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Why Competition Enforcers’ Annual Roundtable Should Focus on Competition Advocacy and Combating Anticompetitive Market Distortions

Alden Abbott —  22 March 2023 — Leave a comment

Spring is here, and hope springs eternal in the human breast that competition enforcers will focus on welfare-enhancing initiatives, rather than on welfare-reducing interventionism that fails the consumer welfare standard.

Fortuitously, on March 27, the Federal Trade Commission (FTC) and U.S. Justice Department (DOJ) are hosting an international antitrust-enforcement summit, featuring senior state and foreign antitrust officials (see here). According to an FTC press release, “FTC Chair Lina M. Khan and DOJ Assistant Attorney General Jonathan Kanter, as well as senior staff from both agencies, will facilitate discussions on complex challenges in merger and unilateral conduct enforcement in digital and transitional markets.”

I suggest that the FTC and DOJ shelve that topic, which is the focus of endless white papers and regular enforcement-oriented conversations among competition-agency staffers from around the world. What is there for officials to learn? (Perhaps they could discuss the value of curbing “novel” digital-market interventions that undermine economic efficiency and innovation, but I doubt that this important topic would appear on the agenda.)

Rather than tread familiar enforcement ground (albeit armed with novel legal theories that are known to their peers), the FTC and DOJ instead should lead an international dialogue on applying agency resources to strengthen competition advocacy and to combat anticompetitive market distortions. Such initiatives, which involve challenging government-generated impediments to competition, would efficiently and effectively promote the Biden administration’s “whole of government” approach to competition policy.

Competition Advocacy

The World Bank and the Organization for Economic Cooperation and Development (OECD) have jointly described the role and importance of competition advocacy:

[C]ompetition may be lessened significantly by various public policies and institutional arrangements as well [as by private restraints]. Indeed, private restrictive business practices are often facilitated by various government interventions in the marketplace. Thus, the mandate of the competition office extends beyond merely enforcing the competition law. It must also participate more broadly in the formulation of its country’s economic policies, which may adversely affect competitive market structure, business conduct, and economic performance. It must assume the role of competition advocate, acting proactively to bring about government policies that lower barriers to entry, promote deregulation and trade liberalization, and otherwise minimize unnecessary government intervention in the marketplace.

The FTC and DOJ have a proud history of competition-advocacy initiatives. In an article exploring the nature and history of FTC advocacy efforts, FTC scholars James Cooper, Paul Pautler, & Todd Zywicki explained:

Competition advocacy, broadly, is the use of FTC expertise in competition, economics, and consumer protection to persuade governmental actors at all levels of the political system and in all branches of government to design policies that further competition and consumer choice. Competition advocacy often takes the form of letters from the FTC staff or the full Commission to an interested regulator, but also consists of formal comments and amicus curiae briefs.

Cooper, Pautler, & Zywicki also provided guidance—derived from an evaluation of FTC public-interest interventions—on how advocacy initiatives can be designed to maximize their effectiveness.

During the Trump administration, the FTC’s Economic Liberty Task Force shone its advocacy spotlight on excessive state occupational-licensing restrictions that create unwarranted entry barriers and distort competition in many lines of work. (The Obama administration in 2016 issued a report on harms to workers that stem from excessive occupational licensing, but it did not accord substantial resources to advocacy efforts in this area.)

Although its initiatives in this area have been overshadowed in recent decades by the FTC, DOJ over the years also has filed a large number of competition-advocacy comments with federal and state entities.

Anticompetitive Market Distortions (ACMDs)

ACMDs refer to government-imposed restrictions on competition. These distortions may take the form of distortions of international competition (trade distortions), distortions of domestic competition, or distortions of property-rights protection (that with which firms compete). Distortions across any of these pillars could have a negative effect on economic growth. (See here.)

Because they enjoy state-backed power and the force of law, ACMDs cannot readily be dislodged by market forces over time, unlike purely private restrictions. What’s worse, given the role that governments play in facilitating them, ACMDs often fall outside the jurisdictional reach of both international trade laws and domestic competition laws.

The OECD’s Competition Assessment Toolkit sets forth four categories of regulatory restrictions that distort competition. Those are provisions that:

  1. limit the number or range of providers;
  2. limit the ability of suppliers to compete;
  3. reduce the incentive of suppliers to compete; and that
  4. limit the choices and information available to consumers.

When those categories explicitly or implicitly favor domestic enterprises over foreign enterprises, they may substantially distort international trade and investment decisions, to the detriment of economic efficiency and consumer welfare in multiple jurisdictions.

Given the non-negligible extraterritorial impact of many ACMDs, directing the attention of foreign competition agencies to the ACMD problem would be a particularly efficient use of time at gatherings of peer competition agencies from around the world. Peer competition agencies could discuss strategies to convince their governments to phase out or limit the scope of ACMDs.

The collective action problem that may prevent any one jurisdiction from acting unilaterally to begin dismantling its ACMDs might be addressed through international trade negotiations (perhaps, initially, plurilateral negotiations) aimed at creating ACMD remedies in trade treaties. (Shanker Singham has written about crafting trade remedies to deal with ACMDs—see here, for example.) Thus, strategies whereby national competition agencies could “pull in” their fellow national trade agencies to combat ACMDs merit exploration. Why not start the ball rolling at next week’s international antitrust-enforcement summit? (Hint, why not pull in a bunch of DOJ and FTC economists, who may feel underappreciated and underutilized at this time, to help out?)

Conclusion

If the Biden administration truly wants to strengthen the U.S. economy by bolstering competitive forces, the best way to do that would be to reallocate a substantial share of antitrust-enforcement resources to competition-advocacy efforts and the dismantling of ACMDs.

In order to have maximum impact, such efforts should be backed by a revised “whole of government” initiative – perhaps embodied in a new executive order. That new order should urge federal agencies (including the “independent” agencies that exercise executive functions) to cooperate with the DOJ and FTC in rooting out and repealing anticompetitive regulations (including ACMDs that undermine competition by distorting trade flows).

The DOJ and FTC should also be encouraged by the executive order to step up their advocacy efforts at the state level. The Office of Management and Budget (OMB) could be pulled in to help identify ACMDs, and the U.S. Trade Representative’s Office (USTR), with DOJ and FTC economic assistance, could start devising an anti-ACMD negotiating strategy.

In addition, the FTC and DOJ should directly urge foreign competition agencies to engage in relatively more competition advocacy. The U.S. agencies should simultaneously push to make competition-advocacy promotion a much higher International Competition Network priority (see here for the ICN Advocacy Working Group’s 2022-2025 Work Plan). The FTC and DOJ could simultaneously encourage their competition-agency peers to work with their fellow trade agencies (USTR’s peer bureaucracies) to devise anti-ACMD negotiating strategies.

These suggestions may not quite be ripe for meetings to be held in a few days. But if the administration truly believes in an all-of-government approach to competition, and is truly committed to multilateralism, these recommendations should be right up its alley. There will be plenty of bilateral and plurilateral trade and competition-agency meetings (not to mention the World Bank, OECD, and other multilateral gatherings) in the next year or so at which these sensible, welfare-enhancing suggestions could be advanced. After all, “hope springs eternal in the human breast.”

In Antitrust & Competition, Antitrust Division, Federal Trade Commission, International, Justice Department, Platforms, Truth on the Market , , , , , , , , ,
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Mergers and Innovation: DOJ and FTC Take Heed

Alden Abbott —  15 February 2023

Economists have long recognized that innovation is key to economic growth and vibrant competition. As an Organisation for Economic Co-operation and Development (OECD) report on innovation and growth explains, “innovative activity is the main driver of economic progress and well-being as well as a potential factor in meeting global challenges in domains such as the environment and health. . . . [I]nnovation performance is a crucial determinant of competitiveness and national progress.”

It follows that an economically rational antitrust policy should be highly attentive to innovation concerns. In a December 2020 OECD paper, David Teece and Nicolas Petit caution that antitrust today is “missing broad spectrum competition that delivers innovation, which in turn is the main driver of long term growth in capitalist economies.” Thus, the authors stress that “[i]t is about time to put substance behind economists’ and lawyers’ long time admonition to inject more dynamism in our analysis of competition. An antitrust renaissance, not a revolution, is long overdue.”

Accordingly, before the U.S. Justice Department (DOJ) and Federal Trade Commission (FTC) finalize their new draft merger guidelines, they would be well-advised to take heed of new research that “there is an important connection between merger activity and innovation.” This connection is described in a provocative new NERA Economic Consulting paper by Robert Kulick and Andrew Card titled “Mergers, Industries, and Innovation: Evidence from R&D Expenditures and Patent Applications.” As the executive summary explains (citation deleted):

For decades, there has been a broad consensus among policymakers, antitrust enforcers, and economists that most mergers pose little threat from an antitrust perspective and that mergers are generally procompetitive. However, over the past year, leadership at the FTC and DOJ has questioned whether mergers are, as a general matter, economically beneficial and asserted that mergers pose an active threat to innovation. The Agencies have also set the stage for a substantial increase in the scope of merger enforcement by focusing on new theories of anticompetitive harm such as elimination of potential competition from nascent competitors and the potential for cumulative anticompetitive harm from serial acquisitions. Despite the importance of the question of whether mergers have a positive or negative effect on industry-level innovation, there is very little empirical research on the subject. Thus, in this study, we investigate this question utilizing, what is to our knowledge, a never before used dataset combining industry-level merger data from the FTC/DOJ annual HSR reports with industry-level data from the NSF on R&D expenditure and patent applications. We find a strong positive and statistically significant relationship between merger activity and industry-level innovative activity. Over a three- to four-year cycle, a given merger is associated with an average increase in industry-level R&D expenditure of between $299 million and $436 million in R&D intensive industries. Extrapolating our results to the industry level implies that, on average, mergers are associated with an increase in R&D expenditure of between $9.27 billion and $13.52 billion per year in R&D intensive industries and an increase of between 1,430 and 3,035 utility patent applications per year. Furthermore, using a statistical technique developed by Nobel Laureate Clive Granger, we find that the direction of causality goes, to a substantial extent, directly from merger activity to increased R&D expenditure and patent applications. Based on these findings we draw the following key conclusions:

  • There is no evidence that mergers are generally associated with reduced innovation, nor do the results indicate that supposedly lax antitrust enforcement over the period from 2008 to 2020 diminished innovative activity. Indeed, R&D expenditure and patent applications increased substantially over the period studied, and this increase was directly linked to increases in merger activity.
  • In previous research, we found that “trends in industrial concentration do not provide a reliable basis for making inferences about the competitive effects of a proposed merger” as “trends in concentration may simply reflect temporary fluctuations which have no broader economic significance” or are “often a sign of increasing rather than decreasing market competition.” This study presents further evidence that previous consolidation in an industry or a “trend toward concentration” may reflect procompetitive responses to competitive pressures, and therefore should not play a role in merger review beyond that already embodied in the market-level concentration screens considered by the Agencies.
  • The Agencies should proceed cautiously in pursuing novel theories of anticompetitive harm; our findings are consistent with the prevailing consensus from the previous decades that there is an important connection between merger activity and innovation, and thus, a broad “anti-merger” policy, particularly one pursued in the absence of strong empirical evidence, has the potential to do serious harm by perversely inhibiting innovative activity.
  • Due to the link between mergers and innovative activity in R&D intensive industries where the potential for anticompetitive consequences can be resolved through remedies, relying on remedies rather than blocking transactions outright may encourage innovation while protecting consumers where there are legitimate competitive concerns about a particular transaction.
  • The potential for mergers to create procompetitive benefits should be taken seriously by policymakers, antitrust enforcers, courts, and academics and the Agencies should actively study the potential benefits, in addition to the costs, of mergers.

