in court and to pursue a strategic intentional approach to pushing incremental changes in case law in areas where forward progress is realistic.
The report recommends more dramatic antitrust remedies, including breakups for consummated mergers and monopolistic conduct and compulsory licenses for intellectual property. The report also recommends a significant boost in funding for both agencies, and it is worth noting that many in the liberty camp also support increased resources.
Another report is the House Majority Staff Report, which paints a critical picture of competition in U.S. technology markets as dominated by four large tech companies. The Staff Report asserts that the markets at issue have tipped in favor of only one or just a few dominant providers and are characterized by high concentration and numerous barriers to entry that make it difficult for new competitors to enter and succeed. The report also cites alleged examples of “killer acquisitions.”
Although these findings are specific to particular markets—allegedly made up of Amazon, Google, Facebook, and Apple, whose primary businesses are, respectively, a retailer, a search engine, a social network, and a device maker—the recommendations suggested by the Majority Staff Report are much more far-reaching. It generated a menu of reforms divided into three sections.
First, requirements to restore competition in the digital economy, including structural prohibitions on dominant platforms, preventing expansion into adjacent markets or through acquisitions, nondiscrimination requirements to prevent self-preferencing, and mandatory data portability.
Second, measures to strengthen antitrust laws more generally, including strengthening presumptions and imposing bright-line rules against mergers, clarifying or expanding numerous doctrines of liability for abuse of monopoly power, and overruling certain Supreme Court cases.
Third, reforms to revive antitrust enforcement, including increased penalties, more funding for the agencies, more frequent merger retrospectives, and removing barriers to private plaintiff enforcement.
Another proposal is the Competition and Antitrust Law Enforcement Reform Act of 2021 (CALERA) introduced by Senator Amy Klobuchar, which proposes major shifts in substantive standards for merger and conduct cases but retains the basic legal framework of current law with broadly drafted language on liability, the full contours of which would be left to courts to interpret. CALERA calls for a significant lowering of the bar for what constitutes an illegal merger under the Clayton Act. Instead of condemning transactions that “may substantially lessen competition,” the new proposal would ban transactions that “may create an appreciable risk of materially lessening competition,” where “materially” means more than a de minimis amount. It then creates new presumptions of harm for certain mergers that include specific structural characteristics where there is the presence of a maverick party and, particularly large deals meeting certain size requirements.
While styled as rebuttable presumptions, when combined with the proposed need for merging parties to show a lack of “any appreciable risk of material lessening of competition” to overcome them, these presumptions are likely a firing squad for the vast majority of mergers falling within these categories.
On the conduct side of the ledger, CALERA veers toward a competitor welfare standard and would condemn “any activity by any firm, regardless of market power, that materially disadvantages or tends to foreclose or limit the opportunity of any competitor with an appreciable risk of harming competition.” The bill also creates a rebuttable presumption that exclusionary conduct by certain firms is anticompetitive.
In addition to these fundamental changes, CALERA imposes hefty new civil penalties for antitrust violations.
Turning to the third group, who I call the fraternity group, it is focused on populist calls to expand antitrust to protect noneconomic values. One of the most fascinating developments for antitrust practitioners and observers has been the opening of a third front, in which market trends and recent events have driven advocates on opposite sides of the political spectrum to reach similar conclusions on the need for significant antitrust reform.
Taking a look first at progressive populism, there seems to be a general notion that antitrust law should be expanded as a tool to address issues well beyond just the economic and to encompass what might be called “citizen welfare,” factoring in concerns such as political power, structural racism, press freedom, and harm to workers as part of an evaluation of mergers and business conduct. Progressive reform proposals largely endorse a “big is bad” philosophy that puts harsh restrictions on large corporations’ ability to grow and on their conduct having an impact on competitors.
One particularly dramatic example is the draft Anti-Monopoly and Competition Restoration Act (AMCRA), which was leaked to the legal press in late 2019 and is reportedly linked to both Senator Elizabeth Warren and Congressman David Cicilline. If Senator Klobuchar’s CALERA bill is highly skeptical of mergers and potentially exclusionary conduct by large companies, AMCRA is downright hostile to that concept. The proposal not only flips the burden of proof but requires defendants to disprove that their conduct is illegal. It would essentially require providing various types of aid to competitors, in addition to making a wide range of conduct illegal that is currently viewed as sometimes, or even usually, procompetitive.
Now turning to conservative populism at the other end of the political spectrum, we have seen somewhat of a surprising evolution of thought. As recently as the middle of 2020, leading Republicans involved in the House Big Tech investigation were coalescing around the conclusion that the current U.S. antitrust law is adequate for protecting competition in the modern economy. But, following the dramatic events around the 2020 election, including social media bans for prominent conservative figures, we saw a surge of populist rage on the right against big technology platforms, exacerbating the perception that those platforms discriminate against conservative voices in their censorship decisions.
Ranking Member Ken Buck’s “Third Way” report lays out some points of agreement with the majority staff, starting with their shared views that the tech companies have allegedly used their monopoly power to act as gatekeepers to the marketplace, but it argues that antitrust reform should also address the hot-button issue of censorship against conservative viewpoints.
So, at least for now, the perceived common enemy of Big Tech market power has made some strange bedfellows of populist elements at both ends of the political spectrum.
Turning finally to the question of evolution or revolution, even with so many contrasting visions for the future of U.S. antitrust law, there remains yet another related but distinct and fundamental question: Once we decide where we want to be going, how exactly do we get there? To some extent, the answer to this process question depends largely on which substantive camp one falls in.
For the liberty advocates seeking to preserve what they see as hard-won victories over several decades, the best course of action would be to provide the agencies additional resources to monitor and block anticompetitive abuses and continue to rely on the courts to referee individual antitrust disputes based on the evidentiary standards that have been carefully developed in case law. This does not mean that antitrust law becomes stagnant, however, as it can continue to evolve as economic understanding of particular behaviors grows.
On the other end of the spectrum, fraternity adherents seeking to overhaul even the basic objectives of antitrust are likely to have little use for an incremental approach, betting instead on bold plans for reform of the ends and means of antitrust enforcement.
The equality advocates looking to rein in growing market power by major technology platforms but generally content with the current foundation of antitrust law in the consumer welfare standard, the path forward is more complex, with options on the table for both a case-by-case approach and legislative reforms or some mix of the two.
To wrap up, with the battle lines drawn over the future of antitrust law, the stakes could scarcely be higher. Much of the debate has focused on the actions of the tech companies at the pinnacle of the U.S. economy, but, crucially, none of the battle plans—at least those on the table—would limit their effects to just four companies, no matter how large they might be.
These major reform proposals have the potential to fundamentally reshape the American economy. And though it is certainly tempting for some to jump headlong into dramatic reforms in this truly fascinating and energized moment in antitrust history, I think we should use every tool at our disposal to be sure of our course, as there may be no turning back once the revolution has begun.
GARY ZANFAGNA: I think there is a lot for us to talk about and think about over the next hour and a half. Carl, you’re up.
CARL SHAPIRO: Thank you, Gary. I appreciate being here.
My paper written for this event is entitled “Antitrust: What Went Wrong and How to Fix It.” I am going to give some personal notes on top of that today, but I will only be able to touch on a little bit from the paper.
Maureen has been mentioning the Big Tech firms. My paper and my talk today are about antitrust generally; they are not specific to any sector. The reforms I think we need will help in the Big Tech area, but we also need digital regulation because a lot of the issues arising in the digital sector are not antitrust issues as such.
Let me start with context. I am sure all of you are aware that antitrust is getting a bad rap these days, with many people saying that antitrust is not doing its job. I think what has happened is that we have seen accumulating economic evidence for ten years or more on several dimensions: large firms account for a growing share of the economy; profits as a share of GDP are going up and are particularly concentrated in the most profitable firms; the labor share of GDP has gone down; price/cost margins have increased; and income and wealth inequality have grown.
Overall, there is a lot of evidence of increasing market power. In some cases we can link increased market power to failures of antitrust, based on merger retrospectives and other studies of specific industries where we have market power problems. The health care sector is a good example. I think one can clearly link market power problems in that sector to inadequate antitrust enforcement.
The result is a stark gap between the economic evidence, which shows growing market power and inadequate antitrust enforcement, on the one hand, and, on the other hand, the courts and the case law, which basically has not kept up with what is going on in the economy. As I will explain, the courts and the case law have been ossified and frozen as a result of a free-market ideology that has been embedded into the case law and doctrinal assumptions. So we are facing a big gap between economic reality and doctrine embedded in antitrust case law.
Now, jumping ahead, what is the solution? In my view, the solution is not to abandon the goal of antitrust, which is to protect and promote competition. Rather, the solution is to adjust the case law to reflect economy reality. This can be done using common law principles—but it takes a long time. Basically, this adjustment involves turning the dials, if you will, much more in favor of antitrust plaintiffs. This can be achieved through a series of rebuttable presumptions—or even in some cases per se illegality, though I am mostly thinking about rebuttable presumptions. I will explain what those presumptions are. Basically, I am advocating reducing the burden placed on many antitrust plaintiffs.
Now, how do I frame that? Like Maureen, interestingly, I also see three camps here, but my camps are not quite the same as hers and, in a revealing way, in an interesting way.
First, we have the Chicago School camp. In my paper I detail what I mean by this, but I think you know what I mean generally. Fundamentally, the Chicago School camp is laissez-faire oriented. This is the camp that Maureen calls the “entrenched incumbent.” Now, sorry, Maureen, but I am not giving you Harvard in that group. I agree with Maureen that Harvard and Chicago together pushed during the 1970s and into the 1980s to make beneficial changes. However, during the last 20 to 30 years, Chicago has been in the ascendency, and the courts have moved away from the more moderate positions the Harvard School took. So today’s entrenched incumbent is the Chicago School, and we know pretty clearly that the Chicago approach has failed. That is the first camp.
The second camp—I am calling them “Modernists,” but you could call them “pragmatists” or “empiricists” or “progressives.” Frankly, I am not quite sure what the best name is, but this group sees that antitrust is indeed not doing its job. This group sees that the case law is not keeping up with economic reality. This group recognizes that the case law has evolved to be quite skeptical, if not downright hostile, to antitrust plaintiffs, in a way that is undermining the mission of antitrust, which is to protect and promote competition.
