The Federal Trade Commission’s scrutiny of Microsoft’s acquisition of game producer Activision-Blizzard did not end as planned. Judge Jacqueline Scott Corley, a Biden appointee, denied the FTC’s motion for preliminary injunction, ruling that the merger was in the public interest. At the time of this writing, the FTC has pursued an appeal of that decision to the Ninth Circuit, identifying numerous reversible legal errors that the Ninth Circuit will assess de novo.
But even critics of Judge Corley’s opinion might find agreement on one aspect: the relative lack of enforcement against anticompetitive vertical mergers in the past 40+ years. As Corley’s opinion correctly observes, United States v. AT&T Inc, 916 F.3d 1029 (D.C. Circuit 2019), is the only court of appeals decision addressing a vertical merger in decades. Absent evolution of the law to account for, among other recent phenomena, the unique nature of technology-enabled content platforms, the starting point for Corley’s opinion is misplaced faith in case law that casts vertical mergers as inherently pro-competitive.
As with horizontal mergers, the FTC and Department of Justice have historically promulgated vertical merger guidelines that outline analytical techniques and enforcement policies. In 2021, the Federal Trade Commission withdrew the 2020 Vertical Merger Guidelines, with the stated intent of avoiding industry and judicial reliance on “unsound economic theories.” In so doing, the FTC committed to working with the DOJ to provide guidance for vertical mergers that better reflects market realities, particularly as to various features of modern firms, including in digital markets.
The FTC’s challenge to Microsoft’s proposed $69 billion acquisition of Activision, the largest proposed acquisition in the Big Tech era, concerns a vertical merger in both existing and emerging digital markets. It involves differentiated inputs—namely, unique content for digital platforms that is inherently not replaceable. The FTC’s theories of harm, Judge Corley’s decision, and the now-pending appeal to the Ninth Circuit provide key insights into how the FTC and DOJ might update the Vertical Merger Guidelines to stem erosion of legal theories that are otherwise ripe for application to contemporary and emerging markets.
Beware of must-have inputs
In describing a vertical relationship, an “input” refers to goods that are created “upstream” of a distributor, retail, or manufacturer of finished goods. Take for instance the production and sale of tennis shoes. In the vertical relationship between the shoe manufacturer and the shoe retailer, the input is the shoe itself. If the shoe manufacturer and shoe retailer merge, that’s called a vertical merger—and the input in this example, tennis shoes, is characteristic of a replaceable good that vertical merger scrutiny has conventionally addressed. If such a merger were to occur and the newly-merged firm sought to foreclose rival shoe retailers from selling its shoes, rival shoe retailers would likely seek an alternative source for tennis shoes, assuming the availability of such an alternative.
When it comes to assessing vertical mergers in digital content markets, not all inputs are created equal. To the contrary, online platforms, audio and video streaming platforms, and—in the case of Microsoft’s proposed acquisition of Activision—gaming platforms all rely on unique intellectual property that cannot simply be replicated if a platform’s access to that content is restricted. The ability to foreclose access to differentiated content that flows from the merger of a content creator and distributor creates a heightened concern of anticompetitive effects, because rivals cannot readily switch to alternatives to the foreclosed product. This is particularly true when the foreclosed content is extremely popular or “must-have,” and where the goal of the merged firm is to steer consumers toward the platform where it is exclusively available. (See also Steven Salop, “Invigorating Vertical Merger Enforcement,” 127 Yale L.J. 1962 (2018).)
The 2020 Vertical Merger Guidelines fall short in their analysis of mergers involving highly differentiated products. The guidelines emphasize that vertical mergers are pro-competitive when they eliminate “double marginalization,” or mark-ups that independent firms claim at different levels of the distribution chain. For example, when game consoles purchase content from game developers, they may decide to add a mark-up on that content before offering it for consumer consumption. (In the real world of predatory pricing and cross-subsidization, the incentive to add such a mark-up is a more complex business calculation.) Theoretically, the elimination of those markups creates an incentive to lower prices to the end consumer.
But this narrow focus on elimination of double marginalization—and theoretical downward price pressure for consumers—ignores how the reduction in competition among downstream retailers for access to those inputs can also degrade the quality of the input. Let’s take Microsoft-Activision as an example. As an independent firm, Activision creates games and downstream consoles engage in some form of competition to carry those games. When consoles compete on terms to carry Activision games, the result to Activision includes greater investment in game development and higher quality games. When Microsoft acquires Activision, that downstream competition for exclusive or first-run access to Activision’s games is diminished. Gone is the pro-competitive pressure created by rival consoles bidding for exclusivity, as is the incentive for Activision to innovate and demand greater third-party investment in higher quality games.
Emphasizing the pro-competitive effects of eliminating double marginalization—even if that means lower prices to consumers—only provides half of the picture, because consumers will likely be paying for lower quality games. Previous iterations of the Vertical Merger Guidelines emphasize the consumer benefits of eliminating double marginalization, but they stop short of assessing the countervailing harms of mergers involving differentiated inputs. They should be updated accordingly.
Partial foreclosure will suffice
During the evidentiary hearings in the Northern District of California, the FTC repeatedly pushed back against the artificially high burden of having to prove that Microsoft had an incentive to fully foreclose access to Activision games. In the midst of an exchange during the FTC’s closing arguments, FTC’s counsel put it directly: “I don’t want to just give into the full foreclosure theory. That’s another artificially high burden that the Defendants have tried to put on the government.” And yet, in her decision, Judge Corley conflates the analysis for both full and partial foreclosure, writing, “If the FTC has not shown a financial incentive to engage in full foreclosure, then it has not shown a financial incentive to engage in partial foreclosure.”
Although agencies have acknowledged that the incentive to partially foreclose may exist even in the absence of total foreclosure (see, for instance, the FCC’s 2011 Order regarding the Comcast-NBCU vertical transaction), the Vertical Merger Guidelines do not make any such distinction. Again, that incomplete analysis hinges in part on the failure to distinguish between types of inputs. Take for instance a producer of oranges merging with a firm that makes orange juice. Theoretically, the merged firm might fully foreclose access to oranges to rival orange juice makers, who may then go in search for alternative sources of oranges. Or the merged firm might supply lower quality produce to rival firms, which may again send it in search of an alternative source.
But a merged firm’s ability and incentive to foreclose looks different when foreclosure takes the subtler form of investing less in the functionality of game content with a gaming console, subtly degrading game features, or adding unique features to the merged firm’s platforms in ways that will eventually drive more astute gamers to the merged firm (even though the game in question is technically still available on rival consoles). Such eventualities are perhaps easier to imagine in the context of other content platforms—for example, if news content were less readable on one social media platform than another. When a merged firm has unilateral control over those subtle design and development decisions, the ability and incentive to engage in more subtle forms of anticompetitive partial foreclosure is more likely and predictable.
In finding that Microsoft would not have a financial incentive to fully foreclose access to Activision games, Judge Corley’s analysis hinges on a near-term assessment of Microsoft’s financial incentive to elicit game sales by keeping games on rival consoles. (Never mind that Microsoft is a $2.5 trillion corporation that can afford near-term losses in service of its longer-view monopoly ambitions.) Regardless, a theory of partial foreclosure does not mean that Microsoft must forgo independent sales on rival consoles to achieve its ambitions. To the contrary, partial foreclosure would still allow users to purchase and play games on rival consoles. But it also allows for Microsoft’s incentive to gradually encourage consumers to use its own console or game subscription service for better game play and unique features.
Finally, Judge Corley’s analysis of Microsoft’s incentive to fully foreclosure is irresponsibly deferential to statements made by Activision Blizzard CEO Bobby Kotick that the merging entities would suffer “irreparable reputational harm” if games were not made available on rival consoles. Again, by conflating the incentives for full and partial foreclosure, the court ignores Microsoft’s ability to mitigate that reputational harm—while continuing to drive consumers to its own platforms—if foreclosure is only partial.
Rejecting private behavioral remedies
In a particularly convoluted passage in the district court’s order, the Court appears to read an entirely new requirement into the FTC’s initial burden of demonstrating a likelihood of success on the merits—namely, that the FTC must assess the adequacy of Microsoft’s proposed side agreements with rival consoles and third-party platforms to not foreclose access to Call of Duty. Never mind that these side agreements lack any verifiable uniformity, are timebound, and cannot possibly account for incentives for partial foreclosure. Yet, the Court takes at face value the adequacy of those agreements, identifying them as the principal evidence of Microsoft’s lack of incentive to foreclose access to just one of Activision’s several AAA games.
In its appeal to the Ninth Circuit, the FTC seizes on this potential legal error as a basis for reversal. The FTC writes, “in crediting proposed efficiencies absent any analysis of their actual market impact, the district court failed to heed [the Ninth Circuit’s] observation ‘[t]he Supreme Court has never expressly approved an efficiencies defense to a Section 7 claim.’” The FTC argues that Microsoft’s proposed remedies should only have been considered after a finding of liability at the subsequent remedy stage of a merits proceeding, citing the Supreme Court’s decision in United States v. Greater Buffalo Press, Inc., 402 U.S. 549 (1971). Indeed, federal statute identifies the Commission as the expert body equipped to craft appropriate remedies in the event of a violation of the antitrust laws.
In its statement withdrawing the 2020 Vertical Merger Guidelines, the FTC announced it would work with the Department of Justice on updating the guidelines to address ineffective remedies. Presumably, the district court’s heavy reliance on Microsoft’s proposed behavioral remedies is catalyst enough to clarify that they should not qualify as cognizable efficiencies, at least at the initial stages of a case brought by the FTC or DOJ.
If this decision has taught us anything, it is that the agencies can’t come out with the new Merger Guidelines fast enough. In particular, those guidelines must address the competitive harms that flow from the vertical integration of differentiated content and digital media platforms. Even so, updating the guidelines may be insufficient to shift a judiciary so hostile to merger enforcement that it will turn a blind eye to brazen admissions of a merging firm’s monopoly ambitions. If that’s the case, we should look to Congress to reassert its anti-monopoly objectives.
Lee Hepner is Legal Counsel at the American Economic Liberties Project.
At some point soon, the Federal Trade Commission is very likely to sue Amazon over the many ways the e-commerce giant abuses its power over online retail, cloud computing and beyond. If and when it does, the agency would be wise to lean hard on the useful and powerful law at the core of its anti-monopoly authority.
The agency’s animating statute, the Federal Trade Commission Act and its crucial Section 5, bans “unfair methods of competition,” a phrase Congress deliberately crafted, and the Supreme Court has interpreted, to give the agency broad powers beyond the traditional antitrust laws to punish and prevent the unfair, anticompetitive conduct of monopolists and those companies that seek to monopolize industries.
Section 5 is what makes the FTC the FTC. Yet the agency hasn’t used its most powerful statute to its fullest capability for years. Today, with the world’s most powerful monopolist fully in the commission’s sights, the time for the FTC to re-embrace its core mission of ensuring fairness in the economy is now.
The FTC appears to agree. Last year, the agency issued fresh guidance for how and why it will enforce its core anti-monopoly law, and the 16-page document read like a promise to once again step up and enforce the law against corporate abuse just as Congress had intended.
Why Section 5?
The history of the Section 5—why Congress included it in the law and how lawmakers expected it to be enforced—is clear and has been spelled out in detail: Congress set out to create an expert antitrust agency that could go after bad actors and dangerous conduct that the traditional anti-monopoly law, the Sherman Act, could not necessarily reach. To do that, Congress crafted Section 5 so that the FTC could stop tactics that dominant corporations devise to sidestep competition on the merits and instead unfairly drive out their competitors. Congress gave the FTC the power to enforce the law on its own, to stop judges from hamstringing the law from the bench, as they have done to the Sherman Act.
As I’ve detailed, the Supreme Court has issued scores of rulings since the 1970s that have collectively gutted the ability of public enforcement agencies and private plaintiffs to sue monopolists for their abusive conduct and win. These cases have names—Trinko, American Express, Brooke Group, and so on—and, together, they dramatically reshaped the country’s decades-old anti-monopoly policy and allowed once-illegal corporate conduct to go unchecked.
Many of these decisions are now decades old, but they continue to have outsized effects on our ability to policy monopoly abuses. The Court’s 1984 Jefferson Parish decision, for example, made it far more difficult to successfully prosecute a tying case, in which a monopolist in one industry forces customers to buy a separate product or service. The circuit court in the government’s monopoly case against Microsoft relied heavily on Jefferson Parish in overturning the lower court’s order to break Microsoft up. More recently, courts deciding antitrust cases against Facebook, Qualcomm and Apple all relied on decades of pro-bigness court rulings to throw out credible monopoly claims against powerful defendants.
