Archives For antitrust

As has been rumored in the press for a few weeks, today Comcast announced it is considering making a renewed bid for a large chunk of Twenty-First Century Fox’s (Fox) assets. Fox is in the process of a significant reorganization, entailing primarily the sale of its international and non-television assets. Fox itself will continue, but with a focus on its US television business.

In December of last year, Fox agreed to sell these assets to Disney, in the process rejecting a bid from Comcast. Comcast’s initial bid was some 16% higher than Disney’s, although there were other differences in the proposed deals, as well.

In April of this year, Disney and Fox filed a proxy statement with the SEC explaining the basis for the board’s decision, including predominantly the assertion that the Comcast bid (NB: Comcast is identified as “Party B” in that document) presented greater regulatory (antitrust) risk.

As noted, today Comcast announced it is in “advanced stages” of preparing another unsolicited bid. This time,

Any offer for Fox would be all-cash and at a premium to the value of the current all-share offer from Disney. The structure and terms of any offer by Comcast, including with respect to both the spin-off of “New Fox” and the regulatory risk provisions and the related termination fee, would be at least as favorable to Fox shareholders as the Disney offer.

Because, as we now know (since the April proxy filing), Fox’s board rejected Comcast’s earlier offer largely on the basis of the board’s assessment of the antitrust risk it presented, and because that risk assessment (and the difference between an all-cash and all-share offer) would now be the primary distinguishing feature between Comcast’s and Disney’s bids, it is worth evaluating that conclusion as Fox and its shareholders consider Comcast’s new bid.

In short: There is no basis for ascribing a greater antitrust risk to Comcast’s purchase of Fox’s assets than to Disney’s.

Summary of the Proposed Deal

Post-merger, Fox will continue to own Fox News Channel, Fox Business Network, Fox Broadcasting Company, Fox Sports, Fox Television Stations Group, and sports cable networks FS1, FS2, Fox Deportes, and Big Ten Network.

The deal would transfer to Comcast (or Disney) the following:

  • Primarily, international assets, including Fox International (cable channels in Latin America, the EU, and Asia), Star India (the largest cable and broadcast network in India), and Fox’s 39% interest in Sky (Europe’s largest pay TV service).
  • Fox’s film properties, including 20th Century Fox, Fox Searchlight, and Fox Animation. These would bring along with them studios in Sydney and Los Angeles, but would not include the Fox Los Angeles backlot. Like the rest of the US film industry, the majority of Fox’s film revenue is earned overseas.
  • FX cable channels, National Geographic cable channels (of which Fox currently owns 75%), and twenty-two regional sports networks (RSNs). In terms of relative demand for the two cable networks, FX is a popular basic cable channel, but fairly far down the list of most-watched channels, while National Geographic doesn’t even crack the top 50. Among the RSNs, only one geographic overlap exists with Comcast’s current RSNs, and most of the Fox RSNs (at least 14 of the 22) are not in areas where Comcast has a substantial service presence.
  • The deal would also entail a shift in the companies’ ownership interests in Hulu. Hulu is currently owned in equal 30% shares by Disney, Comcast, and Fox, with the remaining, non-voting 10% owned by Time Warner. Either Comcast or Disney would hold a controlling 60% share of Hulu following the deal with Fox.

Analysis of the Antitrust Risk of a Comcast/Fox Merger

According to the joint proxy statement, Fox’s board discounted Comcast’s original $34.36/share offer — but not the $28.00/share offer from Disney — because of “the level of regulatory issues posed and the proposed risk allocation arrangements.” Significantly on this basis, the Fox board determined Disney’s offer to be superior.

The claim that a merger with Comcast poses sufficiently greater antitrust risk than a purchase by Disney to warrant its rejection out of hand is unsupportable, however. From an antitrust perspective, it is even plausible that a Comcast acquisition of the Fox assets would be on more-solid ground than would be a Disney acquisition.

Vertical Mergers Generally Present Less Antitrust Risk

A merger between Comcast and Fox would be predominantly vertical, while a merger between Disney and Fox, in contrast, would be primarily horizontal. Generally speaking, it is easier to get antitrust approval for vertical mergers than it is for horizontal mergers. As Bruce Hoffman, Director of the FTC’s Bureau of Competition, noted earlier this year:

[V]ertical merger enforcement is still a small part of our merger workload….

There is a strong theoretical basis for horizontal enforcement because economic models predict at least nominal potential for anticompetitive effects due to elimination of horizontal competition between substitutes.

Where horizontal mergers reduce competition on their face — though that reduction could be minimal or more than offset by benefits — vertical mergers do not…. [T]here are plenty of theories of anticompetitive harm from vertical mergers. But the problem is that those theories don’t generally predict harm from vertical mergers; they simply show that harm is possible under certain conditions.

On its face, and consistent with the last quarter century of merger enforcement by the DOJ and FTC, the Comcast acquisition would be less likely to trigger antitrust scrutiny, and the Disney acquisition raises more straightforward antitrust issues.

This is true even in light of the fact that the DOJ decided to challenge the AT&T-Time Warner (AT&T/TWX) merger.

The AT&T/TWX merger is a single data point in a long history of successful vertical mergers that attracted little scrutiny, and no litigation, by antitrust enforcers (although several have been approved subject to consent orders).

Just because the DOJ challenged that one merger does not mean that antitrust enforcers generally, nor even the DOJ in particular, have suddenly become more hostile to vertical mergers.

Of particular importance to the conclusion that the AT&T/TWX merger challenge is of minimal relevance to predicting the DOJ’s reception in this case, the theory of harm argued by the DOJ in that case is far from well-accepted, while the potential theory that could underpin a challenge to a Disney/Fox merger is. As Bruce Hoffman further remarks:

I am skeptical of arguments that vertical mergers cause harm due to an increased bargaining skill; this is likely not an anticompetitive effect because it does not flow from a reduction in competition. I would contrast that to the elimination of competition in a horizontal merger that leads to an increase in bargaining leverage that could raise price or reduce output.

The Relatively Lower Risk of a Vertical Merger Challenge Hasn’t Changed Following the DOJ’s AT&T/Time Warner Challenge

Judge Leon is expected to rule on the AT&T/TWX merger in a matter of weeks. The theory underpinning the DOJ’s challenge is problematic (to say the least), and the case it presented was decidedly weak. But no litigated legal outcome is ever certain, and the court could, of course, rule against the merger nevertheless.

Yet even if the court does rule against the AT&T/TWX merger, this hardly suggests that a Comcast/Fox deal would create a greater antitrust risk than would a Disney/Fox merger.

A single successful challenge to a vertical merger — what would be, in fact, the first successful vertical merger challenge in four decades — doesn’t mean that the courts are becoming hostile to vertical mergers any more than the DOJ’s challenge means that vertical mergers suddenly entail heightened enforcement risk. Rather, it would simply mean that that, given the specific facts of the case, the DOJ was able to make out its prima facie case, and that the defendants were unable to rebut it.  

A ruling for the DOJ in the AT&T/TWX merger challenge would be rooted in a highly fact-specific analysis that could have no direct bearing on future cases.

In the AT&T/TWX case, the court’s decision will turn on its assessment of the DOJ’s argument that the merged firm could raise subscriber prices by a few pennies per subscriber. But as AT&T’s attorney aptly pointed out at trial (echoing the testimony of AT&T’s economist, Dennis Carlton):

The government’s modeled price increase is so negligible that, given the inherent uncertainty in that predictive exercise, it is not meaningfully distinguishable from zero.

Even minor deviations from the facts or the assumptions used in the AT&T/TWX case could completely upend the analysis — and there are important differences between the AT&T/TWX merger and a Comcast/Fox merger. True, both would be largely vertical mergers that would bring together programming and distribution assets in the home video market. But the foreclosure effects touted by the DOJ in the AT&T/TWX merger are seemingly either substantially smaller or entirely non-existent in the proposed Comcast/Fox merger.

Most importantly, the content at issue in AT&T/TWX is at least arguably (and, in fact, argued by the DOJ) “must have” programming — Time Warner’s premium HBO channels and its CNN news programming, in particular, were central to the DOJ’s foreclosure argument. By contrast, the programming that Comcast would pick up as a result of the proposed merger with Fox — FX (a popular, but non-essential, basic cable channel) and National Geographic channels (which attract a tiny fraction of cable viewing) — would be extremely unlikely to merit that designation.

Moreover, the DOJ made much of the fact that AT&T, through DirectTV, has a national distribution footprint. As a result, its analysis was dependent upon the company’s potential ability to attract new subscribers decamping from competing providers from whom it withholds access to Time Warner content in every market in the country. Comcast, on the other hand, provides cable service in only about 35% of the country. This significantly limits its ability to credibly threaten competitors because its ability to recoup lost licensing fees by picking up new subscribers is so much more limited.

And while some RSNs may offer some highly prized live sports programming, the mismatch between Comcast’s footprint and the FOX RSNs (only about 8 of the 22 Fox RSNs are in Comcast service areas) severely limits any ability or incentive the company would have to leverage that content for higher fees. Again, to the extent that RSN programming is not “must-have,” and to the extent there is not overlap between the RSN’s geographic area and Comcast’s service area, the situation is manifestly not the same as the one at issue in the AT&T/TWX merger.

In sum, a ruling in favor of the DOJ in the AT&T/TWX case would be far from decisive in predicting how the agency and the courts would assess any potential concerns arising from Comcast’s ownership of Fox’s assets.

A Comcast/Fox Deal May Entail Lower Antitrust Risk than a Disney/Fox Merger

As discussed below, concerns about antitrust enforcement risk from a Comcast/Fox merger are likely overstated. Perhaps more importantly, however, to the extent these concerns are legitimate, they apply at least as much to a Disney/Fox merger. There is, at minimum, no basis for assuming a Comcast deal would present any greater regulatory risk.

The Antitrust Risk of a Comcast/Fox Merger Is Likely Overstated

The primary theory upon which antitrust enforcers could conceivably base a Comcast/Fox merger challenge would be a vertical foreclosure theory. Importantly, such a challenge would have to be based on the incremental effect of adding the Fox assets to Comcast, and not on the basis of its existing assets. Thus, for example, antitrust enforcers would not be able to base a merger challenge on the possibility that Comcast could leverage NBC content it currently owns to extract higher fees from competitors. Rather, only if the combination of NBC programming with additional content from Fox could create a new antitrust risk would a case be tenable.

