Archives For Cartels

As a new year dawns, the Biden administration remains fixated on illogical, counterproductive “big is bad” nostrums.

Noted economist and former Clinton Treasury Secretary Larry Summers correctly stressed recently that using antitrust to fight inflation represents “science denial,” tweeting that:

In his extended Twitter thread, Summers notes that labor shortages are the primary cause of inflation over time and that lowering tariffs, paring back import restrictions (such as the Buy America Act), and reducing regulatory delays are vital to combat inflation.

Summers’ points, of course, are right on the mark. Indeed, labor shortages, supply-chain issues, and a dramatic increase in regulatory burdens have been key to the dramatic run-up of prices during the Biden administration’s first year. Reducing the weight of government on the private sector and thereby enhancing incentives for increased investment, labor participation, and supply are the appropriate weapons to slow price rises and incentivize economic growth.

More specifically, administration policies can be pinpointed as the cause, not the potential solution to, rapid price increases in specific sectors, particularly the oil and gas industry. As I recently commented, policies that disincentivize new energy production, and fail to lift excessive regulatory burdens, have been a key factor in sparking rises in gasoline prices. Administration claims that anticompetitive activity is behind these prices increases should be discounted. New Federal Trade Commission (FTC) investigations of oil and gas companies would waste resources and increase already large governmental burdens on those firms.

The administration, nevertheless, appears committed to using antitrust as an anti-inflationary “tool” against “big business” (or perhaps, really, as a symbolic hammer to shift blame to the private sector for rising prices). Recent  pronouncements about combatting “big meat” are a case in point.

The New ‘Big Meat’ Crusade

Part of the administration’s crusade against “big meat” involves providing direct government financial support for favored firms. A U.S. Department of Agriculture (USDA) plan to spend up to $1 billion to assist smaller meat processors is a subsidy that artificially favors one group of competitors. This misguided policy, which bears the scent of special-interest favoritism, wastes taxpayer dollars and distorts free-market outcomes. It will do nothing to cure supply and regulatory problems that affect rising meat prices. It will, however, misallocate resources.

The other key aspect of the big meat initiative smacks more of problematic, old-style, economics-free antitrust. It centers on: (1) threatening possible antitrust actions against four large meat processors based principally on their size and market share; and (2) initiating a planned rulemaking under the Packers and Stockyards Act. (That rulemaking was foreshadowed by language in the July 2021 Biden Administration Executive Order on Competition.)

The administration’s apparent focus on the “dominance” of four large meatpacking firms (which have the temerity to collectively hold greater than 50% market shares in the hog, cattle, and chicken sectors) and the 120% jump in their gross profits since the pandemic began is troubling. It echoes the structuralist “big is bad” philosophy of the 1950s and 1960s. In and of itself, large market share is not, of course, an antitrust problem, nor are large gross profits. Rather, those metrics typically signal a particular firm’s superior efficiency relative to the competition. (Gross profit “reflects the efficiency of a business in terms of making use of its labor, raw material and other supplies.”) Antitrust investigations of firms merely because they are large would inefficiently bloat those companies’ costs and discourage them from engaging in cost-reducing new capacity and production improvements. This would tend to raise, not lower, prices by major firms. It thus would lower consumer welfare, a result at odds with the guiding policy goal of antitrust, which is to promote consumer welfare.

The administration’s announcement that the USDA “will also propose rules this year to strengthen enforcement of the Packers and Stockyards Act” is troublesome. That act, dating back to 1921, uses broad terms that extend beyond antitrust law (such as a prohibition on “giv[ing] any undue or unreasonable preference or advantage to any particular person”) and threatens to penalize efficient conduct by individual competitors. “Ratcheting up” enforcement under this act also could undermine business efficiency and paradoxically raise, not lower, prices.

Obviously, the specifics of the forthcoming proposed rules have not yet been revealed. Nevertheless, the administration’s “big is bad” approach to “big meat” strongly signals that one may expect rules to generate new costly and inefficient restrictions on meat-packer conduct. Such restrictions, of course, would be at odds with vibrant competition and consumer-welfare enhancement.    

This is not to say, of course, that meat packing should be immune from antitrust attention. Such scrutiny, however, should not be transfixed by “big is bad” concerns. Rather, it should center on the core antitrust goal of combatting harmful business conduct that unreasonably restrains competition and reduces consumer welfare. A focus on ferreting out collusive agreements among meat processors, such as price-fixing schemes, should have pride of place. The U.S. Justice Department’s already successful ongoing investigation into price fixing in the broiler-chicken industry is precisely the sort of antitrust initiative on which the administration should expend its scarce enforcement resources.

Conclusion

In sum, the Biden administration could do a lot of good in antitrust land if it would only set aside its nostalgic “big is bad” philosophy. It should return to the bipartisan enlightened understanding that antitrust is a consumer-welfare prescription that is based on sound and empirically based economics and is concerned with economically inefficient conduct that softens or destroys competition.

If it wants to stray beyond mere enforcement, the administration could turn its focus toward dismantling welfare-reducing anticompetitive federal regulatory schemes, rather than adding to private-sector regulatory burdens. For more about how to do this, we recommend that the administration consult a just-released Mercatus Center policy brief that Andrew Mercado and I co-authored.

[This post adapts elements of “Should ASEAN Antitrust Laws Emulate European Competition Policy?”, published in the Singapore Economic Review (2021). Open access working paper here.]

U.S. and European competition laws diverge in numerous ways that have important real-world effects. Understanding these differences is vital, particularly as lawmakers in the United States, and the rest of the world, consider adopting a more “European” approach to competition.

In broad terms, the European approach is more centralized and political. The European Commission’s Directorate General for Competition (DG Comp) has significant de facto discretion over how the law is enforced. This contrasts with the common law approach of the United States, in which courts elaborate upon open-ended statutes through an iterative process of case law. In other words, the European system was built from the top down, while U.S. antitrust relies on a bottom-up approach, derived from arguments made by litigants (including the government antitrust agencies) and defendants (usually businesses).

This procedural divergence has significant ramifications for substantive law. European competition law includes more provisions akin to de facto regulation. This is notably the case for the “abuse of dominance” standard, in which a “dominant” business can be prosecuted for “abusing” its position by charging high prices or refusing to deal with competitors. By contrast, the U.S. system places more emphasis on actual consumer outcomes, rather than the nature or “fairness” of an underlying practice.

The American system thus affords firms more leeway to exclude their rivals, so long as this entails superior benefits for consumers. This may make the U.S. system more hospitable to innovation, since there is no built-in regulation of conduct for innovators who acquire a successful market position fairly and through normal competition.

In this post, we discuss some key differences between the two systems—including in areas like predatory pricing and refusals to deal—as well as the discretionary power the European Commission enjoys under the European model.

Exploitative Abuses

U.S. antitrust is, by and large, unconcerned with companies charging what some might consider “excessive” prices. The late Associate Justice Antonin Scalia, writing for the Supreme Court majority in the 2003 case Verizon v. Trinko, observed that:

The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system. The opportunity to charge monopoly prices—at least for a short period—is what attracts “business acumen” in the first place; it induces risk taking that produces innovation and economic growth.

This contrasts with European competition-law cases, where firms may be found to have infringed competition law because they charged excessive prices. As the European Court of Justice (ECJ) held in 1978’s United Brands case: “In this case charging a price which is excessive because it has no reasonable relation to the economic value of the product supplied would be such an abuse.”

While United Brands was the EU’s foundational case for excessive pricing, and the European Commission reiterated that these allegedly exploitative abuses were possible when it published its guidance paper on abuse of dominance cases in 2009, the commission had for some time demonstrated apparent disinterest in bringing such cases. In recent years, however, both the European Commission and some national authorities have shown renewed interest in excessive-pricing cases, most notably in the pharmaceutical sector.

European competition law also penalizes so-called “margin squeeze” abuses, in which a dominant upstream supplier charges a price to distributors that is too high for them to compete effectively with that same dominant firm downstream:

[I]t is for the referring court to examine, in essence, whether the pricing practice introduced by TeliaSonera is unfair in so far as it squeezes the margins of its competitors on the retail market for broadband connection services to end users. (Konkurrensverket v TeliaSonera Sverige, 2011)

As Scalia observed in Trinko, forcing firms to charge prices that are below a market’s natural equilibrium affects firms’ incentives to enter markets, notably with innovative products and more efficient means of production. But the problem is not just one of market entry and innovation.  Also relevant is the degree to which competition authorities are competent to determine the “right” prices or margins.

As Friedrich Hayek demonstrated in his influential 1945 essay The Use of Knowledge in Society, economic agents use information gleaned from prices to guide their business decisions. It is this distributed activity of thousands or millions of economic actors that enables markets to put resources to their most valuable uses, thereby leading to more efficient societies. By comparison, the efforts of central regulators to set prices and margins is necessarily inferior; there is simply no reasonable way for competition regulators to make such judgments in a consistent and reliable manner.

Given the substantial risk that investigations into purportedly excessive prices will deter market entry, such investigations should be circumscribed. But the court’s precedents, with their myopic focus on ex post prices, do not impose such constraints on the commission. The temptation to “correct” high prices—especially in the politically contentious pharmaceutical industry—may thus induce economically unjustified and ultimately deleterious intervention.

Predatory Pricing

A second important area of divergence concerns predatory-pricing cases. U.S. antitrust law subjects allegations of predatory pricing to two strict conditions:

  1. Monopolists must charge prices that are below some measure of their incremental costs; and
  2. There must be a realistic prospect that they will able to recoup these initial losses.

In laying out its approach to predatory pricing, the U.S. Supreme Court has identified the risk of false positives and the clear cost of such errors to consumers. It thus has particularly stressed the importance of the recoupment requirement. As the court found in 1993’s Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., without recoupment, “predatory pricing produces lower aggregate prices in the market, and consumer welfare is enhanced.”

Accordingly, U.S. authorities must prove that there are constraints that prevent rival firms from entering the market after the predation scheme, or that the scheme itself would effectively foreclose rivals from entering the market in the first place. Otherwise, the predator would be undercut by competitors as soon as it attempts to recoup its losses by charging supra-competitive prices.

Without the strong likelihood that a monopolist will be able to recoup lost revenue from underpricing, the overwhelming weight of economic evidence (to say nothing of simple logic) is that predatory pricing is not a rational business strategy. Thus, apparent cases of predatory pricing are most likely not, in fact, predatory; deterring or punishing them would actually harm consumers.