In short, the Kulick & Card paper lends valuable empirical support for an economics-based approach to merger analysis that fully takes into account innovation concerns. If the FTC and DOJ truly care about strengthening the American economy (consistent with “President Biden’s stated goals of renewing U.S. innovation and global competitiveness”—see, e.g., here and here), they should take heed in crafting new merger guidelines. An emphasis in the guidelines on avoiding interference with merger-related innovation (taking into account research by such scholars as Kulick, Card, Teece, and Petit) would demonstrate that the antitrust agencies are fully behind President Joe Biden’s plans to promote an innovative economy.

In Antitrust & Competition, Antitrust Division, Federal Trade Commission, Justice Department, Merger Guidelines, Mergers & Acquisitions, Truth on the Market , ,
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7 Top Takeaways from the 2nd Annual Mercatus Antitrust Forum

Alden Abbott —  1 February 2023

At the Jan. 26 Policy in Transition forum—the Mercatus Center at George Mason University’s second annual antitrust forum—various former and current antitrust practitioners, scholars, judges, and agency officials held forth on the near-term prospects for the neo-Brandeisian experiment undertaken in recent years by both the Federal Trade Commission (FTC) and the U.S. Justice Department (DOJ). In conjunction with the forum, Mercatus also released a policy brief on 2022’s significant antitrust developments.

Below, I summarize some of the forum’s noteworthy takeaways, followed by concluding comments on the current state of the antitrust enterprise, as reflected in forum panelists’ remarks.

Takeaways

    1. The consumer welfare standard is neither a recent nor an arbitrary antitrust-enforcement construct, and it should not be abandoned in order to promote a more “enlightened” interventionist antitrust.

George Mason University’s Donald Boudreaux emphasized in his introductory remarks that the standard goes back to Adam Smith, who noted in “The Wealth of Nations” nearly 250 years ago that the appropriate end of production is the consumer’s benefit. Moreover, American Antitrust Institute President Diana Moss, a leading proponent of more aggressive antitrust enforcement, argued in standalone remarks against abandoning the consumer welfare standard, as it is sufficiently flexible to justify a more interventionist agenda.

    1. The purported economic justifications for a far more aggressive antitrust-enforcement policy on mergers remain unconvincing.

Moss’ presentation expressed skepticism about vertical-merger efficiencies and called for more aggressive challenges to such consolidations. But Boudreaux skewered those arguments in a recent four-point rebuttal at Café Hayek. As he explains, Moss’ call for more vertical-merger enforcement ignores the fact that “no one has stronger incentives than do the owners and managers of firms to detect and achieve possible improvements in operating efficiencies – and to avoid inefficiencies.”

Moss’ complaint about chronic underenforcement mistakes by overly cautious agencies also ignores the fact that there will always be mistakes, and there is no reason to believe “that antitrust bureaucrats and courts are in a position to better predict the future [regarding which efficiencies claims will be realized] than are firm owners and managers.” Moreover, Moss provided “no substantive demonstration or evidence that vertical mergers often lead to monopolization of markets – that is, to industry structures and practices that harm consumers. And so even if vertical mergers never generate efficiencies, there is no good argument to use antitrust to police such mergers.”

And finally, Boudreaux considers Moss’ complaint that a court refused to condemn the AT&T-Time Warner merger, arguing that this does not demonstrate that antitrust enforcement is deficient:

[A]s soon as the  . . . merger proved to be inefficient, the parties themselves undid it. This merger was undone by competitive market forces and not by antitrust! (Emphasis in the original.)

    1. The agencies, however, remain adamant in arguing that merger law has been badly unenforced. As such, the new leadership plans to charge ahead and be willing to challenge more mergers based on mere market structure, paying little heed to efficiency arguments or actual showings of likely future competitive harm.

In her afternoon remarks at the forum, Principal Deputy Assistant U.S. Attorney General for Antitrust Doha Mekki highlighted five major planks of Biden administration merger enforcement going forward.

  • Clayton Act Section 7 is an incipiency statute. Thus, “[w]hen a [mere] change in market structure suggests that a firm will have an incentive to reduce competition, that should be enough [to justify a challenge].”
  • “Once we see that a merger may lead to, or increase, a firm’s market power, only in very rare circumstances should we think that a firm will not exercise that power.”
  • A structural presumption “also helps businesses conform their conduct to the law with more confidence about how the agencies will view a proposed merger or conduct.”
  • Efficiencies defenses will be given short shrift, and perhaps ignored altogether. This is because “[t]he Clayton Act does not ask whether a merger creates a more or less efficient firm—it asks about the effect of the merger on competition. The Supreme Court has never recognized efficiencies as a defense to an otherwise illegal merger.”
  • Merger settlements have often failed to preserve competition, and they will be highly disfavored. Therefore, expect a lot more court challenges to mergers than in recent decades. In short, “[w]e must be willing to litigate. . . . [W]e need to acknowledge the possibility that sometimes a court might not agree with us—and yet go to court anyway.”

Mekki’s comments suggest to me that the soon-to-be-released new draft merger guidelines may emphasize structural market-share tests, generally reject efficiencies justifications, and eschew the economic subtleties found in the current guidelines.

    1. The agencies—and the FTC, in particular—have serious institutional problems that undermine their effectiveness, and risk a loss of credibility before the courts in the near future.

In his address to the forum, former FTC Chairman Bill Kovacic lamented the inefficient limitations on reasoned FTC deliberations imposed by the Sunshine Act, which chills informal communications among commissioners. He also pointed to our peculiarly unique global status of having two enforcers with duplicative antitrust authority, and lamented the lack of policy coherence, which reflects imperfect coordination between the agencies.

Perhaps most importantly, Kovacic raised the specter of the FTC losing credibility in a possible world where Humphrey’s Executor is overturned (see here) and the commission is granted little judicial deference. He suggested taking lessons on policy planning and formulation from foreign enforcers—the United Kingdom’s Competition and Markets Authority, in particular. He also decried agency officials’ decisions to belittle prior administrations’ enforcement efforts, seeing it as detracting from the international credibility of U.S. enforcement.

    1. The FTC is embarking on a novel interventionist path at odds with decades of enforcement policy.

In luncheon remarks, Commissioner Christine S. Wilson lamented the lack of collegiality and consultation within the FTC. She warned that far-reaching rulemakings and other new interventionist initiatives may yield a backlash that undermines the institution.

Following her presentation, a panel of FTC experts discussed several aspects of the commission’s “new interventionism.” According to one panelist, the FTC’s new Section 5 Policy Statement on Unfair Methods of Competition (which ties “unfairness” to arbitrary and subjective terms) “will not survive in” (presumably, will be given no judicial deference by) the courts. Another panelist bemoaned rule-of-law problems arising from FTC actions, called for consistency in FTC and DOJ enforcement policies, and warned that the new merger guidelines will represent a “paradigm shift” that generates more business uncertainty.

The panel expressed doubts about the legal prospects for a proposed FTC rule on noncompete agreements, and noted that constitutional challenges to the agency’s authority may engender additional difficulties for the commission.

    1. The DOJ is greatly expanding its willingness to litigate, and is taking actions that may undermine its credibility in court.

Assistant U.S. Attorney General for Antitrust Jonathan Kanter has signaled a disinclination to settle, as well as an eagerness to litigate large numbers of cases (toward that end, he has hired a huge number of litigators). One panelist noted that, given this posture from the DOJ, there is a risk that judges may come to believe that the department’s litigation decisions are not well-grounded in the law and the facts. The business community may also have a reduced willingness to “buy in” to DOJ guidance.

Panelists also expressed doubts about the wisdom of DOJ bringing more “criminal Sherman Act Section 2” cases. The Sherman Act is a criminal statute, but the “beyond a reasonable doubt” standard of criminal law and Due Process concerns may arise. Panelists also warned that, if new merger guidelines are ”unsound,” they may detract from the DOJ’s credibility in federal court.

    1. International antitrust developments have introduced costly new ex ante competition-regulation and enforcement-coordination problems.

As one panelist explained, the European Union’s implementation of the new Digital Markets Act (DMA) will harmfully undermine market forces. The DMA is a form of ex ante regulation—primarily applicable to large U.S. digital platforms—that will harmfully interject bureaucrats into network planning and design. The DMA will lead to inefficiencies, market fragmentation, and harm to consumers, and will inevitably have spillover effects outside Europe.

Even worse, the DMA will not displace the application of EU antitrust law, but merely add to its burdens. Regrettably, the DMA’s ex ante approach is being imitated by many other enforcement regimes, and the U.S. government tacitly supports it. The DMA has not been included in the U.S.-EU joint competition dialogue, which risks failure. Canada and the U.K. should also be added to the dialogue.

Other International Concerns

The international panelists also noted that there is an unfortunate lack of convergence on antitrust procedures. Furthermore, different jurisdictions manifest substantial inconsistencies in their approaches to multinational merger analysis, where better coordination is needed. There is a special problem in the areas of merger review and of criminal leniency for price fixers: when multiple jurisdictions need to “sign off” on an enforcement matter, the “most restrictive” jurisdiction has an effective veto.

Finally, former Assistant U.S. Attorney General for Antitrust James Rill—perhaps the most influential promoter of the adoption of sound antitrust laws worldwide—closed the international panel with a call for enhanced transnational cooperation. He highlighted the importance of global convergence on sound antitrust procedures, emphasizing due process. He also advocated bolstering International Competition Network (ICN) and OECD Competition Committee convergence initiatives, and explained that greater transparency in agency-enforcement actions is warranted. In that regard, Rill said, ICN nongovernmental advisers should be given a greater role.

Conclusion

Taken as a whole, the forum’s various presentations painted a rather gloomy picture of the short-term prospects for sound, empirically based, economics-centric antitrust enforcement.