Enforcers would be unlikely to view the addition of FX and National Geographic to the portfolio of programming content Comcast currently owns as sufficient to raise concerns that the merger would give Comcast anticompetitive bargaining power or the ability to foreclose access to its content.

Although even less likely, enforcers could be concerned with the (horizontal) addition of 20th Century Fox filmed entertainment to Universal’s existing film production and distribution. But the theatrical film market is undeniably competitive, with the largest studio by revenue (Disney) last year holding only 22% of the market. The combination of 20th Century Fox with Universal would still result in a market share only around 25% based on 2017 revenues (and, depending on the year, not even result in the industry’s largest share).

There is also little reason to think that a Comcast controlling interest in Hulu would attract problematic antitrust attention. Comcast has already demonstrated an interest in diversifying its revenue across cable subscriptions and licensing, broadband subscriptions, and licensing to OVDs, as evidenced by its recent deal to offer Netflix as part of its Xfinity packages. Hulu likely presents just one more avenue for pursuing this same diversification strategy. And Universal has a history (see, e.g., this, this, and this) of very broad licensing across cable providers, cable networks, OVDs, and the like.

In the case of Hulu, moreover, the fact that Comcast is vertically integrated in broadband as well as cable service likely reduces the anticompetitive risk because more-attractive OVD content has the potential to increase demand for Comcast’s broadband service. Broadband offers larger margins (and is growing more rapidly) than cable, and it’s quite possible that any loss in Comcast’s cable subscriber revenue from Hulu’s success would be more than offset by gains in its content licensing and broadband subscription revenue. The same, of course, goes for Comcast’s incentives to license content to OVD competitors like Netflix: Comcast plausibly gains broadband subscription revenue from heightened consumer demand for Netflix, and this at least partially offsets any possible harm to Hulu from Netflix’s success.

At the same time, especially relative to Netflix’s vast library of original programming (an expected $8 billion worth in 2018 alone) and content licensed from other sources, the additional content Comcast would gain from a merger with Fox is not likely to appreciably increase its bargaining leverage or its ability to foreclose Netflix’s access to its content.     

Finally, Comcast’s ownership of Fox’s RSNs could, as noted, raise antitrust enforcers’ eyebrows. Enforcers could be concerned that Comcast would condition competitors’ access to RSN programming on higher licensing fees or prioritization of its NBC Sports channels.

While this is indeed a potential risk, it is hardly a foregone conclusion that it would draw an enforcement action. Among other things, NBC is far from the market leader, and improving its competitive position relative to ESPN could be viewed as a benefit of the deal. In any case, potential problems arising from ownership of the RSNs could easily be dealt with through divestiture or behavioral conditions; they are extremely unlikely to lead to an outright merger challenge.

The Antitrust Risk of a Disney Deal May Be Greater than Expected

While a Comcast/Fox deal doesn’t entail no antitrust enforcement risk, it certainly doesn’t entail sufficient risk to deem the deal dead on arrival. Moreover, it may entail less antitrust enforcement risk than would a Disney/Fox tie-up.

Yet, curiously, the joint proxy statement doesn’t mention any antitrust risk from the Disney deal at all and seems to suggest that the Fox board applied no risk discount in evaluating Disney’s bid.

Disney — already the market leader in the filmed entertainment industry — would acquire an even larger share of box office proceeds (and associated licensing revenues) through acquisition of Fox’s film properties. Perhaps even more important, the deal would bring the movie rights to almost all of the Marvel Universe within Disney’s ambit.

While, as suggested above, even that combination probably wouldn’t trigger any sort of market power presumption, it would certainly create an entity with a larger share of the market and stronger control of the industry’s most valuable franchises than would a Comcast/Fox deal.

Another relatively larger complication for a Disney/Fox merger arises from the prospect of combining Fox’s RSNs with ESPN. Whatever ability or incentive either company would have to engage in anticompetitive conduct surrounding sports programming, that risk would seem to be more significant for undisputed market leader, Disney. At the same time, although still powerful, demand for ESPN on cable has been flagging. Disney could well see the ability to bundle ESPN with regional sports content as a way to prop up subscription revenues for ESPN — a practice, in fact, that it has employed successfully in the past.   

Finally, it must be noted that licensing of consumer products is an even bigger driver of revenue from filmed entertainment than is theatrical release. No other company comes close to Disney in this space.

Disney is the world’s largest licensor, earning almost $57 billion in 2016 from licensing properties like Star Wars and Marvel Comics. Universal is in a distant 7th place, with 2016 licensing revenue of about $6 billion. Adding Fox’s (admittedly relatively small) licensing business would enhance Disney’s substantial lead (even the number two global licensor, Meredith, earned less than half of Disney’s licensing revenue in 2016). Again, this is unlikely to be a significant concern for antitrust enforcers, but it is notable that, to the extent it might be an issue, it is one that applies to Disney and not Comcast.

Conclusion

Although I hope to address these issues in greater detail in the future, for now the preliminary assessment is clear: There is no legitimate basis for ascribing a greater antitrust risk to a Comcast/Fox deal than to a Disney/Fox deal.

As Thom previously posted, he and I have a new paper explaining The Case for Doing Nothing About Common Ownership of Small Stakes in Competing Firms. Our paper is a response to cries from the likes of Einer Elhauge and of Eric Posner, Fiona Scott Morton, and Glen Weyl, who have called for various types of antitrust action to reign in what they claim is an “economic blockbuster” and “the major new antitrust challenge of our time,” respectively. This is the first in a series of posts that will unpack some of the issues and arguments we raise in our paper.

At issue is the growth in the incidence of common-ownership across firms within various industries. In particular, institutional investors with broad portfolios frequently report owning small stakes in a number of firms within a given industry. Although small, these stakes may still represent large block holdings relative to other investors. This intra-industry diversification, critics claim, changes the managerial objectives of corporate executives from aggressively competing to increase their own firm’s profits to tacitly colluding to increase industry-level profits instead. The reason for this change is that competition by one firm comes at a cost of profits from other firms in the industry. If investors own shares across firms, then any competitive gains in one firm’s stock are offset by competitive losses in the stocks of other firms in the investor’s portfolio. If one assumes corporate executives aim to maximize total value for their largest shareholders, then managers would have incentive to soften competition against firms with which they share common ownership. Or so the story goes (more on that in a later post.)

Elhague and Posner, et al., draw their motivation for new antitrust offenses from a handful of papers that purport to establish an empirical link between the degree of common ownership among competing firms and various measures of softened competitive behavior, including airline prices, banking fees, executive compensation, and even corporate disclosure patterns. The paper of most note, by José Azar, Martin Schmalz, and Isabel Tecu and forthcoming in the Journal of Finance, claims to identify a causal link between the degree of common ownership among airlines competing on a given route and the fares charged for flights on that route.

Measuring common ownership with MHHI

Azar, et al.’s airline paper uses a metric of industry concentration called a Modified Herfindahl–Hirschman Index, or MHHI, to measure the degree of industry concentration taking into account the cross-ownership of investors’ stakes in competing firms. The original Herfindahl–Hirschman Index (HHI) has long been used as a measure of industry concentration, debuting in the Department of Justice’s Horizontal Merger Guidelines in 1982. The HHI is calculated by squaring the market share of each firm in the industry and summing the resulting numbers.

The MHHI is rather more complicated. MHHI is composed of two parts: the HHI measuring product market concentration and the MHHI_Delta measuring the additional concentration due to common ownership. We offer a step-by-step description of the calculations and their economic rationale in an appendix to our paper. For this post, I’ll try to distill that down. The MHHI_Delta essentially has three components, each of which is measured relative to every possible competitive pairing in the market as follows:

  1. A measure of the degree of common ownership between Company A and Company -A (Not A). This is calculated by multiplying the percentage of Company A shares owned by each Investor I with the percentage of shares Investor I owns in Company -A, then summing those values across all investors in Company A. As this value increases, MHHI_Delta goes up.
  2. A measure of the degree of ownership concentration in Company A, calculated by squaring the percentage of shares owned by each Investor I and summing those numbers across investors. As this value increases, MHHI_Delta goes down.
  3. A measure of the degree of product market power exerted by Company A and Company -A, calculated by multiplying the market shares of the two firms. As this value increases, MHHI_Delta goes up.

This process is repeated and aggregated first for every pairing of Company A and each competing Company -A, then repeated again for every other company in the market relative to its competitors (e.g., Companies B and -B, Companies C and -C, etc.). Mathematically, MHHI_Delta takes the form:

where the Ss represent the firm market shares of, and Betas represent ownership shares of Investor I in, the respective companies A and -A.

As the relative concentration of cross-owning investors to all investors in Company A increases (i.e., the ratio on the right increases), managers are assumed to be more likely to soften competition with that competitor. As those two firms control more of the market, managers’ ability to tacitly collude and increase joint profits is assumed to be higher. Consequently, the empirical research assumes that as MHHI_Delta increases, we should observe less competitive behavior.

And indeed that is the “blockbuster” evidence giving rise to Elhauge’s and Posner, et al.,’s arguments  For example, Azar, et. al., calculate HHI and MHHI_Delta for every US airline market–defined either as city-pairs or departure-destination pairs–for each quarter of the 14-year time period in their study. They then regress ticket prices for each route against the HHI and the MHHI_Delta for that route, controlling for a number of other potential factors. They find that airfare prices are 3% to 7% higher due to common ownership. Other papers using the same or similar measures of common ownership concentration have likewise identified positive correlations between MHHI_Delta and their respective measures of anti-competitive behavior.

Problems with the problem and with the measure

We argue that both the theoretical argument underlying the empirical research and the empirical research itself suffer from some serious flaws. On the theoretical side, we have two concerns. First, we argue that there is a tremendous leap of faith (if not logic) in the idea that corporate executives would forgo their own self-interest and the interests of the vast majority of shareholders and soften competition simply because a small number of small stakeholders are intra-industry diversified. Second, we argue that even if managers were so inclined, it clearly is not the case that softening competition would necessarily be desirable for institutional investors that are both intra- and inter-industry diversified, since supra-competitive pricing to increase profits in one industry would decrease profits in related industries that may also be in the investors’ portfolios.