By contrast, the EU employs a more expansive legal standard to define predatory pricing, and almost certainly risks injuring consumers as a result. Authorities must prove only that a company has charged a price below its average variable cost, in which case its behavior is presumed to be predatory. Even when a firm charges prices that are between its average variable and average total cost, it can be found guilty of predatory pricing if authorities show that its behavior was part of a plan to eliminate a competitor. Most significantly, in neither case is it necessary for authorities to show that the scheme would allow the monopolist to recoup its losses.

[I]t does not follow from the case‑law of the Court that proof of the possibility of recoupment of losses suffered by the application, by an undertaking in a dominant position, of prices lower than a certain level of costs constitutes a necessary precondition to establishing that such a pricing policy is abusive. (France Télécom v Commission, 2009).

This aspect of the legal standard has no basis in economic theory or evidence—not even in the “strategic” economic theory that arguably challenges the dominant Chicago School understanding of predatory pricing. Indeed, strategic predatory pricing still requires some form of recoupment, and the refutation of any convincing business justification offered in response. For example, ​​in a 2017 piece for the Antitrust Law Journal, Steven Salop lays out the “raising rivals’ costs” analysis of predation and notes that recoupment still occurs, just at the same time as predation:

[T]he anticompetitive conditional pricing practice does not involve discrete predatory and recoupment periods, as in the case of classical predatory pricing. Instead, the recoupment occurs simultaneously with the conduct. This is because the monopolist is able to maintain its current monopoly power through the exclusionary conduct.

The case of predatory pricing illustrates a crucial distinction between European and American competition law. The recoupment requirement embodied in American antitrust law serves to differentiate aggressive pricing behavior that improves consumer welfare—because it leads to overall price decreases—from predatory pricing that reduces welfare with higher prices. It is, in other words, entirely focused on the welfare of consumers.

The European approach, by contrast, reflects structuralist considerations far removed from a concern for consumer welfare. Its underlying fear is that dominant companies could use aggressive pricing to engender more concentrated markets. It is simply presumed that these more concentrated markets are invariably detrimental to consumers. Both the Tetra Pak and France Télécom cases offer clear illustrations of the ECJ’s reasoning on this point:

[I]t would not be appropriate, in the circumstances of the present case, to require in addition proof that Tetra Pak had a realistic chance of recouping its losses. It must be possible to penalize predatory pricing whenever there is a risk that competitors will be eliminated… The aim pursued, which is to maintain undistorted competition, rules out waiting until such a strategy leads to the actual elimination of competitors. (Tetra Pak v Commission, 1996).

Similarly:

[T]he lack of any possibility of recoupment of losses is not sufficient to prevent the undertaking concerned reinforcing its dominant position, in particular, following the withdrawal from the market of one or a number of its competitors, so that the degree of competition existing on the market, already weakened precisely because of the presence of the undertaking concerned, is further reduced and customers suffer loss as a result of the limitation of the choices available to them.  (France Télécom v Commission, 2009).

In short, the European approach leaves less room to analyze the concrete effects of a given pricing scheme, leaving it more prone to false positives than the U.S. standard explicated in the Brooke Group decision. Worse still, the European approach ignores not only the benefits that consumers may derive from lower prices, but also the chilling effect that broad predatory pricing standards may exert on firms that would otherwise seek to use aggressive pricing schemes to attract consumers.

Refusals to Deal

U.S. and EU antitrust law also differ greatly when it comes to refusals to deal. While the United States has limited the ability of either enforcement authorities or rivals to bring such cases, EU competition law sets a far lower threshold for liability.

As Justice Scalia wrote in Trinko:

Aspen Skiing is at or near the outer boundary of §2 liability. The Court there found significance in the defendant’s decision to cease participation in a cooperative venture. The unilateral termination of a voluntary (and thus presumably profitable) course of dealing suggested a willingness to forsake short-term profits to achieve an anticompetitive end. (Verizon v Trinko, 2003.)

This highlights two key features of American antitrust law with regard to refusals to deal. To start, U.S. antitrust law generally does not apply the “essential facilities” doctrine. Accordingly, in the absence of exceptional facts, upstream monopolists are rarely required to supply their product to downstream rivals, even if that supply is “essential” for effective competition in the downstream market. Moreover, as Justice Scalia observed in Trinko, the Aspen Skiing case appears to concern only those limited instances where a firm’s refusal to deal stems from the termination of a preexisting and profitable business relationship.

While even this is not likely the economically appropriate limitation on liability, its impetus—ensuring that liability is found only in situations where procompetitive explanations for the challenged conduct are unlikely—is completely appropriate for a regime concerned with minimizing the cost to consumers of erroneous enforcement decisions.

As in most areas of antitrust policy, EU competition law is much more interventionist. Refusals to deal are a central theme of EU enforcement efforts, and there is a relatively low threshold for liability.

In theory, for a refusal to deal to infringe EU competition law, it must meet a set of fairly stringent conditions: the input must be indispensable, the refusal must eliminate all competition in the downstream market, and there must not be objective reasons that justify the refusal. Moreover, if the refusal to deal involves intellectual property, it must also prevent the appearance of a new good.

In practice, however, all of these conditions have been relaxed significantly by EU courts and the commission’s decisional practice. This is best evidenced by the lower court’s Microsoft ruling where, as John Vickers notes:

[T]he Court found easily in favor of the Commission on the IMS Health criteria, which it interpreted surprisingly elastically, and without relying on the special factors emphasized by the Commission. For example, to meet the “new product” condition it was unnecessary to identify a particular new product… thwarted by the refusal to supply but sufficient merely to show limitation of technical development in terms of less incentive for competitors to innovate.

EU competition law thus shows far less concern for its potential chilling effect on firms’ investments than does U.S. antitrust law.

Vertical Restraints

There are vast differences between U.S. and EU competition law relating to vertical restraints—that is, contractual restraints between firms that operate at different levels of the production process.

On the one hand, since the Supreme Court’s Leegin ruling in 2006, even price-related vertical restraints (such as resale price maintenance (RPM), under which a manufacturer can stipulate the prices at which retailers must sell its products) are assessed under the rule of reason in the United States. Some commentators have gone so far as to say that, in practice, U.S. case law on RPM almost amounts to per se legality.

Conversely, EU competition law treats RPM as severely as it treats cartels. Both RPM and cartels are considered to be restrictions of competition “by object”—the EU’s equivalent of a per se prohibition. This severe treatment also applies to non-price vertical restraints that tend to partition the European internal market.

Furthermore, in the Consten and Grundig ruling, the ECJ rejected the consequentialist, and economically grounded, principle that inter-brand competition is the appropriate framework to assess vertical restraints:

Although competition between producers is generally more noticeable than that between distributors of products of the same make, it does not thereby follow that an agreement tending to restrict the latter kind of competition should escape the prohibition of Article 85(1) merely because it might increase the former. (Consten SARL & Grundig-Verkaufs-GMBH v. Commission of the European Economic Community, 1966).

This treatment of vertical restrictions flies in the face of longstanding mainstream economic analysis of the subject. As Patrick Rey and Jean Tirole conclude:

Another major contribution of the earlier literature on vertical restraints is to have shown that per se illegality of such restraints has no economic foundations.

Unlike the EU, the U.S. Supreme Court in Leegin took account of the weight of the economic literature, and changed its approach to RPM to ensure that the law no longer simply precluded its arguable consumer benefits, writing: “Though each side of the debate can find sources to support its position, it suffices to say here that economics literature is replete with procompetitive justifications for a manufacturer’s use of resale price maintenance.” Further, the court found that the prior approach to resale price maintenance restraints “hinders competition and consumer welfare because manufacturers are forced to engage in second-best alternatives and because consumers are required to shoulder the increased expense of the inferior practices.”

The EU’s continued per se treatment of RPM, by contrast, strongly reflects its “precautionary principle” approach to antitrust. European regulators and courts readily condemn conduct that could conceivably injure consumers, even where such injury is, according to the best economic understanding, exceedingly unlikely. The U.S. approach, which rests on likelihood rather than mere possibility, is far less likely to condemn beneficial conduct erroneously.

Political Discretion in European Competition Law

EU competition law lacks a coherent analytical framework like that found in U.S. law’s reliance on the consumer welfare standard. The EU process is driven by a number of laterally equivalent—and sometimes mutually exclusive—goals, including industrial policy and the perceived need to counteract foreign state ownership and subsidies. Such a wide array of conflicting aims produces lack of clarity for firms seeking to conduct business. Moreover, the discretion that attends this fluid arrangement of goals yields an even larger problem.

The Microsoft case illustrates this problem well. In Microsoft, the commission could have chosen to base its decision on various potential objectives. It notably chose to base its findings on the fact that Microsoft’s behavior reduced “consumer choice.”

The commission, in fact, discounted arguments that economic efficiency may lead to consumer welfare gains, because it determined “consumer choice” among media players was more important:

Another argument relating to reduced transaction costs consists in saying that the economies made by a tied sale of two products saves resources otherwise spent for maintaining a separate distribution system for the second product. These economies would then be passed on to customers who could save costs related to a second purchasing act, including selection and installation of the product. Irrespective of the accuracy of the assumption that distributive efficiency gains are necessarily passed on to consumers, such savings cannot possibly outweigh the distortion of competition in this case. This is because distribution costs in software licensing are insignificant; a copy of a software programme can be duplicated and distributed at no substantial effort. In contrast, the importance of consumer choice and innovation regarding applications such as media players is high. (Commission Decision No. COMP. 37792 (Microsoft)).

It may be true that tying the products in question was unnecessary. But merely dismissing this decision because distribution costs are near-zero is hardly an analytically satisfactory response. There are many more costs involved in creating and distributing complementary software than those associated with hosting and downloading. The commission also simply asserts that consumer choice among some arbitrary number of competing products is necessarily a benefit. This, too, is not necessarily true, and the decision’s implication that any marginal increase in choice is more valuable than any gains from product design or innovation is analytically incoherent.

The Court of First Instance was only too happy to give the commission a pass in its breezy analysis; it saw no objection to these findings. With little substantive reasoning to support its findings, the court fully endorsed the commission’s assessment:

As the Commission correctly observes (see paragraph 1130 above), by such an argument Microsoft is in fact claiming that the integration of Windows Media Player in Windows and the marketing of Windows in that form alone lead to the de facto standardisation of the Windows Media Player platform, which has beneficial effects on the market. Although, generally, standardisation may effectively present certain advantages, it cannot be allowed to be imposed unilaterally by an undertaking in a dominant position by means of tying.

