Congressional Democrats managed to pass a few crucial measures during December’s lame duck session. One tiny fraction of the omnibus bill to fund the government was the Merger Filing Fee Modernization Act, a measure for which anti-monopoly advocates have long been pushing.
The Act reforms the Hart-Scott-Rodino (HSR) filing fee structure, the program through which the Federal Trade Commission (FTC) and Department of Justice (DOJ) collect fees from corporations seeking to merge and gain federal approval. The HSR program takes significant resources to administer, and the number of companies seeking to merge has increased in recent years — between 2020 and 2021, filing more than doubled from 1,637 to 3,644, but the fee system had not been updated to account for increased burden upon the antitrust enforcers. Due to the Merger Filing Fee Modernization Act increasing the cap on fees, the Congressional Budget Office estimates that the new fees will result in $325 million in each of the first five years, with the two antitrust agencies splitting the fees and receiving $162.5 million each per year.
Congress appropriated $430 million for the FTC and $225 million for the DOJ Antitrust Division for FY2023. These budgets represent only a 22.5% and 11.9% increase from FY2022, respectively, and fall well short of the agencies’ respective requests of $490 million and $273 million. Since 2010, when adjusted for inflation, the FTC has received only a $40 million increase and the Antitrust Division a measly $7 million extra, despite processing more than double the number of HSR transactions in 2022 that they did in 2010. The agencies didn’t request more funding because they’re greedy; they need more funding to carry out their enormous missions, and Congress should support the missions.
The Merger Filing Fee Modernization Act, while an important reform, only increases what share of the FTC and DOJ Antitrust budget comes from HSR fees, and does not increase the overall budget independent of congressional funding. The recent flood of mergers (and higher valuations of those mergers) necessitates additional staff and resources at the agencies to properly review each transaction. Without more investment by Congress, the FTC and DOJ will remain pitifully short-staffed and under-resourced relative to the thousands of mergers and acquisitions that take place each year.
The perpetual underfunding of antitrust regulation has been known for years. As anti-monopoly researcher Matt Stoller pointed out, “spending on antitrust today is about a third what it was throughout most of the 20th century, and with a much bigger economy today. To get back to the level of antitrust enforcement we had in 1941 would require increasing the budgets of the agencies by ten times.”
And beyond the DOJ Antitrust and FTC’s edict to enforce competition, the FTC has another underfunded but crucial mission: consumer protection.
The FTC’s Mission To Protect Consumers Is Just As Important As Protecting Competition
In 2022, the headlines were filled with stories of corporate misdeeds, oftentimes involving deceit of customers. The FTC has a legal mandate and enforcement power to crack down on many such businesses. Through Section 5 of the FTC Act, the FTC can take legal action against companies that engage in “unfair or deceptive acts.”
The FTC has two options for enforcement under Section 5 — administrative and judicial. Administrative enforcement happens after a problem has already arisen. It involves a proceeding in front of an administrative law judge, who issues a cease and desist order if they find a given practice illegal under Section 5. It is then up to the FTC to determine whether the illegal practices warrant additional penalties, mainly through consumer redress or civil fines. Judicial enforcement, on the other hand, is a preventive measure used by the FTC while the administrative process is still underway. For example, the FTC can use judicial enforcement to enjoin a merger that will hurt consumers while the administrative judge is still determining its legality.
One of the FTC’s “top priorities” is to protect older consumers. A 2022 FTC report found that older Americans were more likely to be victims of scams and lost more money when being scammed. The best-known of these are telemarketing scams in which fraudsters convince people to transfer money by impersonating a friend or government agent, or convincing them they’d won a prize or lottery. The fraudsters can’t carry out these schemes alone — and the FTC is cracking down.
FTC Chair Lina Khan has made good on the promise to prioritize cases that harm elderly Americans. In June 2022, the FTC filed a lawsuit against Walmart for its part in facilitating fraudulent transactions that targeted the elderly. The lawsuit alleges that Walmart’s money-transfer service routinely turned a blind eye to fraudulent transactions by not training their employees or warning consumers, thus allowing the scammers to collect the ill-gotten money. Over a five-year period, over 200,000 fraud-induced money transfers were sent to or from Walmart stores, costing consumers nearly $200 million. If the FTC is successful, Walmart will have to compensate consumers for the lost money, pay civil penalties, and be subject to a permanent injunction that forces them to end money-transfering practices that result in fraud.
While older consumers are more likely to fall victim to telemarketing scams, children are unknowingly being tricked by corporations to increase their profits. Epic Games, the video game company that owns Fortnite, was fined $520 million for numerous privacy violations and “deceptive interfaces” that resulted in users, many of whom were children, making unintended purchases.
The FTC also cracked down on so-called “dark patterns” — underhanded tactics that companies use to squeeze more money from consumers including junk fees, misleading advertising, data sharing, and making it difficult to cancel subscriptions. The agency has prosecuted LendingClub, ABCmouse, and Vizio for these dark patterns, and returned millions of dollars to consumers. The public benefits greatly from this work, both by cracking down on shady schemes and putting money back in the victim’s pockets.
Although it carries out work that clearly benefits everyday Americans, the consumer protection side of the FTC often gets less press than high-profile mergers and acquisitions. But Americans are weary of corporations deceiving them to make more money off their private information. According to a 2019 study by Pew Research, 79% of Americans are very or somewhat concerned about how companies are using their personal data. Enforcing laws we already have in place shows people how the Biden Administration can help them by reining in corporate misbehavior and putting money back in their pockets.
In FY 2022, the FTC returned a total of $459.6 million to 2.3 million consumers who lost money to illegal business practices. These are material results demonstrating to people that the government can protect them from corporate shenanigans. And yet, the budget for FY 2023 underfunded the FTC by $60 million. The FTC’s budget request included funds for an additional 148 full-time staff members specifically dedicated to consumer protection, a worthy investment for addressing more of these complaints. Without the full amount of requested funds, it’s unclear how many staffers the FTC will be able to hire, but it certainly will not be enough.
The FTC should make bold requests for adequate staffing, and the Biden Administration should be willing to elevate any resistance from Congress. And don’t just take our word on why such a fight would be good politics – Biden’s prioritizing consumer protection in his State of the Union address demonstrates that he and his team see consumer protection as a political winner.
Going After Dominant Firms Is Not Enough To Protect Consumers
As with antitrust enforcement, the FTC looks to “maximize impact” of its limited resources for enforcing data privacy by going after “dominant” and “intermediary” companies. While this makes the best of the situation, this approach means plenty of abuses are falling through the cracks formed by inadequate funding for enforcement. Compare this to how the Securities and Exchange Commission often targets well-known celebrities when they engage in petty financial fraud — these cases are relatively easy to prosecute and generate headlines that hopefully give the impression of a tough agency on the beat, but these are all ultimately efforts to make do with far too little.
The actions the FTC does take against privacy-violating corporations are isolated and have limited power to deter future misconduct. For example, in 2019, the FTC fined Facebook $5 billion for misleading users by sharing personal information to third parties without their knowledge. While the fine was the largest ever levied by the agency, Facebook was using this misleading tactic for seven years in violation of a 2012 FTC order following previous allegations of even more brazenly deceptive practices.
And it is far from clear if the Trump-era FTC would have taken enforcement action but for the horrendous press Facebook generated for their relationship with Cambridge Analytica. Reliance on high stakes and high stress journalism is not a dependable basis of law enforcement – especially as journalism declines as an industry (ironically, in large part due to abuses by social media platforms). The fact that Facebook, one of the largest companies in the world, got away with deceptive data sharing for seven years also indicates that the FTC needs more resources to go after the dominant firms in addition to ensuring that smaller companies are not engaging in similar tactics. And the $5 billion fine, while historic, was a drop in the bucket for a company that hit a $1 trillion market cap not long after.
The limited financial impact of historic fines would be true for other large corporations profiting off their customer’s information as well. As Marta Tellada of Consumer Reports pointed out, “fines alone will not reform [the] market,” and the tech giants view fines “as a cost of doing business.”
And it’s not just Facebook which collects personal information on its users — today, 73% of companies in the United States do so, from small businesses to monopolies, with many opportunities for corporate malfeasance. When a potentially unfair or deceptive business practice becomes endemic across the economy, regulators cannot meaningfully “set examples” and hope the rest of the market complies. Yes, the FTC needs new rulemaking as well as congressionally-mandated tools for protecting consumers, but ramping up capacity in the meanwhile can tangibly benefit millions of Americans. The FTC needs the resources to properly enforce the laws it is already charged with carrying out.
Andrea Beaty is Research Director at the Revolving Door Project, focusing on anti-monopoly, executive branch ethics and housing policy. KJ Boyle is a research intern with the Revolving Door Project. The Revolving Door Project scrutinizes executive branch appointees to ensure they use their office to serve the broad public interest, rather than to entrench corporate power or seek personal advancement.
An analysis of public comments submitted to the FTC
In conjunction with its proposed ban on noncompete agreements, the FTC solicited comments on from any interested parties. Submission began on January 10 and, as of Friday, January 27, 2022, approximately 5,200 comments had been submitted. Fortunately, under the eRulemaking Initiative, the US Government has broadened public access to documents, permitting bulk download of comments pertaining to regulatory materials, including the FTC proposed ban on noncompete agreements.
Bulk download permits the output of all comments to a delimited text file, allowing the various fields including dates, individual and/or corporate entity submitting the comment (where available), state (again, where available) to be analyzed. Further, the comments field, which includes submissions up to 5,000 characters in length, permits text parsing for keywords such as type of employment, hourly wages, and other phrases of interest. Most importantly, the comments field reveals the submitting entity’s stance toward the proposed rulemaking.
This article describes my ongoing analysis of these data through January 27. Updated results will be uploaded periodically through the March 20, 2023 deadline for comment submissions.
As of January 27, the results:
- demonstrate overwhelming public support for the ban on non-compete agreements. Such support is consistent across individual states, underscoring bipartisan agreement on prohibiting such restraints of trade.
- highlight the ubiquity of such agreements and their ability to constrain both lower wage and higher wage labor
- reveal that medical professionals, including physicians, represent the single most vocal group supporting the FTC’s proposed rule and advocating for a complete ban on non-compete agreements. This result exposes the flaw in attempting to cabin the scope of the rulemaking to lower-wage workers. While arguments supporting non-compete clauses may appear least defensible when encumbering lower-wage workers, the comments indicate that the negative effects are no less pronounced on those earning higher wages, such as doctors and others in the healthcare field. Further, as myriad comments observe, such constraints can have negative spillover effects, such as entrenching monopsony power, raising healthcare costs, and lowering the quality of care.
