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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[The ideas in this post from Truth on the Market regular Jonathan M. Barnett of USC Gould School of Law—the eighth entry in our FTC UMC Rulemaking symposiumare developed in greater detail in “Regulatory Rents: An Agency-Cost Analysis of the FTC Rulemaking Initiative,” a chapter in the forthcoming book FTC’s Rulemaking Authority, which will be published by Concurrences later this year. This is the first of two posts we are publishing today; see also this related post from Aaron Nielsen of BYU Law. You can find other posts at the symposium page here. Truth on the Market also invites academics, practitioners, and other antitrust/regulation commentators to send us 1,500-4,000 word responses for potential inclusion in the symposium.]

In December 2021, the Federal Trade Commission (FTC) released its statement of regulatory priorities for 2022, which describes its intention to expand the agency’s rulemaking activities to target “unfair methods of competition” (UMC) under Section 5 of the Federal Trade Commission Act (FTC Act), in addition to (and in some cases, presumably in place of) the conventional mechanism of case-by-case adjudication. Agency leadership (meaning, the FTC chair and the majority commissioners) largely characterizes the rulemaking initiative as a logistical improvement to enable the agency to more efficiently execute its statutory commitment to preserve competitive markets. Unburdened by the costs and delays inherent to the adjudicative process (which, in the antitrust context, typically requires evidence of actual or likely competitive harm), the agency will be able to take expedited action against UMCs based on rules preemptively set forth by the agency. 

This shift from enforcement by adjudication to enforcement by rulemaking is far from a mechanical adjustment. Rather, it is best understood as part of an initiative to make fundamental changes to the substance and methodology of antitrust enforcement.  Substantively, the initiative appears to be part of a broader effort to alter the goals of antitrust enforcement so that it promotes what are deemed to be “equitable” market outcomes, rather than preserving the competitive process through which outcomes are determined by market forces. Methodologically, the initiative appears to be part of a broader effort to displace rule-of-reason treatment with the practical equivalent of per se prohibitions in a wide range of putatively “unfair” practices. Both steps would be inconsistent with the agency’s statutory mission to safeguard the competitive process or a meaningful commitment to a market-driven economy and the rule of law.

Abandoning Competitive Markets

Little steps sometimes portend bigger changes. 

In July 2021, FTC leadership removed the following words from the mission description of the agency’s Bureau of Competition: “The Bureau’s work aims to preserve the free market system and assure the unfettered operation of the forces of supply and demand.” This omitted statement had tracked what remains the standard characterization by federal courts and agency guidelines of the core objective of the antitrust laws. Following this characterization, the antitrust laws seek to preserve the “rules of the game” for market competition, while remaining indifferent to the outcomes of such competition in any particular market. It is the competitive process, not the fortunes of particular competitors, that matters.

Other statements by FTC leadership suggest that they seek to abandon this outcome-agnostic perspective. A memo from the FTC chair to staff, distributed in September 2021, states that the agency’s actions “shape the distribution of power and opportunity” and encourages staff “to take a holistic approach to identifying harms, recognizing that antitrust and consumer protection violations harm workers and independent businesses as well as consumers.” In a draft strategic plan distributed by FTC leadership in October 2021, the agency described its mission as promoting “fair competition” for the “benefit of the public.”  In contrast, the agency’s previously released strategic plan had described the agency’s mission as promoting “competition” for the benefit of consumers, consistent with the case law’s commitment to protecting consumer welfare, dating at least to the Supreme Court’s 1979 decision in Reiter v. Sonotone Corp. et al. The change in language suggests that the agency’s objectives encompass a broad range of stakeholders and policies (including distributive objectives) that extends beyond, and could conflict with, its commitment to preserve the integrity of the competitive process.

These little steps are part of a broader package of “big steps” undertaken during 2021 by FTC leadership. 

In July 2021, the agency abandoned decades of federal case law and agency guidelines by rejecting the consumer-welfare standard for purposes of enforcement of Section 5 of the FTC Act against UMCs. Relatedly, FTC leadership asserted in the same statement that Congress had delegated to the agency authority under Section 5 “to determine which practices fell into the category of ‘unfair methods of competition’”. Remarkably, the agency’s claimed ambit of prosecutorial discretion to identify “unfair” practices is apparently only limited by a commitment to exercise such power “responsibly.”

This largely unbounded redefinition of the scope of Section 5 divorces the FTC’s enforcement authority from the concepts and methods as embodied in decades of federal case law and agency guidelines interpreting the Sherman and Clayton Acts. Those concepts and methods are in turn anchored in the consumer-welfare principle, which ensures that regulatory and judicial actions promote the public interest in the competitive process, rather than the private interests of any particular competitor or other policy goals not contemplated by the antitrust laws. Effectively, agency leadership has unilaterally converted Section 5 into an empty vessel into which enforcers may insert a fluid range of business practices that are deemed by fiat to pose a risk to “fair” competition. 

Abandoning the Rule of Reason

In the same statement in which FTC leadership rejected the consumer-welfare principle for purposes of Section 5 enforcement, it rejected the relevance of the rule of reason for these same purposes. In that statement, agency leadership castigated the rule of reason as a standard that “leads to soaring enforcement costs” and asserted that it is incompatible with Section 5 of the FTC Act. In March 2021 remarks delivered to the House Judiciary Committee’s Antitrust Subcommittee, Commissioner Rebecca Kelly Slaughter similarly lamented “[t]he effect of cramped case law,” specifically viewing as problematic the fact that “[u]nder current Section 5 jurisprudence, courts have to consider conduct under the ‘rule of reason,’ a fact-intensive investigation into whether the anticompetitive effects of the conduct outweigh the procompetitive justifications.” Hence, it appears that the FTC, in exercising its purported rulemaking powers against UMCs under Section 5, does not intend to undertake the balancing of competitive harms and gains that is the signature element of rule-of-reason analysis. Tellingly, the agency’s draft strategic plan, released in October 2021, omits language that it would execute its enforcement mission “without unduly burdening legitimate business activity” (language that had appeared in the previously released strategic plan)—again, suggesting that it plans to take littleaccount of the offsetting competitive gains attributable to a particular business practice.

This change in methodology has two profound and concerning implications. 

First, it means that any “unfair” practice targeted by the agency under Section 5 is effectively subject to a per se prohibition—that is, the agency can prevail merely by identifying that the defendant engaged in a particular practice, rather than having to show competitive harm. Note that this would represent a significant step beyond the per se rule that Sherman Act case law applies to certain cases of horizontal collusion. In those cases, a per se rule has been adopted because economic analysis indicates that these types of practices in general pose such a high risk of net anticompetitive harm that a rule-of-reason inquiry is likely to fail a cost-benefit test almost all of the time. By contrast, there is no indication that FTC leadership plans to confine its rulemaking activities to practices that systematically pose an especially high risk of anticompetitive harm, in part because it is not clear that agency leadership still views harm to the competitive process as being the determinative criterion in antitrust analysis.  

Second, without further clarification from agency leadership, this means that the agency appears to place substantially reduced weight on the possibility of “false positive” error costs. This would be a dramatic departure from the conventional approach to error costs as reflected in federal antitrust case law. Antitrust scholars have long argued, and many courts have adopted the view, that “false positive” costs should be weighted more heavily relative to “false negative” error costs, principally on the ground that, as Judge Richard Posner once put it, “a cartel . . . carries within it the seeds of its own destruction.” To be clear, this weighted approach should still meaningfully assess the false-negative error costs that arise from mistaken failures to intervene. By contrast, the agency’s blanket rejection of the rule of reason in all circumstances for Section 5 purposes raises doubt as to whether it would assign any material weight to false-positive error costs in exercising its purported rulemaking power under Section 5 against UMCs. Consistent with this possibility, the agency’s July 2021 statement—which rejected the rule of reason specifically—adopted the view that Section 5 enforcement should target business practices in their “incipiency,” even absent evidence of a “likely” anticompetitive effect.

While there may be reasonable arguments in favor of an equal weighting of false-positive and false-negative error costs (on the grounds that markets are sometimes slow to correct anticompetitive conduct, as compared to the speed with which courts correct false-positive interventions), it is hard to fathom a reasonable policy argument in favor of placing no material weight on the former cost category. Under conditions of uncertainty, the net economic effect of any particular enforcement action, or failure to take such action, gives rise to a mix of probability-adjusted false-positive and false-negative error costs. Hence, any sound policy framework seeks to minimize the sum of those costs. Moreover, the wholesale rejection of a balancing analysis overlooks extensive scholarship identifying cases in which federal courts, especially during the period prior to the Supreme Court’s landmark 1977 decision in Continental TV Inc. v. GTE Sylvania Inc., applied per se rules that erroneously targeted business practices that were almost certainly generating net-positive competitive gains. Any such mistaken intervention counterproductively penalizes the efforts and ingenuity of the most efficient firms, which then harms consumers, who are compelled to suffer higher prices, lower quality, or fewer innovations than would otherwise have been the case.

The dismissal of efficiency considerations and false-positive error costs is difficult to reconcile with an economically informed approach that seeks to take enforcement actions only where there is a high likelihood of improving economic welfare based on available evidence. On this point, it is worth quoting Oliver Williamson’s well-known critique of 1960s-era antitrust: “[I]f neither the courts nor the enforcement agencies are sensitive to these [efficiency] considerations, the system fails to meet a basic test of economic rationality. And without this the whole enforcement system lacks defensible standards and becomes suspect.”

Abandoning the Rule of Law

In a liberal democratic system of government, the market relies on the state’s commitment to set forth governing laws with adequate notice and specificity, and then to enforce those laws in a manner that is reasonably amenable to judicial challenge in case of prosecutorial error or malfeasance. Without that commitment, investors are exposed to arbitrary enforcement and would be reluctant to place capital at stake. In light of the agency’s concurrent rejection of the consumer-welfare and rule-of-reason principles, any future attempt by the FTC to exercise its purported Section 5 rulemaking powers against UMCs under what currently appears to be a regime of largely unbounded regulatory discretion is likely to violate these elementary conditions for a rule-of-law jurisdiction. 

Having dismissed decades of learning and precedent embodied in federal case law and agency guidelines, FTC leadership has declined to adopt any substitute guidelines to govern its actions under Section 5 and, instead, has stated (in its July 2021 statement rejecting the consumer-welfare principle) that there are few bounds on its authority to specify and target practices that it deems to be “unfair.” This blunt approach contrasts sharply with the measured approach reflected in existing agency guidelines and federal case law, which seek to delineate reasonably objective standards to govern enforcers’ and courts’ decision making when evaluating the competitive merits of a particular business practice.  

This approach can be observed, even if imperfectly, in the application of the Herfindahl-Hirschman Index (HHI) metric in the merger-review process and the use of “safety zones” (defined principally by reference to market-share thresholds) in the agencies’ Antitrust Guidelines for the Licensing of Intellectual Property, Horizontal Merger Guidelines, and Antitrust Guidelines for Collaborations Among Competitors. This nuanced and evidence-based approach can also be observed in a decision such as California Dental Association v. FTC (1999), which provides a framework for calibrating the intensity of a rule-of-reason inquiry based on a preliminary assessment of the likely net competitive effect of a particular practice. In making these efforts to develop reasonably objective thresholds for triggering closer scrutiny, regulators and courts have sought to reconcile the open-ended language of the offenses described in the antitrust statutes—“restraint of trade” (Sherman Act Section 1) or “monopolization” (Sherman Act Section 2)—with a meaningful commitment to providing the market with adequate notice of the inherently fuzzy boundary between competitive and anti-competitive practices in most cases (and especially, in cases involving single-firm conduct that is most likely to be targeted by the agency under its Section 5 authority). 

It does not appear that agency leadership intends to adopt this calibrated approach in implementing its rulemaking initiative, in light of its largely unbounded understanding of its Section 5 enforcement authority and wholesale rejection of the rule-of-reason methodology. If Section 5 is understood to encompass a broad and fluid set of social goals, including distributive objectives that can conflict with a commitment to the competitive process, then there is no analytical reference point by which markets can reliably assess the likelihood of antitrust liability and plan transactions accordingly. If enforcement under Section 5, including exercise of any purported rulemaking powers, does not require the agency to consider offsetting efficiencies attributable to any particular practice, then a chilling effect on everyday business activity and, more broadly, economic growth can easily ensue. In particular, firms may abstain from practices that may have mostly or even entirely procompetitive effects simply because there is some material likelihood that any such practice will be subject to investigation and enforcement under the agency’s understanding of its Section 5 authority and its adoption of a per se approach for which even strong evidence of predominantly procompetitive effects would be moot.

From Free Markets to Administered Markets

The FTC’s proposed rulemaking initiative, when placed within the context of other fundamental changes in substance and methodology adopted by agency leadership, is not easily reconciled with a market-driven economy in which resources are principally directed by the competitive forces of supply and demand. FTC leadership has reserved for the agency discretion to deem a business practice as “unfair,” while defining fairness by reference to an agglomeration of loosely described policy goals that include—but go beyond, and in some cases may conflict with—the agency’s commitment to preserve market competition. Concurrently, FTC leadership has rejected the rule-of-reason balancing approach and, by implication, may place no material weight on (or even fail to consider entirely) the efficiencies attributable to a particular business practice. 