Indeed, the courts’ willingness to undermine Congress was a core concern for lawmakers when drafting and passing Section 5. Three years before Congress created the FTC, the U.S. Supreme Court handed down its verdict in the government’s monopoly case against Standard Oil, breaking up the oil trust but also establishing the so-called “rule of reason” standard for monopoly cases. That standard gave judges the power to decide if and when a monopoly violated the law, regardless of the language of, or democratic intent behind, the Sherman Act. Since then, the courts have marched the law away from its goal of constraining monopoly power, case by case, to the point that bringing most monopolization cases under the Sherman Act today is far more difficult than it should be, given the simple text of the law and Congress’ intent when it wrote, debated, and passed the act.
That’s the beauty and the importance of Section 5. Congress knew that the judicial constraints put on the Sherman Act meant it could not not reach every monopolistic act in the economy. That’s now truer than ever. Section 5 can stop and prevent unfair, anticompetitive acts without having to rely on precedent built up around the Sherman Act. It’s a separate law, with a separate standard and a separate enforcement apparatus. What’s more, the case law around Section 5 has reinforced the agency’s purview. In at least a dozen decisions, the Supreme Court has made clear that Congress intended for the law to reach unfair conduct that falls outside of the reach of the Sherman Act.
So the law is on solid footing, and after decades of sidestepping the job Congress charged it to do, the FTC appears ready to once again take on abuses of corporate power. And not a moment too soon. After decades of inadequate antitrust enforcement, unfairness abounds, particularly when it comes to the most powerful companies in the economy. Amazon perches atop that list.
A Recidivist Violator of Antitrust Laws
Investigators and Congress have repeatedly identified Amazon practices that appear to violate the spirit of the antitrust laws. The company has a long history of using predatory pricing as a tactic to undermine its competition, either as a means of forcing companies to accept its takeover offers, as it did with Zappos and Diapers.com, or simply as a way to weaken vendors or take market share from competing retailers, especially small, independent businesses. Lina Khan, the FTC’s chair, has called out Amazon’s predatory pricing, both in her seminal 2017 paper Amazon’s Antitrust Paradox, and when working for the House Judiciary Committee during its big tech monopoly investigation.
Under the current interpretation of predatory pricing as a violation of the Sherman Act, a company that priced a product below cost to undercut a rival must successfully put that rival out of business and then hike up prices to the point that it can recoup the money it lost with its below-cost pricing. Yet with companies like Amazon—big, rich, with different income streams and sources of capital—it might never need to make up for its below-cost pricing by hiking up prices on any one specific product, let alone the below-cost product. Indeed, as Jeff Bezos’s vast fortune can attest, predatory pricing can generate lucrative returns simply by sending a company’s stock price soaring as it rapidly gains market share.
If Amazon wants to sell products from popular books to private-label batteries at a loss, it can. Amazon makes enormous profits by taxing small businesses on its marketplace platform and from Amazon Web Services. It can sell stuff below cost forever if it wants to–a clearly unfair method of competing with any other single-product business–all while avoiding prosecution under the judicially weakened Sherman Act. Section 5 can and should step in to stop such conduct.
Amazon’s marketplace itself is another monopolization issue that the FTC could and should address with Section 5. The company’s monopoly online retail platform has become essential for many small businesses and others trying to reach customers. To wit, the company controls at least half of all online commerce, and even more for some products. As an online retail platform, Amazon is essential, suggesting it should be under some obligation to allow equal access to all users at minimal cost. Of course, that’s not what happens; as my organization has documented extensively, Amazon’s captured third-party sellers pay a litany of tolls and fees just to be visible to shoppers on the site. Amazon’s tolls can now account for more than half of the revenues from every sale a small business makes on the platform.
The control Amazon displays over its sellers mirrors the railroad monopolies of yesteryear, which controlled commerce by deciding which goods could reach buyers and under what terms. Antitrust action under the Sherman Act and legislation helped break down the railroad trusts a century ago. But if enforcers were to declare Amazon’s marketplace an essential facility today, the path to prosecution under the Sherman Act would be difficult at best.
Section 5’s broad prohibition of unfair business practices could prevent Amazon’s anticompetitive abuses. It could ban Amazon from discriminating against companies that sell products on its platform that compete with Amazon’s own in-house brands, or stop it from punishing sellers that refuse to buy Amazon’s own logistics and advertising services by burying their products in its search algorithm. The FTC could potentially challenge such conduct under the Sherman Act, as a tying case, or an essential facilities case. But again, the pathway to winning those cases is fraught, even though the conduct is clearly unfair and anticompetitive. If Amazon’s platform is the road to the market, then the rules of that road need to be fair for all. Section 5 could help pave the way.
These are just a few of the ways we could see the FTC use its broad authority under Section 5 to take on some of Amazon’s most egregious conduct. If I had to guess, I imagine the FTC in a potential future Amazon lawsuit will likely charge the company under both the Sherman Act and the FTC Act’s Section 5 for some conduct it feels the traditional anti-monopoly statute can reach, and will rely solely on Section 5 for conduct that it believes is unfair and anticompetitive, but beyond the scope of the Sherman Act in its current, judicially constrained form. For example, while the FTC could potentially use the Sherman Act to address Amazon’s decision to tie success on its marketplace to its logistics and advertising services, the agency’s statement makes clear that Section 5 has been and can be used to address “loyalty rebates, tying, bundling, and exclusive dealing arrangements that have the tendency to ripen into violations of the antitrust laws by virtue of industry conditions and the respondent’s position within the industry.”
Might this describe Amazon’s conduct? Very possibly, but that will ultimately be up to the FTC to decide. Suing Amazon under both statutes would invite the court to make better choices around the Sherman Act that are more critical of monopoly abuses, and help develop the law so that the FTC can eagerly embark on its core mission under Section 5: to help ensure markets are fair for all.
Ron Knox is a Senior Researcher and Writer for ILSR’s Independent Business Initiative.
For those not steeped in antitrust law’s treatment of single-firm monopolization cases, under the rule-of-reason framework, a plaintiff must first demonstrate that the challenged conduct by the defendant is anticompetitive; if successful, the burden shifts to the defendant in the second or balancing stage to justify the restraints on efficiency grounds. According to research by Professor Michael Carrier, between 1999 and 2009, courts dismissed 97 percent of cases at the first stage, reaching the balancing stage in only two percent of cases.
There is a fierce debate in antitrust circles as to what constitutes a cognizable efficiency. In April, the Ninth Circuit upheld Judge Yvonne Gonzalez Rogers’ dismissal of Epic Game’s antitrust case against Apple on the flimsiest of efficiencies.
A brief recap of the case is in order, beginning with the challenged conduct. Epic alleged Apple forces certain app developers to pay monopoly rents and exclusively use its App Store, and in addition requires the use of Apple’s payment system for any in-app purchases. The use of Apple’s App Store, and the prohibition on a developer loading its own app store, as well as the required use of Apple’s payment system are set forth in several Apple contracts developers must execute to operate on Apple’s iOS. The Ninth Circuit found that Epic met its burden of demonstrating an unreasonable restraint of trade, but Epic’s case failed because Apple was able to proffer two procompetitive rationales that the Appellate Court held were non-pretextual and legally cognizable. One of those justifications was that Apple prohibited competitive app stores and required developers to only use Apple’s payment system because it was protecting its intellectual property (“IP”) rights.
Yet neither the District Court nor the Ninth Circuit ever tell us what IP Apple’s restraints are protecting. The District Court opinion states that “Apple’s R&D spending in FY 2020 was $18.8 billion,” and that Apple has created “thousands of developer tools.” But even Apple disputes in a recent submission to the European Commission that R&D has any relationship to the value of IP: “A patent’s value is traditionally measured by the value of the claimed technology, not the amount of effort expended by the patent holder in obtaining the patent, much less ‘failed investments’ that did not result in any valuable patented technology.”
Moreover, every tech platform must invest something to encourage participation by developers and users. Without the developers’ apps, however, there would be few if any device sales. If all that is required to justify exclusion of competitors, as well tying and monopolization, is the existence of some unspecified IP rights, then exclusionary conduct by tech platforms for all practical purposes becomes per se legal. Plaintiffs challenging these tech platform practices on antitrust grounds are doomed from the start. Even though the plaintiff theoretically can proffer a less restrictive alternative for the tech platform owners to monetize their IP, this alternative per the Ninth Circuit must be “virtually as effective” and “without increased cost.” Again, the deck was already stacked against plaintiffs, and this decision risks making it even less likely for abusive monopolists to be held to account.
Ignoring the Economic Literature on IP
In addition to bestowing virtual antitrust immunity on tech platforms in rule-of-reason cases, there are important reasons why IP should never qualify as a procompetitive business justification for exclusionary conduct. Had the Ninth Circuit consulted the relevant economic literature, it would have learned that IP is fundamentally not procompetitive. Indeed, there is virtually no evidence that patents and copyrights, particularly in software, incentivize or create innovation. As Professors Michele Boldrin and David Levine conclude, “there is no empirical evidence that [patents] serve to increase innovation and productivity…” This same claim could be made for the impact of copyrights as well. Academic studies find little connection between patents, copyright, and innovation. Historical analysis similarly disputes the connection. Surveys of companies further find that the goals of patenting are not primarily to stimulate innovation but instead the “prevention of rivals from patenting related inventions.” Or, in other words, the creation of barriers to entry. Innovation within individual firms is motivated much more by gaining first-mover advantages, moving quickly down the learning curve or developing superior sales and marketing in competitive markets. As Boldrin and Levine explain:
In most industries, the first-mover advantage and the competitive rents it induces are substantial without patents. The smartphone industry-laden as it is with patent litigation-is a case in point. Apple derived enormous profits in this market before it faced any substantial competition.
Possibly even more decisive for innovation are higher labor costs that result from strong unions. Other factors have also been found to be important for innovation. The government is responsible for 57 percent of all basic research, research that has been the foundation of the internet, modern agriculture, drug develop, biotech, communications and other areas. Strong research universities are the source of many more significant innovations than private firms. Professor Margaret O’Mara’s recent history of Silicon Valley demonstrates how military contracts and relationships with Stanford University were absolutely critical to the Silicon Valley success story. Her book reveals the irony of how the Silicon Valley leaders embraced libertarian ideologies while at the same time their companies were propelled forward by government contracts.
In an earlier period, the antitrust agencies ordered thousands of compulsory licensing decrees, which were estimated to have covered between 40,000 and 50,000 patents. Professor F.M. Scherer shows how these licenses did not lead to less innovation. Indeed, the availability of this technology led to significant economic advances in the United States. In his book, “Inventing the electronic Century,” Professor Alfred Chandler documents how Justice Department consent decrees with RCA, AT&T and IBM, which made important patents available to even rivals, created enormous competition and innovation in data processing, consumer electronics, and telecommunications. The evidence is that limiting or abolishing patent protection has far more beneficial impact than its protection, let alone allowing its use to justify anticompetitive exclusion.
Probably the weakest case for the economic value of patents exists in the software industry. Bill Gates, reflecting on patents in the software industry said in 1991 that:
If people had understood how patents would be granted when most of today’s ideas were invented and had taken out patents, the industry would be at a complete standstill today…A future start-up with no patents of its own will be forced to pay whatever price the giants choose to impose.
The point is that there is very little support for antitrust courts to elevate IP to a justification for market exclusion. The case for procompetitive benefits from patents is nonexistent, while much evidence supports an exclusionary motive for obtaining IP by big tech firms.
As Professors James Bessen and Michael Meurer show, patents on software are particularly problematic because they have high rates of litigation, are of little value, and many appear to be trivial. In particular, Bessen and Meurer argue that many software patents are obvious and therefore invalid. Moreover, the claim boundaries are “fuzzy” and therefore infringement is expensive to resolve.
When asserted in a rule-of-reason case under the Apple precedent, software patents would seem to escape all scrutiny. The defendant would simply assert IP protection without any obligation to reveal with specificity the nature of the IP. The plaintiff then would have no way to challenge validity or infringement or to be able to demonstrate an ability to design around the defendant’s IP. Instead, they must show, per the Ninth Circuit’s opinion, that there is a less restrictive way for the plaintiff to be paid for its IP that is “virtually as effective” and “without increased cost.” This makes no sense at all. It would make far more sense to force any tech platform that seeks to exclude competitors on the basis of IP to simply file a counterclaim to the antitrust complaint alleging patent or copyright infringement and seeking an injunction that excludes the plaintiff. In such a case, the platform’s IP can be tested for validity. The exclusion by the antitrust defendant can be compared to the patent grant, and patent misuse can be examined.
Ignoring Its Own Precedent
It is unfortunate that the Apple court did not take seriously the Circuit’s earlier analysis in Image Technical Services v. Eastman Kodak. There, Kodak defended its decision to tie its parts and service in the aftermarket by claiming that some of its parts were patented. The Court noted that “case law supports the proposition that a holder of a patent or copyright violates the antitrust laws by ‘concerted and contractual behavior that threatens competition.’” The Kodak Court’s example of such prohibited conduct was tying, a claim made by Epic. Because we know that there are numerous competing payment systems, and because nothing in the Ninth Circuit’s opinion addresses the specifics of Apple’s IP that must be protected, it is likely the case that Apple does not have blocking patents that preclude use of alternative payment systems. And if this is the case, Epic alleged the very situation where the Ninth Circuit earlier (citing Supreme Court precedent) found that patents or copyrights violate the antitrust laws. Moreover, the Ninth Circuit thought it was significant that Kodak refused to allow use of both patented or copyrighted products and non-protected products. This may also be true of Apple’s development license in the Epic case. The Court didn’t seem to think that an inquiry into what IP was licensed by these agreements to be significant.