The Court further notes that it cannot be ruled out that third parties will not want the de facto standardisation advocated by Microsoft but will prefer it if different platforms continue to compete, on the ground that that will stimulate innovation between the various platforms. (Microsoft Corp. v Commission, 2007)

Pointing to these conflicting effects of Microsoft’s bundling decision, without weighing either, is a weak basis to uphold the commission’s decision that consumer choice outweighs the benefits of standardization. Moreover, actions undertaken by other firms to enhance consumer choice at the expense of standardization are, on these terms, potentially just as problematic. The dividing line becomes solely which theory the commission prefers to pursue.

What such a practice does is vest the commission with immense discretionary power. Any given case sets up a “heads, I win; tails, you lose” situation in which defendants are easily outflanked by a commission that can change the rules of its analysis as it sees fit. Defendants can play only the cards that they are dealt. Accordingly, Microsoft could not successfully challenge a conclusion that its behavior harmed consumers’ choice by arguing that it improved consumer welfare, on net.

By selecting, in this instance, “consumer choice” as the standard to be judged, the commission was able to evade the constraints that might have been imposed by a more robust welfare standard. Thus, the commission can essentially pick and choose the objectives that best serve its interests in each case. This vastly enlarges the scope of potential antitrust liability, while also substantially decreasing the ability of firms to predict when their behavior may be viewed as problematic. It leads to what, in U.S. courts, would be regarded as an untenable risk of false positives that chill innovative behavior and create nearly unwinnable battles for targeted firms.

Overview

Virtually all countries in the world have adopted competition laws over the last three decades. In a recent Mercatus Foundation Research Paper, I argue that the spread of these laws has benefits and risks. The abstract of my Paper states:

The United States stood virtually alone when it enacted its first antitrust statute in 1890. Today, almost all nations have adopted competition laws (the term used in most other nations), and US antitrust agencies interact with foreign enforcers on a daily basis. This globalization of antitrust is becoming increasingly important to the economic welfare of many nations, because major businesses (in particular, massive digital platforms like Google and Facebook) face growing antitrust scrutiny by multiple enforcement regimes worldwide. As such, the United States should take the lead in encouraging adoption of antitrust policies, here and abroad, that are conducive to economic growth and innovation. Antitrust policies centered on promoting consumer welfare would be best suited to advancing these desirable aims. Thus, the United States should oppose recent efforts (here and abroad) to turn antitrust into a regulatory system that seeks to advance many objectives beyond consumer welfare. American antitrust enforcers should also work with like-minded agencies—and within multilateral organizations such as the International Competition Network and the Organisation for Economic Cooperation and Development—to promote procedural fairness and the rule of law in antitrust enforcement.

A brief summary of my Paper follows.

Discussion

Widespread calls for “reform” of the American antitrust laws are based on the false premises that (1) U.S. economic concentration has increased excessively and competition has diminished in recent decades; and (2) U.S. antitrust enforcers have failed to effectively enforce the antitrust laws (the consumer welfare standard is sometimes cited as the culprit to blame for “ineffective” antitrust enforcement). In fact, sound economic scholarship, some of it cited in chapter 6 of the 2020 Economic Report of the President, debunks these claims. In reality, modern U.S. antitrust enforcement under the economics-based consumer welfare standard (despite being imperfect and subject to error costs) has done a good job overall of promoting competitive and efficient markets.

The adoption of competition laws by foreign nations was promoted by the U.S. Government. The development of European competition law in the 1950s, and its incorporation into treaties that laid the foundation for the European Union (EU), was particularly significant. The EU administrative approach to antitrust, based on civil law (as compared to the U.S. common law approach), has greatly influenced the contours of most new competition laws. The EU, like the U.S., focuses on anticompetitive joint conduct, single firm conduct, and mergers. EU enforcement (carried out through the European Commission’s Directorate General for Competition) initially relied more on formal agency guidance than American antitrust law, but it began to incorporate an economic effects-based consumer welfare-centric approach over the last 20 years. Nevertheless, EU enforcers still pay greater attention to the welfare of competitors than their American counterparts.

In recent years, the EU prosecutions of digital platforms have begun to adopt a “precautionary antitrust” perspective, which seeks to prevent potential monopoly abuses in their incipiency by sanctioning business conduct without showing that it is causing any actual or likely consumer harm. What’s more, the EU’s recently adopted “Digital Markets Act” for the first time imposes ex ante competition regulation of platforms. These developments reflect a move away from a consumer welfare approach. On the plus side, the EU (unlike the U.S.) subjects state-owned or controlled monopolies to liability for anticompetitive conduct and forbids anticompetitive government subsidies that seriously distort competition (“state aids”).

Developing and former communist bloc countries rapidly enacted and implemented competition laws over the last three decades. Many newly minted competition agencies suffer from poor institutional capacity. The U.S. Government and the EU have worked to enhance the quality and consistency of competition enforcement in these jurisdictions by supporting technical support and training.

Various institutions support efforts to improve competition law enforcement and develop support for a “competition culture.” The International Competition Network (ICN), established in 2001, is a “virtual network” comprised of almost all competition agencies. The ICN focuses on discrete projects aimed at procedural and substantive competition law convergence through the development of consensual, nonbinding “best practices” recommendations and reports. It also provides a significant role for nongovernmental advisers from the business, legal, economic, consumer, and academic communities, as well as for experts from other international organizations. ICN member agency staff are encouraged to communicate with each other about the fundamentals of investigations and evaluations and to use ICN-generated documents and podcasts to support training. The application of economic analysis to case-specific facts has been highlighted in ICN work product. The Organization for Economic Cooperation and Development (OECD) and the World Bank (both of which carry out economics-based competition policy research) have joined with the ICN in providing national competition agencies (both new and well established) with the means to advocate effectively for procompetitive, economically beneficial government policies. ICN and OECD “toolkits” provide strategies for identifying and working to dislodge (or not enact) anticompetitive laws and regulations that harm the economy.

While a fair degree of convergence has been realized, substantive uniformity among competition law regimes has not been achieved. This is not surprising, given differences among jurisdictions in economic development, political organization, economic philosophy, history, and cultural heritage—all of which may help generate a multiplicity of policy goals. In addition to consumer welfare, different jurisdictions’ competition laws seek to advance support for small and medium sized businesses, fairness and equality, public interest factors, and empowerment of historically disadvantaged persons, among other outcomes. These many goals may not take center stage in the evaluation of most proposed mergers or restrictive business arrangements, but they may affect the handling of particular matters that raise national sensitivities tied to the goals.

The spread of competition law worldwide has generated various tangible benefits. These include consensus support for combating hard core welfare-reducing cartels, fruitful international cooperation among officials dedicated to a pro-competition mission, and support for competition advocacy aimed at dismantling harmful government barriers to competition.

There are, however, six other factors that raise questions regarding whether competition law globalization has been cost-beneficial overall: (1) effective welfare-enhancing antitrust enforcement is stymied in jurisdictions where the rule of law is weak and private property is poorly protected; (2) high enforcement error costs (particularly in jurisdictions that consider factors other than consumer welfare) may undermine the procompetitive features of antitrust enforcement efforts; (3) enforcement demands by multiple competition authorities substantially increase the costs imposed on firms that are engaging in multinational transactions; (4) differences among national competition law rules create complications for national agencies as they seek to have their laws vindicated while maintaining good cooperative relationships with peer enforcers; (5) anticompetitive rent-seeking by less efficient rivals may generate counterproductive prosecutions of successful companies, thereby disincentivizing welfare-inducing business behavior; and (6) recent developments around the world suggest that antitrust policy directed at large digital platforms (and perhaps other dominant companies as well) may be morphing into welfare-inimical regulation. These factors are discussed at greater length in my paper.

One cannot readily quantify the positive and negative welfare effects of the consequences of competition law globalization. Accordingly, one cannot state with any degree of confidence whether globalization has been “good” or “bad” overall in terms of economic welfare.

Conclusion

The extent to which globalized competition law will be a boon to consumers and the global economy will depend entirely on the soundness of public policy decision-making.  The U.S. Government should take the lead in advancing a consumer welfare-centric competition policy at home and abroad. It should work with multilateral institutions and engage in bilateral and regional cooperation to support the rule of law, due process, and antitrust enforcement centered on the consumer welfare standard.

Amazingly enough, at a time when legislative proposals for new antitrust restrictions are rapidly multiplying—see the Competition and Antitrust Law Enforcement Reform Act (CALERA), for example—Congress simultaneously is seriously considering granting antitrust immunity to a price-fixing cartel among members of the newsmedia. This would thereby authorize what the late Justice Antonin Scalia termed “the supreme evil of antitrust: collusion.” What accounts for this bizarre development?

Discussion

The antitrust exemption in question, embodied in the Journalism Competition and Preservation Act of 2021, was introduced March 10 simultaneously in the U.S. House and Senate. The press release announcing the bill’s introduction portrayed it as a “good government” effort to help struggling newspapers in their negotiations with large digital platforms, and thereby strengthen American democracy:

We must enable news organizations to negotiate on a level playing field with the big tech companies if we want to preserve a strong and independent press[.] …

A strong, diverse, free press is critical for any successful democracy. …

Nearly 90 percent of Americans now get news while on a smartphone, computer, or tablet, according to a Pew Research Center survey conducted last year, dwarfing the number of Americans who get news via television, radio, or print media. Facebook and Google now account for the vast majority of online referrals to news sources, with the two companies also enjoying control of a majority of the online advertising market. This digital ad duopoly has directly contributed to layoffs and consolidation in the news industry, particularly for local news.

This legislation would address this imbalance by providing a safe harbor from antitrust laws so publishers can band together to negotiate with large platforms. It provides a 48-month window for companies to negotiate fair terms that would flow subscription and advertising dollars back to publishers, while protecting and preserving Americans’ right to access quality news. These negotiations would strictly benefit Americans and news publishers at-large; not just one or a few publishers.

The Journalism Competition and Preservation Act only allows coordination by news publishers if it (1) directly relates to the quality, accuracy, attribution or branding, and interoperability of news; (2) benefits the entire industry, rather than just a few publishers, and are non-discriminatory to other news publishers; and (3) is directly related to and reasonably necessary for these negotiations.

Lurking behind this public-spirited rhetoric, however, is the specter of special interest rent seeking by powerful media groups, as discussed in an insightful article by Thom Lambert. The newspaper industry is indeed struggling, but that is true overseas as well as in the United States. Competition from internet websites has greatly reduced revenues from classified and non-classified advertising. As Lambert notes, in “light of the challenges the internet has created for their advertising-focused funding model, newspapers have sought to employ the government’s coercive power to increase their revenues.”