We need to make reforms to further that mission based on economic evidence. In many litigated cases, this will require looking at the evidence and doing fact-based analysis. There is no getting around the need to understand an industry to properly evaluate economic effects. We don’t have a lot of shortcuts, but we can make the analysis simpler through well-crafted rebuttable presumptions. That is what the Modernist group wants to do: to work within the existing framework, but with significant changes. Within this group, people differ in just how far they would move away from current doctrine.
The third group I am calling the “Populists.” The Populists aim to deconcentrate the economy to reduce the power of large firms. They have a broader agenda driven in many respects by the excessive political power of large firms. They see the consumer welfare standard as fundamentally flawed and believe it should be discarded.
Those are the three groups.
As many of you know, I am very squarely in the middle group, in the Modernist group. I don’t accept Maureen’s label of “equality” for this middle group. It’s not about equality of outcomes; it is about promoting and protecting competition. It is not about mandating specific outcomes, much less “equal” ones; it is about the competitive process. But I am happy to see that Maureen and I both agree that the group I am describing is in the center. The question here, like so much else in our politics these days, is: Can the center hold?
How did we get here? I want to mostly talk about how we got here and then I have already given a hint of where I think we need to go. The way I am going to do that is by first telling you a little bit about the evolution of the field of industrial organization (IO) Economics. IO Economics is the field within economics that includes antitrust economics as well as regulatory economics; the economics of organizations also is part of (IO) Economics. I am pretty sure most of the antitrust economists you work with are trained in industrial organization economics.
During the first part of the 20th century the field did not have that much theory; it was basically institutionally studying markets and firms and how things worked. This was a time when the industrial revolution was unfolding and large firms were growing.
Then, in the middle of the last century, with Joe Bain as a leader, the structure/conduct/performance framework came into ascendency. That framework focused on market concentration. The general view was if you had a concentrated market, you would tend to have poor performance. That framework applied especially to the manufacturing sector, in which there were many oligopolies. Poor performance in those industries meant tacit collusion or conscious parallelism that would lead to high prices, high margins, and high profits. None of those outcomes was good for the customers, for economic efficiency, or for final consumers.
The structure/conduct/performance framework fueled a structuralist view to deconcentrate industries. We saw that very much through the middle of the century, when that view greatly influenced antitrust law. But then, by the 1970s and into the 1980s and beyond, IO Economics moved beyond that highly structural view.
First, IO Economics recognized that concentrated markets can result from competition, so cause and effect are more complicated. Second, IO Economics learned that while there was indeed a link between market concentration and performance, that link was not as strong as had formerly been believed.
During my career—I got my Ph.D. around 1980—we have had two big strands in IO Economics. On the theory side, the game theory revolution has allowed economists to look at a very wide range of behavior, not just collusion or tacit collusion but all manner of things. On the empirical side, we have seen a real flowering of work on econometrically estimating demand systems to assess market power directly. On both sides, there have been great advances over the 40 years I am talking about, from 1980 to now.
That empirical literature, particularly during the last decade, has found increasing market power in the U.S. ecomomy. The theoretical literature has helped identify the myriad ways in which firms with market power can abuse that power and exclude rivals.
I find myself living in two worlds. In the academic world there is all this literature about identifying market power and exclusionary conduct. Concerns about the abuse of market power are widespread, and academic economists have assembled more and more evidence of growing market power—including the evidence based on merger retrospectives that I mentioned. That is the academic world.
And then, as an expert witness, I find the courts are increasingly skeptical of antitrust plaintiffs. The courts increasingly seem inclined to dismiss or discount a variety of anticompetitive business practices that industrial organization economists have observed and analyzed. So a yawning gap has grown up between what the relevant field of industrial organization economics is finding and where the courts are at.
With that background on the economics, let me go back to antitrust law, still in the “How did we get here?” mode.
Today, it is widely understood that during the 1960s the Supreme Court’s antitrust jurisprudence really went off the rails. The Court issued a bunch of opinions that were not well grounded in economics and did not hold up to scrutiny. The Court did not understand the economic effects of various practices, particularly vertical practices, as Maureen mentioned, which led to errors such as the per se rule against territorial allocation by a manufacturer. The Court also had difficulty distinguishing legitimate price competition from predatory pricing. In response to those errors, the Chicago and Harvard School scholars guided the Court back in a more sensible direction, based on a better understanding of the underlying economics. From my perspective as an economist, the Court went astray by not being well grounded in economics, and scholars from the Chicago and Harvard Schools assisted the Court to get more in line with economics through the 1970s and into the early 1980s.
Then what happened during the last 30 years or so—and this is where I differ with Maureen—was the Chicago School ideology really became much more the focus and the force of what we see in the case law. The Harvard moderation fell away. Bill Kovacic has written about this very nicely, so I think he is going to have some views on that today.
And by the way, Maureen, one reason I am not giving you Phillip Areeda in your Chicago camp is you should talk to Herb Hovenkamp. Herb has a very nice paper with Fiona Scott Morton about how the Chicago School took extreme views that were not shared by the Harvard School. We now see that in the case law; that is not what Areeda or the Harvard School was about.
The Court has again gone off the rails by ignoring economics, but this time in the opposite direction from the 1960s. As before, the correction needed is for the Court to pay attention to the economic evidence and build what we know from economics into the case law through legal rules, in this case through a set of rebuttable presumptions.
Right now we have a whole bunch of doctrinal assumptions baked into the law that are very favorable to defendants. These assumptions never had a good economic basis but now they are very hard to change. If the courts can move, dropping those assumptions is the way to do it. Of course, it is very hard for the lower courts to do that, and the Supreme Court does not seem so inclined. That is why it sure seems like we need legislation now in order to get there during my lifetime.
Let me say a little more about how things went astray in the last 30 years or so. My paper goes into some detail on this. It is a story told before about the Chicago School’s excesses. Jonathan Baker’s book covers this very nicely. What I do in my paper is I go back and look at Robert Bork’s book, The Antitrust Paradox, which I read within a couple of years of when it came out in 1978. I have my own copy that I heavily annotated in red pen in 1981. That is a professor’s prerogative. At many places I wrote “This is wrong,” “This isn’t correct,” or “These are strong assumptions.” Many economists knew at the time that Bork’s book was full of bad economics.
Let me use as an example Bork’s chapter on vertical integration. He says, “Antitrust’s concern with vertical merger is mistaken. Vertical mergers are a means of creating efficiency, not of injuring competition.” That is a bold and sweeping statement. How does Bork support this assertion? He has a very simple economic argument—you can call it a model—but then, when you look at it, it has all these assumptions built in. As a young professor, I’m thinking, “This isn’t right; this makes no sense; you can build a little model with that assumption, but if you change the assumptions a little bit you get the opposite result. How could you base broad policy conclusions on this deeply unscientific method, never tested through peer review?”
Why do I say “deeply unscientific?” Because on the theory side it just didn’t hold up. These were fragile, very simple models. A referee would say, “No. That is a simple model, but not a general result.” You can start there, but in his model of vertical integration he doesn’t even have competitors to be excluded, so then he says, “You can’t exclude.” It’s kind of nonsensical, even laughable, from the point of view of an economist. Bork is neither a game theorist nor an economist, but that’s what he says.
Bork’s claim about vertical mergers also was unscientific because it was not supported by systematic empirical evidence. There is some evidence, of course, on both sides of these issues, and sometimes Bork and other Chicago School scholars would cite some evidence. But their claims went far beyond the evidence. Take Bork’s claim that vertical mergers are procompetitive. Why don’t you look at a large set of them? How about looking at the vertical mergers where one or both of the merging firms have a lot of market power to begin with? Fiona Scott Morton has a recent paper with Marissa Beck looking at the empirical evidence on vertical mergers, and that evidence does not support the bold claims made by Bork and the Chicago School.
So Bork’s whole approach was deeply unscientific. Largely for that reason, it was not echoed by the economists of the day. Yet it was clothed as though “we are bringing economics into the discussion.” But that is not what Bork and other Chicago School scholars were doing. They were bringing in a certain ideology under cover of economics. So that’s what happened.
What should we do now? First, we should stick with the central goal of antitrust, which is to protect and promote competition. However, I think that “consumer welfare standard” as a term has become confusing and misleading. Even some judges get thrown off by it. So I favor replacing the term “consumer welfare standard” with the term “protecting competition standard.” I made this suggestion when I testified at the FTC Hearings in November 2018. This change of terminology does not involve changing the mission of antitrust. The point is to avoid confusion because of the way that the term “consumer welfare standard” has evolved, and Bork’s misuse of the term 40 years ago has caused ongoing confusion.
Substantively, what I propose is a series of rebuttable presumptions. I give some examples in the paper, four cases, all of which I was involved with on the government side, that I think came out the wrong way and would come out the right way if the law incorporated certain rebuttable presumptions.
First, the Actavis case. I shouldn’t say the Actavis case came out the wrong way. I am content with the result, but the Court should have made clear that if a branded company pays a generic and there is a restriction on entry, it is the branded company’s job to explain what the branded company got in exchange for that payment, not the plaintiff’s job to prove it was “unexplained.”
The American Express case: American Express prohibited merchants from offering discounts to customers who use rival credit cards, which were less costly to merchants. American Express limited the ability of its rivals to compete on price; American Express had the high-price business model. I agree that American Express should have the freedom to choose its own business model—high merchant fees and high rewards to cardholder. But American Express should not be allowed to impose restrictions on merchants that prevent its rivals such as Discover from having their own business model—lower merchant fees and lower rewards to cardholders. The American Express case should have been an easy case, but instead the Court went down a rabbit hole about market definition and two-sided this and that. That was a distraction and a shame.
The Qualcomm case was a sad outcome in the Ninth Circuit. It’s a really screwed-up opinion. I’ll have more to say about that in future writings.
In T-Mobile/Sprint, if the court had given the structural presumption in mergers (which is in the law of course, based on Philadelphia Natioinal Bank) a greater weight, then I think we would have gotten a different outcome there.
GARY ZANFAGNA: I think that sets the stage for a discussion that is going to be fantastic. You both really have, at my request, put those papers together to benefit this program, so thank you. They are phenomenal.