In sum, use of IP as a procompetitive business justification has no place in rule-of-reason cases. There is no evidence IP is procompetitive, and use of IP as a business justification relieves the antitrust defendant of the burden to demonstrate validity and infringement required in IP cases. It further stacks the deck in rule-of-reason cases against plaintiffs, and unjustly favors exclusionary practices by dominant tech platforms.
Mark Glick is a professor in the economics department of the University of Utah.
In recent years, economists have become increasingly interested in the study of monopsony power. Such research has indicated that monopsony power does indeed exist. Furthermore, where it exists the gains to workers suffer.
Much of this research has ignored what sports economists have known for decades. The study of sports taught economists who were paying attention that enhancing the market power of labor clearly results in a larger share of the pie going from owners to workers. Conversely, reducing labor’s market power increases the gains of owners.
This should be well understood by anyone (i.e., both economists and non-economists) who takes the time to look at sports. What is less well understood is the role rules designed to ensure competitive balance play in this process.
To wit, The Economist recently asked whether Europeans or Americans had built the better sports business model. The European approach emphasizes the free market. There are no caps on player pay, no player drafts, and losers in each level are literally kicked out of the league. In contrast, American sports leagues restrict how much athletes can be paid. And not only do the losers stay in the league, but they are also rewarded with better draft picks.
So, which approach is best? The answer depends upon who you are in the business.
Consider the story of Brittney Griner. Perhaps the biggest sports story in the past year was Griner’s Russian imprisonment. For 294 days, Griner was, according to the U.S. State Department, wrongfully detained by Russian authorities. One question people asked when this story broke is why was an American basketball player in Russia in the first place?
Griner was not in Russia on vacation. She was there to work. For many years it has been quite common for WNBA players to take a second job in another league outside the United States. Historically this has happened because—as Griner has argued in the past —the WNBA doesn’t pay particularly well. . In contrast, annual pay in Russia for a players like Griner often exceeded $1 million.
To understand why Griner is paid so little by the WNBA, a little league history is in order. In 1997, David Stern and the NBA launched the WNBA. At that time, the NBA already had a player draft, a cap on team payroll, and a cap on rookie pay. Two years later, the NBA added a cap on individual player salaries. Today the WNBA—like its NBA partner but very much unlike its Russian counterpart—employs all of these institutions. However, the labor market design in the WNBA, as Griner and the other members of the WNBA have learned, is much more restrictive than the men’s NBA.
Consider the player draft. Fans of professional sports in North America are often quite interested and excited about the annual drafts that exist in many leagues. What is often lost in the excitement, though, is what this means for the individual athlete. Once a team selects a player, that player can only negotiate with that team. And the future of their career often depends crucially on whether or not they truly fit in with the organization that has chosen them. If the fit is poor, an athlete’s career can be seriously harmed.
In the NBA, this is the gamble that faces the 60 players selected. For the undrafted, draft night may not be a happy experience. But for them an opportunity now exists that isn’t available to the drafted. The undrafted player with multiple offers can choose the team that is the better fit. In sum, labor market choice benefits the worker.
The WNBA also has a player draft. But the structure of the WNBA limits the likelihood an undrafted player would ever find any employment at all. In the NBA there are 30 teams with 15 roster spots. So, the 60 drafted players each year enter a league with 450 potential positions. Or to put it another way, the drafted are 13 percent of the possible jobs. The WNBA has 12 teams with only 12 roster spots, leaving only 144 potential positions. The WNBA draft, though, has three rounds with 36 players selected. This means, the players drafted by the WNBA are 25 percent of all potential jobs. Consequently, in the WNBA, many drafted players do not end up with jobs. Obviously, the undrafted also likely end up unemployed as well.
For those who are lucky to find work in the WNBA, they discover that their pay is also quite restricted. The NBA contract is written so that the size of the various caps move with league revenue. The WNBA contract isn’t quite so generous. A recent Bloomberg article indicated that while WNBA revenue recently doubled from about $100 million to $200 million, player salaries didn’t really change. As a result, whereas NBA players are paid 50 percent of basketball-related-income (known as the “wage share” or “players’ share”), WNBA players only receive 10 percent of their league’s revenue.
Remember, the top players in the WNBA only get about $235,000 per year. If the WNBA shared half its revenue with its players, the top players would be getting $1 million or more per season. And that means, Griner in the WNBA would be paid like she is in Russia!
In European sports, the labor market institutions that reduce the pay of athletes like Griner don’t exist. Instead, the very best players, at least in theory, migrate to where they are paid the best. And teams that can’t pay to acquire such talent… well, they are expected to be less successful. In other words, the free competitive market supposedly rewards the winners and punishes the losers.
Why do sports leagues in North America tend to adopt institutions that limit the free market? The argument offered is that institutions that restrict player pay are required for leagues to survive. And this argument has a very long history. In 1879, the National League in baseball made the following statement:
The financial results of the past season prove that salaries must come down. We believe that players insisting on exorbitant prices are injuring their own interests by forcing out of existence of clubs which cannot be run and pay large salaries except at a personal loss.
To force salaries down, the National League began putting a clause in player contracts that said that even if a player’s contract had expired, they were not allowed to negotiate with other teams. In other words, the solution to higher salaries was to restrict market freedom for workers.
Students of economic history know that this was not an uncommon strategy in the latter-19th century. Business leaders at this time, who became known as “the Robber Barons,” often created institutions that would eliminate market competition. Here was how this was described by Jeremy Atack and Peter Passell:
The discipline of the market posed a serious threat to the growing investment in increasingly specific capital goods and human capital. As a result, firms sought to maintain or increase profits and reduce risk by controlling prices and output — that is through monopolization. Increasingly competition was viewed as “ruinous” or “cutthroat”.
Or to put it another way, market competition is only fun when you win. If there is a chance you are going to lose, then it is far less entertaining.
The behavior of the Robber Barons inspired both the antitrust and labor movements. And these movements were intended to reduce the market power of firms in both output and labor markets. Sports, though, found some exceptions. The obvious one was the Supreme Court ruling in 1922 that exempted Major League Baseball from the Sherman Act. Less obvious is that a league and its labor union can create rules, such as player drafts and caps on pay, that give the teams an immense amount of power in labor market negotiations.
These institutions have been pitched to unions in the name of competitive balance. The story told by leagues is that if teams are allowed to spend as much money as they like, the richest teams will hire all the best talent. And if that happens, the richest teams will win all the games, the fans will eventually lose interest, and the league would die. Therefore, leagues need restrictions like drafts and limits on pay to protect competitive balance and save the league.
Lessons on Competitive Balance
Sports economists have studied the issue of competitive balance for decades. And that research indicates that the story American sports leagues tell is wrong on more than one level.
Let’s begin with the story that leagues can create rules to impact competitive balance. In the late 1980s, Gerald Scully and Roger Noll independently argued that balance in a league can be measured by a ratio of the actual dispersion of wins in the league relative to the dispersion that would exist if the league was ideally balanced; the smaller the ratio, the more competitive is the league. For example, this past season the standard deviation for winning percentage in the NFL was 0.184. According to the formula devised by Noll and Scully, if the NFL was ideally balanced this standard deviation would be 0.122. Therefore, the Noll-Scully competitive balance ratio is 1.51 (equal to 0.184 divided by 0.122).
Across the past ten years, the average Noll-Scully ratio for the NFL has been 1.55. In contrast, the average Noll Scully ratio for the American League in Major League Baseball has been 1.97, while the same ratio for the National League has been 1.92. These numbers tell us the NFL is more competitive than Major League Baseball.
Given the story the leagues tell, this makes sense. The NFL has both a draft and a cap on payrolls. That cap cannot be exceeded and therefore the richest teams in the NFL cannot buy the best talent. Major League Baseball has a draft. But because payroll is not capped, the richest teams—in New York and Los Angeles—frequently buy the best buy the best talent.
Therefore, the story the leagues tell is right. Limiting labor market freedom is good for the league!
Well, not quite.
People have argued that the NFL adding a cap on payrolls in 1994 improved competitive balance. But from 1970 (when the NFL merged with the AFL) until 1993, the average Noll-Scully ratio in the NFL was 1.54. In the years since the cap was put in place the average is also 1.54. In other words, the cap didn’t change the league’s average level of competitive balance.
The story in baseball also defies the story the American leagues tell. Prior to the 1970s, Major League Baseball players had no labor market freedom. Once you signed with a team, that team held your rights whether you actually had a contract or not. Given the story the leagues told, the inability of players to negotiate with multiple teams should have made baseball much more competitive. But prior to free agency being enacted in 1976, the average Noll-Scully ratio in the American League was 2.40. In the years since free agency was enacted, this average has been 1.88. A similar story can be told for the National League. Competitive balance in both leagues improved after workers gained more labor market freedom.
Then there is the story in the NBA. The NBA doesn’t just have a draft and a cap on team payrolls. The NBA also caps individual pay. So, labor market restrictions in the NBA are more extreme than they are in the NFL. But this past season, the Noll-Scully ratio for the NBA was 2.21, suggesting a relative lack of competitive balance. And that was the most balanced the NBA has been since the 1978-79 season. Across the last ten years, the Noll-Scully ratio in the NBA has averaged 2.65. That mark is quite consistent with what we have always seen in the NBA. In fact, it is also consistent with what we saw in the American Basketball Association fifty years ago.
What explain the pattern we see in the basketball and baseball? As noted in research I co-authored many years ago, competitive balance in a league is primarily about the size of the potential talent pool. Here is how I explained this story in the New York Times:
As the evolutionary biologist Stephen Jay Gould observed, when a population is relatively small, the difference between the very best and the average athlete will be quite large. In other words, when your population of athletes is small, your league will have less competitive balance.
Basketball relies on very tall athletic people, who are generally quite scarce in the population. Because the population is small, the supply of truly amazing athletes is also relatively small. This means, some teams get to hire LeBron James, Nikola Jokic, Giannis, Antetokounmpo, and Luka Doncic. And other teams… well, they have to fill out their rosters with lesser talents.
Gould’s story also explains why competitive balance in baseball improved across time. In the first half of the 20th century, Major League Baseball players were white males from the United States. Racial integration and a subsequent global search for baseball talent increased the pool of outstanding baseball players and hence made the game more competitive.
It is important to emphasize that this story has nothing to do with the institutions the American leagues adopt. Restricting the freedom of athletes to negotiate a better deal will not change the underlying population of talent a league employs.
All of this means these restrictions are not about making the league better for the fans. In fact, and this is perhaps the more important issue, it isn’t even clear fans really care about competitive balance. At least, academic studies often show fans are not quite as interested in this issue as leagues contend.
Follow the Money
One doesn’t really need an academic study to see this point. Again, the NBA has never had competitive balance. Despite this, the NBA has become a global brand with fans all over the world.
So, if caps on pay and player drafts don’t create competitive balance and fans wouldn’t care much if they did, why do these institutions exist? This is easy to understand. Again, the NBA only pays 50 percent of basketball-related income to its players and the WNBA is only paying 10 percent of its revenue to its athletes. In contrast, the English Premier League—where labor market restrictions don’t exist—pays 70 percent of league revenue.
Those numbers make it clear: Labor market restrictions are all about transferring money from the athletes to teams. In other words, these institutions exist to give teams monopsony power, which allows the teams to pay the players less than they would get in a free market.
Consequently, the legendary Bob Gibson was exploited (i.e., paid a wage less than his economic value) when he played in Major League Baseball. And the legendary Oscar Robertson was also exploited when he played in the NBA.
Of course, the same story is told about the WNBA players. But because the labor market institutions are more restrictive, the level of exploitation is even worse. Consequently, Brittney Griner and other players risk their safety and health playing outside the WNBA.
The owners of the sports teams, like the Robber Barons from more than a century ago, would tell you that their restrictions on market power are necessary. But that story doesn’t stand up to scrutiny. Rules that enhance the market power of owners don’t make anyone better off. Except, of course, the owners that implement the rules!
So, which model is best? For the owners in America, the American sports model is best. At least, in the short-run. As I argued recently at Global Sports Matters, the WNBA is probably held back by the labor market institutions it has inherited from the men’s NBA. Just ask Brittney Griner. Again, she wasn’t in Russia on vacation. The WNBA’s salary restrictions forced her and other WNBA talents to find work elsewhere. It is not in the long-run interest of the WNBA for the talented players it employers to work second job. And that means, the American sports business model definitely isn’t working well for everyone.
