The FTC Knows It When It Sees It

Ramsi Woodcock —  22 November 2022 — Leave a comment

[This post is a contribution to Truth on the Market‘s continuing digital symposium “FTC Rulemaking on Unfair Methods of Competition.” You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

When Congress created the Federal Trade Commission (FTC) in 1914, it charged the agency with condemning “unfair methods of competition.” That’s not the language Congress used in writing America’s primary antitrust statute, the Sherman Act, which prohibits “monopoliz[ation]” and “restraint[s] of trade.”

Ever since, the question has lingered whether the FTC has the authority to go beyond the Sherman Act to condemn conduct that is unfair, but not necessarily monopolizing or trade-restraining.

According to a new policy statement, the FTC’s current leadership seems to think that the answer is “yes.” But the peculiar strand of progressivism that is currently running the agency lacks the intellectual foundation needed to tell us what conduct that is unfair but not monopolizing might actually be—and misses an opportunity to bring about an expansion of its powers that courts might actually accept.

Better to Keep the Rule of Reason but Eliminate the Monopoly-Power Requirement

The FTC’s policy statement reads like a thesaurus. What is unfair competition? Answer: conduct that is “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power of a similar nature.”

In other words: the FTC has no idea. Presumably, the agency thinks, like Justice Potter Stewart did of obscenity, it will know it when it sees it. Given the courts’ long history of humiliating the FTC by rejecting its cases, even when the agency is able to provide a highly developed account of why challenged conduct is bad for America, one shudders to think of the reception such an approach to fairness will receive.

The one really determinate proposal in the policy statement is to attack bad conduct regardless whether the defendant has monopoly power. “Section 5 does not require a separate showing of market power or market definition when the evidence indicates that such conduct tends to negatively affect competitive conditions,” writes the FTC.

If only the agency had proposed this change alone, instead of cracking open the thesaurus to try to redefine bad conduct as well. Dropping the monopoly-power requirement would, by itself, greatly increase the amount of conduct subject to the FTC’s writ without forcing the agency to answer the metaphysical question: what is fair?

Under the present rule-of-reason approach, the courts let consumers answer the question of what constitutes bad conduct. Or to be precise, the courts assume that the only thing consumers care about is the product—its quality and price—and they try to guess whether consumers prefer the changes that the defendant’s conduct had on products in the market. If a court thinks consumers don’t prefer the changes, then the court condemns the conduct. But only if the defendant happens to have monopoly power in the market for those products.

Preserving this approach to identifying bad conduct would let the courts continue to maintain the pretense that they are doing the bidding of consumers—a role they will no doubt prefer to deciding what is fair as an absolute matter.

The FTC can safely discard the monopoly-power requirement without disturbing the current test for bad conduct because—as I argue in a working paper and as Timothy J. Brennen has long insisted—the monopoly-power requirement is directed at the wrong level of the supply chain: the market in which the defendant has harmed competition rather than the input market through which the defendant causes harm.

Power, not just in markets but in all social life, is rooted in one thing only: control over what others need. Harm to competition depends not on how much a defendant can produce relative to competitors but on whether a defendant controls an input that competitors need, but which the defendant can deny to them.

What others need, they do not buy from the market for which they produce. They buy what they need from other markets: input markets. It follows that the only power that should matter for antitrust—the only power that determines whether a firm can harm competition—is power over input markets, not power in the market in which competition is harmed.

And yet, apart from vertical-merger and contracting cases, where an inquiry into foreclosure of inputs still occasionally makes an appearance, antitrust today never requires systematic proof of power in input markets. The efforts of economists are wasted on the proof of power at the wrong level of the supply chain.

That represents an opportunity for the FTC, which can at one stroke greatly expand its authority to encompass conduct by firms having little power in the markets in which they harm competition.

To be sure, really getting the rule of reason right would require that proof of monopoly power continue to be required, only now at the input level instead of in the downstream market in which competition is harmed. But the courts have traditionally required only informal proof of power over inputs. The FTC could probably eliminate the economics-intensive process of formal proof of monopoly power entirely, instead of merely kicking it up one level in the supply chain.

That is surely an added plus for a current leadership so fearful of computation that it was at pains in the policy statement specifically to forswear “numerical” cost-benefit analysis.

Whatever Happened to No Fault?  

The FTC’s interest in expanding enforcement by throwing off the monopoly-power requirement is a marked departure from progressive antimonopolisms of the past. Mid-20th century radicals did not attack the monopoly-power side of antitrust’s two-part test, but rather the anticompetitive-conduct side.

For more than two decades, progressives mooted establishing a “no-fault” monopolization regime in which the only requirement for liability was size. By contrast, the present movement has sought to focus on conduct, rather than size, its own anti-concentration rhetoric notwithstanding.

Anti-Economism

That might, in part, be a result of the movement’s hostility toward economics. Proof of monopoly power is a famously economics-heavy undertaking.