On the empirical side, we have concerns both with the data used to calculate the MHHI_Deltas and with the nature of the MHHI_Delta itself. First, the data on institutional investors’ holdings are taken from Schedule 13 filings, which report aggregate holdings across all the institutional investor’s funds. Using these data masks the actual incentives of the institutional investors with respect to investments in any individual company or industry. Second, the construction of the MHHI_Delta suffers from serious endogeneity concerns, both in investors’ shareholdings and in market shares. Finally, the MHHI_Delta, while seemingly intuitive, is an empirical unknown. While HHI is theoretically bounded in a way that lends to interpretation of its calculated value, the same is not true for MHHI_Delta. This makes any inference or policy based on nominal values of MHHI_Delta completely arbitrary at best.

We’ll expand on each of these concerns in upcoming posts. We will then take on the problems with the policy proposals being offered in response to the common ownership ‘problem.’

 

 

 

 

 

 

Although not always front page news, International Trade Commission (“ITC”) decisions can have major impacts on trade policy and antitrust law. Scott Kieff, a former ITC Commissioner, recently published a thoughtful analysis of Certain Carbon and Alloy Steel Products — a potentially important ITC investigation that implicates the intersection of these two policy areas. Scott was on the ITC when the investigation was initiated in 2016, but left in 2017 before the decision was finally issued in March of this year.

Perhaps most important, the case highlights an uncomfortable truth:

Sometimes (often?) Congress writes really bad laws and promotes really bad policies, but administrative agencies can do more harm to the integrity of our legal system by abusing their authority in an effort to override those bad policies.

In this case, that “uncomfortable truth” plays out in the context of the ITC majority’s effort to override Section 337 of the Tariff Act of 1930 by limiting the ability of the ITC to investigate alleged violations of the Act rooted in antitrust.

While we’re all for limiting the ability of competitors to use antitrust claims in order to impede competition (as one of us has noted: “Erecting barriers to entry and raising rivals’ costs through regulation are time-honored American political traditions”), it is inappropriate to make an end-run around valid and unambiguous legislation in order to do so — no matter how desirable the end result. (As the other of us has noted: “Attempts to [effect preferred policies] through any means possible are rational actions at an individual level, but writ large they may undermine the legal fabric of our system and should be resisted.”)

Brief background

Under Section 337, the ITC is empowered to, among other things, remedy

Unfair methods of competition and unfair acts in the importation of articles… into the United States… the threat or effect of which is to destroy or substantially injure an industry in the United States… or to restrain or monopolize trade and commerce in the United States.

In Certain Carbon and Alloy Steel Products, the ITC undertook an investigation — at the behest of U.S. Steel Corporation — into alleged violations of Section 337 by the Chinese steel industry. The complaint was based upon a number of claims, including allegations of price fixing.

As ALJ Lord succinctly summarizes in her Initial Determination:

For many years, the United States steel industry has complained of unfair trade practices by manufacturers of Chinese steel. While such practices have resulted in the imposition of high tariffs on certain Chinese steel products, U.S. Steel seeks additional remedies. The complaint by U.S. Steel in this case attempts to use section 337 of the Tariff Act of 1930 to block all Chinese carbon and alloy steel from coming into the United States. One of the grounds that U.S. Steel relies on is the allegation that the Chinese steel industry violates U.S. antitrust laws.

The ALJ dismissed the antitrust claims (alleging violations of the Sherman Act), however, concluding that they failed to allege antitrust injury as required by US courts deciding Sherman Act cases brought by private parties under the Clayton Act’s remedial provisions:

Under federal antitrust law, it is firmly established that a private complainant must show antitrust standing [by demonstrating antitrust injury]. U.S. Steel has not alleged that it has antitrust standing or the facts necessary to establish antitrust standing and erroneously contends it need not have antitrust standing to allege the unfair trade practice of restraining trade….

In its decision earlier this year, a majority of ITC commissioners agreed, and upheld the ALJ’s Initial Determination.

In comments filed with the ITC following the ALJ’s Initial Determination, we argued that the ALJ erred in her analysis:

Because antitrust injury is not an express requirement imposed by Congress, because ITC processes differ substantially from those of Article III courts, and because Section 337 is designed to serve different aims than private antitrust litigation, the Commission should reinstate the price fixing claims and allow the case to proceed.

Unfortunately, in upholding the Initial Determination, the Commission compounded this error, and also failed to properly understand the goals of the Tariff Act, and, by extension, its own role as arbiter of “unfair” trade practices.

A tale of two statutes

The case appears to turn on an arcane issue of adjudicative process in antitrust claims brought under the antitrust laws in federal court, on the one hand, versus antitrust claims brought under the Section 337 of the Tariff Act at the ITC, on the other. But it is actually about much more: the very purposes and structures of those laws.

The ALJ notes that

[The Chinese steel manufacturers contend that] under antitrust law as currently applied in federal courts, it has become very difficult for a private party like U.S. Steel to bring an antitrust suit against its competitors. Steel accepts this but says the law under section 337 should be different than in federal courts.

And as the ALJ further notes, this highlights the differences between the two regimes:

The dispute between U.S. Steel and the Chinese steel industry shows the conflict between section 337, which is intended to protect American industry from unfair competition, and U.S. antitrust laws, which are intended to promote competition for the benefit of consumers, even if such competition harms competitors.

Nevertheless, the ALJ (and the Commission) holds that antitrust laws must be applied in the same way in federal court as under Section 337 at the ITC.

It is this conclusion that is in error.

Judging from his article, it’s clear that Kieff agrees and would have dissented from the Commission’s decision. As he writes:

Unlike the focus in Section 16 of the Clayton Act on harm to the plaintiff, the provisions in the ITC’s statute — Section 337 — explicitly require the ITC to deal directly with harms to the industry or the market (rather than to the particular plaintiff)…. Where the statute protects the market rather than the individual complainant, the antitrust injury doctrine’s own internal logic does not compel the imposition of a burden to show harm to the particular private actor bringing the complaint. (Emphasis added)

Somewhat similar to the antitrust laws, the overall purpose of Section 337 focuses on broader, competitive harm — injury to “an industry in the United States” — not specific competitors. But unlike the Clayton Act, the Tariff Act does not accomplish this by providing a remedy for private parties alleging injury to themselves as a proxy for this broader, competitive harm.

As Kieff writes:

One stark difference between the two statutory regimes relates to the explicit goals that the statutes state for themselves…. [T]he Clayton Act explicitly states it is to remedy harm to only the plaintiff itself. This difference has particular significance for [the Commission’s decision in Certain Carbon and Alloy Steel Products] because the Supreme Court’s source of the private antitrust injury doctrine, its decision in Brunswick, explicitly tied the doctrine to this particular goal.

More particularly, much of the Court’s discussion in Brunswick focuses on the role the [antitrust injury] doctrine plays in mitigating the risk of unjustly enriching the plaintiff with damages awards beyond the amount of the particular antitrust harm that plaintiff actually suffered. The doctrine makes sense in the context of the Clayton Act proceedings in federal court because it keeps the cause of action focused on that statute’s stated goal of protecting a particular litigant only in so far as that party itself is a proxy for the harm to the market.

By contrast, since the goal of the ITC’s statute is to remedy for harm to the industry or to trade and commerce… there is no need to closely tie such broader harms to the market to the precise amounts of harms suffered by the particular complainant. (Emphasis and paragraph breaks added)

The mechanism by which the Clayton Act works is decidedly to remedy injury to competitors (including with treble damages). But because its larger goal is the promotion of competition, it cabins that remedy in order to ensure that it functions as an appropriate proxy for broader harms, and not simply a tool by which competitors may bludgeon each other. As Kieff writes:

The remedy provisions of the Clayton Act benefit much more than just the private plaintiff. They are designed to benefit the public, echoing the view that the private plaintiff is serving, indirectly, as a proxy for the market as a whole.

The larger purpose of Section 337 is somewhat different, and its remedial mechanism is decidedly different:

By contrast, the provisions in Section 337[] are much more direct in that they protect against injury to the industry or to trade and commerce more broadly. Harm to the particular complainant is essentially only relevant in so far as it shows harm to the industry or to trade and commerce more broadly. In turn, the remedies the ITC’s statute provides are more modest and direct in stopping any such broader harm that is determined to exist through a complete investigation.

The distinction between antitrust laws and trade laws is firmly established in the case law. And, in particular, trade laws not only focus on effects on industry rather than consumers or competition, per se, but they also contemplate a different kind of economic injury:

The “injury to industry” causation standard… focuses explicitly upon conditions in the U.S. industry…. In effect, Congress has made a judgment that causally related injury to the domestic industry may be severe enough to justify relief from less than fair value imports even if from another viewpoint the economy could be said to be better served by providing no relief. (Emphasis added)

Importantly, under Section 337 such harms to industry would ultimately have to be shown before a remedy would be imposed. In other words, demonstration of injury to competition is a constituent part of a case under Section 337. By contrast, such a demonstration is brought into an action under the antitrust laws by the antitrust injury doctrine as a function of establishing that the plaintiff has standing to sue as a proxy for broader harm to the market.

Finally, it should be noted, as ITC Commissioner Broadbent points out in her dissent from the Commission’s majority opinion, that U.S. Steel alleged in its complaint a violation of the Sherman Act, not the Clayton Act. Although its ability to enforce the Sherman Act arises from the remedial provisions of the Clayton Act, the substantive analysis of its claims is a Sherman Act matter. And the Sherman Act does not contain any explicit antitrust injury requirement. This is a crucial distinction because, as Commissioner Broadbent notes (quoting the Federal Circuit’s Tianrui case):

The “antitrust injury” standing requirement stems, not from the substantive antitrust statutes like the Sherman Act, but rather from the Supreme Court’s interpretation of the injury elements that must be proven under sections 4 and 16 of the Clayton Act.

* * *

Absent [] express Congressional limitation, restricting the Commission’s consideration of unfair methods of competition and unfair acts in international trade “would be inconsistent with the congressional purpose of protecting domestic commerce from unfair competition in importation….”

* * *

Where, as here, no such express limitation in the Sherman Act has been shown, I find no legal justification for imposing the insurmountable hurdle of demonstrating antitrust injury upon a typical U.S. company that is grappling with imports that benefit from the international unfair methods of competition that have been alleged in this case.

Section 337 is not a stand-in for other federal laws, even where it protects against similar conduct, and its aims diverge in important ways from those of other federal laws. It is, in other words, a trade protection provision, first and foremost, not an antitrust law, patent law, or even precisely a consumer protection statute.