David J. Berri is a sports economist and professor of economics at Southern Utah University. He the is the author of four books and more than eighty academic articles on sports economics. Included in this list is Sports Economics, a textbook published with Macmillan Learning.
The mid-sized town of Springfield maintained a speed limit of 25 miles per hour on a one-mile stretch of Main Street that was home to both an elementary school and a middle school. The speed limit had been in force for decades. Children as young as three walked on the sidewalks and sometimes unexpectedly darted across the street. By forcing drivers to slow down, the speed limit minimized the risk of serious injury and death. While collisions occurred occasionally on this busy road, no pedestrian, driver, or passenger, had ever suffered a serious injury. For years, the 25-mph limit attracted little attention, positive or negative, and was accepted by residents as a fact of life in the town.
One day though, a group of prominent businesspeople and professionals petitioned for a change. These local notables called on the mayor to eliminate the speed limit because it contributed to congestion on the important road and delayed drivers from reaching their destination. In their petition, they contended that removal of the speed limit would allow people to spend less time on the road and more time being productive at their place of work and socializing with their near and dear. They commissioned an economic study that concluded that removing the speed limit would allow children visiting their grandparents to spend less time in the car and more time with their doting grandma or grandpa. Attempting to preempt concerns about road safety, they claimed the speed limit was not necessary, as drivers would naturally be concerned for the safety of kids. They argued that police could pull drivers over for reckless behavior or for driving unsafely. Further, drivers who negligently caused injuries or deaths would face serious consequences, including prison. That threat would deter dangerous driving.
Given the standing of opponents of the speed limit, the mayor soon after lifted speed restrictions on the road. He declared, “The 25 mph may have worked when we led more leisurely lives and could afford to spend an extra 10 or 15 minutes in traffic. But that is the past, we are all busy people now. The speed limit is an impediment to the smooth flow of traffic today.” He did not dismiss concerns about traffic safety and directed the town’s police force to pull over drivers who drive in an “unreasonably unsafe manner.”
The new system appeared to work fine at first. Vehicles proceeded past the schools much faster than they had previously. Congestion was a thing of the past. As proponents of the repeal predicted, the people of Springfield were getting to spend a little more time with their coworkers, friends, and families.
But the repeal of the speed limit was not an unalloyed benefit for the town. With a local bottleneck relieved, many people stopped using the town’s famous monorail and got into their cars, trucks, and vans instead. Many living near Main Street who had previously walked to nearby grocery stores and restaurants started driving. Although traffic congestion on Main Street had been addressed, it had a cost. Rescinding the speed limit encouraged more driving and increased air pollution.
Some drivers who scrupulously followed the 25-mph speed limit began to drive more aggressively. Because there was no speed limit, some felt emboldened to drive past the school at 50 mph or faster, so long as they couldn’t spot any children in harm’s way. That speed was not illegal under the letter of the law unless an observing police officer deemed it to be “unreasonably unsafe.” No one knew quite what this meant. It was rumored that police officers considered the time of day, level of traffic, weather conditions, the proximity of children to the road, and the importance of driver’s trip before passing judgment. When teachers at the elementary school complained that the sound of cars sometimes traveling at 70 mph scared the young children, the mayor said, “While we can’t quantify the subjective terror felt by kids, we can measure the shortened commutes for Springfielders.” To keep their children safe, the elementary school ended recess and other outdoor activities for all children up through fourth grade.
Enforcement of the new “unreasonably unsafe” standard for the rule also drew concern. When a local executive was pulled over for driving 80 mph, the police officer, whose conversation was recorded on a bodycam, let him off with a friendly “warning,” obsequiously saying, “I get it, sir. You are a busy man. If we had kept the 25 mph as some wanted, you’d be spending time stuck here, instead of tending to your important work.”
But others were not so lucky. Black drivers, especially those driving late model cars, were frequently pulled over for going 30 mph. That was only five miles per hour faster than the old speed limit, but many officers deemed it “unreasonably unsafe.” The discriminatory pattern of enforcement was impossible to ignore.
Proponents of the new approach dismissed growing criticisms. They said the improved flow of traffic trumped other considerations. They conceded fewer people were taking the monorail and walking for short trips, but insisted these are not “traffic-related” issues. The city should address these problems though other measures, they said. Moreover, discriminatory enforcement was not inherent to the new standard and could be resolved. The mayor pledged to improve police training and socialize officers “not to see color” in performing their duties.
But after one deadly incident, even the strongest proponents were at a loss for defenses. One afternoon, the 20-year-old scion of a local real estate magnate took his new red Ferrari out for a spin. He wanted to test its acceleration and went from zero to 60 mph on Main Street in four seconds. Focused on his immediate aim, he did not notice a 12-year-old schoolboy who had run into the street to retrieve an errant soccer ball and struck him. The boy was killed instantly. The local prosecutor pledged to prosecute the driver and seek the maximum possible sentence. But whatever the result, no prison sentence would bring the young boy back to life or provide solace to his parents and siblings.
The tragic death of the child made clear to almost everyone that the new system was a failure. While its proponents rationalized or offered solutions for increased driving, forcing schoolchildren indoors, and discriminatory enforcement, they had no ready answers for the clearly avoidable fatality. The old 25-mph speed limit had created modest inconveniences, but it would have prevented the fatal accident. In addition to allowing schoolchildren to play safely outside, the old rule encouraged people to use public transit and to walk and reduced the potential for subjective and discriminatory law enforcement. It was an example of what the economist Gardiner Means called a good “canalizing rule.”
For the past 40 years, the federal judiciary has followed the model of Springfield and overturned or weakened bright-line antitrust rules for mergers and other business practices. For instance, the Supreme Court held that manufacturers dictating resale prices on their goods to retailers and wholesalers through contract—an example of a “vertical restraint” imposed on a firm at another level in the same supply chain—was no longer a categorically illegal practice. In place of such clear “speed limits,” it adopted the rule of reason as its default analytical framework—a standard that requires case-by-case assessment of “effects” and has practically legalized many formerly restricted business practices.
Much like Springfield’s decision gave license to residents to drive as they wish on Main Street, the courts have granted corporate executives broad discretion to compete and grow their enterprises as they wish. In theory, this case-by-case approach allows business leaders to engage in socially beneficial mergers and to use vertical restraints to protect against harmful free riding. But as the story of Springfield shows, legal rules are used not only to decide specific cases but also to structure individual and organizational behavior.
Congressional and regulatory enactment of bright-line rules on mergers and unfair practices would channel business strategy in different and better directions. Strong rules against mergers, such as a general prohibition on all acquisitions by firms with more than a 30% share in any market or $10 billion in total assets, might sacrifice the occasional beneficial consolidation (there are ample grounds to be skeptical of such losses to be sure). Yet these bright-line rules would channel business strategy toward internal expansion and development of new production methods. Similarly, a prohibition on non-compete clauses could prevent an employer from stopping an employee from departing for a rival after receiving valuable training on the job, but it would also encourage employers to retain workers through regular raises and promotions and fair treatment and to use more targeted tools for protecting their proprietary information. And bright-line rules for antitrust enforcement would limit governmental discretion and the ability of unscrupulous officials to reward friendly businesses and punish their perceived enemies. These rules would deprive the CEOs of the largest corporations of autonomy and surely make them unhappy. But for the rest of us, life would be better.
The announced PGA-DP World Tour-LIV Golf “partnership” (read, merger) has reverberated throughout the sporting world, sending shockwaves across not only the golf industry but the sports world as well. ESPN reported players reacting with “complete and utter shock” at the announcement, as did, much of the sports media, calling the news “stunning”.
Let’s clear the air. None of this was surprising in the slightest.
The golf industry merger is but the latest example of, as the Propellerheads and the legendary Dame Shirley Bassey melodically put it, history repeating. Sports historians and economists have recounted the episodes of consolidation that have precipitated the modern-day U.S. professional sports leagues. These commercial joinders all share a common theme: a response by an entrenched, dominant entity faced with the threat of entry and the prospect of seeing its monopsony power diluted by the crucible of competition.
The real question with which golfers, as the primary interested party, should concern themselves is quo vadem: where do we go from here? This article aims to shed some light on that question by first recounting what has befallen athletes in other leagues following similar consolidation, evaluating what similar or differing conditions characterize this golf industry consolidation, then evaluating what path such conditions presage for current players. Finally, I address what steps players could take to protect their interests from any wage suppression that may result from the merger.
Wage suppression warrants concern here for the same reason it has in other sports cases (not to mention the broader labor market): the leverage of monopsony power. Monopsony power in a labor market reflects an entity’s ability to restrain wages below the levels that would prevail under competitive conditions. Such actions reflect worker exploitation, defined as the ability to reduce wages below the marginal revenue product (MRP) of labor (the marginal revenues generated by the next unit of labor). When faced with an upward sloping labor supply curve, a firm will set its wages at MRP, just as, under similar competitive conditions in an output market, a seller will set its price equal to marginal cost.
As the FTC has observed, the exercise of monopsony power in input markets reflects the mirror image of monopoly power in output markets. Historically, the PGA Tour has behaved like a monopsonist: it unilaterally set Tour members’ pay below competitive levels, reduced the input of labor, and excluded competitors. (Those familiar with the NCAA antitrust litigation will immediately notice its similarities to the PGA.)
The PGA Tour’s actions mirror those of other entities that held the same power over workers. Faced with the possibility of increased competition for labor, a monopsonist will commonly seek to either 1) prevent such entry or 2) acquire the entrant, and thus reduce or eliminate workers’ ability to choose among alternatives. Prior to the announced merger, the PGA Tour sought to do just that, by threatening golfers who considered joining LIV.
On that note, let’s start with a quick trip down memory lane to acquaint ourselves with how much this latest merger resembles previous sports industry consolidation.
In 1962, the AFL sued the NFL, alleging the latter had monopolized the market for professional football leagues; the district court ruled against the AFL, finding that the NFL did not have monopoly power. In the following year, the 4th Circuit Court of Appeals affirmed the lower court’s finding against the AFL, ending the litigation. In June of 1966, following a series of secret meetings, the two leagues announced the decision to merge. The September 1975, Congressional oversight hearings on the NFL labor-management dispute provide some details of the effects on labor. In his statement, Ed Garvey, Director of the NFL Players’ Association president at the time explained that, between the birth of the AFL and 1966, little if any bargaining between labor and management in the NFL occurred, noting that “Because of competition for player services, salaries nearly tripled, and the NFL was anxious to institute some fringe benefits to attract players to the NFL. When merger plans were announced in the summer of 1966, efforts were mounting within the NFLPA to oppose the merger, but Congress exempted the merger before there could be any serious opposition mounted.” The exemption refers to Congress’ statutory enshrinement of monopoly and monopsony power for major sports leagues in the form of 15 USC Ch. 32, §1291, “Exemption from antitrust laws of agreements covering the telecasting of sports contests and the combining of professional football leagues.” The provision passed in 1966 amended the Sports Broadcasting Act of 1961 to exempt merging sports leagues from antitrust laws as long as the merger “increases rather than decreases the number of football clubs.”
A similar scenario played out in the history of professional basketball in the United States, in which the rise of the American Basketball Association (ABA) militated against the exercise of monopsony power by owners of National Basketball Association (NBA) teams. As sports economist David Berri observed in the Antitrust Bulletin, while NBA players received a wage share of approximately 27 percent in 1970, “By 1972–1973, the NBA had to increase salaries to prevent players from joining a league that clearly was a legitimate competitor.” At the time, the leagues considered merging; however the existence of a reserve clause that gave a team control over a player’s mobility represented an untenable situation for the athletes, who sued to block it in 1970. (Robertson v. National Basketball Association, 556 F.2d 682 (2d Cir. 1977). The 1976 settlement culminated in the Oscar Robertson Rule and resulted in the elimination of the reserve clause (also known as the “option clause”) and rise of free agency rules that exist today.
National Hockey League (NHL) player wages also benefited from inter-league competition. Like other professional sports leagues, the NHL included a reserve clause in player contracts, bestowing exclusive negotiating rights on the original team with which a player signed. In the early 1970s, the World Hockey Association (WHA) entered the market, seeking to fill demand for teams in various major cities that represented relatively smaller markets than those having NHL teams.
Like LIV Golf, the WHA attracted top players by offering greater mobility and the potential for more lucrative compensation. As a result, it signed sixty-seven players, including the legendary Bobby Hull, in its inaugural 1972 season; for the following year, the WHA also signed another hockey superstar, Gordie Howe. While NHL sued to block the players from leaving from the WHA (just as the PGA threatened potential LIV signees with expulsion), a Massachusetts district court denied injunctive relief, allowing two stars, Gerry Cheevers and Derek Sanderson to join the WHA. Concurrently, a federal court in Philadelphia enjoined the NHL from taking legal action to enforcing its reserve clause. (In total, litigation between the WHA and NHL spanned four separate suits.)The following year, 1973, the NHL abolished the reserve clause, replacing it with a one-year option. The 1975 collective bargaining agreement between the NHL and its players’ association included additional modifications, including guaranteed contracts and enabling players to enter into contracts without an option year. Negotiations between the NHL and WHA culminated in the June 22, 1979 NHL expansion, where four WHA teams, the Edmonton Oilers, New England (now Hartford) Whalers, Quebec Nordiques (now Colorado Avalanche), and Winnipeg Jets received NHL expansion slots and the rest of the WHA folded.