In the aggregate, any rulemaking activity undertaken within this unstructured framework would make it challenging for firms and investors to assess whether any particular action is likely to trigger agency scrutiny. Faced with this predicament, firms could only substantially reduce exposure to antitrust liability by seeking various forms of preclearance with FTC staff, who would in turn be led to issue supplemental guidance, rules, and regulations to handle the high volume of firm inquiries. Contrary to the advertised advantages of enforcement by rulemaking, this unavoidable cycle of rule interpretation and adjustment would likely increase substantially aggregate transaction and compliance costs as compared to enforcement by adjudication. While enforcement by adjudication occurs only periodically and impacts a limited number of firms, enforcement by rulemaking is a continuous activity that impacts all firms. The ultimate result: the free play of the forces of supply and demand would be replaced by a continuously regulated environment where market outcomes are constantly being reviewed through the administrative process, rather than being worked out through the competitive process.  

This is a state of affairs substantially removed from the “free market system” to which the FTC’s Bureau of Competition had once been committed. Of course, that may be exactly what current agency leadership has in mind.

[This guest post from Lawrence J. Spiwak of the Phoenix Center for Advanced Legal & Economic Public Policy Studies is the second in our FTC UMC Rulemaking symposium. 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.]

While antitrust and regulation are supposed to be different sides of the same coin, there has always been a healthy debate over which enforcement paradigm is the most efficient. For those who have long suffered under the zealous hand of ex ante regulation, they would gladly prefer to be overseen by the more dispassionate and case-specific oversight of antitrust. Conversely, those dissatisfied with the current state of antitrust enforcement have increased calls to abandon the ex post approach of antitrust and return to some form of active, “always on” regulation.

While the “antitrust versus regulation” debate has raged for some time, the election of President Joe Biden has brought a new wrinkle: Lina Khan, the controversial chair of the Federal Trade Commission (FTC), has made it very clear that she would like to expand the commission’s role from that of a mere enforcer of the nation’s antitrust laws to that of an agency that also promulgates ex ante “bright line” rules. Thus, the “antitrust versus regulation” debate is no longer academic.

Khan’s efforts to convert the FTC into a de facto regulator should surprise no one, however. Even before she was nominated, Khan was quite vocal about her policy vision for the FTC. For example, in 2020, she co-authored an essay with her former boss (and later briefly her FTC colleague) Rohit Chopra in the University of Chicago Law Review titled “The Case for ‘Unfair Methods of Competition’ Rulemaking.” In it, Khan and Chopra lay out both legal and policy arguments to support “unfair methods of competition” (UMC) rulemaking. But as I explain in a law review published last year in the Federalist Society Review titled “A Change in Direction for the Federal Trade Commission?”, Khan and Chopra’s arguments simply do not hold up to scrutiny. While I encourage those interested in the bounds of the FTC’s UMC rulemaking authority to read my paper in full, for purposes of this symposium, I include a brief summary of my analysis below.

At the outset of their essay, Chopra and Khan lay out what they believe to be the shortcomings of modern antitrust enforcement. As they correctly note, “[a]ntitrust law today is developed exclusively through adjudication,” which is designed to “facilitate[] nuanced and fact-specific analysis of liability and well-tailored remedies.” However, the authors contend that, while a case-by-case approach may sound great in theory, “in practice, the reliance on case-by-case adjudication yields a system of enforcement that generates ambiguity, unduly drains resources from enforcers, and deprives individuals and firms of any real opportunity to democratically participate in the process.” Chopra and Khan blame this alleged policy failure on the abandonment of per se rules in favor of the use of the “rule-of-reason” approach in antitrust jurisprudence. In their view, a rule-of-reason approach is nothing more than “a broad and open-ended inquiry into the overall competitive effects of particular conduct [which] asks judges to weigh the circumstances to decide whether the practice at issue violates the antitrust laws.” To remedy this perceived analytical shortcoming, they argue that the commission should step into the breach and promulgate ex ante bright-line rules to better enforce the prohibition against “unfair methods of competition” (UMC) outlined in Section 5 of the Federal Trade Commission Act.

As a threshold matter, while courts have traditionally provided guidance as to what exactly constitutes “unfair methods of competition,” Chopra and Khan argue that it should be the FTC that has that responsibility in the first instance. According to Chopra and Khan, because Congress set up the FTC as the independent expert agency to implement the FTC Act and because the phrase “unfair methods of competition” is ambiguous, courts must accord great deference to “FTC interpretations of ‘unfair methods of competition’” under the Supreme Court’s Chevron doctrine.

The authors then argue that the FTC has statutory authority to promulgate substantive rules to enforce the FTC’s interpretation of UMC. In particular, they point to the broad catch-all provision in Section 6(g) of the FTC Act. Section 6(g) provides, in relevant part, that the FTC may “[f]rom time to time . . . make rules and regulations for the purpose of carrying out the provisions of this subchapter.” Although this catch-all rulemaking provision is far from the detailed statutory scheme Congress set forth in the Magnuson-Moss Act to govern rulemaking to deal with Section 5’s other prohibition against “unfair or deceptive acts and practices” (UDAP), Chopra and Khan argue that the D.C. Circuit’s 1973 ruling in National Petroleum Refiners Association v. FTC—a case that predates the Magnuson-Moss Act—provides judicial affirmation that the FTC has the authority to “promulgate substantive rules, not just procedural rules” under Section 6(g). Stating Khan’s argument differently: although there may be no affirmative specific grant of authority for the FTC to engage in UMC rulemaking, in the absence of any limit on such authority, the FTC may engage in UMC rulemaking subject to the constraints of the Administrative Procedure Act.

As I point out in my paper, while there are certainly strong arguments that the FTC lacks UMC rulemaking authority (see, e.g., Ohlhausen & Rill, “Pushing the Limits? A Primer on FTC Competition Rulemaking”), it is my opinion that, given the current state of administrative law—in particular, the high level of judicial deference accorded to agencies under both Chevron and the “arbitrary and capricious standard”—whether the FTC can engage in UMC rulemaking remains a very open question.

That said, even if we assume arguendo that the FTC does, in fact, have UMC rulemaking authority, the case law nonetheless reveals that, despite Khan’s hopes and desires, the FTC cannot unilaterally abandon the consumer welfare standard. As I explain in detail in my paper, even with great judicial deference, it is well-established that independent agencies simply cannot ignore antitrust terms of art (especially when that agency is specifically charged with enforcing the antitrust laws).  Thus, Khan may get away with initiating UMC rulemaking, but, for example, attempting to impose a mandatory common carrier-style non-discrimination rule may be a bridge too far.

Khan’s Policy Arguments in Favor of UMC Rulemaking

Separate from the legal debate over whether the FTC can engage in UMC rulemaking, it is also important to ask whether the FTC should engage in UMC rulemaking. Khan essentially posits that the American economy needs a generic business regulator possessed with plenary power and expansive jurisdiction. Given the United States’ well-documented (and sordid) experience with public-utility regulation, that’s probably not a good idea.

Indeed, to Khan and Chopra, ex ante regulation is superior to ex post antitrust enforcement. For example, they submit that UMC “rulemaking would enable the Commission to issue clear rules to give market participants sufficient notice about what the law is, helping ensure that enforcement is predictable.” Moreover, they argue that “establishing rules could help relieve antitrust enforcement of steep costs and prolonged trials.” In particular, “[t]argeting conduct through rulemaking, rather than adjudication, would likely lessen the burden of expert fees or protracted litigation, potentially saving significant resources on a present-value basis.” And third, they contend that rulemaking “would enable the Commission to establish rules through a transparent and participatory process, ensuring that everyone who may be affected by a new rule has the opportunity to weigh in on it, granting the rule greater legitimacy.”   

Khan’s published writings argue forcefully for greater regulatory power, but they suffer from analytical omissions that render her judgment questionable. For example, it is axiomatic that, while it is easy to imagine or theorize about the many benefits of regulation, regulation imposes significant costs of both the intended and unintended sorts. These costs can include compliance costs, reductions of innovation and investment, and outright entry deterrence that protects incumbents. Yet nowhere in her co-authored essay does Khan contemplate a cost-benefit analysis before promulgating a new regulation; she appears to assume that regulation is always costless, easy, and beneficial, on net. Unfortunately, history shows that we cannot always count on FTC commissioners to engage in wise policymaking.

Khan also fails to contemplate the possibility that changing market circumstances or inartful drafting might call for the removal of regulations previously imposed. Among other things, this failure calls into question her rationale that “clear rules” would make “enforcement … predictable.” Why, then, does the government not always use clear rules, instead of the ham-handed approach typical of regulatory interventions? More importantly, enforcement of rules requires adjudication on a case-by-case basis that is governed by precedent from prior applications of the rule and due process.

Taken together, Khan’s analytical omissions reveal a lack of historical awareness about (and apparently any personal experience with) the realities of modern public-utility regulation. Indeed, Khan offers up as an example of purported rulemaking success the Federal Communications Commission’s 2015 Open Internet Order, which imposed legacy common-carrier regulations designed for the old Ma Bell monopoly on the internet. But as I detail extensively in my paper, the history of net-neutrality regulation bears witness that Khan’s assertions that this process provided “clear rules,” was faster and cheaper, and allowed for meaningful public participation simply are not true.

[The following is a guest post from Andrew Mercado, a research assistant at the Mercatus Center at George Mason University and an adjunct professor and research assistant at George Mason’s Antonin Scalia Law School.]

Barry Schwartz’s seminal work “The Paradox of Choice” has received substantial attention since its publication nearly 20 years ago. In it, Schwartz argued that, faced with an ever-increasing plethora of products to choose from, consumers often feel overwhelmed and seek to limit the number of choices they must make.

In today’s online digital economy, a possible response to this problem is for digital platforms to use consumer data to present consumers with a “manageable” array of choices and thereby simplify their product selection. Appropriate “curation” of product-choice options may substantially benefit consumer welfare, provided that government regulators stay out of the way.   

New Research

In a new paper in the American Economic Review, Mark Armstrong and Jidong Zhou—of Oxford and Yale universities, respectively—develop a theoretical framework to understand how companies compete using consumer data. Their findings conclude that there is, in fact, an impact on consumer, producer, and total welfare when different privacy regimes are enacted to change the amount of information a company can use to personalize recommendations.

The authors note that, at least in theory, there is an optimal situation that maximizes total welfare (scenario one). This is when a platform can aggregate information on consumers to such a degree that buyers and sellers are perfectly matched, leading to consumers buying their first-best option. While this can result in marginally higher prices, understandably leading to higher welfare for producers, search and mismatch costs are minimized by the platform, leading to a high level of welfare for consumers.

The highest level of aggregate consumer welfare comes when product differentiation is minimized (scenario two), leading to a high number of substitutes and low prices. This, however, comes with some level of mismatch. Since consumers are not matched with any recommendations, search costs are high and introduce some error. Some consumers may have had a higher level of welfare with an alternative product, but do not feel the negative effects of such mismatch because of the low prices. Therefore, consumer welfare is maximized, but producer welfare is significantly lower.

Finally, the authors suggest a “nearly total welfare” optimal solution in suggesting a “top two-best” scheme (scenario three), whereby consumers are shown their top two best options without explicit ranking. This nearly maximizes total welfare, since consumers are shown the best options for them and, even if the best match isn’t chosen, the second-best match is close in terms of welfare.

Implications

In cases of platform data aggregation and personalization, scenarios one, two, and three can be represented as different privacy regimes.

Scenario one (a personalized-product regime) is akin to unlimited data gathering, whereby platforms can use as much information as is available to perfectly suggest products based on revealed data. From a competition perspective, interfirm competition will tend to decrease under this regime, since product differentiation will be accentuated, and substitutability will be masked. Since one single product will be shown as the “correct” product, the consumer will not want to shift to a different, welfare-inferior product and firms have incentive to produce ever more specialized products for a relatively higher price. Total welfare under this regime is maximized, with producers using their information to garner a relatively large share of economic surplus. Producers are effectively matched with consumers, and all gains from trade are realized.

Scenario two (a data-privacy regime) is one of near-perfect data privacy, whereby the platform is only able to recommend products based on general information, such as sales trends, new products, or product specifications. Under this regime, competition is maximized, since consumers consider a large pool of goods to be close substitutes. Differences in offered products are downplayed, which has the tendency to reduce prices and increase quality, but at the tradeoff of some consumer-product mismatch. For consumers who want a general product and a low price, this is likely the best option, since prices are low, and competition is high. However, for consumers who want the best product match for their personal use case, they will likely undertake search costs, increasing their opportunity cost of product acquisition and tending toward a total cost closer to the cost under a personalized-product regime.

Scenario three (a curated-list regime) represents defined guardrails surrounding the display of information gathered, along the same lines as the personalized-product regime. Platforms remain able to gather as much information as they desire in order to make a personalized recommendation, but they display an array of products that represent the first two (or three to four, with tighter anti-preference rules) best-choice options. These options are displayed without ranking the products, allowing the consumer to choose from a curated list, rather than a single product. The scenario-three regime has two effects on the market:

  1. It will tend to decrease prices through increased competition. Since firms can know only which consumers to target, not which will choose the product, they have to effectively compete with closely related products.
  2. It will likely spur innovation and increase competition from nascent competitors.

