Archives For Unfairness

The FTC Knows It When It Sees It

Ramsi Woodcock —  22 November 2022

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

When Congress created the Federal Trade Commission (FTC) in 1914, it charged the agency with condemning “unfair methods of competition.” That’s not the language Congress used in writing America’s primary antitrust statute, the Sherman Act, which prohibits “monopoliz[ation]” and “restraint[s] of trade.”

Ever since, the question has lingered whether the FTC has the authority to go beyond the Sherman Act to condemn conduct that is unfair, but not necessarily monopolizing or trade-restraining.

According to a new policy statement, the FTC’s current leadership seems to think that the answer is “yes.” But the peculiar strand of progressivism that is currently running the agency lacks the intellectual foundation needed to tell us what conduct that is unfair but not monopolizing might actually be—and misses an opportunity to bring about an expansion of its powers that courts might actually accept.

Better to Keep the Rule of Reason but Eliminate the Monopoly-Power Requirement

The FTC’s policy statement reads like a thesaurus. What is unfair competition? Answer: conduct that is “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power of a similar nature.”

In other words: the FTC has no idea. Presumably, the agency thinks, like Justice Potter Stewart did of obscenity, it will know it when it sees it. Given the courts’ long history of humiliating the FTC by rejecting its cases, even when the agency is able to provide a highly developed account of why challenged conduct is bad for America, one shudders to think of the reception such an approach to fairness will receive.

The one really determinate proposal in the policy statement is to attack bad conduct regardless whether the defendant has monopoly power. “Section 5 does not require a separate showing of market power or market definition when the evidence indicates that such conduct tends to negatively affect competitive conditions,” writes the FTC.

If only the agency had proposed this change alone, instead of cracking open the thesaurus to try to redefine bad conduct as well. Dropping the monopoly-power requirement would, by itself, greatly increase the amount of conduct subject to the FTC’s writ without forcing the agency to answer the metaphysical question: what is fair?

Under the present rule-of-reason approach, the courts let consumers answer the question of what constitutes bad conduct. Or to be precise, the courts assume that the only thing consumers care about is the product—its quality and price—and they try to guess whether consumers prefer the changes that the defendant’s conduct had on products in the market. If a court thinks consumers don’t prefer the changes, then the court condemns the conduct. But only if the defendant happens to have monopoly power in the market for those products.

Preserving this approach to identifying bad conduct would let the courts continue to maintain the pretense that they are doing the bidding of consumers—a role they will no doubt prefer to deciding what is fair as an absolute matter.

The FTC can safely discard the monopoly-power requirement without disturbing the current test for bad conduct because—as I argue in a working paper and as Timothy J. Brennen has long insisted—the monopoly-power requirement is directed at the wrong level of the supply chain: the market in which the defendant has harmed competition rather than the input market through which the defendant causes harm.

Power, not just in markets but in all social life, is rooted in one thing only: control over what others need. Harm to competition depends not on how much a defendant can produce relative to competitors but on whether a defendant controls an input that competitors need, but which the defendant can deny to them.

What others need, they do not buy from the market for which they produce. They buy what they need from other markets: input markets. It follows that the only power that should matter for antitrust—the only power that determines whether a firm can harm competition—is power over input markets, not power in the market in which competition is harmed.

And yet, apart from vertical-merger and contracting cases, where an inquiry into foreclosure of inputs still occasionally makes an appearance, antitrust today never requires systematic proof of power in input markets. The efforts of economists are wasted on the proof of power at the wrong level of the supply chain.

That represents an opportunity for the FTC, which can at one stroke greatly expand its authority to encompass conduct by firms having little power in the markets in which they harm competition.

To be sure, really getting the rule of reason right would require that proof of monopoly power continue to be required, only now at the input level instead of in the downstream market in which competition is harmed. But the courts have traditionally required only informal proof of power over inputs. The FTC could probably eliminate the economics-intensive process of formal proof of monopoly power entirely, instead of merely kicking it up one level in the supply chain.

That is surely an added plus for a current leadership so fearful of computation that it was at pains in the policy statement specifically to forswear “numerical” cost-benefit analysis.

Whatever Happened to No Fault?  

The FTC’s interest in expanding enforcement by throwing off the monopoly-power requirement is a marked departure from progressive antimonopolisms of the past. Mid-20th century radicals did not attack the monopoly-power side of antitrust’s two-part test, but rather the anticompetitive-conduct side.

For more than two decades, progressives mooted establishing a “no-fault” monopolization regime in which the only requirement for liability was size. By contrast, the present movement has sought to focus on conduct, rather than size, its own anti-concentration rhetoric notwithstanding.

Anti-Economism

That might, in part, be a result of the movement’s hostility toward economics. Proof of monopoly power is a famously economics-heavy undertaking.

The origin of contemporary antimonopolism is in activism by journalists against the social-media companies that are outcompeting newspapers for ad revenue, not in academia. As a result, the best traditions of the left, which involve intellectually outflanking opponents by showing how economic theory supports progressive positions, are missing here.

Contemporary antimonopolism has no “Capital” (Karl Marx), no “Progress and Poverty” (Henry George), and no “Freedom through Law” (Robert Hale). The most recent installment in this tradition of left-wing intellectual accomplishment is “Capital in the 21st Century” (Thomas Piketty). Unfortunately for progressive antimonopolists, it states: “pure and perfect competition cannot alter . . . inequality[.]’”

The contrast with the last revolution to sweep antitrust—that of the Chicago School—could not be starker. That movement was born in academia and its triumph was a triumph of ideas, however flawed they may in fact have been.

If one wishes to understand how Chicago School thinking put an end to the push for “no-fault” monopolization, one reads the Airlie House conference volume. In the conversations reproduced therein, one finds the no-faulters slowly being won over by the weight of data and theory deployed against them in support of size.

No equivalent watershed moment exists for contemporary antimonopolism, which bypassed academia (including the many progressive scholars doing excellent work therein) and went straight to the press and the agencies.

There is an ongoing debate about whether recent increases in markups result from monopolization or scarcity. It has not been resolved.

Rather than occupy economics, contemporary antimonopolists—and, perhaps, current FTC leadership—recoil from it. As one prominent antimonopolist lamented to a New York Times reporter, merger cases should be a matter of counting to four, and “[w]e don’t need economists to help us count to four.”

As the policy statement puts it: “The unfair methods of competition framework explicitly contemplates a variety of non-quantifiable harms, and justifications and purported benefits may be unquantifiable as well.”

Moralism

Contemporary antimonopolism’s focus on conduct might also be due to moralism—as reflected in the litany of synonyms for “bad” in the FTC’s policy statement.

For earlier progressives, antitrust was largely a means to an end—a way of ensuring that wages were high, consumer prices were low, and products were safe and of good quality. The fate of individual business entities within markets was of little concern, so long as these outcomes could be achieved.

What mattered were people. While contemporary antimonopolism cares about people, too, it differs from earlier antimonopolisms in that it personifies the firm.

If the firm dies, we are to be sad. If the firm is treated roughly by others, starved of resources or denied room to grow and reach its full potential, we are to be outraged, just as we would be if a child were starved. And, just as in the case of a child, we are to be outraged even if the firm would not have grown up to contribute anything of worth to society.

The irony, apparently lost on antimonopolists, is that the same personification of the firm as a rights-bearing agent, operating in other areas of law, undermines progressive policies.

The firm personified not only has a right to be treated gently by competing firms but also to be treated well by other people. But that means that people no longer come first relative to firms. When the Supreme Court holds that a business firm has a First Amendment right to influence politics, the Court takes personification of the firm to its logical extreme.

The alternative is not to make the market a morality play among firms, but to focus instead on market outcomes that matter to people—wages, prices, and product quality. We should not care whether a firm is “coerc[ed], exploitat[ed], collu[ded against], abus[ed], dece[ived], predate[ed], or [subjected to] economic power of a similar nature” except insofar as such treatment fails to serve people.

If one firm wishes to hire away the talent of another, for example, depriving the target of its lifeblood and killing it, so much the better if the result is better products, lower prices, or higher wages.

Antitrust can help maintain this focus on people only in part—by stopping unfair conduct that degrades products. I have argued elsewhere that the rest is for price regulation, taxation, and direct regulation to undertake.  

Can We Be Fairer and Still Give Product-Improving Conduct a Pass?

The intellectual deficit in contemporary antimonopolism is also evident in the care that the FTC’s policy statement puts into exempting behavior that creates superior products.

For one cannot expand the FTC’s powers to reach bad conduct without condemning product-improving conduct when the major check on enforcement today under the rule of reason (apart from the monopoly-power requirement) is precisely that conduct that improves products is exempt.

Under the rule of reason, bad conduct is a denial of inputs to a competitor that does not help consumers, meaning that the denial degrades the competitor’s products without improving the defendant’s products. Bad conduct is, in other words, unfairness that does not improve products.

If the FTC’s goal is to increase fairness relative to a regime that already pursues it, except when unfairness improves products, the additional fairness must come at the cost of product improvement.

The reference to superior products in the policy statement may be an attempt to compromise with the rule of reason. Unlike the elimination of the monopoly-power requirement, it is not a coherent compromise.

The FTC doesn’t need an economist to grasp this either.  