My first question is for Christine. It is an obvious softball question, with a lot of meaning to it though: How would you assess the visions that Maureen and Carl have offered for the future of antitrust? How would you assess what they are saying?
CHRISTINE WILSON: Thank you, Gary, for inviting me to participate in this discussion, and thank you to Maureen and Carl for covering the waterfront in a very short amount of time and, frankly, in a concise way in your papers, which I commend to everyone. They are great.
Maureen and Carl have described the future of antitrust in a way that I think accurately captures the current popular and political culture. Spoiler alert: I am firmly in the liberty camp that Maureen described.
There is a great deal of disillusionment on the economic front. We are told that income inequality and a host of other ills are the fault of capitalism. But I view the problem differently. Many businesses operate within a system in which lobbyists engage in rent seeking and legislatures and regulators pick winners and losers. To pick up on Maureen’s point, markets cannot self-correct in this environment, and citizens typically lose out to the special interests, so they understandably despair. In other words, I think the widespread economic disillusionment is with crony capitalism, not capitalism and free markets. It is the system of rent seeking and competition-distorting regulation that we need to reject to restore the faith of the citizenry in our antitrust regime.
Today, so-called Big Tech is identified as the source for much of the public’s dissatisfaction. But there are many causes for this disillusionment with Big Tech, including concerns not just about competition but also about consumer privacy and content moderation.
When addressing the issues regarding Big Tech and other firms, I agree with Carl that competition law should be focused on competition concerns and grounded in economics. Concerns about consumer privacy can be addressed with federal privacy legislation. Concerns about content moderation can be addressed by amending Section 230. Both of those topics are full discussions on their own, so we will set them aside, but concerns that are tied to competition policy bring us to our discussion today.
Maureen and Carl covered several possible reforms. Given time constraints, I cannot address each of the proposals they described, but I do want to react to a couple of points.
First, I think it is interesting that Carl, in his paper in particular, points primarily to Robert Bork and the Chicago School for what he views as the failings of antitrust today. Yes, Bork started a conversation with his seminal book, The Antitrust Paradox, but, as Maureen pointed out, the evolution or revolution of antitrust in the 1970s and 1980s was the result of both the Chicago School and important voices at Harvard. I have been practicing antitrust law for far longer than I care to say, but, like many of you, I spent far more time reading Areeda and Hovenkamp’s treatise than Bork’s book. In fact, many of the policies that concern Carl are far more closely affiliated with Harvard than Chicago, including Areeda’s work on predatory pricing.
And I think it is important to note that the Chicago School was not monolithic. Bork thought competition arose with three firms, Posner wanted to attack four-firm concentration at 60 percent, and Baxter’s Merger Guidelines created thresholds corresponding to reductions in the number of competitors from six-to-five.
Second, Carl advocates replacing the consumer welfare standard with a protecting competition standard. But the organizing principle for antitrust must be administrable, predictable, and credible. The protecting competition standard, I submit, fails to satisfy those criteria. What is “a unit of competition?” How is it to be measured? Even when Carl attempts to operationalize the standard in his paper, it depends on a judgment that conduct disrupts the competitive process. But identifying conduct that disrupts the competitive process may be similar to Potter Stewart’s description of obscenity: “I know it when I see it.”
I also worry that the goal of protecting the competitive process is a slippery slope that will lead to the protection of competitors, not competition.
So I remain a firm advocate for the consumer welfare standard, which, contrary to assertion, takes into account all of the many facets of competition, including price, output, innovation, and so on.
One additional point. Among the proposals from Carl’s progressives is a recommendation to change presumptions in merger evaluations to increase enforcement. I question whether there are cases that changed presumptions would affect. The government has an incredibly strong track record. No merger litigated by the DOJ under the 2010 Horizontal Merger Guidelines has closed, and the FTC has won 11 of 15 challenges. In other words, under the 2010 Horizontal Merger Guidelines, the federal government has won 77 percent of merger challenges resolved by the courts and the FTC and DOJ have won every appellate case since 2010.
In addition to the litigated victories, there are many more cases where the parties abandoned transactions after the government announced its intent to challenge. Last year ten mergers were abandoned after the Commission started investigations. I am not sure there are additional cases that would have been won by the government with a change in presumptions that would not have been won under current presumptions.
I am concerned not just about this legislative proposal to change merger presumptions, but legislative proposals more generally. Legislation is a blunt instrument, and the process of legislating is fraught with those special interests that I discussed at the outset.
That said, if we are considering legislative change, there are proposals I can support. As a student of Tim Muris, I would say it is important to have a positive agenda, so I want to take a minute to lay out proposals that someone in Maureen’s liberty camp, like me, can support.
I would love to see a fix for Section 13(b) of the FTC Act. Two issues are at stake: (1) the ability of the FTC to challenge illegal conduct that has ceased; and (2) the FTC’s ability to obtain monetary relief, which far more frequently arises for consumer protection matters, not antitrust matters.
I support additional funding for the agencies, including through merger filing fee adjustments.
To address stakeholder perceptions I support legislative clarification that the same standard applies to merger challenges at both the FTC and DOJ.
I support giving the FTC authority over nonprofits and common carriers.
Legislation is not necessary for the next two, but I support far more merger retrospectives and more transparency in decision-making—not just for cases we bring, but for cases we decide not to bring.
This is just an illustrative list. There are many more, and we may discuss a couple of others as the session continues.
GARY ZANFAGNA: Thank you, Christine. Very helpful.
Let’s move to Fiona. Fiona, same question to you: What are your thoughts on the visions that Maureen and Carl set out?
FIONA SCOTT MORTON: I guess, not surprisingly, I agree completely with Carl. I come from the same tradition of using economics in the real world, so that means the economics has to be right and up-to-date and reflect what is happening on the ground. The courts have been busy codifying into jurisprudence assumptions that are not up-to-date and not supported by the evidence and do not reflect reality on the ground, and that does not help us to capture anticompetitive conduct when we see it.
I have a few reactions to the discussion so far.
I would say I am just the economist, but I never thought legislation was a blunt instrument. I thought it was exactly how Congress got to say precisely what it wanted to do. So I think that is maybe not correct.
Also, I agree that large firms are grabbing more rents and they may be doing that through lobbying. I am encouraged to see a Republican who would like to get money out of politics. That would be really great. I think the other way that they preserve their market power is through the conduct that the antitrust laws are designed to prevent.
So I am in favor of going after both of those routes, both the lobbying route and the “dark money” and so on, and also the conduct route, using a position of power to exclude a rival for example.
Which person wrote at which law school in which decade is irrelevant to my opinions. I don’t really mind what somebody said at Harvard or Chicago or wherever. I think what is important is what they said, and what we have in the past literature is a lot of stuff that just does not hold up to current scrutiny.
We know consumers have default bias. We know that markups are very high when products are differentiated. We know that oligopolists do not price at marginal cost. These are just things that need to be part of the way we enforce and not be ignored by the courts.
It is interesting to me furthermore that both the right and the left, the people who are not in Carl’s and my group, want predictability. I do not think that if you generate predictability that helps consumers because today, predictably, a defendant can do whatever it wants. In another world, maybe if we blocked all mergers, predictably, firms could not merge. I do not really think that is a great way to run a market economy. I think that what is great about capitalism is that firms are free to be creative and try new things and when they go outside the rules of the road we stop them. We need rules of the road to make capitalism work because there is an incentive, as previously discussed, for firms with market power to get more of it and keep it, and you have to have antitrust laws to stop them from doing that, to instead have them try to invent new things, like vaccines or tablet computers or electric cars, that we all want.
So I think predictability is the wrong goal. That just means that you are going to have errors.
I am also a little surprised that Christine thinks that Carl’s protecting competition standard is too hard and unworkable because he did explicitly say it is the same as the consumer welfare standard; he is just changing the name.
So if the consumer welfare standard is not workable and that is what we are doing right now, we have a problem. That means we’ve got to get rid of the rule of reason and just let firms do whatever they want, I guess, and I think we know where that would end. So I don’t think that is quite right.
The last thing I will do is make a statistical point. If you look at the record of the government in the cases that it brought, that is not an evaluation of how strong the law is because enforcers think carefully before they bring a case about whether they could win it. They may see perfectly well that consumers are harmed, they may see perfectly well that competition is impeded, and they may have been told by the courts that in this predation case unless price is below cost and they can prove that the recoupment actually happened—not that the firm planned to have it happen, not that they had done an analysis of it and expected to have it happen, but that it actually did happen—so in other words, the agency better wait for a number of years to sue because the recoupment is probably not going to happen in the first week. An agency might look at that and say, “Well, we have harm here, but we will lose if we bring that case, so we are not going to bring it.”
Think of lining the mergers up on a line from worst to best. The courts have a cut-off, and the agencies are going to bring cases that are on one side of that cut-off or very close to it. So the fact that the government wins does not tell us that the courts’ cutoff is in the right place. It just tells us that the government is responding to incentives just like everybody else. So that is a problem.
I think, like Carl, I really do not want to be retired before we have an actual shift in what the courts are doing, and going that long not protecting consumers and not being able to restrain the market power that we now see so prevalent in the economy.
I think the courts are likely to be on a one-way ratchet. There is work on this showing that the courts do move like a one-way ratchet and Congress every so often has to say, “No, here’s what we meant, here’s what we meant.”
But I think the problem is urgent now and I think waiting for the courts to figure it out is just a waste of time. We know what is wrong and we should lay out some instruction on how we expect them to do this, and that will get us to a good place a lot quicker.
GARY ZANFAGNA: Let’s move on to question number 2, which is for Bill: What should the antitrust agencies do to improve antitrust enforcement—that is assuming that you think improvement may be appropriate in certain ways? That is a good follow-on to what Fiona set up.
WILLIAM KOVACIC: My inspiration is testimony Thurman Arnold, the Assistant Attorney General for Antitrust, gave to the Temporary National Economic Committee in February 1941. Arnold laid out a vision of a collaborative joint venture between the Federal Trade Commission and the Department of Justice. He described the complementary, overlapping policy instruments of the two agencies and said the ability of the U.S. antitrust system to progress depended on harnessing these capabilities, not as a matter of reluctant, occasional interagency cooperation, but through a fully cooperative recognition of comparative strengths.