From an innovation perspective, firms will have to find better methods to differentiate themselves from the competition, increasing the probability of a consumer acquiring their product. Also, considering nascent competitors, a new product has an increased chance of being picked when ranked sufficiently high to be included on the consumer’s curated list. In contrast, the probability of acquisition under scenario one’s personalized-product regime is low, since the new product must be a better match than other, existing products. Similarly, under scenario two’s data-privacy regime, there is so much product substitutability in the market that the probability of choosing any one new product is low.

Below is a list of how the regimes stack up:

  • Personalized-Product: Total welfare is maximized, but prices are relatively higher and competition is relatively lower than under a data-privacy regime.
  • Data-Privacy: Consumer welfare and competition are maximized, and prices are theoretically minimized, but at the cost of product mismatch. Consumers will face search costs that are not reflected in the prices paid.
  • Curated-List: Consumer welfare is higher and prices are lower than under a personalized-product regime and competition is lower than under a data-privacy regime, but total welfare is nearly optimal when considering innovation and nascent-competitor effects.

Policy in Context

Applying these theoretical findings to fashion administrable policy prescriptions is understandably difficult. A far easier task is to evaluate the welfare effects of actual and proposed government privacy regulations in the economy. In that light, I briefly assess a recently enacted European data-platform privacy regime and U.S. legislative proposals that would restrict data usage under the guise of bans on “self-preferencing.” I then briefly note the beneficial implications of self-preferencing associated with the two theoretical data-usage scenarios (scenarios one and three) described above (scenario two, data privacy, effectively renders self-preferencing ineffective). 

GDPR

The European Union’s General Data Protection Regulation (GDPR)—among the most ambitious and all-encompassing data-privacy regimes to date—has significant negative ramifications for economic welfare. This regulation is most like the second scenario, whereby data collection and utilization are seriously restricted.

The GDPR diminishes competition through its restrictions on data collection and sharing, which reduce the competitive pressure platforms face. For platforms to gain a complete profile of a consumer for personalization, they cannot only rely on data collected on their platform. To ensure a level of personalization that effectively reduces search costs for consumers, these platforms must be able to acquire data from a range of sources and aggregate that data to create a complete profile. Restrictions on aggregation are what lead to diminished competition online.

The GDPR grants consumers the right to choose both how their data is collected and how it is distributed. Not only do platforms themselves have obligations to ensure consumers’ wishes are met regarding their privacy, but firms that sell data to the platform are obligated to ensure the platform does not infringe consumers’ privacy through aggregation.

This creates a high regulatory burden for both the platform and the data seller and reduces the incentive to transfer data between firms. Since the data seller can be held liable for actions taken by the platform, this significantly increases the price at which the data seller will transfer the data. By increasing the risk of regulatory malfeasance, the cost of data must now incorporate some risk premium, reducing the demand for outside data.

This has the effect of decreasing the quality of personalization and tilting the scales toward larger platforms, who have more robust data-collection practices and are able to leverage economies of scale to absorb high regulatory-enforcement costs. The quality of personalization is decreased, since the platform has incentive to create a consumption profile based on activity it directly observes without considering behavior occurring outside of the platform. Additionally, those platforms that are already entrenched and have large user bases are better able to manage the regulatory burden of the GDPR. One survey of U.S. companies with more than 500 workers found that 68% planned to spend between $1 and $10 million in upfront costs to prepare for GDPR compliance, a number that will likely pale in comparison to the long-term compliance costs. For nascent competitors, this outlay of capital represents a significant barrier to entry.

Additionally, as previously discussed, consumers derive some benefit from platforms that can accurately recommend products. If this is the case, then large platforms with vast amounts of accumulated, first-party data will be the consumers’ destination of choice. This will tend to reduce the ability for smaller firms to compete, simply because they do not have access to the same scale of data as the large platforms when data cannot be easily transferred between parties.

SelfPreferencing

Claims of anticompetitive behavior by platforms are abundant (e.g., see here and here), and they often focus on the concept of self-preferencing. Self-preferencing refers to when a company uses its economies of scale, scope, or a combination of the two to offer products at a lower price through an in-house brand. In decrying self-preferencing, many commentators and politicians point to an alleged “unfair advantage” in tech platforms’ ability to leverage data and personalization to drive traffic toward their own products.

It is far from clear, however, that this practice reduces consumer welfare. Indeed, numerous commentaries (e.g., see here and here) circulated since the introduction of anti-preferencing bills in the U.S. Congress (House; Senate) have rejected the notion that self-preferencing is anti-competitive or anti-consumer.

There are good reasons to believe that self-preferencing promotes both competition and consumer welfare. Assume that a company that manufactures or contracts for its own, in-house products can offer them at a marginally lower price for the same relative quality. This decrease in price raises consumer welfare. The in-house brand’s entrance into the market represents a potent competitive threat to firms already producing products, who in turn now have incentive to lower their own prices or raise the quality of their own goods (or both) to maintain their consumer base. This creates even more consumer welfare, since all consumers, not just the ones purchasing the in-house goods, are better off from the entrance of an in-house brand.

It therefore follows that the entrance of an in-house brand and self-preferencing in the data-utilizing regimes discussed above has the potential to enhance consumer welfare.

In general, the use of data analysis on the platform can allow for targeted product entrance into certain markets. If the platform believes it can make a product of similar quality for a lower price, then it will enter that market and consumers will be able to choose a comparable product for a lower price. (If the company does not believe it is able to produce such a product, it will not enter the market with an in-house brand, and consumer welfare will stay the same.) Consumer welfare will further rise as firms producing products that compete against the in-house brand will innovate to compete more effectively.

To be sure, under a personalized-product regime (scenario one), platforms may appear to have an incentive to self-preference to the detriment of consumers. If consumers trust the platform to show the greatest welfare-producing product before the emergence of an in-house brand, the platform may use this consumer trust to its advantage and suggest its own, potentially consumer-welfare-inferior product instead of a competitor’s welfare-superior product. In such a case, consumer welfare may decrease in the face of an in-house brand’s entrance.

The extent of any such welfare loss, however, may be ameliorated (or eliminated entirely) by the platform’s concern that an unexpectedly low level of house-brand product quality will diminish its reputation. Such a reputational loss could come about due to consumer disappointment, plus the efforts of platform rivals to highlight the in-house product’s inferiority. As such, the platform might decide to enhance the quality of its “inferior” in-house offering, or refrain from offering an in-house brand at all.

A curated-list regime (scenario three) is unequivocally consumer-welfare beneficial. Under such a regime, consumers will be shown several more options (a “manageable” number intended to minimize consumer-search costs) than under a personalized-product regime. Consumers can actively compare the offerings from different firms to determine the correct product for their individual use. In this case, there is no incentive to self-preference to the detriment of the consumer, as the consumer is able to make value judgements between the in-house brand and the alternatives.

If the in-house brand is significantly lower in price, but also lower in quality, consumers may not see the two as interchangeable and steer away from the in-house brand. The same follows when the in-house brand is higher in both price and quality. The only instance where the in-house brand has a strong chance of success is when the price is lower than and the quality is greater than competing products. This will tend to increase consumer welfare. Additionally, the entrance of consumer-welfare-superior products into a competitive market will encourage competing firms to innovate and lower prices or raise quality, again increasing consumer welfare for all consumers.

Conclusion

What effects do digital platform-data policies have on consumer welfare? As a matter of theory, if providing an increasing number of product choices does not tend to increase consumer welfare, then do reductions in prices or increases in quality? What about precise targeting of personal-product choices? How about curation—the idea that a consumer raises his or her level of certainty by outsourcing decision-making to a platform that chooses a small set of products for the consumer’s consideration at any given moment? Apart from these theoretical questions, is the current U.S. legal treatment of platform data usage doing a generally good job of promoting consumer welfare? Finally, considering this overview, are new government interventions in platform data policy likely to benefit or harm consumers?

Recently published economic research develops theoretical scenarios that demonstrate how digital platform curation of consumer data may facilitate welfare-enhancing consumer-purchase decisions. At least implicitly, this research should give pause to proponents of major new restrictions of platform data usage.

Furthermore, a review of actual and proposed regulatory restrictions underscores the serious welfare harm of government meddling in digital platform-data usage.   

After the first four years of GDPR, it is clear that there have been significant negative unintended consequences stemming from omnibus privacy regulation. Competition has decreased, regulatory barriers to entry have increased, and consumers are marginally worse off. Since companies are less able and willing to leverage data in their operations and service offerings—due in large part to the risk of hefty fines—they are less able to curate and personalize services to consumers.

Additionally, anti-preferencing bills in the United States threaten to suppress the proper functioning of platform markets and reduce consumer welfare by making the utilization of data in product-market decisions illegal. More research is needed to determine the aggregate welfare effects of such preferencing on platforms, but all early indications point to the fact that consumers are better off when an in-house brand enters the market and increases competition.

Furthermore, current U.S. government policy, which generally allows platforms to use consumer data freely, is good for consumer welfare. Indeed, the consumer-welfare benefits generated by digital platforms, which depend critically on large volumes of data, are enormous. This is documented in a well-reasoned Harvard Business Review article (by an MIT professor and his student) that utilizes online choice experiments based on digital-survey techniques.

The message is clear. Governments should avoid new regulatory meddling in digital platform consumer-data usage practices. Such meddling would harm consumers and undermine the economy.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A Suggested Framework for Consumer Welfare Analysis

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

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

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

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

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

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

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

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

Conclusion

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

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

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

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

U.S. antitrust policy seeks to promote vigorous marketplace competition in order to enhance consumer welfare. For more than four decades, mainstream antitrust enforcers have taken their cue from the U.S. Supreme Court’s statement in Reiter v. Sonotone (1979) that antitrust is “a consumer welfare prescription.” Recent suggestions (see here and here) by new Biden administration Federal Trade Commission (FTC) and U.S. Justice Department (DOJ) leadership that antitrust should promote goals apart from consumer welfare have yet to be embodied in actual agency actions, and they have not been tested by the courts. (Given Supreme Court case law, judicial abandonment of the consumer welfare standard appears unlikely, unless new legislation that displaces it is enacted.)   

Assuming that the consumer welfare paradigm retains its primacy in U.S. antitrust, how do the goals of antitrust match up with those of national security? Consistent with federal government pronouncements, the “basic objective of U.S. national security policy is to preserve and enhance the security of the United States and its fundamental values and institutions.” Properly applied, antitrust can retain its consumer welfare focus in a manner consistent with national security interests. Indeed, sound antitrust and national-security policies generally go hand-in-hand. The FTC and the DOJ should keep that in mind in formulating their antitrust policies (spoiler alert: they sometimes have failed to do so).

Discussion

At first blush, it would seem odd that enlightened consumer-welfare-oriented antitrust enforcement and national-security policy would be in tension. After all, enlightened antitrust enforcement is concerned with targeting transactions that harmfully reduce output and undermine innovation, such as hard-core collusion and courses of conduct that inefficiently exclude competition and weaken marketplace competition. U.S. national security would seem to be promoted (or, at least, not harmed) by antitrust enforcement directed at supporting stronger, more vibrant American markets.

This initial instinct is correct, if antitrust-enforcement policy indeed reflects economically sound, consumer-welfare-centric principles. But are there examples where antitrust enforcement falls short and thereby is at odds with national security? An evaluation of three areas of interaction between the two American policy interests is instructive.

The degree of congruence between national security and appropriate consumer welfare-enhancing antitrust enforcement is illustrated by a brief discussion of:

  1. defense-industry mergers;
  2. the intellectual property-antitrust interface, with a focus on patent licensing; and
  3. proposed federal antitrust legislation.

The first topic presents an example of clear consistency between consumer-welfare-centric antitrust and national defense. In contrast, the second topic demonstrates that antitrust prosecutions (and policies) that inappropriately weaken intellectual-property protections are inconsistent with national defense interests. The second topic does not manifest a tension between antitrust and national security; rather, it illustrates a tension between national security and unsound antitrust enforcement. In a related vein, the third topic demonstrates how a change in the antitrust statutes that would undermine the consumer welfare paradigm would also threaten U.S. national security.

Defense-Industry Mergers

The consistency between antitrust goals and national security is relatively strong and straightforward in the field of defense-industry-related mergers and joint ventures. The FTC and DOJ traditionally have worked closely with the U.S. Defense Department (DOD) to promote competition and consumer welfare in evaluating business transactions that affect national defense needs.

The DOD has long supported policies to prevent overreliance on a single supplier for critical industrial-defense needs. Such a posture is consistent with the antitrust goal of preventing mergers to monopoly that reduce competition, raise prices, and diminish quality by creating or entrenching a dominant firm. As then-FTC Commissioner William Kovacic commented about an FTC settlement that permitted the United Launch Alliance (an American spacecraft launch service provider established in 2006 as a joint venture between Lockheed Martin and Boeing), “[i]n reviewing defense industry mergers, competition authorities and the DOD generally should apply a presumption that favors the maintenance of at least two suppliers for every weapon system or subsystem.”

Antitrust enforcers have, however, worked with DOD to allow the only two remaining suppliers of a defense-related product or service to combine their operations, subject to appropriate safeguards, when presented with scale economy and quality rationales that advanced national-security interests (see here).