In the United States, the enforcement agencies are committed to far more aggressive antitrust enforcement, particularly with respect to mergers. The agencies’ new approach downplays efficiencies and they will be quick to presume broad categories of business conduct are anticompetitive, relying far less closely on case-specific economic analysis.

The outlook is also bad overseas, as European Union enforcers are poised to implement new ex ante regulation of competition by large platforms as an addition to—not a substitute for—established burdensome antitrust enforcement. Most foreign jurisdictions appear to be following the European lead, and the U.S. agencies are doing nothing to discourage them. Indeed, they appear to fully support the European approach.

The consumer welfare standard, which until recently was the stated touchstone of American antitrust enforcement—and was given at least lip service in Europe—has more or less been set aside. The one saving grace in the United States is that the federal courts may put a halt to the agencies’ overweening ambitions, but that will take years. In the meantime, consumer welfare will suffer and welfare-enhancing business conduct will be disincentivized. The EU courts also may place a minor brake on European antitrust expansionism, but that is less certain.

Recall, however, that when evils flew out of Pandora’s box, hope remained. Let us hope, then, that the proverbial worm will turn, and that new leadership—inspired by hopeful and enlightened policy advocates—will restore principled antitrust grounded in the promotion of consumer welfare.

In Antitrust & Competition, Antitrust Division, European Union, Federal Trade Commission, International, Justice Department, Mergers & Acquisitions , , , , , , , , , , , , ,
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Your Definitive End-of-Year Global Tech Regulation Wrap-Up: Who’s Doing What, Where, and What to Make of It

Lazar Radic —  21 December 2022

As 2023 draws to a close, we wanted to reflect on a year that saw jurisdictions around the world proposing, debating, and (occasionally) enacting digital regulations. Some of these initiatives amended existing ex-post competition laws. Others were more ambitious, contemplating entirely new regulatory regimes from the ground up.

With everything going on, it can be overwhelming even for hardcore antitrust enthusiasts to keep pace with the latest developments. If you have the high-brow interests of a scholar but the jam-packed schedule of a CEO, you have come to the right place. This post is intended to summarize who is doing what, where, and what to make of it.

Status of Tech Regulation Around the World

European Union

In the European Union—the patient zero of tech regulation—two crucial pieces of legislation passed this year: the Digital Markets Act (DMA) and the Digital Services Act (DSA).

But notably, the EU is just now—i.e., six months before the act is set to apply in full to all digital “gatekeepers”—launching a consultation on the DMA’s procedural rules (a draft is available here). Many of those procedural questions remain exceedingly fuzzy (substantive ones, too), such as, e.g.—the role of the advisory committee, the role of third parties in proceedings, national authorities’ access to data gathered by the Commission, and the role to be played (if any) by the European Competition Network. Further, only now is a DMA enforcement unit being created within the Commission, although it is also unclear whether it will have the staffing capacity to satisfy the tight deadlines.

Whether or not the implementing regulation ultimately resolves all of these questions, they should have been settled much sooner. But as is becoming customary in tech regulation, it seems that the political urge to “do something” has once again prevailed over careful consideration and foresight.

United Kingdom

In the United Kingdom, legislation to empower the Competition and Markets Authority’s (CMA) Digital Markets Unit (DMU) is set to be brought to Parliament this term, meaning that it may be discussed in the next two months. Of all the “pending” antitrust bills around the world, this is probably the most likely to be adopted. Although it dropped an earlier dubious proposal on mergers, there remain several significant concerns with the DMU (see here and here for previous commentary). For example, the DMU’s standard of review is surprisingly truncated, considering the expansive powers that would be bestowed on the agency. The DMU would apply the strategic market significance (SMS) tag to entire firms and not just to those operations where the firm may have market power. Moreover, the DMU proposal shows little concern for due process.

One looming question is whether the UK will learn from the EU’s example, and resolve substantive and procedural questions well ahead of imposing any obligations on SMS companies. In the end, whatever the UK does or doesn’t do will have reverberations around the globe, as many countries appear to be adopting a DMA-style designation process for gatekeepers but imposing “code of conduct” obligations inspired by the DMU.

United States

Across the pond, the major antitrust tech bills introduced in Congress have come to a standstill. Despite some 11th hour efforts by their sponsors, neither the American Innovation and Choice Online Act, nor the Open App Markets Act, nor the Journalism Competition and Preservation Act made the cut to be included in the $1.7 trillion, 4,155-page omnibus bill that will be the last vote taken by the 117th Congress. With divided power in the 118th Congress, it’s possible that the push to regulate tech might fizzle out.

What went wrong for antitrust reformers? Republicans and Democrats have always sought different things from the bills. Democrats want to “tame” big tech, hold it accountable for the proliferation of “harmful” content online, and redistribute rents toward competitors and other businesses across the supply chain (e.g., app developers, media organizations, etc.). Republicans, on the other hand, seek to limit platforms’ ability to “censor conservative views” and to punish them for supposedly having done so in the past. The difficulty of aligning these two visions has obstructed decisive movement on the bills. But, more broadly, it also goes to show that the logic for tech regulation is far from homogenous, and that wildly different aims can be pursued under the umbrella of “choice,” “contestability,” and “fairness.”

South Africa

As my colleague Dirk Auer covered yesterday, South Africa has launched a sectoral inquiry into online-intermediation platforms, which has produced a provisional report (see here for a brief overview). The provisional report identifies Apple, Google, Airbnb, Uber Eats, and South Africa’s own Takealot, among others, as “leading online platforms” and offers suggestions to make the markets in which these companies compete more “contestable.” This includes a potential ex ante regulatory regime.

But as Dirk noted, there are certain considerations the developing countries must bear in mind when contemplating ex ante regimes that developed countries do not (or, at least, not to the same extent). Most importantly, these countries are typically highly dependent on foreign investment, which might sidestep those jurisdictions that impose draconian DMA-style laws.

This could be the case with Amazon, which is planning to launch its marketplace in South Africa in February 2023 (the same month the sectoral inquiry is due). The degree and duration of Amazon’s presence might hinge on the country’s regulatory regime for online platforms. If unfavorable or exceedingly ambiguous, the new rules might prompt Amazon and other companies to relocate elsewhere. It is notable that local platform Takealot has, to date, demonstrated market dominance in South Africa, which most observers doubt that Amazon will be able to displace.

India

No one can be quite sure what is going on in India. There has been some agitation for a DMA-style ex ante regulatory regime within the Parliament of India, which is currently debating an amendment to the Competition Act that would, among other things, lower merger thresholds.

More drastically, however, a standing committee on e-commerce (where e-commerce is taken to mean all online commerce, not just retail) issued a report that recommended identifying “gatekeepers” for more stringent supervision under an ex ante regime that would, e.g., bar companies from selling goods on the platforms they own. At its core, the approach appears to assume that the DMA constitutes “best practices” in online competition law, despite the fact that the DMA’s ultimate effects and costs remain a mystery. As such, “best practices” in this area of law may not be very good at all.

Australia

The Australian Competition and Consumer Commission (ACCC) has been conducting a five-year inquiry into digital-platform services, which is due in March 2025. In its recently published fifth interim report, the ACCC recommended codes of conduct (similar to the DMU) for “designated” digital platforms. Questions surrounding the proposed regime include whether the ACCC will have to demonstrate effects; the availability of objective justifications (the latest report mentions security and privacy); and what thresholds would be used to “designate” a company (so far, turnover seems likely).

On the whole, Australia’s strategy has been to follow closely in the footsteps of the EU and the United States. Given this influence from international developments, the current freeze on U.S. tech regulation might have taken some of the wind out of the sails of similar regulatory efforts down under.

China

China appears to be playing a waiting game. On the one hand, it has ramped up antitrust enforcement under the Anti-Monopoly Law (AML). On the other, in August 2022, it introduced the first major amendment since the enactment of the AML, which included a new prohibition on the use of “technology, algorithms and platform rules” to engage in monopolistic behavior. This is clearly aimed at strengthening enforcement against digital platforms. Numerous other digital-specific regulations are also under consideration (with uncertain timelines). These include a platform-classification regime that would subject online platforms to different obligations in the areas of data protection, fair competition, and labor treatment, and a data-security regulation that would prohibit online-platform operators from taking advantage of data for unfair discriminatory practices against the platform’s users or vendors.

South Korea

Seoul was one of the first jurisdictions to pass legislation targeting app stores (see here and here). Other legislative proposals include rules on price-transparency obligations and the use of platform-generated data, as well as a proposed obligation for online news services to remunerate news publishers. With the government’s new emphasis on self-regulation as an alternative to prescriptive regulation, however, it remains unclear whether or when these laws will be adopted.

Germany

Germany recently implemented a reform to its Competition Act that allows the Bundeskartellamt to prohibit certain forms of conduct (such as self-preferencing) without the need to prove anticompetitive harm and that extends the essential-facility doctrine to cover data. The Federal Ministry for Economic Affairs and Climate Action (BMWK) is now considering further amendments that would, e.g., allow the Bundeskartellamt to impose structural remedies following a sectoral inquiry, independent of an abuse; and introduce a presumption that anticompetitive conduct has resulted in profits for the infringing company (this is relevant for the purpose of calculating fines and, especially, for proving damages in private enforcement).

Canada

Earlier this year, Canada reformed its abuse-of-dominance provisions to bolster fines and introduce a private right of access to tribunals. It also recently opened a consultation on the future of competition policy, which invites input about the objectives of antitrust, the enforcement powers of the Competition Bureau, and the effectiveness of private remedies, and raises the question of whether digital markets require special rules (see this report). Although an ex-ante regime doesn’t currently appear to be in the cards, Canada’s strategy has been to wait and see how existing regulatory proposals play out in other countries.

Turkey

Turkey is considering a DMA-inspired amendment to the Competition Act that would, however, go beyond even the EU’s ex-ante regulatory regime in that it would not allow for any objective justifications or defenses.

Japan

In 2020, Japan introduced the Act on Improving Transparency and Fairness of Digital Platforms, which stipulates that designated platforms should take voluntary and proactive steps to ensure transparency and “fairness” vis-a-vis businesses. This “co-regulation” approach differs from other regulations in that it stipulates the general framework and leaves details to businesses’ voluntary efforts. Japan is now, however, also contemplating DMA-like ex-ante regulations for mobile ecosystems, voice assistants, and wearable devices.