- expose the incongruity of economic theory proffered by some in defense of non-compete agreements when juxtaposed against the real-world experiences of workers who labor under such restrictions.
The overall results including comments submitted through January 27, 2023 appear in Table 1 below. Overall, approximately 93% of comments reflect support for the FTC’s proposed ban. Determination of whether the respondent supported or opposed the FTC rulemaking proceeded as follows. Of the approximately 5,200 comments received as of January 27, I reviewed approximately 3,626 by reading or skimming each comment individually. The reminder were classified as 1) supporting the ban if they contained keywords such as “depress”, “oppress”, “trap”, “archaic”, “in favor”, “eliminate”, “monopoly” or 2) opposing the ban if they contain key phrases such as “to the state”, “overreach”, “object”, “oppose”, “protect small”, “damage small”, “hurt small”, “harm small”. The latter comments were interpreted to mean that the FTC’s rulemaking would hurt small businesses or infringe upon states’ rights. Individual review of the 3600+ comments informed the determination of the keywords and phrases used.
Table 1. Results
The overwhelming support for the FTC’s rulemaking banning non-compete agreements shown in Table 1 extends nationwide, with every state except Hawaii (n=2) indicating that the majority of commenters favor of the FTC’s proposed ban. Among states with at least 10 respondents, the lowest rates of approval were 78.9%, 80% and 81.8% for New Mexico, Utah, and South Carolina, respectively.
The figure below provides a daily breakdown of the percentage of comments submitted that supported the proposed ban on non-compete agreements. The results provide some evidence of coordination of responses in opposition to the FTC’s position. A substantially higher proportion of comments opposing the proposed rulemaking occurred during the 3-day period of January 20, 23 and 24 (the 21st and 22nd were weekend days so the data did not include comments on those dates), reaching a zenith on January 23.
I also analyzed the extent of support for the ban on non-competes by occupation, as reflected in the comments. By far the most common occupation listed referenced work as either a “physician”, a specialty therein (e.g., cardiologist, radiologist, etc.) or a generic description of the medical field. Other noted occupations included accounting (e.g., CPA), dentist, veterinarian, engineering, spa/salon, insurance, or restaurant-related work.
The support among physicians for the ban on non-competes was nearly unanimous. Approximately 98% decried the use of non-competes, citing their harm to physician careers, their families, as well as the negative impact non-competes have on quality of care.
Support for non-competes largely originates from owners of individual practices who expressed concern that their employees may leave and “open up shop across the street” and compete with them. However, even business owners overwhelmingly support the FTC’s proposed rule. Among comments that included terms such as “small business” or “small company(ies)” approximately 68.9% of comments favored the FTC ban, a nearly identical result when evaluating comments indicating ownership of a company (69.3% in favor of the FTC ban).
Many supporters of the FTC’s planned rulemaking vehemently rejected the restraints imposed by non-compete agreements, likening them to indentured servitude, slavery, and using evocative terms such as “toxic”, “chains”, “prison”, “trap”, “bully” and “exploit”. Of the 4653 respondents who supported the FTC’s ban (93.2% of total), approximately 730 (15.7%) used at least one of these terms in their comments.
Note: Ted Tatos is an adjunct professor of economics at the University of Utah and a testifying expert with EconONE Research. This analysis of responses to FTC comments will be updated periodically until the March 20 deadline.
The Federal Trade Commission recently announced it is proposing to ban non-compete agreements between employers and workers. We are of the opinion that much of the conversation about the FTC’s proposed rule, both in terms of its substance and its ability to promulgate, are muddled between differing concepts. Our takeaway is that there is no justification for non-compete agreements once one sets aside Trade Secret protection—a matter already protected by existing law. We also argue that arguments about why the FTC should avoid challenges to its authority are overbroad: Essentially, the argument that the FTC should shy away from rulemaking because of the “major questions doctrine” and the “non-delegation doctrine” suggest that no agency should ever attempt to do anything. Moreover, the FTC has the better argument on these issues.
No Legitimate Business Justification
For present purposes, we set aside non-competes that are part of the sale of a business, as well as trade-secret provisions. We focus solely on clauses that restrict post-employment labor market activities. We refer to these contract terms as post-employment non-compete agreements or non-compete agreements. In the case of a trade secret (not protected by a non-compete agreement but a trade-secret protection clause), a business may have a protectable intellectual property interest. To bring a misappropriation of a trade-secret case, the employer must come forward and identify the trade secret, show that (a) it has competitive significance, (b) the employer took reasonable steps to protect the secret, and (c) the employee misappropriated the secret. In such cases, the claimed business justification is put to the test.
That’s not the case with post-employment non-competes. One of the authors has practiced law in Utah for more than three decades, a state that vigorously enforces non-compete agreements. In nearly every case, the central issue is: What exactly is the legitimate business interest being protected? In our experience, there is no credible business interest that justifies a non-compete agreement. While many corporate lawyers and business litigators will fight to enforce a client’s non-compete, and we have done this as well, there is rarely if ever a credible case. Ironically, the attorneys themselves never agree to their own non-compete agreements, and the American Bar Association’s Model Rule 5.6 (“Restrictions on Right to Practice”) makes non-competes among attorneys and law firms unethical. Is it the case that law firms are somehow different and have no legitimate interests to be protected like other businesses?
States that enforce non-competes usually adopt some version of the Restatement (Second) of Contracts Section 188. Under the rule, the post-employment non-compete restraint cannot be greater than needed to protect the legitimate business interest. Our main point is that there is no legitimate business interest in an employment non-compete agreement. Any effort to define the geographic scope or the duration of the restraint is pure fiction. Lawyers who draft these agreements don’t define relevant markets or estimate the time it takes to depreciate some alleged goodwill. They simply draft the broadest language they believe they may get away with either because litigation is unlikely, or the local precedent provides a good faith argument. This is because, again, there is almost never a credible business interest to be protected in the first place.
So what possible reason could a business have for preventing former employees from working where they choose, independent of trade secret issues such as secret technology or client lists? The classic answer appears in the lead Utah case where a clerk at a pharmacy through his hard work gains the trust of local patrons. The company claimed ownership in that goodwill.
How many situations are like this in today’s economy? According to a study by the Economic Policy Institute, roughly half of all businesses in the United States use non-compete agreements. It is not reasonable to believe workers at half the nations’ firms have acquired company-related customer goodwill sufficient to injure the company. American companies themselves do not seem to think so. Companies must report goodwill on their financial statements. Yet you will not find the list of their employees with non-competes reported as material sources of company goodwill. Indeed, if an employee does increase its employer’s goodwill with the public by their own efforts, why remove their bargaining power to increase their wages? The employee should be compensated for these achievements. Allowing the firm to appropriate the fruits of such efforts is the essence of “exploitation.”
One argument some businesses make is that the non-compete agreements are necessary to protect their investment in employee training. We find this argument particularly untenable. Non-compete incidence is rising among holders of professional degrees. A Ph.D. with a science background comes to a firm with significant human capital acquired over years at their own expense. The same is true of lawyers, accountants, and physicians. Often additional training occurs through professional organizations. For example, an accountant may receive training in valuation from the American Institute of Certified Public Accountants, or a lawyer may learn how to take a deposition at a National Institute for Trial Advocacy seminar. There are often continuing education requirements. The internal investments by firms in training are trivial in comparison, and what little there is to protect can be protected through trade-secret contract agreements. Such training may also not be valuable to other firms and may not lead to competitive injury. This seems particularly true at the lower end of the labor market. Learning the McDonald’s process may not be particularly useful at Burger King.
Moreover, investment in training takes place without non-compete agreements. It is unlikely that firms in California train less than other states. Law firms invest heavily in training without non-competes. There is no need to give employers the equivalent of an equitable stake in an employee’s human capital to induce training. We don’t allow banks to do this with student loans, and the same public policy should prohibit non-compete agreements as an incentive for training. In both cases, student loans and training will occur without the draconian “exploitation.”
Workers Generally Do Not Negotiate for Non-Competes
Even if there were a legitimate business interest in preventing former employee labor mobility, the Restatement further avers that such an interest can be outweighed by the hardship to the worker or the public. The FTC’s Supplementary Information accompanying its Notice of Proposed Rulemaking comprehensively reviews the economic literature relevant to these two points. The weight of the evidence from the economic studies show that non-compete agreements (a) lower wages, (b) increase racial and gender wage gaps, (c) harm entry and business formation because they impede labor mobility (one can speculate what would have happened if Shockley Semiconductor had non competes with the future Fairchild and Intel founders), (d) increase medical costs, and (e) may reduce innovation.
One of the most frustrating situations for an employee who becomes a party in a non-compete agreement enforcement action is to face a judge who views a post-employment non-compete as purely a contract issue. Early Chicago School law and economics encouraged this simplified thinking. The logic is that since there is a valid contract, and the employee voluntarily chose to execute it, it should be enforced (sometimes this is called the employee choice rule). This logic would only hold under conditions of perfect competition—that is, full information on both sides, equal bargaining power, and no issue of externalities impacting markets and the public. Most judges know this kind of thinking is pure ideology simply based on their knowledge of the common law. The common law itself recognizes that perfect competition is a fiction. The contract defenses of mutual mistake and frustration of purpose are because of asymmetric information. The defenses of unconscionability, duress, and necessity result from unequal bargaining power, and of course, restraints of trade are because of externalities.
To simply enforce a non-compete because it is in a contract, a judge must put on his or her ideological blinders and ignore the real-world factual record. In our litigation experience, employees learn about the non-compete for the first time after the job negotiations are completed and it is time to sign the paperwork. This often occurs after the employee has started the job. The non-compete is often in fine print and written in legal jargon. The contract terms are often presented as a nonnegotiable firm policy. If the worker wishes to negotiate, they are placed in a position where they must risk starting a major confrontation on their first day of work. And to adequately understand their rights will result in a long work delay. Thus, even if the employee might have not agreed ex ante to the non-compete agreement, by the time of the contract (or when they get around to reading the employee handbook), they agree ex post. According to the EPI survey, the vast majority of non-compete agreements are executed without any negotiation.
Answering Commissioner Wilson’s Dissent
This brings us to FTC Commissioner Christine Wilson’s dissent. True to form, she is most concerned that a rule against employee non-competes might harm “the business justification that prompted its adoption.” Of course, she never identifies or defends that business justification, Nonetheless, she knows that there must be something to be defended, and “unelected bureaucrats” shouldn’t interfere. Interestingly, elected officials seem to differ with Commissioner Wilson. Indeed, as noted by the FTC, three states already have rendered employee non-competes unenforceable, and many other states have limited their application. There is no identifiable trend in the other direction. The FTC proposed rule advances a sound policy that will promote economic development and the interests of consumers, workers, and new business formation.