In particular, media groups have successfully lobbied various foreign governments to impose rules requiring that Google and Facebook pay newspapers licensing fees to display content. The Australian government went even further by mandating that digital platforms share their advertising revenue with news publishers and give the publishers advance notice of any algorithm changes that could affect page rankings and displays. Media rent-seeking efforts took a different form in the United States, as Lambert explains (citations omitted):

In the United States, news publishers have sought to extract rents from digital platforms by lobbying for an exemption from the antitrust laws. Their efforts culminated in the introduction of the Journalism Competition and Preservation Act of 2018. According to a press release announcing the bill, it would allow “small publishers to band together to negotiate with dominant online platforms to improve the access to and the quality of news online.” In reality, the bill would create a four-year safe harbor for “any print or digital news organization” to jointly negotiate terms of trade with Google and Facebook. It would not apply merely to “small publishers” but would instead immunize collusive conduct by such major conglomerates as Murdoch’s News Corporation, the Walt Disney Corporation, the New York Times, Gannet Company, Bloomberg, Viacom, AT&T, and the Fox Corporation. The bill would permit news organizations to fix prices charged to digital platforms as long as negotiations with the platforms were not limited to price, were not discriminatory toward similarly situated news organizations, and somehow related to “the quality, accuracy, attribution or branding, and interoperability of news.” Given the ease of meeting that test—since news organizations could always claim that higher payments were necessary to ensure journalistic quality—the bill would enable news publishers in the United States to extract rents via collusion rather than via direct government coercion, as in Australia.

The 2021 version of the JCPA is nearly identical to the 2018 version discussed by Thom. The only substantive change is that the 2021 version strengthens the pro-cartel coalition by adding broadcasters (it applies to “any print, broadcast, or news organization”). While the JCPA plainly targets Facebook and Google (“online content distributors” with “not fewer than 1,000,000,000 monthly active users, in the aggregate, on its website”), Microsoft President Brad Smith noted in a March 12 House Antitrust Subcommittee Hearing on the bill that his company would also come under its collective-bargaining terms. Other online distributors could eventually become subject to the proposed law as well.

Purported justifications for the proposal were skillfully skewered by John Yun in a 2019 article on the substantively identical 2018 JCPA. Yun makes several salient points. First, the bill clearly shields price fixing. Second, the claim that all news organizations (in particular, small newspapers) would receive the same benefit from the bill rings hollow. The bill’s requirement that negotiations be “nondiscriminatory as to similarly situated news content creators” (emphasis added) would allow the cartel to negotiate different terms of trade for different “tiers” of organizations. Thus The New York Times and The Washington Post, say, might be part of a top tier getting the most favorable terms of trade. Third, the evidence does not support the assertion that Facebook and Google are monopolistic gateways for news outlets.

Yun concludes by summarizing the case against this legislation (citations omitted):

Put simply, the impact of the bill is to legalize a media cartel. The bill expressly allows the cartel to fix the price and set the terms of trade for all market participants. The clear goal is to transfer surplus from online platforms to news organizations, which will likely result in higher content costs for these platforms, as well as provisions that will stifle the ability to innovate. In turn, this could negatively impact quality for the users of these platforms.

Furthermore, a stated goal of the bill is to promote “quality” news and to “highlight trusted brands.” These are usually antitrust code words for favoring one group, e.g., those that are part of the News Media Alliance, while foreclosing others who are not “similarly situated.” What about the non-discrimination clause? Will it protect non-members from foreclosure? Again, a careful reading of the bill raises serious questions as to whether it will actually offer protection. The bill only ensures that the terms of the negotiations are available to all “similarly situated” news organizations. It is very easy to carve out provisions that would favor top tier members of the media cartel.

Additionally, an unintended consequence of antitrust exemptions can be that it makes the beneficiaries lax by insulating them from market competition and, ultimately, can harm the industry by delaying inevitable and difficult, but necessary, choices. There is evidence that this is what occurred with the Newspaper Preservation Act of 1970, which provided antitrust exemption to geographically proximate newspapers for joint operations.

There are very good reasons why antitrust jurisprudence reserves per se condemnation to the most egregious anticompetitive acts including the formation of cartels. Legislative attempts to circumvent the federal antitrust laws should be reserved solely for the most compelling justifications. There is little evidence that this level of justification has been met in this present circumstance.

Conclusion

Statutory exemptions to the antitrust laws have long been disfavored, and with good reason. As I explained in my 2005 testimony before the Antitrust Modernization Commission, such exemptions tend to foster welfare-reducing output restrictions. Also, empirical research suggests that industries sheltered from competition perform less well than those subject to competitive forces. In short, both economic theory and real-world data support a standard that requires proponents of an exemption to bear the burden of demonstrating that the exemption will benefit consumers.

This conclusion applies most strongly when an exemption would specifically authorize hard-core price fixing, as in the case with the JCPA. What’s more, the bill’s proponents have not borne the burden of justifying their pro-cartel proposal in economic welfare terms—quite the opposite. Lambert’s analysis exposes this legislation as the product of special interest rent seeking that has nothing to do with consumer welfare. And Yun’s evaluation of the bill clarifies that, not only would the JCPA foster harmful collusive pricing, but it would also harm its beneficiaries by allowing them to avoid taking steps to modernize and render themselves more efficient competitors.

In sum, though the JCPA claims to fly a “public interest” flag, it is just another private interest bill promoted by well-organized rent seekers would harm consumer welfare and undermine innovation.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Corbin Barthold, (Senior Litigation Counsel, Washington Legal Foundation).]

The pandemic is serious. COVID-19 will overwhelm our hospitals. It might break our entire healthcare system. To keep the number of deaths in the low hundreds of thousands, a study from Imperial College London finds, we will have to shutter much of our economy for months. Small wonder the markets have lost a third of their value in a relentless three-week plunge. Grievous and cruel will be the struggle to come.

“All men of sense will agree,” Hamilton wrote in Federalist No. 70, “in the necessity of an energetic Executive.” In an emergency, certainly, that is largely true. In the midst of this crisis even a staunch libertarian can applaud the government’s efforts to maintain liquidity, and can understand its urge to start dispersing helicopter money. By at least acting like it knows what it’s doing, the state can lessen many citizens’ sense of panic. Some of the emergency measures might even work.

Of course, many of them won’t. Even a trillion-dollar stimulus package might be too small, and too slowly dispersed, to do much good. What’s worse, that pernicious line, “Don’t let a crisis go to waste,” is in the air. Much as price gougers are trying to arbitrage Purell, political gougers, such as Senator Elizabeth Warren, are trying to cram woke diktats into disaster-relief bills. Even now, especially now, it is well to remember that government is not very good at what it does.

But dreams of dirigisme die hard, especially at the New York Times. “During the Great Depression,” Farhad Manjoo writes, “Franklin D. Roosevelt assembled a mighty apparatus to rebuild a broken economy.” Government was great at what it does, in Manjoo’s view, until neoliberalism arrived in the 1980s and ruined everything. “The incompetence we see now is by design. Over the last 40 years, America has been deliberately stripped of governmental expertise.” Manjoo implores us to restore the expansive state of yesteryear—“the sort of government that promised unprecedented achievement, and delivered.”

This is nonsense. Our government is not incompetent because Grover Norquist tried (and mostly failed) to strangle it. Our government is incompetent because, generally speaking, government is incompetent. The keystone of the New Deal, the National Industrial Recovery Act of 1933, was an incoherent mess. Its stated goals were at once to “reduce and relieve unemployment,” “improve standards of labor,” “avoid undue restriction of production,” “induce and maintain united action of labor and management,” “organiz[e] . . . co-operative action among trade groups,” and “otherwise rehabilitate industry.” The law empowered trade groups to create their own “codes of unfair competition,” a privilege they quite predictably used to form anticompetitive cartels.

At no point in American history has the state, with all its “governmental expertise,” been adept at spending money, stimulus or otherwise. A law supplying funds for the Transcontinental Railroad offered to pay builders more for track laid in the mountains, but failed to specify where those mountains begin. Leland Stanford commissioned a study finding that, lo and behold, the Sierra Nevada begins deep in the Sacramento Valley. When “the federal Interior Department initially challenged [his] innovative geology,” reports the historian H.W. Brands, Stanford sent an agent directly to President Lincoln, a politician who “didn’t know much geology” but “preferred to keep his allies happy.” “My pertinacity and Abraham’s faith moved mountains,” the triumphant lobbyist quipped after the meeting.

The supposed golden age of expert government, the time between the rise of FDR and the fall of LBJ, was no better. At the height of the Apollo program, it occurred to a physics professor at Princeton that if there were a small glass reflector on the Moon, scientists could use lasers to calculate the distance between it and Earth with great accuracy. The professor built the reflector for $5,000 and approached the government. NASA loved the idea, but insisted on building the reflector itself. This it proceeded to do, through its standard contracting process, for $3 million.

When the pandemic at last subsides, the government will still be incapable of setting prices, predicting industry trends, or adjusting to changed circumstances. What F.A. Hayek called the knowledge problem—the fact that useful information is dispersed throughout society—will be as entrenched and insurmountable as ever. Innovation will still have to come, if it is to come at all, overwhelmingly from extensive, vigorous, undirected trial and error in the private sector.

When New York Times columnists are not pining for the great government of the past, they are surmising that widespread trauma will bring about the great government of the future. “The outbreak,” Jamelle Bouie proposes in an article entitled “The Era of Small Government is Over,” has “made our mutual interdependence clear. This, in turn, has made it a powerful, real-life argument for the broadest forms of social insurance.” The pandemic is “an opportunity,” Bouie declares, to “embrace direct state action as a powerful tool.”

It’s a bit rich for someone to write about the coming sense of “mutual interdependence” in the pages of a publication so devoted to sowing grievance and discord. The New York Times is a totem of our divisions. When one of its progressive columnists uses the word “unity,” what he means is “submission to my goals.”

In any event, disunity in America is not a new, or even necessarily a bad, thing. We are a fractious, almost ungovernable people. The colonists rebelled against the British government because they didn’t want to pay it back for defending them from the French during the Seven Years’ War. When Hamilton, champion of the “energetic Executive,” pushed through a duty on liquor, the frontier settlers of western Pennsylvania tarred and feathered the tax collectors. In the Astor Place Riot of 1849, dozens of New Yorkers died in a brawl over which of two men was the better Shakespearean actor. Americans are not housetrained.

