The More Intelligent Type of Reformer
In his essay “The Drift from Domesticity,” the British writer G.K. Chesterton outlined a principle that is now often called “Chesterton’s Fence.” He analogized institutions and laws to a fence that has been in place for years. “The more modern type of reformer” says that, as he sees no use for the fence, it should be cleared away.
To which the more intelligent type of reformer will do well to answer: “If you don’t see the use of it, I certainly won’t let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it.”
Chesterton offers this principle with the understanding that the fence was not built by sleepwalkers. “Some person had some reason for thinking it would be a good thing for somebody. And until we know what the reason was, we really cannot judge whether the reason was reasonable.” Chesterton’s insight does not mean that all fences should be left up forever. If someone understands how a law or rule came to be, “and what purposes it was supposed to serve, he may really be able to say that they were bad purposes, or that they have since become bad purposes, or that they are purposes which are no longer served.”
A Carefully and Soundly Constructed Fence
The United States has arrived at the antitrust standards it now employs not by sleepwalking, but incrementally and through literal trial-and-error, as courts have grappled with real situations to determine whether a merger or conduct was anticompetitive. In the 1890 Congressional debates about the Sherman Antitrust Act, Senator John Sherman explained why the law is written so broadly: “I admit that it is difficult to define in legal language the precise line between lawful and unlawful combinations. This must be left for the courts to determine in each particular case.”
The courts then spent almost 90 years devising a workable standard to help them determine what conduct should be illegal under the federal antitrust laws. They quickly discarded any attempt to construe the Sherman Act strictly because banning every contract that restrains trade would lead to banning most contracts. Looking back to the common law that pre-dated the Sherman Act, the courts said this new federal statute must be intended to ban only unreasonable restraints of trade. Over time, as the government and private plaintiffs brought cases, the courts ascertained that certain kinds of restraints were always unreasonable and anticompetitive, so those were per se illegal. All other restraints had to be judged under the rule of reason, which assesses both the benefits and the harms of the conduct at issue.
Some commentators would turn antitrust into a series of rules that forbids various practices and mergers without examining their actual or likely effects given specific facts. These commentators refer to themselves as neo-Brandeisians. Ironically, it was Justice Louis Brandeis who gave a classic formulation of the rule of reason, in his opinion for the Supreme Court in Chicago Board of Trade v. United States:
The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition. To determine that question the court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable. The history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or end sought to be attained, are all relevant facts.
The current common law of antitrust was achieved slowly, through government enforcement and private litigation. As late as 1968, the Supreme Court held that setting maximum prices was always illegal. But also by 1968, such rulings drew dissent both within the court and outside it. More than a decade before the publication of his 1978 book, The Antitrust Paradox, Robert Bork was arguing in legal journals against the per se illegality of any vertical restraints on the grounds that these restraints could increase total output.
While Bork referred to “the maximization of consumer want satisfaction through the most efficient allocation and use of resources” as “consumer welfare,” the consumer welfare standard today seeks to maximize consumer surplus or, in economic terms, the difference between what each consumer actually pays and what he or she would be willing to pay. The consumer welfare standard is sometimes misunderstood as caring only about prices. But if consumers’ willingness to pay goes up based on quality, innovation, or other factors, then the improved version of a product increases consumer surplus even if the price does not decrease. By 1979, the Supreme Court described the Sherman Act as a “consumer welfare prescription.”
Increasingly Sophisticated Economics
Both popular and scholarly accounts of this shift point primarily to Bork and the Chicago School for what they view as the failings of antitrust today. But Phillip Areeda and others at Harvard influenced the rethinking of antitrust in the 1970s and 1980s. Moreover, Bork did not originate the idea that competition enforcement should focus on benefiting consumers. It was commonplace in remarks by a diverse set of antitrust enforcers long before Bork popularized his ideas on total welfare. For example, FTC Commissioner Leon Higginbotham in 1963 praised the American competitive enterprise system because, although “our system is not free from fault . . . it has maximized consumer welfare; it has produced economic efficiency and technological progress.”
Bork, Areeda, and many other antitrust scholars helped courts understand what would benefit consumers. Rather than presuming that mergers, vertical restraints, below-cost pricing, and other business activities were harmful and thus should be illegal per se, these scholars provided a more complete picture of the costs and benefits. Economic research found benign explanations for highly concentrated markets, which broke from prior scholarship that was suspicious of concentration. The updated research undercut the Structure-Conduct-Performance paradigm that had previously guided antitrust policy and judicial decisions.