Arnold also proposed that the Congress give the FTC greater funding to do studies that help guide DOJ law enforcement and to bring more cases where the Commission had a special capacity to shape the law. I can find no instance since 1941 in which an Assistant Attorney General for Antitrust has made such recommendations publicly on behalf of the FTC.
Arnold’s comments in 1941 stand in contrast to the prevailing nature of the DOJ-FTC relationship since the Commission opened for business in 1915: a reluctant joint venture. Today I want to suggest how the DOJ-FTC joint venture can work better by recognizing a sense of common cause.
In offering my suggestions, I acknowledge that the 80 years of history since Arnold’s TNEC testimony are not encouraging. Do the federal antitrust agencies cooperate now and then? There have been some instances of good collaboration. For example, the DOJ and FTC have drafted some useful guidelines together. Nonetheless, a willing acceptance of a common vision for U.S. competition policy could accomplish much more.
A starting point would be for the federal agencies to restate what they believe to be the purposes of the antitrust system going forward. The audiences for this restatement are the staff of the agencies and the competition policy community of academics, advocacy groups, practitioners, and public officials at home and abroad. There is a growing need for the federal agencies to respond to the intense modern debate about the proper aims of competition policy and present their current view about what goals federal enforcement should seek to attain.
A restatement of goals may require the federal agencies to spell out their objectives with a new vocabulary. As Professor Michelle Meagher stated at an earlier session at this Spring Meeting, the phrase “consumer welfare” comes with heavy baggage. The very mention of the phrase tends to provoke contentious, sterile discussion that lacks a careful initial definition of terms.
A truly harmonious DOJ-FTC collaboration could do better with a fresh start that, among other means, uses public consultations to help define how the federal agencies view the aims of antitrust law today. A useful focal point for public consultations and internal deliberations between the agencies would be to study how and why conceptions of the goals of U.S. antitrust law have changed over time. From the late 1930s to the mid-1970s, U.S. antitrust policy arguably traveled on a path that Congress intended. Doctrine and policy reflected an egalitarian vision that was especially evident in Brown Shoe, where the Supreme Court confronted the possibility that vertical integration brought about by the merger might reduce prices and increase output. The Court said that Congress intended to sacrifice at least some degree of efficiency for the sake of preserving a more egalitarian business environment. Measured by this vision, antitrust policy since the mid-1970s has gone astray.
A number of forces caused the abandonment of the egalitarian goals framework. One important influence was the work of Phillip Areeda and Donald Turner. In the first volumes of their Antitrust Law treatise in 1978, they urged courts to ignore the egalitarian vision because its application would vary almost impressionistically from judge to judge. The first volumes of the Areeda-Turner Treatise also depicted private rights of action as they existed as a poisonous influence on the antitrust system. To a degree that is overlooked today, Areeda and Turner fostered the view that private treble damage cases, often tried before juries, produced excessive deterrence, especially in monopolization cases that might be considered to be close calls—where mandatory trebling was disproportionate to the harm caused by the improper exclusion. Areeda and Turner urged courts to reframe liability tests to make it more difficult for private litigants to prevail.
The continuing influence of Areeda and Turner is evident in the Supreme Court’s Trinko decision. Justice Scalia’s opinion for the Court majority is carefully designed to gain the approval of Justice Stephen Breyer, who taught on the Harvard Law School faculty with Areeda and Turner. The Scalia majority opinion contains approving citations to Areeda’s scholarship and to the Breyer opinion for the First Circuit in Town of Concord and to the Breyer dissent in Iowa Utilities Board. Note, as well, that Justice Breyer joined the Court majority in Twombly, which also expresses wariness about private rights of action. The modern Harvard School influence of Areeda and Turner lives on emphatically in these and other landmarks of U.S. antitrust jurisprudence.
To study Areeda and Turner carefully is to see a strategy for expanding antitrust enforcement. Areeda and Turner distrusted private plaintiffs but did not distrust the government agencies. By contrast, Robert Bork often wrote about the government agencies with contempt. The Antitrust Paradox is scathing in its assessment of the motives and the performance of the Department of Justice and the Federal Trade Commission. Bork described the agencies as irrational and bent upon seeking power as an end in itself. Antitrust Paradox is a damning assessment of the public sector. Areeda and Turner never thought that way about the public enforcement institutions.
One way for the public agencies to work with what they have is to go into the courts and say, “We are not the private treble-damage claimants whom you distrust so much. We are the government of the United States. We are using our distinctive responsibility as public institutions to formulate policy.” One part of such a strategy is for the FTC to rely more heavily upon administrative litigation to advance doctrine in the way it did in cases such as PolyGram and North Carolina State Board of Dentists (a case which emerged directly from Maureen Ohlhausen’s work in the FTC’s Office of Policy Planning) to draw attention to efforts by professional boards to suppress new service delivery models that would increase access to vital services.
An enhancement of government enforcement would require a new approach to forming a litigation strategy. It would require the DOJ and the FTC to say, “Where do we want to move the frontiers outward? Should the government have to be saddled with the recoupment requirement in predatory pricing cases? For example, shouldn’t the government be trusted, owing to its broader public interest perspective and accumulated experience, to develop new approaches for assessing exclusionary pricing strategies—such as drawing upon research that dates back to the late 1970s on how firms can use a reputation for toughness to deter entry?
The approach suggested here requires a common effort to identify priorities, diagnose where the case law has become too restrictive, and offer government intervention as an alternative. Imagine if the FTC might address exclusionary pricing issues in an opinion that attains the sophistication of Terry Calvani’s decision for the Commission in the 1980s in the Hospital Corporation of America merger case. The Seventh Circuit affirmed the Commission’s finding of liability in the HCA case, and Judge Richard Posner’s decision for the court of appeals emphasized the quality of the FTC’s decision. The agencies profitably can examine their base of experience and ask: Where did the successes come from? What are our greatest hits? How do we do them again?
Achieving good litigation results will require a continuing investment in research and development in the form of assessing past cases, but it also involves looking outside the United States to borrow good things that are happening in other agencies. I tout the United Kingdom’s Competition and Markets Authority because I believe the CMA is performing at a level second to none in the world with respect to what they do and how they do it. For example, several years ago the CMA realized that it could improve its performance, and better understand developments in technologically dynamic sectors, by improving its data analytics capability. The CMA has built a data team that now has over 40 people. The CMA DaTA unit is visibly improving the agency’s competition and consumer protection work, including its litigation programs. There are promising moves by which the DOJ and FTC are engaging in deeper forms of collaboration with their foreign counterparts, and these suggest a promising path for future work.
So my plea is, foremost, for the DOJ and the FTC to recognize the benefits from enhancing the operation of the federal antitrust joint venture and to take steps to realize its fullest possibilities in the way suggested by Thurman Arnold’s testimony before the TNEC panel in 1941. At the moment, the federal agencies are operating well inside the production possibilities frontier. My suggested approach departs from the historical pattern of occasional, as-needed cooperation—to work willingly together to learn intelligently from what the agencies have done before and to jointly devise another path, to develop common cause with state officials, and indeed to adopt superior techniques developed abroad.
GARY ZANFAGNA: Thank you, Bill, very much. That is a lot to think about.
Let’s turn to the next topic. Christine, back to you. I want to talk next about something that we have heard a lot about in a couple of different contexts. We have heard that Supreme Court precedent has been a challenge to antitrust enforcement—in other words, where the Court has moved, some of the decisions they have made. Do you agree with that? Is that a correct characterization of where the Supreme Court is in terms of antitrust enforcement?
CHRISTINE WILSON: In my answer to this question, I am going to fulfill my designated role as provocateur.
I think that the characterization that Supreme Court precedent limits enforcement is based on an assumption that the Supreme Court, perhaps because of its current composition, opposes effective antitrust enforcement, but I think this assumption ignores important recent Supreme Court cases that have actually expanded antitrust enforcement. In particular, the FTC has obtained some important decisions limiting application of the state action doctrine.
In the 2015 decision in the North Carolina Board of Dental Examiners, the Supreme Court held that, because a controlling number of the Board’s decision makers are active market participants in the occupation the Board regulates, the Board can invoke state action antitrust immunity only if it is subject to active supervision by the state, and, in that case, the Court said the requirement was not met.
Two years earlier, in Phoebe Putney Health System, a unanimous Supreme Court ruled in favor of the Commission and reversed the dismissal of our complaint, holding the state action doctrine did not bar the Commission from taking action.
And apart from state action cases, consider Actavis, which, frankly, established a precedent that is plaintiff-friendly.
So when we are drawing conclusions about the Court, it is important to consider these recent Supreme Court decisions that promote more aggressive enforcement.
In fact, as Carl acknowledges, there is an evolution in Supreme Court thinking regarding antitrust. In Kimble v. Marvel Entertainment in 2015 the Supreme Court explained that Congress intended the Sherman Act’s reference to restraints of trade to have changing content and authorized the Court to oversee the term’s dynamic potential. We can observe that the Court has revised legal analysis as our economic understanding has evolved.
But Carl and others are concerned with the speed of the evolution of Supreme Court precedent. He does not want to wait 40 years for change.
First, we should not be surprised that evolution is slow. There are relatively few conduct cases, and even fewer that make it to the Supreme Court. The slow evolution may be a matter of numbers rather than an indictment of the Court. But I agree with Carl and I agree with Bill that FTC and DOJ leadership is important if we wish to see a change in the antitrust analysis in the Court.
I think there is a significant role for amicus briefs from the FTC and DOJ. I am proud of the FTC’s track record in submitting amicus briefs on important areas of competition law, which we have done on numerous occasions since I joined the Commission.
In addition, as Bill mentioned, the Commission’s Part 3 process provides an important way to refine and update antitrust analysis. As Bill mentioned, we saw this approach in moving the law in PolyGram Holding, known also as “the Three Tenors case,” where the D.C. Circuit endorsed the Commission’s inherently suspect abbreviated rule of reason analysis, which was another development to aid enforcement.