Commissioner Wilson’s jurisdictional objection is that the FTC may not have the power to promulgate a rule against non-compete clauses. This is also the point recently made by Chicago law professor Randy Picker. They both imply that if legal challenges could occur, the Commission should censor itself in advance and give up on policies that improve welfare. For them, the potential protection the rule could afford workers (and ultimately consumers) is not worth the risk of a courtroom loss. We disagree both on the philosophy and on the merits. In connection with the merits, what cannot be disputed is that Section 5 of the FTC act covers non-competes. Binding precedent allows the FTC to bring cases under Section 5 that are covered by the Sherman Act. The Sherman Act prohibits contracts in restraint of trade. A non-compete agreement is a contract, and there is no doubt that the Sherman Act was meant to apply to common law restraints of trade.
The classic example of a restraint of trade is a non-compete agreement (and is where the name “restraint of TRADE” derives). Indeed, Justice White in the Standard Oil Case, which introduced the rule of reason, traces the common law of restraints of trade from Mitchel v. Reynolds, a covenant not to compete case. Because, in our view, post-employment covenants have no legitimate procompetitive purpose, they should be considered per se illegal. This was the view of the district court in Newberger, Loeb & Co. v. Gross, 563 F. 2d 1057, 1083 (1977) (“Restraint on postemployment competition that serve no legitimate purpose at the time they are adopted would be per se invalid”).
But courts in several cases have found that non-competes can protect interests in trade secrets and customer good will. For example, Aydin Corp. v. Loral Corp, 718 F 2d 897, 900 (1983). Therefore, at present the rule of reason is the norm. In our view, these courts have made an unjustified melding of trade secrets and post-employment non-compete agreements. Although a trade secret can be a legitimate interest, it is best handled by a separate contract clause, while the post-employment non-compete agreement is without any legitimate merit. Because of this confusion, post-employment covenants are analyzed under the rule of reason, and under this standard they inevitably fail. This is because it is virtually impossible to demonstrate a market effect emanating from a single or limited number of non-compete agreements, particularly where contracts include arbitration and/or non-class action clauses. In this legal context, Section 5 of the FTC Act can play a critical role. As the Supreme Court stated in FTC v. Brown Shoe Co, Section 5 “is particularly well established with regard to trade practices which conflict with the basic policies of the Sherman and Clayton Acts even though such practices may not actually violate these laws.” 384 US 316, 321 (1966).
On the FTC’s Legal Authority
The remaining issue is whether the FTC is authorized to promulgate a rule against employment non-compete contracts. There is great back-and-forth about whether the language of 6(g) of the FTC Act allows for unfair methods of competition rulemaking. The pre-Chevron doctrine D.C. Circuit decision in Nat’l Petroleum Ref’rs Ass’n v. FTC, 482 F.2d 672 (D.C. Cir. 1973), found such rulemaking authority.
In a nod perhaps to Justice O’Connor’s FDA v. Brown & Williamson decision, Commissioner Wilson notes that the Magnusson Moss Act (establishing Sisyphean barriers to Unfair Trade Practices Rulemaking) expressly carved out unfair methods of competition rulemaking. Commissioner Wilson suggests the reason is reliance on statements by FTC Commissioners and Chairs past disclaiming such authority.
Her argument faces two logical hurdles. The first is that the plain language of the FTC Act, which implies that that the agency has such authority: “From time to time classify corporations and (except as provided in section 57a(a)(2) of this title) to make rules and regulations for the purpose of carrying out the provisions of this subchapter.” To the extent we are all textualists now, it is surprising to see conservative flight to legislative history and former FTC Commissioner statements.
The second logical hurdle is that Chevron Doctrine is dead. Chevron in essence states that where a statutory provision is ambiguous, the Agency’s interpretation shall be given deference so long as that interpretation is reasonable. There is no discussion in Commissioner Wilson’s dissent of Chevron. One can only assume she believes the FTC deserves no deference.
Those are not the only precedents that appear to be ignored. Commissioner Wilson and others argue that it is improvident for the FTC to engage in rulemaking on this issue rather than adjudication. However, the Supreme Court has spoken on this issue as well. In “Chenery II,” Justice Murphy wrote (emphasis ours):
Problems may arise in a case which the administrative agency could not reasonably foresee, problems which must be solved despite the absence of a relevant general rule. Or the agency may not have had sufficient experience with a particular problem to warrant rigidifying its tentative judgment into a hard and fast rule. Or the problem may be so specialized and varying in nature as to be impossible of capture within the boundaries of a general rule. In those situations, the agency must retain power to deal with the problems on a case-to-case basis if the administrative process is to be effective. There is thus a very definite place for the case-by-case evolution of statutory standards. And the choice made between proceeding by general rule or by individual, ad hoc litigation is one that lies primarily in the informed discretion of the administrative agency.
It is entirely possible the Court will ignore its own precedent, but the FTC should not be so quick to do so like antitrust practitioners did with Philadelphia National Bank and other pre-consumer welfare decisions. The FTC should stick to protecting the public and not give deference to the Chicago School over controlling precedent.
The Constitutional Issues
Commissioner Wilson invokes Constitutional issues in apparent eagerness to eliminate her own agency’s authority. In doing so, she assumes that in any “major questions doctrine” (MQD) challenge to the FTC’s rulemaking the Supreme Court will rule against the agency. This is not an unreasonable assumption, given the MQD appears based on Judicial Activism to hijack Congressional intent and Agency autonomy and transfer power to the Supreme Court. Quite simply, according to the Supreme Court, the doctrine suggests that
there are extraordinary cases in which the history and the breadth of the authority that [the agency] has asserted, and the economic and political significance of that assertion, provide a reason to hesitate before concluding that Congress meant to confer such authority… Under this body of law, known as the major questions doctrine, given both separation of powers principles and a practical understanding of legislative intent, the agency must point to clear congressional authorization for the authority it claims.
But are all administrative rulemaking cases a major question? Are all rulemakings “extraordinary?” Is every rulemaking that benefits society destined to end in a MQD challenge? If that’s the case, then no agency rulemaking is safe, and the argument that the FTC should not promulgate this rule should really be that no agency should promulgate any rule, despite decades of precedent to the contrary. And perhaps that is the end goal that her comments imply she would favor.
Finally, it could be the case that the Supreme Court will just end the administrative state altogether. Certainly Justice Thomas has signaled that way. The “non-Delegation doctrine,” as some would have it, would kill independent administrative agencies, and perhaps the administrative state altogether.
These issues are shared by all administrative agencies, not just the FTC. So to claim that such rulemaking might bring the downfall of the administrative state understates the argument: Any rulemaking might do so, if five justices decide to again ignore precedent to gain power to halt changes that protect the public.
Conclusion
It is telling that a notice of proposed rulemaking has created such ire. Firms rely on non-compete agreements to “unfairly exploit and coerce” workers by minimizing worker leverage, depress their wages, and protect non-existent interests. Trade Secret law already protects any relevant employer interests. But firms favor less competition in the labor market and in the output markets in which they operate.
And Commissioner Wilson is happy to help them. The Notice itself is keenly aware of the history Wilson lays out (and the administrative law she ignores). Warning an agency to do nothing because it will bring backlash by the Supreme Court is a well-established antitrust philosophy. It is one that needs to change.
Mark Glick is a professor of economics at the University of Utah. Darren Bush is a professor of law at the University of Houston Law Center. The views express here are those of the authors only, and do not represent the views of their respective institutions.
The recent debacle that saw Taylor Swift concert tickets surge as high as $22,000 has prompted the United States Senate to join antitrust authorities in reexamining the controversial merger that created Live Nation Entertainment (LNE), the corporation that mishandled ticket sales for the event. The deal, consummated in 2010, combined two already powerful firms —Ticketmaster, which dominated ticketing services for events, and Live Nation, which was the leading event promoter — into a near monopoly.
Critics predicted that LNE would abuse its market power in ways that hurt consumers, artists, and venues, and they proved to be right. Ticket prices, for example, have nearly tripled in the last two decades. In December, the company followed up its fiasco with Taylor Swift by botching ticket sales to a Mexico City concert by Bad Bunny, one of the world’s biggest pop stars, prompting calls for an investigation by Mexico’s president, Andrés Manuel López. Meanwhile, LNE has coerced artists and venues into using its ticket-selling services exclusively — a practice known as exclusive dealing that violates antitrust law.
Fortunately, it’s not too late for the federal regulators to remedy the mess. In addition to a lawsuit being developed by the Department of Justice (DOJ), the Federal Trade Commission (FTC) can use some of its long-neglected – but recently awakened – powers to create market-wide rules targeting LNE’s use of exclusive dealing, a predatory practice that garners little attention with headlines focused on Ticketmaster’s prohibitive ticket prices and botched ticket sales.
* * *
The story of the merger that created LNE illustrates almost every mistake the government can make in preventing monopolies. When it approved the merger twelve years ago, DOJ knew that Ticketmaster was already operating as a virtual monopoly, having captured 80 percent of the primary ticketing market.
DOJ also knew that Live Nation possessed significant power in the live entertainment industry. Live Nation was the leading concert promoter, whose role involves contracting the chosen venue, handling the advertising, and managing other production services. Live Nation managed a third of major concert events in the United States, and owned 75 concert venues.
Moreover, due to its position as the nation’s leading promoter, Live Nation was well positioned to develop its own primary ticketing service and challenge Ticketmaster. Soon after entering the primary ticketing market, Live Nation became the second most dominant firm in the industry, controlling 16.5 percent of ticketing sales.
Nonetheless, the Obama administration’s DOJ approved the merger, demanding only a consent decree (formal legal jargon for a settlement) that required LNE to agree to certain minimal conditions. LNE was required, for example, to (1) divest a small division of its company, (2) not share consumer information collected from its ticketing business, and most importantly, (3) not engage in any retaliatory or unfair practices, such as exclusive dealing. LNE would soon blatantly violate all three conditions.
Consequently, consumers, entertainers, and venue operators have had to endure the full brunt of the merged firm’s monopoly power. The New York Times detailed in 2018 how “Live Nation and its operations extend into nearly every aspect of the concert world,” further expanding its dominant position by withholding access to its events if its customers did not use Ticketmaster’s ticketing service.
LNE also uses its power to take more of a cut of the proceeds and, by virtue of shutting out venues that refuse to comply with LNE’s terms, limit an artist’s access to venues, even if that venue can offer better terms to the artist. Artists themselves are put in a position in which to avoid angering fans over unaffordable ticket prices, they have to reduce their own earned income from the event to ensure stable and fair prices.
