By Neil Averitt Originally published on FTCWatch™ on March 16, 2018
Right about now, the proponents of a hands-off, business libertarian approach to antitrust enforcement must be wondering whether their recent victories on doctrine and vocabulary have come at too high a cost.
So far they seem to have successfully fended off attacks on their central and favored enforcement model — the “consumer welfare” standard. They have achieved this goal, however, only by broadening the reach of the standard to such an extent that even antitrust activists are now happy with it.
In the last three months there have been at least two major hearings on the goals of the antitrust laws — evidently organized by the libertarian community to head off challenges from the left. (I include in this community the quasi-libertarians at the most free-market end of the Chicago school.) The range of support they received suggests that the libertarians have retained the consensus in favor of the familiar consumer welfare standard.
But this victory comes at a high and ironic cost to their agenda. In order to make the welfare standard seem sufficiently reasonable and attractive to be worth preserving, the libertarians have had to concede that it can take account of a variety of future or non-price effects in an economic analysis. This moves the standard decisively away from the focus on short-term price effects that had been its original stock in trade.
The change opens the door to more aggressive antitrust enforcement, and through that, indirectly, to many of the same social benefits that the libertarians had been trying to remove from the equation.
This is a classic case of a pyrrhic victory. When King Pyrrhus of Epirus surveyed the wreckage on the battlefield of Asculum in southern Italy, where he had just won a costly victory over the Romans, he famously commented: “Another such victory and we are ruined.”
Antitrust issues were put on the table for public discussion in the last US presidential election. For the first time in a hundred years, antitrust was a visible topic in the campaigns. Hillary Clinton’s website promised that she would “address excessive concentration” in major industries; Donald Trump said that the proposed AT&T-Time Warner merger would put too much power “in the hands of too few.”
Seeing the new traction for antitrust issues, other, more intense voices began to call for replacing the consumer welfare standard with other tests, some of which would focus quite directly and explicitly on social goals.
A few examples suggest the tone.
Scholars from the leftist Open Markets Institute (a spinoff from the New America Foundation) have variously proposed that Amazon should be banned from grocery acquisitions, or that a cap should be put on the fees that credit card companies can charge merchants. Congressional Democrats have unveiled a new political platform called “A Better Deal” that promises to revise antitrust standards so that the agencies can consider whether a merger might, among other things, “cut jobs” or “hinder the ability of small businesses and entrepreneurs to compete.”
Antitrust has been down these roads before, leaving most practitioners convinced that broad social goals do not make for disciplined or workable legal standards. The business libertarians were particularly unhappy. Clearly something had to be done to protect the consumer welfare standard.
Who organized the response is not clear, but the name “George Mason” does show up repeatedly in the event programs.
The titles of the events make clear where they were headed. On Dec. 13, 2017, Senator Mike Lee of Utah, the Republican chairing the Senate Judiciary Committee’s antitrust panel, conducted a hearing on “The Consumer Welfare Standard in Antitrust: Outdated or a Harbor in a Sea of Doubt?”
Two months later, on Feb. 16, 2018, the George Mason Law Review hosted a seminar entitled “The Consumer Welfare Standard: From The Antitrust Paradox to Hipster Antitrust.” Safe harbors are good; hipsters are bad.
But then a curious thing happened. At both these events the champions of business libertarianism defended the consumer welfare standard, not on the traditional grounds that it would maximize short-term price benefits, but rather as something that can already take account of a wide variety of other economic factors that also affect consumer welfare, thus making any change of standard unnecessary.
At the George Mason event, it seemed that virtually all the speakers went out of their way to note that the consumer welfare standard would include at least one particular non-price effect, the effect on innovation.
One speaker, Hal Singer, a principal at Economists Incorporated, went on to comment that the innovation factor, while an important part of the standard, had been under-appreciated in recent applications. He noted that there has been no big case since Microsoft to focus on innovation in the context of single-firm conduct.