In the 1970s, the courts increasingly focused on the challenged restraint’s market impact to determine whether it was anticompetitive and thus illegal. This evolution led the Supreme Court to overturn several of its own precedents that had deemed various kinds of practices to be per se illegal, opting instead to apply the rule of reason. For example, in Continental T.V. v. GTE Sylvania, the Supreme Court relied on economic reasoning to hold that nonprice vertical restraints, including the territorial restraints on franchisees at issue in the case, should be evaluated under the rule of reason. The Court declared that the rule of reason standard must be based upon demonstrable economic effect.
Several decades later, in 2015, the Supreme Court opined that “Congress . . . intended [the Sherman Act’s] reference to ‘restraint of trade’ to have ‘changing content,’ and authorized courts to oversee the term’s ‘dynamic potential.’” Courts have revised the legal analysis as economic understanding has progressed, often with the help of amicus briefs from the FTC and the DOJ. The Commission’s Part 3 process also provides an important way to refine and update antitrust analysis. For example, in Polygram Holding, the U.S. Court of Appeals for the District of Columbia Circuit endorsed the Commission’s abbreviated rule of reason analysis.
International Convergence Toward Consumers
Some antimonopoly activists have attributed what they see as the flaws in U.S. antitrust law to its being judge-made common law. Yet a move toward effects-based analysis is by no means unique to the United States; many civil law jurisdictions around the world that also began with inflexible, rules-oriented competition enforcement have evolved toward a less form-based approach. Competition authorities’ gathering in multilateral fora and building strong bilateral relationships have provided opportunities for a rich and continuing dialogue on best practices. Over the course of decades, these conversations have led to a consensus approach focused on the effect of business conduct on consumers. This convergence is particularly notable in merger review, but it has occurred to some extent in the analysis of conduct as well, despite significant variation in nations’ legal and economic contexts.
But even as the world has moved toward effects-based economic analysis in competition enforcement, the U.S. bipartisan consensus on antitrust may now be ending. This consensus followed decades of pendulum swings between intense antitrust enforcement and very little enforcement. Sometimes these reversals would occur under the same president—the Franklin Roosevelt administration first encouraged companies to cooperate to stabilize prices during the Great Depression, then prosecuted them for doing so. At its worst, instability of that kind might sap confidence in antitrust policy and legitimize more radical solutions at both ends of the ideological spectrum.
Measuring competition by the consumer welfare standard is democratic because everyone is a consumer, whereas not everyone is a business owner, a shareholder, or even an employee. Some scholars have advocated a “protecting competition standard,” but this fails to satisfy the criteria of being administrable, predictable, and credible. What is a unit of competition? How is it to be measured? It seems to depend on a judgment that conduct “disrupts the competitive process.” But in the absence of anticompetitive effects, this may be similar to Justice Potter Stewart’s description of obscenity: “I know it when I see it.” The goal of protecting the competitive process also can become a slippery slope to the protection of competitors who complain about disruption.
Knowing the history of antitrust and regulatory policy is particularly crucial when evaluating proposals that call for a return to the past. For example, the House Staff Report holds up the now-defunct Interstate Commerce Commission and the now-repealed Congressional approach to regulating railroads as a model for the regulation of Big Tech. The report explains that Congress passed a law in 1906 that banned railroads from transporting any goods that they had produced or in which they held an interest. It connects railroads to technology companies by saying both are dominant intermediaries in network industries. Notably, the report does not mention that this regulatory regime, and the ICC itself, were eventually abolished—as was a similar regulatory regime governing airlines. In fact, a bipartisan consensus drove this deregulatory effort. After decades of hearing complaints from their constituents about high prices and insufficient service, members of Congress realized that the constraints imposed on the railroad and airline industries were harming the very consumers they were designed to protect. Congress therefore deregulated these industries except for the regulations covering health and safety.
The House Staff Report’s historical perspective fails to explain how and why U.S. antitrust law evolved to its current state. So far as the report is concerned, there was no fence in 1890, and there should be no fence today.