The ITC hamstrings Itself

Kieff lays out a number of compelling points in his paper, including an argument that the ITC was statutorily designed as a convenient forum with broad powers in order to enable trade harms to be remedied without resort to expensive and protracted litigation in federal district court.

But, perhaps even more important, he points to a contradiction in the ITC’s decision that is directly related to its statutory design.

Under the Tariff Act, the Commission is entitled to self-initiate a Section 337 investigation identical to the one in Certain Alloy and Carbon Steel Products. And, as in this case, private parties are also entitled to file complaints with the Commission that can serve as the trigger for an investigation. In both instances, the ITC itself decides whether there is sufficient basis for proceeding, and, although an investigation unfolds much like litigation in federal court, it is, in fact, an investigation (and decision) undertaken by the ITC itself.

Although the Commission is statutorily mandated to initiate an investigation once a complaint is properly filed, this is subject to a provision requiring the Commission to “examine the complaint for sufficiency and compliance with the applicable sections of this Chapter.” Thus, the Commission conducts a preliminary investigation to determine if the complaint provides a sound basis for institution of an investigation, not unlike an assessment of standing and evaluation of the sufficiency of a complaint in federal court — all of which happens before an official investigation is initiated.

Yet despite the fact that, before an investigation begins, the ITC either 1) decides for itself that there is sufficient basis to initiate its own action, or else 2) evaluates the sufficiency of a private complaint to determine if the Commission should initiate an action, the logic of the decision in Certain Alloy and Carbon Steel Products would apply different standards in each case. Writes Kieff:

There appears to be broad consensus that the ITC can self-initiate an antitrust case under Section 337 and in such a proceeding would not be required to apply the antitrust injury doctrine to itself or to anyone else…. [I]t seems odd to make [this] legal distinction… After all, if it turned out there really were harm to a domestic industry or trade and commerce in this case, it would be strange for the ITC to have to dismiss this action and deprive itself of the benefit of the advance work and ongoing work of the private party [just because it was brought to the ITC’s attention by a private party complaint], only to either sit idle or expend the resources to — flying solo that time — reinitiate and proceed to completion.

Odd indeed, because, in the end, what is instituted is an investigation undertaken by the ITC — whether it originates from a private party or from its own initiative. The role of a complaining party before the ITC is quite distinct from that of a plaintiff in an Article III court.

In trade these days, it always comes down to China

We are hesitant to offer justifications for Congress’ decision to grant the ITC a sweeping administrative authority to prohibit the “unfair” importation of articles into the US, but there could be good reasons that Congress enacted the Tariff Act as a protectionist statute.

In a recent Law360 article, Kieff noted that analyzing anticompetitive behavior in the trade context is more complicated than in the domestic context. To take the current example: By limiting the complainant’s ability to initiate an ITC action based on a claim that foreign competitors are conspiring to keep prices artificially low, the ITC majority decision may be short-sighted insofar as keeping prices low might actually be part of a larger industrial and military policy for the Chinese government:

The overlooked problem is that, as the ITC petitioners claim, the Chinese government is using its control over many Chinese steel producers to accomplish full-spectrum coordination on both price and quantity. Mere allegations of course would have to be proven; but it’s not hard to imagine that such coordination could afford the Chinese government effective surveillance and control over  almost the entire worldwide supply chain for steel products.

This access would help the Chinese government run significant intelligence operations…. China is allegedly gaining immense access to practically every bid and ask up and down the supply chain across the global steel market in general, and our domestic market in particular. That much real-time visibility across steel markets can in turn give visibility into defense, critical infrastructure and finance.

Thus, by taking it upon itself to artificially narrow its scope of authority, the ITC could be undermining a valid congressional concern: that trade distortions not be used as a way to allow a foreign government to gain a more pervasive advantage over diplomatic and military operations.

No one seriously doubts that China is, at the very least, a supportive partner to much of its industry in a way that gives that industry some potential advantage over competitors operating in countries that receive relatively less assistance from national governments.

In certain industries — notably semiconductors and patent-intensive industries more broadly — the Chinese government regularly imposes onerous conditions (including mandatory IP licensing and joint ventures with Chinese firms, invasive audits, and obligatory software and hardware “backdoors”) on foreign tech companies doing business in China. It has long been an open secret that these efforts, ostensibly undertaken for the sake of national security, are actually aimed at protecting or bolstering China’s domestic industry.

And China could certainly leverage these partnerships to obtain information on a significant share of important industries and their participants throughout the world. After all, we are well familiar with this business model: cheap or highly subsidized access to a desired good or service in exchange for user data is the basic description of modern tech platform companies.

Only Congress can fix Congress

Stepping back from the ITC context, a key inquiry when examining antitrust through a trade lens is the extent to which countries will use antitrust as a non-tariff barrier to restrain trade. It is certainly the case that a sort of “mutually assured destruction” can arise where every country chooses to enforce its own ambiguously worded competition statute in a way that can favor its domestic producers to the detriment of importers. In the face of that concern, the impetus to try to apply procedural constraints on open-ended competition laws operating in the trade context is understandable.

And as a general matter, it also makes sense to be concerned when producers like U.S. Steel try to use our domestic antitrust laws to disadvantage Chinese competitors or keep them out of the market entirely.

But in this instance the analysis is more complicated. Like it or not, what amounts to injury in the international trade context, even with respect to anticompetitive conduct, is different than what’s contemplated under the antitrust laws. When the Tariff Act of 1922 was passed (which later became Section 337) the Senate Finance Committee Report that accompanied it described the scope of its unfair methods of competition authority as “broad enough to prevent every type and form of unfair practice” involving international trade. At the same time, Congress pretty clearly gave the ITC the discretion to proceed on a much less-constrained basis than that on which Article III courts operate.

If these are problems, Congress needs to fix them, not the ITC acting sua sponte.

Moreover, as Kieff’s paper (and our own comments in the Certain Alloy and Carbon Steel Products investigation) make clear, there are also a number of relevant, practical distinctions between enforcement of the antitrust laws in a federal court in a case brought by a private plaintiff and an investigation of alleged anticompetitive conduct by the ITC under Section 337. Every one of these cuts against importing an antitrust injury requirement from federal court into ITC adjudication.

Instead, understandable as its motivation may be, the ITC majority’s approach in Certain Alloy and Carbon Steel Products requires disregarding Congressional intent, and that’s simply not a tenable interpretive approach for administrative agencies to take.

Protectionism is a terrible idea, but if that’s how Congress wrote the Tariff Act, the ITC is legally obligated to enforce the protectionist law it is given.

Today would have been Henry Manne’s 90th birthday. When he passed away in 2015 he left behind an immense and impressive legacy. In 1991, at the inaugural meeting of the American Law & Economics Association (ALEA), Manne was named a Life Member of ALEA and, along with Nobel Laureate Ronald Coase, and federal appeals court judges Richard Posner and Guido Calabresi, one of the four Founders of Law and Economics. The organization I founded, the International Center for Law & Economics is dedicated to his memory, along with that of his great friend and mentor, UCLA economist Armen Alchian.

Manne is best known for his work in corporate governance and securities law and regulation, of course. But sometimes forgotten is that his work on the market for corporate control was motivated by concerns about analytical flaws in merger enforcement. As former FTC commissioners Maureen Ohlhausen and Joshua Wright noted in a 2015 dissenting statement:

The notion that the threat of takeover would induce current managers to improve firm performance to the benefit of shareholders was first developed by Henry Manne. Manne’s pathbreaking work on the market for corporate control arose out of a concern that antitrust constraints on horizontal mergers would distort its functioning. See Henry G. Manne, Mergers and the Market for Corporate Control, 73 J. POL. ECON. 110 (1965).

But Manne’s focus on antitrust didn’t end in 1965. Moreover, throughout his life he was a staunch critic of misguided efforts to expand the power of government, especially when these efforts claimed to have their roots in economic reasoning — which, invariably, was hopelessly flawed. As his obituary notes:

In his teaching, his academic writing, his frequent op-eds and essays, and his work with organizations like the Cato Institute, the Liberty Fund, the Institute for Humane Studies, and the Mont Pèlerin Society, among others, Manne advocated tirelessly for a clearer understanding of the power of markets and competition and the importance of limited government and economically sensible regulation.

Thus it came to be, in 1974, that Manne was called to testify before the Senate Judiciary Committee, Subcommittee on Antitrust and Monopoly, on Michigan Senator Philip A. Hart’s proposed Industrial Reorganization Act. His testimony is a tour de force, and a prescient rejoinder to the faddish advocates of today’s “hipster antitrust”— many of whom hearken longingly back to the antitrust of the 1960s and its misguided “gurus.”

Henry Manne’s trenchant testimony critiquing the Industrial Reorganization Act and its (ostensible) underpinnings is reprinted in full in this newly released ICLE white paper (with introductory material by Geoffrey Manne):

Henry G. Manne: Testimony on the Proposed Industrial Reorganization Act of 1973 — What’s Hip (in Antitrust) Today Should Stay Passé

Sen. Hart proposed the Industrial Reorganization Act in order to address perceived problems arising from industrial concentration. The bill was rooted in the belief that industry concentration led inexorably to monopoly power; that monopoly power, however obtained, posed an inexorable threat to freedom and prosperity; and that the antitrust laws (i.e., the Sherman and Clayton Acts) were insufficient to address the purported problems.

That sentiment — rooted in the reflexive application of the (largely-discredited structure-conduct-performance (SCP) paradigm) — had already become largely passé among economists in the 70s, but it has resurfaced today as the asserted justification for similar (although less onerous) antitrust reform legislation and the general approach to antitrust analysis commonly known as “hipster antitrust.”

The critiques leveled against the asserted economic underpinnings of efforts like the Industrial Reorganization Act are as relevant today as they were then. As Henry Manne notes in his testimony:

To be successful in this stated aim [“getting the government out of the market”] the following dreams would have to come true: The members of both the special commission and the court established by the bill would have to be satisfied merely to complete their assigned task and then abdicate their tremendous power and authority; they would have to know how to satisfactorily define and identify the limits of the industries to be restructured; the Government’s regulation would not sacrifice significant efficiencies or economies of scale; and the incentive for new firms to enter an industry would not be diminished by the threat of a punitive response to success.

The lessons of history, economic theory, and practical politics argue overwhelmingly against every one of these assumptions.