In Antitrust & Competition, Federal Trade Commission, FTC UMC Rulemaking, Monopolization, Section 5, Supreme Court, Symposia, Truth on the Market , , , , , , , , , , , ,
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The End of Reason at the FTC

Jonathan M. Barnett —  14 November 2022

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

In a 3-2 July 2021 vote, the Federal Trade Commission (FTC) rescinded the nuanced statement it had issued in 2015 concerning the scope of unfair methods of competition under Section 5 of the FTC Act. At the same time, the FTC rejected the applicability of the balancing test set forth in the rule of reason (and with it, several decades of case law, agency guidance, and legal and economic scholarship).

The July 2021 statement not only rejected these long-established guiding principles for Section 5 enforcement but left in its place nothing but regulatory fiat. In the statement the FTC issued Nov. 10, 2022 (again, by a divided 3-1 vote), the agency has now adopted this “just trust us” approach as a permanent operating principle.

The November 2022 statement purports to provide a standard under which the agency will identify unfair methods of competition under Section 5. As Commissioner Christine Wilson explains in her dissent, however, it clearly fails to do so. Rather, it delivers a collection of vaguely described principles and pejorative rhetoric that encompass loosely defined harms to competition, competitors, workers and a catch-all group of “other market participants.”  

The methodology for identifying these harms is comparably vague. The agency not only again rejects the rule of reason but asserts the authority to take action against a variety of “non-quantifiable harms,” all of which can be addressed at the most “incipient” stages. Moreover, and perhaps most remarkably, the statement specifically rejects any form of “net efficiencies” or “numerical cost-benefit analysis” to guide its enforcement decisions or provide even a modicum of predictability to the business community.  

The November 2022 statement amounts to regulatory fiat on overdrive, presented with a thin veneer of legality derived from a medley of dormant judicial decisions, incomplete characterizations of precedent, and truncated descriptions of legislative history. Under the agency’s dubious understanding of Section 5, Congress in 1914 elected to provide the FTC with the authority to declare any business practice “unfair” subject to no principle other than the agency’s subjective understanding of that term (and, apparently, never to be informed by “numerical cost-benefit analysis”).

Moreover, any enforcement action that targeted a purportedly “unfair” practice would then be adjudicated within the agency and appealable in the first instance to the very same commissioners who authorized the action. This institutional hall of mirrors would establish the FTC as the national “fairness” arbiter subject to virtually no constraining principles under which the exercise of such powers could ever be deemed to have exceeded its scope. The license for abuse is obvious and the departure from due process inherent.

The views reflected in the November 2022 statement would almost certainly lead to a legal dead-end.  If the agency takes action under its idiosyncratic understanding of the scope of unfair methods of competition under Section 5, it would elicit a legal challenge that would likely lead to two possible outcomes, both being adverse to the agency. 

First, it is likely that a judge would reject the agency’s understanding of Section 5, since it is irreconcilable with a well-developed body of case law requiring that the FTC (just like any other administrative agency) act under principles that provide businesses with, as described by the 2nd U.S. Circuit Court of Appeals, at least “an inkling as to what they can lawfully do rather than be left in a state of complete unpredictability.”

Any legally defensible interpretation of the scope of unfair methods of competition under Section 5 must take into account not only legislative intent at the time the FTC Act was enacted but more than a century’s worth of case law that courts have developed to govern the actions of administrative powers. Contrary to suggestions made in the November 2022 statement, neither the statute nor the relevant body of case law mandates unqualified deference by courts to the presumed wisdom of expert regulators.

Second, even if a court accepted the agency’s interpretation of the statute (or did so provisionally), there is a strong likelihood that it would then be compelled to strike down Section 5 as an unconstitutional delegation of lawmaking powers from the legislative to the executive branch. Given the concern that a majority of the Supreme Court has increasingly expressed over actions by regulatory agencies—including the FTC, specifically, in AMG Capital Management LLC v. FTC (2021)and now again in the pending case, Axon Enterprise Inc. v. FTC—that do not clearly fall within the legislatively specified scope of an agency’s authority (as in the AMG decision and other recent Court decisions concerning the U.S. Securities and Exchange Commission, the Occupational Safety and Health Administration, the U.S. Environmental Protection Agency, and the United States Patent and Trademark Office), this would seem to be a high-probability outcome.

In short: any enforcement action taken under the agency’s newly expanded understanding of Section 5 is unlikely to withstand judicial scrutiny, either as a matter of statutory construction or as a matter of constitutional principle. Given this legal forecast, the November 2022 statement could be viewed as mere theatrics that is unlikely to have a long legal life or much practical impact (although, until judicial intervention, it could impose significant costs on firms that must defend against agency-enforcement actions brought under the unilaterally expanded scope of Section 5). 

Even if that were the case, however, the November 2022 statement and, in particular, its expanded understanding of the harms that the agency is purportedly empowered to target, is nonetheless significant because it should leave little doubt concerning the lack of any meaningful commitment by agency leadership to the FTC’s historical mission to preserve market competition. Rather, it has become increasingly clear that agency leadership seeks to deploy the powerful remedies of the FTC Act (and the rest of the antitrust-enforcement apparatus) to displace a market-driven economy governed by the free play of competitive forces with an administered economy in which regulators continuously intervene to reengineer economic outcomes on grounds of fairness to favored constituencies, rather than to preserve the competitive process.

Reengineering Section 5 of the FTC Act as a “shadow” antitrust statute that operates outside the rule of reason (or any other constraining objective principle) provides a strategic detour around the inconvenient evidentiary and other legal obstacles that the agency would struggle to overcome when seeking to achieve these policy objectives under the Sherman and Clayton Acts. This intentionally unstructured and inherently politicized approach to antitrust enforcement threatens not only the institutional preconditions for a market economy but ultimately the rule of law itself.

In Administrative Law, Antitrust & Competition, Federal Trade Commission, FTC UMC Rulemaking, Regulation, Section 5, Supreme Court, Symposia, Truth on the Market , , , , , , , , , , , , , , ,
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FTC Rejects Economics for ‘Fairness’

Brian Albrecht —  10 November 2022

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

The current Federal Trade Commission (FTC) appears to have one overarching goal: find more ways to sue companies. The three Democratic commissioners (with the one Republican dissenting) issued a new policy statement earlier today that brings long-abandoned powers back into the FTC’s toolkit. Under Chair Lina Khan’s leadership, the FTC wants to bring challenges against “unfair methods of competition in or affecting commerce.” If that sounds extremely vague, that’s because it is. 

For the past few decades, antitrust violations have fallen into two categories. Actions like price-fixing with competitors are assumed to be illegal. Other actions are only considered illegal if they are proven to sufficiently restrain trade. This latter approach is called the “rule of reason.”

The FTC now wants to return to a time when they could also challenge conduct it viewed as unfair. The policy statement says the commission will go after behavior that is “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve the use of economic power of a similar nature.” Who could argue against stopping coercive behavior? The problem is what it means in practice for actual antitrust cases. No one knows: businesses or courts. It’s up to the whims of the FTC.

This is how antitrust used to be. In 1984, the 2nd U.S. Circuit Court of Appeals admonished the FTC and argued that “the Commission owes a duty to define the conditions under which conduct … would be unfair so that businesses will have an inkling as to what they can lawfully do rather than be left in a state of complete unpredictability.” Fairness, as the Clayton Act puts forward, proved unworkable as an antitrust standard.

The FTC’s movement to clarify what “unfair” means led to a 2015 policy statement, which the new statement supersedes. In the 2015 statement, the Obama-era FTC, with bipartisan support, issued new rules laying out what would qualify as unfair methods of competition. In doing so, they rolled “unfair methods” under the rule of reason. The consequences of the action matter.

The 2015 statement is part of a longer-run trend of incorporating more economic analysis into antitrust. For the past few decades, courts have followed in antitrust law is called the “consumer welfare standard.”  The basic idea is that the goal of antitrust decisions should be to choose whatever outcome helps consumers, or as economists would put it, whatever increases “consumer welfare.” Once those are the terms of the dispute, economic analysis can help the courts sort out whether an action is anticompetitive.

Beyond helping to settle particular cases, these features of modern antitrust—like the consumer welfare standard and the rule of reason—give market participants some sense of what is illegal and what is not. That’s necessary for the rule of law to prevail and for markets to function.

The new FTC rules explicitly reject any appeal to consumer benefits or welfare. Efficiency gains from the action—labeled “pecuniary gains” to suggest they are merely about money—do not count as a defense. The FTC makes explicit that parties cannot justify behavior based on efficiencies or cost-benefit analysis.

Instead, as Commissioner Christine S. Wilson points out in her dissent, “the Policy Statement adopts an ‘I know it when I see it’ approach premised on a list of nefarious-sounding adjectives.” If the FTC claims some conduct is unfair, why worry about studying the consequences of the conduct?

The policy statement is an attempt to roll back the clock on antitrust and return to the incoherence of 1950s and 1960s antitrust. The FTC seeks to protect other companies, not competition or consumers. As Khan herself said, “for a lot of businesses it comes down to whether they’re going to be able to sink or swim.”

But President Joe Biden’s antitrust enforcers have struggled to win traditional antitrust cases. On mergers, for example, they have challenged a smaller percentage of mergers and were less successful than the FTC and DOJ under President Donald Trump.