Bulldozing the Fence
The House Staff Report is perhaps the most comprehensive set of proposals to tear down the antitrust fence, so its recommendations warrant a closer look. Some of its proposals deal with conduct, others with mergers, and yet others with procedural issues. While the report ostensibly focuses on competition in digital markets—the investigation examined Alphabet, Amazon, Apple, and Facebook—many of its recommendations would apply to other sectors of the economy.
Failure to Recognize or Reward Business Acumen. The report takes a static view of markets. A sweeping set of proposals, ranging from the revitalization of the essential facilities doctrine to prohibitions on various type of mergers, looks solely at a snapshot in time. The recommendations do not consider the incentives that led (or would lead) to the creation of facilities, technologies, and platforms. This static approach runs contrary to American lawmakers’ dynamic perspective going back to the nation’s founding. The Constitution specifically justifies the government grant of the copyright and patent monopolies—“securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries”—because it would “promote the progress of science and useful arts.”
One such short-sighted proposal in the House Staff Report seeks to reduce a company’s “conflicts of interest” through structural separations and restrictions on the lines of business into which it could enter. This proposal fails to consider incentives for investment and innovation. For example, if a firm is already a popular seller of products—whether these are physical products or apps—why would it open a marketplace to third-party sellers, if doing so will mean that it is forbidden to operate in that marketplace itself? Yet the lack of such a marketplace makes both the third-party sellers and consumers worse off. Existing antitrust law already can police against actual anticompetitive conduct, such as exclusion, where it harms consumer welfare.
The report recommends mandating interoperability for dominant firms—in other words, forcing certain tech companies to enable competitors to interconnect with them, so users can communicate across services. Some observers have pointed to the Federal Communications Commission’s order on the AOL/Time Warner merger as an instance in which the government successfully demanded that a dominant platform provide for interoperability. The FCC feared that the merged company would dominate the advanced instant-messaging-based high-speed services market and conditioned its approval on AOL implementing instant-messaging interoperability. However, AOL eventually said it was unable to make instant-messaging interoperability work and had the order waived. Agencies can order tech companies to do things, but that does not mean those directives will be feasible or even possible to implement.
Interoperability and data portability have the potential to improve consumers’ lives and increase competition, but they merit close examination before being turned into legal mandates on the private sector. The FTC is pursuing this kind of examination; in September 2020, it held a virtual workshop on data portability that featured chief technologists from both the public and private sectors. These experts acknowledged the issues that arise from interconnection, including the security of personal data, the problem of identity verification for data transfer requests, and privacy concerns for those whose data may be transferred as part of another person’s request.
Reliance on Regulation over Consumer Choice
The House Staff Report also recommends that Congress prohibit the abuse of superior bargaining power, including through potentially targeting contracts deemed to be anticompetitive, and introduce due process protections for individuals and businesses dependent on the dominant platforms. “Abuse” is an amorphous term that, if not carefully cabined by guidelines and case law, can empower enforcers to challenge any conduct they disfavor. For example, some observers have suggested that mandatory arbitration of consumer or worker disputes is an abuse that signals the existence of market power, even though arbitration clauses have become standard in contracts and terms of service from incumbent firms and new entrants alike.
The proposal for the United States to prohibit the abuse of superior bargaining position appears to import the competition laws of some foreign jurisdictions. Regulations like Japan’s platform guidelines and enforcement matters like Germany’s Facebook case seek to protect consumers from companies’ superior bargaining power. But they may have the effect of reducing consumers’ choices. Many consumers may rationally conclude that the ability to upload and share an unlimited number of high-definition digital photos or videos online, without paying a penny for server space and webhosting, is a good trade for their data. These emerging competition principles about abuse of superior bargaining position could preclude consumers from rationally choosing to make this trade.
Consumers should have the information necessary to evaluate the pros and cons of this trade, which will require federal privacy legislation that gives them greater transparency regarding which data are collected, and how those data are processed, shared, and monetized. Legislation that limits the types of data that can be collected, shared, and monetized also may provide breathing room for new companies to innovate and enter. Thus, privacy legislation could have the benefit of injecting competition into the tech space. But governments should empower consumers to make genuinely informed choices, not remove their decision-making authority.
Elevation of Bright-Line Rules and Structural Presumptions
Devolving from an effects-based to a form- or rules-based competition regime is no less harmful in the area of mergers than it is for conduct. The House Staff Report calls for Congress to reduce market power through merger presumptions. Any acquisition by a dominant platform—even one in an unrelated market—would be presumed anticompetitive unless the merging parties could show that the transaction is necessary to serve the public interest and that similar benefits could not be achieved through internal growth and expansion.