Antitrust enforcers have also consulted and found common cause with DOD in opposing anticompetitive mergers that have national-security overtones. For example, antitrust enforcement actions targeting vertical defense-sector mergers that threaten anticompetitive input foreclosure or facilitate anticompetitive information exchanges are in line with the national-security goal of preserving vibrant markets that offer the federal government competitive, high-quality, innovative, and reasonably priced purchase options for its defense needs.

The FTC’s recent success in convincing Lockheed Martin to drop its proposed acquisition of Aerojet Rocketdyne holdings fits into this category. (I express no view on the merits of this matter; I merely cite it as an example of FTC-DOD cooperation in considering a merger challenge.) In its February 2022 press release announcing the abandonment of this merger, the FTC stated that “[t]he acquisition would have eliminated the country’s last independent supplier of key missile propulsion inputs and given Lockheed the ability to cut off its competitors’ access to these critical components.” The FTC also emphasized the full consistency between its enforcement action and national-security interests:

Simply put, the deal would have resulted in higher prices and diminished quality and innovation for programs that are critical to national security. The FTC’s enforcement action in this matter dovetails with the DoD report released this week recommending stronger merger oversight of the highly concentrated defense industrial base.

Intellectual-Property Licensing

Shifts in government IP-antitrust patent-licensing policy perspectives

Intellectual-property (IP) licensing, particularly involving patents, is highly important to the dynamic and efficient dissemination of new technologies throughout the economy, which, in turn, promotes innovation and increased welfare (consumers’ and producers’ surplus). See generally, for example, Daniel Spulber’s The Case for Patents and Jonathan Barnett’s Innovation, Firms, and Markets. Patents are a property right, and they do not necessarily convey market power, as the federal government has recognized (see 2017 DOJ-FTC Antitrust Guidelines for the Licensing of Intellectual Property).

Standard setting through standard setting organizations (SSOs) has been a particularly important means of spawning valuable benchmarks (standards) that have enabled new patent-backed technologies to drive innovation and enable mass distribution of new high-tech products, such as smartphones. The licensing of patents that cover and make possible valuable standards—“standard-essential patents” or SEPs—has played a crucial role in bringing to market these products and encouraging follow-on innovations that have driven fast-paced welfare-enhancing product and process quality improvements.

The DOJ and FTC have recognized specific efficiency benefits of IP licensing in their 2017 Antitrust Guidelines for the Licensing of Intellectual Property, stating (citations deleted):

Licensing, cross-licensing, or otherwise transferring intellectual property (hereinafter “licensing”) can facilitate integration of the licensed property with complementary factors of production. This integration can lead to more efficient exploitation of the intellectual property, benefiting consumers through the reduction of costs and the introduction of new products. Such arrangements increase the value of intellectual property to consumers and owners. Licensing can allow an innovator to capture returns from its investment in making and developing an invention through royalty payments from those that practice its invention, thus providing an incentive to invest in innovative efforts. …

[L]imitations on intellectual property licenses may serve procompetitive ends by allowing the licensor to exploit its property as efficiently and effectively as possible. These various forms of exclusivity can be used to give a licensee an incentive to invest in the commercialization and distribution of products embodying the licensed intellectual property and to develop additional applications for the licensed property. The restrictions may do so, for example, by protecting the licensee against free riding on the licensee’s investments by other licensees or by the licensor. They may also increase the licensor’s incentive to license, for example, by protecting the licensor from competition in the licensor’s own technology in a market niche that it prefers to keep to itself.

Unfortunately, however, FTC and DOJ antitrust policies over the last 15 years have too often belied this generally favorable view of licensing practices with respect to SEPs. (See generally here, here, and here). Notably, the antitrust agencies have at various times taken policy postures and enforcement actions indicating that SEP holders may face antitrust challenges if:

  1. they fail to license all comers, including competitors, on fair, reasonable, and nondiscriminatory (FRAND) terms; and
  2. seek to obtain injunctions against infringers.

In addition, antitrust policy officials (see 2011 FTC Report) have described FRAND price terms as cabined by the difference between the licensing rates for the first (included in the standard) and second (not included in the standard) best competing patented technologies available prior to the adoption of a standard. This pricing measure—based on the “incremental difference” between first and second-best technologies—has been described as necessary to prevent SEP holders from deriving artificial “monopoly rents” that reflect the market power conferred by a standard. (But see then FTC-Commissioner Joshua Wright’s 2013 essay to the contrary, based on the economics of incomplete contracts.)

This approach to SEPs undervalues them, harming the economy. Limitations on seeking injunctions (which are a classic property-right remedy) encourages opportunistic patent infringements and artificially disfavors SEP holders in bargaining over licensing terms with technology implementers, thereby reducing the value of SEPs. SEP holders are further disadvantaged by the presumption that they must license all comers. They also are harmed by the implication that they must be limited to a relatively low hypothetical “ex ante” licensing rate—a rate that totally fails to take into account the substantial economic welfare value that will accrue to the economy due to their contribution to the standard. Considered individually and as a whole, these negative factors discourage innovators from participating in standardization, to the detriment of standards quality. Lower-quality standards translate into inferior standardized produces and processes and reduced innovation.

Recognizing this problem, in 2018 DOJ, Assistant Attorney General for Antitrust Makan Delrahim announced a “New Madison Approach” (NMA) to SEP licensing, which recognized:

  1. antitrust remedies are inappropriate for patent-licensing disputes between SEP-holders and implementers of a standard;
  2. SSOs should not allow collective actions by standard-implementers to disfavor patent holders;
  3. SSOs and courts should be hesitant to restrict SEP holders’ right to exclude implementers from access to their patents by seeking injunctions; and
  4. unilateral and unconditional decisions not to license a patent should be per se legal. (See, for example, here and here.)

Acceptance of the NMA would have counter-acted the economically harmful degradation of SEPs stemming from prior government policies.

Regrettably, antitrust-enforcement-agency statements during the last year effectively have rejected the NMA. Most recently, in December 2021, the DOJ issued for public comment a Draft Policy Statement on Licensing Negotiations and Remedies, SEPs, which displaces a 2019 statement that had been in line with the NMA. Unless the FTC and Biden DOJ rethink their new position and decide instead to support the NMA, the anti-innovation approach to SEPs will once again prevail, with unfortunate consequences for American innovation.

The “weaker patents” implications of the draft policy statement would also prove detrimental to national security, as explained in a comment on the statement by a group of leading law, economics, and business scholars (including Nobel Laureate Vernon Smith) convened by the International Center for Law & Economics:

China routinely undermines U.S. intellectual property protections through its industrial policy. The government’s stated goal is to promote “fair and reasonable” international rules, but it is clear that China stretches its power over intellectual property around the world by granting “anti-suit injunctions” on behalf of Chinese smartphone makers, designed to curtail enforcement of foreign companies’ patent rights. …

Insufficient protections for intellectual property will hasten China’s objective of dominating collaborative standard development in the medium to long term. Simultaneously, this will engender a switch to greater reliance on proprietary, closed standards rather than collaborative, open standards. These harmful consequences are magnified in the context of the global technology landscape, and in light of China’s strategic effort to shape international technology standards. Chinese companies, directed by their government authorities, will gain significant control of the technologies that will underpin tomorrow’s digital goods and services.

A Center for Security and International Studies submission on the draft policy statement (signed by a former deputy secretary of the DOD, as well as former directors of the U.S. Patent and Trademark Office and the National Institute of Standards and Technology) also raised China-related national-security concerns:

[T]he largest short-term and long-term beneficiaries of the 2021 Draft Policy Statement are firms based in China. Currently, China is the world’s largest consumer of SEP-based technology, so weakening protection of American owned patents directly benefits Chinese manufacturers. The unintended effect of the 2021 Draft Policy Statement will be to support Chinese efforts to dominate critical technology standards and other advanced technologies, such as 5G. Put simply, devaluing U.S. patents is akin to a subsidized tech transfer to China.

Furthermore, in a more general vein, leading innovation economist David Teece also noted the negative national-security implications in his submission on the draft policy statement:

The US government, in reviewing competition policy issues that might impact standards, therefore needs to be aware that the issues at hand have tremendous geopolitical consequences and cannot be looked at in isolation. … Success in this regard will promote competition and is our best chance to maintain technological leadership—and, along with it, long-term economic growth and consumer welfare and national security.

That’s not all. In its public comment warning against precipitous finalization of the draft policy statement, the Innovation Alliance noted that, in recent years, major foreign jurisdictions have rejected the notion that SEP holders should be deprived the opportunity to seek injunctions. The Innovation Alliance opined in detail on the China national-security issues (footnotes omitted):

[T]he proposed shift in policy will undermine the confidence and clarity necessary to incentivize investments in important and risky research and development while simultaneously giving foreign competitors who do not rely on patents to drive investment in key technologies, like China, a distinct advantage. …

The draft policy statement … would devalue SEPs, and undermine the ability of U.S. firms to invest in the research and development needed to maintain global leadership in 5G and other critical technologies.

Without robust American investments, China—which has clear aspirations to control and lead in critical standards and technologies that are essential to our national security—will be left without any competition. Since 2015, President Xi has declared “whoever controls the standards controls the world.” China has rolled out the “China Standards 2035” plan and has outspent the United States by approximately $24 billion in wireless communications infrastructure, while China’s five-year economic plan calls for $400 billion in 5G-related investment.

Simply put, the draft policy statement will give an edge to China in the standards race because, without injunctions, American companies will lose the incentive to invest in the research and development needed to lead in standards setting. Chinese companies, on the other hand, will continue to race forward, funded primarily not by license fees, but by the focused investment of the Chinese government. …

Public hearings are necessary to take into full account the uncertainty of issuing yet another policy on this subject in such a short time period.

A key part of those hearings and further discussions must be the national security implications of a further shift in patent enforceability policy. Our future safety depends on continued U.S. leadership in areas like 5G and artificial intelligence. Policies that undermine the enforceability of patent rights disincentivize the substantial private sector investment necessary for research and development in these areas. Without that investment, development of these key technologies will begin elsewhere—likely China. Before any policy is accepted, key national-security stakeholders in the U.S. government should be asked for their official input.

These are not the only comments that raised the negative national-security ramifications of the draft policy statement (see here and here). For example, current Republican and Democratic senators, prior International Trade Commissioners, and former top DOJ and FTC officials also noted concerns. What’s more, the Patent Protection Society of China, which represents leading Chinese corporate implementers, filed a rather nonanalytic submission in favor of the draft statement. As one leading patent-licensing lawyer explains: “UC Berkley Law Professor Mark Cohen, whose distinguished government service includes serving as the USPTO representative in China, submitted a thoughtful comment explaining how the draft Policy Statement plays into China’s industrial and strategic interests.”

Finally, by weakening patent protection, the draft policy statement is at odds with  the 2021 National Security Commission on Artificial Intelligence Report, which called for the United States to “[d]evelop and implement national IP policies to incentivize, expand, and protect emerging technologies[,]” in response to Chinese “leveraging and exploiting intellectual property (IP) policies as a critical tool within its national strategies for emerging technologies.”

In sum, adoption of the draft policy statement would raise antitrust risks, weaken key property rights protections for SEPs, and undercut U.S. technological innovation efforts vis-à-vis China, thereby undermining U.S. national security.

FTC v. Qualcomm: Misguided enforcement and national security

U.S. national-security interests have been threatened by more than just the recent SEP policy pronouncements. In filing a January 2017 antitrust suit (at the very end of the Obama administration) against Qualcomm’s patent-licensing practices, the FTC (by a partisan 2-1 vote) ignored the economic efficiencies that underpinned this highly successful American technology company’s practices. Had the suit succeeded, U.S. innovation in a critically important technology area would have needlessly suffered, with China as a major beneficiary. A recent Federalist Society Regulatory Transparency Project report on the New Madison Approach underscored the broad policy implications of FTC V. Qualcomm (citations deleted):

The FTC’s Qualcomm complaint reflected the anti-SEP bias present during the Obama administration. If it had been successful, the FTC’s prosecution would have seriously undermined the freedom of the company to engage in efficient licensing of its SEPs.

Qualcomm is perhaps the world’s leading wireless technology innovator. It has developed, patented, and licensed key technologies that power smartphones and other wireless devices, and continues to do so. Many of Qualcomm’s key patents are SEPs subject to FRAND, directed to communications standards adopted by wireless devices makers. Qualcomm also makes computer processors and chips embodied in cutting edge wireless devices. Thanks in large part to Qualcomm technology, those devices have improved dramatically over the last decade, offering consumers a vast array of new services at a lower and lower price, when quality is factored in. Qualcomm thus is the epitome of a high tech American success story that has greatly benefited consumers.

Qualcomm: (1) sells its chips to “downstream” original equipment manufacturers (OEMs, such as Samsung and Apple), on the condition that the OEMs obtain licenses to Qualcomm SEPs; and (2) refuses to license its FRAND-encumbered SEPs to rival chip makers, while allowing those rivals to create and sell chips embodying Qualcomm SEP technologies to those OEMS that have entered a licensing agreement with Qualcomm.