In Antitrust & Competition, Federal Trade Commission, FTC UMC Rulemaking, Section 5, Symposia, Truth on the Market , , , , , , , ,
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Potential Rulemaking on Commercial Surveillance and Data Security: The FTC Must Use Cost-Benefit Analysis

Alden Abbott —  7 September 2022

[This post is an entry in Truth on the Market’s continuing 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.]

The Federal Trade Commission’s (FTC) Aug. 22 Advance Notice of Proposed Rulemaking on Commercial Surveillance and Data Security (ANPRM) is breathtaking in its scope. For an overview summary, see this Aug. 11 FTC press release.

In their dissenting statements opposing ANPRM’s release, Commissioners Noah Phillips and Christine Wilson expertly lay bare the notice’s serious deficiencies. Phillips’ dissent stresses that the ANPRM illegitimately arrogates to the FTC legislative power that properly belongs to Congress:

[The [A]NPRM] recast[s] the Commission as a legislature, with virtually limitless rulemaking authority where personal data are concerned. It contemplates banning or regulating conduct the Commission has never once identified as unfair or deceptive. At the same time, the ANPR virtually ignores the privacy and security concerns that have animated our [FTC] enforcement regime for decades. … [As such, the ANPRM] is the first step in a plan to go beyond the Commission’s remit and outside its experience to issue rules that fundamentally alter the internet economy without a clear congressional mandate. That’s not “democratizing” the FTC or using all “the tools in the FTC’s toolbox.” It’s a naked power grab.

Wilson’s complementary dissent critically notes that the 2021 changes to FTC rules of practice governing consumer-protection rulemaking decrease opportunities for public input and vest significant authority solely with the FTC chair. She also echoed Phillips’ overarching concern with FTC overreach (footnote citations omitted):

Many practices discussed in this ANPRM are presented as clearly deceptive or unfair despite the fact that they stretch far beyond practices with which we are familiar, given our extensive law enforcement experience. Indeed, the ANPRM wanders far afield of areas for which we have clear evidence of a widespread pattern of unfair or deceptive practices. … [R]egulatory and enforcement overreach increasingly has drawn sharp criticism from courts. Recent Supreme Court decisions indicate FTC rulemaking overreach likely will not fare well when subjected to judicial review.

Phillips and Wilson’s warnings are fully warranted. The ANPRM contemplates a possible Magnuson-Moss rulemaking pursuant to Section 18 of the FTC Act,[1] which authorizes the commission to promulgate rules dealing with “unfair or deceptive acts or practices.” The questions that the ANPRM highlights center primarily on concerns of unfairness.[2] Any unfairness-related rulemaking provisions eventually adopted by the commission will have to satisfy a strict statutory cost-benefit test that defines “unfair” acts, found in Section 5(n) of the FTC Act. As explained below, the FTC will be hard-pressed to justify addressing most of the ANPRM’s concerns in Section 5(n) cost-benefit terms.

Discussion

The requirements imposed by Section 5(n) cost-benefit analysis

Section 5(n) codifies the meaning of unfair practices, and thereby constrains the FTC’s application of rulemakings covering such practices. Section 5(n) states:

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

In other words, a practice may be condemned as unfair only if it causes or is likely to cause “(1) substantial injury to consumers (2) which is not reasonably avoidable by consumers themselves and (3) not outweighed by countervailing benefits to consumers or to competition.”

This is a demanding standard. (For scholarly analyses of the standard’s legal and economic implications authored by former top FTC officials, see here, here, and here.)

First, the FTC must demonstrate that a practice imposes a great deal of harm on consumers, which they could not readily have avoided. This requires detailed analysis of the actual effects of a particular practice, not mere theoretical musings about possible harms that may (or may not) flow from such practice. Actual effects analysis, of course, must be based on empiricism: consideration of hard facts.

Second, assuming that this formidable hurdle is overcome, the FTC must then acknowledge and weigh countervailing welfare benefits that might flow from such a practice. In addition to direct consumer-welfare benefits, other benefits include “benefits to competition.” Those may include business efficiencies that reduce a firm’s costs, because such efficiencies are a driver of vigorous competition and, thus, of long-term consumer welfare. As the Organisation for Economic Co-operation and Development has explained (see OECD Background Note on Efficiencies, 2012, at 14), dynamic and transactional business efficiencies are particularly important in driving welfare enhancement.

In sum, under Section 5(n), the FTC must show actual, fact-based, substantial harm to consumers that they could not have escaped, acting reasonably. The commission must also demonstrate that such harm is not outweighed by consumer and (procompetitive) business-efficiency benefits. What’s more, Section 5(n) makes clear that the FTC cannot “pull a rabbit out of a hat” and interject other “public policy” considerations as key factors in the rulemaking  calculus (“[s]uch [other] public policy considerations may not serve as a primary basis for … [a] determination [of unfairness]”).

It ineluctably follows as a matter of law that a Section 18 FTC rulemaking sounding in unfairness must be based on hard empirical cost-benefit assessments, which require data grubbing and detailed evidence-based economic analysis. Mere anecdotal stories of theoretical harm to some consumers that is alleged to have resulted from a practice in certain instances will not suffice.

As such, if an unfairness-based FTC rulemaking fails to adhere to the cost-benefit framework of Section 5(n), it inevitably will be struck down by the courts as beyond the FTC’s statutory authority. This conclusion is buttressed by the tenor of the Supreme Court’s unanimous 2021 opinion in AMG Capital v. FTC, which rejected the FTC’s claim that its statutory injunctive authority included the ability to obtain monetary relief for harmed consumers (see my discussion of this case here).

The ANPRM and Section 5(n)

Regrettably, the tone of the questions posed in the ANPRM indicates a lack of consideration for the constraints imposed by Section 5(n). Accordingly, any future rulemaking that sought to establish “remedies” for many of the theorized abuses found in the ANPRM would stand very little chance of being upheld in litigation.

The Aug. 11 FTC press release cited previously addresses several broad topical sources of harms: harms to consumers; harms to children; regulations; automated systems; discrimination; consumer consent; notice, transparency, and disclosure; remedies; and obsolescence. These categories are chock full of questions that imply the FTC may consider restrictions on business conduct that go far beyond the scope of the commission’s authority under Section 5(n). (The questions are notably silent about the potential consumer benefits and procompetitive efficiencies that may arise from the business practices called here into question.)

A few of the many questions set forth under just four of these topical listings (harms to consumers, harms to children, regulations, and discrimination) are highlighted below, to provide a flavor of the statutory overreach that categorizes all aspects of the ANPRM. Many other examples could be cited. (Phillips’ dissenting statement provides a cogent and critical evaluation of ANPRM questions that embody such overreach.) Furthermore, although there is a short discussion of “costs and benefits” in the ANPRM press release, it is wholly inadequate to the task.

Under the category “harms to consumers,” the ANPRM press release focuses on harm from “lax data security or surveillance practices.” It asks whether FTC enforcement has “adequately addressed indirect pecuniary harms, including potential physical harms, psychological harms, reputational injuries, and unwanted intrusions.” The press release suggests that a rule might consider addressing harms to “different kinds of consumers (e.g., young people, workers, franchisees, small businesses, women, victims of stalking or domestic violence, racial minorities, the elderly) in different sectors (e.g., health, finance, employment) or in different segments or ‘stacks’ of the internet economy.”

These laundry lists invite, at best, anecdotal public responses alleging examples of perceived “harm” falling into the specified categories. Little or no light is likely to be shed on the measurement of such harm, nor on the potential beneficial effects to some consumers from the practices complained of (for example, better targeted ads benefiting certain consumers). As such, a sound Section 5(n) assessment would be infeasible.

Under “harms to children,” the press release suggests possibly extending the limitations of the FTC-administered Children’s Online Privacy Protection Act (COPPA) to older teenagers, thereby in effect rewriting COPPA and usurping the role of Congress (a clear statutory overreach). The press release also asks “[s]hould new rules set out clear limits on personalized advertising to children and teenagers irrespective of parental consent?” It is hard (if not impossible) to understand how this form of overreach, which would displace the supervisory rights of parents (thereby imposing impossible-to-measure harms on them), could be shoe-horned into a defensible Section 5(n) cost-benefit assessment.

Under “regulations,” the press release asks whether “new rules [should] require businesses to implement administrative, technical, and physical data security measures, including encryption techniques, to protect against risks to the security, confidentiality, or integrity of covered data?” Such new regulatory strictures (whose benefits to some consumers appear speculative) would interfere significantly in internal business processes. Specifically, they could substantially diminish the efficiency of business-security measures, diminish business incentives to innovate (for example, in encryption), and reduce dynamic competition among businesses.

Consumers also would be harmed by a related slowdown in innovation. Those costs undoubtedly would be high but hard, if not impossible, to measure. The FTC also asks whether a rule should limit “companies’ collection, use, and retention of consumer data.” This requirement, which would seemingly bypass consumers’ decisions to make their data available, would interfere with companies’ ability to use such data to improve business offerings and thereby enhance consumers’ experiences. Justifying new requirements such as these under Section 5(n) would be well-nigh impossible.