Singer also noted that the effects on wages had been similarly (although also incorrectly) neglected under the welfare standard. Wage effects, he said, might have been perceived by past antitrust enforcers as an efficiency, particularly if monopsony power were being exercised by firms that did not have similar market power in the markets into which they were selling. But the welfare standard can in fact consider these issues, he said.
At the Senate subcommittee hearing, former Federal Trade Commission member Joshua Wright similarly emphasized that the consumer welfare standard is not limited to short-term price effects. Any such contention is “misguided and clearly incorrect.”
Tad Lipsky, the former Bureau of Competition director, concurred, specifically disputing the view that the consumer welfare standard attracts or requires an undue focus on short-term price effects. Rather, he said, the standard looks to “long-run” value, and to the “dynamic effects” that the disputed conduct may have on the competitive process.
This revisionist history should be taken with a grain of salt, of course.
When the consumer welfare standard was introduced into the enforcement agencies in the 1980s, it came with a laser-like focus on price, and with helpful lectures for the staff on cost curves, allocative efficiency, the welfare triangle, and frictionless entry and exit. It also had a tendency to veer into assessments of total welfare.
To be fair, the Chicagoists did acknowledge, in principle, that other, non-price forms of competition were relevant and should be folded into an assessment of “quality-adjusted price.” Yet in practice, these troublesome, hard-to-quantify factors were generally confined to the footnotes of papers and seldom became the basis for actual decisions.
All of this provided an opening for Diana Moss, the president of the American Antitrust Institute, who spoke at both the recent events. The consumer welfare standard, she said, is perfectly adequate in its modern form, even for the purposes of her own enforcement-leaning organization. It can now take account of factors like innovation (prominent in pharmaceutical markets), quality (prominent in media), or buyer power (no-poach agreements). The real need, in her view, is simply for more committed enforcement.
The Chicagoists’ volte-face was dictated in part by pragmatic considerations. The shortcomings in the pure price focus had become too evident to be sustained. But the change was surely also dictated by principle. One of the attractive features of the Chicago school is its rigor and intellectual honesty — here’s to you, Tim Muris — and a midcourse correction was clearly needed.
But business libertarians are a subset of the Chicago school with a distinctly concrete agenda. The concessions on the consumer welfare standard will deeply undercut that agenda. A wider range of competitive effects can now be invoked in enforcement actions with their explicit blessing. This will still not extend to directly considering social and political values as standards for judgment. However, it will now permit an economic analysis sufficiently broad and sensitive to achieve, indirectly, most of the social benefits that can be fairly asked from antitrust enforcement.
Some of this new scope comes from the new, non-price forms of competition that are now recognized. As described in the hearings, these include effects on innovation, quality, variety, and upstream labor markets. To these might be added some further areas of competition such as customer service and data security.
Along with these new dimensions of competition must come a very important collateral change in the number of firms (and the other characteristics of a market) that antitrust seeks to preserve. For example, the number of firms needed to protect innovation is not necessarily going to be the same — indeed, is almost certainly not the same — as the number needed to protect price competition. Or it could turn out that only certain firms in a product market actively compete in terms of innovation, meaning that the market in that respect is already more concentrated than it first appears.
Even the analysis of basic price effects can be fine-tuned under a more inclusive consumer welfare standard. This may lead to conclusions about prices that will support enforcement actions more strongly than now. A fresh analysis might assess price effects over a longer (or a shorter) term. It might apply different discount rates to future effects. It might make differing demands for reliability in the evidence. It might make different allowances for risks and uncertainties.
Will the agencies actually go in any of these new directions? That remains to be seen. An early test will be to see how many resources their economic offices invest in effectively quantifying the new modes of competition and making them useable in litigation.
What we do know at the moment is that many doors are now open to a more enforcement-oriented economic analysis.
King Phyrrus memorably brought 20 war elephants on his campaign — an effective innovation that suggested a similar tactic to Hannibal 60 years later. Pyrrhus ran into trouble despite that, however. And today the business libertarians are starting to run short on elephants themselves.