Archives For Error Costs

AICOA Is Neither Urgently Needed Nor Good: A Response to Professors Scott Morton, Salop, and Dinielli

Thom Lambert —  25 July 2022

[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]

Earlier this month, Professors Fiona Scott Morton, Steve Salop, and David Dinielli penned a letter expressing their “strong support” for the proposed American Innovation and Choice Online Act (AICOA). In the letter, the professors address criticisms of AICOA and urge its approval, despite possible imperfections.

“Perhaps this bill could be made better if we lived in a perfect world,” the professors write, “[b]ut we believe the perfect should not be the enemy of the good, especially when change is so urgently needed.”

The problem is that the professors and other supporters of AICOA have shown neither that “change is so urgently needed” nor that the proposed law is, in fact, “good.”

Is Change ‘Urgently Needed’?

With respect to the purported urgency that warrants passage of a concededly imperfect bill, the letter authors assert two points. First, they claim that AICOA’s targets—Google, Apple, Facebook, Amazon, and Microsoft (collectively, GAFAM)—“serve as the essential gatekeepers of economic, social, and political activity on the internet.” It is thus appropriate, they say, to amend the antitrust laws to do something they have never before done: saddle a handful of identified firms with special regulatory duties.

But is this oft-repeated claim about “gatekeeper” status true? The label conjures up the old Terminal Railroad case, where a group of firms controlled the only bridges over the Mississippi River at St. Louis. Freighters had no choice but to utilize their services. Do the GAFAM firms really play a similar role with respect to “economic, social, and political activity on the internet”? Hardly.

With respect to economic activity, Amazon may be a huge player, but it still accounts for only 39.5% of U.S. ecommerce sales—and far less of retail sales overall. Consumers have gobs of other ecommerce options, and so do third-party merchants, which may sell their wares using Shopify, Ebay, Walmart, Etsy, numerous other ecommerce platforms, or their own websites.

For social activity on the internet, consumers need not rely on Facebook and Instagram. They can connect with others via Snapchat, Reddit, Pinterest, TikTok, Twitter, and scores of other sites. To be sure, all these services have different niches, but the letter authors’ claim that the GAFAM firms are “essential gatekeepers” of “social… activity on the internet” is spurious.

Nor are the firms singled out by AICOA essential gatekeepers of “political activity on the internet.” The proposed law touches neither Twitter, the primary hub of political activity on the internet, nor TikTok, which is increasingly used for political messaging.

The second argument the letter authors assert in support of their claim of urgency is that “[t]he decline of antitrust enforcement in the U.S. is well known, pervasive, and has left our jurisprudence unable to protect and maintain competitive markets.” In other words, contemporary antitrust standards are anemic and have led to a lack of market competition in the United States.

The evidence for this claim, which is increasingly parroted in the press and among the punditry, is weak. Proponents primarily point to studies showing:

  1. increasing industrial concentration;
  2. higher markups on goods and services since 1980;
  3. a declining share of surplus going to labor, which could indicate monopsony power in labor markets; and
  4. a reduction in startup activity, suggesting diminished innovation. 

Examined closely, however, those studies fail to establish a domestic market power crisis.

Industrial concentration has little to do with market power in actual markets. Indeed, research suggests that, while industries may be consolidating at the national level, competition at the market (local) level is increasing, as more efficient national firms open more competitive outlets in local markets. As Geoff Manne sums up this research:

Most recently, several working papers looking at the data on concentration in detail and attempting to identify the likely cause for the observed data, show precisely the opposite relationship. The reason for increased concentration appears to be technological, not anticompetitive. And, as might be expected from that cause, its effects are beneficial. Indeed, the story is both intuitive and positive.

What’s more, while national concentration does appear to be increasing in some sectors of the economy, it’s not actually so clear that the same is true for local concentration — which is often the relevant antitrust market.

With respect to the evidence on markups, the claim of a significant increase in the price-cost margin depends crucially on the measure of cost. The studies suggesting an increase in margins since 1980 use the “cost of goods sold” (COGS) metric, which excludes a firm’s management and marketing costs—both of which have become an increasingly significant portion of firms’ costs. Measuring costs using the “operating expenses” (OPEX) metric, which includes management and marketing costs, reveals that public-company markups increased only modestly since the 1980s and that the increase was within historical variation. (It is also likely that increased markups since 1980 reflect firms’ more extensive use of technology and their greater regulatory burdens, both of which raise fixed costs and require higher markups over marginal cost.)

As for the declining labor share, that dynamic is occurring globally. Indeed, the decline in the labor share in the United States has been less severe than in Japan, Canada, Italy, France, Germany, China, Mexico, and Poland, suggesting that anemic U.S. antitrust enforcement is not to blame. (A reduction in the relative productivity of labor is a more likely culprit.)

Finally, the claim of reduced startup activity is unfounded. In its report on competition in digital markets, the U.S. House Judiciary Committee asserted that, since the advent of the major digital platforms:

  1. “[t]he number of new technology firms in the digital economy has declined”;
  2. “the entrepreneurship rate—the share of startups and young firms in the [high technology] industry as a whole—has also fallen significantly”; and
  3. “[u]nsurprisingly, there has also been a sharp reduction in early-stage funding for technology startups.” (pp. 46-47.)

Those claims, however, are based on cherry-picked evidence.

In support of the first two, the Judiciary Committee report cited a study based on data ending in 2011. As Benedict Evans has observed, “standard industry data shows that startup investment rounds have actually risen at least 4x since then.”

In support of the third claim, the report cited statistics from an article noting that the number and aggregate size of the very smallest venture capital deals—those under $1 million—fell between 2014 and 2018 (after growing substantially from 2008 to 2014). The Judiciary Committee report failed to note, however, the cited article’s observation that small venture deals ($1 million to $5 million) had not dropped and that larger venture deals (greater than $5 million) had grown substantially during the same time period. Nor did the report acknowledge that venture-capital funding has continued to increase since 2018.

Finally, there is also reason to think that AICOA’s passage would harm, not help, the startup environment:

AICOA doesn’t directly restrict startup acquisitions, but the activities it would restrict most certainly do dramatically affect the incentives that drive many startup acquisitions. If a platform is prohibited from engaging in cross-platform integration of acquired technologies, or if it can’t monetize its purchase by prioritizing its own technology, it may lose the motivation to make a purchase in the first place.

Despite the letter authors’ claims, neither a paucity of avenues for “economic, social, and political activity on the internet” nor the general state of market competition in the United States establishes an “urgent need” to re-write the antitrust laws to saddle a small group of firms with unprecedented legal obligations.

Is the Vagueness of AICOA’s Primary Legal Standard a Feature?

AICOA bars covered platforms from engaging in three broad classes of conduct (self-preferencing, discrimination among business users, and limiting business users’ ability to compete) where the behavior at issue would “materially harm competition.” It then forbids several specific business practices, but allows the defendant to avoid liability by proving that their use of the practice would not cause a “material harm to competition.”

Critics have argued that “material harm to competition”—a standard that is not used elsewhere in the antitrust laws—is too indeterminate to provide business planners and adjudicators with adequate guidance. The authors of the pro-AICOA letter, however, maintain that this “different language is a feature, not a bug.”

That is so, the letter authors say, because the language effectively signals to courts and policymakers that antitrust should prohibit more conduct. They explain:

To clarify to courts and policymakers that Congress wants something different (and stronger), new terminology is required. The bill’s language would open up a new space and move beyond the standards imposed by the Sherman Act, which has not effectively policed digital platforms.

Putting aside the weakness of the letter authors’ premise (i.e., that Sherman Act standards have proven ineffective), the legislative strategy they advocate—obliquely signal that you want “change” without saying what it should consist of—is irresponsible and risky.

The letter authors assert two reasons Congress should not worry about enacting a liability standard that has no settled meaning. One is that:

[t]he same judges who are called upon to render decisions under the existing, insufficient, antitrust regime, will also be called upon to render decisions under the new law. They will be the same people with the same worldview.

It is thus unlikely that “outcomes under the new law would veer drastically away from past understandings of core concepts….”

But this claim undermines the argument that a new standard is needed to get the courts to do “something different” and “move beyond the standards imposed by the Sherman Act.” If we don’t need to worry about an adverse outcome from a novel, ill-defined standard because courts are just going to continue applying the standard they’re familiar with, then what’s the point of changing the standard?

A second reason not to worry about the lack of clarity on AICOA’s key liability standard, the letter authors say, is that federal enforcers will define it:

The new law would mandate that the [Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice], the two expert agencies in the area of competition, together create guidelines to help courts interpret the law. Any uncertainty about the meaning of words like ‘competition’ will be resolved in those guidelines and over time with the development of caselaw.

This is no doubt music to the ears of members of Congress, who love to get credit for “doing something” legislatively, while leaving the details to an agency so that they can avoid accountability if things turn out poorly. Indeed, the letter authors explicitly play upon legislators’ unwholesome desire for credit-sans-accountability. They emphasize that “[t]he agencies must [create and] update the guidelines periodically. Congress doesn’t have to do much of anything very specific other than approve budgets; it certainly has no obligation to enact any new laws, let alone amend them.”

AICOA does not, however, confer rulemaking authority on the agencies; it merely directs them to create and periodically update “agency enforcement guidelines” and “agency interpretations” of certain affirmative defenses. Those guidelines and interpretations would not bind courts, which would be free to interpret AICOA’s new standard differently. The letter authors presume that courts would defer to the agencies’ interpretation of the vague standard, and they probably would. But that raises other problems.

For one thing, it reduces certainty, which is likely to chill innovation. Giving the enforcement agencies de facto power to determine and redetermine what behaviors “would materially harm competition” means that the rules are never settled. Administrations differ markedly in their views about what the antitrust laws should forbid, so business planners could never be certain that a product feature or revenue model that is legal today will not be deemed to “materially harm competition” by a future administration with greater solicitude for small rivals and upstarts. Such uncertainty will hinder investment in novel products, services, and business models.

Consider, for example, Google’s investment in the Android mobile operating system. Google makes money from Android—which it licenses to device manufacturers for free—by ensuring that Google’s revenue-generating services (e.g., its search engine and browser) are strongly preferenced on Android products. One administration might believe that this is a procompetitive arrangement, as it creates a different revenue model for mobile operating systems (as opposed to Apple’s generation of revenue from hardware sales), resulting in both increased choice and lower prices for consumers. A subsequent administration might conclude that the arrangement materially harms competition by making it harder for rival search engines and web browsers to gain market share. It would make scant sense for a covered platform to make an investment like Google did with Android if its underlying business model could be upended by a new administration with de facto power to rewrite the law.

A second problem with having the enforcement agencies determine and redetermine what covered platforms may do is that it effectively transforms the agencies from law enforcers into sectoral regulators. Indeed, the letter authors agree that “the ability of expert agencies to incorporate additional protections in the guidelines” means that “the bill is not a pure antitrust law but also safeguards other benefits to consumers.” They tout that “the complementarity between consumer protection and competition can be addressed in the guidelines.”

Of course, to the extent that the enforcement guidelines address concerns besides competition, they will be less useful for interpreting AICOA’s “material harm to competition” standard; they might deem a practice suspect on non-competition grounds. Moreover, it is questionable whether creating a sectoral regulator for five widely diverse firms is a good idea. The history of sectoral regulation is littered with examples of agency capture, rent-seeking, and other public-choice concerns. At a minimum, Congress should carefully examine the potential downsides of sectoral regulation, install protections to mitigate those downsides, and explicitly establish the sectoral regulator.

Will AICOA Break Popular Products and Services?

Many popular offerings by the platforms covered by AICOA involve self-preferencing, discrimination among business users, or one of the other behaviors the bill presumptively bans. Pre-installation of iPhone apps and services like Siri, for example, involves self-preferencing or discrimination among business users of Apple’s iOS platform. But iPhone consumers value having a mobile device that offers extensive services right out of the box. Consumers love that Google’s search result for an establishment offers directions to the place, which involves the preferencing of Google Maps. And consumers positively adore Amazon Prime, which can provide free expedited delivery because Amazon conditions Prime designation on a third-party seller’s use of Amazon’s efficient, reliable “Fulfillment by Amazon” service—something Amazon could not do under AICOA.

The authors of the pro-AICOA letter insist that the law will not ban attractive product features like these. AICOA, they say:

provides a powerful defense that forecloses any thoughtful concern of this sort: conduct otherwise banned under the bill is permitted if it would ‘maintain or substantially enhance the core functionality of the covered platform.’

But the authors’ confidence that this affirmative defense will adequately protect popular offerings is misplaced. The defense is narrow and difficult to mount.

First, it immunizes only those behaviors that maintain or substantially enhance the “core” functionality of the covered platform. Courts would rightly interpret AICOA to give effect to that otherwise unnecessary word, which dictionaries define as “the central or most important part of something.” Accordingly, any self-preferencing, discrimination, or other presumptively illicit behavior that enhances a covered platform’s service but not its “central or most important” functions is not even a candidate for the defense.

Even if a covered platform could establish that a challenged practice would maintain or substantially enhance the platform’s core functionality, it would also have to prove that the conduct was “narrowly tailored” and “reasonably necessary” to achieve the desired end, and, for many behaviors, the “le[ast] discriminatory means” of doing so. That is a remarkably heavy burden, and it beggars belief to suppose that business planners considering novel offerings involving self-preferencing, discrimination, or some other presumptively illicit conduct would feel confident that they could make the required showing. It is likely, then, that AICOA would break existing products and services and discourage future innovation.

Of course, Congress could mitigate this concern by specifying that AICOA does not preclude certain things, such as pre-installed apps or consumer-friendly search results. But the legislation would then lose the support of the many interest groups who want the law to preclude various popular offerings that its text would now forbid. Unlike consumers, who are widely dispersed and difficult to organize, the groups and competitors that would benefit from things like stripped-down smartphones, map-free search results, and Prime-less Amazon are effective lobbyists.

Should the US Follow Europe?

Having responded to criticisms of AICOA, the authors of the pro-AICOA letter go on offense. They assert that enactment of the bill is needed to ensure that the United States doesn’t lose ground to Europe, both in regulatory leadership and in innovation. Observing that the European Union’s Digital Markets Act (DMA) has just become law, the authors write that:

[w]ithout [AICOA], the role of protecting competition and innovation in the digital sector outside China will be left primarily to the European Union, abrogating U.S. leadership in this sector.

Moreover, if Europe implements its DMA and the United States does not adopt AICOA, the authors claim:

the center of gravity for innovation and entrepreneurship [could] shift from the U.S. to Europe, where the DMA would offer greater protections to start ups and app developers, and even makers and artisans, against exclusionary conduct by the gatekeeper platforms.

