Editor’s Note: This Paper Trail considers two papers that explore the possibilities of expanding the consumer welfare standard to encompass goals other than protecting or increasing consumer surplus.
Please send suggestions for papers to review to [email protected].
—John R. Woodbury
Lawrence J. White, Rethinking Antitrust (March 5, 2021). Forthcoming, Milken Institute Review. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3760747
Recently, there has been much discussion about the future of the consumer welfare standard in antitrust analysis, at least as is commonly defined as narrowly focused on the effect of conduct or a merger on price and output. Some in the antitrust community argue that the agencies should expand the scope of antitrust, a call amplified by the antitrust challenges to the perceived political, economic, and media dominance of “big tech”—Facebook, Amazon, Apple, and Google in particular.
Notably, in a paper written prior to her becoming Chair of the Federal Trade Commission, Lina Khan argued that this “narrow focus” of the consumer welfare standard—exploring whether a merger or practice increased prices or lowered output—is
misguided. It betrays legislative history, which reveals that Congress passed the antitrust laws to promote a host of political economic ends—including our interests as workers, producers, entrepreneurs, and citizens. It also mistakenly supplants concern about process and structure (i.e., whether power is sufficiently distributed to keep markets competitive) with a calculation regarding outcome (i.e., whether consumers are materially better off).
Khan notes further that the conventional consumer welfare standard is also too narrow in that it ignores how substantial market concentration can result in supplier and producer price and profit squeezes, market instability (e.g., allowing markets to become dependent on firms that were permitted to become too big to allow their failure), and a lack of media diversity.
Khan (at 1) recently emphasized this more expansive role of antitrust in outlining goals for her FTC tenure:
[W]e need to take a holistic approach to identifying harms, recognizing that antitrust and consumer protection violations harm workers and independent businesses as well as consumers. Focusing on power asymmetries and the unlawful practices those imbalances enable will help to ensure our efforts are geared towards tackling the most significant harms across markets, including those directed at marginalized communities.
In his recent paper, one noted antitrust scholar—Larry White—takes issue with expanding the scope of the consumer welfare standard to encompass additional criteria when evaluating mergers or exclusionary conduct. White (at 3) concludes that while there is much that might be done to increase the effectiveness of antitrust policy, “a more cautious approach is warranted lest antitrust become a scattershot substitute for focused remedies to offset some adverse social impacts of market forces.”
White notes (at 8) that one can ask what our experience has been in efforts to balance “the interests of suppliers, customers, and communities.” Those were the goals, under the rubric of advancing the “public interest,” in regulating the price, conduct, and entry by industry, such as telecommunications, airlines, and trucking. White (at 8) argues that because regulation displaced competition through detailed rules governing these aspects of the market, prices were higher, inefficiency was rampant, and innovation was effectively discouraged. Indeed, when regulation of these industries began unwinding in the 1970s and 1980s, competition increased substantially. In the airline industry, for example, prices fell while new ways of organizing routes through hub networks developed.
Although not mentioned by White, this kind of detailed regulation of prices, entry and quality also sets the stage for regulatory capture. Either through a “revolving door” of employment between the regulators and the firms being regulated or a regulator’s balancing of private interests of the parties and those of the regulator, the effect of regulation is in effect to define the public interest more in terms of the well-being of the regulated firms (and the regulator) rather than consumers.
Of course, deregulating the firms in these industries raised an entirely different set of competitive questions similar to those arising in other far less regulated markets. Under what circumstances should two airlines be allowed to merge? Under what circumstances should two long-distance providers be allowed to merge? For telecommunications in particular, the introduction of cellular service in the 1980s and 1990s dramatically changed the telecommunications environment so that the market looks far different from that of the mid-late 20th century. One might reasonably ask how rapidly this development would have occurred had much of telecommunications remained closed to competition.
White urges “restraint” when considering restructuring or otherwise breaking up firms in the name of increasing competition, reducing economic dominance, and increasing media diversity, particularly with regard to the “big tech” firms. For example, White notes (at 9) that there are proposals for the “slicing and dicing” of Facebook to create a number of “mini” Facebooks competing for patronage of consumers and advertisers.
White advises (at 9-10) that the “break-up” history in the U.S. is not a particularly helpful guide to a breakup of “big tech.” The divestitures required of Standard Oil and AT&T (the old Ma Bell) involved largely physical rather than intellectual assets that could be spun off into separate stand-alone companies.