At this point, the common thread between the NFL, NBA, NHL and Major League Baseball merits emphasis, as it highlights the dichotomy between the PGA Tour and other major professional sports leagues. While athletes in other leagues have the benefit of a union and a collective bargaining agreement between the players’ association and the league, PGA Tour athletes do not. (Somewhat ironically, the caddies themselves do: The Association of Professional Tour Caddies.) The presence of a union could have cautioned Tiger Woods and Rory McIlroy, who apparently turned down a combined $1.5 billion from LIV only to now find themselves in the same position but sans the lucrative offer.
In response to the threat of entry, the PGA adopted a tripartite strategy that was one part carrot, one part stick, and one part a morality play. The latter, of course, referenced the source of LIV’s funding: a Saudi regime run by crown prince Muhammad bin-Salman, whom the US government found approved the brutal murder of Washington Post journalist Jamal Khashoggi. Of course, the merger exposed the lack of sincerity in such appeals. The carrot refers to the fact that the PGA Tour previously announced more than $100 million in purse increases for 2022, an apparent response to the threat of competition that resembles similar action by the NBA and NFL discussed above. Indeed, the PGA Commissioner acknowledged the treat to the Tour’s margins that LIV represented. As CBS Sports Adam Silverstein reported, Monahan explained that “f you just look at the environment we’re in, the PIF was controlling LIV, and we were competing against LIV.It felt good about the changes we’d made and the position we were in, but ultimately, to get the competitor off the board — to have them exist as a partner, not as an owner…” The PGA also leveraged its stick, banning golfers who participated in LIV tournaments.
The PGA Tour’s threats of lifetime bans against players who sought to avail themselves financially of LIV’s competition with the PGA Tour also bears close resemblance to the reserve clause that existed in baseball (and other major sports). The reserve clause in a contract bound a professional baseball player to a single team; prior to 1887, baseball contracts stipulated that the player agreed to “abide by the constitution and bylaws of organized baseball” a phrase remarkably similar to the language used by PGA Tour Commissioner Jay Monahan in his letter to tour members reminding them that “You have made a different choice, which is to abide by the Tournament Regulations you agreed to when you accomplished the dream of earning a PGA TOUR card.”
The 1889 version of the baseball contract included a clause that permitted a team to “reserve” a player for the following season at a rate at least as high as the player’s current-year compensation. As economists James Quirk and Rodney Fort explained in their book “Pay Dirt: The Business of Professional Sports Teams”, interpretation of the clause effectively granted the owners a perpetual option to retain a player’s services over his entire career, particularly considering that owners agreed not to hire players from other teams’ reserve lists. Subsequently, following the Supreme Court decision in Federal Baseball Club v. National League, 259 U.S. 200 (1922), which granted baseball’s antitrust exemption, the following clause was incorporated in every player contract from the 1920s into the 1950s:
[If] the player and the club have not agreed upon the terms of such contract [for the next playing season], then … the club shall have the right to renew this contract for the period of one year on the same terms, except that the amount payable to the player shall be such as the club shall fix in said notice…
This incarnation of the reserve clause lasted nearly a century, binding a player to a team and prohibiting his ability to obtain better wages elsewhere. During the 1957 Congressional hearings on organized professional team sports, Major League Baseball reported revenues from the previous five years. In a recent paper, sports economist David Berri analyzed these data, showing that, during this period, MLB paid less than 25% of the revenues to players, a clear indication of the wage-restraining effects of the reserve clause. The first major cracks in owners’ hegemony over labor came at the hands of Golden Glove winner Curt Flood in 1969. Upon being traded from St. Louis to the Philadelphia Phillies and told that he had no say in the matter, Flood filed suit, Flood v. Kuhn, 407 U.S. 258 (1972), telling Commissioner Bowie Kuhn that “I do not regard myself as a piece of property to be bought or sold.” While the Supreme Court ruled 5-3 in 1922 to exempt baseball from the jurisdiction of the Sherman Act, an agreement between Major League Baseball and the players’ union granted free agency to players with at least six years of tenure beginning after 1976. This agreement accorded greater bargaining power to players and permitted them to capture a higher wage share. The eponymous 1998 Curt Flood Act revoked baseball’s antitrust exemption as it related to the employment of players, allowing them to enjoy the fruits of competition for their services.
More recently, a group of approximately 1,200 fighters who sued the Ultimate Fighting Championship (UFC) mixed martial arts (MMA) promotion company, won class certification. The Plaintiffs alleged that Zuffa, Inc. (d/b/a, UFC) sought to exclude competition from other promoters in an attempt to exert monopsony power to restrain fighters’ wages. In doing so, Plaintiffs claimed that 1) Defendants’ use of long-term exclusive contracts prevented them from competing elsewhere, 2) Defendants leveraged market power over the labor to force fighters to resign contracts, effectively locking them into perpetuity, 3) acquiring and terminating rival MMA promoters. Documents revealed in the litigation indicated that fighters’ wage share is only approximately 17 percent. Critically, this figure represented a substantial drop from the approximately 29 percent wage share that existed prior to the UFC’s acquisition of Strikeforce.
So what does all this presage for golfers’ futures? Absent potential regulatory intervention, nothing positive.
Two primary external forces counteract the exercise of monopsony power: 1) competitive entry and 2) collective bargaining. While lacking the latter, golfers benefited from the former in the form of LIV, which exposed the PGA’s ability to restrain compensation below competitive levels as evidenced by the purse increases once LIV became a viable competitor. Post-merger, golfers have neither and now find themselves facing an even stronger monopsonist. If golfers hope to maintain any semblance of a fair wage split with the newly formed industry leviathan, their primary recourse is organization into a Professional Golfers Union that can bargain collectively on their behalf. Otherwise, the outcome will mirror the UFC and the state of inequality in American society generally: a small cadre of patricians surrounded a multitude of workers fighting over table scraps. Of course, the newly merged entity will fight tooth and nail against such organization; those with market power seldom if ever concede it willingly. Nonetheless, one would do well to remember that the NBA has crossed swords with its Players’ Association numerous times, yet both sides have prospered. And so has the game.
Ted Tatos teaches econometrics at the University of Utah and regularly consults on economic issues involving antitrust, intellectual property, labor issues, and others. He can be reached at ttatos@eaecon.com.
Many in the anti-monopoly movement are celebrating the recent DOJ victory against the Northeast Alliance (NEA). It’s a rare enforcement action in the airline industry, and a rare decision that gives a clear victory to the DOJ.
But I will not be celebrating. What follows is my attempt to read the potential tea leaves from the NEA decision in looking forward to the JetBlue/Spirit merger. The TLDR: Don’t count the JetBlue/Spirit merger down and out based upon the NEA decision. While I’m pleased with DOJ’s victory, one step forward does not eradicate the giant leaps backward that have befallen the airline industry in the past few decades.
Fake Remedies and Abdication of Responsibility
In every instance of past consolidation in the airline industry, the DOJ (a) did nothing; (b) compelled the divestiture of slots and gates; or (c) filed a complaint, then got spanked by politicians into settling for slots and gates.
A couple of examples should suffice.
In 2013, the DOJ entered into a consent decree in the proposed merger of U.S. Air and American Airlines. The remedy, as is often the case, focused on the sale of slots and gates at LaGuardia Airport, as well as gates at other airports.
Yet the complaint stated that competition would have been enhanced with the emergence from bankruptcy of American Airlines as a standalone competitor. The complaint also argued that the industry had suffered from consolidation (from nine to five majors), and that fares increased due to that consolidation.
So, it’s only natural that slots and gates at a few airports would fix that, right? Not according to the complaint. Head-to-head competition would be eradicated. And it’s hard to start a network carrier, I might add, even with access to slots and gates.
One other example is in order. In the United-Continental merger, despite 18 overlapping markets (routes), the DOJ closed the investigation into the merger with the parties’ agreeing to sell slots and other assets in Newark to Southwest Airlines.
Slots and gates solve all ills in the airline industry. Got it. Unless you’re in one of those overlapping markets, where there is no obligation of the winning bidder of said slot to service the same route. Or unless you’re in rural America, where service has either disappeared completely or is much more expensive.
I don’t want to rehash the entire history of consolidation in the airline industry or the significant role that DOJ has played in shaping that development, but these two transactions are just a few on the path of placating the airlines by essentially creating a “tax” on the transaction that did not cure the anticompetitive ills of the mergers whatsoever. I do not, by the way, blame my former colleagues on staff at the DOJ for this. My blame goes higher up than the trial attorneys and paralegals who work those cases.
Given these data points, does the decision by Judge Sorokin represents a “sea change” in antitrust enforcement in the airline industry? I think not. Let’s break the decision down by some key elements: Concentration, efficiencies, and entry. I’ll also add a comment about the role of economists in that analysis.
Concentration Is Not New
Judge Sorokin discovered what many of us know already: “The industry is highly concentrated. Four carriers control more than eighty percent of the market for domestic air travel: the three GNCs (American, Delta, and United) and Southwest. The remainder of the market—less than twenty percent—is generally split among nine smaller carriers.”
At mainstream antitrust conferences, where consultants are rewarded for taking positions aligned with the most powerful, one might find a variety of people telling you that the airline industry is not concentrated. Since 2001, American bought TWA, U.S. Airways bought America West, American merged with U.S. Air, Delta with Northwest, United with Continental, and Southwest with AirTran. The full list can be found here. In each instance, DOJ was complicit. And, by the way, the market was highly concentrated before those decisions. Take DOJ’s complaint in U.S Air/American: “In 2005, there were nine major airlines. If this merger were approved, there would be only four. The three remaining legacy airlines and Southwest would account for over 80% of the domestic scheduled passenger service market, with the new American becoming the biggest airline in the world.” Indeed, many of the HHIs in the markets in question in that merger exceeded 2,500, or what the Merger Guidelines consider to be “highly concentrated markets.”
After that merger, others followed. Alaska and Virgin merged, Southwest bought some locals, and United bought ExpressJet.
So it is only natural that the DOJ allege concentrated markets in its complaint in the JetBlue/Spirit Merger: According to the agency’s calculations, the merger increases concentration in 150 routes, including 40 nonstop routes. The complaint alleges the risk of heightened coordination among the remaining airlines as well and lower innovation in service.
In short, there is nothing new on the concentration side. ‘Twas ever thus (at least the past 20 years). This suggests that high concentration is not predictive of stopping an anticompetitive merger.
Efficiencies Arising from the Elimination of Competition
Judge Sorokin was skeptical of the claimed efficiencies in the NEA: “American’s Chief Executive Officer (‘CEO’) described the numerous challenges created by mergers, as well as the “inordinate amount of management time and attention” required to integrate two airlines.” Prior mergers touted those great efficiencies. Some during that time period (me included) argued that those efficiencies do not pan out, take longer to achieve, and may be ethereal.
But the parties to the NEA claimed efficiencies even absent merger. Judge Sorokin rejected the claimed efficiencies, ruling they were insufficient to rebut the claimed harms in the NEA litigation. As Judge Sorokin pointed out: “These features arise only if the defendants mimic one carrier, elect not to compete with one another, and cooperate in ways that horizontal competitors normally would not. This elimination of competition negatively impacts the number and diversity of choices available to consumers in the northeast. As such, ‘benefits’ arising in this way cannot justify the defendants’ collusion.”
It’s hard to read that conclusion without thinking about the claims of merger efficiencies in the past. It suggests that the efficiency claim would have been stronger if the NEA members had merged rather than formed an alliance. If that’s the right reading, that could spell trouble for the DOJ in JetBlue/Spirit.
So again, nothing new here, except it was defendants arguing that merger efficiencies are hard to achieve, and in essence claimed that the NEA achieved the same efficiencies without requiring integration. Again, the U.S. Air/American complaint was skeptical of such purported efficiencies: “There are not sufficient acquisition-specific and cognizable efficiencies that would be passed through to U.S. consumers to rebut the presumption that competition and consumers would likely be harmed by this merger.”
Often times, those statements are made in hopes of “out of market” efficiencies counting in favor of the transaction. As the Commentary to the Merger Guidelines states, “Inextricably linked out-of-market efficiencies, however, can cause the Agencies, in their discretion, not to challenge mergers that would be challenged absent the efficiencies. This circumstance may arise, for example, if a merger presents large procompetitive benefits in a large market and a small anticompetitive problem in another, smaller market.” While that Commentary goes against everything that Philadelphia National Bank stands for, it is nonetheless continued policy. Just ignore the citation to Philadelphia National Bank in the complaint. That’s on presumptions.