The FTC’s 2017 antitrust complaint, filed in federal district court in San Francisco, charged that Qualcomm’s “no license, no chips” policy allegedly “forced” OEM cell phone manufacturers to pay elevated royalties on products that use a competitor’s baseband processors. The FTC deemed this an illegal “anticompetitive tax” on the use of rivals’ processors, since phone manufacturers “could not run the risk” of declining licenses and thus losing all access to Qualcomm’s processors (which would be needed to sell phones on important cellular networks). The FTC also argued that Qualcomm’s refusal to license its rivals despite its SEP FRAND commitment violated the antitrust laws. Finally, the FTC asserted that a 2011-2016 Qualcomm exclusive dealing contract with Apple (in exchange for reduced patent royalties) had excluded business opportunities for Qualcomm competitors.

The federal district court held for the FTC. It ordered that Qualcomm end these supposedly anticompetitive practices and renegotiate its many contracts. [Among the beneficiaries of new pro-implementer contract terms would have been a leading Chinese licensee of Qualcomm’s, Huawei, the huge Chinese telecommunications company that has been accused by the U.S. government of using technological “back doors” to spy on the United States.]

Qualcomm appealed, and in August 2020 a panel of the Ninth Circuit Court of Appeals reversed the district court, holding for Qualcomm. Some of the key points underlying this holding were: (1) Qualcomm had no antitrust duty to deal with competitors, consistent with established Supreme Court precedent (a very narrow exception to this precedent did not apply); (2) Qualcomm’s rates were chip supplier neutral because all OEMs paid royalties, not just rivals’ customers; (3) the lower court failed to show how the “no license, no chips” policy harmed Qualcomm’s competitors; and (4) Qualcomm’s agreements with Apple did not have the effect of substantially foreclosing the market to competitors. The Ninth Circuit as a whole rejected the FTC’s “en banc” appeal for review of the panel decision.

The appellate decision in Qualcomm largely supports pillar four of the NMA, that unilateral and unconditional decisions not to license a patent should be deemed legal under the antitrust laws. More generally, the decision evinces a refusal to find anticompetitive harm in licensing markets without hard empirical support. The FTC and the lower court’s findings of “harm” had been essentially speculative and anecdotal at best. They had ignored the “big picture” that the markets in which Qualcomm operates had seen vigorous competition and the conferral of enormous and growing welfare benefits on consumers, year-by-year. The lower court and the FTC had also turned a deaf ear to a legitimate efficiency-related business rationale that explained Qualcomm’s “no license, no chips” policy – a fully justifiable desire to obtain a fair return on Qualcomm’s patented technology.

Qualcomm is well reasoned, and in line with sound modern antitrust precedent, but it is only one holding. The extent to which this case’s reasoning proves influential in other courts may in part depend on the policies advanced by DOJ and the FTC going forward. Thus, a preliminary examination of the Biden administration’s emerging patent-antitrust policy is warranted. [Subsequent discussion shows that the Biden administration apparently has rejected pro-consumer policies embodied in the 9th U.S. Circuit’s Qualcomm decision and in the NMA.]

Although the 9th Circuit did not comment on them, national-security-policy concerns weighed powerfully against the FTC v. Qualcomm suit. In a July 2019 Statement of Interest (SOI) filed with the circuit court, DOJ cogently set forth the antitrust flaws in the district court’s decision favoring the FTC. Furthermore, the SOI also explained that “the public interest” favored a stay of the district court holding, due to national-security concerns (described in some detail in statements by the departments of Defense and Energy, appended to the SOI):

[T]he public interest also takes account of national security concerns. Winter v. NRDC, 555 U.S. 7, 23-24 (2008). This case presents such concerns. In the view of the Executive Branch, diminishment of Qualcomm’s competitiveness in 5G innovation and standard-setting would significantly impact U.S. national security. A251-54 (CFIUS); LD ¶¶10-16 (Department of Defense); ED ¶¶9-10 (Department of Energy). Qualcomm is a trusted supplier of mission-critical products and services to the Department of Defense and the Department of Energy. LD ¶¶5-8; ED ¶¶8-9. Accordingly, the Department of Defense “is seriously concerned that any detrimental impact on Qualcomm’s position as global leader would adversely affect its ability to support national security.” LD ¶16.

The [district] court’s remedy [requiring the renegotiation of Qualcomm’s licensing contracts] is intended to deprive, and risks depriving, Qualcomm of substantial licensing revenue that could otherwise fund time-sensitive R&D and that Qualcomm cannot recover later if it prevails. See, e.g., Op. 227-28. To be sure, if Qualcomm ultimately prevails, vacatur of the injunction will limit the severity of Qualcomm’s revenue loss and the consequent impairment of its ability to perform functions critical to national security. The Department of Defense “firmly believes,” however, “that any measure that inappropriately limits Qualcomm’s technological leadership, ability to invest in [R&D], and market competitiveness, even in the short term, could harm national security. The risks to national security include the disruption of [the Department’s] supply chain and unsure U.S. leadership in 5G.” LD ¶3. Consequently, the public interest necessitates a stay pending this Court’s resolution of the merits. In these rare circumstances, the interest in preventing even a risk to national security—“an urgent objective of the highest order”—presents reason enough not to enforce the remedy immediately. Int’l Refugee Assistance Project, 137 S. Ct. at 2088 (internal quotations omitted).

Not all national-security arguments against antitrust enforcement may be well-grounded, of course. The key point is that the interests of national security and consumer-welfare-centric antitrust are fully aligned when antitrust suits would inefficiently undermine the competitive vigor of a firm or firms that play a major role in supporting U.S. national-security interests. Such was the case in FTC v. Qualcomm. More generally, heightened antitrust scrutiny of efficient patent-licensing practices (as threatened by the Biden administration) would tend to diminish innovation by U.S. patentees, particularly in areas covered by standards that are key to leading global technologies. Such a diminution in innovation will tend to weaken American advantages in important industry sectors that are vital to U.S. national-security interests.

Proposed Federal Antitrust Legislation

Proposed federal antitrust legislation being considered by Congress (see here, here, and here for informed critiques) would prescriptively restrict certain large technology companies’ business transactions. If enacted, such legislation would thereby preclude case-specific analysis of potential transaction-specific efficiencies, thereby undermining the consumer welfare standard at the heart of current sound and principled antitrust enforcement. The legislation would also be at odds with our national-security interests, as a recent U.S. Chamber of Commerce paper explains:

Congress is considering new antitrust legislation which, perversely, would weaken leading U.S. technology companies by crafting special purpose regulations under the guise of antitrust to prohibit those firms from engaging in business conduct that is widely acceptable when engaged in by rival competitors.

A series of legislative proposals – some of which already have been approved by relevant Congressional committees – would, among other things: dismantle these companies; prohibit them from engaging in significant new acquisitions or investments; require them to disclose sensitive user data and sensitive IP and trade secrets to competitors, including those that are foreign-owned and controlled; facilitate foreign influence in the United States; and compromise cybersecurity.  These bills would fundamentally undermine American security interests while exempting from scrutiny Chinese and other foreign firms that do not meet arbitrary user and market capitalization thresholds specified in the legislation. …

The United States has never used legislation to punish success. In many industries, scale is important and has resulted in significant gains for the American economy, including small businesses.  U.S. competition law promotes the interests of consumers, not competitors. It should not be used to pick winners and losers in the market or to manage competitive outcomes to benefit select competitors.  Aggressive competition benefits consumers and society, for example by pushing down prices, disrupting existing business models, and introducing innovative products and services.

If enacted, the legislative proposals would drag the United States down in an unfolding global technological competition.  Companies captured by the legislation would be required to compete against integrated foreign rivals with one hand tied behind their backs.  Those firms that are the strongest drivers of U.S. innovation in AI, quantum computing, and other strategic technologies would be hamstrung or even broken apart, while foreign and state-backed producers of these same technologies would remain unscathed and seize the opportunity to increase market share, both in the U.S. and globally. …

Instead of warping antitrust law to punish a discrete group of American companies, the U.S. government should focus instead on vigorous enforcement of current law and on vocally opposing and effectively countering foreign regimes that deploy competition law and other legal and regulatory methods as industrial policy tools to unfairly target U.S. companies.  The U.S. should avoid self-inflicted wounds to our competitiveness and national security that would result from turning antitrust into a weapon against dynamic and successful U.S. firms.      

Consistent with this analysis, former Obama administration Defense Secretary Leon Panetta and former Trump administration Director of National Intelligence Dan Coats argued in a letter to U.S. House leadership (see here) that “imposing severe restrictions solely on U.S. giants will pave the way for a tech landscape dominated by China — echoing a position voiced by the Big Tech companies themselves.”

The national-security arguments against current antitrust legislative proposals, like the critiques of the unfounded FTC v. Qualcomm case, represent an alignment between sound antitrust policy and national-security analysis. Unfounded antitrust attacks on efficient business practices by large firms that help maintain U.S. technological leadership in key areas undermine both principled antitrust and national security.

Conclusion

Enlightened antitrust enforcement, centered on consumer welfare, can and should be read in a manner that is harmonious with national-security interests.

The cooperation between U.S. federal antitrust enforcers and the DOD in assessing defense-industry mergers and joint ventures is, generally speaking, an example of successful harmonization. This success reflects the fact that antitrust enforcers carry out their reviews of those transactions with an eye toward accommodating efficiencies that advance defense goals without sacrificing consumer welfare. Close antitrust-agency consultation with DOD is key to that approach.

Unfortunately, federal enforcement directed toward efficient intellectual-property licensing, as manifested in the Qualcomm case, reflects a disharmony between antitrust and national security. This disharmony could be eliminated if DOJ and the FTC adopted a dynamic view of intellectual property and the substantial economic-welfare benefits that flow from restrictive patent-licensing transactions.

In sum, a dynamic analysis reveals that consumer welfare is enhanced, not harmed, by not subjecting such licensing arrangements to antitrust threat. A more permissive approach to licensing is thus consistent with principled antitrust and with the national security interest of protecting and promoting strong American intellectual property (and, in particular, patent) protection. The DOJ and the FTC should keep this in mind and make appropriate changes to their IP-antitrust policies forthwith.

Finally, proposed federal antitrust legislation would bring about statutory changes that would simultaneously displace consumer welfare considerations and undercut national security interests. As such, national security is supported by rejecting unsound legislation, in order to keep in place consumer-welfare-based antitrust enforcement.

The acceptance and implementation of due-process standards confer a variety of welfare benefits on society. As Christopher Yoo, Thomas Fetzer, Shan Jiang, and Yong Huang explain, strong procedural due-process protections promote: (1) compliance with basic norms of impartiality; (2) greater accuracy of decisions; (3) stronger economic growth; (4) increased respect for government; (5) better compliance with the law; (6) better control of the bureaucracy; (7) restraints on the influence of special-interest groups; and (8) reduced corruption.  

Recognizing these benefits (and consistent with the long Anglo-American tradition of recognizing due-process rights that dates back to Magna Carta), the U.S. government (USG) has long been active in advancing the adoption of due-process principles by competition-law authorities around the world, working particularly through the Organisation for Economic Co-operation and Development (OECD) and the International Competition Network (ICN). More generally, due process may be seen as an aspect of the rule of law, which is as important in antitrust as in other legal areas.

The USG has supported OECD Competition Committee work on due-process safeguards which began in 2010, and which culminated in the OECD ministers’ October 2021 adoption of a “Recommendation on Transparency and Procedural Fairness in Competition Law Enforcement.” This recommendation calls for: (1) competition and predictability in competition-law enforcement; (2) independence, impartiality, and professionalism of competition authorities; (3) non-discrimination, proportionality, and consistency in the treatment of parties subject to scrutiny; (4) timeliness in handling cases; (5) meaningful engagement with parties (including parties’ right to respond and be heard); (6) protection of confidential and privileged information; (7) impartial judicial review of enforcement decisions; and (8) periodic review of policies, rules, procedures, and guidelines, to ensure that they are aligned with the preceding seven principles.

The USG has also worked through the International Competition Network (ICN) to generate support for the acceptance of due-process principles by ICN member competition agencies and their governments. In describing ICN due-process initiatives, James Rill and Jana Seidl have explained that “[t]he current challenge is to determine the extent to which the ICN, as a voluntary organization, can or should establish mechanisms to evaluate implementation of … [due process] norms by its members and even non-members.”

In 2019, the ICN announced creation of a Framework for Competition Agency Procedures (CAP), open to both ICN and non-ICN national and multinational (most prominently, the EU’s Directorate General for Competition) competition agencies. The CAP essentially embodied the principles of a June 2018 U.S. Justice Department (DOJ) framework proposal. A September 2021 CAP Report (footnotes omitted) issued at an ICN steering-group meeting noted that the CAP had 73 members, and summarized the history and goals of the CAP as follows:

The ICN CAP is a non-binding, opt-in framework. It makes use of the ICN infrastructure to maximize visibility and impact while minimizing the administrative burden for participants that operate in different legal regimes and enforcement systems with different resource constraints. The ICN CAP promotes agreement among competition agencies worldwide on fundamental procedural norms. The Multilateral Framework for Procedures project, launched by the US Department of Justice in 2018, was the starting point for what is now the ICN CAP.