Both the subject matter of and impetus for the proposed bill (as well as Manne’s testimony explaining its economic and political failings) are eerily familiar. The preamble to the Industrial Reorganization Act asserts that

competition… preserves a democratic society, and provides an opportunity for a more equitable distribution of wealth while avoiding the undue concentration of economic, social, and political power; [and] the decline of competition in industries with oligopoly or monopoly power has contributed to unemployment, inflation, inefficiency, an underutilization of economic capacity, and the decline of exports….

The echoes in today’s efforts to rein in corporate power by adopting structural presumptions are unmistakable. Compare, for example, this language from Sen. Klobuchar’s Consolidation Prevention and Competition Promotion Act of 2017:

[C]oncentration that leads to market power and anticompetitive conduct makes it more difficult for people in the United States to start their own businesses, depresses wages, and increases economic inequality;

undue market concentration also contributes to the consolidation of political power, undermining the health of democracy in the United States; [and]

the anticompetitive effects of market power created by concentration include higher prices, lower quality, significantly less choice, reduced innovation, foreclosure of competitors, increased entry barriers, and monopsony power.

Remarkably, Sen. Hart introduced his bill as “an alternative to government regulation and control.” Somehow, it was the antithesis of “government control” to introduce legislation that, in Sen. Hart’s words,

involves changing the life styles of many of our largest corporations, even to the point of restructuring whole industries. It involves positive government action, not to control industry but to restore competition and freedom of enterprise in the economy

Like today’s advocates of increased government intervention to design the structure of the economy, Sen. Hart sought — without a trace of irony — to “cure” the problem of politicized, ineffective enforcement by doubling down on the power of the enforcers.

Henry Manne was having none of it. As he pointedly notes in his testimony, the worst problems of monopoly power are of the government’s own making. The real threat to democracy, freedom, and prosperity is the political power amassed in the bureaucratic apparatus that frequently confers monopoly, at least as much as the monopoly power it spawns:

[I]t takes two to make that bargain [political protection and subsidies in exchange for lobbying]. And as we look around at various industries we are constrained to ask who has not done this. And more to the point, who has not succeeded?

It is unhappily almost impossible to name a significant industry in the United States that has not gained some degree of protection from the rigors of competition from Federal, State or local governments.

* * *

But the solution to inefficiencies created by Government controls cannot lie in still more controls. The politically responsible task ahead for Congress is to dismantle our existing regulatory monster before it strangles us.

We have spawned a gigantic bureaucracy whose own political power threatens the democratic legitimacy of government.

We are rapidly moving toward the worst features of a centrally planned economy with none of the redeeming political, economic, or ethical features usually claimed for such systems.

The new white paper includes Manne’s testimony in full, including his exchange with Sen. Hart and committee staffers following his prepared remarks.

It is, sadly, nearly as germane today as it was then.

One final note: The subtitle for the paper is a reference to the song “What Is Hip?” by Tower of Power. Its lyrics are decidedly apt:

You done went and found you a guru,

In your effort to find you a new you,

And maybe even managed

To raise your conscious level.

While you’re striving to find the right road,

There’s one thing you should know:

What’s hip today

Might become passé.

— Tower of Power, What Is Hip? (Emilio Castillo, John David Garibaldi & Stephen M. Kupka, What Is Hip? (Bob-A-Lew Songs 1973), from the album TOWER OF POWER (Warner Bros. 1973))

And here’s the song, in all its glory:

 

One of the hottest antitrust topics of late has been institutional investors’ “common ownership” of minority stakes in competing firms.  Writing in the Harvard Law Review, Einer Elhauge proclaimed that “[a]n economic blockbuster has recently been exposed”—namely, “[a] small group of institutions has acquired large shareholdings in horizontal competitors throughout our economy, causing them to compete less vigorously with each other.”  In the Antitrust Law Journal, Eric Posner, Fiona Scott Morton, and Glen Weyl contended that “the concentration of markets through large institutional investors is the major new antitrust challenge of our time.”  Those same authors took to the pages of the New York Times to argue that “[t]he great, but mostly unknown, antitrust story of our time is the astonishing rise of the institutional investor … and the challenge that it poses to market competition.”

Not surprisingly, these scholars have gone beyond just identifying a potential problem; they have also advocated policy solutions.  Elhauge has called for allowing government enforcers and private parties to use Section 7 of the Clayton Act, the provision primarily used to prevent anticompetitive mergers, to police institutional investors’ ownership of minority positions in competing firms.  Posner et al., concerned “that private litigation or unguided public litigation could cause problems because of the interactive nature of institutional holdings on competition,” have proposed that federal antitrust enforcers adopt an enforcement policy that would encourage institutional investors either to avoid common ownership of firms in concentrated industries or to limit their influence over such firms by refraining from voting their shares.

The position of these scholars is thus (1) that common ownership by institutional investors significantly diminishes competition in concentrated industries, and (2) that additional antitrust intervention—beyond generally applicable rules on, say, hub-and-spoke conspiracies and anticompetitive information exchanges—is appropriate to prevent competitive harm.

Mike Sykuta and I have recently posted a paper taking issue with this two-pronged view.  With respect to the first prong, we contend that there are serious problems with both the theory of competitive harm stemming from institutional investors’ common ownership and the empirical evidence that has been marshalled in support of that theory.  With respect to the second, we argue that even if competition were softened by institutional investors’ common ownership of small minority interests in competing firms, the unintended negative consequences of an antitrust fix would outweigh any benefits from such intervention.

Over the next few days, we plan to unpack some of the key arguments in our paper, The Case for Doing Nothing About Institutional Investors’ Common Ownership of Small Stakes in Competing Firms.  In the meantime, we encourage readers to download the paper and send us any comments.

The paper’s abstract is below the fold. Continue Reading…

There are some who view a host of claimed negative social ills allegedly related to the large size of firms like Amazon as an occasion to call for the company’s break up. And, unfortunately, these critics find an unlikely ally in President Trump, whose tweet storms claim that tech platforms are too big and extract unfair rents at the expense of small businesses. But these critics are wrong: Amazon is not a dangerous monopoly, and it certainly should not be broken up.  

Of course, no one really spells out what it means for these companies to be “too big.” Even Barry Lynn, a champion of the neo-Brandeisian antitrust movement, has shied away from specifics. The best that emerges when probing his writings is that he favors something like a return to Joe Bain’s “Structure-Conduct-Performance” paradigm (but even here, the details are fuzzy).

The reality of Amazon’s impact on the market is quite different than that asserted by its critics. Amazon has had decades to fulfill a nefarious scheme to suddenly raise prices and reap the benefits of anticompetive behavior. Yet it keeps putting downward pressure on prices in a way that seems to be commoditizing goods instead of building anticompetitive moats.

Amazon Does Not Anticompetitively Exercise Market Power

Twitter rants aside, more serious attempts to attack Amazon on antitrust grounds argue that it is engaging in pricing that is “predatory.” But “predatory pricing” requires a specific demonstration of factors — which, to date, have not been demonstrated — in order to justify legal action. Absent a showing of these factors, it has long been understood that seemingly “predatory” conduct is unlikely to harm consumers and often actually benefits consumers.

One important requirement that has gone unsatisfied is that a firm engaging in predatory pricing must have market power. Contrary to common characterizations of Amazon as a retail monopolist, its market power is less than it seems. By no means does it control retail in general. Rather, less than half of all online commerce (44%) takes place on its platform (and that number represents only 4% of total US retail commerce). Of that 44 percent, a significant portion is attributable to the merchants who use Amazon as a platform for their own online retail sales. Rather than abusing a monopoly market position to predatorily harm its retail competitors, at worst Amazon has created a retail business model that puts pressure on other firms to offer more convenience and lower prices to their customers. This is what we want and expect of competitive markets.

The claims leveled at Amazon are the intellectual kin of the ones made against Walmart during its ascendancy that it was destroying main street throughout the nation. In 1993, it was feared that Walmart’s quest to vertically integrate its offerings through Sam’s Club warehouse operations meant that “[r]etailers could simply bypass their distributors in favor of Sam’s — and Sam’s could take revenues from local merchants on two levels: as a supplier at the wholesale level, and as a competitor at retail.” This is a strikingly similar accusation to those leveled against Amazon’s use of its Seller Marketplace to aggregate smaller retailers on its platform.

But, just as in 1993 with Walmart, and now with Amazon, the basic fact remains that consumer preferences shift. Firms need to alter their behavior to satisfy their customers, not pretend they can change consumer preferences to suit their own needs. Preferring small, local retailers to Amazon or Walmart is a decision for individual consumers interacting in their communities, not for federal officials figuring out how best to pattern the economy.

All of this is not to say that Amazon is not large, or important, or that, as a consequence of its success it does not exert influence over the markets it operates in. But having influence through success is not the same as anticompetitively asserting market power.

Other criticisms of Amazon focus on its conduct in specific vertical markets in which it does have more significant market share. For instance, a UK Liberal Democratic leader recently claimed that “[j]ust as Standard Oil once cornered 85% of the refined oil market, today… Amazon accounts for 75% of ebook sales … .”

The problem with this concern is that Amazon’s conduct in the ebook market has had, on net, pro-competitive, not anti-competitive, effects. Amazon’s behavior in the ebook market has actually increased demand for books overall (and expanded output), increased the amount that consumers read, and decreased the price of theses books. Amazon is now even opening physical bookstores. Lina Khan made much hay in her widely cited article last year that this was all part of a grand strategy to predatorily push competitors out of the market:

The fact that Amazon has been willing to forego profits for growth undercuts a central premise of contemporary predatory pricing doctrine, which assumes that predation is irrational precisely because firms prioritize profits over growth. In this way, Amazon’s strategy has enabled it to use predatory pricing tactics without triggering the scrutiny of predatory pricing laws.

But it’s hard to allege predation in a market when over the past twenty years Amazon has consistently expanded output and lowered overall prices in the book market. Courts and lawmakers have sought to craft laws that encourage firms to provide consumers with more choices at lower prices — a feat that Amazon repeatedly accomplishes. To describe this conduct as anticompetitive is asking for a legal requirement that is at odds with the goal of benefiting consumers. It is to claim that Amazon has a contradictory duty to both benefit consumers and its shareholders, while also making sure that all of its less successful competitors also stay in business.