Six Hasty Conclusions from the Even Hastier Global Wave of Tech Regulation

  • Most of these regimes are still in the making. Some have just been proposed and have a long way to go until they become law. The U.S. example shows how lack of consensus can derail even the most apparently imminent tech bill.
  • Even if every single country covered in this post were to adopt tech legislation, we have seen that the goals pursued and the obligations imposed can be wildly different and possibly contradictory. Even within a given jurisdiction, lawmakers may not agree what the purpose of the law should be (see, e.g., the United States). And, after all, it should probably be alarming if the Chinese Communist Party and the EU had the same definition of “fairness.”
  • Should self-preferencing bans, interoperability mandates, and similar rules that target online platforms be included under the banner of antitrust? In some countries, like Turkey, rules copied and pasted from the DMA have been proposed as amendments to the national competition act. But the EU itself insists that competition law and the DMA are separate things. Which is it? At this stage, shouldn’t the first principles of digital regulation be clearer?
  • In the EU, in particular, multiple overlapping ex-ante regimes can lead to double and even triple jeopardy, especially given their proximity to antitrust law. In other words, there is a risk that the same conduct will be punished at both the national and EU level, and under the DMA and EU competition rules.
  • In light of the above, global ex-ante regulatory compliance is going to impose mind-boggling costs on targeted companies, especially considering the opacity of some provisions and the substantial differences among countries (think, e.g., of Turkey, where there is no space for objective justifications).
  • There are always complex tradeoffs to be made and sensitive considerations to keep in mind when deciding whether and how to regulate the most successful tech companies. The potential for costly errors is multiplied, however, in the case of developing countries, where there is a realistic risk of repelling “dominant” companies before they even enter the market (see South Africa).

Some of the above issues could be addressed with some foresight. That, however, seems to be sorely lacking in the race to push tech regulation through the door at any cost. As distinguished scholars like Fred Jenny have warned, caving to the political pressure of economic populism can come at the expense of competition and innovation. Let’s hope that is not the case here, there, or anywhere.

In Antitrust & Competition, China, European Union, Federal Trade Commission, International, Justice Department, United Kingdom , , , , , , , , , , , , ,
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Biweekly FTC Roundup: Grail-Shaped Beacon Edition

Daniel Gilman —  9 December 2022

The lame duck is not yet dead, and the Federal Trade Commission (FTC) is supposed to be an independent agency. Work continues. The Commission has announced a partly open oral argument in the Illumina-Grail matter.  That is, parts of the argument will be open to the public, via webcast, and parts won’t. This is what’s known as translucency in government.

Enquiring minds: I have several questions about Illumina-Grail. First, for anyone reading this column, am I the only one who cannot think of the case without thinking of Monty Python’s grail-shaped beacon? Asking for a friend who worries about me.

Second, why seek to unwind this merger? My ICLE colleagues Geoff Manne and Gus Hurwitz are members of a distinguished group of law & economics scholars who filed a motion for leave to file an amicus brief in the matter. They question the merits of the case on a number of grounds.

Pertinent, not dispositive: this is a vertical merger. Certainly, it’s possible for vertical mergers to harm competition but theory suggests that they entail at least some efficiencies, and the empirical evidence from Francine Lafontaine and others tends to suggest that most have been beneficial for firms and consumers alike. One might wonder about the extent to which this case is built on analysis of the facts and circumstances rather than on Chair Lina Khan’s well-publicized antipathy to vertical mergers.

Recall that the FTC and U.S. Justice Department (DOJ) jointly issued updated vertical-merger guidelines in June 2020. (The Global Antitrust Institute’s 2018 comments are worth review). The FTC—but not DOJ—promptly withdrew them in 2021, with a new majority, a partisan vote, and a questionable rationale for going it alone. Carl Shapiro and Herbert Hovenkamp minced no words, saying that the Commission’s justification rested on “specious economic arguments.”

There’s also a question of whether FTC’s likely foreclosure argument is all that likely. Illumina, which created Grail and had retained a substantial interest in it all along, would have strong commercial incentives against barring Grail’s future competitors from its platform. Moreover, Illumina made an open offer—contractually binding—to continue providing access for 12 years to its NGS platform and other products, on terms substantially similar to those available pre-merger. That would seem to undercut the possibility of foreclosure. Complaint counsel discounts this as a remedy (with behavioral remedies disfavored), but it is relatively straightforward and not really a remedy at all, with terms both private parties and the FTC might enforce. Thom Lambert and Jonathan Barnett both have interesting posts on the matter.

This is about a future market and potential (presumed) competitors. And it’s an area of biologics commerce where the deep pockets and regulatory sophistication necessary for development and approval frequently militate in favor of acquisition of a small innovator by a larger, established firm. As I noted in a prior column, “[p]otential competition cases are viable given the right facts, and in areas where good grounds to predict significant entry are well-established.” It can be hard to second-guess rule-of-reason cases from the outside, but there are reasons to think this is one of those matters where the preconditions to a strong potential competition argument are absent, but merger-related efficiencies real.  

What else is going on at the FTC? Law360 reports on a staff brief urging the Commission not to pitch a new standard of review in Altria-Juul on what look to be sensible grounds, independent of the merits of their Section I case. The Commission had asked to be briefed on the possibility of switching to a claim of a per se violation or, in the alternative, quick look, and the staff brief recommends maintaining the rule-of-reason approach that the Commission’s ALJ found unpersuasive in dismissing the Commission’s case, which will now be heard by the Commission itself. I have no non-public information on the matter. There’s a question of whether this signals any real tension between the staff’s analysis and the Commission’s preferred approach or simply the Commission’s interest in asking questions about pushing boundaries and the staff providing good counsel. I don’t know, but it could be business as usual.

And just this week, FTC announced that it is bringing a case to block Microsoft’s acquisition of Activision. More on that to follow.

What’s pressing is not so clear. The Commission announced the agenda for a Dec. 14 open meeting. On it is a vote on regulatory review of the “green guides,” which provide guidance on environmental-marketing claims. But there’s nothing further on the various ANPRs announced in September, or about rulemaking that the Chair has hinted at for noncompete clauses in employment contracts. And, of course, we’re still waiting for merger guidelines to replace the ones that have been withdrawn—likely joint FTC/DOJ guidelines that will likely range over both horizontal and vertical mergers.

There’s the Altria matter, Meta, Meta-Within, the forthcoming Supreme Court opinion in Axon, etc. The FTC’s request for an injunction in Meta-Within will be heard in federal district court in California over the next couple of weeks. It’s a novel (read, speculative) complaint. I had a few paragraphs on Meta-Within in my first roundup column; Gus Hurwitz covered it, as well. We shall see. 

Wandering up Pennsylvania Avenue onto the Hill, various bills seem not so much lame ducks as dead ones. But perhaps one or more is not dead yet. The Journalism Competition and Preservation Act (JCPA) might be one such bill, its conspicuous defects notwithstanding. “Might be.” First, a bit of FTC history. Way back in 2010, the FTC held a series of workshops on the Future of Journalism. There were many interesting issues there, if no obvious room for antitrust. I reveal no secrets in saying THOSE WORKSHOPS WERE NOT THE STAFF’S IDEA. We failed to recommend any intervention, although the staff did publish a clarification of its discussion draft:

The FTC has not endorsed the idea of making any policy recommendation or recommended any of the proposals in the discussion draft

My own take at the time: many newspapers were struggling, and that was unfortunate, but much of the struggle had to do with the papers’ loss of local print-advertising monopolies, which tended to offer high advertising prices but not high quality. Remember the price of classified ads? For decades, many of the holders of market power happened to turn large portions of their rents over to their news divisions. Then came the internet, then Craigslist, etc., etc., and down went the rents. Antitrust intervention seemed no answer at all.

Back to the bill. In brief, as currently drafted, the JCPA would permit certain “digital journalism providers” to form cartels to negotiate prices with large online platforms, and to engage in group boycotts, without being liable to the federal antitrust laws, at least for four years. Dirk Auer and Ben Sperry have an overview here.

This would be an exemption for some sources of journalism, but not all, and its benefits would not be equally distributed. I am a paying consumer of digital (and even print) journalism. On the one hand, I enjoy it when others subsidize my preferences. On the other, I’m not sure why they should. As I said in a prior column, “antitrust exemptions help the special interests receiving them but not a living soul besides those special interests. That’s it, full stop.”  

Moreover, as Brian Albrecht points out, the bill’s mandatory final arbitration provision is likely to lead to a form of price regulation.

England v. France on Saturday. Allez les bleus or we few, we happy few? Cheers.  

In Antitrust & Competition, Antitrust Division, Biweekly FTC Roundup, Federal Trade Commission, Justice Department, Mergers & Acquisitions, Section 5, Truth on the Market , , , , , , , , , , , ,
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FTC Biweekly UMC Roundup – Mountain of Puffery Edition

Daniel Gilman —  4 November 2022

Research still matters, so I recommend video from the Federal Trade Commission’s 15th Annual Microeconomics Conference, if you’ve not already seen it. It’s a valuable event, and it’s part of the FTC’s still important statutory-research mission. It also reminds me that the FTC’s excellent, if somewhat diminished, Bureau of Economics still has no director; Marta Woskinska concluded her very short tenure in February. Eight-plus months of hiring and appointments (and many departures) later, she’s not been replaced. Priorities.

The UMC Watch Continues: In 2015, the FTC issued a Statement of Enforcement Principles Regarding “Unfair Methods of Competition.” On July 1, 2021, the Commission withdrew the statement on a 3-2 vote, sternly rebuking its predecessors: “the 2015 Statement …abrogates the Commission’s congressionally mandated duty to use its expertise to identify and combat unfair methods of competition even if they do not violate a separate antitrust statute.”

That was surprising. First, it actually presaged a downturn in enforcement. Second, while the 2015 statement was not empty, many agreed with Commissioner Maureen Ohlhausen’s 2015 dissent that it offered relatively little new guidance on UMC enforcement. In other words, stating that conduct “will be evaluated under a framework similar to the rule of reason” seemed not much of a limiting principle to some, if far too much of one to others. Eye of the beholder. 

Third, as Commissioners Noah Phillips and Christine S. Wilson noted in their dissent, given that there was no replacement, it was “[h]inting at the prospect of dramatic new liability without any guide regarding what the law permits or proscribes.” The business and antitrust communities were put on watch: winter is coming. Winter is still coming. In September, Chair Lina Khan stated that one of her top priorities “has been the preparation of a policy statement on Section 5 that reflects the statutory text, our institutional structure, the history of the statute, and the case law.” Indeed. More recently, she said she was hopeful that the statement would be released in “the coming weeks.”  Stay tuned. 

There was September success, and a little mission creep at the DOJ Antitrust Division: Congrats to the U.S. Justice Department for some uncharacteristic success, and not a little creativity. In U.S. v. Nathan Nephi Zito, the defendant pleaded guilty to illegal monopolization for proposing that he and a competitor allocate markets for highway-crack-sealing services.  