LNE’s violations of its merger settlement were so blatant that the DOJ under Trump faced enormous political pressure to amend the consent degree with harsher terms, which it did. But these proved insufficient to infusing competition into the industry and major abuses continued.
Today, in addition to the abuses already described, LNE engages in kickback agreements to share its monopoly profits with venues to promise not to take their business elsewhere. Firms failing to submit to LNE’s demands can expect explicit or implicit retaliation against them by LNE cutting them off from all its services.
The hardball tactics have worked. As one lawsuit cogently describes, LNE has locked up over 70 percent of concert venues — numbering 12,000 individual locations — across the United States to exclusively use LNE’s Ticketmaster service, satisfying the significant foreclosure requirement in exclusive dealing law (typically at least 30-40 percent). Each contract is, on average, five to seven years long and sometimes exceeds ten years, satisfying the duration requirement in exclusive dealing law.
Exclusive dealing requirements like these are a centuries-old means of forestalling competition and building monopolies among businesses that sell to other businesses. They prevent a firm from choosing among different competing suppliers, thereby tending to make dominant suppliers still stronger. As I describe in a forthcoming law review article, exclusive dealing requirements restrict the freedom of businesses to select their suppliers or customers, as well as reduce and deter competition – making them “weapons of subjugation that allow dominant corporations to exert their power to maintain their control and be able to punish dependent firms.”
The antitrust laws, such as Section 2 of the Sherman Act, Section 5 of the FTC Act, and in some cases Section 3 of the Clayton Act, broadly prohibit exclusive dealing. LNE’s conduct also clearly violates the controlling Trump-era settlement, which explicitly restricts LNE from “Condition[ing] or threaten[ing] to Condition” its services in a manner that prevents venue owners from “contracting with a company other than [LNE] for Primary Ticketing Services[.]” Indeed, a class action lawsuit initiated in 2022 makes such assertions.
Additionally, other factors such as LNE’s monopoly power and the number of venues locked in by LNE’s exclusive arrangements make antitrust litigation likely to succeed. The ticketing and venue market has extensively high barriers to entry: there are only so many venues, and so many artists that draw massive crowds to fill up venues.
Supporters of the merger could counter by pointing to the fact that concert venues need ticketing service firms to have a proven record of reliability, experience, and scale to handle significant sales volume. Yet Ticketmaster’s recent mismanagement of Taylor Swift’s and Bad Bunny’s concert tickets show that LNE by itself could not provide the necessary level of service. Maybe if LNE faced more competition, it would improve the quality of its service.
Now that millions of Taylor Swift fans have discovered the evils of monopoly, a federal lawsuit against LNE would be bound to receive lots of press attention and wide public support. Initiating a federal lawsuit would also showcase that antitrust enforcement can directly rein in corporate power, and that it can provide tangible benefits to consumers — such as lower ticket prices, higher quality handling of ticket purchases, and increased open access to resale tickets. Moreover, a lawsuit would represent an implicit admission that settlements of the kind that was supposed to restrain LNE are not an earnest policy position that restrains dominant corporations and that litigation and remedies, such as structural breakups, should be the preferred enforcement route.
Antitrust litigation, to be sure, is costly, time consuming, and, more importantly given the current construction of the federal judiciary, unpredictable. Particularly over the last 40 years, reviewing courts have shown little hesitation in rewriting the rules to favor dominant corporations. Furthermore, because significant portions of antitrust litigation are based on a defendant-friendly burden-shifting framework known as the rule of reason, successful litigation against one company does not automatically translate into successful litigation against another corporation using similar market practices. Yet in this case, even if litigation fails, an even better solution is available.
Congress endowed the FTC with broad, delegated authority to enact economy-wide rules prohibiting unfair methods of competition. The FTC can use its power to enact a rule that would prevent the use of exclusive deals by dominant firms or when exclusive arrangements restrict access to an undue percentage of the market. A July 2020 petition to the FTC, signed by over 30 scholars and advocacy organizations, including my current employer, the Open Markets Institute, supports such a rule. The FTC’s recent proposal banning non-compete agreements using this latent power, reveals that the agency can initiate a similar proposal against exclusive deals.
A rule banning monopolistic and unfair uses of exclusive arrangements, like those employed by LNE, would have many benefits. A bright-line rule would provide exceptional clarity for businesses to know when exclusive deals are allowed. A rule would also avoid the currently onerous requirements of antitrust litigation by limiting the analysis courts would engage in.
As the Supreme Court once stated, clear rules “avoid the necessity for an incredibly complicated and prolonged economic investigation into… a particular restraint… an inquiry so often wholly fruitless when undertaken.” Clear rules also limit the unduly expansive prosecutorial discretion afforded to public enforcers. The FTC should act as quickly as possible to use it full powers. In the process it will not only uphold the role of law and fair marketplace but will win the gratitude of everyone who doesn’t want to pay monopoly prices to see their favorite entertainer.
Daniel A. Hanley is a Senior Legal Analyst at the Open Markets Institute. You can follow him on Mastodon @danielhanley@mstdn.social.
Disclosure: Daniel is employed at the Open Markets Institute, which along with 36 other organizations and scholars, petitioned the FTC to use its unfair methods of competition rulemaking powers to prohibit exclusive contracts.
Over the last year, three of the four current FTC Commissioners (one seat is vacant) have indicated an interest in renewed enforcement of the Robinson-Patman Act as a potential means of policing anticompetitive conduct. The most robust support has been voiced by Commissioner Alvaro Bedoya, who delivered a speech on the subject on September 22, 2022 at a Minneapolis event titled: “Midwest Forum on Fair Markets: What the New Antimonopoly Vision Means for Main Street.” Commissioner Bedoya titled his speech “Returning to Fairness,” and through three anecdotal case studies, expressed skepticism of the prevailing paradigm that “efficiency” is (or should be) the paramount goal of the antitrust laws. As Commissioner Bedoya pointed out, none of the Congresses that enacted any of the familiar antitrust acts invoked “efficiency” as their central purpose; indeed, none of them even mentions “efficiency” as a goal. Rather, he explained, those Congresses targeted “unfairness.” He summarized his views thusly:
Certain laws that were clearly passed under what you could call a fairness mandate – laws like Robinson-Patman – directly spell out specific legal prohibitions. Congress’s intent in those laws is clear. We should enforce them.
With Commissioners Khan and Slaughter having previously expressed similar sentiments, it is not surprising that opponents of a resurgent RPA have been quick to respond. On October 11, 2022, the American Action Forum published a “primer” titled “FTC to Use Robinson-Patman Act as an Antitrust Tool to Target Large Retailers,”[1] and a week later the Cato Institute published an article titled “The Zombie Robinson‐Patman Act Doesn’t Deserve Revival.”[2]
These articles repeat a series of criticisms that will be familiar to anyone who has spent time with the Robinson-Patman Act (the “RPA”). For example, the article from the Cato Institute proclaims that “[b]y inhibiting more efficient firms from receiving wholesale discounts, the RPA therefore denied retail consumer savings in the form of lower prices,” and that “[i]f enforced again it would no doubt smother efficiencies once more, resulting in higher prices for customers.” The piece from the American Action Forum likewise expresses the concern that “expansion of the use of the RPA as an antitrust tool could have major implications for consumers,” because “[a]n RPA claim may ignore the efficiencies firms generate that come with scale,” such that “consumers will likely pay higher prices.” These criticisms echo those from former FTC Commissioner Noah Phillips, who testified to the House Judiciary Committee of the last Congress that an “unfortunate result [of the RPA] was that American consumers paid more money for groceries and household products that they use every day.”[3]
These recurrent criticisms of the RPA have echoed since the “Chicago School” of economic theory gained ascendance in the Reagan administration and have been repeated with such frequency and certainty that they have become truisms. One may then be surprised to learn that despite 40+ years of repetition, these familiar criticisms are entirely lacking in empirical support. As Commissioner Bedoya recognized, “some 86 years after its passage, there is not one empirical analysis showing that Robinson-Patman actually raised consumer prices.” Indeed, when one traces the lineage of these familiar criticisms back through the literature, he finds that the supporting citations (where citations are offered at all) are only to prior works voicing the same criticisms. And if one delves even further back, he will find that the criticisms did not originate in the work of economists at all, but in the works of laissez faire legal scholars. That is, the familiar criticisms largely originated in the writings of Judges Bork and Posner, and Professor Hovenkamp, all of whom stated the criticisms as axiomatic.[4] Perhaps now when a potential revival of the RPA is at hand, it is finally time to query whether the generally accepted condemnations of the RPA are valid to begin with.
1. Are the companies that receive discriminatory pricing “more efficient”?
One might begin with the criticism that the Act prevents suppliers from giving favorable pricing to “larger, more efficient businesses.”[5] This criticism contains two (apparently unrecognized) assumptions: (1) that “larger” businesses obtain discriminatory pricing because they are more “efficient” and (2) that the Act prohibits discounts associated with actual efficiency.
As to the first, what evidence is there that suppliers grant preferential pricing to customers based on their “efficiency”? It’s a rhetorical question; the answer is “none.” Perhaps the proponents of this criticism don’t really mean demonstrated “efficiency,” but instead use “larger” as a proxy for “more efficient.” But if that’s what they mean, why do they feel the need to cloak bigness in the garb of “efficiency”? Surely they recognize that a customer like Walmart or Amazon is able to demand preferential pricing based purely on its largeness, with no regard to its “efficiency.” This same criticism of the RPA has been leveled for more than forty years, but I have read volumes of RPA literature and caselaw, and am not aware of any empirical study showing that big businesses are more efficient than small businesses in the only metric that is relevant to the RPA—the cost to the supplier of making sales to its customers.
In the real world, we have substantial reason to doubt whether it is more efficient for a supplier to sell to big businesses than to their smaller competitors. Our firm has litigated only two RPA cases where cost information as to the favored and disfavored purchasers has been produced in discovery. In these two matters, we learned (from the defendants’ own calculations) that because of Costco and Walmart’s exacting packaging and delivery requirements, it was more costly for the supplier to supply those giants than it was to supply their independent competitors. Nevertheless, both suppliers gave Costco and Walmart better pricing merely because the behemoths demanded it. While two is admittedly a tiny sample, it is also two-out-of-two. Before we adopt economic and public policy around the assumption that big businesses should be entitled to discriminatory pricing because they are “more efficient,” we at least ought to know whether it’s true.
Moreover, the RPA includes a specific provision that protects sales to firms that are actually more efficient. Under the “cost-justification” defense, “nothing herein contained shall prevent differentials which make only due allowance for differences in the cost of manufacture, sale, or delivery resulting from the differing methods or quantities in which such commodities are to such purchasers sold or delivered.”[6] In other words, where it is actually demonstrably cheaper for a supplier to sell to Walmart or Costco than to their smaller competitors, the RPA permits a lower price offer. The Act only prohibits discounts that cannot be justified as more efficient.