The category “discrimination” is especially problematic. In addressing “algorithmic discrimination,” the ANPRM press release asks whether the FTC should “consider new trade regulation rules that bar or somehow limit the deployment of any system that produces discrimination, irrespective of the data or processes on which those outcomes are based.” In addition, the press release asks “if the Commission [should] consider harms to other underserved groups that current law does not recognize as protected from discrimination (e.g., unhoused people or residents of rural communities)?”

The FTC cites no statutory warrant for the authority to combat such forms of “discrimination.” It is not a civil-rights agency. It clearly is not authorized to issue anti-discrimination rules dealing with “groups that current law does not recognize as protected from discrimination.” Any such rules, if issued, would be summarily struck down in no uncertain terms by the judiciary, even without regard to Section 5(n).

In addition, given the fact that “economic discrimination” often is efficient (and procompetitive) and may be beneficial to consumer welfare (see, for example, here), more limited economic anti-discrimination rules almost certainly would not pass muster under the Section 5(n) cost-benefit framework.     

Finally, while the ANPRM press release does contain a very short section entitled “costs and benefits,” that section lacks any specific reference to the required Section 5(n) evaluation framework. Phillips’ dissent points out that the ANPRM:

…simply fail[s] to provide the detail necessary for commenters to prepare constructive responses” on cost-benefit analysis. He stresses that the broad nature of requests for commenters’ view on costs and benefits renders the inquiry “not conducive to stakeholders submitting data and analysis that can be compared and considered in the context of a specific rule. … Without specific questions about [the costs and benefits of] business practices and potential regulations, the Commission cannot hope for tailored responses providing a full picture of particular practices.

In other words, the ANPRM does not provide the guidance needed to prompt the sorts of responses that might assist the FTC in carrying out an adequate Section 5(n) cost-benefit analysis.

Conclusion

The FTC would face almost certain defeat in court if it promulgated a broad rule addressing many of the perceived unfairness-based “ills” alluded to in the ANPRM. Moreover, although its requirements would (I believe) not come into effect, such a rule nevertheless would impose major economic costs on society.

Prior to final judicial resolution of its status, the rule would disincentivize businesses from engaging in a variety of data-related practices that enhance business efficiency and benefit many consumers. Furthermore, the FTC resources devoted to developing and defending the rule would not be applied to alternative welfare-enhancing FTC activities—a substantial opportunity cost.

The FTC should take heed of these realities and opt not to carry out a rulemaking based on the ANPRM. It should instead devote its scarce consumer protection resources to prosecuting hard core consumer fraud and deception—and, perhaps, to launching empirical studies into the economic-welfare effects of data security and commercial surveillance practices. Such studies, if carried out, should focus on dispassionate economic analysis and avoid policy preconceptions. (For example, studies involving digital platforms should take note of the existing economic literature, such as a paper indicating that digital platforms have generated enormous consumer-welfare benefits not accounted for in gross domestic product.)

One can only hope that a majority of FTC commissioners will apply common sense and realize that far-flung rulemaking exercises lacking in statutory support are bad for the rule of law, bad for the commission’s reputation, bad for the economy, and bad for American consumers.

[1] The FTC states specifically that it “is issuing this ANPR[M] pursuant to Section 18 of the Federal Trade Commission Act”.

[2] Deceptive practices that might be addressed in a Section 18 trade regulation rule would be subject to the “FTC Policy Statement on Deception,” which states that “the Commission will find deception if there is a representation, omission or practice that is likely to mislead the consumer acting reasonably in the circumstances, to the consumer’s detriment.” A court reviewing an FTC Section 18 rule focused on “deceptive acts or practices” undoubtedly would consult this Statement, although it is not clear, in light of recent jurisprudential trends, that the court would defer to the Statement’s analysis in rendering an opinion. In any event, questions of deception, which focus on acts or practices that mislead consumers, would in all likelihood have little relevance to the evaluation of any rule that might be promulgated in light of the ANPRM.    

In Administrative Law, Data Privacy & Security, Federal Trade Commission, FTC UMC Rulemaking, Regulation, Section 5, Symposia, Truth on the Market , , , , , ,
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The Road to Antitrust’s Least Glorious Hour

Aurelien Portuese —  29 July 2022

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

Things are heating up in the antitrust world. There is considerable pressure to pass the American Innovation and Choice Online Act (AICOA) before the congressional recess in August—a short legislative window before members of Congress shift their focus almost entirely to campaigning for the mid-term elections. While it would not be impossible to advance the bill after the August recess, it would be a steep uphill climb.

But whether it passes or not, some of the damage from AICOA may already be done. The bill has moved the antitrust dialogue that will harm innovation and consumers. In this post, I will first explain AICOA’s fundamental flaws. Next, I discuss the negative impact that the legislation is likely to have if passed, even if courts and agencies do not aggressively enforce its provisions. Finally, I show how AICOA has already provided an intellectual victory for the approach articulated in the European Union (EU)’s Digital Markets Act (DMA). It has built momentum for a dystopian regulatory framework to break up and break into U.S. superstar firms designated as “gatekeepers” at the expense of innovation and consumers.

The Unseen of AICOA

AICOA’s drafters argue that, once passed, it will deliver numerous economic benefits. Sen. Amy Klobuchar (D-Minn.)—the bill’s main sponsor—has stated that it will “ensure small businesses and entrepreneurs still have the opportunity to succeed in the digital marketplace. This bill will do just that while also providing consumers with the benefit of greater choice online.”

Section 3 of the bill would provide “business users” of the designated “covered platforms” with a wide range of entitlements. This includes preventing the covered platform from offering any services or products that a business user could provide (the so-called “self-preferencing” prohibition); allowing a business user access to the covered platform’s proprietary data; and an entitlement for business users to have “preferred placement” on a covered platform without having to use any of that platform’s services.

These entitlements would provide non-platform businesses what are effectively claims on the platform’s proprietary assets, notwithstanding the covered platform’s own investments to collect data, create services, and invent products—in short, the platform’s innovative efforts. As such, AICOA is redistributive legislation that creates the conditions for unfair competition in the name of “fair” and “open” competition. It treats the behavior of “covered platforms” differently than identical behavior by their competitors, without considering the deterrent effect such a framework will have on consumers and innovation. Thus, AICOA offers rent-seeking rivals a formidable avenue to reap considerable benefits at the expense of the innovators thanks to the weaponization of antitrust to subvert, not improve, competition.

In mandating that covered platforms make their data and proprietary assets freely available to “business users” and rivals, AICOA undermines the underpinning of free markets to pursue the misguided goal of “open markets.” The inevitable result will be the tragedy of the commons. Absent the covered platforms having the ability to benefit from their entrepreneurial endeavors, the law no longer encourages innovation. As Joseph Schumpeter seminally predicted: “perfect competition implies free entry into every industry … But perfectly free entry into a new field may make it impossible to enter it at all.”

To illustrate, if business users can freely access, say, a special status on the covered platforms’ ancillary services without having to use any of the covered platform’s services (as required under Section 3(a)(5)), then platforms are disincentivized from inventing zero-priced services, since they cannot cross-monetize these services with existing services. Similarly, if, under Section 3(a)(1) of the bill, business users can stop covered platforms from pre-installing or preferencing an app whenever they happen to offer a similar app, then covered platforms will be discouraged from investing in or creating new apps. Thus, the bill would generate a considerable deterrent effect for covered platforms to invest, invent, and innovate.

AICOA’s most detrimental consequences may not be immediately apparent; they could instead manifest in larger and broader downstream impacts that will be difficult to undo. As the 19th century French economist Frederic Bastiat wrote: “a law gives birth not only to an effect but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause—it is seen. The others unfold in succession—they are not seen it is well for, if they are foreseen … it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come,—at the risk of a small present evil.”

To paraphrase Bastiat, AICOA offers ill-intentioned rivals a “small present good”–i.e., unconditional access to the platforms’ proprietary assets–while society suffers the loss of a greater good–i.e., incentives to innovate and welfare gains to consumers. The logic is akin to those who advocate the abolition of intellectual-property rights: The immediate (and seen) gain is obvious, concerning the dissemination of innovation and a reduction of the price of innovation, while the subsequent (and unseen) evil remains opaque, as the destruction of the institutional premises for innovation will generate considerable long-term innovation costs.

Fundamentally, AICOA weakens the benefits of scale by pursuing vertical disintegration of the covered platforms to the benefit of short-term static competition. In the long term, however, the bill would dampen dynamic competition, ultimately harming consumer welfare and the capacity for innovation. The measure’s opportunity costs will prevent covered platforms’ innovations from benefiting other business users or consumers. They personify the “unseen,” as Bastiat put it: “[they are] always in the shadow, and who, personifying what is not seen, [are] an essential element of the problem. [They make] us understand how absurd it is to see a profit in destruction.”

The costs could well amount to hundreds of billions of dollars for the U.S. economy, even before accounting for the costs of deterred innovation. The unseen is costly, the seen is cheap.

A New Robinson-Patman Act?

Most antitrust laws are terse, vague, and old: The Sherman Act of 1890, the Federal Trade Commission Act, and the Clayton Act of 1914 deal largely in generalities, with considerable deference for courts to elaborate in a common-law tradition on the specificities of what “restraints of trade,” “monopolization,” or “unfair methods of competition” mean.

