Inter-Agency Scuffling Over Section 2: What Role for Economists and Economics at the FTC and DOJ?

Josh Wright —  12 September 2008

Much has already been written about the strained relationship between the FTC and DOJ in antitrust matters.  There is no more entertaining description of these strains than Chairman Kovacic’s description of the sister agencies as “an archipelago of policy makers with very inadequate ferry service between the islands” and “too many instances when you go to visit those islands the inhabitants come out with sticks and torches and try to chase you away.” It looks like the recent dust-up over the Section 2 Report is going to be the latest front in that matter.  Here’s the DOJ Report, the Statement from Commissioners Rosch, Leibowitz and Harbour, and from Chairman Kovacic.

I’m looking forward to getting some more time to digest the specifics of the Report and responses, but I wanted to share at least one immediate reaction.  One critical difference between the agencies appears to be increasingly divergent views on the role of economics in antitrust analysis both in Section 2 and elsewhere.  I’ve commented on what I perceive to be an alarming trend towards minimizing the role of economics in antitrust analysis gleaned from Commissioner Rosch’s remarks earlier this year on litigating merger cases.  The Commissioner described economists and economic evidence as, essentially, role players in antitrust analysis whose primary consequence is to put Commissioners, judges and juries to sleep (“when I see an economic formula my eyes start to glaze over, and if the formula uses Greek letters I tend to think “it’s all Greek to me.”).

That view of the role of economics bothered me then.  I wrote:

First, the passage bothers me primarily because even if one believes that economic evidence is not effective at trial, a primary contribution of economic units at competition agencies is to aid in the decision to prosecute in the first instance by, for example, analyzing whether condemning the conduct at issue is likely to benefit consumers.  If Rosch means that the FTC should rely just as heavily on economic evidence at the decision to prosecute stage but is simply saying something about what to do at trial in a world where judges don’t appear to be responding to sophisticated economics that is one thing.  The part about eyes glazing over suggests to me that he is making a more general point about the usefulness of economics in antitrust.

Second, and relatedly, much of the trend in antitrust analysis has been about establishing institutions within competition agencies to facilitate economic analysis into both decisions to bring an enforcement action as well and at trial.  The message here appears to be especially anti-economics relative to other policy speeches that have come out of the Commission in recent years (see, e.g. this or this for recent examples) advocating increased reliance on economic analysis with respect to both the decision to prosecute and litigation.

I’m more certain that Commissioner Rosch’s message has significant anti-economic sentiment after reading the Rosch/Leibowitz/Harbour statement.  For example, consider the following line from the Statement on the DOJ Report’s reliance on economic theory and evidence:

And insofar as the Report relies on economic theory, the recent warning of Justice Breyer bears repeating: while economic theory is an important consideration in applying antitrust law, economic theory is not tantamount to the law itself.

Okay.  But wasn’t the Breyer dissent in Leegin, well … a dissent?  More importantly, the Breyer dissent completely mischaracterized both the state of economic theory and empirical evidence on resale price maintenance.  It seems quite odd to cite Breyer’s dissent here as a model for appropriate incorporation of economic knowledge into antitrust analysis.  See, e.g. Thom’s excellent new paper, my own analysis of Leegin, or our TOTM coverage here for more detailed criticism of the dissent.  Also, along similar lines, I was struck by the fact that while the FTC takes the DOJ to task for “seriously overstate[ing] the level of legal, economic, and academic consensus regarding Section 2,” the FTC Statement itself doesn’t doesn’t offer a single citation to economic theory or evidence contradicting DOJ positions and instead relies on assertions and rhetoric like the following:

the Department’s Report is chiefly concerned with firms that enjoy monopoly or near monopoly power, and prescribes a legal regime that places these firms’ interests ahead of the interests of consumers. At almost every turn, the Department would place a thumb on the scales in favor of firms with monopoly or near-monopoly power and against other equally significant stakeholders.

That passage is actually an excellent example of the appropriate role of economics in antitrust analysis and what can go wrong — horribly wrong — if we ignore economic theory and evidence.  The allegation that the DOJ position favors “firms’ interests ahead of the interests of consumers” ignores the very basic econonomic insight that sometimes those interests are aligned!  And by sometimes, I mean most of the time.  The evidence on the likelihood of anticompetitive harm from single firm conduct is clear.  There is little empirical support for the various anticompetitive theories of single firm conduct that have sprinkled the pages of top IO journals everywhere for the last 20 years (as well as old antitrust cases!).  This is a very basic insight.  The FTC has made the same error as Erwin Chemerinsky and Jeff Rosen in describing Leegin as a “pro-business” and “anti-consumer” decision without considering the basic possibility that vertical restraints improve both firm profits and consumer welfare.

The key to distinguishing pro-competitive conduct from anticompetitive conduct in the single firm conduct setting is economic analysis.  Were it not for economic analysis, antitrust analysis would be lumbering along under the misunderstood impression that all non-standard contracting practices (tying, exclusive dealing, vertical mergers, etc., etc.) were nearly always anti-competitive.  Consumers would pay the price for our economic ignorance.  But antitrust enforcers in the 21st century have the benefit of better economic theory and more empirical evidence to rely upon in designing policy.  They should use it.  Instead, we appear to get this sort of pre-economic or anti-economic approach that seems to equate an increase of firm profits with a decrease in consumer welfare without stopping to consider the possibility that pro-business conduct might improve consumer welfare.  But its not the failure to consider the possibility that gets me.  What really bothers me is  the Commissioners’ failure to consider, at least seriously consider, the evidence and engaging in this anti-economic rhetoric all while taking the DOJ to task for misstating the consensus.

I consider these conclusions tentative, but I would be quite disheartened if I were an economist at the FTC in light of some of the anti-economic rhetoric in the Statement and elsewhere, as well as the fact that it attracted 3 out of 4 Commissioner votes.  In related news, I also suspect that this sort of anti-economic rhetoric significantly weakens the ability of our agencies to persuade international competition agencies to engage in serious “effects-based” analysis.

*I participated in the DOJ/FTC Section 2 Hearings as a witness and also commented on both FTC and DOJ draft chapters while at the FTC.

3 responses to Inter-Agency Scuffling Over Section 2: What Role for Economists and Economics at the FTC and DOJ?

  1. 

    [comment deleted by editor]

  2. 

    Skip: The only thing fanciful here is your skewed characterization of Josh’s views.

  3. 

    It seems to me that the Section 2 civil war — and the FTC’s response to the DOJ report was for all intents and purposes a declaration of war, against both the DOJ and every firm doing business in the U.S. — can be explained without resorting to Professor Wright’s fanciful economic analysis. The conflict is quite simple: The DOJ and its allies, such as Professor Wright, view antitrust as a type of regulation, something that can be clearly explained and applied with relative consistency. The FTC and its allies, in contrast, see antitrust as a form of patent power — in the sense that term was originally understood in England and later by the Constitution’s framers.

    The patent view of antitrust sees the grant of monopoly power to the FTC as broad and lacking precise definition. The FTC is only charged with using its best judgment in deciding what is best for the economy. To constrain such behavior with formal rules or “economics” is to reject the nature of the patent itself — something that only the sovereign (in this case Congress) may do.