The ICN CAP rests on two pillars: the first pillar is a catalogue of fundamental, consensus principles for fair and effective agency procedures that reflect the broad consensus within the global competition community. The principles address: non-discrimination, transparency, notice of investigations, timely resolution, confidentiality protections, conflicts of interest, opportunity to defend, representation, written decisions, and judicial review.

The second pillar of the ICN CAP consists of two processes: the “CAP Cooperation Process,” which facilitates a dialogue between participating agencies, and the “CAP Review Process,” which enhances transparency about the rules governing participants’ investigation and enforcement procedures.

The ICN CAP template is the practical implementation tool for the CAP. Participants each submit CAP templates, outlining how their agencies adhere to each of the CAP principles. The templates allow participants to share and explain important features of their systems, including links and other references to related materials such as legislation, rules, regulations, and guidelines. The CAP templates are a useful resource for agencies to consult when they would like to gain a quick overview of other agencies’ procedures, benchmark with peer agencies, and develop new processes and procedures.

Through the two pillars and the template, the CAP provides a framework for agencies to affirm the importance of the CAP principles, to confer with other jurisdictions, and to illustrate how their regulations and guidelines adhere to those principles.

In short, the overarching goal of the ICN CAP is to give agencies a “nudge” to implement due-process principles by encouraging consultation with peer CAP members and exposing to public view agencies’ actual due-process record. The extent to which agencies will prove willing to strengthen their commitment to due process because of the CAP, or even join the CAP, remains to be seen. (China’s competition agency, the State Administration for Market Regulation (SAMR), has not joined the ICN CAP.)

Antitrust, Due Process, and the Rule of Law at the DOJ and the FTC  

Now that the ICN CAP and OECD recommendation are in place, it is important that the DOJ and Federal Trade Commission (FTC), as long-time international promoters of due process, lead by example in adhering to all of those multinational instruments’ principles. A failure to do so would, in addition to having negative welfare consequences for affected parties (and U.S. economic welfare), undermine USG international due-process advocacy. Less effective advocacy efforts could, of course, impose additional costs on American businesses operating overseas, by subjecting them to more procedurally defective foreign antitrust prosecutions than otherwise.

With those considerations in mind, let us briefly examine the current status of due-process protections afforded by the FTC and DOJ. Although traditionally robust procedural safeguards remain strong overall, some worrisome developments during the first year of the Biden administration merit highlighting. Those developments implicate classic procedural issues and some broader rule of law concerns. (This commentary does not examine due-process and rule-of-law issues associated with U.S. antitrust enforcement at the state level, a topic that warrants scrutiny as well.)

The FTC

  • New FTC leadership has taken several actions that have unfortunate due-process and rule-of-law implications (many of them through highly partisan 3-2 commission votes featuring strong dissents).

Consider the HSR Act, a Congressional compromise that gave enforcers advance notice of deals and parties the benefit of repose. HSR review [at the FTC] now faces death by a thousand cuts. We have hit month nine of a “temporary” and “brief” suspension of early termination. Letters are sent to parties when their waiting periods expire, warning them to close at their own risk. Is the investigation ongoing? Is there a set amount of time the parties should wait? No one knows! The new prior approval policy will flip the burden of proof and capture many deals below statutory thresholds. And sprawling investigations covering non-competition concerns exceed our Clayton Act authority.

These policy changes impose a gratuitous tax on merger activity – anticompetitive and procompetitive alike. There are costs to interfering with the market for corporate control, especially as we attempt to rebound from the pandemic. If new leadership wants the HSR Act rewritten, they should persuade Congress to amend it rather than taking matters into their own hands.

Uncertainty and delay surrounding merger proposals and new merger-review processes that appear to flaunt tension with statutory commands are FTC “innovations” that are in obvious tension with due-process guarantees.

  • FTC rulemaking initiatives have due-process and rule-of-law problems. As Commissioner Wilson noted (footnotes omitted), “[t]he [FTC] majority changed our rules of practice to limit stakeholder input and consolidate rulemaking power in the chair’s office. In Commissioner [Noah] Phillips’ words, these changes facilitate more rules, but not better ones.” Lack of stakeholder input offends due process. Even more serious, however, is the fact that far-reaching FTC competition rules are being planned (see the December 2021 FTC Statement of Regulatory Priorities). FTC competition rulemaking is likely beyond its statutory authority and would fail a cost-benefit analysis (see here). Moreover, even if competition rules survived, they would offend the rule of law (see here) by “lead[ing] to disparate legal treatment of a firm’s business practices, depending upon whether the FTC or the U.S. Justice Department was the investigating agency.”
  • The FTC’s July 2021 withdrawal of its 2015 “Statement of Enforcement Principles Regarding ‘Unfair Methods of Competition’ [UMC] Under Section 5 of the FTC Act” likewise undercuts the rule of law (see here). The 2015 Statement had tended to increase predictability in enforcement by tying the FTC’s exercise of its UMC authority to well-understood antitrust rule-of-reason principles and the generally accepted consumer welfare standard. By withdrawing the statement (over the dissents of Commissioners Wilson and Phillips) without promulgating a new policy, the FTC majority reduced enforcement guidance and generated greater legal uncertainty. The notion that the FTC may apply the UMC concept in an unbounded fashion lacks legal principle and threatens to chill innovative and welfare-enhancing business conduct.
  • Finally, the FTC’s abrupt September 2021 withdrawal of its approval of jointly issued 2020 DOJ-FTC Vertical Merger Guidelines (again over a dissent by Commissioners Wilson and Phillips), offends the rule of law in three ways. As Commissioner Wilson explains, it engenders confusion as to FTC policies regarding vertical-merger analysis going forward; it appears to reflect flawed economic thinking regarding vertical integration (which may in turn lead to enforcement error); and it creates a potential tension between DOJ and FTC approaches to vertical acquisitions (the third concern may disappear if and when DOJ and FTC agree to new merger guidelines).  

The DOJ

As of now, the Biden administration DOJ has not taken as many actions that implicate rule-of-law and due-process concerns. Two recent initiatives with significant rule-of-law implications, however, deserve mention.

  • First, on Dec. 6, 2021, DOJ suddenly withdrew a 2019 policy statement on “Licensing Negotiations and Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments.” In so doing, DOJ simultaneously released a new draft policy statement on the same topic, and requested public comments. The timing of the withdrawal was peculiar, since the U.S. Patent and Trademark Office (PTO) and the National Institute of Standards and Technology (NIST)—who had joined with DOJ in the 2019 policy statement (which itself had replaced a 2013 policy statement)—did not yet have new Senate-confirmed leadership and were apparently not involved in the withdrawal. What’s more, DOJ originally requested that public comments be filed by the beginning of January, a ridiculously short amount of time for such a complex topic. (It later relented and established an early February deadline.) More serious than these procedural irregularities, however, are two new features of the Draft Policy Statement: (1) its delineation of a suggested private-negotiation framework for patent licensing; and (2) its assertion that standard essential patent (SEP) holders essentially forfeit the right to seek an injunction. These provisions, though not binding, may have a coercive effect on some private negotiators, and they problematically insert the government into matters that are appropriately the province of private businesses and the courts. Such an involvement by government enforcers in private negotiations, which treats one category of patents (SEPs) less favorably than others, raises rule-of-law questions.
  • Second, in January 2018, DOJ and the FTC jointly issued a “Request for Information on Merger Enforcement” [RIF] that contemplated the issuance of new merger guidelines (see my recent analysis, here). The RIF was chock full of numerous queries to prospective commentators that generally reflected a merger-skeptical tone. This suggests a predisposition to challenge mergers that, if embodied in guidelines language, could discourage some (or perhaps many) non-problematic consolidations from being proposed. New merger guidelines that impliedly were anti-merger would be a departure from previous guidelines, which stated in neutral fashion that they would consider both the anticompetitive risks and procompetitive benefits of mergers being reviewed. A second major concern is that the enforcement agencies might produce long and detailed guidelines containing all or most of the many theories of competitive harm found in the RIF. Overly complex guidelines would not produce any true guidance to private parties, inconsistent with the principle that individuals should be informed what the law is. Such guidelines also would give enforcers greater flexibility to selectively pick and choose theories best suited to block particular mergers. As such, the guidelines might be viewed by judges as justifications for arbitrary, rather than principled, enforcement, at odds with the rule of law.    

Conclusion

No man is an island entire of itself.” In today’s world of multinational antitrust cooperation, the same holds true for competition agencies. Efforts to export due process in competition law, which have been a USG priority for many years, will inevitably falter if other jurisdictions perceive the FTC and DOJ as not practicing what they preach.

It is to be hoped that the FTC and DOJ will take into account this international dimension in assessing the merits of antitrust “reforms” now under consideration. New enforcement policies that sow delay and uncertainty undermine the rule of law and are inconsistent with due-process principles. The consumer welfare harm that may flow from such deficient policies may be substantial. The agency missteps identified above should be rectified and new polices that would weaken due-process protections and undermine the rule of law should be avoided.              

Even as delivery services work to ship all of those last-minute Christmas presents that consumers bought this season from digital platforms and other e-commerce sites, the U.S. House and Senate are contemplating Grinch-like legislation that looks to stop or limit how Big Tech companies can “self-preference” or “discriminate” on their platforms.

A platform “self-preferences” when it blends various services into the delivery of a given product in ways that third parties couldn’t do themselves. For example, Google self-preferences when it puts a Google Shopping box at the top of a Search page for Adidas sneakers. Amazon self-preferences when it offers its own AmazonBasics USB cables alongside those offered by Apple or Anker. Costco’s placement of its own Kirkland brand of paper towels on store shelves can also be a form of self-preferencing.

Such purportedly “discriminatory” behavior constitutes much of what platforms are designed to do. Virtually every platform that offers a suite of products and services will combine them in ways that users find helpful, even if competitors find it infuriating. It surely doesn’t help Yelp if Google Search users can see a Maps results box next to a search for showtimes at a local cinema. It doesn’t help other manufacturers of charging cables if Amazon sells a cheaper version under a brand that consumers trust. But do consumers really care about Yelp or Apple’s revenues, when all they want are relevant search results and less expensive products?

Until now, competition authorities have judged this type of conduct under the consumer welfare standard: does it hurt consumers in the long run, or does it help them? This test does seek to evaluate whether the conduct deprives consumers of choice by foreclosing rivals, which could ultimately allow the platform to exploit its customers. But it doesn’t treat harm to competitors—in the form of reduced traffic and profits for Yelp, for example—as a problem in and of itself.

“Non-discrimination” bills introduced this year in both the House and Senate aim to change that, but they would do so in ways that differ in important respects.

The House bill would impose a blanket ban on virtually all “discrimination” by platforms. This means that even such benign behavior as Facebook linking to Facebook Marketplace on its homepage would become presumptively unlawful. The measure would, as I’ve written before, break a lot of the Internet as we know it, but it has the virtue of being explicit and clear about its effects.

The Senate bill is, in this sense, a lot more circumspect. Instead of a blanket ban, it would prohibit what the bill refers to as “unfair” discrimination that “materially harm[s] competition on the covered platform,” with a carve-out exception for discrimination that was “necessary” to maintain or enhance the “core functionality” of the platform. In theory, this would avoid a lot of the really crazy effects of the House bill. Apple likely still could, for example, pre-install a Camera app on the iPhone.

But this greater degree of reasonableness comes at the price of ambiguity. The bill does not define “unfair discrimination,” nor what it would mean for something to be “necessary” to improve the core functionality of a platform. Faced with this ambiguity, companies would be wise to be overly cautious, given the steep penalties they would face for conduct found to be “unfair”: 15% of total U.S. revenues earned during the period when the conduct was ongoing. That’s a lot of money to risk over a single feature!

Also unlike the House legislation, the Senate bill would not create a private right of action, thereby limiting litigation to enforce the bill’s terms to actions brought by the Federal Trade Commission (FTC), U.S. Justice Department (DOJ), or state attorneys general.

Put together, these features create the perfect recipe for extensive discretionary power held by a handful of agencies. With such vague criteria and such massive penalties for lawbreaking, the mere threat of a lawsuit could force a company to change its behavior. The rules are so murky that companies might even be threatened with a lawsuit over conduct in one area in order to make them change their behavior in another.

It’s hardly unprecedented for powers like this to be misused. During the Obama administration, the Internal Revenue Service (IRS) was alleged to have targeted conservative groups for investigation, for which the agency eventually had to apologize (and settle a lawsuit brought by some of the targeted groups). More than a decade ago, the Bank Secrecy Act was used to uncover then-New York Attorney General Eliot Spitzer’s involvement in an international prostitution ring. Back in 2008, the British government used anti-terrorism powers to seize the assets of some Icelandic banks that had become insolvent and couldn’t repay their British depositors. To this day, municipal governments in Britain use anti-terrorism powers to investigate things like illegal waste dumping and people who wrongly park in spots reserved for the disabled.

The FTC itself has a history of abusing its authority. As Commissioners Noah Phillips and Christine Wilson remind us, the commission was nearly shut down in the 1970s after trying to use its powers to “protect” children from seeing ads for sugary foods, interpreting its consumer-protection mandate so broadly that it considered tooth decay as falling within its scope.