The odd part, and an FTC connection that was noted by Pallavi Guniganti and Gus Hurwitz: at issue was a single charge of monopolization in violation of Section 2 of the Sherman Act. There’s long been widespread agreement that the bounds of Section 5 UMC authority exceed those of the Sherman Act, along with widespread disagreement on the extent to which that’s true, but there was consensus on invitations to collude. Agreements to fix prices or allocate markets are per se violations of Section 1. Refused invitations to collude are not, or were not. But as the FTC stated in its now-withdrawn Statement of Enforcement Principles, UMC authority extends to conduct “that, if allowed to mature or complete, could violate the Sherman or Clayton Act.” But the FTC didn’t bring the case against Zito, the competitor rejected the invitation, and nobody alleged a violation of either Sherman Section 1 or FTC Section 5. 

The admitted conduct seems indefensible, under Section 5, so perhaps there’s no harm ex post, but I wonder where this is going.     

DOJ also had a Halloween win when Judge Florence Y. Pan of the U.S. Court of Appeals for the District of Columbia, sitting by designation in the U.S. District Court for the District of Columbia, issued an order blocking the proposed merger of Penguin Random House and Simon & Schuster. The opinion is still sealed. But based on the complaint, it was a relatively straightforward monopsony case, albeit one with a very narrow market definition: two market definitions, but with most of the complaint and the more convincing story about “the market for acquisition of publishing rights to anticipated top-selling books.” Steven King, Oprah Winfrey, etc. 

Maybe they got it right, although Assistant Attorney General Jonathan Kanter’s description seems a bit of puffery, if not a mountain of it: “The proposed merger would have reduced competition, decreased author compensation, diminished the breadth, depth, and diversity of our stories and ideas, and ultimately impoverished our democracy.”

At the margin? The Division did not need to prove harm to consumers downstream, although it alleged such harm. Here’s a policy question: suppose the deal would have lowered advances paid to top-selling authors—those cited in the complaint are mostly in the millions of dollars—but suppose DOJ was wrong about the larger market and downstream effects. If publisher savings were accompanied by a slight reduction in book prices, not output, would that have been a bad result?    

And you thought entry was procompetitive? For some, Halloween fright does not abate with daylight. On Nov. 1, Sen. Elizabeth Warren (D-Mass.) sent a letter to Lina Khan and Jonathan Kanter, writing “with serious concern about emerging competition and consumer protection issues that Big Tech’s expansion into the automotive industry poses.” I gather that “emerging” is a term of art in legal French meaning “possible, maybe.” The senator writes with great imagination and not a little drama, cataloging numerous allegations about such worrisome conduct as bundling.

Of course, some tying arrangements are anticompetitive, but bundling is not necessarily or even typically anticompetitive. As an article still posted on the DOJ website explains, the “pervasiveness of tying in the economy shows that it is generally beneficial,” For instance, in the automotive industry, most consumers seem to prefer buying their cars whole rather than in parts.

It’s impossible to know that none of Warren’s myriad purported harms will come to pass in any market, but nobody has argued that the agencies ought to stop screening Hart-Scott-Rodino submissions. The need to act “quickly and decisively” on so many issues seems dubious. Perhaps there might be advantages to having technically sophisticated, data-rich, well-financed firms enter into product R&D and competition in new areas, including nascent product markets that might want more of such things for the technology that goes into vehicles that hurtle us down the highway.        

The Oct. 21 Roundup highlighted the FTC’s recent flood of regulatory proposals, including the “commercial surveillance” ANPR. Three new ANPRs were mentioned that week: one regarding “Junk Fees,” one regarding “Fake Reviews and Endorsements,” and one regarding potential updates to the FTC’s “Funeral Rule.” Periodic rule review is a requirement, so a potential update is not unusual. On the others, I recommend Commissioner Wilson’s dissents for an overview of legitimate concerns. In sum, the junk-ees ANPR is “sweeping in its breadth; may duplicate, or contradict, existing laws and rules; is untethered from a solid foundation of FTC enforcement; relies on flawed assumptions and vague definitions; ignores impacts on competition; and diverts scarce agency resources from important law enforcement efforts.” And if some “junk fees” are the result of deceptive or unfair practices under established standards, the ANPR also seems to refer to potentially useful and efficient unbundling. Wilson finds the “fake reviews and endorsements” ANPR clearer and better focused, but another bridge too far, contemplating a burdensome regulatory scheme while active enforcement and guidance initiatives are underway, and may adequately address material and deceptive advertising practices.

As Wilson notes, the costs of regulating are substantial, too. New proposals spring forth while overdue projects founder. For instance, the long, long overdue “10-year” review of the FTC’s Eyeglass Rule last saw an ANPR in 2015, following a 2004 decision to leave an earlier version of the rule in place. The Contact Lens Rule, implementing the Fairness to Contact Lens Consumers Act, was initially adopted in 2004 and amended 16 years later, partly because the central provision of the rule had proved unenforceable, resulting in chronic noncompliance. The chair is also considering rulemaking on noncompete clauses. Again, there are worries that some anticompetitive conduct might prompt considerably overbroad regulation, given legitimate applications, a developing and mixed body of empirical literature, and recent activity in the states. It’s another area to wonder whether the FTC has either congressional authorization or the resources, experience, and expertise to regulate the conduct at issue–potentially, every employment agreement in the United States.

In Administrative Law, Antitrust & Competition, Antitrust Division, Biweekly FTC Roundup, Cartels, Federal Trade Commission, Justice Department, Section 5, Tying , , , , , , , , , , ,
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Damn the Economics, Full Speed Ahead!

Alden Abbott —  22 September 2022

A White House administration typically announces major new antitrust initiatives in the fall and spring, and this year is no exception. Senior Biden administration officials kicked off the fall season at Fordham Law School (more on that below) by shedding additional light on their plans to expand the accepted scope of antitrust enforcement.

Their aggressive enforcement statements draw headlines, but will the administration’s neo-Brandeisians actually notch enforcement successes? The prospects are cloudy, to say the least.

The U.S. Justice Department (DOJ) has lost some cartel cases in court this year (what was the last time that happened?) and, on Sept. 19, a federal judge rejected the DOJ’s attempt to enjoin United Health’s $13.8 billion bid for Change Healthcare. The Federal Trade Commission (FTC) recently lost two merger challenges before its in-house administrative law judge. It now faces a challenge to its administrative-enforcement processes before the U.S. Supreme Court (the Axon case, to be argued in November).

(Incidentally, on the other side of the Atlantic, the European Commission has faced some obstacles itself. Despite its recent Google victory, the Commission has effectively lost two abuse of dominance cases this year—the Intel and Qualcomm matters—before the European General Court.)

So, are the U.S. antitrust agencies chastened? Will they now go back to basics? Far from it. They enthusiastically are announcing plans to charge ahead, asserting theories of antitrust violations that have not been taken seriously for decades, if ever. Whether this turns out to be wise enforcement policy remains to be seen, but color me highly skeptical. Let’s take a quick look at some of the big enforcement-policy ideas that are being floated.

Fordham Law’s Antitrust Conference

Admiral David Farragut’s order “Damn the torpedoes, full speed ahead!” was key to the Union Navy’s August 1864 victory in the Battle of Mobile Bay, a decisive Civil War clash. Perhaps inspired by this display of risk-taking, the heads of the two federal antitrust agencies—DOJ Assistant Attorney General (AAG) Jonathan Kanter and FTC Chair Lina Khan—took a “damn the economics, full speed ahead” attitude in remarks at the Sept. 16 session of Fordham Law School’s 49th Annual Conference on International Antitrust Law and Policy. Special Assistant to the President Tim Wu was also on hand and emphasized the “all of government” approach to competition policy adopted by the Biden administration.

In his remarks, AAG Kanter seemed to be endorsing a “monopoly broth” argument in decrying the current “Whac-a-Mole” approach to monopolization cases. The intent may be to lessen the burden of proof of anticompetitive effects, or to bring together a string of actions taken jointly as evidence of a Section 2 violation. In taking such an approach, however, there is a serious risk that efficiency-seeking actions may be mistaken for exclusionary tactics and incorrectly included in the broth. (Notably, the U.S. Court of Appeals for the D.C. Circuit’s 2001 Microsoft opinion avoided the monopoly-broth problem by separately discussing specific company actions and weighing them on their individual merits, not as part of a general course of conduct.)

Kanter also recommended going beyond “our horizontal and vertical framework” in merger assessments, despite the fact that vertical mergers (involving complements) are far less likely to be anticompetitive than horizontal mergers (involving substitutes).

Finally, and perhaps most problematically, Kanter endorsed the American Innovative and Choice Online Act (AICOA), citing the protection it would afford “would-be competitors” (but what about consumers?). In so doing, the AAG ignored the fact that AICOA would prohibit welfare-enhancing business conduct and could be harmfully construed to ban mere harm to rivals (see, for example, Stanford professor Doug Melamed’s trenchant critique).

Chair Khan’s presentation, which called for a far-reaching “course correction” in U.S. antitrust, was even more bold and alarming. She announced plans for a new FTC Act Section 5 “unfair methods of competition” (UMC) policy statement centered on bringing “standalone” cases not reachable under the antitrust laws. Such cases would not consider any potential efficiencies and would not be subject to the rule of reason. Endorsing that approach amounts to an admission that economic analysis will not play a serious role in future FTC UMC assessments (a posture that likely will cause FTC filings to be viewed skeptically by federal judges).

In noting the imminent release of new joint DOJ-FTC merger guidelines, Khan implied that they would be animated by an anti-merger philosophy. She cited “[l]awmakers’ skepticism of mergers” and congressional rejection “of economic debits and credits” in merger law. Khan thus asserted that prior agency merger guidance had departed from the law. I doubt, however, that many courts will be swayed by this “economics free” anti-merger revisionism.

Tim Wu’s remarks closing the Fordham conference had a “big picture” orientation. In an interview with GW Law’s Bill Kovacic, Wu briefly described the Biden administration’s “whole of government” approach, embodied in President Joe Biden’s July 2021 Executive Order on Promoting Competition in the American Economy. While the order’s notion of breaking down existing barriers to competition across the American economy is eminently sound, many of those barriers are caused by government restrictions (not business practices) that are not even alluded to in the order.

Moreover, in many respects, the order seeks to reregulate industries, misdiagnosing many phenomena as business abuses that actually represent efficient free-market practices (as explained by Howard Beales and Mark Jamison in a Sept. 12 Mercatus Center webinar that I moderated). In reality, the order may prove to be on net harmful, rather than beneficial, to competition.

Conclusion

What is one to make of the enforcement officials’ bold interventionist screeds? What seems to be missing in their presentations is a dose of humility and pragmatism, as well as appreciation for consumer welfare (scarcely mentioned in the agency heads’ presentations). It is beyond strange to see agencies that are having problems winning cases under conventional legal theories floating novel far-reaching initiatives that lack a sound economics foundation.