Those who are concerned about Supreme Court precedent advocate replacing what they view as unfavorable judicial decisions with legislative rules. If we are wiping the slate clean, I think the entire slate should be erased. If we replace an unfavorable judicial decision, we should also replace all of the corollary rules and decisions associated with that opinion. We should avoid cherry-picking. Take, for example, the topic of market definition. I recently co-authored with Keith Klovers a paper that will soon be published in the Antitrust Law Journal that observes that market definition has narrowed over time, but also observes that corollary rules have not similarly evolved. The development has a distortionary effect on our analysis.
Philadelphia National Bank is a great example. There, the Supreme Court examined the legality of a bank merger. It defined the market broadly as the cluster of products (various kinds of credit) and services (such as checking accounts and trust administration) denoted by the term “commercial banking.” The Court explained that only benefits arising in that defined market should be balanced against harms from the merger in that market.
Today, though, markets are defined more narrowly. The DOJ defines separate relevant markets for checking, savings, and so on. In other words, the DOJ defines the relevant markets in bank mergers much more narrowly than the cluster of products and services that the Court found in Philadelphia National Bank.
At the same time, antitrust has retained the ban on out-of-market efficiencies first advanced in that decision. The effect? Efficiencies that would have been accepted under the broad market of Philadelphia National Bank are now rejected.
Back to Gary’s original question: Are there Supreme Court cases that, in my view, impede sensible antitrust analysis and enforcement? The answer is absolutely yes.
First, courts applying the Philadelphia National Bank rule against out-of-market efficiencies have failed to recognize that the Supreme Court in that case rejected precisely the kind of narrow product markets that are now routine. In other words, the Supreme Court envisioned an efficiencies analysis fundamentally different than what the courts apply today. To address this issue I would revoke the PNB prohibition on multimarket balancing of pro- and anticompetitive effects.
Two other decisions I would address are Otter Tail Power and Aspen Skiing. I know there are those, including many on the panel, who would like to breathe new life into the essential facilities doctrine, but I disagree. The problem with the essential facilities doctrine is that it adopts a static, not dynamic, analysis. It sees that the facility exists today and that it would be useful to others. It does not consider how compelling a company to make facilities available to rivals will undermine the incentive to construct those facilities in the first place. The same problem arises with compulsory licensing for intellectual property.
That takes me back to one of the points that Fiona made. She questioned the benefit of predictability of antitrust rules. Frankly, if we want a robust market economy, the rule of law, predictability, and certainty are necessary to incentivize investment and innovation. If we create regulatory uncertainty or facilitate a regulatory roller coaster (as we did with net neutrality), then we are going to experience a significant loss of competition and innovation.
GARY ZANFAGNA: I want to go to Sandeep for a second and talk more about the Supreme Court, and then we will go to Rich to finish up on the agency work. Sandeep, I have the same question for you that Christine just talked about in terms of the precedent the Supreme Court has set forth and the obstacles to antitrust enforcement.
SANDEEP VAHEESAN: As a preliminary matter, some table setting is necessary because answering this question requires laying out what your vision is of the antitrust laws and what your vision is of a fair market.
In her paper Maureen used a very curious phrase. She contrasted government-designed markets with free markets. Unfortunately for her, this is a false and mythical dichotomy. Every market is a government-designed market; property, contracts, corporations are products of government design and action. Property is just another name for entitlements to things, tangible and intangible, that are backed by the coercive power of the government.
There is an ongoing and dynamic question: What things should be entitled to this protection? The law once recognized property rights in human beings. So we shouldn’t pretend the law on property is static or should be static. Similarly, what contracts should the courts enforce? Shelley v. Kraemer famously held that the enforcement of racially restrictive covenants in housing is unconstitutional. So the government structures and governs the marketplace one way or the other, including through interpretations and applications of the antitrust laws.
I think use of language like “free market” and “market forces” really obscures the state and legal construction of a marketplace. It is an attempt to naturalize the existing configuration of rules and present any changes to them as unnatural and unjustified. “Market force” is almost characterized like gravity or electromagnetism, when it is something really quite different.
You commonly hear the term “we shouldn’t pick winners and losers.” I’m sorry, that’s the very essence of law. The law picks winners and losers. The essence of law is who gets to do what when. So the debate is not free markets versus government-designed markets, but over who sets the market rules—Congress, agencies, or courts—and the content of these rules.
I think it is important to reflect on the changing vision of the antitrust laws over time. In the postwar era you had one vision of the antitrust law. The courts took legislative history very seriously, as Bill pointed out, and held that the antitrust laws had multiple purposes, including to protect consumers and suppliers from corporate power, but also disperse economic and political power broadly. Say what you want about legislative history as an interpretive aid, but surely the views and philosophy of the drafters, elected representatives, should trump the ideological preferences of assorted academics like Robert Bork and Phillip Areeda.
From the 1930s to the 1970s we had a series of decisions, like Alcoa and Brown Shoe, in which judges looked to the legislative history to interpret the relatively open-ended language of the antitrust laws. They, in other words, respected legislative prerogatives and congressional supremacy-a model of judicial restraint.
Starting in the 1970s the Court did a real 180. The Court looked to the history of Robert Bork. He said Congress was concerned primarily, if not exclusively, with consumer welfare when it passed the Sherman Act. This is bad history. It has been debunked by a number of legal scholars and historians. Judge Wood in her House testimony last week reminded us of Bork’s false history.
In recent times the Court, implicitly recognizing this, has said: “Actually the Sherman Act is a common law statute. We will treat it as an invitation for judicial legislation.” But this is also bad history. Law Professor Sanjukta Paul has a forthcoming article in the Yale Law Journal explaining why Congress did not establish the Sherman Act as a common law statute.
This is the bad history underlying contemporary antitrust jurisprudence.
But I would argue there is also bad economics underlying it. One theme that Christine mentioned is the law should protect the incentive of monopolists. The law prohibits monopolization, attempted monopolization, conspiracies to monopolize; it does not talk about protecting the prerogatives and profits of monopolists.
And what about the incentives and opportunities for new entrants and rivals? The Trinko case is especially interesting and in some ways amusing. It talks about the importance of maintaining monopolists’ incentive to invest and characterizes Verizon as a dynamic innovative company, but in reality Verizon was a franchised telecom entity that enjoyed a state monopoly for decades. So this was not the company that the Court characterized it as. There is a major mismatch between the Court’s soaring Schumpeterian tribute to monopoly and the defendant in front of it.
Similarly, on predatory pricing I think the theory is radically simplified, and indeed simplistic. The theory articulated in decisions like Matsushita and Brooke Group failed to grapple with the deterrent effects of predation—something Bill alluded to as well—and relies on very stylized models of how finance is allocated and assumes that everyone has equal access to finance, which is just not true.
The end result is the burdens have been steadily shifted over time to plaintiffs. The rule of reason became the default standard starting in the 1970s, and in recent times the rule of reason has really been supercharged in decisions like American Express and now National Collegiate Athletic Association v. Shawne Alston, which is before the Supreme Court.
The rule of reason today functions like open-ended cost-benefit analysis in which the burdens are all on plaintiffs and defendants have numerous escapes. The practical result is de facto legality for many practices in mergers.
The law is too complicated, it is costly, time-consuming, and based on bad history and bad economics. I will conclude by saying I believe the vision of Congress in 1890 and 1914 was the right one then and is the right one now for those who believe in fair, democratic economic life. I believe we should honor those congressional intents, whether through rule-making or new legislation, and radically simplify the law to ensure that wrongdoers are quickly and efficiently brought to account.
GARY ZANFAGNA: I want to move on to the next question. Bill, let’s talk about mergers. Does the agencies’ view on merger review need to be thought through?
WILLIAM KOVACIC: Let’s assume that the Congress does not come to the rescue right away. Instead, assume that for a year or longer, we will be working with the statutes we have now.
Within the existing mandate, a number of adjustments would be desirable. In many ways my thoughts draw upon joint work with my colleague at King’s College London, Alison Jones.
One useful step is to emulate good practice outside our borders. It would be very helpful for the federal agencies to issue informative closing statements that explain why the agency has ended an inquiry without taking action. A good place to start is with merger control in each instance in which an agency has issued a second request. Explaining decisions not to prosecute can improve the quality of an antitrust system. Without making a claim about whether the decision not to act was correct, I would offer the FTC’s closing statement involving the Carnival Cruise Line’s merger in the early 2000s as a good example. The Cruise Lines closing statement presented a detailed discussion of the agency’s assumptions and its expectations about the affected market in the future.
A second step also involves better disclosure. The agencies should return to the practice, begun in the 2000s, of revealing data sets that indicate why the agencies have taken the decisions they have. Owing in large part to the work of FTC economist Malcolm Coate, the FTC began a routine of periodically publishing a report that set out the assumptions embedded in staff memos and other decision-to-prosecute documents about entry and efficiency arguments. These reports provide useful information about what guided FTC decision making in merger review. Notably, the FTC undertook this disclosure program on its own initiative. Nothing compelled it to do so. When I was at the Commission at the time the disclosure program was developed, there were bitter objections from case handlers who said, “If we put that out there, everyone will know exactly what we did.” The answer was: “That is the point.”
Thus, without any congressional command, without any gun to the agency’s head, the FTC started putting into the public domain valuable data sets about what took place. This has facilitated an extensive amount of second guessing, and much of it has been critical (as the case handlers feared). John Kwoka could not have made the contributions that he has provided to the debate on merger policy without those data sets. They are fundamental to what he has done. Despite the discomfort it can cause for a competition agency, I would suggest that such disclosure should be a routine part of agency practice.
My third suggestion involves the use of what might be called “big antitrust data” to inform the assessment of past experience as a way of identifying promising paths ahead. There is a good FTC tradition that goes back to the late 1970s of taking a look at what happened in individual enforcement episodes, asking how decisions were taken, and to consider how to do it better the next time.
A good evaluation program does not happen by accident. At the time of a decision to prosecute or to close a file, the agency must carefully document the assumptions that support its decision. This requires honesty in spelling out what the agency did and stating doubts or uncertainties the agency felt regarding whether it was making the right call.
The later stage of an evaluation process is to return to the matters (without necessarily collecting elaborate data about subsequent market developments) and ask: How did things turn out? How do the agency’s prior assumptions match up with actual experience? This cycle of analysis can assist the agency in deciding what new matters to bring. For litigated disputes, systematic review of past appearances in court can help identify which of the agency’s litigation processes worked well and which could stand improvement.