Implicit in the argument that AICOA is needed to maintain America’s regulatory leadership is the assumption that to lead in regulatory policy is to have the most restrictive rules. The most restrictive regulator will necessarily be the “leader” in the sense that it will be the one with the most control over regulated firms. But leading in the sense of optimizing outcomes and thereby serving as a model for other jurisdictions entails crafting the best policies—those that minimize the aggregate social losses from wrongly permitting bad behavior, wrongly condemning good behavior, and determining whether conduct is allowed or forbidden (i.e., those that “minimize the sum of error and decision costs”). Rarely is the most restrictive regulatory regime the one that optimizes outcomes, and as I have elsewhere explained, the rules set forth in the DMA hardly seem calibrated to do so.

As for “innovation and entrepreneurship” in the technological arena, it would be a seismic shift indeed if the center of gravity were to migrate to Europe, which is currently home to zero of the top 20 global tech companies. (The United States hosts 12; China, eight.)

It seems implausible, though, that imposing a bunch of restrictions on large tech companies that have significant resources for innovation and are scrambling to enter each other’s markets will enhance, rather than retard, innovation. The self-preferencing bans in AICOA and DMA, for example, would prevent Apple from developing its own search engine to compete with Google, as it has apparently contemplated. Why would Apple develop its own search engine if it couldn’t preference it on iPhones and iPads? And why would Google have started its shopping service to compete with Amazon if it couldn’t preference Google Shopping in search results? And why would any platform continually improve to gain more users as it neared the thresholds for enhanced duties under DMA or AICOA? It seems more likely that the DMA/AICOA approach will hinder, rather than spur, innovation.

At the very least, wouldn’t it be prudent to wait and see whether DMA leads to a flourishing of innovation and entrepreneurship in Europe before jumping on the European bandwagon? After all, technological innovations that occur in Europe won’t be available only to Europeans. Just as Europeans benefit from innovation by U.S. firms, American consumers will be able to reap the benefits of any DMA-inspired innovation occurring in Europe. Moreover, if DMA indeed furthers innovation by making it easier for entrants to gain footing, even American technology firms could benefit from the law by launching their products in Europe. There’s no reason for the tech sector to move to Europe to take advantage of a small-business-protective European law.

In fact, the optimal outcome might be to have one jurisdiction in which major tech platforms are free to innovate, enter each other’s markets via self-preferencing, etc. (the United States, under current law) and another that is more protective of upstart businesses that use the platforms (Europe under DMA). The former jurisdiction would create favorable conditions for platform innovation and inter-platform competition; the latter might enhance innovation among businesses that rely on the platforms. Consumers in each jurisdiction, however, would benefit from innovation facilitated by the other.

It makes little sense, then, for the United States to rush to adopt European-style regulation. DMA is a radical experiment. Regulatory history suggests that the sort of restrictiveness it imposes retards, rather than furthers, innovation. But in the unlikely event that things turn out differently this time, little harm would result from waiting to see DMA’s benefits before implementing its restrictive approach. 

Does AICOA Threaten Platforms’ Ability to Moderate Content and Police Disinformation?

The authors of the pro-AICOA letter conclude by addressing the concern that AICOA “will inadvertently make content moderation difficult because some of the prohibitions could be read… to cover and therefore prohibit some varieties of content moderation” by covered platforms.

The letter authors say that a reading of AICOA to prohibit content moderation is “strained.” They maintain that the act’s requirement of “competitive harm” would prevent imposition of liability based on content moderation and that the act is “plainly not intended to cover” instances of “purported censorship.” They further contend that the risk of judicial misconstrual exists with all proposed laws and therefore should not be a sufficient reason to oppose AICOA.

Each of these points is weak. Section 3(a)(3) of AICOA makes it unlawful for a covered platform to “discriminate in the application or enforcement of the terms of service of the covered platform among similarly situated business users in a manner that would materially harm competition.” It is hardly “strained” to reason that this provision is violated when, say, Google’s YouTube selectively demonetizes a business user for content that Google deems harmful or misleading. Or when Apple removes Parler, but not every other violator of service terms, from its App Store. Such conduct could “materially harm competition” by impeding the de-platformed business’ ability to compete with its rivals.

And it is hard to say that AICOA is “plainly not intended” to forbid these acts when a key supporting senator touted the bill as a means of policing content moderation and observed during markup that it would “make some positive improvement on the problem of censorship” (i.e., content moderation) because “it would provide protections to content providers, to businesses that are discriminated against because of the content of what they produce.”

At a minimum, we should expect some state attorneys general to try to use the law to police content moderation they disfavor, and the mere prospect of such legal action could chill anti-disinformation efforts and other forms of content moderation.

Of course, there’s a simple way for Congress to eliminate the risk of what the letter authors deem judicial misconstrual: It could clarify that AICOA’s prohibitions do not cover good-faith efforts to moderate content or police disinformation. Such clarification, however, would kill the bill, as several Republican legislators are supporting the act because it restricts content moderation.

The risk of judicial misconstrual with AICOA, then, is not the sort that exists with “any law, new or old,” as the letter authors contend. “Normal” misconstrual risk exists when legislators try to be clear about their intentions but, because language has its limits, some vagueness or ambiguity persists. AICOA’s architects have deliberately obscured their intentions in order to cobble together enough supporters to get the bill across the finish line.

The one thing that all AICOA supporters can agree on is that they deserve credit for “doing something” about Big Tech. If the law is construed in a way they disfavor, they can always act shocked and blame rogue courts. That’s shoddy, cynical lawmaking.

Conclusion

So, I respectfully disagree with Professors Scott Morton, Salop, and Dinielli on AICOA. There is no urgent need to pass the bill right now, especially as we are on the cusp of seeing an AICOA-like regime put to the test. The bill’s central liability standard is overly vague, and its plain terms would break popular products and services and thwart future innovation. The United States should equate regulatory leadership with the best, not the most restrictive, policies. And Congress should thoroughly debate and clarify its intentions on content moderation before enacting legislation that could upend the status quo on that important matter.

For all these reasons, Congress should reject AICOA. And for the same reasons, a future in which AICOA is adopted is extremely unlikely to resemble the Utopian world that Professors Scott Morton, Salop, and Dinielli imagine.

In Amazon, Antitrust & Competition, Antitrust’s Uncertain Future, Apple, Error Costs, European Union, Facebook, Federal Trade Commission, Google, Monopolization, Platforms, Price Discrimination, Symposia, Truth on the Market, Twitter, Tying, Vertical Restraints , , , , , ,
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DOJ’s Threatened Reign of Error: Proposed Criminal-Monopolization Prosecutions

Alden Abbott —  17 June 2022

The Biden administration’s antitrust reign of error continues apace. The U.S. Justice Department’s (DOJ) Antitrust Division has indicated in recent months that criminal prosecutions may be forthcoming under Section 2 of the Sherman Antitrust Act, but refuses to provide any guidance regarding enforcement criteria.

Earlier this month, Deputy Assistant Attorney General Richard Powers stated that “there’s ample case law out there to help inform those who have concerns or questions” regarding Section 2 criminal enforcement, conveniently ignoring the fact that criminal Section 2 cases have not been brought in almost half a century. Needless to say, those ancient Section 2 cases (which are relatively few in number) antedate the modern era of economic reasoning in antitrust analysis. What’s more, unlike Section 1 price-fixing and market-division precedents, they yield no clear rule as to what constitutes criminal unilateral behavior. Thus, DOJ’s suggestion that old cases be consulted for guidance is disingenuous at best. 

It follows that DOJ criminal-monopolization prosecutions would be sheer folly. They would spawn substantial confusion and uncertainty and disincentivize dynamic economic growth.

Aggressive unilateral business conduct is a key driver of the competitive process. It brings about “creative destruction” that transforms markets, generates innovation, and thereby drives economic growth. As such, one wants to be particularly careful before condemning such conduct on grounds that it is anticompetitive. Accordingly, error costs here are particularly high and damaging to economic prosperity.

Moreover, error costs in assessing unilateral conduct are more likely than in assessing joint conduct, because it is very hard to distinguish between procompetitive and anticompetitive single-firm conduct, as DOJ’s 2008 Report on Single Firm Conduct Under Section 2 explains (citations omitted):

Courts and commentators have long recognized the difficulty of determining what means of acquiring and maintaining monopoly power should be prohibited as improper. Although many different kinds of conduct have been found to violate section 2, “[d]efining the contours of this element … has been one of the most vexing questions in antitrust law.” As Judge Easterbrook observes, “Aggressive, competitive conduct by any firm, even one with market power, is beneficial to consumers. Courts should prize and encourage it. Aggressive, exclusionary conduct is deleterious to consumers, and courts should condemn it. The big problem lies in this: competitive and exclusionary conduct look alike.”

The problem is not simply one that demands drawing fine lines separating different categories of conduct; often the same conduct can both generate efficiencies and exclude competitors. Judicial experience and advances in economic thinking have demonstrated the potential procompetitive benefits of a wide variety of practices that were once viewed with suspicion when engaged in by firms with substantial market power. Exclusive dealing, for example, may be used to encourage beneficial investment by the parties while also making it more difficult for competitors to distribute their products.

If DOJ does choose to bring a Section 2 criminal case soon, would it target one of the major digital platforms? Notably, a U.S. House Judiciary Committee letter recently called on DOJ to launch a criminal investigation of Amazon (see here). Also, current Federal Trade Commission (FTC) Chair Lina Khan launched her academic career with an article focusing on Amazon’s “predatory pricing” and attacking the consumer welfare standard (see here).

Khan’s “analysis” has been totally discredited. As a trenchant scholarly article by Timothy Muris and Jonathan Nuechterlein explains:

[DOJ’s criminal Section 2 prosecution of A&P, begun in 1944,] bear[s] an eerie resemblance to attacks today on leading online innovators. Increasingly integrated and efficient retailers—first A&P, then “big box” brick-and-mortar stores, and now online retailers—have challenged traditional retail models by offering consumers lower prices and greater convenience. For decades, critics across the political spectrum have reacted to such disruption by urging Congress, the courts, and the enforcement agencies to stop these American success stories by revising antitrust doctrine to protect small businesses rather than the interests of consumers. Using antitrust law to punish pro-competitive behavior makes no more sense today than it did when the government attacked A&P for cutting consumers too good a deal on groceries. 

Before bringing criminal Section 2 charges against Amazon, or any other “dominant” firm, DOJ leaders should read and absorb the sobering Muris and Nuechterlein assessment. 

Finally, not only would DOJ Section 2 criminal prosecutions represent bad public policy—they would also undermine the rule of law. In a very thoughtful 2017 speech, then-Acting Assistant Attorney General for Antitrust Andrew Finch succinctly summarized the importance of the rule of law in antitrust enforcement:

[H]ow do we administer the antitrust laws more rationally, accurately, expeditiously, and efficiently? … Law enforcement requires stability and continuity both in rules and in their application to specific cases.

Indeed, stability and continuity in enforcement are fundamental to the rule of law. The rule of law is about notice and reliance. When it is impossible to make reasonable predictions about how a law will be applied, or what the legal consequences of conduct will be, these important values are diminished. To call our antitrust regime a “rule of law” regime, we must enforce the law as written and as interpreted by the courts and advance change with careful thought.

The reliance fostered by stability and continuity has obvious economic benefits. Businesses invest, not only in innovation but in facilities, marketing, and personnel, and they do so based on the economic and legal environment they expect to face.

Of course, we want businesses to make those investments—and shape their overall conduct—in accordance with the antitrust laws. But to do so, they need to be able to rely on future application of those laws being largely consistent with their expectations. An antitrust enforcement regime with frequent changes is one that businesses cannot plan for, or one that they will plan for by avoiding certain kinds of investments.

Bringing criminal monopolization cases now, after a half-century of inaction, would be antithetical to the stability and continuity that underlie the rule of law. What’s worse, the failure to provide prosecutorial guidance would be squarely at odds with concerns of notice and reliance that inform the rule of law. As such, a DOJ decision to target firms for Section 2 criminal charges would offend the rule of law (and, sadly, follow the FTC ‘s recent example of flouting the rule of law, see here and here).

In sum, the case against criminal Section 2 prosecutions is overwhelming. At a time when DOJ is facing difficulties winning “slam dunk” criminal Section 1  prosecutions targeting facially anticompetitive joint conduct (see here, here, and here), the notion that it would criminally pursue unilateral conduct that may generate substantial efficiencies is ludicrous. Hopefully, DOJ leadership will come to its senses and drop any and all plans to bring criminal Section 2 cases.

In Amazon, Antitrust & Competition, Error Costs, Federal Trade Commission, Justice Department, Monopolization, Platforms, Price Discrimination, Truth on the Market , , , , , , , , , , , , , , , ,
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Chevron and Administrative Antitrust, Redux

Gus Hurwitz —  29 April 2022

[Wrapping up the first week of our FTC UMC Rulemaking symposium is a post from Truth on the Market’s own Justin (Gus) Hurwitz, director of law & economics programs at the International Center for Law & Economics and an assistant professor of law and co-director of the Space, Cyber, and Telecom Law program at the University of Nebraska College of Law. You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

Introduction

In 2014, I published a pair of articles—”Administrative Antitrust” and “Chevron and the Limits of Administrative Antitrust”—that argued that the U.S. Supreme Court’s recent antitrust and administrative-law jurisprudence was pushing antitrust law out of the judicial domain and into the domain of regulatory agencies. The first article focused on the Court’s then-recent antitrust cases, arguing that the Court, which had long since moved away from federal common law, had shown a clear preference that common-law-like antitrust law be handled on a statutory or regulatory basis where possible. The second article evaluated and rejected the FTC’s long-held belief that the Federal Trade Commission’s (FTC) interpretations of the FTC Act do not receive Chevron deference.

Together, these articles made the case (as a descriptive, not normative, matter) that we were moving towards a period of what I called “administrative antitrust.” From today’s perspective, it surely seems that I was right, with the FTC set to embrace Section 5’s broad ambiguities to redefine modern understandings of antitrust law. Indeed, those articles have been cited by both former FTC Commissioner Rohit Chopra and current FTC Chair Lina Khan in speeches and other materials that have led up to our current moment.

This essay revisits those articles, in light of the past decade of Supreme Court precedent. It comes as no surprise to anyone familiar with recent cases that the Court is increasingly viewing the broad deference characteristic of administrative law with what, charitably, can be called skepticism. While I stand by the analysis offered in my previous articles—and, indeed, believe that the Court maintains a preference for administratively defined antitrust law over judicially defined antitrust law—I find it less likely today that the Court would defer to any agency interpretation of antitrust law that represents more than an incremental move away from extant law.