True enough, if the virus takes us to the kind of depths not seen in these parts since the Great Depression, all bets are off. Short of that, however, no one should lightly assume that Americans will long tolerate a statist revolution imposed on their fears. And thank goodness for that. Our unruliness, our unwillingness to do what we’re told, is part of what makes our society so dynamic and prosperous.

COVID-19 will shake the world. When it has gone, a new scene will open. We can say very little now about what is going to change. But we can hope that Americans will remain a creative, opinionated, fiercely independent lot. And we can be confident that, come what may, planned administration will remain a source of problems, while unplanned free enterprise will remain the surest source of solutions.


Conspiracies and collusion often (always?) get a bad rap. Adam Smith famously derided “people of the same trade” for their inclination to conspire against the public or contrive to raise prices. Today, such conspiracies and contrivances are per se illegal and felonies punishable under the Sherman Act.

It is well known and widely accepted that collusion to suppress competition is associated with an increase in price, a transfer of consumer surplus to producers, and a deadweight loss. It seems that nothing good comes from anticompetitive collusion.

But what if there was some good from a conspiracy in restraint of trade?

Using data from the formation and breakup of illegal cartels, Hyo Kang finds higher levels of innovation—measured by patents and R&D spending—during the cartel period than in the period before the formation of the cartel or the period after the breakup of the cartel. 

By Kang’s measures, during the cartel period, colluding firms increased the annual number of patent applications by about 50% or more and their R&D expenditures by more than 20% relative to the pre-cartel period. After the breakup of the cartel, patent applications and R&D spending return to approximately pre-cartel levels.

These findings are consistent with ICLE’s review of research on four-to-three mergers in the telecom industry. The review found that, of those studies that considered the effect on investment in four-to-three mergers, all of them demonstrated that capital expenditures, a proxy for investment, increased post-merger.

If Kang’s conclusions are correct they contradict John Hicks’ quip that “the best of all monopoly profits is a quiet life.” Instead of silently collecting the profits of price fixing and other forms of collusion, cartel conspirators seem to be aggressively innovating. So what gives?

Kang’s paper points to Joseph Schumpeter, who argued that some degree of market power can promote innovation by providing firms with the financial resources and predictability required for innovative activities:

Thus it is true that there is or may be an element of genuine monopoly gain in those entrepreneurial profits which are the prizes offered by capitalist society to the successful innovator. But the quantitative importance of that clement, its volatile nature and its function in the process in which it emerges put it in a class by itself. The main value to a concern of a single seller position that is secured by patent or monopolistic strategy does not consist so much in the opportunity to behave temporarily according to the monopolist schema, as in the protection it affords against temporary disorganization of the market and the space it secures for long-range planning.

Along this line, Kang argues that the reduced competition afforded by the cartel provides both an incentive to innovate and an ability to innovate. Incentives include the potential for higher returns from innovation and the reduction of duplicative R&D investment. Increased profits from collusion provide increased resources available for R&D, thereby improving a firm’s ability to innovate. In some ways, it can be argued that the cartel arrangement reduces price competition, while increasing competition along other dimensions.

A seemingly unrelated working paper by R. Andrew Butters and Thomas N. Hubbard come to a similar conclusion. They note that over time, hotels have increased competition along nonprice dimensions, trading improved room size and in-room amenities for reduced out-of-room amenities such full-service restaurants, swimming pools, and meeting spaces. 

Butters & Hubbard note that many out-of-room amenities are typified by fixed costs that do not vary (much) with hotel size, while room-size and in-room amenities are largely variable costs with respect to hotel size. With the shift from out-of-room amenities to in-room amenities, the market has shifted from one of larger hotels with many rooms, to smaller hotels with fewer rooms. Thus with the shift in the dimensions of competition, the structure of the industry has shifted along with it.

The research of Kang and Butters & Hubbard raise important issues about competition policy. A single-minded focus on price ignores the other many dimensions across which firms compete. While a cartel’s consumers may face higher prices, they may also benefit from increased innovation. Similarly, while hotel guests may experience reduced price competition among hotels, they are also experiencing a better in-room experience. Although increased concentration and outright collusion may harm consumers along the price dimension, they may also benefit along other dimensions that are not so easily quantified or quantifiable.

[TOTM: The following is the seventh in a series of posts by TOTM guests and authors on the politicization of antitrust. The entire series of posts is available here.]

This post is authored by Cento Veljanoski, Managing Partner, Case Associates and IEA Fellow in Law and Economics, Institute of Economic Affairs.

The concept of a “good” or “efficient” cartel is generally regarded by competition authorities as an oxymoron. A cartel is seen as the worst type of antitrust violation and one that warrants zero tolerance. Agreements between competitors to raise prices and share the market are assumed unambiguously to reduce economic welfare. As such, even if these agreements are ineffective, the law should come down hard on attempts to rig prices. In this post, I argue that this view goes too far and that even ‘hard core’ cartels that lower output and increase prices can be efficient, and pro-competitive. I discuss three examples of where hard core cartels may be efficient.

Resuscitating the efficient cartel

Basic economic theory tells us that coordination can be efficient in many instances, and this is accepted in law, e.g. joint ventures and agreements on industry standards.  But where competitors agree on prices and the volume of sales – so called “hard core” cartels – there is intolerance.

Nonetheless there is a recognition that cartel-like arrangements can promote efficiency. For example, Article 101(3)TFEU exempts anticompetitive agreements or practices whose economic and/or technical benefits outweigh their restrictions on competition, provided a fair share of those benefits are passed-on to consumers. However, this so-called ‘efficiency defence’ is highly unlikely to be accepted for hard core cartels nor are the wider economic or non-economic considerations. But as will be shown, there are classes of hard core cartels and restrictive agreement which, while they reduce output, raise prices and foreclose entry, are nonetheless efficient and not anticompetitive.

Destructive competition and the empty core

The claim that cartels have beneficial effects precedes US antitrust law. Trusts were justified as necessary to prevent ‘ruinous’ or ‘destructive’ competition in industries with high fixed costs subject to frequent ‘price wars’. This was the unsuccessful defence in Trans-Missouri (166 U.S. 290 (1897), where 18 US railroad companies formed a trust to set their rates, arguing that absent their agreement there would be ruinous competition, eventual monopoly and even higher prices.  Since then industries such as steel, cement, paper, shipping and airlines have at various times claimed that competition was unsustainable and wasteful.

These seem patently self-serving claims.  But the idea that some industries are unstable without a competitive equilibrium has long been appreciated by economists.  Nearly a century after Trans-Missouri, economist Lester Telser (1996) refreshed the idea that cooperative arrangements among firms in some industries were not attempts to impose monopoly prices but a response to their inherent structural inefficiency. This was based on the concept of an ‘empty core’. While Tesler’s article uses some hideously dense mathematical game theory, the idea is simple to state.  A market is said to have a ‘core’ if there is a set of transactions between buyers and sellers such that there are no other transactions that could make some of the buyers or sellers better off. Such a core will survive in a competitive market if all firms can make zero economic profits. In a market with an empty core no coalition of firms will be able to earn zero profits; some firms will be able to earn a surplus and thereby attract entry, but because the core is empty the new entry will inflict losses on all firms. When firms exit due to their losses, the remaining firms again earn economic profits, and attract entry. There are no competitive long-run stable equilibria for these industries.

The literature suggests that an industry is likely to have an empty core: (1) where firms have fixed production capacities; (2) that are large relative to demand; (3) there are scale economies in production; (4) incremental costs are low, (5) demand is uncertain and fluctuates markedly; and (6) output cannot be stored cheaply. Industries which have frequently been cartelised share many of these features (see above).

In the 1980s several academic studies applied empty core theory to antitrust. Brittlingmayer (1982) claimed that the US iron pipe industry had an empty core and that the famous Addyston Pipe case was thus wrongly decided, and responsible for mergers in the industry.

Sjostrom (1989) and others have argued that conference lines were not attempts to overcharge shippers but to counteract an empty core that led to volatile market shares and freight rates due to excess capacity and fixed schedules.  This type of analysis formed the basis for their exemption from competition laws. Since the nineteenth century, liner conferences had been permitted to fix prices and regulate capacity on routes between Europe, and North America and the Far East. The EU block exemption (Council Regulation 4056/86) allowed them to set common freight rates, to take joint decisions on the limitation of supply and to coordinate timetables. However the justifications for these exemptions has worn thin. As from October 2008, these EU exemptions were removed based on scepticism that liner shipping is an empty core industry particularly because, with the rise of modern leasing and chartering techniques to manage capacity, the addition of shipping capacity is no longer a lumpy process. 

While the empty core argument may have merit, it is highly unlikely to persuade European competition authorities, and the experience with legal cartels that have been allowed in order to rationalise production and costs has not been good.

Where there are environmental problems

Cartels in industries with significant environmental problems – which produce economic ‘bads’ rather than goods – can have beneficial effects. Restricting the output of an economic bad is good. Take an extreme example. When most people hear the word cartel, they think of a Colombian drugs cartel. . A drugs cartel reduces drug trafficking to keep its profits high. Competition in the supply would  lead to an over-supply of cheaper drugs, and a cartel charging higher prices and lower output is superior to a competitive outcome.

The same logic applies also to industries in which bads, such as pollution, are a by-product of otherwise legitimate and productive activities.  An industry which generates pollution does not take the full costs of its activities into account, and hence output is over-expanded and prices too low. Economic efficiency requires a reduction in the harmful activities and the associated output.  It also requires the product’s price to increase to incorporate the pollution costs. A cartel that raises prices can move such an industry’s output and harm closer to the efficient level, although this would not be in response to higher pollution-inclusive costs – which makes this a second-best solution.

There has been a fleeting recognition that competition in the presence of external costs is not efficient and that restricting output does not necessarily distort competition. In 1999, the European Commission almost uniquely exempted a cartel-like restrictive agreement among producers and importers of washing machines under Article 101(3)TFEU (Case IV.F.1/36.718. CECED).  The agreement not to produce or import the least energy efficient washing machines representing 10-11% of then EC sales would adversely affect competition and increase prices since the most polluting machines were the least expensive ones.

The Commission has since rowed back from its broad application of Article 101(3)TFEU in CECED. In its 2001 Guidelines on Horizontal Agreements it devoted a chapter to environmental agreements which it removed from its revised 2011 Guidelines (para 329) which treated CECED as a standardisation agreement.