The response that the cost-justification defense is “virtually impossible” to meet is unconvincing.[7] In all of my RPA reading, I have yet to see a cogent explanation of why it would be so hard for a supplier to demonstrate its cost savings to the recipient of a discriminatory price. After all, cost-of-goods-sold calculations represent a fundamental component of business accounting. The reason why the defense has been “virtually impossible” to meet in practice almost certainly rests with the challenged price having no supporting cost calculation as a basis in the first place. Where a supplier offers an arbitrary 20% discount to a favored customer, for example, no one should be surprised to find that it is “virtually impossible” for the supplier to cobble together data to show that it was cost-justified. But that does not condemn the defense; rather, it demonstrates that the supplier engaged in unjustified price discrimination.
2. Does the RPA prohibit “discounting,” resulting in higher prices to consumers?
The Cato Institute article proclaims that the RPA “inhibit[s] more efficient firms from receiving wholesale discounts,” and that “[i]f enforced again it would no doubt . . . result[] in higher prices for customers.” These are two familiar and related criticisms—that the RPA prohibits “discounts,” and that the result is higher prices to end consumers.
The notion that the RPA “prohibits discounts” is merely a framing device to support the criticism. Section 2(a) says nothing about “discounts;” what it prohibits is “discriminating in price.” The RPA can only be framed as prohibiting discounts if one assumes that the supplier’s baseline price is the higher price it charges its disfavored customers. But why should the price that the supplier unilaterally sets be deemed the baseline? One can just as easily declare that the baseline price is the one that the supplier negotiates with a strong buyer; Walmart or Costco for example. Under that framing device, what the Act prohibits is charging illegally higher prices to smaller businesses.
The effect on prices to end consumers follows suit. As Commissioner Bedoya noted, it has never been empirically demonstrated that prohibiting price discrimination results in higher prices to end consumers. But even with the lack of empirical support, the assumption that RPA enforcement “would no doubt . . . result[] in higher prices for customers” depends on supposing that if suppliers are forced to sell to competing purchasers at a single price, it would be their higher list-price, rather than their “Walmart price.” But surely a supplier’s largest customers aren’t mere price-takers, who will settle for whatever list price the supplier announces. Undoubtedly they would bargain for a lower price, and when that bargaining process is complete, the smaller purchasers would benefit from the same lower price. This is because “[i]f the bargaining is done by the stronger of two buyers, then the lower price becomes the price paid by everyone.”[8] If that is true, then prohibiting price discrimination gives all buyers access to the favored price, and “would no doubt” result in lower consumer prices to more people.
Of course there are numerous complications to a simplistic view that the proper “but for” price is the one given to the favored purchaser, and that all purchasers would get that price if the RPA were rigorously enforced. Most obviously, it seems likely that a supplier uses the higher prices it charges to its disfavored purchasers to subsidize the low prices it gives to the favored. But that is hardly a reason to suspect that the RPA results in higher prices to consumers on average. Rather, it seems consistent with the RPA’s fears: that in a world that permits price discrimination, smaller businesses will find themselves subsidizing the profitability of their larger competitors. More to the point of this article, however, is that I have yet to see any of the RPA’s legal critics even consider any of these issues, let alone attempt to rigorously analyze them.
Nevertheless, real world observation of RPA litigation supports the view that the proper baseline price is the one given to the big buyer. While I cannot speak as knowledgeably about the FTC’s historic enforcement actions, I can say that out of the hundreds of private-enforcement RPA cases I have read, the plaintiff has always demanded to be given the lower favored price, not demanded that its competitor be required to pay the plaintiff’s own higher price. In other words, success in those cases “would no doubt” result in lower prices, not higher ones, as the critics proclaim. That pattern is supported by the cases our firm has brought where the settlement has included a price component. Never once has the lower price given to the favored purchaser been taken away; it has always been the case that that lower price has been extended to our client.
* * *
In his September speech, Commissioner Bedoya quite rightly observed that nothing in the RPA or its legislative history suggested that Congress was concerned with promoting “efficiency.” Indeed (and while Commissioner Bedoya sagely refrained from making the point) the Congress that passed the RPA did not even express the purpose of ensuring the lowest possible prices to consumers. The Supreme Court has recently reiterated that the judiciary “is not free to substitute its preferred economic policies for those chosen by the people’s representatives.”[9] But since the Supreme Court has already largely substituted its preferred economic policies for those chosen by Congress in the antitrust realm, I fear that Commissioner Bedoya is ceding unnecessary ground in exhorting “a return to fairness,” as if fairness and efficiency are antipodes. While Commissioner Bedoya’s reading of congressional intent is undoubtedly correct, I sense that the FTC will have better luck in any future enforcement actions if—in addition to emphasizing the plain language of the Act—it pushes back strongly on the familiar condemnations of the Act, by pointing out that despite their endless repetition, they lack any empirical support.
Mark Poe is a co-founder of San Francisco-based Gaw | Poe LLP. Mr. Poe and his co-founder Randolph Gaw are classmates of the 2002 class of Stanford Law School, who worked at Morrison & Foerster, Wilson Sonsini, and O’Melveny & Myers prior to founding their own firm in 2014. The firm frequently litigates Robinson-Patman Act cases on behalf of “disfavored” wholesalers who cater to convenience stores and independent grocers.
[1] See https://www.americanactionforum.org/insight/ftc-to-use-robinson-patman-act-as-an-antitrust-tool-to-target-large-retailer/#ixzz7otMtpJl0.
[2] See https://www.cato.org/blog/zombie-robinson-patman-act-doesnt-deserve-revival.
[3] See https://www.congress.gov/event/117th-congress/house-event/LC68134/text?s=1&r=91.
[4] See Robert Bork, The Antitrust Paradox (1978); Richard A. Posner, The Robinson-Patman Act, Federal Regulation of Price Differences, American Enterprise Institute (1976); Herbert Hovenkamp, Federal Antitrust Policy: The Law of Competition and Its Practice (3d ed. 2005).
[5] Hovenkamp, n.5, § 14.6a1.
[6] 15 U.S.C. § 13(a).
[7] See n.5, Posner at 41.
[8] Daniel P. O’Brien, The welfare effects of third-degree price discrimination in intermediate good markets: the case of bargaining, 45 RAND J. OF ECON. 92, 100 (2014).
[9] Epic Systems Corp. v. Lewis, 138 S. Ct. 1612, 1632 (2018) (Gorsuch, J.)
An overlooked impact of corporate mergers has been their adverse impact on the gender gap. Under the Consumer Welfare Standard, disparate impact on women and minorities is deemed irrelevant for antitrust policy. This deficiency merely reveals how the Consumer Welfare Standard illegitimately forces policymakers to ignore important features of social welfare in the interest of the merging parties. Merging parties contend that the severe layoffs that often accompany mergers as “efficiencies.” Quite the contrary, these layoffs cause human suffering and social dislocation.
Merger-related job cuts tend to target lower-level positions because they tend to be less specialized in nature and have the most employees. Historically, women and minorities have been over-represented in lower-level positions and under-represented in the highest-wage workforce. According to the Current Population Survey, women comprise 58 percent of the low-wage workforce, and women represent 69 percent of the lowest-wage workforce, referring to those occupations that typically pay less than $10 per hour.
Consider the recent merger of the two banks BB&T and SunTrust. Using the Corporate Social Responsibility Reports from BB&T and SunTrust pre- and post-merger, I estimate that the gender composition across executive and senior managers, originally 28 percent and 42 percent for BB&T and SunTrust, respectively, was reduced to 22 percent post-merger. The antitrust status quo’s inability to address the gender difference, which produces such evident injury to female and minority labor, highlights the basic flaws of utilizing the Consumer Welfare Standard as the only compass to investigate and restrain anticompetitive activity.
Background on the Merger
On February 7, 2019, the boards of both BB&T and SunTrust announced the unanimous approvals to combine in merger of equals. Following discussion, the shareholders approved the merger of equals agreement on July 30, 2019. The parties contended that the merger was needed because of a changing financial landscape, which required increased scale and efficiency in the face of competition from larger banks. The combined entity was expected to benefit from cost savings and synergies (i.e., layoffs), as well as a broader range of products and services for customers.
The merger involved large banks. A Congressional Research Service examination of S&P Global Intelligence data reveals that, since 2010, in 88 percent of bank acquisitions, the acquired bank had assets of less than $1 billion, while in just one percent of acquisitions, the acquired bank had assets exceeding $10 billion. The BB&T-SunTrust merger is a clear outlier: SunTrust’s $215.5 billion in assets surpasses the second largest post-crisis purchase by more than double. Although it was one of the largest mergers in banking history, neither the Federal Reserve Board nor the Federal Deposit Insurance Corporation challenged the merger. The Department of Justice ordered the divestiture of approximately $2.3 billion in deposits across seven local markets. While this divestiture ensured that banking consumers in Virginia, North Carolina, and Georgia had continued access to competitively priced banking products, including small business loans, none of the federal agencies tasked with reviewing the merger addressed concerns of loss of diversity among the company or the loss of jobs due to said merger.
On December 6, 2019, the merger was officially consummated, and the company was renamed Truist Bank. The merger resulted in a merged corporation with a net value of $66 billion, and assets exceeding $400 billion. It also included around $330 billion in savings from over 10 million American families. The merged corporation is currently the sixth biggest bank in the United States, only preceded by JPMorgan Chase, Bank of America, Wells Fargo & Co, Citigroup, and U.S. Bancorp.
The Adverse Impact on Labor and on Diversity
The Corporate Social Responsibility forms filed by each company before and after the mergers raise several concerns regarding the loss of diversity among women and persons of color after the merger. In 2018, BB&T had 35,900 workers, while SunTrust had 23,499 workers. Before the merger, the two firms had a combined total of 59,399 employees. After the merger, Truist had a total of 58,767 employees. The workforce was thus reduced by 632 employees. Additionally, in 2018, BB&T had 67 percent women employees, and SunTrust had 61 percent women employees. Thus, the overall percentage of women employees in total between the two companies as a weighted average was 65.1 percent. In comparison, after the merger the percentage of women employees was reduced to 64.4 percent. The number of women in total between the companies decreased from 38,669 before the merger to 37,846 after the merger, for a reduction of 823. This means that the reduction in total workforce can be largely accounted for by the reduction in women employed. In fact, some women were replaced with men after the merger. Overall, we notice reductions of women employed in several positions, including executive and senior managers, sales workers, and administrative support.
The table below highlights the gender and minority distribution pre- and post-merger for the fiscal years 2018 and 2019.