It is also amazing to observe the downplaying of consumer welfare by agency heads, given that, since 1979 (in Reiter v. Sonotone), the U.S. Supreme Court has described antitrust as a “consumer welfare prescription.” Unless there is fundamental change in the makeup of the federal judiciary (and, in particular, the Supreme Court) in the very near future, the new unconventional theories are likely to fail—and fail badly—when tested in court. 

Bringing new sorts of cases to test enforcement boundaries is, of course, an entirely defensible role for U.S. antitrust leadership. But can the same thing be said for bringing “non-boundary” cases based on theories that would have been deemed far beyond the pale by both Republican and Democratic officials just a few years ago? Buckle up: it looks as if we are going to find out. 

In Administrative Law, Antitrust & Competition, Cartels, European Union, Federal Trade Commission, Justice Department, Mergers & Acquisitions, Regulation, Section 5, Truth on the Market , , , , , , , , , , , , , ,
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Are All Mergers Inherently Anticompetitive?

Brian Albrecht —  31 August 2022

A recent viral video captures a prevailing sentiment in certain corners of social media, and among some competition scholars, about how mergers supposedly work in the real world: firms start competing on price, one firm loses out, that firm agrees to sell itself to the other firm and, finally, prices are jacked up.(Warning: Keep the video muted. The voice-over is painful.)

The story ends there. In this narrative, the combination offers no possible cost savings. The owner of the firm who sold doesn’t start a new firm and begin competing tomorrow, and nor does anyone else. The story ends with customers getting screwed.

And in this telling, it’s not just horizontal mergers that look like the one in the viral egg video. It is becoming a common theory of harm regarding nonhorizontal acquisitions that they are, in fact, horizontal acquisitions in disguise. The acquired party may possibly, potentially, with some probability, in the future, become a horizontal competitor. And of course, the story goes, all horizontal mergers are anticompetitive.

Therefore, we should have the same skepticism toward all mergers, regardless of whether they are horizontal or vertical. Steve Salop has argued that a problem with the Federal Trade Commission’s (FTC) 2020 vertical merger guidelines is that they failed to adopt anticompetitive presumptions.

This perspective is not just a meme on Twitter. The FTC and U.S. Justice Department (DOJ) are currently revising their guidelines for merger enforcement and have issued a request for information (RFI). The working presumption in the RFI (and we can guess this will show up in the final guidelines) is exactly the takeaway from the video: Mergers are bad. Full stop.

The RFI repeatedly requests information that would support the conclusion that the agencies should strengthen merger enforcement, rather than information that might point toward either stronger or weaker enforcement. For example, the RFI asks:

What changes in standards or approaches would appropriately strengthen enforcement against mergers that eliminate a potential competitor?

This framing presupposes that enforcement should be strengthened against mergers that eliminate a potential competitor.

Do Monopoly Profits Always Exceed Joint Duopoly Profits?

Should we assume enforcement, including vertical enforcement, needs to be strengthened? In a world with lots of uncertainty about which products and companies will succeed, why would an incumbent buy out every potential competitor? The basic idea is that, since profits are highest when there is only a single monopolist, that seller will always have an incentive to buy out any competitors.

The punchline for this anti-merger presumption is “monopoly profits exceed duopoly profits.” The argument is laid out most completely by Salop, although the argument is not unique to him. As Salop points out:

I do not think that any of the analysis in the article is new. I expect that all the points have been made elsewhere by others and myself.

Under the model that Salop puts forward, there should, in fact, be a presumption against any acquisition, not just horizontal acquisitions. He argues that:

Acquisitions of potential or nascent competitors by a dominant firm raise inherent anticompetitive concerns. By eliminating the procompetitive impact of the entry, an acquisition can allow the dominant firm to continue to exercise monopoly power and earn monopoly profits. The dominant firm also can neutralize the potential innovation competition that the entrant would provide.

We see a presumption against mergers in the recent FTC challenge of Meta’s purchase of Within. While Meta owns Oculus, a virtual-reality headset and Within owns virtual-reality fitness apps, the FTC challenged the acquisition on grounds that:

The Acquisition would cause anticompetitive effects by eliminating potential competition from Meta in the relevant market for VR dedicated fitness apps.

Given the prevalence of this perspective, it is important to examine the basic model’s assumptions. In particular, is it always true that—since monopoly profits exceed duopoly profits—incumbents have an incentive to eliminate potential competition for anticompetitive reasons?

I will argue no. The notion that monopoly profits exceed joint-duopoly profits rests on two key assumptions that hinder the simple application of the “merge to monopoly” model to antitrust.

First, even in a simple model, it is not always true that monopolists have both the ability and incentive to eliminate any potential entrant, simply because monopoly profits exceed duopoly profits.

For the simplest complication, suppose there are two possible entrants, rather than the common assumption of just one entrant at a time. The monopolist must now pay each of the entrants enough to prevent entry. But how much? If the incumbent has already paid one potential entrant not to enter, the second could then enter the market as a duopolist, rather than as one of three oligopolists. Therefore, the incumbent must pay the second entrant an amount sufficient to compensate a duopolist, not their share of a three-firm oligopoly profit. The same is true for buying the first entrant. To remain a monopolist, the incumbent would have to pay each possible competitor duopoly profits.

Because monopoly profits exceed duopoly profits, it is profitable to pay a single entrant half of the duopoly profit to prevent entry. It is not, however, necessarily profitable for the incumbent to pay both potential entrants half of the duopoly profit to avoid entry by either. 

Now go back to the video. Suppose two passersby, who also happen to have chickens at home, notice that they can sell their eggs. The best part? They don’t have to sit around all day; the lady on the right will buy them. The next day, perhaps, two new egg sellers arrive.

For a simple example, consider a Cournot oligopoly model with an industry-inverse demand curve of P(Q)=1-Q and constant marginal costs that are normalized to zero. In a market with N symmetric sellers, each seller earns 1/((N+1)^2) in profits. A monopolist makes a profit of 1/4. A duopolist can expect to earn a profit of 1/9. If there are three potential entrants, plus the incumbent, the monopolist must pay each the duopoly profit of 3*1/9=1/3, which exceeds the monopoly profits of 1/4.

In the Nash/Cournot equilibrium, the incumbent will not acquire any of the competitors, since it is too costly to keep them all out. With enough potential entrants, the monopolist in any market will not want to buy any of them out. In that case, the outcome involves no acquisitions.

If we observe an acquisition in a market with many potential entrants, which any given market may or may not have, it cannot be that the merger is solely about obtaining monopoly profits, since the model above shows that the incumbent doesn’t have incentives to do that.

If our model captures the dynamics of the market (which it may or may not, depending on a given case’s circumstances) but we observe mergers, there must be another reason for that deal besides maintaining a monopoly. The presence of multiple potential entrants overturns the antitrust implications of the truism that monopoly profits exceed duopoly profits. The question turns instead to empirical analysis of the merger and market in question, as to whether it would be profitable to acquire all potential entrants.

The second simplifying assumption that restricts the applicability of Salop’s baseline model is that the incumbent has the lowest cost of production. He rules out the possibility of lower-cost entrants in Footnote 2:

Monopoly profits are not always higher. The entrant may have much lower costs or a better or highly differentiated product. But higher monopoly profits are more usually the case.

If one allows the possibility that an entrant may have lower costs (even if those lower costs won’t be achieved until the future, when the entrant gets to scale), it does not follow that monopoly profits (under the current higher-cost monopolist) necessarily exceed duopoly profits (with a lower-cost producer involved).

One cannot simply assume that all firms have the same costs or that the incumbent is always the lowest-cost producer. This is not just a modeling choice but has implications for how we think about mergers. As Geoffrey Manne, Sam Bowman, and Dirk Auer have argued:

Although it is convenient in theoretical modeling to assume that similarly situated firms have equivalent capacities to realize profits, in reality firms vary greatly in their capabilities, and their investment and other business decisions are dependent on the firm’s managers’ expectations about their idiosyncratic abilities to recognize profit opportunities and take advantage of them—in short, they rest on the firm managers’ ability to be entrepreneurial.

Given the assumptions that all firms have identical costs and there is only one potential entrant, Salop’s framework would find that all possible mergers are anticompetitive and that there are no possible efficiency gains from any merger. That’s the thrust of the video. We assume that the whole story is two identical-seeming women selling eggs. Since the acquired firm cannot, by assumption, have lower costs of production, it cannot improve on the incumbent’s costs of production.

Many Reasons for Mergers

But whether a merger is efficiency-reducing and bad for competition and consumers needs to be proven, not just assumed.

If we take the basic acquisition model literally, every industry would have just one firm. Every incumbent would acquire every possible competitor, no matter how small. After all, monopoly profits are higher than duopoly profits, and so the incumbent both wants to and can preserve its monopoly profits. The model does not give us a way to disentangle when mergers would stop without antitrust enforcement.

Mergers do not affect the production side of the economy, under this assumption, but exist solely to gain the market power to manipulate prices. Since the model finds no downsides for the incumbent to acquiring a competitor, it would naturally acquire every last potential competitor, no matter how small, unless prevented by law. 

Once we allow for the possibility that firms differ in productivity, however, it is no longer true that monopoly profits are greater than industry duopoly profits. We can see this most clearly in situations where there is “competition for the market” and the market is winner-take-all. If the entrant to such a market has lower costs, the profit under entry (when one firm wins the whole market) can be greater than the original monopoly profits. In such cases, monopoly maintenance alone cannot explain an entrant’s decision to sell.

An acquisition could therefore be both procompetitive and increase consumer welfare. For example, the acquisition could allow the lower-cost entrant to get to scale quicker. The acquisition of Instagram by Facebook, for example, brought the photo-editing technology that Instagram had developed to a much larger market of Facebook users and provided a powerful monetization mechanism that was otherwise unavailable to Instagram.

In short, the notion that incumbents can systematically and profitably maintain their market position by acquiring potential competitors rests on assumptions that, in practice, will regularly and consistently fail to materialize. It is thus improper to assume that most of these acquisitions reflect efforts by an incumbent to anticompetitively maintain its market position.

In Antitrust & Competition, Economic Theory, Facebook, Federal Trade Commission, Justice Department, Merger Guidelines, Mergers & Acquisitions, Monopolization, Platforms, Truth on the Market , , , , , , , , ,
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Three Big Pitfalls in the Way of Lina Khan’s Agenda

Gus Hurwitz —  11 August 2022

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

In a recent op-ed for the Wall Street Journal, Svetlana Gans and Eugene Scalia look at three potential traps the Federal Trade Commission (FTC) could trigger if it pursues the aggressive rulemaking agenda many have long been expecting. From their opening:

FTC Chairman Lina Khan has Rooseveltian ambitions for the agency. … Within weeks the FTC is expected to begin a blizzard of rule-makings that will include restrictions on employment noncompete agreements and the practices of technology companies.