I will approach this discussion in four parts. First, I will offer some reflections on the setting of my prior articles. The piece on Chevron and the FTC, in particular, argued that the FTC had misunderstood how Chevron would apply to its interpretations of the FTC Act because it was beholden to out-of-date understandings of administrative law. I will make the point below that the same thing can be said today. I will then briefly recap the essential elements of the arguments made in both of those prior articles, to the extent needed to evaluate how administrative approaches to antitrust will be viewed by the Court today. The third part of the discussion will then summarize some key elements of administrative law that have changed over roughly the past decade. And, finally, I will bring these elements together to look at the viability of administrative antitrust today, arguing that the FTC’s broad embrace of power anticipated by many is likely to meet an ill fate at the hands of the courts on both antitrust and administrative law grounds.

In reviewing these past articles in light of the past decade’s case law, this essay reaches an important conclusion: for the same reasons that the Court seemed likely in 2013 to embrace an administrative approach to antitrust, today it is likely to view such approaches with great skepticism unless they are undertaken on an incrementalist basis. Others are currently developing arguments that sound primarily in current administrative law: the major questions doctrine and the potential turn away from National Petroleum Refiners. My conclusion is based primarily in the Court’s view that administrative antitrust would prove less indeterminate than judicially defined antitrust law. If the FTC shows that not to be the case, the Court seems likely to close the door on administrative antitrust for reasons sounding in both administrative and antitrust law.

Setting the Stage, Circa 2013

It is useful to start by visiting the stage as it was set when I wrote “Administrative Antitrust” and “Limits of Administrative Antitrust” in 2013. I wrote these articles while doing a fellowship at the University of Pennsylvania Law School, prior to which I had spent several years working at the U.S. Justice Department Antitrust Division’s Telecommunications Section. This was a great time to be involved on the telecom side of antitrust, especially for someone with an interest in administrative law, as well. Recent important antitrust cases included Pacific Bell v. linkLine and Verizon v. Trinko and recent important administrative-law cases included Brand-X, Fox v. FCC, and City of Arlington v. FCC. Telecommunications law was defining the center of both fields.

I started working on “Administrative Antitrust” first, prompted by what I admit today was an overreading of the Court’s 2011 American Electric Power Co. Inc. v. Connecticut opinion, in which the Court held broadly that a decision by Congress to regulate broadly displaces judicial common law. In Trinko and Credit Suisse, the Court had held something similar: roughly, that regulation displaces antitrust law. Indeed, in linkLine,the Court had stated that regulation is preferable to antitrust, known for its vicissitudes and adherence to the extra-judicial development of economic theory. “Administrative Antitrust” tied these strands together, arguing that antitrust law, long-discussed as one of the few remaining bastions of federal common law, would—and in the Court’s eyes, should—be displaced by regulation.

Antitrust and administrative law also came together, and remain together, in the debates over net neutrality. It was this nexus that gave rise to “Limits of Administrative Antitrust,” which I started in 2013 while working on “Administrative Antitrust”and waiting for the U.S. Court of Appeals for the D.C. Circuit’s opinion in Verizon v. FCC.

Some background on the net-neutrality debate is useful. In 2007, the Federal Communications Commission (FCC) attempted to put in place net-neutrality rules by adopting a policy statement on the subject. This approach was rejected by the D.C. Circuit in 2010, on grounds that a mere policy statement lacked the force of law. The FCC then adopted similar rules through a rulemaking process, finding authority to issue those rules in its interpretation of the ambiguous language of Section 706 of the Telecommunications Act. In January 2014, the D.C. Circuit again rejected the specific rules adopted by the FCC, on grounds that those rules violated the Communications Act’s prohibition on treating internet service providers (ISPs) as common carriers. But critically, the court affirmed the FCC’s interpretation of Section 706 as allowing it, in principle, to adopt rules regulating ISPs.

Unsurprisingly, whether the language of Section 706 was either ambiguous or subject to the FCC’s interpretation was a central debate within the regulatory community during 2012 and 2013. The broadest consensus, at least among my peers, was strongly of the view that it was neither: the FCC and industry had long read Section 706 as not giving the FCC authority to regulate ISP conduct and, to the extent that it did confer legislative authority, that authority was expressly deregulatory. I was the lone voice arguing that the D.C. Circuit was likely to find that Chevron applied to Section 706 and that the FCC’s reading was permissible on its own (that is, not taking into account such restrictions as the prohibition on treating non-common carriers as common carriers).

I actually had thought this conclusion quite obvious. The past decade of the Court’s Chevron case law followed a trend of increasing deference. Starting with Mead, then Brand-X, Fox v. FCC, and City of Arlington, the safe money was consistently placed on deference to the agency.

This was the setting in which I started thinking about what became “Chevron and the Limits of Administrative Antitrust.” If my argument in “Administrative Antitrust”was right—that the courts would push development of antitrust law from the courts to regulatory agencies—this would most clearly happen through the FTC’s Section 5 authority over unfair methods of competition (UMC). But there was longstanding debate about the limits of the FTC’s UMC authority. These debates included whether it was necessarily coterminous with the Sherman Act (so limited by the judicially defined federal common law of antitrust).

And there was discussion about whether the FTC would receive Chevron deference to its interpretations of its UMC authority. As with the question of the FCC receiving deference to its interpretation of Section 706, there was widespread understanding that the FTC would not receive Chevron deference to its interpretations of its Section 5 UMC authority. “Chevron and the Limits of Administrative Antitrust” explored that issue, ultimately concluding that the FTC likely would indeed be given the benefit of Chevron deference, tracing the commission’s belief to the contrary back to longstanding institutional memory of pre-Chevron judicial losses.

The Administrative Antitrust Argument

The discussion above is more than mere historical navel-gazing. The context and setting in which those prior articles were written is important to understanding both their arguments and the continual currents that propel us across antitrust’s sea of doubt. But we should also look at the specific arguments from each paper in some detail, as well.

Administrative Antitrust

The opening lines of this paper capture the curious judicial statute of antitrust law:

Antitrust is a peculiar area of law, one that has long been treated as exceptional by the courts. Antitrust cases are uniquely long, complicated, and expensive; individual cases turn on case-specific facts, giving them limited precedential value; and what precedent there is changes on a sea of economic—rather than legal—theory. The principal antitrust statutes are minimalist and have left the courts to develop their meaning. As Professor Thomas Arthur has noted, “in ‘the anti-trust field the courts have been accorded, by common consent, an authority they have in no other branch of enacted law.’” …


This Article argues that the Supreme Court is moving away from this exceptionalist treatment of antitrust law and is working to bring antitrust within a normalized administrative law jurisprudence.

Much of this argument is based in the arguments framed above: Trinko and Credit Suisse prioritize regulation over the federal common law of antitrust, and American Electric Power emphasizes the general displacement of common law by regulation. The article adds, as well, the Court’s focus, at the time, against domain-specific “exceptionalism.” Its opinion in Mayo had rejected the longstanding view that tax law was “exceptional” in some way that excluded it from the Administrative Procedure Act (APA) and other standard administrative law doctrine. And thus, so too must the Court’s longstanding treatment of antitrust as exceptional also fall.

Those arguments can all be characterized as pulling antitrust law toward an administrative approach. But there was a push as well. In his majority opinion, Chief Justice John Roberts expressed substantial concern about the difficulties that antitrust law poses for courts and litigants alike. His opinion for the majority notes that “it is difficult enough for courts to identify and remedy an alleged anticompetitive practice” and laments “[h]ow is a judge or jury to determine a ‘fair price?’” And Justice Stephen Breyer writes in concurrence, that “[w]hen a regulatory structure exists [as it does in this case] to deter and remedy anticompetitive harm, the costs of antitrust enforcement are likely to be greater than the benefits.”

In other words, the argument in “Administrative Antitrust” goes, the Court is motivated both to bring antitrust law into a normalized administrative-law framework and also to remove responsibility for the messiness inherent in antitrust law from the courts’ dockets. This latter point will be of particular importance as we turn to how the Court is likely to think about the FTC’s potential use of its UMC authority to develop new antitrust rules.

Chevron and the Limits of Administrative Antitrust

The core argument in “Limits of Administrative Antitrust” is more doctrinal and institutionally focused. In its simplest statement, I merely applied Chevron as it was understood circa 2013 to the FTC’s UMC authority. There is little argument that “unfair methods of competition” is inherently ambiguous—indeed, the term was used, and the power granted to the FTC, expressly to give the agency flexibility and to avoid the limits the Court was placing on antitrust law in the early 20th century.

There are various arguments against application of Chevron to Section 5; the article goes through and rejects them all. Section 5 has long been recognized as including, but being broader than, the Sherman Act. National Petroleum Refiners has long held that the FTC has substantive-rulemaking authority—a conclusion made even more forceful by the Supreme Court’s more recent opinion in Iowa Utilities Board. Other arguments are (or were) unavailing.

The real puzzle the paper unpacks is why the FTC ever believed it wouldn’t receive the benefit of Chevron deference. The article traces it back to a series of cases the FTC lost in the 1980s, contemporaneous with the development of the Chevron doctrine. The commission had big losses in cases like E.I. Du Pont and Ethyl Corp. Perhaps most important, in its 1986 Indiana Federation of Dentists opinion (two years after Chevron was decided), the Court seemed to adopt a de novo standard for review of Section 5 cases. But, “Limits of Administrative Antitrust” argues, this is a misreading and overreading of Indiana Federation of Dentists (a close reading of which actually suggests that it is entirely in line with Chevron), and it misunderstands the case’s relationship with Chevron (the importance of which did not start to come into focus for another several years).

The curious conclusion of the argument is, in effect, that a generation of FTC lawyers, “shell-shocked by its treatment in the courts,” internalized the lesson that they would not receive the benefits of Chevron deference and that Section 5 was subject to de novo review, but also that this would start to change as a new generation of lawyers, trained in the modern Chevron era, came to practice within the halls of the FTC. Today, that prediction appears to have borne out.

Things Change

The conclusion from “Limits of Administrative Antitrust” that FTC lawyers failed to recognize that the agency would receive Chevron deference because they were half a generation behind the development of administrative-law doctrine is an important one. As much as antitrust law may be adrift in a sea of change, administrative law is even more so. From today’s perspective, it feels as though I wrote those articles at Chevron’s zenith—and watching the FTC consider aggressive use of its UMC authority feels like watching a commission that, once again, is half a generation behind the development of administrative law.

The tide against Chevron’sexpansive deference was already beginning to grow at the time I was writing. City of Arlington, though affirming application of Chevron to agencies’ interpretations of their own jurisdictional statutes in a 6-3 opinion, generated substantial controversy at the time. And a short while later, the Court decided a case that many in the telecom space view as a sea change: Utility Air Regulatory Group (UARG). In UARG, Justice Antonin Scalia, writing for a 9-0 majority, struck down an Environmental Protection Agency (EPA) regulation related to greenhouse gasses. In doing so, he invoked language evocative of what today is being debated as the major questions doctrine—that the Court “expect[s] Congress to speak clearly if it wishes to assign to an agency decisions of vast economic and political significance.” Two years after that, the Court decided Encino Motorcars, in which the Court acted upon a limit expressed in Fox v. FCC that agencies face heightened procedural requirements when changing regulations that “may have engendered serious reliance interests.”

And just like that, the dams holding back concern over the scope of Chevron have burst. Justices Clarence Thomas and Neil Gorsuch have openly expressed their views that Chevron needs to be curtailed or eliminated. Justice Brett Kavanaugh has written extensively in favor of the major questions doctrine. Chief Justice Roberts invoked the major questions doctrine in King v. Burwell. Each term, litigants are more aggressively bringing more aggressive cases to probe and tighten the limits of the Chevron doctrine. As I write this, we await the Court’s opinion in American Hospital Association v. Becerra—which, it is widely believed could dramatically curtail the scope of the Chevron doctrine.

Administrative Antitrust, Redux

The prospects for administrative antitrust look very different today than they did a decade ago. While the basic argument continues to hold—the Court will likely encourage and welcome a transition of antitrust law to a normalized administrative jurisprudence—the Court seems likely to afford administrative agencies (viz., the FTC) much less flexibility in how they administer antitrust law than they would have a decade ago. This includes through both the administrative-law vector, with the Court reconsidering how it views delegation of congressional authority to agencies such as through the major questions doctrine and agency rulemaking authority, as well as through the Court’s thinking about how agencies develop and enforce antitrust law.

Major Questions and Major Rules

Two hotly debated areas where we see this trend: the major questions doctrine and the ongoing vitality of National Petroleum Refiners. These are only briefly recapitulated here. The major questions doctrine is an evolving doctrine, seemingly of great interest to many current justices on the Court, that requires Congress to speak clearly when delegating authority to agencies to address major questions—that is, questions of vast economic and political significance. So, while the Court may allow an agency to develop rules governing mergers when tasked by Congress to prohibit acquisitions likely to substantially lessen competition, it is unlikely to allow that agency to categorically prohibit mergers based upon a general congressional command to prevent unfair methods of competition. The first of those is a narrow rule based upon a specific grant of authority; the other is a very broad rule based upon a very general grant of authority.

The major questions doctrine has been a major topic of discussion in administrative-law circles for the past several years. Interest in the National Petroleum Refiners question has been more muted, mostly confined to those focused on the FTC and FCC. National Petroleum Refiners is a 1973 D.C. Circuit case that found that the FTC Act’s grant of power to make rules to implement the act confers broad rulemaking power relating to the act’s substantive provisions. In 1999, the Supreme Court reached a similar conclusion in Iowa Utilities Board, finding that a provision in Section 202 of the Communications Act allowing the FCC to create rules seemingly for the implementation of that section conferred substantive rulemaking power running throughout the Communications Act.

Both National Petroleum Refiners and Iowa Utilities Board reflect previous generations’ understanding of administrative law—and, in particular, the relationship between the courts and Congress in empowering and policing agency conduct. That understanding is best captured in the evolution of the non-delegation doctrine, and the courts’ broad acceptance of broad delegations of congressional power to agencies in the latter half of the 20th century. National Petroleum Refiners and Iowa Utilities Board are not non-delegation cases-—but, similar to the major questions doctrine, they go to similar issues of how specific Congress must be when delegating broad authority to an agency.

In theory, there is little difference between an agency that can develop legal norms through case-by-case adjudications that are backstopped by substantive and procedural judicial review, on the one hand, and authority to develop substantive rules backstopped by procedural judicial review and by Congress as a check on substantive errors. In practice, there is a world of difference between these approaches. As with the Court’s concerns about the major questions doctrine, were the Court to review National Petroleum Refiners Association or Iowa Utilities Board today, it seems at least possible, if not simply unlikely, that most of the Justices would not so readily find agencies to have such broad rulemaking authority without clear congressional intent supporting such a finding.