The results of these evaluation efforts are linked to my suggestions for the Federal Trade Commission to make greater use of the administrative adjudication mandate. The FTC can learn a lot about building future litigation programs by studying the good results achieved in administrative adjudication matters, such as Robert Pitofsky’s opinion for the Commission involving the Brunswick/Yamaha joint venture and the Terry Calvani opinion for the FTC in Hospital Corporation of America.
Imagine that the FTC, for example, in a merger case, brought its distinctive portfolio of policy-making tools (including the systematic review of past experience) to bear upon the matter at hand and approached the court with the following message: “This is our expert judgment about what the analytical standards ought to be and how they should be applied here. We support this judgment by setting out the full range of learning that has informed our work.” I would like to give this approach a full test as a way of gaining deference for the FTC from the courts in its effort to define antitrust’s analytical content and to justify the application of this methodology to specific business practices.
I return to my suggestions about the possibility for establishing an enhanced, cooperative joint venture between the DOJ and the FTC. In spirit, the two agencies are farther apart than the large city block that stands between them in downtown Washington, D.C. One vital topic for discussion for the agencies to consider is this: When the Supreme Court takes a merger case on substantive standards, for the first time since the mid-1970s, what do we want that opinion to say? What will the Solicitor General’s brief say about the appropriate test for implementing Section 7 of the Clayton Act? What will the U.S. government say to the Court about the framework of goals that should animate merger control?
I am with Sandeep Vaheesan all the way in his assessment of how diverse, how broad-based, how pluralistic that goals framework was through the 1960s. At the same time, I am sobered by the work of legal historians like Jim May, whose examination of the relevant legislative history indicates that many different policy impulses inspired Congress to enact the antitrust laws. These aims were varied and not always internally coherent. Congress did not reconcile all of its competing aims, and it left open difficult questions, which persist today, about how to realize its vision for the antitrust system.
In future merger challenges, the agencies should be prepared to press cases through the courts of appeals and ultimately to the Supreme Court. If the Court endorses a permissive vision of merger control that conforms to developments in a number of lower court decisions since the mid-1970s, then the agencies can turn to the Congress and say that legislative rebalancing is essential to reset the system. During his tenure as Assistant Attorney General for Antitrust, Joel Klein sometimes spoke about the importance of litigation as the means for sustaining a conversation between the antitrust agencies and the courts. In general, an increased tempo of engagement between the federal agencies and the courts is necessary to enrich this conversation, and merger review is an area of antitrust policy that would benefit from it, especially if it brings cases before the Supreme Court.
GARY ZANFAGNA: Absolutely. I very much agree with that. Rich, you are doing double duty here. I want you to talk about improving antitrust enforcement and also agency merger enforcement, so wrap those together if you can.
RICHARD PARKER: I will spend more time on enforcement. I have three points on enforcement.
The first is this is not business as usual. With populism of the left and right, with concerns of citizens about companies with huge market caps and with bit profits and with lots of private data, concerns about globalization, and a literature that Carl cited that says we really do have a concentration problem, this is not like the Antitrust Modernization Commission, which I thought did a great job. We are in a whole new ballgame here.
I think whoever runs these agencies, the American people and Congress and everybody else can expect them to look at this set of issues that is now affecting antitrust. Gary, I want to thank you for making this the centerpiece of your year and for making the ABA a place of convening to discuss those issues.
But let me talk about the tools. Whenever you think about problems with concentration, you think about Section 2. Of course you do.
I am not making any opinions at all about the Google case or the Facebook case or the XYZ case. I am not saying the government is right or Google is right or anybody is right. I am talking generally.
I am not going to be appointed to anything, but if I were, the first thing I would want to do is have a Section 6(b) study or something that shows whether we really have a problem and, if so, what it is, so you don’t go off half-cocked with legislation and exotica in antitrust theory. That’s number one, I want to get some information.
Number two, when you think about Section 2, what do you think about? You think about Microsoft. That is the best, most important opinion that has come down over my career, and that is the rule of reason, and the rule of reason makes a lot of sense.
If I am an enforcer, here’s what I think.
Step one, you’ve got to show an anticompetitive effect. I know how to do that.
Step two, if I am defense counsel, I can probably think of some efficiencies, I can probably think of a business justification because if you can’t think of a business justification, you are Goliath and not the Jolly Green Giant and you’re done. But let’s assume that you have a business justification.
The problem is in Step three: How do you make the balance? When Professor Hovenkamp says he doesn’t know how to do it, I guarantee you Rich Parker doesn’t either. How do you balance an exclusionary conduct against “I’ve got all kinds of scale efficiencies?” I have no idea how to do that.
So what I would look at, and what I think the agencies ought to look at, is what Carl Shapiro and maybe others on this panel did with the 2010 Guidelines: Get some people who are a lot smarter than me to sit down and structure that rule of reason, saying: “As an agency this is how we are going to think about anticompetitive effects, these are the justifications we are going to consider, and this is how we are going to do the balance, the third step,” so that there are principles laid out, the defense knows what they are up against, and we have an intelligent approach.
The 2010 Guidelines were excellent and they have been sold to the courts, and so maybe as part of the evolutionary process that we are all talking about if you did guidelines on structuring the rule of reason under Section 2, that might be extremely helpful.
First of all, let’s figure out what the problem is before we go off enforcing things.
Second, let’s figure out the rule of reason.
Third, let’s be effective. The problem with these cases is that they sometimes get to trial at the start of the next geological period. They take a long time.
In IBM the issues were the announcement of the System 360 and System 370, and by the time the case was over the only use 360 and 370 would have in the economy would be if the Navy could use them as anchors. They were absolutely obsolete.
So we need to move things along. I have two ideas that I will admit are half-baked, but that’s okay. I am trying to be constructive and effective.
One, what if we had a Federal Rule of Civil Procedure or a statute that established a rocket docket for Section 2 cases? The government could bring a case under Section 2 and you would be in trial in 18 months. That would mean that the government would have to do what? Well, they couldn’t try ten exclusionary practices—you don’t need ten exclusionary practices—you would pick your best three. And the defense would have to say, “I’m going to reject my inner big firm; I’ve got to get to trial in 18 months, and I’m not going to answer 600 pages of interrogatories,” and you move the thing along.
Now I would suggest for all the judges watching here that before somebody did that, using an analogy from environmental law, we do a judicial impact statement and see what the judges think about it.
I would consider a rocket docket because I don’t think a lot of these cases are as complicated as everybody thinks they are as a trial lawyer.
Or one other option. Back in the day, a long time ago, I used to try bankruptcy cases. The case would be filed in April, you’d be in trial in June, and you’d have a decision in July. They were complicated, these transactions were really hard—and you know what? It worked.
I also do a lot of merger cases, and I’m sure many of the people who are watching this program also do a lot of merger cases. So what if the government walked in—and again I am not talking about any pending case—and said at a status conference: “I just sued Company X under the antitrust laws. They did three really bad things A, B, and C, and there is ongoing harm—tomorrow, Tuesday, Thursday, next week—it’s going on right now. So you can expect from me, Your Honor, a preliminary injunction, and I am going to want some interim relief on some of these practices so that while we are getting this case decided and through the appeals, some of the most egregious harm doesn’t happen anymore.”
Merger cases get filed in March, you go to trial in the middle of May, you can get 60 depositions—trust me, it robbed me of my youth, but you can do it, you can get 60 depositions done in that period of time and get to trial—try it for two weeks, try it for one week, and then see if the judge will give interim relief.
At that point I think the agency is being effective because you got interim relief. Or if it is denied, then you really think about where you are. But, either way, that might facilitate a settlement.
Those would be my ideas about being effective under Section 2: (1) figure out what the problem is, let’s not go off half-cocked; (2) let’s work on the rule of reason and figure out what that is, maybe do guidelines; and (3) let’s move the cases.
All right, mergers—and I won’t be as long on this because I think that the current situation is pretty good for the government. I have tried a lot of merger cases and I will tell you, you lose a few. I mean the government is very good.
We now have a situation where you have the narrowest market principle. I think Christine gave a pretty darn good speech about that and it was exactly right.
If you read the Arch Coal opinion, which came down from a pretty conservative judge six or eight or ten months ago, she says: “Well, natural gas competes with coal—but ah! That’s not a market; the market is not just coal, it’s coal from some river in Wyoming.” It seems to me that under the 2010 Guidelines—and I compliment whoever wrote them—from the government’s point of view you have no market.
Then you get a presumption, and I frankly don’t know what else the government needs, I really don’t, because they win an awful lot of cases. They are very good.
And I’ll tell you something—I’ve been in court a lot on these things—the presumption matters. Judges are interested in the presumption. You walk into court and the government has the burden. All right, that’s great, everybody understands that.
All of a sudden, a generalist judge finds out: “Whoa! They don’t anymore. They just put in these Herfindahl-Hirschman Index things and now it is all about the defendant.” That matters.
I have tried a lot of cases and I have done a lot of moot courts with federal judges, mock trials, and there everybody is impressed with a presumption. They’ve got it.
So you’ve got narrow markets, you’ve got the presumption, and the FTC and DOJ have some very good lawyers that work very hard, so I really don’t see much of a need for change in that area.
GARY ZANFAGNA: I want to follow up on something you were saying. There has been a lot of conversation, with proposed legislation, and other peoples’ ideas, that the laws need to change. We’ve talked about that today. You are saying in the merger context, Rich, that the laws are just fine. Should we be concerned—maybe Fiona should reply to this because I know you have thought about this—aren’t the courts doing what they are supposed to do moving forward under a common-law standard? Aren’t the agencies moving their analysis from coordinated effects to unilateral effects? Should we be worried about changing the laws in a way that we think would be more favorable for plaintiffs but maybe causing unforeseeable results? Can’t we work with what we have? Can’t we do more with what we have now?
FIONA SCOTT MORTON: I think we do know what will happen. I think what has been going on is—and I agree with Rich that the laws are fine—courts put in interpretations, like “predation will never happen,” “oligopolists price at marginal cost,” that just are wrong. If you fix that, then you go back to a world where we’ve got our same consumer welfare standard renamed, our same goals that we want to protect competition; we have a rule of reason, the court balances things; but the law stops courts from making mistakes, or the mistakes from recurring.