If Ms. Khan succeeds, she will transform the FTC’s regulation of American business. But there’s a strong chance this regulatory blitz will fail. The FTC is a textbook case for how federal agencies could be affected by the re-examination of administrative law under way at the Supreme Court.

The first pitfall into which the FTC might fall, Gans and Scalia argue, is the “major questions” doctrine. Recently illuminated in the Supreme Court’s opinion in West Virginia v. EPA decision, the doctrine holds that federal agencies cannot enact regulations of vast economic and political significance without clear congressional authorization. The sorts of rules the FTC appears to be contemplating “would run headlong into” major questions, Gans and Scalia write, a position shared by several contributors to Truth on the Market‘s recent symposium on the potential for FTC rulemakings on unfair methods of competition (UMC).

The second trap the authors expect might trip up an ambitious FTC is the major questions doctrine’s close cousin: the nondelegation doctrine. The nondelegation doctrine holds that there are limits to how much authority Congress can delegate to a federal agency, even if it does so clearly.

Curiously, as Gans and Scalia note, the last time the Supreme Court invoked the nondelegation doctrine involved regulations to implement “codes of fair competition”—nearly identical, on their face, to the commission’s current interest in rules to prohibit unfair methods of competition. That last case, Schechter Poultry Corp. v. United States, is more than 80 years old. The doctrine has since lain dormant for multiple generations. But in recent years, several justice have signaled their openness to reinvigorating the doctrine. As Gans and Scalia note, “[a]n aggressive FTC competition rule could be a tempting target” for them.

Finally, the authors anticipate an overly aggressive FTC may find itself entangled in yet a thorny web wrapped around the very heart of the administrative state: the constitutionality of so-called independent agencies. Again, the relevant constitutional doctrine giving rise to these agencies results from another 1935 case involving the FTC itself: Humphrey’s Executor v. United States. While the Court in that opinion upheld the notion that Congress can create agencies led by officials who operate independently of direct presidential control, conservative justices have long questioned the doctrine’s legitimacy and the Roberts court, in particularly, has trimmed its outer limits. An overly aggressive FTC might present an opportunity to further check the independence of these agencies.

While it remains unclear the precise rules the FTC seek try to develop using its UMC authority, the clearest signs are that it will focus first on labor issues, such as emerging research around labor monopsony and firms’ use of noncompete clauses. Indeed, Eric Posner, who joined the U.S. Justice Department Antitrust Division earlier this year as counsel on these issues, recently acknowledged that: “There is this very close and complicated relationship between labor law and antitrust law that has to be maintained.”

If the FTC were to upset this relationship, such as by using its UMC authority either to circumvent the National Labor Relations Board in addressing competition concerns or to assist the NLRB in exceeding its own statutory authority, it would be unsurprising for the courts to exercise their constitutional role as a check on a rogue agency.

In Antitrust & Competition, Antitrust Division, Federal Trade Commission, FTC UMC Rulemaking, Platforms, Truth on the Market , , , , , , , , ,
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Antitrust Populists Don’t Seem to Care About the Poor

Julie Carlson —  26 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.]

When I was a kid, I trailed behind my mother in the grocery store with a notepad and a pencil adding up the cost of each item she added to our cart. This was partly my mother’s attempt to keep my math skills sharp, but it was also a necessity. As a low-income family, there was no slack in the budget for superfluous spending. The Hostess cupcakes I longed for were a luxury item that only appeared in our cart if there was an unexpected windfall. If the antitrust populists who castigate all forms of market power succeed in their crusade to radically deconcentrate the economy, life will be much harder for low-income families like the one I grew up in.

Antitrust populists like Biden White House official Tim Wu and author Matt Stoller decry the political influence of large firms. But instead of advocating for policies that tackle this political influence directly, they seek reforms to antitrust enforcement that aim to limit the economic advantages of these firms, believing that will translate into political enfeeblement. The economic advantages arising from scale benefit consumers, particularly low-income consumers, often at the expense of smaller economic rivals. But because the protection of small businesses is so paramount to their worldview, antitrust populists blithely ignore the harm that advancing their objectives would cause to low-income families.

This desire to protect small businesses, without acknowledging the economic consequences for low-income families, is plainly obvious in calls for reinvigorated Robinson-Patman Act enforcement (a law from the 1930s for which independent businesses advocated to limit the rise of chain stores) and in plans to revise the antitrust enforcement agencies’ merger guidelines. The U.S. Justice Department (DOJ) and the Federal Trade Commission (FTC) recently held a series of listening sessions to demonstrate the need for new guidelines. During the listening session on food and agriculture, independent grocer Anthony Pena described the difficulty he has competing with larger competitors like Walmart. He stated that:

Just months ago, I was buying a 59-ounce orange juice just north of $4 a unit, where we couldn’t get the supplier to sell it to us … Meanwhile, I go to the bigger box like a Walmart or a club store. Not only do they have it fully stocked, but they have it about half the price that I would buy it for at cost.

Half the price. Anthony Pena is complaining that competitors such as Walmart are selling the same product at half the price. To protect independent grocers like Anthony Pena, antitrust populists would have consumers, including low-income families, pay twice as much for groceries.

Walmart is an important food retailer for low-income families. Nearly a fifth of all spending through the Supplemental Nutrition Assistance Program (SNAP), the program formerly known as food stamps, takes place at Walmart. After housing and transportation, food is the largest expense for low-income families. The share of expenditures going toward food for low-income families (i.e., families in the lowest 20% of the income distribution) is 34% higher than for high-income families (i.e., families in the highest 20% of the income distribution). This means that higher grocery prices disproportionately burden low-income families.

In 2019, the U.S. Department of Agriculture (USDA) launched the SNAP Online Purchasing Pilot, which allows SNAP recipients to use their benefits at online food retailers. The pandemic led to an explosion in the number of SNAP recipients using their benefits online—increasing from just 35,000 households in March 2020 to nearly 770,000 households just three months later. While the pilot originally only included Walmart and Amazon, the number of eligible retailers has expanded rapidly. In order to make grocery delivery more accessible to low-income families, an important service during the pandemic, Amazon reduced its Prime membership fee (which helps pay for free delivery) by 50% for SNAP recipients.

The antitrust populists are not only targeting the advantages of large brick-and-mortar retailers, such as Walmart, but also of large online retailers like Amazon. Again, these advantages largely flow to consumers—particularly low-income ones.

The proposed American Innovation and Choice Online Act (AICOA), which was voted out of the Senate Judiciary Committee in February and may make an appearance on the Senate floor this summer, threatens those consumer benefits. AICOA would prohibit so-called “self-preferencing” by Amazon and other large technology platforms.

Should a ban on self-preferencing come to fruition, Amazon would not be able to prominently show its own products in any capacity—even when its products are a good match for a consumer’s search. In search results, Amazon will not be able to promote its private-label products, including Amazon Basics and 365 by Whole Foods, or products for which it is a first-party seller (i.e., a reseller of another company’s product). Amazon may also have to downgrade the ranking of popular products it sells, making them harder for consumers to find. Forcing Amazon to present offers that do not correspond to products consumers want to buy or are not a good value inflicts harm on all consumers but is particularly problematic for low-income consumers. All else equal, most consumers, especially low-income ones, obviously prefer cheaper products. It is important not to take that choice away from them.

Consider the case of orange juice, the product causing so much consternation for Mr. Pena. In a recent search on Amazon for a 59-ounce orange juice, as seen in the image below, the first four “organic” search results are SNAP-eligible, first-party, or private-label products sold by Amazon and ranging in price from $3.55 to $3.79. The next two results are from third-party sellers offering two 59-ounce bottles of orange juice at $38.99 and $84.54—more than five times the unit price offered by Amazon. By prohibiting self-preferencing, Amazon would be forced to promote products to consumers that are significantly more expensive and that are not SNAP-eligible. This increases costs directly for consumers who purchase more expensive products when cheaper alternatives are available but not presented. But it also increases costs indirectly by forcing consumers to search longer for better prices and SNAP-eligible products or by discouraging them from considering timesaving, online shopping altogether. Low-income families are least able to afford these increased costs.

The upshot is that antitrust populists are choosing to support (often well-off) small-business owners at the expense of vulnerable working people. Congress should not allow them to put the squeeze on low-income families. These families are already suffering due to record-high inflation—particularly for items that constitute the largest share of their expenditures, such as transportation and food. Proposed antitrust reforms such as AICOA and reinvigorated Robinson-Patman Act enforcement will only make it harder for low-income families to make ends meet.

In Amazon, Antitrust & Competition, Antitrust’s Uncertain Future, COVID-19, Exclusionary Conduct, Exclusive Dealing, Federal Trade Commission, Justice Department, Platforms, Symposia, Truth on the Market, Tying , , , , , , , , , ,
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The Catch-22 of AICOA’s Guidelines

Geoffrey Manne —  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.]

If S.2992—the American Innovation and Choice Online Act or AICOA—were to become law, it would be, at the very least, an incomplete law. By design—and not for good reason, but for political expediency—AICOA is riddled with intentional uncertainty. In theory, the law’s glaring definitional deficiencies are meant to be rectified by “expert” agencies (i.e., the DOJ and FTC) after passage. But in actuality, no such certainty would ever emerge, and the law would stand as a testament to the crass political machinations and absence of rigor that undergird it. Among many other troubling outcomes, this is what the future under AICOA would hold.

Two months ago, the American Bar Association’s (ABA) Antitrust Section published a searing critique of AICOA in which it denounced the bill for being poorly written, vague, and departing from established antitrust-law principles. As Lazar Radic and I discussed in a previous post, what made the ABA’s letter to Congress so eye-opening was that it was penned by a typically staid group with a reputation for independence, professionalism, and ideational heterogeneity.

One of the main issues the ABA flagged in its letter is that the introduction of vague new concepts—like “materially harm competition,” which does not exist anywhere in current antitrust law—into the antitrust mainstream will risk substantial legal uncertainty and produce swathes of unintended consequences.

According to some, however, the bill’s inherent uncertainty is a feature, not a bug. It leaves enough space for specialist agencies to define the precise meaning of key terms without unduly narrowing the scope of the bill ex ante.

In particular, supporters of the bill have pointed to the prospect of agency guidelines under the law to rescue it from the starkest of the fundamental issues identified by the ABA. Section 4 of AICOA requires the DOJ and FTC to issue “agency enforcement guidelines” no later than 270 days after the date of enactment:

outlining policies and practices relating to conduct that may materially harm competition under section 3(a), agency interpretations of the affirmative defenses under section 3(b), and policies for determining the appropriate amount of a civil penalty to be sought under section 3(c).