Both of these ideas—the major question doctrine and limits on broad rules made using thin grants of rulemaking authority—present potential limits on the potential scope of rules the FTC might make using its UMC authority.

Limits on the Antitrust Side of Administrative Antitrust

The potential limits on FTC UMC rulemaking discussed above sound in administrative-law concerns. But administrative antitrust may also find a tepid judicial reception on antitrust concerns, as well.

Many of the arguments advanced in “Administrative Antitrust” and the Court’s opinions on the antitrust-regulation interface echo traditional administrative-law ideas. For instance, much of the Court’s preference that agencies granted authority to engage in antitrust or antitrust-adjacent regulation take precedence over the application of judicially defined antitrust law track the same separation of powers and expertise concerns that are central to the Chevron doctrine itself.

But the antitrust-focused cases—linkLine, Trinko, Credit Suisse—also express concerns specific to antitrust law. Chief Justice Roberts notes that the justices “have repeatedly emphasized the importance of clear rules in antitrust law,” and the need for antitrust rules to “be clear enough for lawyers to explain them to clients.” And the Court and antitrust scholars have long noted the curiosity that antitrust law has evolved over time following developments in economic theory. This extra-judicial development of the law runs contrary to basic principles of due process and the stability of the law.

The Court’s cases in this area express hope that an administrative approach to antitrust could give a clarity and stability to the law that is currently lacking. These are rules of vast economic significance: they are “the Magna Carta of free enterprise”; our economy organizes itself around them; substantial changes to these rules could have a destabilizing effect that runs far deeper than Congress is likely to have anticipated when tasking an agency with enforcing antitrust law. Empowering agencies to develop these rules could, the Court’s opinions suggest, allow for a more thoughtful, expert, and deliberative approach to incorporating incremental developments in economic knowledge into the law.

If an agency’s administrative implementation of antitrust law does not follow this path—and especially if the agency takes a disruptive approach to antitrust law that deviates substantially from established antitrust norms—this defining rationale for an administrative approach to antitrust would not hold.

The courts could respond to such overreach in several ways. They could invoke the major questions or similar doctrines, as above. They could raise due-process concerns, tracking Fox v. FCC and Encino Motorcars, to argue that any change to antitrust law must not be unduly disruptive to engendered reliance interests. They could argue that the FTC’s UMC authority, while broader than the Sherman Act, must be compatible with the Sherman Act. That is, while the FTC has authority for the larger circle in the antitrust Venn diagram, the courts continue to define the inner core of conduct regulated by the Sherman Act.

A final aspect to the Court’s likely approach to administrative antitrust falls from the Roberts Court’s decision-theoretic approach to antitrust law. First articulated in Judge Frank Easterbrook’s “The Limits of Antitrust,” the decision-theoretic approach to antitrust law focuses on the error costs of incorrect judicial decisions and the likelihood that those decisions will be corrected. The Roberts Court has strongly adhered to this framework in its antitrust decisions. This can be seen, for instance, in Justice Breyer’s statement that: “When a regulatory structure exists to deter and remedy anticompetitive harm, the costs of antitrust enforcement are likely to be greater than the benefits.”

The error-costs framework described by Judge Easterbrook focuses on the relative costs of errors, and correcting those errors, between judicial and market mechanisms. In the administrative-antitrust setting, the relevant comparison is between judicial and administrative error costs. The question on this front is whether an administrative agency, should it get things wrong, is likely to correct. Here there are two models, both of concern. The first is that in which law is policy or political preference. Here, the FCC’s approach to net neutrality and the National Labor Relations Board’s (NLRB) approach to labor law loom large; there have been dramatic swing between binary policy preferences held by different political parties as control of agencies shifts between administrations. The second model is one in which Congress responds to agency rules by refining, rejecting, or replacing them through statute. Here, again, net neutrality and the FCC loom large, with nearly two decades of calls for Congress to clarify the FCC’s authority and statutory mandate, while the agency swings between policies with changing administrations.

Both of these models reflect poorly on the prospects for administrative antitrust and suggest a strong likelihood that the Court would reject any ambitious use of administrative authority to remake antitrust law. The stability of these rules is simply too important to leave to change with changing political wills. And, indeed, concern that Congress no longer does its job of providing agencies with clear direction—that Congress has abdicated its job of making important policy decisions and let them fall instead to agency heads—is one of the animating concerns behind the major questions doctrine.

Conclusion

Writing in 2013, it seemed clear that the Court was pushing antitrust law in an administrative direction, as well as that the FTC would likely receive broad Chevron deference in its interpretations of its UMC authority to shape and implement antitrust law. Roughly a decade later, the sands have shifted and continue to shift. Administrative law is in the midst of a retrenchment, with skepticism of broad deference and agency claims of authority.

Many of the underlying rationales behind the ideas of administrative antitrust remain sound. Indeed, I expect the FTC will play an increasingly large role in defining the contours of antitrust law and that the Court and courts will welcome this role. But that role will be limited. Administrative antitrust is a preferred vehicle for administering antitrust law, not for changing it. Should the FTC use its power aggressively, in ways that disrupt longstanding antitrust principles or seem more grounded in policy better created by Congress, it is likely to find itself on the losing side of the judicial opinion.

In Administrative Law, Antitrust & Competition, Antitrust Division, Error Costs, Federal Communications Commission, Federal Trade Commission, Justice Department, Net Neutrality, Regulation, Section 5, Supreme Court, Telecommunications, Truth on the Market , , , , , , , , , , , , ,
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Attention Markets: They Know Them When they See Them

Dirk Auer —  12 April 2022

A raft of progressive scholars in recent years have argued that antitrust law remains blind to the emergence of so-called “attention markets,” in which firms compete by converting user attention into advertising revenue. This blindness, the scholars argue, has caused antitrust enforcers to clear harmful mergers in these industries.

It certainly appears the argument is gaining increased attention, for lack of a better word, with sympathetic policymakers. In a recent call for comments regarding their joint merger guidelines, the U.S. Justice Department (DOJ) and Federal Trade Commission (FTC) ask:

How should the guidelines analyze mergers involving competition for attention? How should relevant markets be defined? What types of harms should the guidelines consider?

Unfortunately, the recent scholarly inquiries into attention markets remain inadequate for policymaking purposes. For example, while many progressives focus specifically on antitrust authorities’ decisions to clear Facebook’s 2012 acquisition of Instagram and 2014 purchase of WhatsApp, they largely tend to ignore the competitive constraints Facebook now faces from TikTok (here and here).

When firms that compete for attention seek to merge, authorities need to infer whether the deal will lead to an “attention monopoly” (if the merging firms are the only, or primary, market competitors for some consumers’ attention) or whether other “attention goods” sufficiently constrain the merged entity. Put another way, the challenge is not just in determining which firms compete for attention, but in evaluating how strongly each constrains the others.

As this piece explains, recent attention-market scholarship fails to offer objective, let alone quantifiable, criteria that might enable authorities to identify firms that are unique competitors for user attention. These limitations should counsel policymakers to proceed with increased rigor when they analyze anticompetitive effects.

The Shaky Foundations of Attention Markets Theory

Advocates for more vigorous antitrust intervention have raised (at least) three normative arguments that pertain attention markets and merger enforcement.

  • First, because they compete for attention, firms may be more competitively related than they seem at first sight. It is sometimes said that these firms are nascent competitors.
  • Second, the scholars argue that all firms competing for attention should not automatically be included in the same relevant market.
  • Finally, scholars argue that enforcers should adopt policy tools to measure market power in these attention markets—e.g., by applying a SSNIC test (“small but significant non-transitory increase in cost”), rather than a SSNIP test (“small but significant non-transitory increase in price”).

There are some contradictions among these three claims. On the one hand, proponents advocate adopting a broad notion of competition for attention, which would ensure that firms are seen as competitively related and thus boost the prospects that antitrust interventions targeting them will be successful. When the shoe is on the other foot, however, proponents fail to follow the logic they have sketched out to its natural conclusion; that is to say, they underplay the competitive constraints that are necessarily imposed by wider-ranging targets for consumer attention. In other words, progressive scholars are keen to ensure the concept is not mobilized to draw broader market definitions than is currently the case:

This “massive market” narrative rests on an obvious fallacy. Proponents argue that the relevant market includes all substitutable sources of attention depletion,” so the market is “enormous.”

Faced with this apparent contradiction, scholars retort that the circle can be squared by deploying new analytical tools that measure attention for competition, such as the so-called SSNIC test. But do these tools actually resolve the contradiction? It would appear, instead, that they merely enable enforcers to selectively mobilize the attention-market concept in ways that fit their preferences. Consider the following description of the SSNIC test, by John Newman:

But if the focus is on the zero-price barter exchange, the SSNIP test requires modification. In such cases, the “SSNIC” (Small but Significant and Non-transitory Increase in Cost) test can replace the SSNIP. Instead of asking whether a hypothetical monopolist would increase prices, the analyst should ask whether the monopolist would likely increase attention costs. The relevant cost increases can take the form of more time or space being devoted to advertisements, or the imposition of more distracting advertisements. Alternatively, one might ask whether the hypothetical monopolist would likely impose an “SSNDQ” (Small but Significant and Non-Transitory Decrease in Quality). The latter framing should generally be avoided, however, for reasons discussed below in the context of anticompetitive effects. Regardless of framing, however, the core question is what would happen if the ratio between desired content to advertising load were to shift.

Tim Wu makes roughly the same argument:

The A-SSNIP would posit a hypothetical monopolist who adds a 5-second advertisement before the mobile map, and leaves it there for a year. If consumers accepted the delay, instead of switching to streaming video or other attentional options, then the market is correctly defined and calculation of market shares would be in order.

The key problem is this: consumer switching among platforms is consistent both with competition and with monopoly power. In fact, consumers are more likely to switch to other goods when they are faced with a monopoly. Perhaps more importantly, consumers can and do switch to a whole range of idiosyncratic goods. Absent some quantifiable metric, it is simply impossible to tell which of these alternatives are significant competitors.

None of this is new, of course. Antitrust scholars have spent decades wrestling with similar issues in connection with the price-related SSNIP test. The upshot of those debates is that the SSNIP test does not measure whether price increases cause users to switch. Instead, it examines whether firms can profitably raise prices above the competitive baseline. Properly understood, this nuance renders proposed SSNIC and SSNDQ tests (“small but significant non-transitory decrease in quality”) unworkable.

First and foremost, proponents wrongly presume to know how firms would choose to exercise their market power, rendering the resulting tests unfit for policymaking purposes. This mistake largely stems from the conflation of price levels and price structures in two-sided markets. In a two-sided market, the price level refers to the cumulative price charged to both sides of a platform. Conversely, the price structure refers to the allocation of prices among users on both sides of a platform (i.e., how much users on each side contribute to the costs of the platform). This is important because, as Jean Charles Rochet and Jean Tirole show in their Nobel-winning work, changes to either the price level or the price structure both affect economic output in two-sided markets.

This has powerful ramifications for antitrust policy in attention markets. To be analytically useful, SSNIC and SSNDQ tests would have to alter the price level while holding the price structure equal. This is the opposite of what attention-market theory advocates are calling for. Indeed, increasing ad loads or decreasing the quality of services provided by a platform, while holding ad prices constant, evidently alters platforms’ chosen price structure.

This matters. Even if the proposed tests were properly implemented (which would be difficult: it is unclear what a 5% quality degradation would look like), the tests would likely lead to false negatives, as they force firms to depart from their chosen (and, thus, presumably profit-maximizing) price structure/price level combinations.

Consider the following illustration: to a first approximation, increasing the quantity of ads served on YouTube would presumably decrease Google’s revenues, as doing so would simultaneously increase output in the ad market (note that the test becomes even more absurd if ad revenues are held constant). In short, scholars fail to recognize that the consumer side of these markets is intrinsically related to the ad side. Each side affects the other in ways that prevent policymakers from using single-sided ad-load increases or quality decreases as an independent variable.

This leads to a second, more fundamental, flaw. To be analytically useful, these increased ad loads and quality deteriorations would have to be applied from the competitive baseline. Unfortunately, it is not obvious what this baseline looks like in two-sided markets.

Economic theory tells us that, in regular markets, goods are sold at marginal cost under perfect competition. However, there is no such shortcut in two-sided markets. As David Evans and Richard Schmalensee aptly summarize:

An increase in marginal cost on one side does not necessarily result in an increase in price on that side relative to price on the other. More generally, the relationship between price and cost is complex, and the simple formulas that have been derived by single-handed markets do not apply.

In other words, while economic theory suggests perfect competition among multi-sided platforms should result in zero economic profits, it does not say what the allocation of prices will look like in this scenario. There is thus no clearly defined competitive baseline upon which to apply increased ad loads or quality degradations. And this makes the SSNIC and SSNDQ tests unsuitable.

In short, the theoretical foundations necessary to apply the equivalent of a SSNIP test on the “free” side of two-sided platforms are largely absent (or exceedingly hard to apply in practice). Calls to implement SSNIC and SSNDQ tests thus greatly overestimate the current state of the art, as well as decision-makers’ ability to solve intractable economic conundrums. The upshot is that, while proposals to apply the SSNIP test to attention markets may have the trappings of economic rigor, the resemblance is superficial. As things stand, these tests fail to ascertain whether given firms are in competition, and in what market.

The Bait and Switch: Qualitative Indicia

These problems with the new quantitative metrics likely explain why proponents of tougher enforcement in attention markets often fall back upon qualitative indicia to resolve market-definition issues. As John Newman writes:

Courts, including the U.S. Supreme Court, have long employed practical indicia as a flexible, workable means of defining relevant markets. This approach considers real-world factors: products’ functional characteristics, the presence or absence of substantial price differences between products, whether companies strategically consider and respond to each other’s competitive conduct, and evidence that industry participants or analysts themselves identify a grouping of activity as a discrete sphere of competition. …The SSNIC test may sometimes be massaged enough to work in attention markets, but practical indicia will often—perhaps usually—be the preferable method. 

Unfortunately, far from resolving the problems associated with measuring market power in digital markets (and of defining relevant markets in antitrust proceedings), this proposed solution would merely focus investigations on subjective and discretionary factors.

This can be easily understood by looking at the FTC’s Facebook complaint regarding its purchases of WhatsApp and Instagram. The complaint argues that Facebook—a “social networking service,” in the eyes of the FTC—was not interchangeable with either mobile-messaging services or online-video services. To support this conclusion, it cites a series of superficial differences. For instance, the FTC argues that online-video services “are not used primarily to communicate with friends, family, and other personal connections,” while mobile-messaging services “do not feature a shared social space in which users can interact, and do not rely upon a social graph that supports users in making connections and sharing experiences with friends and family.”