According to these data, we find that there was a loss of diversity, expressed via the Persons of Color column in the Difference Between Post- and Pre-Merger section, among the Board of Directors, Executive and Senior Managers, as well as sales workers and administrative support. The total number of persons of color in the sales workers and administrative support category decreased by 427, using the same calculation method as for women.
These data also reveal that the biggest layoffs occur at lower-level positions such as sales workers, administrative support, and professionals. Only three individuals were laid off from the Board of Directors and Executive and Senior managers positions following the merger, while more than 500 individuals from the professionals, sales and administrative support categories were fired from their positions.
The harsh reality workers face when firms decide to merge goes against the main tenants proposed by welfare economics, which promotes policies that improve human well-being regardless of their race, gender, or ethnicity. But under the Consumer Welfare Standard, these harmful outcomes are deemed irrelevant. Even when monopsony is taken into account during a merger review, the impact to marginalized groups is often ignored. In addition, concentration can worsen diversity across firms and hinder women from climbing the professional ladder. In such situations, an emphasis on consumer welfare tips the balance in favor of the (white male) majority and against minority protected class status.
We need a merger standard that accounts for the impact of mergers on diversity and labor mobility for women. Obviously, antitrust enforcement is only one tool, but an important one. Output is not the only important social value and is far from a comprehensive measure of social welfare. In a political environment where women and persons of color are fighting for their rights, why has antitrust decided to turn a blind eye and favor the white male majority?
Laura Beltran is a Ph.D. student in the economics department at the University of Utah.
Should those of us who believe that the vigorous enforcement of the antitrust laws is in the public interest fear the rise of textualism? After all, textualism is the method of statutory construction that historically was pushed by Justice Scalia, and today it is usually used by the most conservative Supreme Court justices. In cases such as Dobbs v. Jackson Women’s Health Organization, the Court used textualism to overturn well established liberal precedent.
Yet, we shouldn’t fear textualism. It’s even possible that textualism could help promote robust antitrust enforcement. Consider, for example, the original, aggressively populist words of Section 7 of the Clayton Act. It prohibits mergers the effect of which “may be substantially to lessen competition or to tend to create a monopoly.” Notice the “may” language. (Also notice some aggressive language that is beyond the scope of this article, the “tend to monopolize” language. Also notice that the original language of Section 7 contains no efficiencies’ defense!)
Although some recent court decisions use “may” in the way that it usually is defined today, many decisions have re-articulated “may” in ways that give the term a very different meaning. For example, in United States v. Baker Hughes, Inc. (then) Circuit Court Judge Thomas affirmed a district court’s conclusion that “it is not likely that the acquisition will substantially lessen competition….” (boldface added). A similar articulation appeared in In re Cast Iron Soil Pipe & Fittings Antitrust Litig., a requirement that “the effect of the merger is to substantially lessen competition or tend to create a monopoly.” (boldface added).
Other courts have re-formulated the “may” language in the context of implementing a three-part balancing test, including the 3rd Circuit’s 2022 opinion in FTC v. Hackensack Meridian Health, Inc.: “First, the FTC must establish a prima facie case that the merger is anticompetitive.” (boldface added). Recent opinions from the D.C. Circuit have substituted “is likely to” for “may,” including United States v. UnitedHealth Grp. Inc.: “[T]he government must show…that the proposed merger is likely to substantially lessen competition.” (boldface added).
These differing but all conservative re-formulations of “may” have been used in many other recent merger cases as well. They give rise to a question for which textualist analysis was well designed: What did “may” mean when the Clayton Act was passed in 1914? Did it mean the same thing as “may” means today? The same thing as “is likely to” or “will”?
A textualist analysis would attempt to determine what “may” meant when this word was used in the Clayton Act by starting – and in almost all cases ending – with the exact words of the statute. It would ascertain what “may” meant when the statute was enacted by giving this word the plain, ordinary, everyday, meaning it had at the time. But it would ignore the statute’s legislative history.
Justice Scalia’s treatise on textualism, Reading Law: The Interpretation of Legal Texts, emphasized that modern enforcers and courts should analyze how the words and phrases in question were used in leading English language dictionaries of the period and (if applicable) also in contemporaneous legal dictionaries, legal treatises, and cases. Scalia helpfully provided lists of the English language dictionaries and legal dictionaries and treatises he considered “the most useful and authoritative” for various time periods. Two of these lists, for dictionaries and for legal treatises, covered the 1901-1950 period, which encompasses both the 1914 enactment of the Clayton Act and its major amendment in 1950.
All four of the English language dictionaries from this period Justice Scalia considered to be the “most useful and authoritative” defined “may,” but none defined the full phrase, “may be substantially.” What follows are the principle definitions contained in each dictionary. Some of these full definitions are quite lengthy.
The Century Dictionary and Cyclopedia (1904) defined “may” principally as: “…. The principal uses are as follows: (a) To indicate subjective ability, or abstract possibility: rarely used absolutely …. (b) To indicate possibility with contingency….” The Oxford English Dictionary (1908) defined “may” principally as: “The primary sense of the verb is to be strong or able, to have power…. to have power or influence; to prevail (over)…. Expressing objective possibility, opportunity, or absence of prohibitive conditions; = CAN…. Expressing subjective possibility, i.e. the admissibility of a supposition. a. In relation to the future (may = ‘perhaps will’)….” Webster’s Second New International Dictionary (1934) defined “may” principally as, “To have power; to be able…. Liberty; opportunity; permission; possibility; as, he may go; you may be right…. Desire or wish…. Contingency….” Funk & Wagnalls New Standard Dictionary of the English Language (1943) defined “may” principally as: “To have permission; be allowed; have the physical or moral opportunity as, you may go; ….To be contingently possible; as it may be; you may get off….”
The Century Dictionary and Cyclopedia explicitly said that, even though “may” could be used to mean only a theoretical or “abstract possibility,” may was “rarely used absolutely” in this way. Webster’s Second New International Dictionary similarly said, “Archaic Ability; competency; – now expressed by can….” The other two dictionaries did not, however, say that an absolutist or literal usage of “may” to mean even a tiny or theoretical possibility was archaic.
All four dictionaries, of course, defined “may” in terms of a possibility or contingency. None of these dictionaries used anything resembling an “is likely to” or “will” or any other type of “more likely than not” standard that was used in the cases cited earlier.
In addition, for the 1901–1950 period, Justice Scalia listed five legal dictionaries and treatises he considered to be “the most useful and authoritative.”. Three included relevant definitions of the word “may”. The Cyclopedia Dictionary of Law (1901) defined “may” as: “Is permitted to; has liberty to. The term is ordinarily permissive….” Legal Definitions by Benjamin Pope (1920) defined “may” principally as: “The word “may” and like expressions give, in their ordinary meaning, an enabling and discretionary power….. When a statute declares that something “may” be done, the language is, as a general rule, permissive….” Bouvier’s Law Dictionary (1940) defined “may” as “Is permitted to; has liberty to… Where there is nothing in the connection of the language or in the sense and policy of the provision to require an unusual interpretation, its use is merely permissive and discretionary….”
These legal dictionaries and treatises are thus consistent with the uses of “may” in the English language dictionaries of the period. None are consistent with the case law cited above.
Especially in light of “may” being used in conjunction with the phrase “be substantially to lessen competition,” it is highly unlikely that Congress wanted “may” to encompass mergers with only a tiny, theoretical chance of substantially lessening competition. The word “may” in Section 7 of the Clayton Act does not, however, limit the law’s prohibitions to mergers that are “likely” to or “are more likely than not” to or that “will” substantially lessen competition. A possibility or a modest probability should be enough.
This textualist analysis demonstrates that the “may” was intended by Congress to mean exactly what it means to a modern speaker of the English language. To the extent recent cases have deviated from Congressional intent, these cases should be overturned. If the courts accept the conclusions in this article the crucial question for believers in aggressive antitrust becomes: how much more vigorous would antitrust enforcement become? It is impossible to know.
To answer this question one should step back and ask the extent to which conservative judges would honestly and faithfully implement this statute as it was written even though they disagree with this wording? This dishonesty could happen even though judges are, of course, not supposed to substitute their own policy preferences for those of Congress.
Suppose, for example, a particular Circuit Court decided that a textualist reading of Section 7 should block all mergers with only a “non-trivial but modest possibility” of leading to a substantial lessening of competition? Would a conservative District Court judge presiding in that circuit who was sympathetic to corporate mergers find another, result-oriented way to dismiss a challenge to a merger? This type of judge could, for example, find a way to artificially broaden the definition of the market and thereby reduce defendant’s post-merger market share dramatically. Could a conservative judge deliberately find, on the basis of a paucity of evidence, that entry was easy and erroneously conclude that the post-merger firm had no ability to substantially affect competition?
Justice Kagan’s recent dissent in West Virginia v. Environmental Protection Agency challenged the sincerity of the current Supreme Court’s embrace of textualism. She believes they allow their conservative values to override their allegiance to textualist analysis:
Some years ago, I remarked that “[w]e’re all textualists now.” . . . It seems I was wrong. The current Court is textualist only when being so suits it. When that method would frustrate broader goals, special canons…. magically appear as get out-of-text-free cards. Today, one of those broader goals makes itself clear: Prevent agencies from doing important work, even though that is what Congress directed…. [an] anti-administrative-state stance….
The antitrust statutes are populist in their origin and nature, and were written using language that reflects the populist, pro-consumer, anti-monopoly beliefs of the time. Congress certainly intended the Clayton Act to be an aggressive pro-consumer statute. Sadly, this law has largely been rendered ineffective by decades of conservative judicial interpretation.
The Supreme Court’s recent embrace of textualism, however, provides a hopeful path for returning Section 7 to its original meaning and purpose. Whether particular conservative result-oriented justices will embrace the logical implications of textualism, or decide that their adherence to textualist analysis is less important than their political beliefs, is impossible to predict.
Textualist analysis could cause courts to re-examine what they have been doing in Section 7 cases and to analyze this law with a fresh perspective. This could cause them to find and follow Congress’s original, vigorous purpose, rather than to simply follow precedent that often has deviated from the precise language contained in Section 7.
It is safe to conclude that a textualist reading of Section 7 of the Clayton Act should not trouble those who believe in robust antitrust enforcement. But in light of the conservative nature of so many judges and justices and the ease that dishonest judges would have to find ways to reach the results they prefer, it is impossible to predict whether antitrust enforcement will become more robust.
Robert Lande is the Venable Professor of Law, University of Baltimore School of Law. This article is a condensation of part of a law review article on the topic scheduled to appear in the Utah Law Review. See Robert H. Lande, “Textualism As An Ally of Antitrust Enforcement: Sections 2 and 7” (forthcoming) (draft available upon request).