White argues (at 9) that it is not clear how that split of the social network into mini-Facebooks would look. But suppose that social networks are characterized by substantial network effects that buttressed the dominance of Facebook, as is almost certain to be the case. Then, however many mini-Facebooks might result from antitrust action, substantial network effects could invariably lead to one network again dominating the others.
In addition, White (at 9) considers the argument that Facebook’s acquisition of WhatsApp and Instagram should be reversed by the agencies (and the courts) because of the possibility that both would have become stand-alone rivals to Facebook’s social network but for the acquisitions. The divestiture of WhatsApp and Instagram by Facebook could provide additional competition for Facebook as these two expand their social network reach. But White’s concern (at 9) is that these two applications may have become highly integrated into the Facebook ecosystem. If so, then undoing these mergers may not result in viable stand-alone entities even in the absence of the substantial network effect advantages of Facebook.
Although White does not support divestiture/breakup solutions in these high-tech industries, he also makes clear that he views current antitrust enforcement as generally too weak to maintain competitive markets. In particular, he notes the evidence that many mergers that have been cleared by the agencies as ones not likely to harm consumers have in fact increased prices post-merger. White (at 11) points specifically to the failure of the DOJ’s efforts to stop the AT&T/Time Warner merger (although arguably that was hardly the fault of the DOJ) and DOJ’s clearance of the Sprint/T-Mobile acquisition on the hope and prayer that Dish would become a viable cellular rival.
In addition to urging that the agencies be allocated additional funds to hire more enforcement staff, White (at 11) recommends that retrospectives on the “close-call” mergers should continue to be undertaken to help identify the extent to which, if at all, those mergers raised post-merger prices. Those studies help illuminate the issue of whether and why enforcement has been too lenient or too strict.
White also suggests that the agencies evaluate mergers and other conduct that can affect workers by depressing wages or other benefits and hiring fewer workers than would be the case in more competitive labor markets, i.e., addressing the acquisition and exercise of monopsony power. White (at 12-13) specifically urges the agencies to be more active (as they have become) in evaluating the competitive effects of non-compete clauses that prevent workers from leaving one firm for higher wages at another. White points out such no-poaching clauses are prevalent in the fast-food industry, where the employees tend to be the working poor and so are the ones being harmed by monopsony.
Other suggested improvements (at 14-15) include expanding the agencies’ competition advocacy role in assisting state and local regulatory agencies in the evaluation of the competitive effects of market restrictions, including occupational licensing requirements which can result in anticompetitive restrictions on competition. Further, White notes (at 15-16) that the current standards to satisfy a finding of price (or non-price) predation are flawed: “They ignore the possibility that the predatory firm is willing to run losses simply to build a reputation for no-holds-barred behavior.” Even if the courts conclude that such conduct is not predatory under current legal standards, this kind of behavior can serve to soften rival responses in the market and deter entry and expansion. White urges the agencies to educate the courts as to this kind of competition-softening conduct that harms consumers.
In terms of meeting the challenges posed by market power resulting from substantial network effects, White suggests (at 16-17) that as compared to forced divestitures, a more effective remedy might be to require interoperability between, say, Facebook and other smaller social networks. As a result, the members of a smaller, more specialized network could interact with the Facebook subscribers as well, eliminating any entry and expansion hurdles resulting from network effects. The difficulty with this solution, as White (at 17) points out, is that any “interoperability requirement, with accompanying standards for interoperability, would require direct regulation” of the implementation of those standards.
Further, one might assess Facebook’s incentives to use new technological developments to delay interoperability by, for example, asserting that the same quality of service cannot be provided with other smaller independent networks because of technical impediments. Similarly, Facebook delay in providing complete interoperability (or in degrading the quality of the connection) would likely result in complaints by smaller networks that will have to be adjudicated. Historically, efforts by the FCC to ensure that (for example) cellular and data service rivals to the Bell Operating companies had comparable interconnection to the local landline network as that for the Bell Operating companies’ own services were at best time consuming, leaving the incumbent with competitive advantages during the regulatory delays.
Of course, Facebook (and other targeted firms) would surely claim that mandating interoperability would generate efficiency losses by discouraging future investments to improve Facebook in ways that attract more subscribers and so permits rivals to free-ride on Facebook’s innovations. Those claimed losses would also have to be carefully assessed for their validity as opposed to relying on broad generalities Facebook might offer. The burden should be on Facebook to validate those losses.
Josh Paul Davis, Eric L. Cramer, Reginald L. Streater, and Mark R. Suter, Antitrust As Antiracism: Antitrust as a Partial Cure for Systemic Racism (and Other Systemic ‘ISMS’), Univ. of San Francisco Law Research Paper No. 2021-01 (March 30, 2021), SSRN: https://ssrn.com/abstract=3816202 or http://dx.doi.org/10.2139/ssrn.3816202.
