So what would populist antitrust policy look like?

26 April 2017 10:41am

By Neil Averitt. Originally published on FTC:Watch on April 21, 2017.

President Donald Trump ran for office and was elected on a platform of populism — a promise to operate the government in the interests of ordinary men and women. Whether he was serious or not remains to be seen.

But the promise itself raises the question: Just what distinctive new elements might show up in a populist antitrust policy?

Let's start with some background concepts. Populism is based on the belief that the law has historically been skewed in favor of the wealthy and well-represented. It aims to shift the balance back toward the ordinary person.

Populist antitrust enforcement would probably reject the "consumer welfare" focus of the Chicago School. It would consider that label fundamentally misleading, focusing too much on total per capita output, and ignoring the equally important question of how that output is distributed among favored and disfavored classes of people.

Populism would also reject "consumer welfare" for a second reason, as being too narrowly focused on people in their single role as consumers. It would aim instead to support people in all the roles they play in a competitive economy — not only as consumers, but also as workers and as proprietors of small businesses.

Populism is a philosophy of governance, however, not a constitutional revolution. It must function within the framework of existing statutes and case law. Non-competition factors like effects on employment and entrepreneurship cannot be a direct part of the antitrust analysis.

They could, however, be a welcome side effect of antitrust policies chosen for other, permissible reasons. As the Supreme Court said in Northern Pacific Railway, the antitrust laws provide the benefits of competition "… while at the same time providing an environment conducive to the preservation of our democratic political and social institutions."

Populist enforcement would look for antitrust topics that lend themselves to these kinds of positive externalities. Promising areas might include mergers, vertical restraints, price discrimination, and occupational licensure.

The first thing populist antitrust would do is to downgrade the importance of efficiencies in merger analysis. Existing policy rests on the tacit assumption that most mergers are efficient and beneficial. This is why the initial horizontal mergers in an industry are accepted, even though they inevitably reduce competition on the margin. The problem is that this analysis leads inexorably toward high levels of concentration. Often there will be only three firms left in the market before the agencies have to acknowledge that market power has become an offsetting concern. But even the earlier steps toward concentration have costs for ordinary people. They can lead to massive layoffs as the merged firms turn to mass-producing a uniform product, and harm to regional cities where the acquired firms had been headquartered.

Populist antitrust enforcement would take a more nuanced view of efficiencies, asking just how large they are, and how they compare with the social costs imposed. It sees this broad weighing of costs and benefits as essential to responsible government. If a merger produces a large efficiency of, say, 20 percent, it is likely to be seen favorably. But if it produces an efficiency of only 1 percent, and has other social costs, it might be opposed. This could be done quite legitimately through the more aggressive use of existing legal principles. A small short-term efficiency could easily be outweighed by uncertainties and risks to competition, for which due allowance should be made; or by anticipated longer-term inefficiencies caused by diminished variety and diminished capacity for competitive innovation going forward.

These theories have been discussed in previous columns under the titles of "n+1"and "consumer choice".

This is a real issue. Some have argued that efficiencies have only limited weight in merger litigation. Efficiencies are of immense practical importance, however, in the agencies' internal deliberations on which deals to challenge in the first place. Moreover, with experience, populist-leaning agencies may begin to establish tighter presumptions against certain mergers, with the parties then having the burden of affirmatively showing their benefits.

Populist antitrust enforcement would similarly limit the role of efficiencies in vertical restraint cases.

Antitrust enforcers have long introduced the topic of vertical restraints with a sheepish admission that of course they can produce important efficiencies. Exclusive dealing contracts are therefore commonly permitted as long as they foreclose no more than 40 percent of a distribution channel. However, allowing this much foreclosure produces costs of its own: it can limit not only the numbers of disfavored manufacturers, but of disfavored retailers as well, and can clog the essential function of new entry.

A populist program would quantify the value of efficiencies here as well, asking how large their benefits actually are in relation to their costs. And where the social costs are too high, the agencies would exercise prosecutorial discretion to challenge the restraints, relying, where the facts warrant, on the longer-term risk to innovation that the entry restrictions cause.

This would be a real change. Vertical restraints are supposed to be judged by the rule of reason, but in practice the courts have been very reluctant to actually balance pros and cons — as the DC Circuit's opinion in Microsoft clearly showed.

To facilitate this sort of analysis, populist enforcement might rethink the institutional role of economists. This does not imply diminishing the role of economics overall. The question is what kinds of economists would be helpful in the agencies' mission.

The current generation of industrial organization microeconomists focuses, as we have seen, on what they sometimes term "consumer welfare," or, more correctly, total welfare — the simple maximization of goods and services. They do not look so much at how that output is allocated among members of society. (Nor do they easily look at consequences for non-price competition; consider how airline mergers helped pave the way to the United debacle.) To counterbalance this disposition, a populist administration might begin to recruit additional economists from specialties having more interest in questions of allocation, such as political economists or, on consumer protection issues, behavioral economists.

No discussion of populist enforcement would be complete without mentioning the Robinson-Patman Act, the statute which prohibits price discrimination among retailers.

Doing sensible things in this area will require self-knowledge. On the one hand, the agencies' refusal to enforce the act has contributed to unambiguous social ills — the devastation of Main Street entrepreneurs and the loss of small-town civic life, for which the presence of a discount house on the edge of town cannot fully compensate. On the other hand, the cost savings in big-box distribution are clearly substantial, and it's also clear that no government agency has the resources to review all the purchase contracts they make.

What populism needs is a way to focus R-P thinking, to concentrate it on the truly problematic areas. One possible approach was suggested by the FTC's decision in McCormick Spices and the Supreme Court's in Volvo Trucks. Price discrimination matters will be particularly worrisome where there is market power somewhere in the picture, on either the buyer or the seller side.

Occupational licensure is another area where antitrust law can protect people in their role as small-business entrepreneurs. When self-interested members of a profession gain control over a regulatory board, and become able to restrict access into the field, more than just consumers are hurt. So too are the people who would otherwise have gone to work in that occupation.

The Supreme Court gave the agencies a tool to challenge these practices with its decision in North Carolina Dentists. That held that the actions of such boards can be treated as horizontal conspiracies, unprotected by state action immunity, unless they are reviewed by a neutral party somewhere else in state government. The FTC is pursuing at least advocacy in this area through its new "Economic Liberty" program. That is the only element of a distinctively populist antitrust policy to have been announced so far; this initiative would of course be continued.

Finally, a word about consumer protection. If populist enforcement is aimed at protecting the little guy, it will need to do so in terms that are effective for the little guy.

This may call for prohibiting certain forms of exploitative conduct, rather than merely requiring more elaborate and lawyerly disclosures. Disclosures don't always work well in complex transactions. The man in the street is not verbally sophisticated. A populist FTC might therefore rethink things like the recent minimal disclosure that safety recalls "may" not have been performed on used cars. It might want to adopt an outright ban on such sales, or at least a more helpful form of disclosure.

Are any of these things likely to happen?

For the last 40 years antitrust has tilted toward business, as risks and presumptions were allocated in its favor. Now there could be a new agenda, resolving risks and ambiguities in the other direction. That will depend on the beliefs of the agency managers, and the direction from the White House. We cannot predict the likelihood of that outcome. But we can make a reasonable guess about what it would look like if it happens.

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