I think it is really interesting that Senator Klobuchar’s legislation gets criticized from both sides. One side says, “This will wildly change the law; it’s stunningly different; we don’t know what’s going to happen.” The other side says, “It’s just the same old rule of reason; it won’t fix anything.” But, of course, this proposed law is just a turning of the dial to make the burden fall on the companies to show that what they are doing is efficient.
My feeling is if what companies are doing is efficient, it is going to be very simple to show: You go into court and you say what is efficient, and everybody wants to hear that. In my experience, the government is not going to be challenging that merger because they don’t want to challenge an efficient merger. But it saves a lot of resources to put the burden for explaining what is good onto the companies rather than onto the agencies.
In the written version of the question you gave me you said, “Aren’t the courts already recognizing the latest post-Chicago thinking because unilateral effects are the focus of merger enforcement and that is game theory?” Unilateral effects are not game theory. They are unilateral—that means one; that means “I’m just thinking about my own incentives, not everybody else’s.” Coordinated effects are about game theory.
So the evolutionary process that we can expect to see is courts continuing to make mistakes and building up the barrier toward making progress unless the legislature changes that.
Let me say one thing about coal. Rich may not realize this, but there are environmental rules in the United States, and when you have dirty coal and not clean coal you build your power plant for that dirty coal and you filter out all the pollutants. Once you have sunk millions of dollars building that power plant, you can only burn one kind of coal. Coal from the Powder River Basin is clean coal and only some power plants burn it. Rich also might not know that coal is very heavy, so if you are near the Powder River Basin that is a good source of coal, but if you are way out in South Carolina it is not a very convenient source of coal.
The result of that is that if you are a responsible economist then you measure the cost of either converting your power plant or shipping the coal to you, and you are going to find out Powder River Basin is not a substitute for a coal field in Appalachia. That is the reason we get those markets, and they are not arbitrarily narrow. Steve Salop has a great example of a market from the 1960s of “fancy frozen dinners.” If you define narrow by number of adjectives, I think we had just as many “narrow” markets in the 1960s.
What is really important today, in all seriousness, is we can measure those markets and we have a lot of products that are low-marginal cost and high markup. Think about digital products, think about pharmaceuticals, think about a lot of stuff that has heavy R&D—those have low marginal cost, high fixed cost; they have very high markups. We know that there is market power, definitionally there is market power. That is just a fact. If you don’t like that fact, I don’t quite know what to tell you. Then you do not want to do evidence-based merger review; you just want to have mergers happen. If you believe in economics and the evidence-based view of it, you have to accept what the data show.
RICHARD PARKER: I do know about coal because I tried the first Arch Coal case. I know all about coal. I was not suggesting that the Court was wrong. I haven’t looked at the record, but I was simply giving it as a phenomenon that—
FIONA SCOTT MORTON: Well, Christine has a paper about how markets are too narrow.
RICHARD PARKER: That is a good example of what the government can do with a great economist like Nick Hill. That’s why I think the government has all the tools they need. That was my only point.
GARY ZANFAGNA: I am going to throw my flag and we are going to move on. I actually want to move on to a question that is very important for the overall context that we are talking about here, and I want to turn to Sandeep. Sandeep, what approach should Congress take to legislation? We have talked a lot about the need for new laws, etc. What is your input on that?
SANDEEP VAHEESAN: Once again it is critical to lay out the normative vision that I think Congress should implement in new legislation. Broadly speaking, I think Congress should seek to do two things.
First, disperse economic and political power. With the caveat that certain sectors or lines of business may have national monopoly tendencies, Congress should express a strong preference for decentralized markets, meaning more firms rather than fewer firms.
Second, Congress should seek to promote fair competition. I will talk a little bit more about this in a moment. I think at present the rule of reason is too complicated, costly, and subjective. It effectively asks the enforcers and the courts to engage in social cost-benefit analysis and compare fundamentally unlike things. We have seen a little bit of this in NCAA v. Alston, in which Judge Wilken and the Ninth Circuit balanced the harms to the players of reduced compensation because of the NCAA’s collusion versus purported fan preference for watching players who are not paid like professionals.
Furthermore, I think the current system invites massive lobbying and encourages backdoor dealing and special favors. The current Merger Guidelines are a good example. They are very open-ended and subjective. Carl, who helped draft the 2010 Horizontal Merger Guidelines, actually boasted that these Guidelines have a virtue of being more fact-intensive and less tied to presumptions and other bright lines.
In practice, what happens is merging parties hire economists who throw spaghetti at the wall and hope something sticks. ProPublica had a great article about how the merger review process works today, which featured a great quote by Seth Bloom. He said: “There are few government functions outside of the CIA that are so secretive as the merger review process.”
This opacity and subjectivity leads to political favoritism. There was a 2017 study by Mihir Mehta, Suraj Srinivasan, and Wanli Zhao that found that firms connected to U.S. politicians that oversee antitrust regulators are more likely to receive favorable merger review.
So we are already seeing lobbying and rent seeking on a large scale. That is an important defect of the present system.
I would submit that Congress should move toward bright lines--clear rules that are transparent and more accessible for both the business community and the public.
On the merger side, Congress should look to do two things: (1) The 1968 Merger Guidelines are a good model, they set out some clear market share tests on the types of horizontal, vertical, and conglomerate mergers that are illegal; and (2) supplement this with restrictions on mergers and acquisitions by large corporations—in other words, place limits on consolidation involving firms above a certain asset or revenue threshold. Senator Klobuchar’s bill incorporates both of these ideas to an extent.
Bob Lande and I recently wrote a piece in The Atlantic laying out the case for a size-based market share test.
And it is important to remember that mergers generally do not yield productive efficiencies, that is the assumption informing current merger law, but business scholar Melissa Schilling wrote a considerable body of research that concludes that most mergers do not create value for anyone except perhaps the investment bankers that negotiated the deal. We need to be mindful of that. Mergers are not as great as current merger policy and enforcement assume.
I would argue that we should also favor internal expansion as a method of growth over mergers. Mergers are often a zero-sum or even negative-sum game.
Walter Adams and James Brock captured the problem of permissive merger policy back in the 1980s. They wrote: “Managerial energies devoted to sterile paper entrepreneurialism and the quick-growth-through-merger game means management attention has been diverted from the critical task of investing in new plants, new products, and state-of-the-art manufacturing techniques. Billions of dollars spent on shuffling ownership shares are, at the same time, billions of dollars not spent on productivity-enhancing plant, equipment, and research and development.”
So there is a pretty good case to be made for bright lines on mergers.
On the exclusionary practices side, I think we should establish presumptions, or even per se rules, for what dominant firms can do. I submit that firms should compete by making better products and offering better terms to counterparties, not by using their market power, financial advantages, and generally prohibited practices, such as deception, commercial bribery, and industrial espionage.
Congress should establish per se rules for dominant firms for practices like refusals to deal, exclusive dealing, below-cost pricing, as well as deception, sabotage, and espionage, the practices that Susan Creighton and co-authors about 15 years ago called “cheap exclusion.”
In closing, I would argue that bright lines would spur firms to compete by making better products, offering better terms to counterparties, and investing in new plants, facilities, and technologies, and should be the model for legislation.
GARY ZANFAGNA: I want to turn it back to Carl and Maureen, but before I do that I want to ask Fiona if she wants to comment on legislation because you are up next on that.
FIONA SCOTT MORTON: I think the issue with making specific rules in the legislation is that we have an evolution of firm strategies along with new products. This is like the German way of doing it—let’s make a list of things that you are not allowed to do. That is okay if you are willing to pass a law every two years to update your list because there are new industries born, new practices invented, new stuff that you realize is damaging that you didn’t realize before. I think in the United States we do not really have a political system that can do that, that can update the law every two years.
I would rather have a principle that can accommodate new conduct that comes along that we realize at that moment is harmful to competition. I think that is the risk with the bright-line rules. The rebuttable presumption is a nice way to get around that because you make a rule, but then, if for some reason it doesn’t hold, the firms have the ability to push back.
GARY ZANFAGNA: Carl, I know you are chomping at the bit to say something.
CARL SHAPIRO: I will be brief. Three topics.
First, on mergers, I was involved in the 2010 Guidelines at DOJ. We did a lot to allow the agencies to define narrower markets by following the hypothetical monopolist test, particularly in markets with targeted customers. I think the 2010 Guidelines also were quite successful in breathing life into unilateral effects, which was limping after the 2004 Oracle decision.
I do think, though, that there is still an overreliance on market definition. Basically, the only way the agencies win is by getting the structural presumption. I would like to see another route for unilateral effects, and I describe that in my paper.
I also want to respond to Maureen a little bit on the liberty label. I guess I want to know: Whose liberty? If it is the liberty of a monopolist, okay, I can see that. I am more interested in having broader liberty, to take your word, and I am really concerned about practices by dominant firms that stop other firms from being able to compete effectively.
The American Express case is a great example because there, American Express’s policies disrupted other business models that involved discounting. Generally we should take the view that a monopolist or a firm with significant market power imposes restrictions on counterparties working with its rivals— that is pretty suspicious. That is stopping somebody else’s liberty to compete. So I am not willing to cede the liberty label.
Qualcomm is another good example—not a Supreme Court case, the Ninth Circuit. Qualcomm was charging a fee, essentially a tax, when a customer purchased from a rival. That tax impeded competition. The Ninth Circuit got that wrong.
Lastly, in terms of what we should do to fix antitrust, in the Equitable Growth Report, which I was a co-author on and so was Fiona Scott Morton, we laid out a lot of specifics.
One important area is mergers involving nascent competitors. There may be a fair bit of consensus actually that we need to intervene more when dominant firms are buying up would-be rivals. Those cases may hinge on the burden of proof because it is very hard for the courts—or anybody—to know with confidence just how the market is going to evolve in a lot of these industries. So you need a legal standard that allows the plaintiff to win if there is a reasonably probability that the merger will harm competition in the future. The courts often seem to be looking for greater certainty before they will block a merger with a potential competitor.