Common property industries

A more clear-cut case of an efficient cartel is where firms compete over a common property resource for which property rights are ill-defined or absent, such as is often the case for fisheries. In these industries, competition leads to excessive entry, over-exploitation, and the dissipation of the economic returns (rents).  A cartel – a ‘club’ of fisherman – having sole control of the fishing grounds would unambiguously increase efficiency even though it increased prices, reduced production and foreclosed entry. 

The benefits of such cartels have not been accepted in law by competition authorities. The Dutch competition authority’s (MNa Case No. 2269/330) and the European Commission’s (Case COMP/39633 Shrimps) shrimps decisions in 2013-14 imposed fines on Dutch shrimp fleet and wholesalers’ organisations for agreeing quotas and prices. One study showed that the Dutch agreement reduced the fishing catch by at least 12%-16% during the cartel period and increased wholesale prices. However, this output reduction and increase in prices was not welfare-reducing if the competitive outcome resulted over-fishing. This and subsequent cases have resulted in a vigorous policy debate in the Netherlands over the use of Article 101(3)TFEU to take the wider benefits into account (ACM Position Paper 2014).

Sustainability and Article 101(3)

There is a growing debate over the conflict between and antitrust and other policy objectives, such as sustainability and industrial policy. One strand of this debate focuses on expanding the efficiency defence under Article 101(3)TFEU.  As currently framed, it has not enabled the reduction in pollution costs or resource over-exploitation to exempt restrictive agreements which distort competition even though these agreements may be efficient. In the pollution case the benefits are generalised ones to third parties not consumers, which are difficult to quantify. In the fisheries case, the short-term welfare of existing consumers is unambiguously reduced as they pay higher prices for less fish; the benefits are long term (more sustainable fish stock which can continue to be consumed) and may not be realized at all by current consumers but rather will accrue to future generations.

To accommodate sustainability concerns and other efficiency factors Article 101(3)TFEU would have to be expanded into a public interest defence based on a wider total welfare objective, not just consumers’ welfare as it is now, which took into account the long-run interest of consumers and third parties potentially affected by a restrictive agreement. This would mark a radical and open-ended expansion of the objectives of European antitrust and the grounds for exemption. It would put sustainability on the same plank as the clamour that industrial policy be taken-into-account by antitrust authorities, which has been firmly resisted so far.  This is not to belittle both the economic and environmental grounds for a public interest defence, it is just to recognise that it is difficult to see how this can be coherently incorporated into Article 101(3)TFEU while at the same time as preserving the integrity and focus of European antitrust.

[TOTM: The following is the fourth in a series of posts by TOTM guests and authors on the politicization of antitrust. The entire series of posts is available here.]

This post is authored by Valentin Mircea, a Senior Partner at Mircea and Partners Law Firm, Bucharest, Romania.

The enforcement of competition rules in the European Union is at historic heights. Competition enforcers at the European Commission seem to think that they have reached a point of perfect equilibrium, or perfection in enforcement. “Everything we do is right,” they seem to say, because for decades no significant competition decision by the Commission has been annulled on substance. Meanwhile, the objectives of EU competition law multiply continuously, as DG Competition assumes more and more public policy objectives. Indeed, so wide is DG Competition’s remit that it has become a kind of government in itself, charged with many areas and facing several problems looking for a cure.

The consumer welfare standard is merely affirmed and rarely pursued in the enforcement of the EU competition rules, where even the abuse of dominance tends to be considered as a per se infringement, at least until the European Court of Justice had its say in Intel. It helps that this standard has been always of a secondary importance in the European Union, where the objective of market integration prevailed over time.

Now other issues are catching the eye of the European Commission and the easiest way to handle things such as the increasing power of the technology companies was to make use of the toolkit of the EU competition enforcement.  A technology giant such as Google has already been hit three times with significant fines; but beyond the transient glory of these decisions, nothing significant happened in the market, to other companies or to consumers. Or it did? I’m not sure and nobody seems to check or even care. But the impetus in investigating and applying fines on the technology companies is unshaken — and is likely to remain so at least until the European Court of Justice has its say in a new roster of cases, which will not happen very soon.

The EU competition rules look both over- and under-enforced. This seeming paradox is explained by the formalistic approach of the European Commission and its willingness to serve political purposes, often the result of lobbying from various industries.  In the European Union, competition enforcement increasingly resembles Swiss Army knife; it is good for quick fixes of various problems, while not solving entirely any of them. 

The pursuit of political goals is not necessarily bad in itself; it seems obvious that competition enforcers should listen to the worries of the societies in which they live. Once objectives such as welfare seem to have been attained, it is thus not entirely surprising that enforcement should move towards fixing other societal problems. Take the case of the antitrust laws in the United States, the enactment of which was not determined by an overwhelming concern for consumer welfare or economic efficiency but by powerful lobbies that convinced Congress to act as a referee for their long-lasting disputes with different industries.  In spite of this not-so-glorious origin, the resultant antitrust rules have generated many benefits throughout the world and are an essential part of the efforts to keep markets competitive and ensure a level-playing field. So, why worry that the European Commission – and, more recently, even certain national competition authorities (such as Germany) – have developed a tendency to use powerful competition rules to make order in other areas, where the public opinion, irrespective if it is or not aware of the real causes of concern, requires it?

But in fact, what is happening today is bad and is setting precedents never seen before.  The speed at which new fronts are being opened, where the enforcement of the EU competition rules is an essential part of the weaponry, gives rise to two main areas of concern.

First, EU competition enforcers are generally ill-equipped to address sensitive technical issues that even big experts in the field do not understand properly, such as the use of the Big Data (a vague concept itself, open to various interpretations).  While creating a different set of rules and a new toolkit for the digital economy does not seem to be warranted (debates are still raging on this subject), a dose of humility as to the right level of knowledge required for a proper understanding of the interactions and for proper enforcement, would be most welcome.  Venturing into territories where conventional economics does not apply to its full extent, such as the absence of a price, an essential element of competition, requires a prudent and diligent enforcer to hold back, advance cautiously, and act only where deemed necessary, in an appropriate and proportionate way. So doing is more likely to have an observably beneficial impact, in contrast to the illusory glory of simply confronting the tech giants.

Second, given the limited resources of the European Commission and the national competition authorities in the Member States, exaggerated attention to cases in the technology and digital economy sectors will result in less enforcement in the traditional economy, where cartels and other harmful behaviors still happen, with often more visible negative effects on consumers and the economy. It is no longer fashionable to tackle such cases, as they do not draw the same attention from the media and their outcomes are not likely to create the same fame to the EU competition enforcers.

More recently, in an interesting move, the new European Commission unified the competition and the digital economy portfolios under the astute supervision of commissioner Margrethe Vestager. Beyond the anomaly to put together ex-ante and ex-post powers, the move signals an even larger propensity towards using competition enforcement tools in order to investigate and try to rein in the power of the behemoths of the digital economy.  The change is a powerful political message that EU competition enforcement will be even more prone to cases and decisions motivated by the pursuit of various public policy goals.

I am not saying that the approach taken by the EU competition enforcers has no chance of generating benefits for European consumers. But I am worried that moving ahead with the same determination and with the same limited expertise of the case handlers as has so far been demonstrated, is unlikely to deliver such a beneficial outcome. Moreover, contrary to the stated intention of the policy, it is likely to chill further the prospects for EU technology ventures. 

Last but not least, courageous enforcement of EU competition rules is not a panacea for the unwanted effects on the evidentiary tier, which might put in danger the credibility of this enforcement, its most valuable feature. Indeed, EU competition enforcement may be at its heights but there is no certainty that it won’t fall from there — and falling could be as spectacular as the cases which made the European Commission get to this point. I thus advocate for DG Competition to be wise and humble, to take one step at a time, to acknowledge that markets are generally able to self-correct, and to remember that the history of the economy is little more than a cemetery of forgotten giants that were once assumed to be unshakeable and unstoppable.

[TOTM: The following is the second in a series of posts by TOTM guests and authors on the politicization of antitrust. The entire series of posts is available here.]

This post is authored by Luigi Zingales, Robert C. McCormack Distinguished Service Professor of Entrepreneurship and Finance, and Charles M. Harper Faculty Fellow, the University of Chicago Booth School of Business. Director, the George J. Stigler Center for the Study of the Economy and the State, and Filippo Maria Lancieri, Fellow, George J. Stigler Center for the Study of the Economy and the State. JSD Candidate, The University of Chicago Law School.

This symposium discusses the “The Politicization of Antitrust.” As the invite itself stated, this is an umbrella topic that encompasses a wide range of subjects: from incorporating environmental or labor concerns in antitrust enforcement, to political pressure in enforcement decision-making, to national security laws (CFIUS-type enforcement), protectionism, federalism, and more. This contribution will focus on the challenges of designing a system that protects the open markets and democracy that are the foundation of modern economic and social development.

The “Chicago School of antitrust” was highly critical of the antitrust doctrine prevailing during the Warren-era Supreme Court. A key objection was that the vague legal standards of the Sherman, Clayton and the Federal Trade Commission Acts allowed for the enforcement of antitrust policy based on what Bork called “inferential analysis from casuistic observations.” That is, without clearly defined goals and without objective standards against which to measure these goals, antitrust enforcement would become arbitrary or even a tool that governments could wield against a political enemy. To address this criticism, Bork and other key members of the Chicago School narrowed the scope of antitrust to a single objective—the maximization of allocative efficiency/total welfare (coined as “consumer welfare”)—and advocated the use of price theory as a method to reduce judicial discretion. It was up to markets and Congress/politics, not judges (and antitrust), to redistribute economic surplus or protect small businesses. Developments in economic theory and econometrics over the next decades increased the number of tools regulators and Courts could rely on to measure the short-term price/output impacts of many specific types of conduct. A more conservative judiciary translated much of the Chicago School’s teaching into policy, including the triumph of Bork’s narrow interpretation of “consumer welfare.”

The Chicago School’s criticism of traditional antitrust struck many correct points. Some of the Warren-era Supreme Court cases are perplexing to say the least (e.g., Brown Shoe, Von’s Grocery, Utah Pie, Schwinn). Antitrust is a very powerful tool that covers almost the entire economy. In the United States, enforcement can be initiated by multiple federal and state regulators and by private parties (for whom treble damages encourage litigation). If used without clear and objective standards, antitrust remedies could easily add an extra layer of uncertainty or could even outright prohibit perfectly legitimate conduct, which would depress competition, investment, and growth. The Chicago School was also right in warning against the creation of what it understood as extensive and potentially unchecked governmental powers to intervene in the economic sphere. At best, such extensive powers can generate rent-seeking and cronyism. At worst, they can become an instrument of political vendettas. While these concerns are always present, they are particularly worrisome now: a time of increased polarization, dysfunctional politics, and constant weakening of many governmental institutions. If “politicizing antitrust” is understood as advocating for a politically driven, uncontrolled enforcement policy, we are similarly concerned about it. Changes to antitrust policy that rely primarily on vague objectives may lead to an unmitigated disaster.