In 1936, Congress passed the Robinson-Patman Act, designed to protect competitors from the then-disruptive competition of large firms who—thanks to scale and practices such as price differentiation—upended traditional incumbents to the benefit of consumers. Passed after “Congress made no factual investigation of its own, and ignored evidence that conflicted with accepted rhetoric,” the law prohibits price differentials that would benefit buyers, and ultimately consumers, in the name of less vigorous competition from more efficient, more productive firms. Indeed, under the Robinson-Patman Act, manufacturers cannot give a bigger discount to a distributor who would pass these savings onto consumers, even if the distributor performs extra services relative to others.

Former President Gerald Ford declared in 1975 that the Robinson-Patman Act “is a leading example of [a law] which restrain[s] competition and den[ies] buyers’ substantial savings…It discourages both large and small firms from cutting prices, making it harder for them to expand into new markets and pass on to customers the cost-savings on large orders.” Despite this, calls to amend or repeal the Robinson-Patman Act—supported by, among others, competition scholars like Herbert Hovenkamp and Robert Bork—have failed.

In the 1983 Abbott decision, Justice Lewis Powell wrote: “The Robinson-Patman Act has been widely criticized, both for its effects and for the policies that it seeks to promote. Although Congress is aware of these criticisms, the Act has remained in effect for almost half a century.”

Nonetheless, the act’s enforcement dwindled, thanks to wise reactions from antitrust agencies and the courts. While it is seldom enforced today, the act continues to create considerable legal uncertainty, as it raises regulatory risks for companies who engage in behavior that may conflict with its provisions. Indeed, many of the same so-called “neo-Brandeisians” who support passage of AICOA also advocate reinvigorating Robinson-Patman. More specifically, the new FTC majority has expressed that it is eager to revitalize Robinson-Patman, even as the law protects less efficient competitors. In other words, the Robinson-Patman Act is a zombie law: dead, but still moving.

Even if the antitrust agencies and courts ultimately follow the same path of regulatory and judicial restraint on AICOA that they have on Robinson-Patman, the legal uncertainty its existence will engender will act as a powerful deterrent on disruptive competition that dynamically benefits consumers and innovation. In short, like the Robinson-Patman Act, antitrust agencies and courts will either enforce AICOA–thus, generating the law’s adverse effects on consumers and innovation–or they will refrain from enforcing AICOA–but then, the legal uncertainty shall lead to unseen, harmful effects on innovation and consumers.

For instance, the bill’s prohibition on “self-preferencing” in Section 3(a)(1) will prevent covered platforms from offering consumers new products and services that happen to compete with incumbents’ products and services. Self-preferencing often is a pro-competitive, pro-efficiency practice that companies widely adopt—a reality that AICOA seems to ignore.

Would AICOA prevent, e.g., Apple from offering a bundled subscription to Apple One, which includes Apple Music, so that the company can effectively compete with incumbents like Spotify? As with Robinson-Patman, antitrust agencies and courts will have to choose whether to enforce a productivity-decreasing law, or to ignore congressional intent but, in the process, generate significant legal uncertainties.

Judge Bork once wrote that Robinson-Patman was “antitrust’s least glorious hour” because, rather than improving competition and innovation, it reduced competition from firms who happen to be more productive, innovative, and efficient than their rivals. The law infamously protected inefficient competitors rather than competition. But from the perspective of legislative history perspective, AICOA may be antitrust’s new “least glorious hour.” If adopted, it will adversely affect innovation and consumers, as opportunistic rivals will be able to prevent cost-saving practices by the covered platforms.

As with Robinson-Patman, calls to amend or repeal AICOA may follow its passage. But Robinson-Patman Act illustrates the path dependency of bad antitrust laws. However costly and damaging, AICOA would likely stay in place, with regular calls for either stronger or weaker enforcement, depending on whether the momentum shifts from populist antitrust or antitrust more consistent with dynamic competition.

Victory of the Brussels Effect

The future of AICOA does not bode well for markets, either from a historical perspective or from a comparative-law perspective. The EU’s DMA similarly targets a few large tech platforms but it is broader, harsher, and swifter. In the competition between these two examples of self-inflicted techlash, AICOA will pale in comparison with the DMA. Covered platforms will be forced to align with the DMA’s obligations and prohibitions.

Consequently, AICOA is a victory of the DMA and of the Brussels effect in general. AICOA effectively crowns the DMA as the all-encompassing regulatory assault on digital gatekeepers. While members of Congress have introduced numerous antitrust bills aimed at targeting gatekeepers, the DMA is the one-stop-shop regulation that encompasses multiple antitrust bills and imposes broader prohibitions and stronger obligations on gatekeepers. In other words, the DMA outcompetes AICOA.

Commentators seldom lament the extraterritorial impact of European regulations. Regarding regulating digital gatekeepers, U.S. officials should have pushed back against the innovation-stifling, welfare-decreasing effects of the DMA on U.S. tech companies, in particular, and on U.S. technological innovation, in general. To be fair, a few U.S. officials, such as Commerce Secretary Gina Raimundo, did voice opposition to the DMA. Indeed, well-aware of the DMA’s protectionist intent and its potential to break up and break into tech platforms, Raimundo expressed concerns that antitrust should not be about protecting competitors and deterring innovation but rather about protecting the process of competition, however disruptive may be.

The influential neo-Brandeisians and radical antitrust reformers, however, lashed out at Raimundo and effectively shamed the Biden administration into embracing the DMA (and its sister regulation, AICOA). Brussels did not have to exert its regulatory overreach; the U.S. administration happily imports and emulates European overregulation. There is no better way for European officials to see their dreams come true: a techlash against U.S. digital platforms that enjoys the support of local officials.

In that regard, AICOA has already played a significant role in shaping the intellectual mood in Washington and in altering the course of U.S. antitrust. Members of Congress designed AICOA along the lines pioneered by the DMA. Sen. Klobuchar has argued that America should emulate European competition policy regarding tech platforms. Lina Khan, now chair of the FTC, co-authored the U.S. House Antitrust Subcommittee report, which recommended adopting the European concept of “abuse of dominant position” in U.S. antitrust. In her current position, Khan now praises the DMA. Tim Wu, competition counsel for the White House, has praised European competition policy and officials. Indeed, the neo-Brandeisians’ have not only praised the European Commission’s fines against U.S. tech platforms (despite early criticisms from former President Barack Obama) but have more dramatically called for the United States to imitate the European regulatory framework.

In this regulatory race to inefficiency, the standard is set in Brussels with the blessings of U.S. officials. Not even the precedent set by the EU’s General Data Protection Regulation (GDPR) fully captures the effects the DMA will have. Privacy laws passed by U.S. states’ privacy have mostly reacted to the reality of the GDPR. With AICOA, Congress is proactively anticipating, emulating, and welcoming the DMA before it has even been adopted. The intellectual and policy shift is historical, and so is the policy error.

AICOA and the Boulevard of Broken Dreams

AICOA is a failure similar to the Robinson-Patman Act and a victory for the Brussels effect and the DMA. Consumers will be the collateral damages, and the unseen effects on innovation will take years before they materialize. Calls for amendments and repeals of AICOA are likely to fail, so that the inevitable costs will forever bear upon consumers and innovation dynamics.

AICOA illustrates the neo-Brandeisian opposition to large innovative companies. Joseph Schumpeter warned against such hostility and its effect on disincentivizing entrepreneurs to innovate when he wrote:

Faced by the increasing hostility of the environment and by the legislative, administrative, and judicial practice born of that hostility, entrepreneurs and capitalists—in fact the whole stratum that accepts the bourgeois scheme of life—will eventually cease to function. Their standard aims are rapidly becoming unattainable, their efforts futile.

President William Howard Taft once said, “the world is not going to be saved by legislation.” AICOA will not save antitrust, nor will consumers. To paraphrase Schumpeter, the bill’s drafters “walked into our future as we walked into the war, blindfolded.” AICOA’s intentions to deliver greater competition, a fairer marketplace, greater consumer choice, and more consumer benefits will ultimately scatter across the boulevard of broken dreams.

The Baron de Montesquieu once wrote that legislators should only change laws with a “trembling hand”:

It is sometimes necessary to change certain laws. But the case is rare, and when it happens, they should be touched only with a trembling hand: such solemnities should be observed, and such precautions are taken that the people will naturally conclude that the laws are indeed sacred since it takes so many formalities to abrogate them.

AICOA’s drafters had a clumsy hand, coupled with what Friedrich Hayek would call “a pretense of knowledge.” They were certain to do social good and incapable of thinking of doing social harm. The future will remember AICOA as the new antitrust’s least glorious hour, where consumers and innovation were sacrificed on the altar of a revitalized populist view of antitrust.

In Antitrust & Competition, Antitrust’s Uncertain Future, European Union, Exclusionary Conduct, Exclusive Dealing, International, Platforms, Symposia, Truth on the Market, Tying, Vertical Restraints , , , , , , , , , , , , , , , , , , , , ,
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New Frontiers of Fairness: Auto Da Fé by the Grand Inquisitor of Economics

Filip Lubinski and Lazar Radic —  26 July 2022

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

26 July, 10 A.F. (after fairness)

Dear Fellow Inquisitors,

It has been more than a decade now since the Federal Neutrality Commission, born of the ashes of the old world, ushered in the Age of Fairness. 

As you all know, the FNC was created during the Online Era, when the emergence of the largest companies in human history opened our eyes to the original sin of the competitive process: unfairness.