But far from creating a monopoly, the empirical reality appears to be that Amazon is driving categories of goods, like books, closer to the textbook model of commodities in a perfectly competitive market. Hardly an antitrust violation.

Amazon Should Not Be Broken Up

“Big is bad” may roll off the tongue, but, as a guiding ethic, it makes for terrible public policy. Amazon’s size and success are a direct result of its ability to enter relevant markets and to innovate. To break up Amazon, or any other large firm, is to punish it for serving the needs of its consumers.

None of this is to say that large firms are incapable of causing harm or acting anticompetitively. But we should accept calls for dramatic regulatory intervention  — especially from those in a position to influence regulatory or market reactions to such calls — to be supported by substantial factual evidence and legal and economic theory.

This tendency to go after large players is nothing new. As noted above, Walmart triggered many similar concerns thirty years ago. Thinking about Walmart then, pundits feared that direct competition with Walmart was fruitless:

In the spring of 1992 Ken Stone came to Maine to address merchant groups from towns in the path of the Wal-Mart advance. His advice was simple and direct: don’t compete directly with Wal-Mart; specialize and carry harder-to-get and better-quality products; emphasize customer service; extend your hours; advertise more — not just your products but your business — and perhaps most pertinent of all to this group of Yankee individualists, work together.

And today, some think it would be similarly pointless to compete with Amazon:

Concentration means it is much harder for someone to start a new business that might, for example, try to take advantage of the cheap housing in Minneapolis. Why bother when you know that if you challenge Amazon, they will simply dump your product below cost and drive you out of business?

The interesting thing to note, of course, is that Walmart is now desperately trying to compete with Amazon. But despite being very successful in its own right, and having strong revenues, Walmart doesn’t seem able to keep up.

Some small businesses will close as new business models emerge and consumer preferences shift. This is to be expected in a market driven by creative destruction. Once upon a time Walmart changed retail and improved the lives of many Americans. If our lawmakers can resist the urge to intervene without real evidence of harm, Amazon just might do the same.

Following is the (slightly expanded and edited) text of my remarks from the panel, Antitrust and the Tech Industry: What Is at Stake?, hosted last Thursday by CCIA. Bruce Hoffman (keynote), Bill Kovacic, Nicolas Petit, and Christine Caffarra also spoke. If we’re lucky Bruce will post his remarks on the FTC website; they were very good.

(NB: Some of these comments were adapted (or lifted outright) from a forthcoming Cato Policy Report cover story co-authored with Gus Hurwitz, so Gus shares some of the credit/blame.)

 

The urge to treat antitrust as a legal Swiss Army knife capable of correcting all manner of social and economic ills is apparently difficult for some to resist. Conflating size with market power, and market power with political power, many recent calls for regulation of industry — and the tech industry in particular — are framed in antitrust terms. Take Senator Elizabeth Warren, for example:

[T]oday, in America, competition is dying. Consolidation and concentration are on the rise in sector after sector. Concentration threatens our markets, threatens our economy, and threatens our democracy.

And she is not alone. A growing chorus of advocates are now calling for invasive, “public-utility-style” regulation or even the dissolution of some of the world’s most innovative companies essentially because they are “too big.”

According to critics, these firms impose all manner of alleged harms — from fake news, to the demise of local retail, to low wages, to the veritable destruction of democracy — because of their size. What is needed, they say, is industrial policy that shackles large companies or effectively mandates smaller firms in order to keep their economic and political power in check.

But consider the relationship between firm size and political power and democracy.

Say you’re successful in reducing the size of today’s largest tech firms and in deterring the creation of new, very-large firms: What effect might we expect this to have on their political power and influence?

For the critics, the effect is obvious: A re-balancing of wealth and thus the reduction of political influence away from Silicon Valley oligarchs and toward the middle class — the “rudder that steers American democracy on an even keel.”

But consider a few (and this is by no means all) countervailing points:

To begin, at the margin, if you limit firm growth as a means of competing with rivals, you make correspondingly more important competition through political influence. Erecting barriers to entry and raising rivals’ costs through regulation are time-honored American political traditions, and rent-seeking by smaller firms could both be more prevalent, and, paradoxically, ultimately lead to increased concentration.

Next, by imbuing antitrust with an ill-defined set of vague political objectives, you also make antitrust into a sort of “meta-legislation.” As a result, the return on influencing a handful of government appointments with authority over antitrust becomes huge — increasing the ability and the incentive to do so.

And finally, if the underlying basis for antitrust enforcement is extended beyond economic welfare effects, how long can we expect to resist calls to restrain enforcement precisely to further those goals? All of a sudden the effort and ability to get exemptions will be massively increased as the persuasiveness of the claimed justifications for those exemptions, which already encompass non-economic goals, will be greatly enhanced. We might even find, again, that we end up with even more concentration because the exceptions could subsume the rules.

All of which of course highlights the fundamental, underlying problem: If you make antitrust more political, you’ll get less democratic, more politically determined, results — precisely the opposite of what proponents claim to want.

Then there’s democracy, and calls to break up tech in order to save it. Calls to do so are often made with reference to the original intent of the Sherman Act and Louis Brandeis and his “curse of bigness.” But intentional or not, these are rallying cries for the assertion, not the restraint, of political power.

The Sherman Act’s origin was ambivalent: although it was intended to proscribe business practices that harmed consumers, it was also intended to allow politically-preferred firms to maintain high prices in the face of competition from politically-disfavored businesses.

The years leading up to the adoption of the Sherman Act in 1890 were characterized by dramatic growth in the efficiency-enhancing, high-tech industries of the day. For many, the purpose of the Sherman Act was to stem this growth: to prevent low prices — and, yes, large firms — from “driving out of business the small dealers and worthy men whose lives have been spent therein,” in the words of Trans-Missouri Freight, one of the early Supreme Court decisions applying the Act.

Left to the courts, however, the Sherman Act didn’t quite do the trick. By 1911 (in Standard Oil and American Tobacco) — and reflecting consumers’ preferences for low prices over smaller firms — only “unreasonable” conduct was actionable under the Act. As one of the prime intellectual engineers behind the Clayton Antitrust Act and the Federal Trade Commission in 1914, Brandeis played a significant role in the (partial) legislative and administrative overriding of the judiciary’s excessive support for economic efficiency.

Brandeis was motivated by the belief that firms could become large only by illegitimate means and by deceiving consumers. But Brandeis was no advocate for consumer sovereignty. In fact, consumers, in Brandeis’ view, needed to be saved from themselves because they were, at root, “servile, self-indulgent, indolent, ignorant.”

There’s a lot that today we (many of us, at least) would find anti-democratic in the underpinnings of progressivism in US history: anti-consumerism; racism; elitism; a belief in centrally planned, technocratic oversight of the economy; promotion of social engineering, including through eugenics; etc. The aim of limiting economic power was manifestly about stemming the threat it posed to powerful people’s conception of what political power could do: to mold and shape the country in their image — what economist Thomas Sowell calls “the vision of the anointed.”

That may sound great when it’s your vision being implemented, but today’s populist antitrust resurgence comes while Trump is in the White House. It’s baffling to me that so many would expand and then hand over the means to design the economy and society in their image to antitrust enforcers in the executive branch and presidentially appointed technocrats.

Throughout US history, it is the courts that have often been the bulwark against excessive politicization of the economy, and it was the courts that shepherded the evolution of antitrust away from its politicized roots toward rigorous, economically grounded policy. And it was progressives like Brandeis who worked to take antitrust away from the courts. Now, with efforts like Senator Klobuchar’s merger bill, the “New Brandeisians” want to rein in the courts again — to get them out of the way of efforts to implement their “big is bad” vision.

But the evidence that big is actually bad, least of all on those non-economic dimensions, is thin and contested.

While Zuckerberg is grilled in Congress over perceived, endemic privacy problems, politician after politician and news article after news article rushes to assert that the real problem is Facebook’s size. Yet there is no convincing analysis (maybe no analysis of any sort) that connects its size with the problem, or that evaluates whether the asserted problem would actually be cured by breaking up Facebook.

Barry Lynn claims that the origins of antitrust are in the checks and balances of the Constitution, extended to economic power. But if that’s right, then the consumer welfare standard and the courts are the only things actually restraining the disruption of that order. If there may be gains to be had from tweaking the minutiae of the process of antitrust enforcement and adjudication, by all means we should have a careful, lengthy discussion about those tweaks.

But throwing the whole apparatus under the bus for the sake of an unsubstantiated, neo-Brandeisian conception of what the economy should look like is a terrible idea.

Introduction

Last week I attended the 17th Annual Conference of the International Competition Network (ICN) held in New Delhi, India from March 21-23.  The Delhi Conference highlighted the key role of the ICN in promoting global convergence toward “best practices” in substantive and procedural antitrust analysis by national antitrust (“competition”) agencies.  The ICN operates as a virtual network of competition agencies and expert “non-governmental advisers” (NGAs), not governments.  As such, the ICN promulgates “recommended practices,” provides online training and other assistance to competition agencies, and serves as a forum for the building of relationships among competition officials (an activity which facilitates cooperation on particular matters and the exchange of advice on questions of antitrust policy and administration).  There is a general consensus among competition agencies and NGAs (I am one) that the ICN has accomplished a great deal since its launch in 2001 – indeed, it has far surpassed expectations.  Although (not surprisingly) inter-jurisdictional differences in perspective on particular competition issues remain, the ICN has done an excellent job in helping ensure that national competition agencies understand each other as they carry out their responsibilities.  By “speaking a common antitrust language,” informed by economic reasoning, agencies are better able to cooperate on individual matters and evaluate the merits of potential changes in law and procedure.

Pre-ICN Program Hosted by Competition Policy International (CPI)

Special one-day programs immediately preceding the ICN have proliferated in recent years.  On March 20, I participated in the small group one-day program hosted by Competition Policy International (CPI), attended by senior competition agency officials, private practitioners, and scholars.  This program featured a morning roundtable covering problems of extraterritoriality and an afternoon roundtable focused on competition law challenges in the digital economy.

The extraterritoriality session reflected the growing number of competition law matters (particularly cartels and mergers) that have effects in multiple jurisdictions.  There appeared to be general support for the proposition that a competition authority should impose remedies that have extraterritorial application only to the extent necessary to remedy harm to competition within the enforcing jurisdiction.  There also was a general consensus that it is very difficult for a competition authority to cede enforcement jurisdiction to a foreign authority, when the first authority finds domestic harm attributable to extraterritorial conduct and has the ability to assert jurisdiction.  Thus, although efforts to promote comity in antitrust enforcement are worthwhile, it must be recognized that there are practical limitations to such initiatives.  As such, a focus on enhancing coordination and cooperation among multiple agencies investigating the same conduct will be of paramount importance.