Focusing largely on the issue of monopsony, a recent paper by Joshua P. Davis, Eric L. Cramer, Reginald L. Streater, and Mark R. Suter (hereafter “Davis et al.”) illustrates how antitrust can serve the interests of consumers using the “narrow” consumer welfare standard while still improving the plight of workers and others by diluting any monopsony power held by employers and preventing further exercises of that power.
This paper begins by asking whether “systemic racism” can be addressed using the antitrust laws. While the authors explicitly avoid defining that term, they argue (at 8-13) that the antitrust laws are far better positioned to deal with “systemic” racism rather than the employment-discrimination laws that are resolved on an individual or firm basis. Resolution of discrimination complaints frequently leaves untouched the practices of other firms not directly affected by a finding of discrimination. While much of antitrust enforcement (e.g., challenging mergers, fashioning remedies) is also firm-specific, those enforcement actions increase (or maintain) competition in the affected markets and so affect all firms in those markets.
But Davis et al. acknowledge antitrust law “is not built to detect or rectify racism” (at 13), at least in any direct way. In that regard, the paper (at 9) observes that antitrust and anti-discrimination policies are complements, not substitutes: “Employment discrimination laws can work in tandem with antitrust lawsuits towards a common goal [of eliminating systemic racism].”
Having made that acknowledgement, the paper focuses on how antitrust enforcement can contribute to reducing income inequality for both minority and white employees on matters where minorities constitute a disproportionate share of the underlying work force. Because the use of antitrust policy is facially non-racial, antitrust can avoid pitting workers against one another based on race, sex, or national origin, as frequently happens in employment discrimination matters.
Davis et al. (at 16-18) offer an extensive discussion on the increasing involvement of the antitrust agencies in addressing issues of monopsony power in the labor market. These include FTC challenges to some nursing homes that sought to restrict competition among nursing homes for nurses. And the DOJ has challenged a number of “no-poaching” agreements in the provision of medical services and in the fast-food industry.
Against that background, Davis et al. identify a number of ongoing matters illustrating how antitrust engagement can advance the interests of workers in industries with disproportionally high employment of minority workers. As one example, the paper (at 18-23) describes an ongoing class action suit against Ultimate Fighting Championship (or UFC), the leading promoter of mixed martial arts (MMA) events. The plaintiffs allege that UFC gained monopsony power through the acquisition of rival promoters. As a result, MMA fighters had few employment options other than UFC. Further, plaintiffs allege that the use of long-term exclusionary contracts with the professional MMA fighters limited their ability to seek more highly-compensated employment. According to the plaintiffs, the net effect of this effort has been to reduce the earnings of the MMA fighters significantly.
Davis et al. (at 19) contend that while the image of MMA is that of a “white sport,” minority fighters account for a substantial proportion of professional MMA fighters. In the background of this litigation is the history of alleged racism: “…the sport of MMA has a long and well-documented history with racism, white supremacy, and the far right. Observers have long noted MMA’s popularity with racist and extremist groups.”
Both the list of MMA champions and MMA stars feature a significant minority population. Davis et al. (at 20) point to evidence that the MMA fighters in general are paid on terms significantly less generous than in other professional sports. According to Davis et al. (at 21-22), this litigation “has the potential to increase the overall compensation MMA fighters receive for their services. The gains to fighters of color in the future in particular need not—and will not—come at the cost of [reduced payments to] white fighters.” As a result, these kinds of actions may help to promote better relations between white and minority workers based on the recognition that all workers can be victims of buyer power by employers. Still, these actions will not resolve any issues of discrimination against minority fighters in compensation differentials between minority and white fighters.
Another example of potential gains to minorities is the recent NCAA litigation, culminating in the Supreme Court’s decision this summer, NCAA v. Alston. Prior to that ruling, NCAA rules limited the amount and kind of compensation a NCAA athlete may earn to scholarships and limited stipends. According to Davis et al., those compensation limitations have disproportionately affected minority athletes. NCAA data (cited at 23) reveal that 56% of all Division I men’s basketball players are black and another 21% identified as “other.” Similarly, 49% of Division I football players identified themselves as black and 37% as white. The paper (at 23) also cites evidence that the revenues generated by these athletes in major collegiate sports are used to subsidize sports that are predominantly white, such as men’s water polo and women’s rowing.