Last week, I had the honor of presenting a paper, co-authored with Jacob Linger and Ted Tatos, on the causes of rental inflation to competition authorities from around the world at the OECD competition conference in Paris. Many factors contribute to rising rents, but one factor hasn’t received much attention: the consolidation of properties by developers within neighborhoods. I’m hoping to change that.
Softening the Beachheads
Before telling you my theory on the nexus between competition and inflation, let me say what it is not: It is not that concentration changed suddenly in 2021, causing an uptick in prices. That’s a straw man invented by Larry Summers and other members of his neoliberal cabal. The real nexus rests with the ability of market concentration to facilitate price coordination, and a small bout of inflation can grease the skids even further.
In December 2021, I was in a courtroom in San Francisco watching a videotape of a Japanese executive whose company was embroiled in a price-fixing conspiracy. And the CEO told the jury that his cartel functioned most efficiently during times of inflation. I nearly fell out of my wooden bench.
He offered two theories, which I have translated into Economese. The first is what I call “Softening the Beachheads,” an unfortunate war analogy. Consumer resistance to price hikes may soften with inflation because there is now a pretext for the price increase. The second is what economists will recognize as a “focal point”—inflation solves coordination problem by providing a floor for future price increases.
Notice that neither theory requires any increase in concentration. The driving force lies with the interaction of inflation with the existing high level of concentration, exacerbated by existing coordination among firms.
The Rental Inflation Problem
Although general inflation began to fall below nine percent in the United States in August 2022, the CPI for “Shelter,” comprised of “Rent of primary residencies” plus “Owners equivalent rents of residences,” continued rising, reaching levels above nine percent. Shelter contributes 32 percent to the total CPI and about 40 percent of core inflation. With the exception of the onset of Covid, housing inflation has generally tracked overall inflation. In 2022, rents were up almost 15 percent in the Miami/Atlanta metro area and by 21 percent in Phoenix. Per Zillow research, renters face growing housing affordability hurdles in the United States; renters in Miami, for example, need to work 96 hours at the average wage to pay the typical rent.
Given its outsized importance, if we could solve the rental inflation problem, we could go a long way to solving the problem of inflation generally. To use a simple analogy, if there was a fire alarm going off in your house, you would want to know the source. Is it coming from upstairs? And once you know the room, you might be able to put out the fire there. You wouldn’t want to apply some generalized treatment, like bulldozing the house.
Some might mistakenly consider the story of rental inflation to be in the rear-view mirror because the Zillow Observed Rental Index (ZORI) has been falling in the last half of 2022.
National ZORI Index (Percentage Change from Last 12 Months)
As the figure shows, even by October 2022, the ZORI was still above ten percent, which exceeds the general CPI. More importantly, because the ZORI is a measure of asking rents, the index will display a more pronounced inflation decline compared to the average rents across all rented units, including those already paying rents at prior agreed-upon rates. In other words, we’re not out of the woods.
Economists Have Their Stories
Economists offer myriad competing narratives. The neoliberal crowd tends to look for stories that absolve the companies actually setting prices. Krugman speculates that the demand for remote working from home, initiated by Covid, caused consumers to demand larger household footprints. This isn’t a very a compelling hypothesis, as it wouldn’t explain across-the-board rental inflation, including on smaller, one-bedroom units. A Redfin economist blames migration from the Coastal cities to the Sun Belt, again initiated by Covid. Again, not entirely persuasive, as it fails it to explain rising rents outside the Sun Belt. And the business press, including the speciously liberal New York Times, harps on the claim that higher prices, including for rents, are caused by higher costs; never mind the marginal cost of leasing the last unit of a multi-family residence is close to zero.
Or maybe, just maybe, the companies setting rents are to blame. I realize this is novel stuff, particularly among economists conditioned to reflexively defend market outcomes as efficient regardless of the mechanism behind them. In ten U.S. cities, including Atlanta, Jacksonville, Tampa and Orlando, institutional investors, defined as entities owning over 100 properties nationwide, had previously acquired at least 15 percent of all single-family rental units. This suggests a possible nexus between concentration (in levels) and rental inflation.
Proving the Nexus
We are not the first to examine the nexus between rental pricing and concentration. If you read our paper, you can learn about these studies in our literature review. I’ll call your attention to just one—a Federal Reserve Bank of St. Louis paper finding a connection between institution ownership and rent to income ratios in a metropolitan statistical area. They find that purchases by institutional investors, as measured by the share of properties owned by all institutional investors collectively in a Metropolitan Statistical Area (MSA), increase (1) the price-to-income ratio, especially in the bottom price-tier, the entry point for first-time buyers, and (2) the rent-to-income ratio generally, especially where the housing supply elasticity is high. By treating all institutional investors in the aggregate and thus as if it were owned a single entity, however, the St. Louis Fed study may have overlooked the incremental explanatory power of clustering properties by a single institutional owner in a given neighborhood. Put differently, an MSA with (say) ten percent institutional ownership, split equally across ten owners, could exhibit different pricing dynamics than an MSA with ten percent institutional ownership split equally across just two owners.
To address this evidentiary gap, we used Florida property tax roll data to construct the footprint of property owners in each neighborhood or census tract. We did this for two separate market distinctions: (1) All non-owner-occupied housing properties, and (2) all multifamily properties. This is an animated map of the South Shore neighborhood of River View from 2015 to 222. You can see how these five owners have built up a cluster of properties over time. And that cluster gives them pricing power, both unilaterally and collectively.
We calculate the Herfindahl Hirschman Index (HHI) among property owners in a given Census Tract as the primary explanatory variable of interest. This approach assumes that the Census Tract approximates the area over which renters perceive rental units to act as reasonably close economic substitutes (or in antitrust parlance, a relevant geographic market). We believe this is the case as renters choose where to live based on neighborhood attributes, and neighborhoods can exhibit wide variation within a specific county or city. Yet there is not a consistent geographic mapping of neighborhoods within the social sciences, and Census tracts are often instead used as a proxy. For each of these markets, we estimate the tract-level HHI by summing the squared unit market share values within the tract. The figure below presents a map of tract-level HHIs in 2022 based on unit shares of non-owner-occupied housing properties. Lower HHI areas are colored lighter yellow, while higher HHIs areas appear in dark red. We lacked ownership data for those areas that appear whited out.
Florida Census Tract HHIs in 2022
Source: 2022 Florida Property Tax Roll Data. HHI’s are unit share based.
For rents, we utilized the Zillow Observed Rent Index (ZORI), which indexes the mean of the middle 30% of asking rents by month. The figure below plots the relationship between our measures of rents and rental ownership across time for all non-owner-occupied rental markets. Both rents and concentration levels have seen a steady uptick, with an increasing inflationary trend over the last two years.
Florida Monthly Average ZORI and HHI by Census Tract (2015—2022)
Sources: Zillow Observed Rent Index; Florida NAL Property Tax Rolls (2015—2022).
You can see how the ZORI seems to track the average HHI across all Florida neighborhoods. To be fair, this relationship would not explain rental inflation, but instead would suggest that higher concentration is associated with higher rents. There does appear to be a jump, however, in the average HHI at the beginning of 2021, which could be an inflation story—though not the one we’re telling.
To investigate this relationship further, we build a regression model that sought to relate concentration with both rent levels and rental inflation, controlling for other things that drive rents, such as migration. I’ll leave it to the reader to go check out our results. (And for the R-squared nuts on Twitter, you’ll have to come up with a better rejoinder this time!) Our main findings are that both rent and rental inflation in Florida are statistically and economically significantly correlated with the level of concentration within a neighborhood or census tract.
Surrendering to the Chicago School
We are keenly aware of the controversy in industrial organization of using HHI as an explanatory variable in a price regression. (Not much has been written on inflation regressions, but we expect the same critique.) We think the lesson from Whinston and other pioneers in this area is to look for instruments or proxies for HHI, rather than abandoning the exercise altogether. Indeed, we think it was a colossal mistake of liberal economists to offer this concession to Demsetz and the Chicago School, which was set on undermining the structural presumption. And indeed they won and antitrust enforcement was largely feckless over the last 40 years. If you want to learn about our instruments, and how they withstand various tests, you can read the paper.
With regard to policy implications, raising interest rates 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. Let that sink in! Our results suggest a different course for arresting rental inflation—namely, for cities or states (or both) to impose an ownership limit on the amount properties an individual owner could control in a given neighborhood. Antitrust enforcement could serve as a check against inflation over the long term, to the extent it is used to fight concentration in rental markets and through the economy writ large; but given antitrust’s glacial pace, the best course now for arresting rental inflation requires going outside of antitrust.
Given antitrust enforcers’ expressed interest in employer power and the potential for market structures and conduct within the remit of antitrust enforcement to harm workers, one natural remedy they might consider is unionization. There is already considerable empirical research to the effect that collective worker organization is an effective counterweight to employer market power. And while no public agency can (or should) force workers to join and be represented by a union, they can encourage (indeed, mandate) that employers remain neutral as workers consider whether to unionize, and with which union. That ‘neutrality’ amounts, in effect, to employers not availing themselves of the range of tactics at their disposal to discourage unionization—tactics the videogame development studio Activision Blizzard is currently making full use of in the face of a nascent union drive, an early effort in an industry that has historically had deplorable labor standards, trading on both the workers’ loyalty to the product and the fact that they tend to be young and hence to have fewer social ties and obligations that would lead them to demand better working conditions. Such tactics aren’t surprising in a company with “an open frat boy environment [that] fostered rampant sexism, harassment, and discrimination,” according to the complaint in a sexual harassment lawsuit filed this past October.
But Activision Blizzard—makers of Call of Duty and other popular franchises—has also agreed to be bought by Microsoft for $68.7 billion and merged into its Xbox Game Studios, a transaction that is currently pending before the FTC and European enforcers. Microsoft entered into a neutrality agreement with the Communications Workers of America for Activision Blizzard that promises to make the path to unionization in the videogame development industry much smoother if the merger is consummated, a development that would be a major step toward cementing the increased worker militancy to have erupted in recent years, particularly among younger workforces. Hence, if the merger is approved, the path forward for unionization in the industry appears bright.