In pointing to the prospect of guidelines, however, supporters are inadvertently admitting defeat—and proving the ABA’s point: AICOA is not ready for prime time.

This thinking is misguided for at least three reasons:

Guidelines are not rules

As section 4(d) of AICOA recognizes, guidelines are emphatically nonbinding:

The joint guidelines issued under this section do not … operate to bind the Commission, Department of Justice, or any person, State, or locality to the approach recommended in the guidelines.

As such, the value of guidelines in dispelling legal uncertainty is modest, at best.

This is even more so in today’s highly politicized atmosphere, where guidelines can be withdrawn at the tip of the ballot (we’ve just seen the FTC rescind the Vertical Merger Guidelines it put in place less than a year ago). Given how politicized the issuing agencies themselves have become, it’s a virtual certainty that the guidelines produced in response to AICOA would be steeped in partisan politics and immediately changed with a change in administration, thus providing no more lasting legal certainty than speculation by a member of Congress.

Guidelines are not the appropriate tool to define novel concepts

Regardless of this political reality, however, the mixture of vagueness and novelty inherent in the key concepts that underpin the infringements and affirmative defenses under AICOA—such as “fairness,” “preferencing,” “materiality”, or the “intrinsic” value of a product—undermine the usefulness (and legitimacy) of guidelines.

Indeed, while laws are sometimes purposefully vague—operating as standards rather than prescriptive rules—to allow for more flexibility, the concepts introduced by AICOA don’t even offer any cognizable standards suitable for fine-tuning.

The operative terms of AICOA don’t have definitive meanings under antitrust law, either because they are wholly foreign to accepted antitrust law (as in the case of “self-preferencing”) or because the courts have never agreed on an accepted definition (as in the case of “fairness”). Nor are they technical standards, which are better left to specialized agencies rather than to legislators to define, such as in the case of, e.g., pollution (by contrast: what is the technical standard for “fairness”?).

Indeed, as Elyse Dorsey has noted, the only certainty that would emerge from this state of affairs is the certainty of pervasive rent-seeking by non-altruistic players seeking to define the rules in their favor.

As we’ve pointed out elsewhere, the purpose of guidelines is to reflect the state of the art in a certain area of antitrust law and not to push the accepted scope of knowledge and practice in a new direction. This not only overreaches the FTC’s and DOJ’s powers, but also risks galvanizing opposition from the courts, thereby undermining the utility of adopting guidelines in the first place.

Guidelines can’t fix a fundamentally flawed law

Expecting guidelines to provide sensible, administrable content for the bill sets the bar overly high for guidelines, and unduly low for AICOA.

The alleged harms at the heart of AICOA are foreign to antitrust law, and even to the economic underpinnings of competition policy more broadly. Indeed, as Sean Sullivan has pointed out, the law doesn’t even purport to define “harms,” but only serves to make specific conduct illegal:

Even if the conduct has no effect, it’s made illegal, unless an affirmative defense is raised. And the affirmative defense requires that it doesn’t ‘harm competition.’ But ‘harm competition’ is undefined…. You have to prove that harm doesn’t result, but it’s not really ever made clear what the harm is in the first place.”

“Self-preferencing” is not a competitive defect, and simply declaring it to be so does not make it one. As I’ve noted elsewhere:

The notion that platform entry into competition with edge providers is harmful to innovation is entirely speculative. Moreover, it is flatly contrary to a range of studies showing that the opposite is likely true…. The theory of vertical discrimination harm is at odds not only with this platform-specific empirical evidence, it is also contrary to the long-standing evidence on the welfare effects of vertical restraints more broadly …

… [M]andating openness is not without costs, most importantly in terms of the effective operation of the platform and its own incentives for innovation.

Asking agencies with an expertise in competition policy to enact economically sensible guidelines to direct enforcement against such conduct is a fool’s errand. It is a recipe for purely political legislation adopted by competition agencies that does nothing to further their competition missions.

AICOA’s Catch-22 Is Its Own Doing, and Will Be Its Downfall

AICOA’s Catch-22 is that, by making the law so vague that it needs enforcement guidelines to flesh it out, AICOA renders both itself and those same guidelines irrelevant and misses the point of both legal instruments.

Ultimately, guidelines cannot resolve the fundamental rule-of-law issues raised by the bill and highlighted by the ABA in its letter. To the contrary, they confirm the ABA’s concerns that AICOA is a poorly written and indeterminate bill. Further, the contentious elements of the bill that need clarification are inherently legislative ones that—paradoxically—shouldn’t be left to competition-agency guidelines to elucidate.

The upshot is that any future under AICOA will be one marked by endless uncertainty and the extreme politicization of both competition policy and the agencies that enforce it.

In Antitrust & Competition, Antitrust’s Uncertain Future, Federal Trade Commission, Justice Department, Platforms, Symposia, Truth on the Market, Tying, Vertical Restraints , , , , , , , , , , ,
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The Cracked Mirror of Monopoly-Monopsony Symmetry

Brian Albrecht —  11 July 2022

Slow wage growth and rising inequality over the past few decades have pushed economists more and more toward the study of monopsony power—particularly firms’ monopsony power over workers. Antitrust policy has taken notice. For example, when the Federal Trade Commission (FTC) and U.S. Justice Department (DOJ) initiated the process of updating their merger guidelines, their request for information included questions about how they should respond to monopsony concerns, as distinct from monopoly concerns. ​

From a pure economic-theory perspective, there is no important distinction between monopsony power and monopoly power. If Armen is trading his apples in exchange for Ben’s bananas, we can call Armen the seller of apples or the buyer of bananas. The labels (buyer and seller) are kind of arbitrary. It doesn’t matter as a pure theory matter. Monopsony and monopoly are just mirrored images.

Some infer from this monopoly-monopsony symmetry, however, that extending antitrust to monopsony power will be straightforward. As a practical matter for antitrust enforcement, it becomes less clear. The moment we go slightly less abstract and use the basic models that economists use, monopsony is not simply the mirror image of monopoly. The tools that antitrust economists use to identify market power differ in the two cases.

Monopsony Requires Studying Output

Suppose that the FTC and DOJ are considering a proposed merger. For simplicity, they know that the merger will generate efficiency gains (and they want to allow it) or market power (and they want to stop it) but not both. The challenge is to look at readily available data like prices and quantities to decide which it is. (Let’s ignore the ideal case that involves being able to estimate elasticities of demand and supply.)

In a monopoly case, if there are efficiency gains from a merger, the standard model has a clear prediction: the quantity sold in the output market will increase. An economist at the FTC or DOJ with sufficient data will be able to see (or estimate) the efficiencies directly in the output market. Efficiency gains result in either greater output at lower unit cost or else product-quality improvements that increase consumer demand. Since the merger lowers prices for consumers, the agencies (assume they care about the consumer welfare standard) will let the merger go through, since consumers are better off.

In contrast, if the merger simply enhances monopoly power without efficiency gains, the quantity sold will decrease, either because the merging parties raise prices or because quality declines. Again, the empirical implication of the merger is seen directly in the market in question. Since the merger raises prices for consumers, the agencies (assume they care about the consumer welfare standard) will let not the merger go through, since consumers are worse off. In both cases, you judge monopoly power by looking directly at the market that may or may not have monopoly power.

Unfortunately, the monopsony case is more complicated. Ultimately, we can be certain of the effects of monopsony only by looking at the output market, not the input market where the monopsony power is claimed.

To see why, consider again a merger that generates either efficiency gains or market (now monopsony) power. A merger that creates monopsony power will necessarily reduce the prices and quantity purchased of inputs like labor and materials. An overly eager FTC may see a lower quantity of input purchased and jump to the conclusion that the merger increased monopsony power. After all, monopsonies purchase fewer inputs than competitive firms.

Not so fast. Fewer input purchases may be because of efficiency gains. For example, if the efficiency gain arises from the elimination of redundancies in a hospital merger, the hospital will buy fewer inputs, hire fewer technicians, or purchase fewer medical supplies. This may even reduce the wages of technicians or the price of medical supplies, even if the newly merged hospitals are not exercising any market power to suppress wages.

The key point is that monopsony needs to be treated differently than monopoly. The antitrust agencies cannot simply look at the quantity of inputs purchased in the monopsony case as the flip side of the quantity sold in the monopoly case, because the efficiency-enhancing merger can look like the monopsony merger in terms of the level of inputs purchased.

How can the agencies differentiate efficiency-enhancing mergers from monopsony mergers? The easiest way may be for the agencies to look at the output market: an entirely different market than the one with the possibility of market power. Once we look at the output market, as we would do in a monopoly case, we have clear predictions. If the merger is efficiency-enhancing, there will be an increase in the output-market quantity. If the merger increases monopsony power, the firm perceives its marginal cost as higher than before the merger and will reduce output. 

In short, as we look for how to apply antitrust to monopsony-power cases, the agencies and courts cannot look to the input market to differentiate them from efficiency-enhancing mergers; they must look at the output market. It is impossible to discuss monopsony power coherently without considering the output market.

In real-world cases, mergers will not necessarily be either strictly efficiency-enhancing or strictly monopsony-generating, but a blend of the two. Any rigorous consideration of merger effects must account for both and make some tradeoff between them. The question of how guidelines should address monopsony power is inextricably tied to the consideration of merger efficiencies, particularly given the point above that identifying and evaluating monopsony power will often depend on its effects in downstream markets.

This is just one complication that arises when we move from the purest of pure theory to slightly more applied models of monopoly and monopsony power. Geoffrey Manne, Dirk Auer, Eric Fruits, Lazar Radic and I go through more of the complications in our comments summited to the FTC and DOJ on updating the merger guidelines.

What Assumptions Make the Difference Between Monopoly and Monopsony?

Now that we have shown that monopsony and monopoly are different, how do we square this with the initial observation that it was arbitrary whether we say Armen has monopsony power over apples or monopoly power over bananas?

There are two differences between the standard monopoly and monopsony models. First, in a vast majority of models of monopsony power, the agent with the monopsony power is buying goods only to use them in production. They have a “derived demand” for some factors of production. That demand ties their buying decision to an output market. For monopoly power, the firm sells the goods, makes some money, and that’s the end of the story.

The second difference is that the standard monopoly model looks at one output good at a time. The standard factor-demand model uses two inputs, which introduces a tradeoff between, say, capital and labor. We could force monopoly to look like monopsony by assuming the merging parties each produce two different outputs, apples and bananas. An efficiency gain could favor apple production and hurt banana consumers. While this sort of substitution among outputs is often realistic, it is not the standard economic way of modeling an output market.

In Antitrust & Competition, Antitrust Division, Economic Theory, Federal Trade Commission, Justice Department, Merger Guidelines, Mergers & Acquisitions, Monopolization, Truth on the Market , , , , , , , , , ,
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