In the course of their evolution, digital platforms—the vanity fairs of the XXI century—had created entire ecosystems that offered integrated services that were so comfortable to use together that they led to a double-sin: sloth on the part of the consumers, and the unfair exclusion of competitors, who were barred from exercising their God-given right to participate in every market and every platform—and to prosper.

Digital stores selling their own branded goods, social-media apps with their own messaging services, search engines using search statistics to generate optimally efficient tools that surpassed the (legitimate) confines of their core functions and spilled over into the dominion of job search, flight booking, or housing apps … App stores were even using their own recognizable software to guarantee that the apps they distributed met the highest standards of security and trustworthiness!

While these things might not seem entirely unreasonable (especially to the heathens: selfish and individualistic consumers who care about nothing other than satisfying their base hedonistic desires), they in fact led to unspeakable evils that flouted the common good.

For example, they made it very, very uncomfortable for someone who wanted to start their own real-estate business to compete with such strong rival companies, who could leverage their superior efficiency in their core markets to become nigh-unbeatable in offering the cheapest, most relevant housing ads. To make matters worse, the gargantuan spending of the digital platforms on research and development built additional moats of quality and innovation around their products—both core and adjacent—that made them utterly unimpregnable to rivals specializing in just one area.

By constantly leveraging their core services to offer better and improved products on adjacent markets, digital platforms had made it unfairly difficult for other companies to join the race and deliver us to “perfect competition”—the euphoric state of blissful equilibrium foretold by the high priests of the only true belief system, Economics.

But not all was lost, and we hadn’t been forsaken. In those dark and faithless days, it was revealed to us by Sen. Amy Klobuchar—praise be her name—that the loathsome practice whereby online companies favored their own products and services over their rivals had a name, “self-preferencing,” and that it was a sin. And, most importantly, that it could be eradicated.

Fortunately, and thanks to the vigilance of the FNC, legal steps were swiftly taken to make the praxis of the Digital Economy more closely resemble its theory, as passed on to us by our forefathers.

And it worked, brothers and sisters! The prohibition of self-preferencing in digital markets made online products much more homogenous, thus validating one of the main assumptions of Economics. In addition, new competition-law Acts, with mechanisms such as forced data sharing, have eliminated all the messy experimentation that had hitherto led to varied (and risky) business models and diversified approaches. By turning competition into forced collaboration, we had finally made it stable, equal, and predictable; in one word: fair.

And what of the sinner in every one of us? Before the great revelation, blasphemous “consumers”—an anachronistic and reductive term for “socially responsible citizens”—were committing the sin of laziness: sloth. Now, choice is finally mandated, and nothing can be pre-selected or even integrated. No more arbitrary safe-browsing mechanisms, integrated malware detectors and spam filters. Where digital platforms experimented and imposed results on us, we are now coercively free to experiment by ourselves—and on ourselves! Online searches today lead to thousands of indistinguishable links hiding an infinity of surprises, requiring us to be more circumspect and informed than ever before. In one word: the prohibition of self-preferencing has improved the moral character of the human stock.

It is universally known that we owe the dawn of the Age of Fairness to the American Innovation and Choice Online Act, adopted by Congress in the year 2022; and the unwavering vigilance of the FNC. What is lesser known—and what I am here to instill in you today—is that that was just the beginning. The success of AICOA has opened our eyes to an even more ancient and perverse evil: self-preferencing in offline markets. It revealed to us that—for centuries, if not millennia—companies in various industries—from togas to wine, from cosmetics to insurance—had, in fact, always preferred their own initiatives over those of their rivals!

Just as the ancient chariot constructors designed chariots to suit the build of their own thoroughbred horses (thereby foreclosing horses raised by other breeders), the XX century car producers were using spare parts delivered by a supplier organizationally related to their company.

This realization has accelerated the birth pangs of the American Innovation and Choice Offline Act, which we are here to announce today. With it, the FNC will eliminate all remnants of unfair rivalry—online and offline—so that we, as one community of faith, can finally enjoy the true benefits of competition. But we must never forget that this tenuous equilibrium hangs by a thread, and that we owe it all to the indefatigable efforts of the FNC agents patrolling the streets, supermarkets, restaurants, gyms, factories, and just about everything else every single day.

Of course, there is still a lot to be done. But every long journey must begin somewhere.

Today, I want to warn you against sin and urge you to adopt the religion of fairness[1] before the day of judgment comes.

Amen.

[1] Or any other religion that condemns self-preferencing. I want to recommend them all equally.

In Antitrust & Competition, Antitrust’s Uncertain Future, Platforms, Symposia, Truth on the Market , , , , , ,
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The Catch-22 of AICOA’s Guidelines

Geoffrey Manne —  25 July 2022

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

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

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

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

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

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

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

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

This thinking is misguided for at least three reasons:

Guidelines are not rules

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

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

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

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

Guidelines are not the appropriate tool to define novel concepts

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

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

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

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

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

Guidelines can’t fix a fundamentally flawed law

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

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

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

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

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

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

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

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

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

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

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

In Antitrust & Competition, Antitrust’s Uncertain Future, Federal Trade Commission, Justice Department, Platforms, Symposia, Truth on the Market, Tying, Vertical Restraints , , , , , , , , , , ,
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Political Philosophy, Competition, and Competition Law: The Road to and from Neoliberalism, Part 1

Lazar Radic —  23 November 2021

This post is the first in a three-part series. The second installment can be found here and the third can be found here.

The interplay among political philosophy, competition, and competition law remains, with some notable exceptions, understudied in the literature. Indeed, while examinations of the intersection between economics and competition law have taught us much, relatively little has been said about the value frameworks within which different visions of competition and competition law operate.

As Ronald Coase reminds us, questions of economics and political philosophy are interrelated, so that “problems of welfare economics must ultimately dissolve into a study of aesthetics and morals.” When we talk about economics, we talk about political philosophy, and vice versa. Every political philosophy reproduces economic prescriptions that reflect its core tenets. And every economic arrangement, in turn, evokes the normative values that undergird it. This is as true for socialism and fascism as it is for liberalism and neoliberalism.

Many economists have understood this. Milton Friedman, for instance, who spent most of his career studying social welfare, not ethics, admitted in Free to Choose that he was ultimately concerned with the preservation of a value: the liberty of the individual. Similarly, the avowed purpose of Friedrich Hayek’s The Constitution of Liberty was to maximize the state of human freedom, with coercion—i.e., the opposite of freedom—described as evil. James Buchanan fought to preserve political philosophy within the economic discipline, particularly worrying that:

Political economy was becoming unmoored from the types of philosophic and institutional analysis which were previously central to the field. In its flight from reality, Buchanan feared economics was in danger of abandoning social-philosophic issues for exclusively technical questions.

— John Kroencke, “Three Essays in the History of Economics”

Against this background, I propose to look at competition and competition law from a perspective that explicitly recognizes this connection. The goal is not to substitute, but rather to complement, our comparatively broad understanding of competition economics with a better grasp of the deeper normative implications of regulating competition in a certain way. If we agree with Robert Bork that antitrust is a subcategory of ideology that reflects and reacts upon deeper tensions in our society, the exercise might also be relevant beyond the relatively narrow confines of antitrust scholarship (which, on the other hand, seem to be getting wider and wider).

The Classical Liberal Revolution and the Unshackling of Competition

Mercantilism

When Adam Smith’s The Wealth of Nations was published in 1776, heavy economic regulation of the market through laws, by-laws, tariffs, and special privileges was the norm. Restrictions on imports were seen as protecting national wealth by preventing money from flowing out of the country—a policy premised on the conflation of money with wealth. A morass of legally backed and enforceable monopoly rights, granted either by royal decree or government-sanctioned by-laws, marred competition. Guilds reigned over tradesmen by restricting entry into the professions and segregating markets along narrow geographic lines. At every turn, economic activity was shot through with rules, restrictions, and regulations.

The Revolution in Political Economy

Classical liberals like Smith departed from the then-dominant mercantilist paradigm by arguing that nations prospered through trade and competition, and not protectionism and monopoly privileges. He demonstrated that both the seller and the buyer benefited from trade; and theorized the market as an automatic mechanism that allocated resources efficiently through the spontaneous, self-interested interaction of individuals.

Undergirding this position was the notion of the natural order, which Smith carried over from his own Theory of Moral Sentiments and which elaborated on arguments previously espoused by the French physiocrats (a neologism meaning “the rule of nature”), such as Anne Robert Jacques Turgot, François Quesnay, and Jacques Claude Marie Vincent de Gournay. The basic premise was that there existed a harmonious order of things established and maintained by means of subconscious balancing of the egoism of the individual and the greatest welfare for all.

The implications of this modest insight, which clashed directly with established mercantilist orthodoxy, were tremendous. If human freedom maximized social welfare, the justification for detailed government intervention in the economy was untenable. The principles of laissez-faire (a term probably coined by Gournay, who had been Turgot’s mentor) instead prescribed that the government should adopt a “night watchman” role, tending to modest tasks such as internal and external defense, the mediation of disputes, and certain public works that were not deemed profitable for the individual.