As a result of NCAA v. Alston, these athletes can earn additional compensation from their participation in collegiate sports. Indeed, one recent report noted that as soon as the NCAA implemented interim rules in response to the Supreme Court’s ruling, “student athletes wasted no time in taking advantage of the opportunity to cash in on their names and fame.”
Both the UFC and the NCAA litigations suggest ways that antitrust can benefit minorities without any expansion in the scope of antitrust beyond the conventional consumer welfare standard. The paper (at 28-33) also highlights other antitrust actions the agencies can also pursue that would benefit minorities. Specifically, the paper points to several matters that have affected registered nurses who are predominantly female and often minorities. These matters include allegations that local hospitals conspired to depress nursing compensation in upstate New York, in Arizona, and in Detroit. The paper notes (at 31) that
Antitrust litigation may not eliminate inequity in pay as between nurses of different races, but it can ensure that all nurses are paid more by their employers and, by placing nurses in solidarity with each other versus management, may encourage solidarity among nurses as they strive for fair and competitive wages.
Like White, Davis et al. (at 31-33) point as well to litigation challenging “no poaching” agreements in (among others) the fast-food industry which “employs predominantly low-wage workers of color” as a means to use traditional antitrust tools to improve wages and benefits for minority workers.
Controversy regarding the expansion of the consumer welfare standard in antitrust enforcement is likely to persist for some time. While one focus in this review has been on income inequality, other factors such as those identified at the outset by Chair Khan (employment effects, market stability and media diversity, among others) may begin to play a role in antitrust enforcement. But at this point at least, White’s more cautious approach makes sense, particularly in light of the failed history of regulation in attempting to balance the needs of different players. Even with the best of intentions, such balancing would be very difficult to achieve. It certainly is easy to argue that the government at all levels have other instruments they could use to attain some of those goals particularly regarding income inequality, such as tax reform, increased educational opportunities and subsidies to the poor. Easy to say, but in practice those kinds of changes requiring legislative action may be implemented over a much longer period of time and (in this view) the use of antitrust to advance those goals would be “remedial” to lengthy delays in addressing these issues. But as the Davis et al. paper concedes, antitrust alone can’t directly resolve the issue of systemic racism.
While there may remain questions about efforts to use antitrust to address other goals through an expansion of the consumer welfare standard, there are certainly more conservative approaches to using antitrust to ameliorate income inequality in particular that do not require a broader consumer welfare standard. As argued by Davis et al., in principle, the agencies could use their prosecutorial discretion to purse those antitrust matters that have a particularly adverse impact on the poor in particular or even more narrowly focused on minorities. To the extent that minorities (as well as women and other disadvantaged groups such as the LGBTQ community) are disproportionately poor, focusing on matters that could adversely affect the poor (or have adversely affected the poor) would be one effort to reduce income inequality.
There are costs to this approach in addition to any competition and innovation concerns. While the agencies could tilt their investigations to such matters, the calculation to do so would still have to weigh those benefits against the standard losses in consumer surplus from anticompetitive mergers or conduct. There might well be greater gains to consumers from matters not pursued because enforcement policy would also consider adverse effects on the poor (or workers in general) as a factor in its enforcement decisions. Suppose that absent consideration of these adverse effects, the gains to consumers (in terms of standard consumer surplus) are greater for merger 1 than for merger 2. With limited resources, the agencies would choose (other things equal) to challenge merger 1 under current enforcement standards. But if merger 2 (relative to merger 1) would adversely and disproportionately affect workers, less well-off consumers or minorities, the agencies could choose to pursue a challenge to merger 2 rather than merger 1. Of course, there may not be any conflict between the goal of challenging (say) a merger that is predicted to reduce consumer surplus and one that adversely affects the poor. Higher prices resulting from mergers in some markets might have a disproportionate impact on the poor.
Thus, in choosing a menu of investigations and challenges, a critical task for the agencies is deciding what weight to attach to the concerns of income inequality (and perhaps an additional weight for industries that disproportionally employ minority workers or other disadvantaged groups) versus the standard consumer welfare analysis. To the extent that other factors (such as employment effects, market stability or media diversity among other goals) are included in the investigation/challenge decisions, appropriate weights need to be assigned to those other goals. It may be useful to consider how (with limited resources) an expansion of the scope of antitrust would change the menu of investigations and challenges undertaken by the agencies. It is also apparent that developing a principled way of incorporating inequality and other goals into antitrust evaluations to avoid what White referred to as a “scattershot” approach will be a tall order. Without a principled approach, competition and consumers (regardless of race, sex, national origin, or income) might be erroneously harmed.