The origin of contemporary antimonopolism is in activism by journalists against the social-media companies that are outcompeting newspapers for ad revenue, not in academia. As a result, the best traditions of the left, which involve intellectually outflanking opponents by showing how economic theory supports progressive positions, are missing here.

Contemporary antimonopolism has no “Capital” (Karl Marx), no “Progress and Poverty” (Henry George), and no “Freedom through Law” (Robert Hale). The most recent installment in this tradition of left-wing intellectual accomplishment is “Capital in the 21st Century” (Thomas Piketty). Unfortunately for progressive antimonopolists, it states: “pure and perfect competition cannot alter . . . inequality[.]’”

The contrast with the last revolution to sweep antitrust—that of the Chicago School—could not be starker. That movement was born in academia and its triumph was a triumph of ideas, however flawed they may in fact have been.

If one wishes to understand how Chicago School thinking put an end to the push for “no-fault” monopolization, one reads the Airlie House conference volume. In the conversations reproduced therein, one finds the no-faulters slowly being won over by the weight of data and theory deployed against them in support of size.

No equivalent watershed moment exists for contemporary antimonopolism, which bypassed academia (including the many progressive scholars doing excellent work therein) and went straight to the press and the agencies.

There is an ongoing debate about whether recent increases in markups result from monopolization or scarcity. It has not been resolved.

Rather than occupy economics, contemporary antimonopolists—and, perhaps, current FTC leadership—recoil from it. As one prominent antimonopolist lamented to a New York Times reporter, merger cases should be a matter of counting to four, and “[w]e don’t need economists to help us count to four.”

As the policy statement puts it: “The unfair methods of competition framework explicitly contemplates a variety of non-quantifiable harms, and justifications and purported benefits may be unquantifiable as well.”

Moralism

Contemporary antimonopolism’s focus on conduct might also be due to moralism—as reflected in the litany of synonyms for “bad” in the FTC’s policy statement.

For earlier progressives, antitrust was largely a means to an end—a way of ensuring that wages were high, consumer prices were low, and products were safe and of good quality. The fate of individual business entities within markets was of little concern, so long as these outcomes could be achieved.

What mattered were people. While contemporary antimonopolism cares about people, too, it differs from earlier antimonopolisms in that it personifies the firm.

If the firm dies, we are to be sad. If the firm is treated roughly by others, starved of resources or denied room to grow and reach its full potential, we are to be outraged, just as we would be if a child were starved. And, just as in the case of a child, we are to be outraged even if the firm would not have grown up to contribute anything of worth to society.

The irony, apparently lost on antimonopolists, is that the same personification of the firm as a rights-bearing agent, operating in other areas of law, undermines progressive policies.

The firm personified not only has a right to be treated gently by competing firms but also to be treated well by other people. But that means that people no longer come first relative to firms. When the Supreme Court holds that a business firm has a First Amendment right to influence politics, the Court takes personification of the firm to its logical extreme.

The alternative is not to make the market a morality play among firms, but to focus instead on market outcomes that matter to people—wages, prices, and product quality. We should not care whether a firm is “coerc[ed], exploitat[ed], collu[ded against], abus[ed], dece[ived], predate[ed], or [subjected to] economic power of a similar nature” except insofar as such treatment fails to serve people.

If one firm wishes to hire away the talent of another, for example, depriving the target of its lifeblood and killing it, so much the better if the result is better products, lower prices, or higher wages.

Antitrust can help maintain this focus on people only in part—by stopping unfair conduct that degrades products. I have argued elsewhere that the rest is for price regulation, taxation, and direct regulation to undertake.  

Can We Be Fairer and Still Give Product-Improving Conduct a Pass?

The intellectual deficit in contemporary antimonopolism is also evident in the care that the FTC’s policy statement puts into exempting behavior that creates superior products.

For one cannot expand the FTC’s powers to reach bad conduct without condemning product-improving conduct when the major check on enforcement today under the rule of reason (apart from the monopoly-power requirement) is precisely that conduct that improves products is exempt.

Under the rule of reason, bad conduct is a denial of inputs to a competitor that does not help consumers, meaning that the denial degrades the competitor’s products without improving the defendant’s products. Bad conduct is, in other words, unfairness that does not improve products.

If the FTC’s goal is to increase fairness relative to a regime that already pursues it, except when unfairness improves products, the additional fairness must come at the cost of product improvement.

The reference to superior products in the policy statement may be an attempt to compromise with the rule of reason. Unlike the elimination of the monopoly-power requirement, it is not a coherent compromise.

The FTC doesn’t need an economist to grasp this either.  

Ramsi Woodcock

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Ramsi Woodcock is an assistant professor of law at the University of Kentucky's Rosenberg College of Law and an assistant professor of management at UK's Gatton College of Business and Economics.

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