The digital economy roundtable directed particular attention to enforcement challenges raised by Internet “digital platforms” (e.g., Google, Facebook, Amazon).  In particular, with respect to digital platforms, roundtable participants discussed whether new business models and disruptive innovations create challenges to existing competition law and practices; what recent technology changes portend for market definition, assessment of market power, and other antitrust enforcement concepts; whether new analytic tools are required; and what are good mechanisms to harmonize regulation and competition enforcement.  Although there was no overall consensus on these topics, there was robust discussion of multi-sided market analysis and differences in approach to digital platform oversight.

An ICN Conference Overview

As in recent years, the ICN Conference itself featured set-piece (no Q&A) plenary sessions involving colloquies among top agency officials regarding cartels, unilateral conduct, mergers, advocacy, and agency effectiveness – the areas covered during the year by the ICN’s specialized working groups.  Numerous break-out sessions allowed ICN delegates to discuss in detail particular developments in these areas, and to evaluate and hash out the relative merits of competing approaches to problems.  At least seven generalizations can be drawn from the Delhi Conference’s deliberations.

First, other international organizations that initially had kept their distance from the ICN, specifically the OECD, the World Bank, and UNCTAD, now engage actively with the ICN.  This is a very positive development indeed.  Research carried out by the OECD on competition policy – for example, on the economic evaluation of regulatory approaches (important for competition advocacy), digital platforms, and public tenders – has been injected as “policy inputs” to discrete ICN initiatives.  Annual Competition advocacy contests cosponsored by the ICN and the World Bank have enabled a large number of agencies (particularly in developing countries) to showcase their successes in helping improve the competitive climate within their jurisdictions.  UNCTAD initiatives on competition and economic development can be effectively presented to new competition agencies through ICN involvement.

Second, competition authorities are focusing more intensively on “vertical mergers” involving firms at different levels of the distribution chain.  The ICN can help agencies be attentive to the need to weigh procompetitive efficiencies as well as new theories of anticompetitive harm in investigating these mergers.

Third, the transformation of economies worldwide through the Internet and the “digital revolution” is posing new challenges – and opportunities – for enforcers.  Policy analysis, informed by economics, is evolving in this area.

Fourth, cartels and bid rigging (collusion in public tenders was the showcase “special project” at the Delhi Conference) investigations remain as significant as ever.  Thinking on the administration of government leniency programs and “ex officio” investigations aimed at ferreting out cartels continues to be refined.

Fifth, the continuing growth in the number and scope of competition laws and the application of those laws to international commerce places a premium on enhanced coordination among competition agencies.  The ICN’s role in facilitating such cooperation thus assumes increased importance.

Sixth, issues of due process, or procedural fairness, commendably are generally recognized as important elements of effective agency administration.  Nevertheless, the precise contours of due process, and its specific application, are not uniform across agencies, and merit continued exploration by the ICN.

Seventh, the question of whether non-purely economic factors (such as fairness, corporate size, and the rights of workers) should be factored into competition analysis is gaining increased traction in a number of jurisdictions, and undoubtedly will be a subject of considerable debate in the years to come.

Conclusion

The ICN is by now a mature organization.  As a virtual network that relies on the power to persuade, not to dictate, it is dynamic, not static.  The ICN continues to respond flexibly to the changing needs of its many members and to global economic developments, within the context of the focused work carried out by its various substantive and process-related working groups.  The Delhi Conference provided a welcome opportunity for a timely review of its accomplishments and an assessment of its future direction.  In short, the ICN remains a highly useful vehicle for welfare-enhancing “soft convergence” among competition law regimes.

 

Excess is unflattering, no less when claiming that every evolution in legal doctrine is a slippery slope leading to damnation. In Friday’s New York Times, Lina Khan trots down this alarmist path while considering the implications for the pending Supreme Court case of Ohio v. American Express. One of the core issues in the case is the proper mode of antitrust analysis for credit card networks as two-sided markets. The Second Circuit Court of Appeals agreed with arguments, such as those that we have made, that it is important to consider the costs and benefits to both sides of a two-sided market when conducting an antitrust analysis. The Second Circuit’s opinion is under review in the American Express case.

Khan regards the Second Circuit approach of conducting a complete analysis of these markets as a mistake.

On her reading, the idea that an antitrust analysis of credit card networks should reflect their two-sided-ness would create “de facto antitrust immunity” for all platforms:

If affirmed, the Second Circuit decision would create de facto antitrust immunity for the most powerful companies in the economy. Since internet technologies have enabled the growth of platform companies that serve multiple groups of users, firms like Alphabet, Amazon, Apple, Facebook, and Uber are set to be prime beneficiaries of the Second Circuit’s warped analysis. Amazon, for example, could claim status as a two-sided platform because it connects buyers and sellers of goods; Google because it facilitates a market between advertisers and search users… Indeed, the reason that the tech giants are lining up behind the Second Circuit’s approach is that — if ratified — it would make it vastly more difficult to use antitrust laws against them.

This paragraph is breathtaking. First, its basic premise is wrong. Requiring a complete analysis of the complicated economic effects of conduct undertaken in two sided markets before imposing antitrust liability would not create “de facto antitrust immunity.” It would require that litigants present, and courts evaluate, credible evidence sufficient to establish a claim upon which an enforcement action can be taken — just like in any other judicial proceeding in any area of law. Novel market structures may require novel analytical models and novel evidence, but that is no different with two-sided markets than with any other complicated issue before a court.

Second, the paragraph’s prescribed response would be, in fact, de facto antitrust liability for any firm competing in a two-sided market — that is, as Kahn notes, almost every major tech firm.

A two-sided platform competes with other platforms by facilitating interactions between the two sides of the market. This often requires a careful balancing of the market: in most of these markets too many or too few participants on one side of the market reduces participation on the other side. So these markets play the role of matchmaker, charging one side of the market a premium in order to cross-subsidize a desirable level of participation on the other. This will be discussed more below, but the takeaway for now is that most of these platforms operate by charging one side of the market (or some participants on one side of the market) an above-cost price in order to charge the other side of the market a below-cost price. A platform’s strategy on either side of the market makes no sense without the other, and it does not adopt practices on one side without carefully calibrating them with the other. If one does not consider both sides of these markets, therefore, the simplistic approach that Kahn demands will systematically fail to capture both the intent and the effect of business practices in these markets. More importantly, such an approach could be used to find antitrust violations throughout these industries — no matter the state of competition, market share, or actual consumer effects.

What are two-sided markets?

Khan notes that there is some element of two-sidedness in many (if not most) markets:

Indeed, almost all markets can be understood as having two sides. Firms ranging from airlines to meatpackers could reasonably argue that they meet the definition of “two-sided,” thereby securing less stringent review.

This is true, as far as it goes, as any sale of goods likely involves the selling party acting as some form of intermediary between chains of production and consumption. But such a definition is unworkably broad from the point of view of economic or antitrust analysis. If two-sided markets exist as distinct from traditional markets there must be salient features that define those specialized markets.

Economists have been intensively studying two-sided markets (see, e.g., here, here, and here) for the past two decades (and had recognized many of their basic characteristics even before then). As Khan notes, multi-sided platforms have indeed existed for a long time in the economy. Newspapers, for example, provide a targeted outlet for advertisers and incentives for subscribers to view advertisements; shopping malls aggregate retailers in one physical location to lower search costs for customers, while also increasing the retailers’ sales volume. Relevant here, credit card networks are two-sided platforms, facilitating credit-based transactions between merchants and consumers.

One critical feature of multi-sided platforms is the interdependent demand of platform participants. Thus, these markets require a simultaneous critical mass of users on each side in order to ensure the viability of the platform. For instance, a credit card is unlikely to be attractive to consumers if few merchants accept it; and few merchants will accept a credit card that isn’t used by a sufficiently large group of consumers. To achieve critical mass, a multi-sided platform uses both pricing and design choices, and, without critical mass on all sides, the positive feedback effects that enable the platform’s unique matching abilities might not be achieved.

This highlights the key distinction between traditional markets and multi-sided markets. Most markets have two sides (e.g., buyers and sellers), but that alone doesn’t make them meaningfully multi-sided. In a multi-sided market a key function of the platform is to facilitate the relationship between the sides of the market in order to create and maintain an efficient relationship between them. The platform isn’t merely a reseller of a manufacturer’s goods, for instance, but is actively encouraging or discouraging participation by users on both sides of the platform in order to maximize the value of the platform itself — not the underlying transaction — for those users. Consumers, for instance, don’t really care how many pairs of jeans a clothier stocks; but a merchant does care how many cardholders an issuer has on its network. This is most often accomplished by using prices charged to each side (in the case of credit cards, so-called interchange fees) to keep each side an appropriate size.

Moreover, the pricing that occurs on a two-sided platform is secondary, to a varying extent, to the pricing of the subject of the transaction. In a two-sided market, the prices charged to either side of the market are an expression of the platform’s ability to control the terms on which the different sides meet to transact and is relatively indifferent to the thing about which the parties are transacting.

The nature of two-sided markets highlights the role of these markets as more like facilitators of transactions and less like traditional retailers of goods (though this distinction is a matter of degree, and different two-sided markets can be more-or-less two-sided). Because the platform uses prices charged to each side of the market in order to optimize overall use of the platform (that is, output or volume of transactions), pricing in these markets operates differently than pricing in traditional markets. In short, the pricing on one side of the platform is often used to subsidize participation on the other side of the market, because the overall value to both sides is increased as a result. Or, conversely, pricing to one side of the market may appear to be higher than the equilibrium level when viewed for that side alone, because this funds a subsidy to increase participation on another side of the market that, in turn, creates valuable network effects for the side of the market facing the higher fees.

The result of this dynamic is that it is more difficult to assess the price and output effects in multi-sided markets than in traditional markets. One cannot look at just one side of the platform — at the level of output and price charged to consumers of the underlying product, say — but must look at the combined pricing and output of both the underlying transaction as well as the platform’s service itself, across all sides of the platform.