Administrability is certainly a key feature of any regulatory regime hoping to actually increase consumer welfare. Bork’s narrow interpretation of “consumer welfare” unquestionably has three important features: Its objectives are i) clearly defined, ii) clearly ranked, and iii) (somewhat) objectively measurable. Yet, whilst certainly representing some gains over previous definitions, Bork’s “consumer welfare” is not the end of history for antitrust policy. Indeed, even the triumph of “consumer welfare” is somewhat bittersweet. With time, academics challenged many of the doctrine’s key tenets. US antitrust policy also constantly accepts some form of external influences that are antagonistic to this narrow, efficiency-focused “consumer welfare” view—the “post-Chicago” United States has explicit exemptions for export cartels, State Action, the Noerr-Pennington doctrine, and regulated markets (solidified in Trinko), among others. Finally, as one of us has indicated elsewhere, while prevailing in the United States, Chicago School ideas find limited footing around the world. While there certainly are irrational or highly politicized regimes, there is little evidence that antitrust enforcement in mature jurisdictions such as the EU or even Brazil is arbitrary, is employed in political vendettas, or reflects outright protectionist policies.

Governments do not function in a vacuum. As economic, political, and social structures change, so must public policies such as antitrust. It must be possible to develop a well-designed and consistent antitrust policy that focuses on goals other than imperfectly measured short-term price/output effects—one that sits in between a narrow “consumer welfare” and uncontrolled “politicized antitrust.” An example is provided by the Stigler Committee on Digital Platforms Final Report, which defends changes to current US antitrust enforcement as a way to increase competition in digital markets. There are many similarly well-grounded proposals for changes to other specific areas, such as vertical relationships. We have not yet seen an all-encompassing, well-grounded, and generalizable framework to move beyond the “consumer welfare” standard. Nonetheless, this is simply the current state of the art, not an impossibility theorem. Academia contributes the most to society when it provides new ways to tackle hard, important questions. The Chicago School certainly did so a few decades ago. There is no reason why academia and policymakers cannot do it again.   

This is exactly why we are dedicating the 2020 Stigler Center annual antitrust conference to the topic of “monopolies and politics.” Competitive markets and democracy are often (and rightly) celebrated as the most important engines of economic and social development. Still, until recently, the relationship between the two was all but ignored. This topic had been popular in the 1930s and 1940s because many observers linked the rise of Hitler, Mussolini, and the nationalist government in Japan to the industrial concentration in the three Axis countries. Indeed, after WWII, the United States set up a “Decartelization Office” in Germany and passed the Celler-Kefauver Act to prevent gigantic conglomerates from destroying democracies. In 1949, Congressman Emanuel Celler, who sponsored the Act, declared:

“There are two main reasons why l am concerned about concentration of economic power in the United States. One is that concentration of business unavoidably leads to some kind of socialism, which is not the desire of the American people. The other is that a concentrated system is inefficient, compared with a system of free competition.

We have seen what happened in the other industrial countries of the Western World. They allowed a free growth of monopolies and cartels; until these private concentrations grew so strong that either big business would own the government or the government would have to seize control of big business. The most extreme case was in Germany, where the big business men thought they could take over the government by using Adolf Hitler as their puppet. So Germany passed from private monopoly to dictatorship and disaster.”

There are many reasons why these concerns around monopolies and democracy are resurfacing now. A key one is that freedom is in decline worldwide and so is trust in democracy, particularly amongst newer generations. At the same time, there is growing evidence that market concentration is on the rise. Correlation is not causation, thus we cannot jump to hasty conclusions. Yet, the stakes are so high that these coincidences need to be investigated further.  

Moreover, even if the correlation between monopolies and fascism were spurious, the correlation between economic concentration and political dissatisfaction in democracy might not be. The fraction of people who feel their interests are represented in government fell from almost 80% in the 1950s to 20% today. Whilst this dynamic is impacted by many different drivers, one of them could certainly be increased market concentration.

Political capture is a reality, and it seems straightforward to assume that firms’ ability to influence the political system greatly depends not only on their size but also on the degree of concentration of the markets they operate in. The reasons are numerous. In concentrated markets, legislators only hear one version of the story, and there are fewer sophisticated stakeholders to ring the alarm when wrongdoing is present, thus making it easier for the incumbents to have their way. Similarly, in concentrated markets, the one or two incumbent firms represent the main or only source of employment for retiring regulators, ensuring an incumbent’s long-term influence over policy. Concentrated markets also restrict the pool of potential employers/customers for technical experts, making it difficult for them to survive if they are hostile to the incumbent behemoths—an issue particularly concerning in complex markets where talent is both necessary and scarce. Finally, firms with market power can use their increased rents to influence public policy through lobbying or some other legal form of campaign contributions.

In other words, as markets become more concentrated, incumbent firms become better at distorting the political process in their favor. Therefore, an increase in dissatisfaction with democracy might not just be a coincidence, but might partially reflect increases in market concentration that drive politicians and regulators away from the preference of voters and closer to that of behemoths.   

We are well aware that, at the moment, these are just theories—albeit quite plausible ones. For this reason, the first day of the 2020 Stigler Center Antitrust Conference will be dedicated to presenting and critically reviewing the evidence currently available on the connections between market concentration and adverse political outcomes.

If a connection is established, then the question becomes how an antitrust (or other similar) policy aimed at preserving free markets and democracy can be implemented in a rational and consistent manner. The “consumer welfare” standard has generated measures of concentration and measures of possible harm to be used in trial. The “democratic welfare” approach would have to do the same. Fortunately, in the last 50 years political science and political economy have made great progress, so there is a growing number of potential alternative theories, evidence, and methods. For this reason, the second day of the 2020 Stigler Center Antitrust Conference will be dedicated to discussing the pros and cons of these alternatives. We are hoping to use the conference to spur further reflection on how to develop a methodology that is predictable, restricts discretion, and makes a “democratic antitrust” administrable.  As mentioned above, we agree that simply “politicizing” the current antitrust regime would be very dangerous for the economic well-being of nations. Yet, ignoring the political consequences of economic concentration on democracy can be even more dangerous—not just for the economic, but also for the democratic well-being of nations. Progress is not achieved by returning to the past nor by staying religiously fixed on the current status quo, but by moving forward: by laying new bricks on the layers of knowledge accumulated in the past. The Chicago School helped build some important foundations of modern antitrust policy. Those foundations should not become a prison; instead, they should be the base for developing new standards capable of enhancing both economic welfare and democratic values in the spirit of what Senator John Sherman, Congressman Emanuel Celler, and other early antitrust advocates envisioned.

The operative text of the Sherman Antitrust Act of 1890 is a scant 100 words:

Section 1:

Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony…

Section 2:

Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony…

Its short length and broad implications (“Every contract… in restraint of trade… is declared to be illegal”) didn’t give the courts much to go on in terms of textualism. As for originalism, the legislative history of the Sherman Act is mixed, and no consensus currently exists among experts. In practice, that means enforcement of the antitrust laws in the US has been a product of the evolutionary common law process (and has changed over time due to economic learning). 

Over the last fifty years, academics, judges, and practitioners have generally converged on the consumer welfare standard as the best approach for protecting market competition. Although some early supporters of aggressive enforcement (e.g., Brandeis and, more recently, Pitofsky) advocated for a more political conception of antitrust, that conception of the law has been decisively rejected by the courts as the contours of the law have evolved through judicial decisionmaking. 

In the last few years, however, a movement has reemerged to expand antitrust beyond consumer welfare to include political and social issues, ranging from broadly macroeconomic matters like rising income inequality and declining wages, to sociopolitical concerns like increasing political concentration, environmental degradation, a struggling traditional news industry, and declining localism. 

Although we at ICLE are decidedly in the consumer welfare camp, the contested “original intent” of the antitrust laws and the simple progress of evolving interpretation could conceivably support a broader, more-political interpretation. It is, at the very least, a timely and significant question whether and how political and social issues might be incorporated into antitrust law. Yet much of the discussion of politics and antitrust has been heavy on rhetoric and light on substance; it is dominated by non-expert, ideologically driven opinion. 

In this blog symposium we seek to offer a more substantive and balanced discussion of the issue. To that end, we invited a number of respected economists, legal scholars, and practitioners to offer their perspectives. 

The symposium comprises posts by Steve Cernak, Luigi Zingales and Filippo Maria Lancieri, Geoffrey A. Manne and Alec Stapp, Valentin MirceaRamsi Woodcock, Kristian Stout, and Cento Veljanoski.

Both Steve Cernak and Zingales and Lancieri offer big picture perspectives. Cernak sees the current debate as, “an opportunity to explain the benefits and limits of antitrust enforcement and the competitive process it is meant to protect.” He then urges “regulatory humility” and outlines what this means in the context of antitrust.  

Zingales and Lancieri note that “simply “politicizing” the current antitrust regime would be very dangerous for the economic well-being of nations.” More specifically, they observe that “If used without clear and objective standards, antitrust remedies could easily add an extra layer of uncertainty or could even outright prohibit perfectly legitimate conduct, which would depress competition, investment, and growth.” Nonetheless, they argue that nuanced changes to the application of antitrust law may be justified because, “as markets become more concentrated, incumbent firms become better at distorting the political process in their favor.”

Manne and Stapp question the existence of a causal relationship between market concentration and political power, noting that there is little empirical support for such a claim.  Moreover, they warn that politicizing antitrust will inevitably result in more politicized antitrust enforcement actions to the detriment of consumers and democracy. 

Mircea argues that antitrust enforcement in the EU is already too political and that enforcement has been too focused on “Big Tech” companies. The result has been to chill investment in technology firms in the EU while failing to address legitimate antitrust violations in other sectors. 

Woodcock argues that the excessive focus on “Big Tech” companies as antitrust villains has come in no small part from a concerted effort by “Big Ink” (i.e. media companies), who resent the loss of advertising revenue that has resulted from the emergence of online advertising platforms. Woodcock suggests that the solution to this problem is to ban advertising. (We suspect that this cure would be worse than the disease but will leave substantive criticism to another blog post.)