Freeing Competition from the Mercantilist Yoke

Smith’s general attitude also carried over to competition. Following the principles described above, classical liberals believed that price and product adjustments following market interactions among tradesmen (i.e., competition) would automatically maximize social utility. As Smith argued:

In general, if any branch of trade, or any division of labor, be advantageous to the public, the freer and more general the competition, it will always be the more so.

This did not mean that competition occurred in a legal void. Rather, Smith’s point was that there was no need to construct a comprehensive system of competition regulation, as markets would oversee themselves so long as a basic legal and institutional framework was in place and government refrained from actively abetting monopolies. Under this view, the only necessary “competition law” would be those individual laws that made competition possible, such as private property rights, contracts, unfair competition laws, and the laws against government and guild restrictions.

Liberal Political Philosophy: Utilitarian and Deontological Perspectives on Liberty and Individuality

Of course, this sort of volte face in political economy needed to be buttressed by a robust philosophical conception of the individual and the social order. Such ontological and moral theories were articulated in, among others, the Theory of Moral Sentiments and John Stuart Mill’s On Liberty. At the heart of the liberal position was the idea that undue restrictions on human freedom and individuality were not only intrinsically despotic, but also socially wasteful, as they precluded men from enjoying the fruits of the exercise of such freedoms. For instance, infringing the freedom to trade and to compete would rob the public of cheaper goods, while restrictions on freedom of expression would arrest the development of thoughts and ideas through open debate.

It is not clear whether the material or the ethical argument for freedom came first. In other words, whether classical liberalism constituted an ex-post rationalization of a moral preference for individual liberty, or precisely the reverse. The question may be immaterial, as classical liberals generally believed that the deontological and the consequentialist cases for liberty—save in the most peripheral of cases (e.g., violence against others)—largely overlapped.

Conclusion

In sum, classical liberalism offered a holistic, integrated view of societies, markets, morals, and individuals that was revolutionary for the time. The notion of competition as a force to be unshackled—rather than actively constructed and chaperoned—flowed organically from that account and its underlying values and assumptions. These included such values as personal freedom and individualism, along with foundational metaphysical presuppositions, such as the existence of a harmonious natural order that seamlessly guided individual actions for the benefit of the whole.

Where such base values and presumptions are eroded, however, the notion of a largely spontaneous, self-sustaining competitive process loses much of its rational, ethical, and moral legitimacy. Competition thus ceases to be tenable on its “own two feet” and must either be actively engineered and protected, or abandoned altogether as a viable organizing principle. In this sense, the crisis of liberalism the West experienced in the late 19th and early 20th centuries—which attacked the very foundations of classical liberal doctrine—can also be read as a crisis of competition.

In my next post, I’ll discuss the collectivist backlash against liberalism.

In Antitrust & Competition, Economic Theory , , , , , , ,
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How US and EU Competition Law Differ

Sam Bowman, Dirk Auer & Geoffrey Manne —  9 August 2021

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

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

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

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

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

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

Exploitative Abuses

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

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

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

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

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

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

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

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

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

Predatory Pricing

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

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

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

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

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

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

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

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

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

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

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

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

Similarly:

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

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

Refusals to Deal

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

As Justice Scalia wrote in Trinko:

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

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

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

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

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

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

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

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

Vertical Restraints

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

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

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

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

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

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

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

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

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

Political Discretion in European Competition Law

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

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

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

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

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

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

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

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

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

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

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

In Antitrust & Competition, Broadband, Cartels, Constitutional Law, Economic Theory, European Union, Exclusionary Conduct, Exclusive Dealing, Health Care, Intellectual Property, International, International Trade, Pharmaceuticals, Platforms, Price Discrimination, Resale Price Maintenance, Supreme Court, Telecommunications, Truth on the Market, Tying, Vertical Restraints , , , , , , , , , , , , , , , , , , , , , , , , , , , ,
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Four Reasons to Reject Neo-Brandeisian Critiques of the Consumer Welfare Approach to Antitrust

Alden Abbott —  30 March 2021

In the battle of ideas, it is quite useful to be able to brandish clear and concise debating points in support of a proposition, backed by solid analysis. Toward that end, in a recent primer about antitrust law published by the Mercatus Center, I advance four reasons to reject neo-Brandeisian critiques of the consensus (at least, until very recently) consumer welfare-centric approach to antitrust enforcement. My four points, drawn from the primer (with citations deleted and hyperlinks added) are as follows:

First, the underlying assumptions of rising concentration and declining competition on which the neo-Brandeisian critique is largely based (and which are reflected in the introductory legislative findings of the Competition and Antitrust Law Enforcement Reform Act [of 2021, introduced by Senator Klobuchar on February 4, lack merit]. Chapter 6 of the 2020 Economic Report of the President, dealing with competition policy, summarizes research debunking those assumptions. To begin with, it shows that studies complaining that competition is in decline are fatally flawed. Studies such as one in 2016 by the Council of Economic Advisers rely on overbroad market definitions that say nothing about competition in specific markets, let alone across the entire economy. Indeed, in 2018, professor Carl Shapiro, chief DOJ antitrust economist in the Obama administration, admitted that a key summary chart in the 2016 study “is not informative regarding overall trends in concentration in well-defined relevant markets that are used by antitrust economists to assess market power, much less trends in concentration in the U.S. economy.” Furthermore, as the 2020 report points out, other literature claiming that competition is in decline rests on a problematic assumption that increases in concentration (even assuming such increases exist) beget softer competition. Problems with this assumption have been understood since at least the 1970s. The most fundamental problem is that there are alternative explanations (such as exploitation of scale economies) for why a market might demonstrate both high concentration and high markups—explanations that are still consistent with procompetitive behavior by firms. (In a related vein, research by other prominent economists has exposed flaws in studies that purport to show a weakening of merger enforcement standards in recent years.) Finally, the 2020 report notes that the real solution to perceived economic problems may be less government, not more: “As historic regulatory reform across American industries has shown, cutting government-imposed barriers to innovation leads to increased competition, strong economic growth, and a revitalized private sector.”

Second, quite apart from the flawed premises that inform the neo-Brandeisian critique, specific neo-Brandeisian reforms appear highly problematic on economic grounds. Breakups of dominant firms or near prohibitions on dominant firm acquisitions would sacrifice major economies of scale and potential efficiencies of integration, harming consumers without offering any proof that the new market structures in reshaped industries would yield consumer or producer benefits. Furthermore, a requirement that merging parties prove a negative (that the merger will not harm competition) would limit the ability of entrepreneurs and market makers to act on information about misused or underutilized assets through the merger process. This limitation would reduce economic efficiency. After-the-fact studies indicating that a large percentage of mergers do not add wealth and do not otherwise succeed as much as projected miss this point entirely. They ignore what the world would be like if mergers were much more difficult to enter into: a world where there would be lower efficiency and dynamic economic growth because there would be less incentive to seek out market-improving opportunities.

Third, one aspect of the neo-Brandeisian approach to antitrust policy is at odds with fundamental notions of fair notice of wrongdoing and equal treatment under neutral principles, notions that are central to the rule of law. In particular, the neo-Brandeisian call for considering a multiplicity of new factors such as fairness, labor, and the environment when enforcing policy is troublesome. There is no neutral principle for assigning weights to such divergent interests, and (even if weights could be assigned) there are no economic tools for accurately measuring how a transaction under review would affect those interests. It follows that abandoning antitrust law’s consumer-welfare standard in favor of an ill-defined multifactor approach would spawn confusion in the private sector and promote arbitrariness in enforcement decisions, undermining the transparency that is a key aspect of the rule of law. Whereas concerns other than consumer welfare may of course be validly considered in setting public policy, they are best dealt with under other statutory schemes, not under antitrust law.

Fourth, and finally, neo-Brandeisian antitrust proposals are not a solution to widely expressed concerns that big companies in general, and large digital platforms in particular, are undermining free speech by censoring content of which they disapprove. Antitrust law is designed to prevent businesses from creating impediments to market competition that reduce economic welfare; it is not well-suited to policing companies’ determinations regarding speech. To the extent that policymakers wish to address speech censorship on large platforms, they should consider other regulatory institutions that would be better suited to the task (such as communications law), while keeping in mind First Amendment limitations on the ability of government to control private speech.

In light of these four points, the primer concludes that the neo-Brandeisian-inspired antitrust “reform” proposals being considered by Congress should be rejected:

[E]fforts to totally reshape antitrust policy into a quasi-regulatory system that arbitrarily blocks and disincentivizes (1) welfare-enhancing mergers and (2) an array of actions by dominant firms are highly troubling. Such interventionist proposals ignore the lack of evidence of serious competitive problems in the American economy and appear arbitrary compared to the existing consumer-welfare-centric antitrust enforcement regime. To use a metaphor, Congress and public officials should avoid a drastic new antitrust cure for an anticompetitive disease that can be handled effectively with existing antitrust medications.

Let us hope that the serious harm associated with neo-Brandeisian legislative “deformation” (a more apt term than reformation) of the antitrust laws is given a full legislative airing before Congress acts.