Thus, as David Evans and Richard Schmalensee have observed, traditional antitrust reasoning is made more complicated in the presence of a multi-sided market:

[I]t is not possible to know whether standard economic models, often relied on for antitrust analysis, apply to multi-sided platforms without explicitly considering the existence of multiple customer groups with interdependent demand…. [A] number of results for single-sided firms, which are the focus of much of the applied antitrust economics literature, do not apply directly to multi-sided platforms.

The good news is that antitrust economists have been focusing significant attention on two- and multi-sided markets for a long while. Their work has included attention to modelling the dynamics and effects of competition in these markets, including how to think about traditional antitrust concepts such as market definition, market power and welfare analysis. What has been lacking, however, has been substantial incorporation of this analysis into judicial decisions. Indeed, this is one of the reasons that the Second Circuit’s opinion in this case was, and why the Supreme Court’s opinion will be, so important: this work has reached the point that courts are recognizing that these markets can and should be analyzed differently than traditional markets.

Getting the two-sided analysis wrong in American Express would harm consumers

Khan describes credit card networks as a “classic case of oligopoly,” and opines that American Express’s contractual anti-steering provision is, “[a]s one might expect, the credit card companies us[ing] their power to block competition.” The initial, inherent tension in this statement should be obvious: the assertion is simultaneously that this a non-competitive, oligopolistic market and that American Express is using the anti-steering provision to harm its competitors. Indeed, rather than demonstrating a classic case of oligopoly, this demonstrates the competitive purpose that the anti-steering provision serves: facilitating competition between American Express and other card issuers.

The reality of American Express’s anti-steering provision, which prohibits merchants who choose to accept AmEx cards from “steering” their customers to pay for purchases with other cards, is that it is necessary in order for American Express to compete with other card issuers. Just like analysis of multi-sided markets needs to consider all sides of the market, platforms competing in these markets need to compete on all sides of the market.

But the use of complex pricing schemes to determine prices on each side of the market to maintain an appropriate volume of transactions in the overall market creates a unique opportunity for competitors to behave opportunistically. For instance, if one platform charges a high fee to one side of the market in order to subsidize another side of the market (say, by offering generous rewards), this creates an opportunity for a savvy competitor to undermine that balancing by charging the first side of the market a lower fee, thus attracting consumers from its competitor and, perhaps, making its pricing strategy unprofitable. This may appear to be mere price competition. But the effects of price competition on one side of a multi-sided market are more complicated to evaluate than those of traditional price competition.

Generally, price competition has the effect of lowering prices for goods, increasing output, decreasing deadweight losses, and benefiting consumers. But in a multi-sided market, the high prices charged to one side of the market can be used to benefit consumers on the other side of the market; and that consumer benefit can increase output on that side of the market in ways that create benefits for the first side of the market. When a competitor poaches a platform’s business on a single side of a multi-sided market, the effects can be negative for users on every side of that platform’s market.

This is most often seen in cases, like with credit cards, where platforms offer differentiated products. American Express credit cards are qualitatively different than Visa and Mastercard credit cards; they charge more (to both sides of the market) but offer consumers a more expansive rewards program (funded by the higher transaction fees charged to merchants) and offer merchants access to what are often higher-value customers (ensured by the higher fees charged to card holders).

If American Express did not require merchants to abide by its anti-steering rule, it wouldn’t be able to offer this form of differentiated product; it would instead be required to compete solely on price. Cardholders exist who prefer higher-status cards with a higher-tier of benefits, and there are merchants that prefer to attract a higher-value pool of customers.

But without the anti-steering provisions, the only competition available is on the price to merchants. The anti-steering rule is needed in order to prevent merchants from free-riding on American Express’s investment in attracting a unique group of card holders to its platform. American Express maintains that differentiation from other cards by providing its card holders with unique and valuable benefits — benefits that are subsidized in part by the fees charged to merchants. But merchants that attract customers by advertising that they accept American Express cards but who then steer those customers to other cards erode the basis of American Express’s product differentiation. Because of the interdependence of both sides of the platform, this ends up undermining the value that consumers receive from the platform as American Express ultimately withdraws consumer-side benefits. In the end, the merchants who valued American Express in the first place are made worse off by virtue of being permitted to selectively free-ride on American Express’s network investment.

At this point it is important to note that many merchants continue to accept American Express cards in light of both the cards’ higher merchant fees and these anti-steering provisions. Meanwhile, Visa and Mastercard have much larger market shares, and many merchants do not accept Amex. The fact that merchants who may be irritated by the anti-steering provision continue to accept Amex despite it being more costly, and the fact that they could readily drop Amex and rely on other, larger, and cheaper networks, suggests that American Express creates real value for these merchants. In other words, American Express, in fact, must offer merchants access to a group of consumers who are qualitatively different from those who use Visa or Mastercard cards — and access to this group of consumers must be valuable to those merchants.

An important irony in this case is that those who criticize American Express’s practices, who are arguing these practices limit price competition and that merchants should be able to steer customers to lower-fee cards, generally also argue that modern antitrust law focuses too myopically on prices and fails to account for competition over product quality. But that is precisely what American Express is trying to do: in exchange for a higher price it offers a higher quality card for consumers, and access to a different quality of consumers for merchants.

Anticompetitive conduct here, there, everywhere! Or nowhere.

The good news is that many on the court — and, for that matter, even Ohio’s own attorney — recognize that the effects of the anti-steering rule on the cardholder side of the market need to be considered alongside their effects on merchants:

JUSTICE KENNEDY: Does output include premiums or rewards to customers?
MR. MURPHY: Yeah. Output would include quality considerations as well.

The bad news is that several justices don’t seem to get it. Justice Kagan, for instance, suggested that “the effect of these anti-steering provisions means a market where we will only have high-cost/high-service products.” Justice Kagan’s assertion reveals the hubris of the would-be regulator, bringing to her evaluation of the market a preconception of what that market is supposed to look like. To wit: following her logic, one can say just as much that without the anti-steering provisions we would have a market with only low-cost/low-service products. Without an evaluation of the relative effects — which is more complicated than simple intuition suggests, especially since one can always pay cash — there is no reason to say that either of these would be a better outcome.

The reality, however, is that it is possible for the market to support both high- and low-cost, and high- and low-service products. In fact, this is the market in which we live today. As Justice Gorsuch said, “American Express’s agreements don’t affect MasterCard or Visa’s opportunity to cut their fees … or to advertise that American Express’s are higher. There is room for all kinds of competition here.” Indeed, one doesn’t need to be particularly creative to come up with competitive strategies that other card issuers could adopt, from those that Justice Gorsuch suggests, to strategies where card issuers are, in fact, “forced” to accept higher fees, which they in turn use to attract more card holders to their networks, such as through sign-up bonuses or awards for American Express customers who use non-American Express cards at merchants who accept them.

A standard response to such proposals is “if that idea is so good, why isn’t the market already doing it?” An important part of the answer in this case is that MasterCard and Visa know that American Express relies on the anti-steering provision in order to maintain its product differentiation.

Visa and Mastercard were initially defendants in this case, as well, as they used similar rules to differentiate some of their products. It’s telling that these larger market participants settled because, to some extent, harming American Express is worth more to them than their own product differentiation. After all, consumers steered away from American Express will generally use Visa or Mastercard (and their own high-priced cards may be cannibalizing from their own low-priced cards anyway, so reducing their value may not hurt so much). It is therefore a better strategy for them to try to use the courts to undermine that provision so that they don’t actually need to compete with American Express.

Without the anti-steering provision, American Express loses its competitive advantage compared to MasterCard and Visa and would be forced to compete against those much larger platforms on their preferred terms. What’s more, this would give those platforms access to American Express’s vaunted high-value card holders without the need to invest resources in competing for them. In other words, outlawing anti-steering provisions could in fact have both anti-competitive intent and effect.

Of course, card networks aren’t necessarily innocent of anticompetitive conduct, one way or the other. Showing that they are on either side of the anti-steering rule requires a sufficiently comprehensive analysis of the industry and its participants’ behavior. But liability cannot be simply determined based on behavior on one side of a two-sided market. These companies can certainly commit anticompetitive mischief, and they need to be held accountable when that happens. But this case is not about letting American Express or tech companies off the hook for committing anticompetitive conduct. This case is about how we evaluate such allegations, weigh them against possible beneficial effects, and put in place the proper thorough analysis for this particular form of business.

Over the last two decades, scholars have studied the nature of multi-sided platforms, and have made a good deal of progress. We should rely on this learning, and make sure that antitrust analysis is sound, not expedient.

Over the last two decades, the United States government has taken the lead in convincing jurisdictions around the world to outlaw “hard core” cartel conduct.  Such cartel activity reduces economic welfare by artificially fixing prices and reducing the output of affected goods and services.  At the same, the United States has acted to promote international cooperation among government antitrust enforcers to detect, investigate, and punish cartels.

In 2017, however, the U.S. Court of Appeal for the Second Circuit (citing concerns of “international comity”) held that a Chinese export cartel that artificially raised the price of vitamin imports into the United States should be shielded from U.S. antitrust penalties—based merely on one brief from a Chinese government agency that said it approved of the conduct. The U.S. Supreme Court is set to review that decision later this year, in a case styled Animal Science Products, Inc., v. Hebei Welcome Pharmaceutical Co. Ltd.  By overturning the Second Circuit’s ruling (and disavowing the overly broad “comity doctrine” cited by that court), the Supreme Court would reaffirm the general duty of federal courts to apply federal law as written, consistent with the constitutional separation of powers.  It would also reaffirm the importance of the global fight against cartels, which has reflected consistent U.S. executive branch policy for decades (and has enjoyed strong support from the International Competition Network, the OECD, and the World Bank).

Finally, as a matter of economic policy, the Animal Science Products case highlights the very real harm that occurs when national governments tolerate export cartels that reduce economic welfare outside their jurisdictions, merely because domestic economic interests are not directly affected.  In order to address this problem, the U.S. government should negotiate agreements with other nations under which the signatory states would agree:  (1) not to legally defend domestic exporting entities that impose cartel harm in other jurisdictions; and (2) to cooperate more fully in rooting out harmful export-cartel activity, wherever it is found.

For a more fulsome discussion of the separation of powers, international relations, and economic policy issues raised by the Animal Science Products case, see my recent Heritage Foundation Legal Memorandum entitled The Supreme Court and Animal Science Products: Sovereignty and Export Cartels.