This is a poor way to delineate relevant markets. It wrongly portrays competitive constraints as a binary question, rather than a matter of degree. Pointing to the functional differences that exist among rival services mostly fails to resolve this question of degree. It also likely explains why advocates of tougher enforcement have often decried the use of qualitative indicia when the shoe is on the other foot—e.g., when authorities concluded that Facebook did not, in fact, compete with Instagram because their services were functionally different.

A second, and related, problem with the use of qualitative indicia is that they are, almost by definition, arbitrary. Take two services that may or may not be competitors, such as Instagram and TikTok. The two share some similarities, as well as many differences. For instance, while both services enable users to share and engage with video content, they differ significantly in the way this content is displayed. Unfortunately, absent quantitative evidence, it is simply impossible to tell whether, and to what extent, the similarities outweigh the differences. 

There is significant risk that qualitative indicia may lead to arbitrary enforcement, where markets are artificially narrowed by pointing to superficial differences among firms, and where competitive constraints are overemphasized by pointing to consumer switching. 

The Way Forward

The difficulties discussed above should serve as a good reminder that market definition is but a means to an end.

As William Landes, Richard Posner, and Louis Kaplow have all observed (here and here), market definition is merely a proxy for market power, which in turn enables policymakers to infer whether consumer harm (the underlying question to be answered) is likely in a given case.

Given the difficulties inherent in properly defining markets, policymakers should redouble their efforts to precisely measure both potential barriers to entry (the obstacles that may lead to market power) or anticompetitive effects (the potentially undesirable effect of market power), under a case-by-case analysis that looks at both sides of a platform.

Unfortunately, this is not how the FTC has proceeded in recent cases. The FTC’s Facebook complaint, to cite but one example, merely assumes the existence of network effects (a potential barrier to entry) with no effort to quantify their magnitude. Likewise, the agency’s assessment of consumer harm is just two pages long and includes superficial conclusions that appear plucked from thin air:

The benefits to users of additional competition include some or all of the following: additional innovation … ; quality improvements … ; and/or consumer choice … . In addition, by monopolizing the U.S. market for personal social networking, Facebook also harmed, and continues to harm, competition for the sale of advertising in the United States.

Not one of these assertions is based on anything that could remotely be construed as empirical or even anecdotal evidence. Instead, the FTC’s claims are presented as self-evident. Given the difficulties surrounding market definition in digital markets, this superficial analysis of anticompetitive harm is simply untenable.

In short, discussions around attention markets emphasize the important role of case-by-case analysis underpinned by the consumer welfare standard. Indeed, the fact that some of antitrust enforcement’s usual benchmarks are unreliable in digital markets reinforces the conclusion that an empirically grounded analysis of barriers to entry and actual anticompetitive effects must remain the cornerstones of sound antitrust policy. Or, put differently, uncertainty surrounding certain aspects of a case is no excuse for arbitrary speculation. Instead, authorities must meet such uncertainty with an even more vigilant commitment to thoroughness.

In Antitrust & Competition, Antitrust Division, Error Costs, Facebook, Federal Trade Commission, Justice Department, Market Definition, Merger Guidelines, Mergers & Acquisitions, Platforms, Truth on the Market , , , , , , ,
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Toward a Dynamic Consumer Welfare Standard for Contemporary U.S. Antitrust Enforcement

Alden Abbott —  24 March 2022

For decades, consumer-welfare enhancement appeared to be a key enforcement goal of competition policy (antitrust, in the U.S. usage) in most jurisdictions:

  • The U.S. Supreme Court famously proclaimed American antitrust law to be a “consumer welfare prescription” in Reiter v. Sonotone Corp. (1979).
  • A study by the current adviser to the European Competition Commission’s chief economist found that that there are “many statements indicating that, seen from the European Commission, modern EU competition policy to a large extent is about protecting consumer welfare.”
  • A comprehensive international survey presented at the 2011 Annual International Competition Network Conference, found that a majority of competition authorities state that “their national [competition] legislation refers either directly or indirectly to consumer welfare,” and that most competition authorities “base their enforcement efforts on the premise that they enlarge consumer welfare.”  

Recently, however, the notion that a consumer welfare standard (CWS) should guide antitrust enforcement has come under attack (see here). In the United States, this movement has been led by populist “neo-Brandeisians” who have “call[ed] instead for enforcement that takes into account firm size, fairness, labor rights, and the protection of smaller enterprises.” (Interestingly, there appear to be more direct and strident published attacks on the CWS from American critics than from European commentators, perhaps reflecting an unspoken European assumption that “ordoliberal” strong government oversight of markets advances the welfare of consumers and society in general.) The neo-Brandeisian critique is badly flawed and should be rejected.

Assuming that the focus on consumer welfare in U.S. antitrust enforcement survives this latest populist challenge, what considerations should inform the design and application of a CWS? Before considering this question, one must confront the context in which it arises—the claim that the U.S. economy has become far less competitive in recent decades and that antitrust enforcement has been ineffective at addressing this problem. After dispatching with this flawed claim, I advance four principles aimed at properly incorporating consumer-welfare considerations into antitrust-enforcement analysis.  

Does the US Suffer from Poor Antitrust Enforcement and Declining Competition?

Antitrust interventionists assert that lax U.S. antitrust enforcement has coincided with a serious decline in competition—a claim deployed to argue that, even if one assumes that promoting consumer welfare remains an overarching goal, U.S. antitrust policy nonetheless requires a course correction. After all, basic price theory indicates that a reduction in market competition raises deadweight loss and reduces consumers’ relative share of total surplus. As such, it might seem to follow that “ramping up antitrust” would lead to more vigorously competitive markets, featuring less deadweight loss and relatively more consumer surplus.

This argument, of course, avoids error cost, rent seeking, and public choice issues that raise serious questions about the welfare effects of more aggressive “invigorated” enforcement (see here, for example). But more fundamentally, the argument is based on two incorrect premises:

  1. That competition has declined; and
  2. That U.S. trustbusters have applied the CWS in a narrow manner ineffective to address competitive problems.

Those premises (which also underlie President Joe Biden’s July 2021 Executive Order on Promoting Competition in the American Economy) do not stand up to scrutiny.

In a recent article in the Stigler Center journal Promarket, Yale University economics professor Fiona Scott-Morton and Yale Law student Leah Samuel accepted those premises in complaining about poor antitrust enforcement and substandard competition (hyperlinks omitted and emphasis in the original):

In recent years, the [CWS] term itself has become the target of vocal criticism in light of mounting evidence that recent enforcement—and what many call the “consumer welfare standard era” of antitrust enforcement—has been a failure. …

This strategy of non-enforcement has harmed markets and consumers. Today we see the evidence of this under-enforcement in a range of macroeconomic measures, studies of markups, as well as in merger post-mortems and studies of anticompetitive behavior that agencies have not pursued. Non-economist observers– journalists, advocates, and lawyers – who have noticed the lack of enforcement and the pernicious results have learned to blame “economics” and the CWS. They are correct that using CWS, as defined and warped by Chicago-era jurists and economists, has been a failure. That kind of enforcement—namely, insufficient enforcement—does not protect competition. But we argue that the “economics” at fault are the corporate-sponsored Chicago School assumptions, which are at best outdated, generally unjustified, and usually incorrect.

While the Chicago School caused the “consumer welfare standard” to become associated with an anti-enforcement philosophy in the legal community, it has never changed its meaning among PhD-trained economists.

To an economist, consumer welfare is a well-defined concept. Price, quality, and innovation are all part of the demand curve and all form the basis for the standard academic definition of consumer welfare. CW is the area under the demand curve and above the quality-adjusted price paid. … Quality-adjusted price represents all the value consumers get from the product less the price they paid, and therefore encapsulates the role of quality of any kind, innovation, and price on the welfare of the consumer.

In my published response to Scott-Morton and Samuel, I summarized recent economic literature that contradicts the “competition is declining” claim. I also demonstrated that antitrust enforcement has been robust and successful, refuting the authors’ claim to the contrary (cross links to economic literature omitted):

There are only two problems with the [authors’] argument. First, it is not clear at all that competition has declined during the reign of this supposedly misused [CWS] concept. Second, the consumer welfare standard has not been misapplied at all. Indeed, as antitrust scholars and enforcement officials have demonstrated … modern antitrust enforcement has not adopted a narrow “Chicago School” view of the world. To the contrary, it has incorporated the more sophisticated analysis the authors advocate, and enforcement initiatives have been vigorous and largely successful. Accordingly, the authors’ call for an adjustment in antitrust enforcement is a solution in search of a non-existent problem.

In short, competitive conditions in U.S. markets are robust and have not been declining. Moreover, U.S. antitrust enforcement has been sophisticated and aggressive, fully attuned to considerations of quality and innovation.

A Suggested Framework for Consumer Welfare Analysis

Although recent claims of “weak” U.S. antitrust enforcement are baseless, they do, nevertheless, raise “front and center” the nature of the CWS. The CWS is a worthwhile concept, but it eludes a precise definition. That is as it should be. In our common law system, fact-specific analyses of particular competitive practices are key to determining whether welfare is or is not being advanced in the case at hand. There is no simple talismanic CWS formula that is readily applicable to diverse cases.

While Scott-Morton argues that the area under the demand curve (consumer surplus) is essentially coincident with the CWS, other leading commentators take account of the interests of producers as well. For example, the leading antitrust treatise writer, Herbert Hovenkamp, suggests thinking about consumer welfare in terms of “maxim[izing] output that is consistent with sustainable competition. Output includes quantity, quality, and improvements in innovation. As an aside, it is worth noting that high output favors suppliers, including labor, as well as consumers because job opportunities increase when output is higher.” (Hovenkamp, Federal Antitrust Policy 102 (6th ed. 2020).)

Federal Trade Commission (FTC) Commissioner Christine Wilson (like Ken Heyer and other scholars) advocates a “total welfare standard” (consumer plus producer surplus). She stresses that it would beneficially:

  1. Make efficiencies more broadly cognizable, capturing cost reductions not passed through in the short run;
  2. Better enable the agencies to consider multi-market effects (whether consumer welfare gains in one market swamp consumer welfare losses in another market); and
  3. Better capture dynamic efficiencies (such as firm-specific efficiencies that are emulated by other “copycat” firms in the market).

Hovenkamp and Wilson point to the fact that efficiency-enhancing business conduct often has positive ramifications for both consumers and producers. As such, a CWS that focuses narrowly on short-term consumer surplus may prompt antitrust challenges to conduct that, properly understood, will prove beneficial to both consumers and producers over time.

With this in mind, I will now suggest four general “framework principles” to inform a CWS analysis that properly accounts for innovation and dynamic factors. These principles are tentative and merely suggestive, intended to prompt a further dialogue on CWS among interested commentators. (Also, many practical details will need to be filled in, based on further analysis.)

  1. Enforcers should consider all effects on consumer welfare in evaluating a transaction. Under the rule of reason, a reduction in surplus to particular defined consumers should not condemn a business practice (merger or non-merger) if other consumers are likely to enjoy accretions to surplus and if aggregate consumer surplus appears unlikely to decline, on net, due to the practice. Surplus need not be quantified—the likely direction of change in surplus is all that is required. In other words, “actual welfare balancing” is not required, consistent with the practical impossibility of quantifying new welfare effects in almost all cases (see, e.g., Hovenkamp, here). This principle is unaffected by market definition—all affected consumers should be assessed, whether they are “in” or “out” of a hypothesized market.
  2. Vertical intellectual-property-licensing contracts should not be subject to antitrust scrutiny unless there is substantial evidence that they are being used to facilitate horizontal collusion. This principle draws on the “New Madison Approach” associated with former Assistant Attorney General for Antitrust Makan Delrahim. It applies to a set of practices that further the interests of both consumers and producers. Vertical IP licensing (particularly patent licensing) “is highly important to the dynamic and efficient dissemination of new technologies throughout the economy, which, in turn, promotes innovation and increased welfare (consumer and producer surplus).” (See here, for example.) The 9th U.S. Circuit Court of Appeals’ refusal to condemn Qualcomm’s patent-licensing contracts (which had been challenged by the FTC) is consistent with this principle; it “evinces a refusal to find anticompetitive harm in licensing markets without hard empirical support.” (See here.)
  3. Furthermore, enforcers should carefully assess the ability of “non-standard” commercial contracts—horizontal and vertical—to overcome market failures, as described by transaction-cost economics (see here, and here, for example). Non-standard contracts may be designed to deal with problems (for instance) of contractual incompleteness and opportunism that stymie efforts to advance new commercial opportunities. To the extent that such contracts create opportunities for transactions that expand or enhance market offerings, they generate new consumer surplus (new or “shifted out” demand curves) and enhance consumer welfare. Thus, they should enjoy a general (though rebuttable) presumption of legality.
  4. Fourth, and most fundamentally, enforcers should take account of cost-benefit analysis, rooted in error-cost considerations, in their enforcement initiatives, in order to further consumer welfare. As I have previously written:

Assuming that one views modern antitrust enforcement as an exercise in consumer welfare maximization, what does that tell us about optimal antitrust enforcement policy design? In order to maximize welfare, enforcers must have an understanding of – and seek to maximize the difference between – the aggregate costs and benefits that are likely to flow from their policies. It therefore follows that cost-benefit analysis should be applied to antitrust enforcement design. Specifically, antitrust enforcers first should ensure that the rules they propagate create net welfare benefits. Next, they should (to the extent possible) seek to calibrate those rules so as to maximize net welfare. (Significantly, Federal Trade Commissioner Josh Wright also has highlighted the merits of utilizing cost-benefit analysis in the work of the FTC.) [Eight specific suggestions for implementing cost-beneficial antitrust evaluations are then put forth in this article.]

Conclusion

One must hope that efforts to eliminate consumer welfare as the focal point of U.S. antitrust will fail. But even if they do, market-oriented commentators should be alert to any efforts to “hijack” the CWS by interventionist market-skeptical scholars. A particular threat may involve efforts to define the CWS as merely involving short-term consumer surplus maximization in narrowly defined markets. Such efforts could, if successful, justify highly interventionist enforcement protocols deployed against a wide variety of efficient (though too often mischaracterized) business practices.

To counter interventionist antitrust proposals, it is important to demonstrate that claims of faltering competition and inadequate antitrust enforcement under current norms simply are inaccurate. Such an effort, though necessary, is not enough.

In order to win the day, it will be important for market mavens to explain that novel business practices aimed at promoting producer surplus tend to increase consumer surplus as well. That is because efficiency-enhancing stratagems (often embodied in restrictive IP-licensing agreements and non-standard contracts) that further innovation and overcome transaction-cost difficulties frequently pave the way for innovation and the dissemination of new technologies throughout the economy. Those effects, in turn, expand and create new market opportunities, yielding huge additions to consumer surplus—accretions that swamp short-term static effects.