Nonetheless, the complaint in Jet Blue/Spirit states that “Defendants have not yet described any procompetitive efficiencies in the alleged relevant markets.”
The American Antitrust Institute has been shouting this point for at least a decade. Take Diana Moss’s paper in 2013, explaining that: “System integration (e.g., integrating reservation and IT systems and combining workforces) in some past mergers has been difficult, protracted, and more costly than what was predicted by the airlines.” Others, including yours truly, have asserted the same.
Entry Is Not Easy
Judge Sorokin indicates that barriers to entry into the markets where NEA operates are significant, with likely entry not mitigating the anticompetitive effects. For example, in Boston and New York City, the judge describes the entry barriers as insurmountable: “By ending competition between American and JetBlue, the NEA means that seventy-three percent of domestic flights at Logan are controlled by two (rather than three) entities: Delta and the NEA. In New York, where entry or expansion by any airline is severely limited due to the FAA’s slot constraints at JFK and LaGuardia, the NEA ensures that eighty-four percent of the slots at JFK and LaGuardia are held by the same two (rather than three) entities that now dominate Logan.”
The JetBlue/Spirit complaint concurs: “New entrants into airline markets face significant barriers, including: difficulty in obtaining access to airport facilities or landing rights, particularly at congested airports; existing loyalty to particular airlines; and the risk of aggressive responses to new entry by a dominant incumbent.”
Curious. If entry is as difficult as the current DOJ and Judge Sorokin now suggest, where were those concerns in the prior two decades, when gate and slot sales were held out as the great elixir to lost actual competition?
Not All Economists
Judge Sorokin found defendant economists’ testimony problematic, lacking in nuance, and biased: “The apparent bias of the defendants’ retained experts is reason enough to reject the
opinions and conclusions they rendered in this case.” Again, this is not a surprise. Matt Stoller’s description of people in lab coats who never get graded on their assignments is apt.
Much has been written about the repeated use of economists to weave magical models that later result in unhappiness for consumers. ProPublica had a piece on the expert economist market four years ago, titled “These Professors Make More Than A Thousand Bucks an Hour Peddling Mega Mergers.” The title is a bit dated, due to the inflationary effects in the economic expert market—$1,000 is considered affordable now. Regardless, this practice is ages old. Agencies almost expect certain economists to walk in the door peddling particular mergers. I should disclose my own personal experience getting stomped by Dan Rubinfeld as I sought to stop the United/Continental merger. Consolidation in 18 nonstop markets was simply insufficient to be a problem for defendants’ economist, who was far more prepared, diligent, and careful.
I do not take Judge Sorokin’s judgment of defendants’ economists as a judgment of all experts. I take it to mean that economists must do more to shore up their assertions and conclusions apart from merely proclaiming themselves to be gods of knowledge. In other words, experts should not engage in “sweeping assertions,” “unnuanced and poorly reasoned conclusions,” “overly simplistic view[s],” “absurd” reasoning, or other analysis the court finds is entitled to ultimately “no weight.”
In short, maybe courts will start treating defendant’s economic experts like they treat plaintiff’s economic experts. And yes, that means they’ll get the blame for losing, even if it not deserved. It might also mean that JetBlue/Spirit should think about its expert reports carefully, and who gives those reports.
Conclusion
Before I get emails pointing out that policies and administrations change: I know. But those policies have an effect on the law as it is applied. Just as one example, there is no meaningful or substantive judicial review of consent decrees. And thus, when the DOJ became the Surface Transportation Board of the friendly skies (blessing all mergers that came before it), there was no countervailing power to stop it. Those impacts cannot be undone. They are permanent.
So, while I’m happy about Judge Sorokin’s decision, it doesn’t predict the future. The DOJ may very well still lose JetBlue/Spirit if it goes to trial. And if does lose, it only has its prior self to blame.
In the last thirty years, the United States has experienced a whirlwind of concentration among food suppliers. This elimination of competition is an urgent problem not only because consumers are faced with higher prices and less food choices in grocery stores, but also because the largest agribusinesses on Earth (“Big Ag”), as a result of their massive economic and political power, clog up the workings of our political system to the detriment of democracy and the planet.
Big Ag’s rising profits have been shown to be a driving force behind inflationary food prices again and again. A recent analysis by the White House explained that “If rising input costs were driving rising meat prices, those profit margins would be roughly flat, because higher prices would be offset by the higher costs.”
In addition to these already egregious displays of power and control, Big Ag also destroys the planet’s natural resources, violates existing labor laws, engages in atrocious and inhumane animal processing practices, and puts small farms out of business. Both the legal and economic arrangements that enable this behavior create an unfair political economy that’s immensely profitable and partial to large agribusinesses; these forces allow massive corporations like Monsanto, Tyson, Cargill, and John Deere to largely evade antitrust scrutiny.
As a result, Big Ag players garner enormous market power and uneven political clout, positioning themselves to create even more favorable legislation with which to entrench their dominance in each sector of agriculture, from beef to farming equipment to poultry to seeds.
It Begins on the Farm
An immediate example of Big Ag’s might is in farming equipment. Before the 1930s, over 160 companies sold farm equipment in response to growing industrialization and mechanization of farming. Through industry consolidation, however, John Deere emerged as the leading supplier of agricultural machinery in the United States. Today, John Deere stands alone as the dominant player, commanding roughly 53 percent of the market for large tractors and 60 percent for combines. From 2005 to 2018, John Deere acquired a staggering twelve companies that specialized in sectors ranging from farm equipment to precision technology.
In February, the Department of Justice filed six lawsuits in an effort to crack down on Deere’s monopoly power, engaging in a right-to-repair battle in four states. The lawsuits allege that Deere has illegally attempted to control the repair of Deere equipment, such as tractors and combines, using electronic-control units. The filing contends that the farming equipment giant and its dealerships monopolize the market for repair and maintenance services by designing proprietary Deere equipment, which requires Deere-controlled software for the diagnosis and maintenance functions. That software is exclusively available to technicians authorized by Deere. This arrangement leaves many independent shops and farmers beholden to Deere-authorized vendors when repairing their equipment. In this way, Big Ag poses a sort of private tyranny over those who have to rely on their equipment to make a living, and they are largely left unaccountable to the public and consumers.
Merger Mania
The tentacles of Big Ag reach beyond equipment into our milk and meat supply. Industry concentration in dairy has led to fewer farms and more mega-dairy operations, diminishing the profits of small family farms. The beef industry similarly has become more heavily concentrated. Today, only four firms—Tyson, Cargill, JBS, and National Beef Packing Co.—control over 70 percent of the nation’s beef supply, and they processed roughly 85 percent of cattle in the United States in 2018.
The level of concentration occurred at such a breakneck pace since the 1980s that Department of Agriculture economists characterized this wave of mergers as “merger mania,” during which concentration soared from 35.7% in 1980 to 71.6% by 1990 in the beef packing sector.
For instance, through mergers in the agriculture industry, “the four largest meatpackers have increased their share of the market from 36% to 85%, and the largest four sellers of corn seed accounted for 85% of U.S. corn seed sales in 2015, up from 60% in 2000.
Due to the resulting power over consumers and input providers, these mega-corporations are doing better than ever. The level of concentration, and the control over factory farming that it grants, are partially responsible for Tyson Foods’ beef sales jumping to $5 billion in the first quarter of 2022, lifting overall sales to $12.93 billion. Tyson Foods realized over a billion dollars in new dividends and stock buybacks. Add this to the more than $3 billion already they paid out to shareholders since the pandemic. In beef processing, corporate profits skyrocketed by $96.9 billion in the third quarter of 2021 alone.
Economic Power Translates into Political Power
Though it is hard to pinpoint a specific and clear approximation of the political power large agribusiness has achieved, each industry as a whole has immense political power resulting from their economic growth and profits from concentration. This is malfeasance in the highest order. Food monopolists and other dominant players in our agriculture system have the ability to contribute a large amount of campaign funds to key lawmakers in charge of legislating the sectors where mega corporations have a direct interest.
Farm subsidies in the United States largely support private associations and large corporations. These subsidies account for roughly 39 percent of farm income while the biggest agriculture firms continue to make record-breaking profits. The United States government gives away free money to private corporations that continue to increase their profits without contributing back into the public coffers or without providing adequate care to farm animals or adequate compensation (or safety) to the labor that generates the profit.
One example is the National Cattlemen’s Beef Association (NCBA). Researchers have long understood how clear the intent to monopolize is through the political clout of large, private trade associations, like the NCBA, which is directly paid a proportion of the proceeds from the U.S. government from every beef sale (like supermarkets steaks or hamburgers from a fast-food restaurant). In addition to lobbying for the further consolidation of the meat-processing industry, the NCBA uses these proceeds to lobby for Americans to eat more meat and to oppose district court judges who are sympathetic to animal rights.
The Social Costs Are Adding Up
Food production and industrial farming pose existential threats to critical ecosystems and rural populations, accelerating climate change by polluting and contributing massively to greenhouse gasses. The natural resources needed to sustain the increasing industrialization of our agricultural infrastructure are exhausted at the behest of large industry titans not in the least bit compelled to employ sustainable environmental practices. These effects are undesirable to everyone but to large agribusiness polluters, which perversely gain a greater capacity to pollute and contribute to climate change to a meaningful degree as they grow in scale and size.
The broader societal costs of the size, power, and dominance of food monopolies are far reaching. Economic power garnered from consolidating food industries, especially during the ongoing COVID-19 pandemic, yields uneven political influence—where corporations shape laws to get enacted in their favor, which in turn garners them more control of the food system. In the legal system, the problem of agriculture monopolies cannot be adequately dealt with on purely economic grounds either. This is because of the popularized role that economic analysis plays in assessing anticompetitive harm. With its fixation on short-run consumer price effects, the current economic lens cannot fully capture the ways in which Tyson, Bayer, or Monsanto grow their market power. Like other dominant players in industries, major corporations within Big Ag also mold political outcomes in their favor to avoid critical enforcement. They achieve this by influencing the anti-monopoly policies enacted to proscribe and limit their size in the first place, positioning themselves to dictate the terms for which market activity is stimulated.
When applying the law, antitrust courts should abandon the antiquated Chicago School dogma, which naively assumes that markets are self-correcting and that consumer welfare is paramount. When it comes to assessing the true harms of food monopolies and food barons, which undermine the rights of local farming operations, antitrust authorities should instead consider a broader set of anti-monopoly goals in order to disperse power more evenly among local farming operations nationwide.
To continue to permit consolidation in the aforementioned ways is anti-democratic. A strategy to implement these tools simply requires the political will to hold Big Ag corporate titans accountable by legally compelling them to relinquish control of their hordes of wealth, industry control, and attendant political influence.
Tyler Clark is an economist working on anti-monopoly, corporate power, and antitrust research. A recent graduate of the M.S. program in economics at the University of Utah, Tyler hopes to return and pursue a JD specializing in antitrust law. You can follow him on Twitter @traptamagotchi.
Just weeks after a series of high profile train derailments headlined by the disaster in East Palestine, Ohio, the Surface Transportation Board (STB) decided to double down on the current railroad oligopoly. The STB approved a merger between Canadian Pacific Railway and Kansas City Southern Railway Company, cutting the number of major “Class I” rail companies in the United States from seven down to six. This decision is diametrically opposed to the public interest and seriously undermines trust in rail regulators.
The merger approval clearly violates President Biden’s Executive Order on Promoting Competition in the American Economy, which explicitly directed the STB to begin rulemaking to make it harder for railroads to engage in anticompetitive practices. The order instructed the chair to “consider rulemakings pertaining to any other relevant matter of competitive access, including bottleneck rates, interchange commitments, or other matters.” Instead, the STB has abetted concentration that makes it harder to regulate.
Because the decision goes against Biden’s overarching competition agenda, the Revolving Door Project today released a letter with RootsAction and FreedomBLOC calling for President Biden to relieve Martin Oberman from his chairmanship at the STB. This backtracking requires a major course correction that can only be achieved by a change in leadership.
Besides being antithetical to one of the defining policies of the Biden administration, the STB’s decision breaks from other parts of the administration. As the FTC and DOJ Antitrust Division have redoubled their efforts to push back on monopolization across the economy, the STB approved the first big freight-rail merger since the 1990s. But it’s not just the FTC and DOJ going in the opposite direction of the STB; Secretary Pete Buttigieg and his Department of Transportation have recently raised their scrutiny of transportation mergers, highlighted by blocking airline consolidation.
And while Buttigieg has not explicitly chimed in on the rail merger, other regulators did, warning the STB against approval. The DOJ Antitrust Division warned against the merger, saying it could “empower the merged railroad to deny shippers access to the lowest cost or fastest end-to-end routings. […] The railroad sector in particular, with its relatively high fixed and sunk costs, often enjoys substantial structural entry barriers and advantages that may facilitate or incentivize anticompetitive behavior.”