Stout argues that while consumers may have legitimate grievances with Big Tech companies, these grievances do not justify widening the scope of antitrust, noting that “Concerns about privacy, hate speech, and, more broadly, the integrity of the democratic process are critical issues to wrestle with. But these aren’t antitrust problems.”

Finally, Veljanovski highlights potential problems with per se rules against cartels, noting that in some cases (most notably regulation of common pool resources such as fisheries), long-run consumer welfare may be improved by permitting certain kinds of cartel. However, he notes that in the case of polluting firms, a cartel that raises prices and lowers output is not likely to be the most efficient way to reduce the harms associated with pollution. This is of relevance given the DOJ’s case against certain automobile manufacturers, which are accused of colluding with California to set emission standards that are stricter than required under federal law.

It is tempting to conclude that U.S. antitrust law is not fundamentally broken, so does not require a major fix. Indeed, if any fix is needed, it is that the CWS should be more widely applied both in the U.S. and internationally.

Thomas Wollmann has a new paper — “Stealth Consolidation: Evidence from an Amendment to the Hart-Scott-Rodino Act” — in American Economic Review: Insights this month. Greg Ip included this research in an article for the WSJ in which he claims that “competition has declined and corporate concentration risen through acquisitions often too small to draw the scrutiny of antitrust watchdogs.” In other words, “stealth consolidation”.

Wollmann’s study uses a difference-in-differences approach to examine the effect on merger activity of the 2001 amendment to the Hart-Scott-Rodino (HSR) Antitrust Improvements Act of 1976 (15 U.S.C. 18a). The amendment abruptly increased the pre-merger notification threshold from $15 million to $50 million in deal size. Strictly on those terms, the paper shows that raising the pre-merger notification threshold increased merger activity.

However, claims about “stealth consolidation” are controversial because they connote nefarious intentions and anticompetitive effects. As Wollmann admits in the paper, due to data limitations, he is unable to show that the new mergers are in fact anticompetitive or that the social costs of these mergers exceed the social benefits. Therefore, more research is needed to determine the optimal threshold for pre-merger notification rules, and claiming that harmful “stealth consolidation” is occurring is currently unwarranted.

Background: The “Unscrambling the Egg” Problem

In general, it is more difficult to unwind a consummated anticompetitive merger than it is to block a prospective anticompetitive merger. As Wollmann notes, for example, “El Paso Natural Gas Co. acquired its only potential rival in a market” and “the government’s challenge lasted 17 years and involved seven trips to the Supreme Court.”

Rolling back an anticompetitive merger is so difficult that it came to be known as “unscrambling the egg.” As William J. Baer, a former director of the Bureau of Competition at the FTC, described it, “there were strong incentives for speedily and surreptitiously consummating suspect mergers and then protracting the ensuing litigation” prior to the implementation of a pre-merger notification rule. These so-called “midnight mergers” were intended to avoid drawing antitrust scrutiny.

In response to this problem, Congress passed the Hart–Scott–Rodino Antitrust Improvements Act of 1976, which required companies to notify antitrust authorities of impending mergers if they exceeded certain size thresholds.

2001 Hart–Scott–Rodino Amendment

In 2001, Congress amended the HSR Act and effectively raised the threshold for premerger notification from $15 million in acquired firm assets to $50 million. This sudden and dramatic change created an opportunity to use a difference-in-differences technique to study the relationship between filing an HSR notification and merger activity.

According to Wollmann, here’s what notifications look like for never-exempt mergers (>$50M):

And here’s what notifications for newly-exempt ($15M < X < $50M) mergers look like:

So what does that mean for merger investigations? Here is the number of investigations into never-exempt mergers:

We see a pretty consistent relationship between number of mergers and number of investigations. More mergers means more investigations.  

How about for newly-exempt mergers?

Here, investigations go to zero while merger activity remains relatively stable. In other words, it appears that some mergers that would have been investigated had they required an HSR notification were not investigated.

Wollmann then uses four-digit SIC code industries to sort mergers into horizontal and non-horizontal categories. Here are never-exempt mergers:

He finds that almost all of the increase in merger activity (relative to the counterfactual in which the notification threshold were unchanged) is driven by horizontal mergers. And here are newly-exempt mergers:

Policy Implications & Limitations

The charts show a stark change in investigations and merger activity. The difference-in-differences methodology is solid and the author addresses some potential confounding variables (such as presidential elections). However, the paper leaves the broader implications for public policy unanswered.

Furthermore, given the limits of the data in this analysis, it’s not possible for this approach to explain competitive effects in the relevant antitrust markets, for three reasons:

Four-digit SIC code industries are not antitrust markets

Wollmann chose to classify mergers “as horizontal or non-horizontal based on whether or not the target and acquirer operate in the same four-digit SIC code industry, which is common convention.” But as Werden & Froeb (2018) notes, four-digit SIC code industries are orders of magnitude too large in most cases to be useful for antitrust analysis:

The evidence from cartel cases focused on indictments from 1970–80. Because the Justice Department prosecuted many local cartels, for 52 of the 80 indictments examined, the Commerce Quotient was less than 0.01, i.e., the SIC 4-digit industry was at least 100 times the apparent scope of the affected market.  Of the 80 indictments, 19 involved SIC 4-digit industries that had been thought to comport well with markets, so these were the most instructive. For  16 of the 19, the SIC 4-digit industry was at least 10 times the apparent scope of the affected market (i.e., the Commerce Quotient was less than 0.1).

Antitrust authorities do not rely on SIC 4-digit industry codes and instead establish a market definition based on the facts of each case. It is not possible to infer competitive effects from census data as Wollmann attempts to do.

The data cannot distinguish between anticompetitive mergers and procompetitive mergers

As Wollmann himself notes, the results tell us nothing about the relative costs and benefits of the new HSR policy:

Even so, these findings do not on their own advocate for one policy over another. To do so requires equating industry consolidation to a specific amount of economic harm and then comparing the resulting figure to the benefits derived from raising thresholds, which could be large. Even if the agencies ignore the reduced regulatory burden on firms, introducing exemptions can free up agency resources to pursue other cases (or reduce public spending). These and related issues require careful consideration but simply fall outside the scope of the present work.

For instance, firms could be reallocating merger activity to targets below the new threshold to avoid erroneous enforcement or they could be increasing merger activity for small targets due to reduced regulatory costs and uncertainty.

The study is likely underpowered for effects on blocked mergers

While the paper provides convincing evidence that investigations of newly-exempt mergers decreased dramatically following the change in the notification threshold, there is no equally convincing evidence of an effect on blocked mergers. As Wollmann points out, blocked mergers were exceedingly rare both before and after the Amendment (emphasis added):

Over 57,000 mergers comprise the sample, which spans eighteen years. The mean number of mergers each year is 3,180. The DOJ and FTC receive 31,464 notifications over this period, or 1,748 per year. Also, as stated above, blocked mergers are very infrequent: there are on average 13 per year pre-Amendment and 9 per-year post-Amendment.

Since blocked mergers are such a small percentage of total mergers both before and after the Amendment, we likely cannot tell from the data whether actual enforcement action changed significantly due to the change in notification threshold.

Greg Ip’s write-up for the WSJ includes some relevant charts for this issue. Ironically for a piece about the problems of lax merger review, the accompanying graphs show merger enforcement actions slightly increasing at both the FTC and the DOJ since 2001:

Source: WSJ

Overall, Wollmann’s paper does an effective job showing how changes in premerger notification rules can affect merger activity. However, due to data limitations, we cannot conclude anything about competitive effects or enforcement intensity from this study.

A recent working paper by Hashmat Khan and Matthew Strathearn attempts to empirically link anticompetitive collusion to the boom and bust cycles of the economy.

The level of collusion is higher during a boom relative to a recession as collusion occurs more frequently when demand is increasing (entering into a collusive arrangement is more profitable and deviating from an existing cartel is less profitable). The model predicts that the number of discovered cartels and hence antitrust filings should be procyclical because the level of collusion is procyclical.

The first sentence—a hypothesis that collusion is more likely during a “boom” than in recession—seems reasonable. At the same time, a case can be made that collusion would be more likely during recession. For example, a reduced risk of entry from competitors would reduce the cost of collusion.

The second sentence, however, seems a stretch. Mainly because it doesn’t recognize the time delay between the collusive activity, the date the collusion is discovered by authorities, and the date the case is filed.

Perhaps, more importantly, it doesn’t acknowledge that many collusive arrangement span months, if not years. That span of time could include times of “boom” and times of recession. Thus, it can be argued that the date of the filing has little (or nothing) to do with the span over which the collusive activity occurred.

I did a very lazy man’s test of my criticisms. I looked at six of the filings cited by Khan and Strathearn for the year 2011, a “boom” year with a high number of horizontal price fixing cases filed.

khanstrathearn

My first suspicion was correct. In these six cases, an average of more than three years passed from the date of the last collusive activity and the date the case was filed. Thus, whether the economy is a boom or bust when the case is filed provides no useful information regarding the state of the economy when the collusion occurred.

Nevertheless, my lazy man’s small sample test provides some interesting—and I hope useful—information regarding Khan and Strathearn’s conclusions.

  1. From July 2001 through September 2009, 24 of the 99 months were in recession. In other words, during this period, there was a 24 percent chance the economy was in recession in any given month.
  2. Five of the six collusive arrangements began when the economy was in recovery. Only one began during a recession. This may seem to support their conclusion that collusive activity is more likely during a recovery. However, even if the arrangements began randomly, there would be a 55 percent chance that that five or more began during a recovery. So, you can’t read too much into the observation that most of the collusive agreements began during a “boom.”
  3. In two of the cases, the collusive activity occurred during a span of time that had no recession. The chances of this happening randomly is less than 1 in 20,000, supporting their conclusion regarding collusive activity and the business cycle.

Khan and Strathearn fall short in linking collusive activity to the business cycle but do a good job of linking antitrust enforcement activities to the business cycle. The information they use from the DOJ website is sufficient to determine when the collusive activity occurred—but it’ll take more vigorous “scrubbing” (their word) of the site to get the relevant data.

The bigger question, however, is the relevance of this research. Naturally, one could argue this line of research indicates that competition authorities should be extra vigilant during a booming economy. Yet, Adam Smith famously noted, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” This suggests that collusive activity—or the temptation to engage in such activity—is always and everywhere present, regardless of the business cycle.