This proposal is problematic for several reasons. First, it requires defining a market up front to know whether the company is “dominant.” This approach harkens back to the outdated structuralist focus on market share, instead of looking at the actual or likely effects of the acquisition. The vague “public interest” standard similarly takes enforcers backward from the consumer welfare standard. Instead of using a metric underpinned by economic tools of analysis to determine whether consumers are harmed or benefited by a merger, this proposal would have enforcers engage in an almost unavoidably political calculus of whose interests to serve.
Second, the merger presumption flips the burden of proof from the enforcer to the private sector and interferes with the free market pursuit of ways to respond to demand. Companies routinely decide whether to “build or buy” new products and capabilities. In acquiring another company to achieve a goal rather than doing so through internal growth and expansion, a company calculates that it is more efficient not to reinvent the wheel using finite resources. An approach that deems merging parties guilty until proven innocent offends long-established American notions of liberty.
Along the same lines, the report recommends that Congress codify bright-line rules and structural presumptions in concentrated markets. Specifically, any transaction that would give a single firm 30 percent or more of a market would be presumptively prohibited, with an even lower market share required for monopsony or buyer power claims. The would-be merging companies would carry the burden of proof to show that the merger would not reduce competition, and they could not point to efficiencies to overcome the presumption.
A codified presumption ignores the many differences among markets, especially regarding barriers to entry and the potential for technological change to enable leaps over those barriers. A 30 percent share in the market for cement in 2005 was not like a 30 percent share in the market for movie rentals at home. No technology was on the horizon to revolutionize adhering bricks to one another, but there was technology that displaced the store rental, first with Netflix’s mail delivery and then streaming video on demand.
Prohibiting mergers that would create a 30 percent market share also prevents smaller competitors from combining to challenge a market leader. The classic example of this prohibition in U.S. antitrust was the FTC’s successful lawsuit to block the merger of two baby food companies that, together, held just over 30 percent market share. Heinz and Beech-Nut argued that Beech-Nut’s superior recipes and Heinz’s underutilized manufacturing facilities, when combined, would create a stronger rival to the dominant company, Gerber. After an appellate court ruled against the merger, Heinz sold its baby food business, which eventually exited the U.S. market entirely. A 2009 retrospective by an FTC economist found that Beech-Nut lost some market share, while Gerber’s share increased and no significant entrants captured the share Heinz previously held.
These consequences suggest that blocking the Heinz/Beech-Nut merger may have been an example of erroneous enforcement. Yet, in an assumption that appears to drive the report as a whole, the Subcommittee simply asserts as fact that “false positives” (or erroneous enforcement) are no more costly than “false negatives” (erroneous non-enforcement), and that, when relating to conduct or mergers involving dominant firms, false negatives are costlier. But false positives cannot be corrected by the market, whereas false negatives can. Heinz and Beech-Nut were legally barred from combining. Had they been permitted to merge and prices increased as the FTC’s lawsuit predicted, a new entrant still could capture market share by offering a lower-priced option.
The government has a strong track record against horizontal mergers, raising the question of how many outcomes would be affected by changed presumptions. No merger litigated by the DOJ under the 2010 Horizontal Merger Guidelines has closed, and the FTC has won 11 of the 15 challenges it took to court in the past decade. Thus, under the 2010 Guidelines, the federal government has won 77 percent of merger challenges resolved by the courts, and every appellate horizontal merger case since 2010. In many other instances, the parties abandon their transactions after the government investigates or announces its intent to challenge the deal. Altered presumptions therefore might be a solution in search of a problem.
Repairing the Fence
Understanding why a fence was built does not preclude considering whether it needs a fresh coat of paint or new hinges to replace the now-rusty originals. Congress created the FTC to be an expert agency, and the Commission has built that expertise in large part by seeking input from stakeholders on emerging policy issues and updating its approach accordingly. For example, following calls by politicians and antimonopoly activists to ban non-competes in employment agreements, the FTC in January 2020 held a public workshop to examine the legal basis and empirical economic support for promulgating a rule against these contract provisions. This mode of operation complements the common-law development, and illustrates the incremental and evidence-based evolution, of antitrust law. Of course, this evolution will never be complete because economic analysis will continue to advance and dynamic markets will continue to transform. In addition, concerned citizens will continue to demand good government and businesses will continue to benefit from clarity and predictability in law enforcement. For that reason, we agree that some changes to legislation and agency practice would improve the future of antitrust.