Additionally, a majority of the Federal Maritime Commission opposed the merger, arguing that “the proposed consolidation does not ensure that the anticompetitive effects of the transaction outweigh the public interest in meeting significant needs.” As I’ve written before, the FMC has a history of serious dovishness on consolidation, making such a strong position all the more notable. The merger is even being opposed by another railroad; Union Pacific is suing to block the STB’s decision.
Besides undermining the administration’s broader policy agenda, the STB’s decision will also undermine safety in the rail industry. What’s the basis for such a strong claim? The STB’s own analysis found the merger would “slightly increase” risks of derailments. Taking their analysis at its word, even slight increases in such risks seem folly after Norfolk Southern set East Palestine ablaze with a single derailment. That incident highlighted how underequipped and unprepared regulators were to deal with any derailment. Allowing an increase in that risk just to enable more corporate profits is a bad trade for the American people.
Another cost of the merger is less effective oversight. As I wrote in The Sling in March, “More industry concentration makes effective regulation harder. As firms increase in size, they gain more and more of a resource advantage over their regulators. One behemoth corporation can often hire more lawyers and cultivate more relationships with lawmakers in order to obfuscate enforcement measures than multiple smaller ones could.”
Of course, there are corporate-friendly defenders of the merger. The Economist argued that the merger “may end up enhancing competition” because the two rail companies do not directly compete—there are no overlapping tracks—and because the merged entity “will provide the first train lines running from Canadian ports through the heart of the United States into Mexico. This is poppycock: A merger that doesn’t involve head-to-head competitors can still be harmful if it enables the merged firm to engage in anticompetitive behavior such as blocking rival’s market access.
Indeed, The Economist gives the game away in the very next paragraph, admitting the rail “industry is also consolidating, which leads to greater pricing power.” There’s only one consolidation going on and it’s the one they’re seeking to defend. If pricing power will increase simply by virtue of consolidation, that means that even though the current lines don’t overlap, the merger facilitates anti-competitive behavior. Full stop.
This is exactly the point the DOJ made in its statement to the STB as well. As they put it:
Even beyond the elimination of head-to-head competition, mergers that increase market power can harm competition in several ways. The merger can empower the merged railroad to deny shippers access to the lowest cost or fastest end-to-end routings. Likewise, in the absence of a complete refusal to interchange traffic, mergers may enable firms to foreclose competition in other ways, such as raising costs for their rivals through control over inputs or access. Such mergers also can create a more conducive structure for post-merger coordination between direct competitors by facilitating communication or discipline through the new integrated asset. The railroad sector in particular, with its relatively high fixed and sunk costs, often enjoys substantial structural entry barriers and advantages that may facilitate or incentivize anticompetitive behavior. For example, railroads may anticompetitively refuse to interchange traffic and/or favor the newly integrated company’s long-haul route over a more efficient joint line route.
Four of the other five Class I railroads agree, having opposed the merger because of how it would enable the new CPKC to block competitors from accessing important junctions, particularly Houston. This comes after earlier concerns from Union Pacific and BNSF around the Houston terminal. In short, the massive market power the merger grants CPKS will allow for the firm to undermine competition by blocking other railroads from readily accessing interchanges and other rail that Kansas City Southern currently shares with other shippers. Despite the two firms not directly competing in their current routes, the vertical integration creates the opportunity to force business away from other railroads because of the degree of control over their competitors’ ability to operate competing routes.
The Canadian Pacific-Kansas City Southern merger undermines administration policy and directly contributes to further anticompetitive practices in the rail industry. It is also likely to cause worse service, job cuts, weaker oversight, and higher prices, among other harms. President Biden should heed his Transportation Department, Justice Department, and Federal Maritime Commission and appoint new leadership at the STB.
Dylan Gyauch-Lewis is a researcher at the Revolving Door Project.
Paradigm change is hard. It took over a year to overcome significant ridicule from neoliberal economists and pundits for the evidence to be so compelling as to flip the consensus on the causes of inflation. Business press outlets from the Wall Street Journal to Bloomberg to Business Insider now perceive what some heterodox economists have recognized for a while—that companies in concentrated industries were exploiting an inflationary environment to hike prices in excess of any cost increases they were incurring. (Alas, The Economist refuses to see the light.) Even Biden’s director of the National Economic Council, Lael Brainard, refers to this bout of inflation as a “price-price spiral, whereby final prices have risen by more than the increases in input prices.”
It’s hard to assign credit for flipping the script, but a few brave economists deserve mention. Isabella Weber, an economist at the University of Massachusetts, published a provocative article, co-authored with Evan Wasner, titled “Sellers’ Inflation, Profits and Conflict: Why Can Large Firms Hike Prices in an Emergency?” They explain how firms with market power only engage in price hikes if they expect their competitors to follow, which requires an implicit agreement that can be coordinated by sector-wide cost shocks and supply bottlenecks.
Josh Bivens of Economic Policy Institute debunked the neoliberal claim that wage demand was driving inflation, showing instead that corporate profit was responsible for more than one third of the price growth. Mike Konzcal and Niko Lusiani of the Roosevelt Institute demonstrated that U.S. firms that increased markups in 2021 the most were those with the higher mark-ups prior to the economic shocks, an indication that concentration was facilitating coordination. (If one were to expand the list of thought influencers beyond economists, you’d have to start with Lindsay Owens of the Groundwork Collaborative, who has been analyzing what CEOs say on earnings calls since the onset of inflation.)
With the new consensus, we need think creatively about attacking inflation. We have more than one tool at our disposal. Rate hikes might ultimately slow inflation, but at enormous social costs, as that mechanism requires putting people out of work so they have less money to spend. What’s worse, rate hikes are regressive, with the most vulnerable among us bearing the largest costs. Solving the inflationary puzzle calls for a scalpel not a chainsaw: We need to identify the industries that contribute the most to inflation (e.g. rental, electricity, certain foods), and then tailor remedies that attack inflation at its source. To use one analogy, it wouldn’t make sense to bulldoze a house because a fire was burning in one room. You’d find that room and put out the fire. I am calling for seven policies in particular.
(1) More Bully Pulpit. The President should use the bully pulpit more—recall JFK’s turning back steel price hikes in 1962. Biden called out junk fees in his state of the union address, causing airlines to remove unwarranted fees for families sitting together. Clearly, Biden can’t hold a press conference about a misbehaving industry daily. But he has not come close to tapping this well.
(2) More Congressional Hearings. Congress should hold hearings to call executives to account for price gouging. Although Congress has held hearings with experts, they have yet to summon the CEOs of industries employing massive price hikes, seemingly in coordination—as if they were some tacit agreement to raise prices in unison. I’d start by calling the CEOs of the packaged food makers, PepsiCo, Unilever, and Nestlé, who bragged last week to investors about record profits, massive price hikes, and enduring pricing power.
(3) The FTC to the Rescue. The FTC should investigate firms for announcing current or future price hikes (or capacity reductions) during earnings calls under the agency’s unique Section 5 authority to police “invitations to collude.” These cases of “tacit collusion” are much harder to prosecute under the Sherman Act. If the FTC were to publicly announce an investigation into a firm or industry—airlines (admittedly outside the FTC’s jurisdiction) or retail would be a good place to start—it would force CEOs economywide to exercise more caution about sharing competitively sensitive information on earnings calls.
(4) Limits on Concentrated Holdings: The cost of shelter makes up a significant share of the core CPI. Cities or states should move to limit the holdings of any individual firm within a given census tract. My OECD paper, co-authored with Jacob Linger and Ted Tatos, showed the nexus between rental inflation and concentration in Florida. A natural cap for a single owner would be five or ten percent of all rental properties in a neighborhood. Raising interest rates, our default anti-inflation tool, perversely puts home ownership out of reach of millions of families, driving them to the rental markets, which bids up rental rates, which is one of the primary drivers of inflation.
(5) Price Controls Should Be on the Table. Price controls are the ugly stepsister in economics. But when backed by a public campaign, they have proven to be effective. Congress imposed price caps for insulin copays in the Inflation Reduction Act, but only for those patients covered by Medicare. Insulin makers, beginning with Eli Lilly, saw the writing on the wall, and voluntarily imposed the $35 cap on all patients. So long as caps are sparingly used in mature industries, the standard investment concerns of economists should be mitigated. The lesson from insulin is that the mere talk of price controls can induce an industry to temper their enthusiasm for price hikes.
(6) Government Provisioning. The threat of government provisioning is another lever that may force private industry to behave. To wit, California offered a $50 million contract to makes its own insulin, which coincided with Eli Lilly, Sanofi and Novo Nordisk preemptively reducing their prices. This playbook could be used in other industries where inflation remains stubbornly high. We can anticipate libertarians screaming “socialism,” but if the cost of inaction is more rate hikes and unemployment, I’d take the libertarian jeers any day.
(7) Fix Antitrust Law. Congress should amend the Sherman Act to give the DOJ, state attorneys general, and private enforcers a better shot at policing tacit collusion among firms in concentrated industries. Courts have implicitly adopted the notion that oligopolistic interdependence is just as likely to achieve prices inflated over competitive conditions as agreement, and so “merely” alleging or putting forward evidence of parallel pricing, excess capacity, and artificially inflated prices is insufficient to prove agreement under Section 1. But why should we presume that it is just as easy to maintain artificially inflated prices tacitly than through agreement?
Congress should flip the presumption. In particular, Section 1 of the Sherman Act should be amended so that the following shall create a presumption of agreement: Evidence of parallel pricing accompanied by evidence of (a) inter-firm communications containing competitively sensitive information, or (b) other actions that would be against the unilateral interests of firms not otherwise colluding, or (c) prices exceeding those that would be predicted by fundamentals of supply or demand. Moreover, the Sherman Act should be amended to permit courts to sanction corporate executives who participated in any price-fixing conspiracy upon a guilty verdict, by barring the executives from working in the industries in which they broke the law, either indefinitely or for a period of time.
Industrial organization gatekeepers like to poo-poo the idea of using competition tools to attack inflation, noting that antitrust moves too slowly. This is needlessly pessimistic. It bears noting that none of the seven remedies suggested here involve bringing a traditional antitrust case against a set of firms pursuant to the Sherman Act. The common thread that binds the first six remedies is inducing a short-run shift in industry behavior. A forced divestiture of rental properties over a holding limit would inject downward-pressure on rents in the short run. CEOs don’t want to be called out by the president or called to testify before Congress to explain their record-breaking profits attributable to massive price hikes above any cost increases. A public investigation by the FTC into invitations to collude via earnings calls would also have an immediate effect on CEOs. Nor would CEOs take lightly to being barred for life from an industry for participating in a price-fixing scheme.
The seven interventions outlined here will require an all-of-government approach. Biden should create a task force to carry out these policies and issue an executive order to signal his seriousness to other agencies. There are two paths for Biden’s legacy: Do nothing about inflation and leave it to the Fed to engineer a recession that likely ends his presidency, or grab the reins himself. With the new consensus emerging that profits (and not wage demands) are driving inflation, the time has come to change our approach.
As the frontline against illegal monopolies and deceptive corporate behavior, the Federal Trade Commission (FTC) has a critical role to play in building an economy that works for consumers and small businesses. Since becoming FTC Chair, Lina Khan’s efforts to rein in anti-competitive behavior and protect consumers has been met with fierce resistance from powerful special interests and hostile editorials in the The Wall Street Journal.
Unfortunately, given the FTC’s role in combating unfair corporate behavior, this pushback is to be expected. I should know: I had the privilege of being an FTC commissioner, serving in both the Clinton and Bush administrations. I’ve seen fair, and unfair, criticism targeted at Republican and Democratic FTC chairs alike.
As a commissioner, I served under Chair Tim Muris, who was appointed by George W. Bush and whose aggressive stewardship of the agency resembled in many ways the current leadership of Chair Lina Khan. While at the helm of the FTC, Chair Muris pursued one of the most aggressive regulatory agendas of any Bush-appointed agency heads. His agenda was assisted by his chief of staff, Christine S. Wilson, who went on to be appointed to the FTC by Donald Trump.
Despite this history, Wilson made big news when, as part of her resignation announcement, she attacked Chair Khan’s “honesty and integrity” and accused her of “abuses of government power” and “lawlessness.” This turned many heads in Washington, particularly mine because of how detached this viewpoint was from my prior experience of serving at the FTC under Wilson’s own stewardship of the agency.
In his 2021 Executive Order on Promoting Competition in the American Economy, President Biden acknowledged that “a fair, open, and competitive marketplace has long been a cornerstone of the American economy.” Unfortunately, corporate concentration has grown under both parties for many years, especially in the technology industry. It is fortunate, and past time, to see the White House, the FTC, Department of Justice, and other agencies working to swing back the pendulum and reinvigorate competition in the American economy.