Enlightened enforcers should apply enforcement protocols that allow such benefits to be taken into account. They should also focus on the interests of all consumers affected by a practice, not just a narrow subset of targeted potentially “harmed” consumers. Finally, public officials should view their enforcement mission through a cost-benefit lens, which is designed to promote welfare. 

In Antitrust & Competition, Error Costs, Intellectual Property, Patent, Truth on the Market, Vertical Restraints , , , , , , ,
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FTC Statement of Regulatory Priorities: Storm Clouds Are Looming

Alden Abbott —  15 December 2021

The Federal Trade Commission (FTC) appears committed—at least, for the moment—to a path of regulatory overreach. The commission’s Dec. 10 Statement of Regulatory Priorities (SRP) offers, in addition to a periodic review of existing rules and the status of proposed rules in the pipeline, a sneak preview of new “unfair methods of competition” (UMC) and “unfair or deceptive acts or practices” (UDAP) rulemakings that the body will consider developing next year.

In issuing its regulatory wish list, the FTC’s current “majority” (actually, only two of the four sitting members) pay no heed to spirited dissents by Commissioners Christine S. Wilson and Noah Phillips. Wilson’s well-reasoned statement particularly merits a close read, as it lays bare serious flaws with the wish list.

Highly problematic from the start, the SRP praises the July 2021 decision to streamline the commission’s consumer-protection rulemaking procedures, thus ignoring Wilson’s concerns (shared by Phillips) that “those changes fast-track regulation at the expense of public input, objectivity, and a full evidentiary record.”

The SRP also asserts that case-by-case antitrust enforcement “has proven insufficient, leaving behind a hyper-concentrated economy whose harms to American workers, consumers, and small businesses demand new approaches.” This attempt to justify new far-reaching rulemakings is made without a shred of substantiation, and without mention of solid economic research to the contrary.

Having failed to establish a broad economic predicate for novel rules, the SRP immediately turns to describing rulemaking possibilities.

It begins by describing a possible hybrid consumer-protection and competition rule focused on “abuses stemming from surveillance-based business models,” including possible lax security practices and discriminatory algorithms. The SRP claims, without citing any evidence, that such abuses are “particularly alarming.”

Next, the SRP sails further into uncharted FTC regulatory waters by stating that the commission will consider initiating a host of possible competition rulemakings that deal with “non-compete clauses, surveillance, the right to repair, pay-for-delay pharmaceutical agreements, unfair competition in online marketplaces, occupational licensing, real-estate listing and brokerage, and industry practices that substantially inhibit competition.”

The SRP also highlights two public petitions for competition rulemaking, dealing with (1) curtailing the use of non-compete clauses and (2) limiting exclusionary contracting by dominant firms. It adds that “the Commission also solicited additional examples of unfair terms” and is “carefully reviewing” thousands of public comments. As if that’s not enough, the SRP further notes that “[t]he Commission will explore the benefits and costs of these and other competition rulemaking ideas.”

This compilation of rulemaking desiderata is stunning in both its breadth and in its impracticality. Any efforts to follow through and actually put forth rulemakings along the lines suggested in the SRP would be harmful to producer and consumer welfare. Three points, in particular, are worth noting.

  1.  As I have previously explained, the legal justification for promulgating FTC UMC rules is highly problematic, to say the least. Moreover, the “streamlining” of consumer-protection rules under Section 18 of the FTC Act raises substantial Due Process problems. These difficulties are compounded by the reality that the commission lacks the administrative law resources to conduct the fulsome fact-finding proceedings and legal analyses that would provide credible record support for a raft of highly unprecedented rule proposals. As such, there is only a modest, at best, chance that most (if any) of the new rulemakings the FTC suggests would survive judicial review. Devoting substantial commission resources to novel and time-consuming rulemakings that will likely fail—resources that could be far better applied to more traditional law enforcement—would not appear to meet any rational cost-benefit test.
  2. The suggested rulemakings involve categories of business conduct that have major efficiency justifications. Imposing inflexible one-size-fits-all rule provisions to limit such conduct would generate enormous error costs, and would doubtless deter a great deal of economically efficient behavior. Business innovations that enhance market offerings would slow, harming consumers and denying potential gains to producers’ product and service improvements. Relatedly, regulatory strictures on industry practices would discourage third-party entrepreneurial activities that could have generated new markets and product and service improvements. These problems would be compounded by the error costs that would inevitably attend the design of rules.
  3. Novel rules would not be an effective means to address any FTC concerns about alleged dominant firm depredations. Indeed, to the contrary, the long and sordid history of regulatory manipulation by powerful firms in response to regulation suggests that new rules could create or enhance barriers to entry and raise less connected rivals’ costs. Such an outcome would, of course, harm consumers while reducing economic efficiency and innovation.

I have only scratched the surface of the problems raised by the SRP’s novel rule proposals. Fortunately, none of the troublesome rulemakings are yet under way. One may hope that the eventual confirmation of a fifth commissioner will lay the groundwork for a reconsideration of the wisdom of new and overly expansive rulemaking proceedings.   

In Antitrust & Competition, Error Costs, Federal Trade Commission, Section 5 , , , ,
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Consumer Welfare-Based Antitrust Enforcement is the Superior Means to Deal with Large Digital-Platform Competition Issues

Alden Abbott —  2 November 2021

There has been a rapid proliferation of proposals in recent years to closely regulate competition among large digital platforms. The European Union’s Digital Markets Act (DMA, which will become effective in 2023) imposes a variety of data-use, interoperability, and non-self-preferencing obligations on digital “gatekeeper” firms. A host of other regulatory schemes are being considered in Australia, France, Germany, and Japan, among other countries (for example, see here). The United Kingdom has established a Digital Markets Unit “to operationalise the future pro-competition regime for digital markets.” Recently introduced U.S. Senate and House Bills—although touted as “antitrust reform” legislation—effectively amount to “regulation in disguise” of disfavored business activities by very large companies,  including the major digital platforms (see here and here).

Sorely missing from these regulatory proposals is any sense of the fallibility of regulation. Indeed, proponents of new regulatory proposals seem to implicitly assume that government regulation of platforms will enhance welfare, ignoring real-life regulatory costs and regulatory failures (see here, for example). Without evidence, new regulatory initiatives are put forth as superior to long-established, consumer-based antitrust law enforcement.

The hope that new regulatory tools will somehow “solve” digital market competitive “problems” stems from the untested assumption that established consumer welfare-based antitrust enforcement is “not up to the task.” Untested assumptions, however, are an unsound guide to public policy decisions. Rather, in order to optimize welfare, all proposed government interventions in the economy, including regulation and antitrust, should be subject to decision-theoretic analysis that is designed to minimize the sum of error and decision costs (see here). What might such an analysis reveal?

Wonder no more. In a just-released Mercatus Center Working Paper, Professor Thom Lambert has conducted a decision-theoretic analysis that evaluates the relative merits of U.S. consumer welfare-based antitrust, ex ante regulation, and ongoing agency oversight in addressing the market power of large digital platforms. While explaining that antitrust and its alternatives have their respective costs and benefits, Lambert concludes that antitrust is the welfare-superior approach to dealing with platform competition issues. According to Lambert:

This paper provides a comparative institutional analysis of the leading approaches to addressing the market power of large digital platforms: (1) the traditional US antitrust approach; (2) imposition of ex ante conduct rules such as those in the EU’s Digital Markets Act and several bills recently advanced by the Judiciary Committee of the US House of Representatives; and (3) ongoing agency oversight, exemplified by the UK’s newly established “Digital Markets Unit.” After identifying the advantages and disadvantages of each approach, this paper examines how they might play out in the context of digital platforms. It first examines whether antitrust is too slow and indeterminate to tackle market power concerns arising from digital platforms. It next considers possible error costs resulting from the most prominent proposed conduct rules. It then shows how three features of the agency oversight model—its broad focus, political susceptibility, and perpetual control—render it particularly vulnerable to rent-seeking efforts and agency capture. The paper concludes that antitrust’s downsides (relative indeterminacy and slowness) are likely to be less significant than those of ex ante conduct rules (large error costs resulting from high informational requirements) and ongoing agency oversight (rent-seeking and agency capture).

Lambert’s analysis should be carefully consulted by American legislators and potential rule-makers (including at the Federal Trade Commission) before they institute digital platform regulation. One also hopes that enlightened foreign competition officials will also take note of Professor Lambert’s well-reasoned study. 

In Antitrust & Competition, Economic Theory, Error Costs, European Union, Federal Trade Commission, International, Platforms, Regulation, Truth on the Market, United Kingdom , , , , , , , , , , , , , , , , , ,
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Broad-Based FTC Data-Privacy and Security Rulemaking Would Flunk a Cost-Benefit Test

Alden Abbott —  13 October 2021

A debate has broken out among the four sitting members of the Federal Trade Commission (FTC) in connection with the recently submitted FTC Report to Congress on Privacy and Security. Chair Lina Khan argues that the commission “must explore using its rulemaking tools to codify baseline protections,” while Commissioner Rebecca Kelly Slaughter has urged the FTC to initiate a broad-based rulemaking proceeding on data privacy and security. By contrast, Commissioners Noah Joshua Phillips and Christine Wilson counsel against a broad-based regulatory initiative on privacy.

Decisions to initiate a rulemaking should be viewed through a cost-benefit lens (See summaries of Thom Lambert’s masterful treatment of regulation, of which rulemaking is a subset, here and here). Unless there is a market failure, rulemaking is not called for. Even in the face of market failure, regulation should not be adopted unless it is more cost-beneficial than reliance on markets (including the ability of public and private litigation to address market-failure problems, such as data theft). For a variety of reasons, it is unlikely that FTC rulemaking directed at privacy and data security would pass a cost-benefit test.

Discussion

As I have previously explained (see here and here), FTC rulemaking pursuant to Section 6(g) of the FTC Act (which authorizes the FTC “to make rules and regulations for the purpose of carrying out the provisions of this subchapter”) is properly read as authorizing mere procedural, not substantive, rules. As such, efforts to enact substantive competition rules would not pass a cost-benefit test. Such rules could well be struck down as beyond the FTC’s authority on constitutional law grounds, and as “arbitrary and capricious” on administrative law grounds. What’s more, they would represent retrograde policy. Competition rules would generate higher error costs than adjudications; could be deemed to undermine the rule of law, because the U.S. Justice Department (DOJ) could not apply such rules; and innovative efficiency-seeking business arrangements would be chilled.

Accordingly, the FTC likely would not pursue 6(g) rulemaking should it decide to address data security and privacy, a topic which best fits under the “consumer protection” category. Rather, the FTC presumably would most likely initiate a “Magnuson-Moss” rulemaking (MMR) under Section 18 of the FTC Act, which authorizes the commission to prescribe “rules which define with specificity acts or practices which are unfair or deceptive acts or practices in or affecting commerce within the meaning of Section 5(a)(1) of the Act.” Among other things, Section 18 requires that the commission’s rulemaking proceedings provide an opportunity for informal hearings at which interested parties are accorded limited rights of cross-examination. Also, before commencing an MMR proceeding, the FTC must have reason to believe the practices addressed by the rulemaking are “prevalent.” 15 U.S.C. Sec. 57a(b)(3).

MMR proceedings, which are not governed under the Administrative Procedure Act (APA), do not present the same degree of legal problems as Section 6(g) rulemakings (see here). The question of legal authority to adopt a substantive rule is not raised; “rule of law” problems are far less serious (the DOJ is not a parallel enforcer of consumer-protection law); and APA issues of “arbitrariness” and “capriciousness” are not directly presented. Indeed, MMR proceedings include a variety of procedures aimed at promoting fairness (see here, for example). An MMR proceeding directed at data privacy predictably would be based on the claim that the failure to adhere to certain data-protection norms is an “unfair act or practice.”

Nevertheless, MMR rules would be subject to two substantial sources of legal risk.

The first of these arises out of federalism. Three states (California, Colorado, and Virginia) recently have enacted comprehensive data-privacy laws, and a large number of other state legislatures are considering data-privacy bills (see here). The proliferation of state data-privacy statutes would raise the risk of inconsistent and duplicative regulatory norms, potentially chilling business innovations addressed at data protection (a severe problem in the Internet Age, when business data-protection programs typically will have interstate effects).

An FTC MMR data-protection regulation that successfully “occupied the field” and preempted such state provisions could eliminate that source of costs. The Magnuson–Moss Warranty Act, however, does not contain an explicit preemption clause, leaving in serious doubt the ability of an FTC rule to displace state regulations (see here for a summary of the murky state of preemption law, including the skepticism of textualist Supreme Court justices toward implied “obstacle preemption”). In particular, the long history of state consumer-protection and antitrust laws that coexist with federal laws suggests that the case for FTC rule-based displacement of state data protection is a weak one. The upshot, then, of a Section 18 FTC data-protection rule enactment could be “the worst of all possible worlds,” with drawn-out litigation leading to competing federal and state norms that multiplied business costs.

The second source of risk arises out of the statutory definition of “unfair practices,” found in Section 5(n) of the FTC Act. Section 5(n) codifies the meaning of unfair practices, and thereby constrains the FTC’s application of rulemakings covering such practices. Section 5(n) states:

The Commission shall have no authority . . . to declare unlawful an act or practice on the grounds that such an act or practice is unfair unless the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition. In determining whether an act or practice is unfair, the Commission may consider established public policies as evidence to be considered with all other evidence. Such public policy considerations may not serve as a primary basis for such determination.

In effect, Section 5(n) implicitly subjects unfair practices to a well-defined cost-benefit framework. Thus, in promulgating a data-privacy MMR, the FTC first would have to demonstrate that specific disfavored data-protection practices caused or were likely to cause substantial harm. What’s more, the commission would have to show that any actual or likely harm would not be outweighed by countervailing benefits to consumers or competition. One would expect that a data-privacy rulemaking record would include submissions that pointed to the efficiencies of existing data-protection policies that would be displaced by a rule.

Moreover, subsequent federal court challenges to a final FTC rule likely would put forth the consumer and competitive benefits sacrificed by rule requirements. For example, rule challengers might point to the added business costs passed on to consumers that would arise from particular rule mandates, and the diminution in competition among data-protection systems generated by specific rule provisions. Litigation uncertainties surrounding these issues could be substantial and would cast into further doubt the legal viability of any final FTC data protection rule.