Finally, regarding digital platforms—“open early, close late” strategies are a good example where the agency leaders, along the lines of what Bill Kovacic was saying, could lay out a bunch of principles—hopefully both agencies together—on how they are going to handle that type of conduct.
GARY ZANFAGNA: Maureen, I’m sorry you haven’t had much to say of late.
MAUREEN OHLHAUSEN: That’s fine. Let my paper stand on its own.
Apparently, people have strong feelings about certain labels. Carl, on your point about liberty, my use of the term has to do with liberty against government control. I think that is a very natural understanding in American history, whether the government can tell you not to do something, versus in a private ordered system where by contract or some voluntary agreement you are not permitted to do something.
Secondly, on your point about equality, when someone says “level playing field” or they are worried about economic inequality, I just naturally presume that they think equality is an important goal.
I very much appreciated Rich Parker’s contributions, very pragmatic and incremental and evidence-based. Your desire to have a Section 6(b) study about whether there is really a problem in concentration is excellent. I raised concerns about that, and I know Carl has and others have as well. What are we really concerned about? What are we trying to address? You cannot solve a problem if you don’t really know whether that problem exists, and certainly if antitrust is the cure for what people are claiming are these ills.
I agree with the challenge of the rule of reason, how to balance. I think that will only get worse if what we try to force into that is a whole host of other varying factors.
Sandeep, you mentioned the difficulty in comparing things that are not alike. Some of the proposals take a whole host of noneconomic factors into account. I think that makes a really important challenge to administrability.
I also agree with Rich on mergers. I think it is absolutely true—whether you think it is desirable or not—that there has been a movement towards defining markets more narrowly. Personally, I never objected to the Philadelphia National Bank presumptions—I think I was maybe unusual as a Republican for not objecting to that—but I think there certainly has been that trend toward more narrowly defined markets.
And the government has been quite successful on merger challenges, not just in court, but in getting parties to abandon mergers. So I think we need to address with care some of those proposals.
My last point is about the difference between forcing companies to develop products in-house, to innovate in-house, versus the ability to have the benefits of a wider ecosystem where that is outsourced. I am not sure that we have the confidence to say, “Oh, everyone has to have a lab inside the company and create their own products,” versus having the ability for many, many startup companies, to create these things, and then to have companies that think it would be a valuable input to their innovation to purchase them through acquisition.
GARY ZANFAGNA: I want to give everybody one minute roughly to say any final comments or thoughts you have. I would like to start with Mr. Kovacic. Final thoughts.
WILLIAM KOVACIC: I think a serious limitation on our discussion is how much the accounts of what has happened before are designed to facilitate what Dan Ernst at Georgetown once called the search for “a usable past.” I don’t think we do enough to put events in a proper historical context. In our invocation of the history of antitrust policy, we are impoverished by our often skewed analysis of what happened in the 1970s and our failure to recognize the full range of forces that shaped antitrust policy.
By the end of the 1970s, why did courts turn more to efficiencies? One reason that often escapes discussions about the era is that the economy was thought to be falling to pieces and that the United States was falling behind foreign counterparts such as Japan.
Why does the focus on consumer interests ascend in the 1970s? As I have suggested earlier in our conversation, the answer is a lot more complicated than saying “Robert Bork.” In the introduction to a volume on antitrust enforcement policy published in 1972, two commentators said “the maximization of consumer welfare is our talisman, not the value of small or big enterprises for their own sakes, not the balance of payments or the interests of organized labor.” These are the words of one of Ralph Nader’s study groups. The Nader volume repeated a consistent theme of the period: Whose interests should antitrust policy serve? Consumers, consumers, consumers.
It is antitrust myopia to think that the change in perspective was driven solely by Robert Bork, Phillip Areeda, Donald Turner, or others in the competition policy community. If we are to use the shift in policy from the 1970s forward as a basis for recommending policy reforms, we shall have to think more carefully about how the consumer-centric focus of antitrust policy arose. The consumer focus emerged from a collection of economic, social, and political forces, not just from the sources so often identified in modern debates. History—even from the relatively recent past—is a lot more complicated than our discussions often assume, and coming to grips with the complexity is necessary to decide what we do next.
GARY ZANFAGNA: Christine, would you like to say anything to close?
CHRISTINE WILSON: I think the overarching question that we need to address as agencies, as antitrust practitioners, as people who take interest in what Congress might do, is: What kind of incentives do we want to create? Do we want to encourage creativity, entrepreneurialism, and investment, or do we want to incentivize free riding, rent seeking, and regulatory gamesmanship? Free markets incentivize the former, and without those incentives we end up with a system where people and companies don’t invest in innovation because they don’t get to reap the rewards. If we have a broad application of the essential facilities doctrine, if we have rules or laws that disincentivize product changes, then we are not going to get the investment and the innovation that distinguish the American economy.
So I am concerned about the incentives that we would create if we were to breathe new life into the essential facilities doctrine or remove the recoupment prong of the predatory pricing test. Making predatory pricing cases easier to bring would certainly make Tim Wu happy. He wrote in The New York Times that he thinks that companies with higher-quality flour that they sell for $6 a bag are better than mass-market flour companies that are selling flour for $2 a bag.
Herbert Hovenkamp said that if the Neo-Brandeisians were clear in the outcomes that they are seeking, these ideas would not get traction—and I think that is true. There is a danger when someone sits in an academic ivory tower or lives inside the Beltway and seeks to reorganize competition law based on a view that low prices are harmful.
To be clear, the consumer welfare standard is not focused only on low prices. But there are a lot of people, especially right now, who are hurting. When Neo-Brandeisians say that low prices are harmful and we need to shift competition rules away from advocating low prices, they are misguided and tone-deaf.
Similarly, the House Judiciary Committee Staff Report proposes to ban design changes that may harm rivals. This proposal seeks to avoid inconvenience to rivals—but what about consumers?
I think my concerns with each of these proposals boil down to the kind of incentives that we want to create to shape our economy. I vote in favor of investment and innovation and, frankly, predictability.
I’d like to close with two clarifications. First, I did not say I wanted to preserve the incentives of monopolists. Precisely the opposite: I want to preserve the incentives of nascent competitors and startups to create products and services that will satisfy consumer demand. And second, the paper that I wrote with Keith Klovers did not say market definitions are too narrow. We traced several data points over time and found that, on average and on balance, relevant markets are narrower. We did not characterize whether this observation is a desirable or an undesirable trend. We made the observation and noted the trend, so policymakers can make decisions based on those data.
I think Rich Parker’s points about gathering more data are all great. Yes, the FTC should do Section 6(b) studies and look at what the data show; the FTC is examining we are doing sub-HSR acquisitions of the GAFA companies.
We need to make policy choices based on the data that we have, but also on the data that we can collect. I fully support 6(b) efforts, and more merger retrospectives, all of which provide more transparency.
GARY ZANFAGNA: Fiona, it’s your turn.
FIONA SCOTT MORTON: A couple of observations.
I think we see here that there are two camps, one that would like bright-line rules and one that thinks that the rule of reason is workable. I don’t want the audience to think that that’s really where we are, however, because the people who want bright-line rules do not agree on what those bright-line rules ought to be, so we see both the populists and the conservatives wanting bright-line rules that are on opposite sides of the rule of reason. I think that is really something to watch going forward as a policy issue.
In terms of the narrowness of markets, Christine, I didn’t see any methodology in your paper—perhaps I read it too quickly—but I know of no methodology in economics to evaluate how narrow a market is nor any data set that would let us look at the way enforcement has been done over the last 40 years.
But again, this gets us back to why we have a rule of reason. Imagine that society moves from buying things like corn and cotton and chairs to buying things like music services and differentiated handsets and things where the nature of the technology and the way we spend our days causes people to want very differentiated products where the markups are naturally different.
Well, if you have a rule of reason and a principle, you are going to end up with more antitrust enforcement in that world because mergers are naturally more problematic because the products naturally have more market power. That is not a problem. That is what we want. We want our system to respond flexibly to the way the economy evolves. If we are moving away from undifferentiated corn where there is a lot of competition to handsets where there is much more concentration, then antitrust ought to adapt. I regard that as a feature, not a bug, and that is why I like the rule of reason.
And there is no particular reason why the share of GDP that is homogeneous products should be frozen over the decades. We would expect things like that to move.
I really am a fan of the rule of reason and of using the tools that we have in economics to be able to address big broad shifts like this as well as particular issues like: Is it clean coal or dirty coal?
GARY ZANFAGNA: Sandeep, final thoughts from you?
SANDEEP VAHEESAN: I will try to make it pithy.
It is worth remembering the marketplace is constructed by laws and rules, which ultimately means the government. There is no such thing as a free market.
Our present legal arrangements, including but certainly not limited to antitrust rules, have produced 40 years of inequality, instability, and increasing immiseration. In fact, our current period from the late 1970s to the present compares quite unfavorably to the postwar era in terms of growth, distribution, and stability.
Congress, the agencies, and the courts are not making policy against the background of apolitical rules. What they are actually doing is trying to replace one configuration of rules with another configuration of rules.
Let’s honestly debate different political and moral visions of the market and reject false dichotomies like government-designed markets versus mythical free markets.
To build on what Carl said, I think it boils down to: Do we want a system of antitrust rules that protect the liberty of consumers, workers, small firms, and entrepreneurs, or one that protects the prerogatives of monopolists and oligopolists?
GARY ZANFAGNA: Great summary. Mr. Parker, I get the last word, but you get the almost-last word.
RICHARD PARKER: One point: Before we run off and do legislation, we’ve got to look at this. My advice to Congress is to take a timeout here and let’s really see what the problem is. I do not want to be in a situation where somebody who is listening to this has a son or a daughter who gets a Ph.D. in economics and says: “Guess what you did 15 years ago? You threw out 130 years of jurisprudence, screwed up the M&A markets, and this paper is going to show you didn’t have a problem that had anything to do with antitrust in the first place.” That is what I worry about.
GARY ZANFAGNA: I do want the last word. The last word is I really want to thank you. What a great discussion. I really do believe antitrust is at an inflection point and for everybody to think about it the right way is really important. I think it is vitally important. I really appreciate all your input, your time today, and all your thoughts as we go forward. Thank you all so much.