In Antitrust & Competition, Constitutional Law, First Amendment, Justice Department, Market Definition, Monopolization, Platforms, Regulation, Regulatory Reform, Truth on the Market, Vertical Restraints , , , , , , , , ,
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Speaking at events next week on privacy/data security and merger enforcement

Geoffrey Manne —  31 May 2017

I’ll be participating in two excellent antitrust/consumer protection events next week in DC, both of which may be of interest to our readers:

5th Annual Public Policy Conference on the Law & Economics of Privacy and Data Security

hosted by the GMU Law & Economics Center’s Program on Economics & Privacy, in partnership with the Future of Privacy Forum, and the Journal of Law, Economics & Policy.

Conference Description:

Data flows are central to an increasingly large share of the economy. A wide array of products and business models—from the sharing economy and artificial intelligence to autonomous vehicles and embedded medical devices—rely on personal data. Consequently, privacy regulation leaves a large economic footprint. As with any regulatory enterprise, the key to sound data policy is striking a balance between competing interests and norms that leaves consumers better off; finding an approach that addresses privacy concerns, but also supports the benefits of technology is an increasingly complex challenge. Not only is technology continuously advancing, but individual attitudes, expectations, and participation vary greatly. New ideas and approaches to privacy must be identified and developed at the same pace and with the same focus as the technologies they address.

This year’s symposium will include panels on Unfairness under Section 5: Unpacking “Substantial Injury”, Conceptualizing the Benefits and Costs from Data Flows, and The Law and Economics of Data Security.

I will be presenting a draft paper, co-authored with Kristian Stout, on the FTC’s reasonableness standard in data security cases following the Commission decision in LabMD, entitled, When “Reasonable” Isn’t: The FTC’s Standard-less Data Security Standard.

Conference Details:

  • Thursday, June 8, 2017
  • 8:00 am to 3:40 pm
  • at George Mason University, Founders Hall (next door to the Law School)
    • 3351 Fairfax Drive, Arlington, VA 22201

Register here

View the full agenda here

 

The State of Antitrust Enforcement

hosted by the Federalist Society.

Panel Description:

Antitrust policy during much of the Obama Administration was a continuation of the Bush Administration’s minimal involvement in the market. However, at the end of President Obama’s term, there was a significant pivot to investigations and blocks of high profile mergers such as Halliburton-Baker Hughes, Comcast-Time Warner Cable, Staples-Office Depot, Sysco-US Foods, and Aetna-Humana and Anthem-Cigna. How will or should the new Administration analyze proposed mergers, including certain high profile deals like Walgreens-Rite Aid, AT&T-Time Warner, Inc., and DraftKings-FanDuel?

Join us for a lively luncheon panel discussion that will cover these topics and the anticipated future of antitrust enforcement.

Speakers:

  • Albert A. Foer, Founder and Senior Fellow, American Antitrust Institute
  • Profesor Geoffrey A. Manne, Executive Director, International Center for Law & Economics
  • Honorable Joshua D. Wright, Professor of Law, George Mason University School of Law
  • Moderator: Honorable Ronald A. Cass, Dean Emeritus, Boston University School of Law and President, Cass & Associates, PC

Panel Details:

  • Friday, June 09, 2017
  • 12:00 pm to 2:00 pm
  • at the National Press Club, MWL Conference Rooms
    • 529 14th Street, NW, Washington, DC 20045

Register here

Hope to see everyone at both events!

In Antitrust & Competition, Data Privacy & Security, Federal Trade Commission, International Center for Law & Economics, Law & Economics, Mergers & Acquisitions, Section 5 , , , , , , , , , , , , , , ,
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FTC v Amazon: With every victory in court the FTC loses a little more

Geoffrey Manne —  27 April 2016

Yesterday a federal district court in Washington state granted the FTC’s motion for summary judgment against Amazon in FTC v. Amazon — the case alleging unfair trade practices in Amazon’s design of the in-app purchases interface for apps available in its mobile app store. The headlines score the decision as a loss for Amazon, and the FTC, of course, claims victory. But the court also granted Amazon’s motion for partial summary judgment on a significant aspect of the case, and the Commission’s win may be decidedly pyrrhic.

While the district court (very wrongly, in my view) essentially followed the FTC in deciding that a well-designed user experience doesn’t count as a consumer benefit for assessing substantial harm under the FTC Act, it rejected the Commission’s request for a permanent injunction against Amazon. It also called into question the FTC’s calculation of monetary damages. These last two may be huge. 

The FTC may have “won” the case, but it’s becoming increasingly apparent why it doesn’t want to take these cases to trial. First in Wyndham, and now in Amazon, courts have begun to chip away at the FTC’s expansive Section 5 discretion, even while handing the agency nominal victories.

The Good News

The FTC largely escapes judicial oversight in cases like these because its targets almost always settle (Amazon is a rare exception). These settlements — consent orders — typically impose detailed 20-year injunctions and give the FTC ongoing oversight of the companies’ conduct for the same period. The agency has wielded the threat of these consent orders as a powerful tool to micromanage tech companies, and it currently has at least one consent order in place with Twitter, Google, Apple, Facebook and several others.

As I wrote in a WSJ op-ed on these troubling consent orders:

The FTC prefers consent orders because they extend the commission’s authority with little judicial oversight, but they are too blunt an instrument for regulating a technology company. For the next 20 years, if the FTC decides that Google’s product design or billing practices don’t provide “express, informed consent,” the FTC could declare Google in violation of the new consent decree. The FTC could then impose huge penalties—tens or even hundreds of millions of dollars—without establishing that any consumer had actually been harmed.

Yesterday’s decision makes that outcome less likely. Companies will be much less willing to succumb to the FTC’s 20-year oversight demands if they know that courts may refuse the FTC’s injunction request and accept companies’ own, independent and market-driven efforts to address consumer concerns — without any special regulatory micromanagement.

In the same vein, while the court did find that Amazon was liable for repayment of unauthorized charges made without “express, informed authorization,” it also found the FTC’s monetary damages calculation questionable and asked for further briefing on the appropriate amount. If, as seems likely, it ultimately refuses to simply accept the FTC’s damages claims, that, too, will take some of the wind out of the FTC’s sails. Other companies have settled with the FTC and agreed to 20-year consent decrees in part, presumably, because of the threat of excessive damages if they litigate. That, too, is now less likely to happen.

Collectively, these holdings should help to force the FTC to better target its complaints to cases of still-ongoing and truly-harmful practices — the things the FTC Act was really meant to address, like actual fraud. Tech companies trying to navigate ever-changing competitive waters by carefully constructing their user interfaces and payment mechanisms (among other things) shouldn’t be treated the same way as fraudulent phishing scams.

The Bad News

The court’s other key holding is problematic, however. In essence, the court, like the FTC, seems to believe that regulators are better than companies’ product managers, designers and engineers at designing app-store user interfaces:

[A] clear and conspicuous disclaimer regarding in-app purchases and request for authorization on the front-end of a customer’s process could actually prove to… be more seamless than the somewhat unpredictable password prompt formulas rolled out by Amazon.

Never mind that Amazon has undoubtedly spent tremendous resources researching and designing the user experience in its app store. And never mind that — as Amazon is certainly aware — a consumer’s experience of a product is make-or-break in the cut-throat world of online commerce, advertising and search (just ask Jet).

Instead, for the court (and the FTC), the imagined mechanism of “affirmatively seeking a customer’s authorized consent to a charge” is all benefit and no cost. Whatever design decisions may have informed the way Amazon decided to seek consent are either irrelevant, or else the user-experience benefits they confer are negligible.

As I’ve written previously:

Amazon has built its entire business around the “1-click” concept — which consumers love — and implemented a host of notification and security processes hewing as much as possible to that design choice, but nevertheless taking account of the sorts of issues raised by in-app purchases. Moreover — and perhaps most significantly — it has implemented an innovative and comprehensive parental control regime (including the ability to turn off all in-app purchases) — Kindle Free Time — that arguably goes well beyond anything the FTC required in its Apple consent order.

Amazon is not abdicating its obligation to act fairly under the FTC Act and to ensure that users are protected from unauthorized charges. It’s just doing so in ways that also take account of the costs such protections may impose — particularly, in this case, on the majority of Amazon customers who didn’t and wouldn’t suffer such unauthorized charges.

Amazon began offering Kindle Free Time in 2012 as an innovative solution to a problem — children’s access to apps and in-app purchases — that affects only a small subset of Amazon’s customers. To dismiss that effort without considering that Amazon might have made a perfectly reasonable judgment that balanced consumer protection and product design disregards the cost-benefit balancing required by Section 5 of the FTC Act.

Moreover, the FTC Act imposes liability for harm only when they are not “reasonably avoidable.” Kindle Free Time is an outstanding example of an innovative mechanism that allows consumers at risk of unauthorized purchases by children to “reasonably avoid” harm. The court’s and the FTC’s disregard for it is inconsistent with the statute.

Conclusion

The court’s willingness to reinforce the FTC’s blackboard design “expertise” (such as it is) to second guess user-interface and other design decisions made by firms competing in real markets is unfortunate. But there’s a significant silver lining. By reining in the FTC’s discretion to go after these companies as if they were common fraudsters, the court has given consumers an important victory. After all, it is consumers who otherwise bear the costs (both directly and as a result of reduced risk-taking and innovation) of the FTC’s largely unchecked ability to extract excessive concessions from its enforcement targets.

In Amazon, Apple, Facebook, Federal Trade Commission, Google, Law & Economics, Platforms, Regulation, Section 5, Twitter , , , , , , , , , , , , ,
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