Apart from these legal risk-based costs, an MMR data privacy predictably would generate error-based costs. Given imperfect information in the hands of government and the impossibility of achieving welfare-maximizing nirvana through regulation (see, for example, here), any MMR data-privacy rule would erroneously condemn some economically inefficient business protocols and disincentivize some efficiency-seeking behavior. The Section 5(n) cost-benefit framework, though helpful, would not eliminate such error. (For example, even bureaucratic efforts to accommodate some business suggestions during the rulemaking process might tilt the post-rule market in favor of certain business models, thereby distorting competition.) In the abstract, it is difficult to say whether the welfare benefits of a final MMA data-privacy rule (measured by reductions in data-privacy-related consumer harm) would outweigh the costs, even before taking legal costs into account.

Conclusion

At least two FTC commissioners (and likely a third, assuming that President Joe Biden’s highly credentialed nominee Alvaro Bedoya will be confirmed by the U.S. Senate) appear to support FTC data-privacy regulation, even in the absence of new federal legislation. Such regulation, which presumably would be adopted as an MMR pursuant to Section 18 of the FTC Act, would probably not prove cost-beneficial. Not only would adoption of a final data-privacy rule generate substantial litigation costs and uncertainty, it would quite possibly add an additional layer of regulatory burdens above and beyond the requirements of proliferating state privacy rules. Furthermore, it is impossible to say whether the consumer-privacy benefits stemming from such an FTC rule would outweigh the error costs (manifested through competitive distortions and consumer harm) stemming from the inevitable imperfections of the rule’s requirements. All told, these considerations counsel against the allocation of scarce FTC resources to a Section 18 data-privacy rulemaking initiative.

But what about legislation? New federal privacy legislation that explicitly preempted state law would eliminate costs arising from inconsistencies among state privacy rules. Ideally, if such legislation were to be pursued, it should to the extent possible embody a cost-benefit framework designed to minimize the sum of administrative (including litigation) and error costs. The nature of such a possible law, and the role the FTC might play in administering it, however, is a topic for another day.

In Administrative Law, Antitrust & Competition, Constitutional Law, Data Privacy & Security, Error Costs, Federal Trade Commission, Federalism, Jurisdictional Competition, Justice Department, Regulation, Section 5, Truth on the Market , , , , , , , , , , , , , ,
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FTC Antitrust Enforcement and the Rule of Law

Alden Abbott —  9 August 2021

The language of the federal antitrust laws is extremely general. Over more than a century, the federal courts have applied common-law techniques to construe this general language to provide guidance to the private sector as to what does or does not run afoul of the law. The interpretive process has been fraught with some uncertainty, as judicial approaches to antitrust analysis have changed several times over the past century. Nevertheless, until very recently, judges and enforcers had converged toward relying on a consumer welfare standard as the touchstone for antitrust evaluations (see my antitrust primer here, for an overview).

While imperfect and subject to potential error in application—a problem of legal interpretation generally—the consumer welfare principle has worked rather well as the focus both for antitrust-enforcement guidance and judicial decision-making. The general stability and predictability of antitrust under a consumer welfare framework has advanced the rule of law. It has given businesses sufficient information to plan transactions in a manner likely to avoid antitrust liability. It thereby has cabined uncertainty and increased the probability that private parties would enter welfare-enhancing commercial arrangements, to the benefit of society.

In a very thoughtful 2017 speech, then Acting Assistant Attorney General for Antitrust Andrew Finch commented on the importance of the rule of law to principled antitrust enforcement. He noted:

[H]ow do we administer the antitrust laws more rationally, accurately, expeditiously, and efficiently? … Law enforcement requires stability and continuity both in rules and in their application to specific cases.

Indeed, stability and continuity in enforcement are fundamental to the rule of law. The rule of law is about notice and reliance. When it is impossible to make reasonable predictions about how a law will be applied, or what the legal consequences of conduct will be, these important values are diminished. To call our antitrust regime a “rule of law” regime, we must enforce the law as written and as interpreted by the courts and advance change with careful thought.

The reliance fostered by stability and continuity has obvious economic benefits. Businesses invest, not only in innovation but in facilities, marketing, and personnel, and they do so based on the economic and legal environment they expect to face.

Of course, we want businesses to make those investments—and shape their overall conduct—in accordance with the antitrust laws. But to do so, they need to be able to rely on future application of those laws being largely consistent with their expectations. An antitrust enforcement regime with frequent changes is one that businesses cannot plan for, or one that they will plan for by avoiding certain kinds of investments.

That is certainly not to say there has not been positive change in the antitrust laws in the past, or that we would have been better off without those changes. U.S. antitrust law has been refined, and occasionally recalibrated, with the courts playing their appropriate interpretive role. And enforcers must always be on the watch for new or evolving threats to competition.  As markets evolve and products develop over time, our analysis adapts. But as those changes occur, we pursue reliability and consistency in application in the antitrust laws as much as possible.

Indeed, we have enjoyed remarkable continuity and consensus for many years. Antitrust law in the U.S. has not been a “paradox” for quite some time, but rather a stable and valuable law enforcement regime with appropriately widespread support.

Unfortunately, policy decisions taken by the new Federal Trade Commission (FTC) leadership in recent weeks have rejected antitrust continuity and consensus. They have injected substantial uncertainty into the application of competition-law enforcement by the FTC. This abrupt change in emphasis undermines the rule of law and threatens to reduce economic welfare.

As of now, the FTC’s departure from the rule of law has been notable in two areas:

  1. Its rejection of previous guidance on the agency’s “unfair methods of competition” authority, the FTC’s primary non-merger-related enforcement tool; and
  2. Its new advice rejecting time limits for the review of generally routine proposed mergers.

In addition, potential FTC rulemakings directed at “unfair methods of competition” would, if pursued, prove highly problematic.

Rescission of the Unfair Methods of Competition Policy Statement

The FTC on July 1 voted 3-2 to rescind the 2015 FTC Policy Statement Regarding Unfair Methods of Competition under Section 5 of the FTC Act (UMC Policy Statement).

The bipartisan UMC Policy Statement has originally been supported by all three Democratic commissioners, including then-Chairwoman Edith Ramirez. The policy statement generally respected and promoted the rule of law by emphasizing that, in applying the facially broad “unfair methods of competition” (UMC) language, the FTC would be guided by the well-established principles of the antitrust rule of reason (including considering any associated cognizable efficiencies and business justifications) and the consumer welfare standard. The FTC also explained that it would not apply “standalone” Section 5 theories to conduct that would violate the Sherman or Clayton Acts.

In short, the UMC Policy Statement sent a strong signal that the commission would apply UMC in a manner fully consistent with accepted and well-understood antitrust policy principles. As in the past, the vast bulk of FTC Section 5 prosecutions would be brought against conduct that violated the core antitrust laws. Standalone Section 5 cases would be directed solely at those few practices that harmed consumer welfare and competition, but somehow fell into a narrow crack in the basic antitrust statutes (such as, perhaps, “invitations to collude” that lack plausible efficiency justifications). Although the UMC Statement did not answer all questions regarding what specific practices would justify standalone UMC challenges, it substantially limited business uncertainty by bringing Section 5 within the boundaries of settled antitrust doctrine.

The FTC’s announcement of the UMC Policy Statement rescission unhelpfully proclaimed that “the time is right for the Commission to rethink its approach and to recommit to its mandate to police unfair methods of competition even if they are outside the ambit of the Sherman or Clayton Acts.” As a dissenting statement by Commissioner Christine S. Wilson warned, consumers would be harmed by the commission’s decision to prioritize other unnamed interests. And as Commissioner Noah Joshua Phillips stressed in his dissent, the end result would be reduced guidance and greater uncertainty.

In sum, by suddenly leaving private parties in the dark as to how to conform themselves to Section 5’s UMC requirements, the FTC’s rescission offends the rule of law.

New Guidance to Parties Considering Mergers

For decades, parties proposing mergers that are subject to statutory Hart-Scott-Rodino (HSR) Act pre-merger notification requirements have operated under the understanding that:

  1. The FTC and U.S. Justice Department (DOJ) will routinely grant “early termination” of review (before the end of the initial 30-day statutory review period) to those transactions posing no plausible competitive threat; and
  2. An enforcement agency’s decision not to request more detailed documents (“second requests”) after an initial 30-day pre-merger review effectively serves as an antitrust “green light” for the proposed acquisition to proceed.

Those understandings, though not statutorily mandated, have significantly reduced antitrust uncertainty and related costs in the planning of routine merger transactions. The rule of law has been advanced through an effective assurance that business combinations that appear presumptively lawful will not be the target of future government legal harassment. This has advanced efficiency in government, as well; it is a cost-beneficial optimal use of resources for DOJ and the FTC to focus exclusively on those proposed mergers that present a substantial potential threat to consumer welfare.

Two recent FTC pronouncements (one in tandem with DOJ), however, have generated great uncertainty by disavowing (at least temporarily) those two welfare-promoting review policies. Joined by DOJ, the FTC on Feb. 4 announced that the agencies would temporarily suspend early terminations, citing an “unprecedented volume of filings” and a transition to new leadership. More than six months later, this “temporary” suspension remains in effect.

Citing “capacity constraints” and a “tidal wave of merger filings,” the FTC subsequently published an Aug. 3 blog post that effectively abrogated the 30-day “green lighting” of mergers not subject to a second request. It announced that it was sending “warning letters” to firms reminding them that FTC investigations remain open after the initial 30-day period, and that “[c]ompanies that choose to proceed with transactions that have not been fully investigated are doing so at their own risk.”

The FTC’s actions interject unwarranted uncertainty into merger planning and undermine the rule of law. Preventing early termination on transactions that have been approved routinely not only imposes additional costs on business; it hints that some transactions might be subject to novel theories of liability that fall outside the antitrust consensus.

Perhaps more significantly, as three prominent antitrust practitioners point out, the FTC’s warning letters states that:

[T]he FTC may challenge deals that “threaten to reduce competition and harm consumers, workers, and honest businesses.” Adding in harm to both “workers and honest businesses” implies that the FTC may be considering more ways that transactions can have an adverse impact other than just harm to competition and consumers [citation omitted].

Because consensus antitrust merger analysis centers on consumer welfare, not the protection of labor or business interests, any suggestion that the FTC may be extending its reach to these new areas is inconsistent with established legal principles and generates new business-planning risks.

More generally, the Aug. 6 FTC “blog post could be viewed as an attempt to modify the temporal framework of the HSR Act”—in effect, an effort to displace an implicit statutory understanding in favor of an agency diktat, contrary to the rule of law. Commissioner Wilson sees the blog post as a means to keep investigations open indefinitely and, thus, an attack on the decades-old HSR framework for handling most merger reviews in an expeditious fashion (see here). Commissioner Phillips is concerned about an attempt to chill legal M&A transactions across the board, particularly unfortunate when there is no reason to conclude that particular transactions are illegal (see here).

Finally, the historical record raises serious questions about the “resource constraint” justification for the FTC’s new merger review policies:

Through the end of July 2021, more than 2,900 transactions were reported to the FTC. It is not clear, however, whether these record-breaking HSR filing numbers have led (or will lead) to more deals being investigated. Historically, only about 13 percent of all deals reported are investigated in some fashion, and roughly 3 percent of all deals reported receive a more thorough, substantive review through the issuance of a Second Request. Even if more deals are being reported, for the majority of transactions, the HSR process is purely administrative, raising no antitrust concerns, and, theoretically, uses few, if any, agency resources. [Citations omitted.]

Proposed FTC Competition Rulemakings

The new FTC leadership is strongly considering competition rulemakings. As I explained in a recent Truth on the Market post, such rulemakings would fail a cost-benefit test. They raise serious legal risks for the commission and could impose wasted resource costs on the FTC and on private parties. More significantly, they would raise two very serious economic policy concerns:

First, competition rules would generate higher error costs than adjudications. Adjudications cabin error costs by allowing for case-specific analysis of likely competitive harms and procompetitive benefits. In contrast, competition rules inherently would be overbroad and would suffer from a very high rate of false positives. By characterizing certain practices as inherently anticompetitive without allowing for consideration of case-specific facts bearing on actual competitive effects, findings of rule violations inevitably would condemn some (perhaps many) efficient arrangements.

Second, competition rules would undermine the rule of law and thereby reduce economic welfare. FTC-only competition rules could lead to disparate legal treatment of a firm’s business practices, depending upon whether the FTC or the U.S. Justice Department was the investigating agency. Also, economic efficiency gains could be lost due to the chilling of aggressive efficiency-seeking business arrangements in those sectors subject to rules. [Emphasis added.]

In short, common law antitrust adjudication, focused on the consumer welfare standard, has done a good job of promoting a vibrant competitive economy in an efficient fashion. FTC competition rulemaking would not.

Conclusion

Recent FTC actions have undermined consensus antitrust-enforcement standards and have departed from established merger-review procedures with respect to seemingly uncontroversial consolidations. Those decisions have imposed costly uncertainty on the business sector and are thereby likely to disincentivize efficiency-seeking arrangements. What’s more, by implicitly rejecting consensus antitrust principles, they denigrate the primacy of the rule of law in antitrust enforcement. The FTC’s pursuit of competition rulemaking would further damage the rule of law by imposing arbitrary strictures that ignore matter-specific considerations bearing on the justifications for particular business decisions.

Fortunately, these are early days in the Biden administration. The problematic initial policy decisions delineated in this comment could be reversed based on further reflection and deliberation within the commission. Chairwoman Lina Khan and her fellow Democratic commissioners would benefit by consulting more closely with Commissioners Wilson and Phillips to reach agreement on substantive and procedural enforcement policies that are better tailored to promote consumer welfare and enhance vibrant competition. Such policies would benefit the U.S. economy in a manner consistent with the rule of law.

In Antitrust & Competition, Antitrust Division, Apple, Error Costs, Federal Trade Commission, Justice Department, Mergers & Acquisitions, Platforms, Section 5, Truth on the Market , , , , , , , , , , , , , , , , , , , ,
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Congress Should Not Grant the FTC Untrammeled Authority to Obtain Monetary Relief

Alden Abbott —  22 July 2021

The U.S. House this week passed H.R. 2668, the Consumer Protection and Recovery Act (CPRA), which authorizes the Federal Trade Commission (FTC) to seek monetary relief in federal courts for injunctions brought under Section 13(b) of the Federal Trade Commission Act.

Potential relief under the CPRA is comprehensive. It includes “restitution for losses, rescission or reformation of contracts, refund of money, return of property … and disgorgement of any unjust enrichment that a person, partnership, or corporation obtained as a result of the violation that gives rise to the suit.” What’s more, under the CPRA, monetary relief may be obtained for violations that occurred up to 10 years before the filing of the suit in which relief is requested by the FTC.

The Senate should reject the House version of the CPRA. Its monetary-recovery provisions require substantial narrowing if it is to pass cost-benefit muster.