As I’ve written before, both Chair Lina Khan and Commissioner Rebecca Kelly Slaughter appear to believe that the FTC ought to take a broad vision of its goals. Slaughter has argued that antitrust ought to be “antiracist.” Khan believes that the “the dispersion of political and economic control” is the proper goal of antitrust, not consumer welfare or some other economic goal.

Khan in particular does not appear especially bound by the usual norms that might constrain this sort of regulatory overreach. In recent weeks, she has pushed through contentious decisions by relying on more than 20 “zombie votes” cast by former Commissioner Rohit Chopra on the final day before he left the agency. While it has been FTC policy since 1984 to count votes cast by departed commissioners unless they are superseded by their successors, Khan’s FTC has invoked this relatively obscure rule to swing more decisions than every single predecessor combined.

Thus, while the Senate bill may avoid immediately breaking large portions of the Internet in ways the House bill would, it would instead place massive discretionary powers into the hands of authorities who have expansive views about the goals those powers ought to be used to pursue.

This ought to be concerning to anyone who disapproves of public policy being made by unelected bureaucrats, rather than the people’s chosen representatives. If Republicans find an empowered Khan-led FTC worrying today, surely Democrats ought to feel the same about an FTC run by Trump-style appointees in a few years. Both sides may come to regret creating an agency with so much unchecked power.

Recent antitrust forays on both sides of the Atlantic have unfortunate echoes of the oldie-but-baddie “efficiencies offense” that once plagued American and European merger analysis (and, more broadly, reflected a “big is bad” theory of antitrust). After a very short overview of the history of merger efficiencies analysis under American and European competition law, we briefly examine two current enforcement matters “on both sides of the pond” that impliedly give rise to such a concern. Those cases may regrettably foreshadow a move by enforcers to downplay the importance of efficiencies, if not openly reject them.

Background: The Grudging Acceptance of Merger Efficiencies

Not long ago, economically literate antitrust teachers in the United States enjoyed poking fun at such benighted 1960s Supreme Court decisions as Procter & Gamble (following in the wake of Brown Shoe andPhiladelphia National Bank). Those holdings—which not only rejected efficiencies justifications for mergers, but indeed “treated efficiencies more as an offense”—seemed a thing of the past, put to rest by the rise of an economic approach to antitrust. Several early European Commission merger-control decisions also arguably embraced an “efficiencies offense.”  

Starting in the 1980s, the promulgation of increasingly economically sophisticated merger guidelines in the United States led to the acceptance of efficiencies (albeit less then perfectly) as an important aspect of integrated merger analysis. Several practitioners have claimed, nevertheless, that “efficiencies are seldom credited and almost never influence the outcome of mergers that are otherwise deemed anticompetitive.” Commissioner Christine Wilson has argued that the Federal Trade Commission (FTC) and U.S. Justice Department (DOJ) still have work to do in “establish[ing] clear and reasonable expectations for what types of efficiency analysis will and will not pass muster.”

In its first few years of merger review, which was authorized in 1989, the European Commission was hostile to merger-efficiency arguments.  In 2004, however, the EC promulgated horizontal merger guidelines that allow for the consideration of efficiencies, but only if three cumulative conditions (consumer benefit, merger specificity, and verifiability) are satisfied. A leading European competition practitioner has characterized several key European Commission merger decisions in the last decade as giving rather short shrift to efficiencies. In light of that observation, the practitioner has advocated that “the efficiency offence theory should, once again, be repudiated by the Commission, in order to avoid deterring notifying parties from bringing forward perfectly valid efficiency claims.”

In short, although the actual weight enforcers accord to efficiency claims is a matter of debate, efficiency justifications are cognizable, subject to constraints, as a matter of U.S. and European Union merger-enforcement policy. Whether that will remain the case is, unfortunately, uncertain, given DOJ and FTC plans to revise merger guidelines, as well as EU talk of convergence with U.S. competition law.

Two Enforcement Matters with ‘Efficiencies Offense’ Overtones

Two Facebook-related matters currently before competition enforcers—one in the United States and one in the United Kingdom—have implications for the possible revival of an antitrust “efficiencies offense” as a “respectable” element of antitrust policy. (I use the term Facebook to reference both the platform company and its corporate parent, Meta.)

FTC v. Facebook

The FTC’s 2020 federal district court monopolization complaint against Facebook, still in the motion to dismiss the amended complaint phase (see here for an overview of the initial complaint and the judge’s dismissal of it), rests substantially on claims that Facebook’s acquisitions of Instagram and WhatsApp harmed competition. As Facebook points out in its recent reply brief supporting its motion to dismiss the FTC’s amended complaint, Facebook appears to be touting merger-related efficiencies in critiquing those acquisitions. Specifically:

[The amended complaint] depends on the allegation that Facebook’s expansion of both Instagram and WhatsApp created a “protective ‘moat’” that made it harder for rivals to compete because Facebook operated these services at “scale” and made them attractive to consumers post-acquisition. . . . The FTC does not allege facts that, left on their own, Instagram and WhatsApp would be less expensive (both are free; Facebook made WhatsApp free); or that output would have been greater (their dramatic expansion at “scale” is the linchpin of the FTC’s “moat” theory); or that the products would be better in any specific way.

The FTC’s concerns about a scale-based merger-related output expansion that benefited consumers and thereby allegedly enhanced Facebook’s market position eerily echoes the commission’s concerns in Procter & Gamble that merger-related cost-reducing joint efficiencies in advertising had an anticompetitive “entrenchment” effect. Both positions, in essence, characterize output-increasing efficiencies as harmful to competition: in other words, as “efficiencies offenses.”

UK Competition and Markets Authority (CMA) v. Facebook

The CMA announced Dec. 1 that it had decided to block retrospectively Facebook’s 2020 acquisition of Giphy, which is “a company that provides social media and messaging platforms with animated GIF images that users can embed in posts and messages. . . .  These platforms license the use of Giphy for its users.”

The CMA theorized that Facebook could harm competition by (1) restricting access to Giphy’s digital libraries to Facebook’s competitors; and (2) prevent Giphy from developing into a potential competitor to Facebook’s display advertising business.

As a CapX analysis explains, the CMA’s theory of harm to competition, based on theoretical speculation, is problematic. First, a behavioral remedy short of divestiture, such as requiring Facebook to maintain open access to its gif libraries, would deal with the threat of restricted access. Indeed, Facebook promised at the time of the acquisition that Giphy would maintain its library and make it widely available. Second, “loss of a single, relatively small, potential competitor out of many cannot be counted as a significant loss for competition, since so many other potential and actual competitors remain.” Third, given the purely theoretical and questionable danger to future competition, the CMA “has blocked this deal on relatively speculative potential competition grounds.”

Apart from the weakness of the CMA’s case for harm to competition, the CMA appears to ignore a substantial potential dynamic integrative efficiency flowing from Facebook’s acquisition of Giphy. As David Teece explains:

Facebook’s acquisition of Giphy maintained Giphy’s assets and furthered its innovation in Facebook’s ecosystem, strengthening that ecosystem in competition with others; and via Giphy’s APIs, strengthening the ecosystems of other service providers as well.

There is no evidence that CMA seriously took account of this integrative efficiency, which benefits consumers by offering them a richer experience from Facebook and its subsidiary Instagram, and which spurs competing ecosystems to enhance their offerings to consumers as well. This is a failure to properly account for an efficiency. Moreover, to the extent that the CMA viewed these integrative benefits as somehow anticompetitive (to the extent that it enhanced Facebook’s competitive position) the improvement of Facebook’s ecosystem could have been deemed a type of “efficiencies offense.”

Are the Facebook Cases Merely Random Straws in the Wind?

It might appear at first blush to be reading too much into the apparent slighting of efficiencies in the two current Facebook cases. Nevertheless, recent policy rhetoric suggests that economic efficiencies arguments (whose status was tenuous at enforcement agencies to begin with) may actually be viewed as “offensive” by the new breed of enforcers.

In her Sept. 22 policy statement on “Vision and Priorities for the FTC,” Chair Lina Khan advocated focusing on the possible competitive harm flowing from actions of “gatekeepers and dominant middlemen,” and from “one-sided [vertical] contract provisions” that are “imposed by dominant firms.” No suggestion can be found in the statement that such vertical relationships often confer substantial benefits on consumers. This hints at a new campaign by the FTC against vertical restraints (as opposed to an emphasis on clearly welfare-inimical conduct) that could discourage a wide range of efficiency-producing contracts.

Chair Khan also sponsored the FTC’s July 2021 rescission of its Section 5 Policy Statement on Unfair Methods of Competition, which had emphasized the primacy of consumer welfare as the guiding principle underlying FTC antitrust enforcement. A willingness to set aside (or place a lower priority on) consumer welfare considerations suggests a readiness to ignore efficiency justifications that benefit consumers.

Even more troubling, a direct attack on the consideration of efficiencies is found in the statement accompanying the FTC’s September 2021 withdrawal of the 2020 Vertical Merger Guidelines:

The statement by the FTC majority . . . notes that the 2020 Vertical Merger Guidelines had improperly contravened the Clayton Act’s language with its approach to efficiencies, which are not recognized by the statute as a defense to an unlawful merger. The majority statement explains that the guidelines adopted a particularly flawed economic theory regarding purported pro-competitive benefits of mergers, despite having no basis of support in the law or market reality.

Also noteworthy is Khan’s seeming interest (found in her writings here, here, and here) in reviving Robinson-Patman Act enforcement. What’s worse, President Joe Biden’s July 2021 Executive Order on Competition explicitly endorses FTC investigation of “retailers’ practices on the conditions of competition in the food industries, including any practices that may violate [the] Robinson-Patman Act” (emphasis added). Those troubling statements from the administration ignore the widespread scholarly disdain for Robinson-Patman, which is almost unanimously viewed as an attack on efficiencies in distribution. For example, in recommending the act’s repeal in 2007, the congressionally established Antitrust Modernization Commission stressed that the act “protects competitors against competition and punishes the very price discounting and innovation and distribution methods that the antitrust otherwise encourage.”

Finally, newly confirmed Assistant Attorney General for Antitrust Jonathan Kanter (who is widely known as a Big Tech critic) has expressed his concerns about the consumer welfare standard and the emphasis on economics in antitrust analysis. Such concerns also suggest, at least by implication, that the Antitrust Division under Kanter’s leadership may manifest a heightened skepticism toward efficiencies justifications.

Conclusion

Recent straws in the wind suggest that an anti-efficiencies hay pile is in the works. Although antitrust agencies have not yet officially rejected the consideration of efficiencies, nor endorsed an “efficiencies offense,” the signs are troubling. Newly minted agency leaders’ skepticism toward antitrust economics, combined with their de-emphasis of the consumer welfare standard and efficiencies (at least in the merger context), suggest that even strongly grounded efficiency explanations may be summarily rejected at the agency level. In foreign jurisdictions, where efficiencies are even less well-established, and enforcement based on mere theory (as opposed to empiricism) is more widely accepted, the outlook for efficiencies stories appears to be no better.     

One powerful factor, however, should continue to constrain the anti-efficiencies movement, at least in the United States: the federal courts. As demonstrated most recently in the 9th U.S. Circuit Court of Appeals’ FTC v. Qualcomm decision, American courts remain committed to insisting on empirical support for theories of harm and on seriously considering business justifications for allegedly suspect contractual provisions. (The role of foreign courts in curbing prosecutorial excesses not grounded in economics, and in weighing efficiencies, depends upon the jurisdiction, but in general such courts are far less of a constraint on enforcers than American tribunals.)

While the DOJ and FTC (and, perhaps to a lesser extent, foreign enforcers) will have to keep the judiciary in mind in deciding to bring enforcement actions, the denigration of efficiencies by the agencies still will have an unfortunate demonstration effect on the private sector. Given the cost (both in resources and in reputational capital) associated with antitrust investigations, and the inevitable discounting for the risk of projects caught up in such inquiries, a publicly proclaimed anti-efficiencies enforcement philosophy will do damage. On the margin, it will lead businesses to introduce fewer efficiency-seeking improvements that could be (wrongly) characterized as “strengthening” or “entrenching” market dominance. Such business decisions, in turn, will be welfare-inimical; they will deny consumers the benefit of efficiencies-driven product and service enhancements, and slow the rate of business innovation.

As such, it is to be hoped that, upon further reflection, U.S. and foreign competition enforcers will see the light and publicly proclaim that they will fully weigh efficiencies in analyzing business conduct. The “efficiencies offense” was a lousy tune. That “oldie-but-baddie” should not be replayed.

In the U.S. system of dual federal and state sovereigns, a normative analysis reveals principles that could guide state antitrust-enforcement priorities, to promote complementarity in federal and state antitrust policy, and thereby advance consumer welfare.

Discussion

Positive analysis reveals that state antitrust enforcement is a firmly entrenched feature of American antitrust policy. The U.S. Supreme Court (1) has consistently held that federal antitrust law does not displace state antitrust law (see, for example, California v. ARC America Corp. (U.S., 1989) (“Congress intended the federal antitrust laws to supplement, not displace, state antitrust remedies”)); and (2) has upheld state antitrust laws even when they have some impact on interstate commerce (see, for example, Exxon Corp. v. Governor of Maryland (U.S., 1978)).