Despite the ongoing crisis of corporate concentration, Ms. Wilson took objection to an antitrust policy statement the FTC adopted in November and to Chair Khan’s statements in favor of strong enforcement. I found this odd having seen up close Ms. Wilson zealously advance Chair Muris’s enforcement agenda. In office, Muris “challenged mergers in markets from ‘ice cream to pickles,’” as the Wall Street Journal once noted, including in the technology industry, where Lina Khan has devoted significant attention.
During his tenure, Muris used the power available to him as Chair on behalf of consumers and for the good of the economy. He evolved the theory behind FTC regulatory authority so he could take new action to protect consumers—like creating the DO NOT CALL registry—over frivolous legal objections by the telecommunications industry. Like Khan, he coordinated with the DOJ to ensure that they were addressing anticompetitive behavior.
Ms. Wilson claims that Chair Khan should have recused herself from a Facebook acquisition case because of opinions she had expressed as a Congressional staffer. But both a federal judge and the full Commission found no basis to these claims of impropriety, and it is clear that Chair Khan had no legal or ethical obligation to recuse in this case. FTC Commissioners including Khan, like judges, are required to set their personal opinions aside and evaluate cases on the merits, and they do. The FTC Ethics Guidelines tells commissioners to ”not work on FTC matters that affect your interests: financial, relational, or organizational.” When it comes to ethics guidelines, it doesn’t get any plainer than that, and Chair Khan’s participation in the case clearly does not violate these guidelines.
In a hyper-partisan environment, Ms. Wilson’s attacks on the FTC’s credibility appear to me as an attempt to slow antitrust enforcement and ultimately obfuscate Chair Khan’s pro-consumer agenda.
The U.S. Chamber of Commerce, which lobbies against pro-consumer regulations, sent an open letter to Senate oversight committees demanding an investigation of “mismanagement” at the FTC, including congressional hearings. No wonder the Chamber is upset. The Biden Administration is taking the crisis of corporate concentration seriously and is taking steps to bolster antitrust and consumer protection enforcement. That’s a development American consumers should cheer, because when corporate consolidation rises, competition is inevitably diminished, leading to higher prices and fewer choices for consumers.
Fortunately, Chair Khan is building on the legacy of strong leaders like Muris to build an economy that works for consumers, not harmful monopolies. Ultimately, she will be remembered for that and not cynical, distracting attacks on her.
Sheila Foster Anthony, a FTC commissioner from 1997-2003, previously served as Assistant Attorney General for Legislation at the U.S.Department of Justice. Prior to her government service, she practiced intellectual property law in a D.C. firm.
Over the last 40 years, antitrust cases have been increasingly onerous and costly to litigate, yet if plaintiffs can prevail on one single issue, they dramatically enhance their chances of obtaining a favorable judgment. That issue is market definition.
Market definition is straightforward to explain because it’s just what it sounds like. Litigants and judges must be able to delineate the market in question in order to determine how much control a corporation exercises over it. Defining a relevant market essentially answers, depending on the conduct courts are analyzing, whether computers that run Apple’s MacOS operating system or Microsoft Windows are in the same market or, similarly, if Coca-Cola competes with Pepsi.
A corporation’s degree of control over any particular market is then typically measured by how much market share it has. In antitrust litigation, calculating a firm’s market share is the simplest and most common way to determine a firm’s ability to adversely affect market competition, including its influence over output, prices, or the entry of new firms. While the issue may seem mundane and even somewhat technocratic, defining a relevant market is the single most important determination in antitrust litigation. Indeed, many antitrust violations turn on whether a defendant has a high market share in the relevant market.
Market definition is a throughline in antitrust litigation. All violations that require a rule of reason analysis under Section 1 of the Sherman Act, such as resale price maintenance and vertical territorial restraints, require a market to be defined. All claims under Section 2 of the Sherman Act require a relevant market. And all claims under Sections 3 and 7 of the Clayton Act require a relevant market to be defined.
Defining relevant markets stems from the language of the antitrust laws. Section 2 of the Sherman Act states that monopolization tactics are illegal in “any part of the trade or commerce[.]” Sections 3 and Section 7 prohibit exclusive deals and tyings involving commodities and mergers, respectively in “any line of commerce or…in any section of the country[.]” “[A]ny” “part” or “line of commerce” inherently requires some description of a market that is at issue.
As I more thoroughly described in a newly released working paper, the process of defining relevant markets has a long and winding history stemming from the inception of the Sherman Act in 1890. Between 1890 and 1944, the Supreme Court took a highly generalized approach, requiring as it stated in 1895, only a description of “some considerable portion, of a particular kind of merchandise or commodity[.]” In subsequent cases during this initial era, the Supreme Court provided little additional guidance, maintaining that litigants merely needed to provide a generalized description of “any one of the classes of things forming a part of interstate or foreign commerce.”
In 1945, after Circuit Court Judge Learned Hand found the Aluminum Company of America (commonly known as ALCOA) liable for monopolization in a landmark case, the market definition process started to become more refined, primarily focusing on how products were similar and interchangeable such that they performed comparable functions. At the same time market definition took on more complexity, antitrust enforcement exploded and courts became flooded with antitrust litigation. Given the circumstances, the Supreme Court felt that it needed to provide litigants with more structure to the antitrust laws, not only to effectuate Congress’s intent of protecting freedom of economic opportunity and preventing dominant corporations from using unfair business practices to succeed, but also to assist judges in determining whether a violation occurred. Throughout the 1940s and 1950s, the Supreme Court repeatedly expressed its frustration that there was no formal process for litigants to help the courts define markets.
It took until 1962 for the Supreme Court to comprehensively determine how markets should be defined and bring some much-needed structure to antitrust enforcement. The process, known as the Brown Shoe methodology after the 1962 case, requires litigants to present information to a reviewing court that describes the “nature of the commercial entities involved and by the nature of the competition [firms] face…[based on] trade realit[ies].” With this information, judges are required to engage in a heavy review of the information they are presented with and make a reasonable decision that accurately reflects the actual market competition between the products and services at issue in the litigation.
Constructing a relevant market for the purposes of antitrust litigation using the Brown Shoe methodology can be made using a variety of commonly understood and accessible information sources. For example, previous markets in antitrust litigation have been constructed from reviewing consumer preferences, consumer surveys, comparing the functional capabilities of products, the uniqueness of the buyers or production facilities, or trade association data. In a series of cases between 1962 to the present, the Supreme Court has rigorously refined its Brown Shoe process to ensure both litigants and judges had sufficient guidance to define markets. Critically, in no way did the Supreme Court intend for its Brown Shoe methodology to restrict or hinder the enforcement of the antitrust laws, and the fact that the process relies on readily accessible and commonly understood information is indicative of that goal.
But 1982 was a watershed year. Enforcement officials in the Reagan administration tossed aside more than a decade of carefully crafted jurisprudence from the Supreme Court in favor of complex, unnecessary, and arbitrary tests to define a relevant market. The new test, known as the hypothetical monopolist test (HMT), which is often informed by econometric models, asks whether a hypothetical monopolist of the products under consideration could profitably raise prices over competitive levels. It is tantamount to asking how many angels can dance on the head of a pin. They primarily accomplished this economics-laden burden through the implementation of a new set of guidelines that detailed how the Department of Justice would analyze mergers, determine whether to bring an enforcement action, and how the agency would conduct certain parts of antitrust litigation, one of those aspects being the market definition process.
From the 1982 implementation of new merger guidelines to the present, judges and litigants, predominantly federal enforcers, have ignored the Brown Shoe methodology and instead have embraced the HMT and its navel-gazing estimation of angels. As a result, courts now entertain battles of econometric experts, over what should amount to a straightforward inquiry.
As scholar Louis Schwartz aptly described, the relegation of the Brown Shoe methodology and its brazen replacement with econometrics under the 1982 guidelines represented a “legal smuggling” of byzantine economic criteria into antitrust litigation.
Besides facilitating the de-economization of antitrust enforcement, abandoning the econometric process would have other notable benefits. First, relying entirely on the Brown Shoe methodology would restrict the power of judges, lawyers, and economists by making the law more comprehensible to litigants. Giving power back to litigants would contribute to making antitrust law less technocratic and abstruse and more democratically accountable. For example, in some cases, economists have great difficulty explaining their findings to judges in intelligible terms. In extreme cases, judges are required to hire their own economic experts just to decipher the material presented by the litigants. Simply stated, the law is not just for economists, judges, or lawyers; it is also for ordinary people. Discarding the econometric tests for market definition facilitates not only the understanding of antitrust law, but also how to stay within its boundaries.
Second, reverting to the Brown Shoe methodology would make antitrust law fairer and promote its enforcement. The only parties that stand to gain from employing econometric tests are the economists conducting the analysis, the lawyers defending large corporations, and corporations who wish to be shielded from the antitrust laws. Frequently charging more than a $1,000 dollars an hour, economists are also extraordinarily expensive for litigants to employ, creating an exceptionally high barrier to otherwise meritorious legal claims.
Since 1982, market definition in antitrust litigation has lingered in a highly nebulous environment, where both the econometric tests informing the HMT and the Brown Shoe methodology co-exist but with only the Brown Shoe methodology having explicit approval by the Supreme Court. Even in its highly contentious and confusing 2018 ruling in Ohio v. American Express, the Supreme Court did not mention or cite the econometric processes currently employed by courts and detailed in the merger guidelines to define relevant markets. In fact, in a brief statement, the Court reaffirmed the controlling process it developed in Brown Shoe, yet lower courts continue to cite the failure of plaintiffs to meet the requirements of the econometric market definition process as one of the primary reasons to dismiss antitrust cases. Putting it aptly, Professor Jonathan Baker has stated that the “outcome of more [antitrust] cases has surely turned on market definition than on any other substantive issue.”
While the econometric process is not the exclusive process enforcers use to define markets in antitrust litigation and is often used in conjunction with the Brown Shoe methodology, completely abandoning it is critical to de-economizing antitrust law more generally. Since the late 1970s, primarily due to the work published by Robert Bork and other Chicago School adherents, economics and economic thinking more generally have become deeply entrenched in antitrust litigation. Chicago School thought has essentially made antitrust enforcement of nearly all vertical restraints like territorial limitations per se legal, and since the 1970s, the Supreme Court has overturned many of its per se rules. Contravening controlling case law on vertical mergers, Chicago School thinking has resulted in judges viewing them as almost always benign or even beneficial and failing to condemn them by applying the antitrust laws. Dubious economic assumptions have significantly restricted antitrust liability for predatory pricing, a practice described by the Supreme Court in 1986 as “rarely tried, and even more rarely successful.” As a result, economic thinking and econometric methodologies, though running contrary to Congress’s intent, have served to undermine the enforcement of the antitrust laws. This is not to say there is no role for economists. Economists can engage in essential fact gathering activities or provide scholarly perspective on empirical data that shows how specific business conduct can adversely affect prices, output, consumer choice, or innovation. For example, economic research has found that mergers and acquisitions habitually lead to higher prices and increased corporate profit margins – repudiating the idea that mergers are beneficial for consumers. But economists have little value to add when it comes to market definition.
Reinstituting many of the overturned per se antitrust rules all but require a change of precedent from the Supreme Court, which appears highly unlikely given the ideology of most of the current justices. However, modifying the process that enforcers use to determine relevant markets does not require overcoming such a seemingly insurmountable hurdle. Ridding antitrust litigation of the econometric process would simply require enforcers, particularly those at the Federal Trade Commission and the Department of Justice, to completely abandon the process altogether in their enforcement efforts (particularly in the merger guidelines) and instead exclusively rely on the Brown Shoe methodology. Neither the law nor the jurisprudence would need to be modified to effectuate this change—although it might be helpful, before unilaterally disarming, to first explain the new policy in the agencies’ forthcoming revision to the merger guidelines.
While some judges currently ignore or dismiss the Brown Shoe methodology, were enforcers to completely abandon the econometric process for defining markets, courts effectively would have no choice but to rely on the controlling Brown Shoe process. Unlike other aspects of antitrust law, enforcement officials can and should fully embrace the controlling law, in this case Brown Shoe, and use it readily, leaving private litigants to employ the econometric process if they so chose. Nevertheless, history indicates that courts are highly deferential to the methods used by federal enforcers—especially when explicated in the merger guidelines—and private litigants would likely follow the lead of federal enforcers in deciding which method to use to define relevant markets.
Currently, the Department of Justice and the Federal Trade Commission are redoing and updating their merger guidelines. To continue facilitating the progressive antitrust policy that began with President Biden’s administration and to start broadly de-economizing antitrust litigation, both agencies should seize the opportunity to jettison the econometric-heavy market definition tests and enshrine this change within the updated merger guidelines. Enforcers should instead exclusively rely on the sensible, practical, and fair approach the Supreme Court developed in Brown Shoe.
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Daniel A. Hanley is a Senior Legal Analyst at the Open Markets Institute. You can follow him on Mastodon @danielhanley@mastodon.social or on Twitter @danielahanley.