The CPRA is a response to the Supreme Court’s April 22 decision in AMG Capital Management v. FTC, which held that Section 13(b) of the FTC Act does not authorize the commission to obtain court-ordered equitable monetary relief. As I explained in an April 22 Truth on the Market post, Congress’ response to the court’s holding should not be to grant the FTC carte blanche authority to obtain broad monetary exactions for any and all FTC Act violations. I argued that “[i]f Congress adopts a cost-beneficial error-cost framework in shaping targeted legislation, it should limit FTC monetary relief authority (recoupment and disgorgement) to situations of consumer fraud or dishonesty arising under the FTC’s authority to pursue unfair or deceptive acts or practices.”

Error cost and difficulties of calculation counsel against pursuing monetary recovery in FTC unfair methods of competition cases. As I explained in my post:

Consumer redress actions are problematic for a large proportion of FTC antitrust enforcement (“unfair methods of competition”) initiatives. Many of these antitrust cases are “cutting edge” matters involving novel theories and complex fact patterns that pose a significant threat of type I [false positives] error. (In comparison, type I error is low in hardcore collusion cases brought by the U.S. Justice Department where the existence, nature, and effects of cartel activity are plain). What’s more, they generally raise extremely difficult if not impossible problems in estimating the degree of consumer harm. (Even DOJ price-fixing cases raise non-trivial measurement difficulties.)

These error-cost and calculation difficulties became even more pronounced as of July 1. On that date, the FTC unwisely voted 3-2 to withdraw a bipartisan 2015 policy statement providing that the commission would apply consumer welfare and rule-of-reason (weighing efficiencies against anticompetitive harm) considerations in exercising its unfair methods of competition authority (see my commentary here). This means that, going forward, the FTC will arrogate to itself unbounded discretion to decide what competitive practices are “unfair.” Business uncertainty, and the costly risk aversion it engenders, would be expected to grow enormously if the FTC could extract monies from firms due to competitive behavior deemed “unfair,” based on no discernible neutral principle.

Error costs and calculation problems also strongly suggest that monetary relief in FTC consumer-protection matters should be limited to cases of fraud or clear deception. As I noted:

[M]atters involving a higher likelihood of error and severe measurement problems should be the weakest candidates for consumer redress in the consumer protection sphere. For example, cases involve allegedly misleading advertising regarding the nature of goods, or allegedly insufficient advertising substantiation, may generate high false positives and intractable difficulties in estimating consumer harm. As a matter of judgment, given resource constraints, seeking financial recoveries solely in cases of fraud or clear deception where consumer losses are apparent and readily measurable makes the most sense from a cost-benefit perspective.

In short, the Senate should rewrite its Section 13(b) amendments to authorize FTC monetary recoveries only when consumer fraud and dishonesty is shown.

Finally, the Senate would be wise to sharply pare back the House language that allows the FTC to seek monetary exactions based on conduct that is a decade old. Serious problems of making accurate factual determinations of economic effects and specific-damage calculations would arise after such a long period of time. Allowing retroactive determinations based on a shorter “look-back” period prior to the filing of a complaint (three years, perhaps) would appear to strike a better balance in allowing reasonable redress while controlling error costs.

In Antitrust & Competition, Error Costs, Federal Trade Commission, Justice Department, Truth on the Market , , , , , , , , , ,
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A First Glance at the Biden Executive Order on Competition: The Good and the Bad (Including Much that Looks Ugly)

Alden Abbott —  9 July 2021

The Biden Administration’s July 9 Executive Order on Promoting Competition in the American Economy is very much a mixed bag—some positive aspects, but many negative ones.

It will have some positive effects on economic welfare, to the extent it succeeds in lifting artificial barriers to competition that harm consumers and workers—such as allowing direct sales of hearing aids in drug stores—and helping to eliminate unnecessary occupational licensing restrictions, to name just two of several examples.

But it will likely have substantial negative effects on economic welfare as well. Many aspects of the order appear to emphasize new regulation—such as Net Neutrality requirements that may reduce investment in broadband by internet service providers—and imposing new regulatory requirements on airlines, pharmaceutical companies, digital platforms, banks, railways, shipping, and meat packers, among others. Arbitrarily imposing new rules in these areas, without a cost-beneficial appraisal and a showing of a market failure, threatens to reduce innovation and slow economic growth, hurting producers and consumer. (A careful review of specific regulatory proposals may shed greater light on the justifications for particular regulations.)

Antitrust-related proposals to challenge previously cleared mergers, and to impose new antitrust rulemaking, are likely to raise costly business uncertainty, to the detriment of businesses and consumers. They are a recipe for slower economic growth, not for vibrant competition.

An underlying problem with the order is that it is based on the false premise that competition has diminished significantly in recent decades and that “big is bad.” Economic analysis found in the February 2020 Economic Report of the President, and in other economic studies, debunks this flawed assumption.

In short, the order commits the fundamental mistake of proposing intrusive regulatory solutions for a largely nonexistent problem. Competitive issues are best handled through traditional well-accepted antitrust analysis, which centers on promoting consumer welfare and on weighing procompetitive efficiencies against anticompetitive harm on a case-by-case basis. This approach:

  1. Deals effectively with serious competitive problems; while at the same time
  2. Cabining error costs by taking into account all economically relevant considerations on a case-specific basis.

Rather than using an executive order to direct very specific regulatory approaches without a strong economic and factual basis, the Biden administration would have been better served by raising a host of competitive issues that merit possible study and investigation by expert agencies. Such an approach would have avoided imposing the costs of unwarranted regulation that unfortunately are likely to stem from the new order.

Finally, the order’s call for new regulations and the elimination of various existing legal policies will spawn matter-specific legal challenges, and may, in many cases, not succeed in court. This will impose unnecessary business uncertainty in addition to public and private resources wasted on litigation.

In Administrative Law, Antitrust & Competition, Antitrust Division, Banking, Broadband, Data Privacy & Security, Error Costs, Federal Communications Commission, Federal Trade Commission, Financial Regulation, Health Care, Intellectual Property, Justice Department, Merger Guidelines, Mergers & Acquisitions, Monopolization, Net Neutrality, Pharmaceuticals, Platforms, Regulation, Telecommunications, Truth on the Market , , , , , , , , , , , , , , , , ,
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FTC Competition Rulemaking Flunks a Cost-Benefit Test

Alden Abbott —  29 June 2021

There is little doubt that Federal Trade Commission (FTC) unfair methods of competition rulemaking proceedings are in the offing. Newly named FTC Chair Lina Khan and Commissioner Rohit Chopra both have extolled the benefits of competition rulemaking in a major law review article. What’s more, in May, Commissioner Rebecca Slaughter (during her stint as acting chair) established a rulemaking unit in the commission’s Office of General Counsel empowered to “explore new rulemakings to prohibit unfair or deceptive practices and unfair methods of competition” (emphasis added).

In short, a majority of sitting FTC commissioners apparently endorse competition rulemaking proceedings. As such, it is timely to ask whether FTC competition rules would promote consumer welfare, the paramount goal of competition policy.

In a recently published Mercatus Center research paper, I assess the case for competition rulemaking from a competition perspective and find it wanting. I conclude that, before proceeding, the FTC should carefully consider whether such rulemakings would be cost-beneficial. I explain that any cost-benefit appraisal should weigh both the legal risks and the potential economic policy concerns (error costs and “rule of law” harms). Based on these considerations, competition rulemaking is inappropriate. The FTC should stick with antitrust enforcement as its primary tool for strengthening the competitive process and thereby promoting consumer welfare.

A summary of my paper follows.

Section 6(g) of the original Federal Trade Commission Act authorizes the FTC “to make rules and regulations for the purpose of carrying out the provisions of this subchapter.” Section 6(g) rules are enacted pursuant to the “informal rulemaking” requirements of Section 553 of the Administrative Procedures Act (APA), which apply to the vast majority of federal agency rulemaking proceedings.

Before launching Section 6(g) competition rulemakings, however, the FTC would be well-advised first to weigh the legal risks and policy concerns associated with such an endeavor. Rulemakings are resource-intensive proceedings and should not lightly be undertaken without an eye to their feasibility and implications for FTC enforcement policy.

Only one appeals court decision addresses the scope of Section 6(g) rulemaking. In 1971, the FTC enacted a Section 6(g) rule stating that it was both an “unfair method of competition” and an “unfair act or practice” for refiners or others who sell to gasoline retailers “to fail to disclose clearly and conspicuously in a permanent manner on the pumps the minimum octane number or numbers of the motor gasoline being dispensed.” In 1973, in the National Petroleum Refiners case, the U.S. Court of Appeals for the D.C. Circuit upheld the FTC’s authority to promulgate this and other binding substantive rules. The court rejected the argument that Section 6(g) authorized only non-substantive regulations concerning regarding the FTC’s non-adjudicatory, investigative, and informative functions, spelled out elsewhere in Section 6.

In 1975, two years after National Petroleum Refiners was decided, Congress granted the FTC specific consumer-protection rulemaking authority (authorizing enactment of trade regulation rules dealing with unfair or deceptive acts or practices) through Section 202 of the Magnuson-Moss Warranty Act, which added Section 18 to the FTC Act. Magnuson-Moss rulemakings impose adjudicatory-type hearings and other specific requirements on the FTC, unlike more flexible section 6(g) APA informal rulemakings. However, the FTC can obtain civil penalties for violation of Magnuson-Moss rules, something it cannot do if 6(g) rules are violated.

In a recent set of public comments filed with the FTC, the Antitrust Section of the American Bar Association stated:

[T]he Commission’s [6(g)] rulemaking authority is buried in within an enumerated list of investigative powers, such as the power to require reports from corporations and partnerships, for example. Furthermore, the [FTC] Act fails to provide any sanctions for violating any rule adopted pursuant to Section 6(g). These two features strongly suggest that Congress did not intend to give the agency substantive rulemaking powers when it passed the Federal Trade Commission Act.

Rephrased, this argument suggests that the structure of the FTC Act indicates that the rulemaking referenced in Section 6(g) is best understood as an aid to FTC processes and investigations, not a source of substantive policymaking. Although the National Petroleum Refiners decision rejected such a reading, that ruling came at a time of significant judicial deference to federal agency activism, and may be dated.

The U.S. Supreme Court’s April 2021 decision in AMG Capital Management v. FTC further bolsters the “statutory structure” argument that Section 6(g) does not authorize substantive rulemaking. In AMG, the U.S. Supreme Court unanimously held that Section 13(b) of the FTC Act, which empowers the FTC to seek a “permanent injunction” to restrain an FTC Act violation, does not authorize the FTC to seek monetary relief from wrongdoers. The court’s opinion rejected the FTC’s argument that the term “permanent injunction” had historically been understood to include monetary relief. The court explained that the injunctive language was “buried” in a lengthy provision that focuses on injunctive, not monetary relief (note that the term “rules” is similarly “buried” within 6(g) language dealing with unrelated issues). The court also pointed to the structure of the FTC Act, with detailed and specific monetary-relief provisions found in Sections 5(l) and 19, as “confirm[ing] the conclusion” that Section 13(b) does not grant monetary relief.

By analogy, a court could point to Congress’ detailed enumeration of substantive rulemaking provisions in Section 18 (a mere two years after National Petroleum Refiners) as cutting against the claim that Section 6(g) can also be invoked to support substantive rulemaking. Finally, the Supreme Court in AMG flatly rejected several relatively recent appeals court decisions that upheld Section 13(b) monetary-relief authority. It follows that the FTC cannot confidently rely on judicial precedent (stemming from one arguably dated court decision, National Petroleum Refiners) to uphold its competition rulemaking authority.

In sum, the FTC will have to overcome serious fundamental legal challenges to its section 6(g) competition rulemaking authority if it seeks to promulgate competition rules.

Even if the FTC’s 6(g) authority is upheld, it faces three other types of litigation-related risks.

First, applying the nondelegation doctrine, courts might hold that the broad term “unfair methods of competition” does not provide the FTC “an intelligible principle” to guide the FTC’s exercise of discretion in rulemaking. Such a judicial holding would mean the FTC could not issue competition rules.

Second, a reviewing court might strike down individual proposed rules as “arbitrary and capricious” if, say, the court found that the FTC rulemaking record did not sufficiently take into account potentially procompetitive manifestations of a condemned practice.

Third, even if a final competition rule passes initial legal muster, applying its terms to individual businesses charged with rule violations may prove difficult. Individual businesses may seek to structure their conduct to evade the particular strictures of a rule, and changes in commercial practices may render less common the specific acts targeted by a rule’s language.

Economic Policy Concerns Raised by Competition Rulemaking

In addition to legal risks, any cost-benefit appraisal of FTC competition rulemaking should consider the economic policy concerns raised by competition rulemaking. These fall into two broad categories.

First, competition rules would generate higher error costs than adjudications. Adjudications cabin error costs by allowing for case-specific analysis of likely competitive harms and procompetitive benefits. In contrast, competition rules inherently would be overbroad and would suffer from a very high rate of false positives. By characterizing certain practices as inherently anticompetitive without allowing for consideration of case-specific facts bearing on actual competitive effects, findings of rule violations inevitably would condemn some (perhaps many) efficient arrangements.

Second, competition rules would undermine the rule of law and thereby reduce economic welfare. FTC-only competition rules could lead to disparate legal treatment of a firm’s business practices, depending upon whether the FTC or the U.S. Justice Department was the investigating agency. Also, economic efficiency gains could be lost due to the chilling of aggressive efficiency-seeking business arrangements in those sectors subject to rules.

Conclusion

A combination of legal risks and economic policy harms strongly counsels against the FTC’s promulgation of substantive competition rules.

First, litigation issues would consume FTC resources and add to the costly delays inherent in developing competition rules in the first place. The compounding of separate serious litigation risks suggests a significant probability that costs would be incurred in support of rules that ultimately would fail to be applied.

Second, even assuming competition rules were to be upheld, their application would raise serious economic policy questions. The inherent inflexibility of rule-based norms is ill-suited to deal with dynamic evolving market conditions, compared with matter-specific antitrust litigation that flexibly applies the latest economic thinking to particular circumstances. New competition rules would also exacerbate costly policy inconsistencies stemming from the existence of dual federal antitrust enforcement agencies, the FTC and the Justice Department.

In conclusion, an evaluation of rule-related legal risks and economic policy concerns demonstrates that a reallocation of some FTC enforcement resources to the development of competition rules would not be cost-effective. Continued sole reliance on case-by-case antitrust litigation would generate greater economic welfare than a mixture of litigation and competition rules.

In Administrative Law, Antitrust & Competition, Antitrust Division, Corporate & Securities Law, Error Costs, Federal Trade Commission, Justice Department, Section 5, Truth on the Market , , , , , , , , , , , , , ,
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