The normative question remains, however, as to what the appropriate relationship between federal and state antitrust enforcement should be. Should federal and state antitrust regimes be complementary, with state law enforcement enhancing the effectiveness of federal enforcement? Or should state antitrust enforcement compete with federal enforcement, providing an alternative “vision” of appropriate antitrust standards?

The generally accepted (until very recently) modern American consumer-welfare-centric antitrust paradigm (see here) points to the complementary approach as most appropriate. In other words, if antitrust is indeed the “magna carta” of American free enterprise (see United States v. Topco Associates, Inc., U.S. (U.S. 1972), and if consumer welfare is the paramount goal of antitrust (a position consistently held by the Supreme Court since Reiter v. Sonotone Corp., (U.S., 1979)), it follows that federal and state antitrust enforcement coexist best as complements, directed jointly at maximizing consumer-welfare enhancement. In recent decades it also generally has made sense for state enforcers to defer to U.S. Justice Department (DOJ) and Federal Trade Commission (FTC) matter-specific consumer-welfare assessments. This conclusion follows from the federal agencies’ specialized resource advantage, reflected in large staffs of economic experts and attorneys with substantial industry knowledge.

The reality, nevertheless, is that while state enforcers often have cooperated with their federal colleagues on joint enforcement, state enforcement approaches historically have been imperfectly aligned with federal policy. That imperfect alignment has been at odds with consumer welfare in key instances. Certain state antitrust schemes, for example, continue to treat resale price maintenance (RPM)  as per se illegal (see, for example, here), a position inconsistent with the federal consumer welfare-centric rule of reason approach (see Leegin Creative Leather Products, Inc. v. PSKS, Inc. (U.S., 2007)). The disparate treatment of RPM has a substantial national impact on business conduct, because commercially important states such as California and New York are among those that continue to flatly condemn RPM.

State enforcers also have from time to time sought to oppose major transactions that received federal antitrust clearance, such as several states’ unsuccessful opposition to the merger of Sprint and T-Mobile merger (see here). Although the states failed to block the merger, they did extract settlement concessions that imposed burdens on the merging parties, in addition to the divestiture requirements impose by the DOJ in settling the matter (see here). Inconsistencies between federal and state antitrust-enforcement decisions on cases of nationwide significance generate litigation waste and may detract from final resolutions that optimize consumer welfare.

If consumer-welfare optimization is their goal (which I believe it should be in an ideal world), state attorneys general should seek to direct their limited antitrust resources to their highest valued uses, rather than seeking to second guess federal antitrust policy and enforcement decisions.

An optimal approach might focus first and foremost on allocating state resources to combat primarily intrastate competitive harms that are clear and unequivocal (such as intrastate bid rigging, hard core price fixing, and horizontal market division). This could free up federal resources to focus on matters that are primarily interstate in nature, consistent with federalism. (In this regard, see a thoughtful proposal by D. Bruce Johnsen and Moin A. Yaha.)

Second, state enforcers could also devote some resources to assist federal enforcers in developing state-specific evidence in support of major national cases. (This would allow state attorneys general to publicize their “big case” involvement in a productive manner.)

Third, but not least, competition advocacy directed at the removal of anticompetitive state laws and regulations could prove an effective means of seeking to improve the competitive climate within individual states (see, for example, here). State antitrust enforcers could advance advocacy through amicus curiae briefs, and (where politically feasible) through interventions (perhaps informal) with peer officials who oversee regulation. Subject to this general guidance, the nature of state antitrust resource allocations would depend upon the specific competitive problems particular to each state.

Of course, in the real world, public choice considerations and rent seeking may at times influence antitrust enforcement decision-making by state (and federal) officials. Nonetheless, the capsule idealized normative summary of a suggested ideal state antitrust-enforcement protocol is useful in that it highlights how state enforcers could usefully complement (assumed) sound federal antitrust initiatives.

Great minds think alike. A well-crafted and much more detailed normative exploration of ideal state antitrust enforcement is found in a recently released Pelican Institute policy brief by Ted Bolema and Eric Peterson. Entitled The Proper Role for States in Antitrust Lawsuits, the brief concludes (in a manner consistent with my observations):

This review of cases and leading commentaries shows that states should focus their involvement in antitrust cases on instances where:

· they have unique interests, such as local price-fixing

· play a unique role, such as where they can develop evidence about how alleged anticompetitive behavior uniquely affects local markets

· they can bring additional resources to bear on existing federal litigation.

States can also provide a useful check on overly aggressive federal enforcement by providing courts with a traditional perspective on antitrust law — a role that could become even more important as federal agencies aggressively seek to expand their powers. All of these are important roles for states to play in antitrust enforcement, and translate into positive outcomes that directly benefit consumers.

Conversely, when states bring significant, novel antitrust lawsuits on their own, they don’t tend to benefit either consumers or constituents. These novel cases often move resources away from where they might be used more effectively, and states usually lose (as with the recent dismissal with prejudice of a state case against Facebook). Through more strategic antitrust engagement, with a focus on what states can do well and where they can make a positive difference antitrust enforcement, states would best serve the interests of their consumers, constituents, and taxpayers.

Conclusion

Under a consumer-welfare-centric regime, an appropriate role can be identified for state antitrust enforcement that would helpfully complement federal efforts in an optimal fashion. Unfortunately, in this tumultuous period of federal antitrust policy shifts, in which the central role of the consumer welfare standard has been called into question, it might appear fatuous to speculate on the ideal melding of federal and state approaches to antitrust administration. One should, however, prepare for the time when a more enlightened, economically informed approach will be reinstituted. In anticipation of that day, serious thinking about antitrust federalism should not be neglected.

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

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

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

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

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

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

A lawsuit filed by the State of Texas and nine other states in December 2020 alleges, among other things, that Google has engaged in anticompetitive conduct related to its online display-advertising business.

Broadly, the Texas complaint (previously discussed in this TOTM symposium) alleges that Google possesses market power in ad-buying tools and in search, illustrated in the figure below.

The complaint also alleges anticompetitive conduct by Google with respect to YouTube in a separate “inline video-advertising market.” According to the complaint, this market power is leveraged to force transactions through Google’s exchange, AdX, and its network, Google Display Network. The leverage is further exercised by forcing publishers to license Google’s ad server, Google Ad Manager.

Although the Texas complaint raises many specific allegations, the key ones constitute four broad claims: 

  1. Google forces publishers to license Google’s ad server and trade in Google’s ad exchange;
  2. Google uses its control over publishers’ inventory to block exchange competition;
  3. Google has disadvantaged technology known as “header bidding” in order to prevent publishers from accessing its competitors; and
  4. Google prevents rival ad-placement services from competing by not allowing them to buy YouTube ad space.

Alleged harms

The Texas complaint alleges Google’s conduct has caused harm to competing networks, exchanges, and ad servers. The complaint also claims that the plaintiff states’ economies have been harmed “by depriving the Plaintiff States and the persons within each Plaintiff State of the benefits of competition.”

In a nod to the widely accepted Consumer Welfare Standard, the Texas complaint alleges harm to three categories of consumers:

  1. Advertisers who pay for their ads to be displayed, but should be paying less;
  2. Publishers who are paid to provide space on their sites to display ads, but should be paid more; and
  3. Users who visit the sites, view the ads, and purchase or use the advertisers’ and publishers’ products and services.

The complaint claims users are harmed by above-competitive prices paid by advertisers, in that these higher costs are passed on in the form of higher prices and lower quality for the products and services they purchase from those advertisers. The complaint simultaneously claims that users are harmed by the below-market prices received by publishers in the form of “less content (lower output of content), lower-quality content, less innovation in content delivery, more paywalls, and higher subscription fees.”

Without saying so explicitly, the complaint insinuates that if intermediaries (e.g., Google and competing services) charged lower fees for their services, advertisers would pay less, publishers would be paid more, and consumers would be better off in the form of lower prices and better products from advertisers, as well as improved content and lower fees on publishers’ sites.

Effective competition is not an antitrust offense

A flawed premise underlies much of the Texas complaint. It asserts that conduct by a dominant incumbent firm that makes competition more difficult for competitors is inherently anticompetitive, even if that conduct confers benefits on users.

This amounts to a claim that Google is acting anti-competitively by innovating and developing products and services to benefit one or more display-advertising constituents (e.g., advertisers, publishers, or consumers) or by doing things that benefit the advertising ecosystem more generally. These include creating new and innovative products, lowering prices, reducing costs through vertical integration, or enhancing interoperability.

The argument, which is made explicitly elsewhere, is that Google must show that it has engineered and implemented its products to minimize obstacles its rivals face, and that any efficiencies created by its products must be shown to outweigh the costs imposed by those improvements on the company’s competitors.

Similarly, claims that Google has acted in an anticompetitive fashion rest on the unsupportable notion that the company acts unfairly when it designs products to benefit itself without considering how those designs would affect competitors. Google could, it is argued, choose alternate arrangements and practices that would possibly confer greater revenue on publishers or lower prices on advertisers without imposing burdens on competitors.

For example, a report published by the Omidyar Network sketching a “roadmap” for a case against Google claims that, if Google’s practices could possibly be reimagined to achieve the same benefits in ways that foster competition from rivals, then the practices should be condemned as anticompetitive:

It is clear even to us as lay people that there are less anticompetitive ways of delivering effective digital advertising—and thereby preserving the substantial benefits from this technology—than those employed by Google.

– Fiona M. Scott Morton & David C. Dinielli, “Roadmap for a Digital Advertising Monopolization Case Against Google”

But that’s not how the law—or the economics—works. This approach converts beneficial aspects of Google’s ad-tech business into anticompetitive defects, essentially arguing that successful competition and innovation create barriers to entry that merit correction through antitrust enforcement.

This approach turns U.S. antitrust law (and basic economics) on its head. As some of the most well-known words of U.S. antitrust jurisprudence have it:

A single producer may be the survivor out of a group of active competitors, merely by virtue of his superior skill, foresight and industry. In such cases a strong argument can be made that, although, the result may expose the public to the evils of monopoly, the Act does not mean to condemn the resultant of those very forces which it is its prime object to foster: finis opus coronat. The successful competitor, having been urged to compete, must not be turned upon when he wins.

– United States v. Aluminum Co. of America, 148 F.2d 416 (2d Cir. 1945)

U.S. antitrust law is intended to foster innovation that creates benefits for consumers, including innovation by incumbents. The law does not proscribe efficiency-enhancing unilateral conduct on the grounds that it might also inconvenience competitors, or that there is some other arrangement that could be “even more” competitive. Under U.S. antitrust law, firms are “under no duty to help [competitors] survive or expand.”  

To be sure, the allegations against Google are couched in terms of anticompetitive effect, rather than being described merely as commercial disagreements over the distribution of profits. But these effects are simply inferred, based on assumptions that Google’s vertically integrated business model entails an inherent ability and incentive to harm rivals.

The Texas complaint claims Google can surreptitiously derive benefits from display advertisers by leveraging its search-advertising capabilities, or by “withholding YouTube inventory,” rather than altruistically opening Google Search and YouTube up to rival ad networks. The complaint alleges Google uses its access to advertiser, publisher, and user data to improve its products without sharing this data with competitors.

All these charges may be true, but they do not describe inherently anticompetitive conduct. Under U.S. law, companies are not obliged to deal with rivals and certainly are not obliged to do so on those rivals’ preferred terms

As long ago as 1919, the U.S. Supreme Court held that:

In the absence of any purpose to create or maintain a monopoly, the [Sherman Act] does not restrict the long recognized right of [a] trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal.

– United States v. Colgate & Co.

U.S. antitrust law does not condemn conduct on the basis that an enforcer (or a court) is able to identify or hypothesize alternative conduct that might plausibly provide similar benefits at lower cost. In alleging that there are ostensibly “better” ways that Google could have pursued its product design, pricing, and terms of dealing, both the Texas complaint and Omidyar “roadmap” assert that, had the firm only selected a different path, an alternative could have produced even more benefits or an even more competitive structure.

The purported cure of tinkering with benefit-producing unilateral conduct by applying an “even more competition” benchmark is worse than the supposed disease. The adjudicator is likely to misapply such a benchmark, deterring the very conduct the law seeks to promote.

For example, Texas complaint alleges: “Google’s ad server passed inside information to Google’s exchange and permitted Google’s exchange to purchase valuable impressions at artificially depressed prices.” The Omidyar Network’s “roadmap” claims that “after purchasing DoubleClick, which became its publisher ad server, Google apparently lowered its prices to publishers by a factor of ten, at least according to one publisher’s account related to the CMA. Low prices for this service can force rivals to depart, thereby directly reducing competition.”

In contrast, as current U.S. Supreme Court Associate Justice Stephen Breyer once explained, in the context of above-cost low pricing, “the consequence of a mistake here is not simply to force a firm to forego legitimate business activity it wishes to pursue; rather, it is to penalize a procompetitive price cut, perhaps the most desirable activity (from an antitrust perspective) that can take place in a concentrated industry where prices typically exceed costs.”  That commentators or enforcers may be able to imagine alternative or theoretically more desirable conduct is beside the point.

It has been reported that the U.S. Justice Department (DOJ) may join the Texas suit or bring its own similar action against Google in the coming months. If it does, it should learn from the many misconceptions and errors in the Texas complaint that leave it on dubious legal and economic grounds.