Certain recommendations from critics of the status quo are worth embracing. One proposal in the House Staff Report would “enhanc[e] the public transparency and accountability of the antitrust agencies, by requiring the agencies to solicit and respond to public comments for merger reviews, and by requiring the agencies to publish written explanations for all enforcement decisions.” Having the FTC publish more written explanations for its enforcement decisions, including those that did not result in the agency’s taking action, would be informative for consumers and businesses. Particularly with respect to mergers, several competition authorities, such as those in the United Kingdom, European Union, and Singapore, disclose their thinking when they decline to take enforcement action.
A second laudable proposal in the House Staff Report recommends that Congress consider “requiring the agencies to conduct and make publicly available merger retrospectives on significant transactions consummated over the last three decades.” As the Heinz/Beech-Nut example illustrates, retrospectives enable competition enforcers to check their homework and refine their enforcement approach.
Citing the submissions of FTC alumni, the report also suggests increasing the budgets of the FTC and the Antitrust Division. The antitrust agencies’ funding has not kept pace with the cost of living or even the mandatory salary increases for staff, which means the number of enforcers has declined. At the same time, the size of the economy has increased. To the extent observers believe the agency is falling short, more resources—which may be funded by adjustments to merger filing fees —could go a long way toward addressing those concerns.
Beyond the recommendations of the House Staff Report, Congress should clarify and, in some cases, augment the FTC’s authorities. In the wake of the Supreme Court’s 9-0 ruling in AMG Capital Management, the agency would welcome legislation to affirm the Commission’s power to seek permanent injunctive and monetary relief under Section 13(b) of the FTC Act, and to amend the FTC Act to authorize the FTC to enforce competition law against non-profits and common carriers.
From Fences to Walls
The United States is not alone in questioning whether competition laws need to be overhauled. For example, in February 2019 the then-chairman of the United Kingdom’s Competition and Markets Authority said the government’s “growing concern” about the status quo was “well-founded,” given the “increasing signs that the public doubt whether markets work for their benefit.” Polls indicate that many young people feel that capitalism is failing them. But capitalism and the system of antitrust law built slowly and carefully over decades should not be torn down. Instead, crony capitalism is the source of obstructions that entrench incumbents, diminish competition, and leave consumers and new entrants out in the cold.
Capitalism is a system in which the production of goods and services is based on supply and demand in the market rather than central planning, and government intervenes only where necessary to address market failures. In contrast, crony capitalism is a system in which lobbyists engage in rent-seeking and legislatures create laws and regulators create rules that pick winners and losers. A labyrinth of government contracts, regulations, and arbitrary enforcement engenders a feeling of hopelessness among citizens, who see no way to better their lives if they are not favored by the rule-makers. Lobbying by dispersed players with an easily identifiable common interest can be just as pernicious for consumers and would-be competitors as lobbying by large companies. The FTC has investigated, advocated against, and in some cases litigated against regulatory boards made up of active market participants who used state power delegated to them to wall off competition from other providers.
In accordance with Chesterton’s counsel regarding any existing institution, reformers who wish to take down the walls put up by crony capitalism must first examine whether those walls had any good purpose, and whether the walls actually serve that purpose. For example, a large scholarly literature indicates that many occupational licensing restrictions protect incumbent profits more than consumers’ health and safety, and particularly impede immigrants and other new workers.
Rejecting crony capitalism will help restore the faith of the citizenry in our antitrust regime. As must all wise reformers, those who wish to tear down that regime should demonstrate that they understand why it exists and should explain why it no longer serves citizens. The United States and many other jurisdictions already have tried competition law that sought to serve multiple constituencies through enforcement based on bright-line rules. After seeing that approach fail, these diverse legal systems built a consensus for enforcement driven by effects-based economic analysis under the consumer welfare standard as the best way to benefit consumers and earn their trust.
The right approach is not to overhaul antitrust, but to clear away the unnecessary obstacles to free market competition—protections for incumbents, restrictions on market entry, and exemptions from antitrust liability —that government has created. Once government is no longer putting its thumb on the scales, citizens will enjoy the freedom to compete on the merits as entrepreneurs, and to enjoy the fruits of free market competition as consumers.