The Microsoft-CWA neutrality agreement represents a union taking advantage of an improved negotiating position due to merger review to score a win on behalf of workers (or rather, to make such a win much more likely in future). A clearer-cut example of the utility of neutrality agreements in merger remedies would concern a merger alleged to harm workers, to which the remedy would be unionization (a second-best outcome to outright blocking a merger). A worthy example when a union neutrality remedy could have been used was Uber’s 2020 merger with Postmates, which the Justice Department declined to challenge but which removed one of very few alternative platform employers for already-disadvantaged gig workers in the rideshare and food delivery business. DOJ should have tried to block the merger, and in the event that attempt was unsuccessful, sought not only employment classification for rideshare and food delivery drivers as a condition for permitting the merger to go forward, but neutrality in any subsequent organizing campaign. Indeed, gig workers are particularly likely to benefit from collective bargaining, but in the past antitrust enforcers have sought to prevent it on the grounds that collective bargaining by non-employees would violate the Sherman Act, in a kind of circular reasoning that has frustrated the thousands of gig workers consigned to an independent contractor status without employment protections, but without any ability to truly operate independently, including by choosing to bargain collectively.
(An alternative remedy would have been to enforce the independence gig platforms promise to workers by ending resale price maintenance and Most-Favored Nations clauses, mandating full, unconditional data-sharing, and prohibiting non-linear loyalty pricing. But that sort of behavioral remedy to a merger has been shown to be difficult to enforce once the merger is concluded, so while the antitrust agencies should indeed enforce the economic independence of bona fide independent contractors, merger control is probably not the best way to do it. Rather, the FTC should look to Section 5 enforcement. The utility of union neutrality as a remedy is that it creates an independent agency to police labor standards.)
Which brings up another example of what not to do in negotiating or sanctioning a neutrality agreement: the proposed legislation to permit “sectoral bargaining” for rideshare and food delivery workers that the New York state legislature considered (but luckily didn’t pass) in 2021. That would have surrendered employment status and already-won labor standards for rideshare and food delivery workers, in exchange for nominal “representation” by company unions who stood to receive a hefty agency fee, plus antitrust immunity for the arrangement and a no-strike pledge. That cautionary tale is a good example of what regulators should not allow, even if (some) unions ask them for it. Which raises the issue that discerning what types of representation are in workers’ best interest requires specialized knowledge and experience with labor relations—exactly the purpose to which the federal antitrust agencies should put their memoranda of understanding with the NLRB and Department of Labor.
There remains one important (depending on whom you ask, paramount) consideration in the Microsoft-Activision Blizzard merger review: whether the merger would harm consumers, even if the neutrality agreement means it would likely benefit workers. This is a vertical merger wherein the manufacturer of one gaming console would acquire the supplier of must-have content for those consoles, potentially disadvantaging manufacturers of rival consoles if the merged firm withholds the must-have content and makes it exclusive to Microsoft’s Xbox. In this case, the leading rival is Sony, the manufacturer of the Playstation console, which competes for the same customer base of avid gamers with Xbox and which would be a substantially weaker price competitor if its products couldn’t carry Call of Duty. On its face, this vertical deal is ripe for a challenge, since Xbox and Playstation are such close rivals for the same consumers and Call of Duty is likely must-have content. However, there have been public reports of a 10-year deal to license Call of Duty to Sony’s Playstation, which would obviate the foreclosure theory of harm if done on similar terms as XBox’s access to it post-merger. It’s possible for Microsoft to make Call of Duty available to Sony, but still disadvantage Playstation-compatible versions of the game relative to Xbox-compatible ones. In such a case, it is hard to distinguish between merger harms—disadvantaging Sony—and merger efficiencies—advantaging Microsoft. What that means is that the success of any challenge would come down to whether Sony is willing to state a public position against it.
Those of us who have encouraged antitrust enforcers to center worker welfare in their competitive analysis have consistently taken the position that harming workers should not offset or counterbalance consumer benefits, as has too often been the case in antitrust policy in the past, when agencies credited merger “efficiencies” that amounted to labor exploitation. Hence, it is difficult now to say that benefits to workers (in the form of much-increased probability of union representation at an otherwise-hostile workplace) should offset would-be harm to consumers. Notwithstanding the neutrality agreement, the proposed merger may still violate the Clayton Act. However, the lesson from this episode is that unions and would-be unions can and should use the tools made available by antitrust enforcers’ interest in labor markets to score victories on behalf of workers and, hopefully, re-engineer the internal political economy and corporate culture of dominant firms with continued business before the antitrust agencies and courts. At the same time, enforcers should be vigilant about ensuring that accommodations reached by unions and employers do in fact benefit workers.
Many have discussed and debated consumer welfare standard (“CWT”). The CWT is the normative economic standard based on Marshall’s consumer surplus theory that many advocate should guide antitrust policy and goal selection.
In our recent paper with Gabriel Lozada, we have categorized the problems with the consumer welfare theory into three general groups: (1) The theory is narrow because it eliminates traditional antitrust goals and populist antitrust goals a priori; (2) Its policy prescriptions are biased in favor of big business and the wealthy, and (3) It suffers from serious internal inconsistencies that have caused most welfare economists to abandon the approach. In this post, we summarize the first categorical problem with the CWT: Only factors that affect surplus matter.
Antitrust goals
According to CWT advocates, if something can’t be measured using economic surplus, it can’t be a goal of antitrust policy. When Judge Bork and other Chicago School advocates rebranded Alfred Marshall’s consumer surplus theory as the CWT, they were motivated by a desire to purge what they referred to as “value judgments” from antitrust policy. These “value judgments” were the traditional antitrust goals of promotion of political democracy and protection of small business that prominently appear in the legislative history of the antitrust statutes and have been recognized by many pre-Rehnquist Court Supreme Court opinions. As an example, Justice Warren wrote in Brown Shoe that “Congress was desirous of preventing the formation of further oligopolies with their attendant adverse effects upon local control of industry and upon small business.” Yet CWT advocates dismiss such concern.
Marshall’s theory served this purpose because it defined economic welfare as economic surplus, the difference between demand and price. Consumers have economic surplus, as does labor (the difference between the actual wage and the reservation wage), as do intermediate sellers. CWT advocates argue that if a policy goal can’t be measured using economic surplus, it is not “objective,” “scientific,” “economically viable,” or whatever methodological adjective they wish to use. Those arguments demonstrate that the choice of CWT advocates is a value-laden policy choice, not one founded in science.
What would Marshall think?
The Chicago School application of Marshall’s theory is not supported by Marshall or modern welfare economics. Marshall himself recognized that welfare was much broader than economic welfare. Marshall and Pigou merely used the term “economic welfare” to distinguish the measurable aspect of total welfare using Marshall’s approach from the rest of total welfare. Indeed, neither economist ever advocated that only what was measurable was a proper goal for government policy. In his day, Marshall supported many policy initiatives that were not strictly measurable using the surplus approach.
Today, major programs initiated by welfare economists are measuring many aspects of welfare that are not directly captured by economic surplus, such as the impact of democracy, health, inequality, sustainability and others, and no welfare economists believe that welfare is limited to economic surplus or is captured by growth of output or GDP. For example, the U.N., the World Bank, the OECD, and many countries have initiated projects to better measure welfare.
There is no economic reason to discard the long standing traditional antitrust goal of dispersion of economic and political power. Stephen Martin has recently made this case. Both Senator Sherman and Senator Hoar, important drafters of the Sherman Act, expressed concern that monopolies would undermine democracy. Members of Congress repeated those concerns when they passed the Clayton Act and the FTC Act. Concerns about democracy were prominent in passage of the Celler-Kefauver Act. These concerns were echoed by Supreme Court Justices. Well, until relatively recently.
Research by welfare economists shows that democracy is a major factor in human well-being and quality of life. Bruno Frey summarizes the literature on democracy and well-being in his book Happiness: A Revolution in Economics, concluding that:
Overall, these results suggest that individuals living in countries with more extensive democratic institutions feel happier with their lives according to their own evaluation than individuals in more authoritarian countries. These results are not prompted by directly asking whether individuals would be happier living in a democracy. Rather, the subjective, self-reported evaluation of well-being has been gathered, independent of the objective political conditions. Moreover, many other influences on happiness are controlled for, and a certain amount of trust can therefore be placed in the results.
Political democracy was an originating Congressional goal. Political democracy matters for human welfare. Can competition policy impact political democracy? This seems likely given the importance of antitrust policy to media markets and high-tech ecosystems. Does it really make sense that because political democracy is not measured by economic surplus, it is not a “scientific” or “objective” goal? Not to us.
An indefensible standard
CWT isn’t a defensible standard, and its entrenchment bars discussion of more useful alternatives. The CWT approach of limiting antitrust goals to those that are measurable using the surplus approach to welfare (an approach deemed unreliable by most welfare economics) is simply not defensible. If competition policy can have a positive impact on a factor that has been shown to have major welfare implications, certainly Marshall’s 1890 theory should not be an impediment to addressing such a goal.
In sum, the CWT is not a tenable approach as an antitrust standard. It does not focus or advance reasonable debate on whether an antitrust goal should be adopted. It is merely a tool to a priori eliminate from the debate all but a very limited range of objectives, but without any principled reason for the limitation. The fact that it eliminated a priori the goals that motivated Congress to adopt the antitrust statutes in the first place should have been a sufficient red flag to render the CWT a non-starter as the foundation of antitrust policy.
Unfortunately, this was not the case.
Even modest progress sometimes meets with hostile resistance. This is what happened when, on November 10, 2022, the Federal Trade Commission (FTC) issued its Policy Statement on the Scope of Unfair Methods of Competition under Section 5 of the FTC Act.
It is a coherent and modest statement. The FTC sought to return antitrust policy to its traditional roots of respecting Congressional intent and Supreme Court precedent. After decades of failed radical Chicago school doctrine that has resulted in significant reductions in competition in the U.S. economy and attendant losses in productivity and growth, it has been clear to many that such a return was necessary. But in the eyes of neoliberal defenders of the Consumer Welfare Standard, it seemed like a catastrophe.
The FTC Policy Statement
In its Policy Statement, the FTC carefully sought to remain faithful to its mission. When Congress passed the FTC Act in 1914, it delegated the work of defining “unfair methods of competition” to the Commission, and the textual prohibition on “unfair methods of competition in or affecting commerce” does not require any market effect of the kind we find in the text of the Sherman and Clayton Acts. The language alone makes it apparent that Section 5 is more general than the other antitrust statutes, and that it must allow for the prohibition of more than the other antitrust statutes.
Congress was motivated in part by its opposition to the rule-of-reason approach adopted in the Standard Oil decision in 1911. Supporters of the Clayton Act and FTC Act feared that a conservative judiciary may not effectively control abuses by big business. As a result, Congress passed the Clayton Act to outline specific practices that were deemed to potentially harm competition, and the FTC Act to establish an agency of experts that would study industries and business practices to define its own rules to protect the competitive process. Section 5 was to be broader than the Clayton and Sherman Acts, but in exchange, it had no private right of action, and only carried equitable remedies.
The FTC Policy Statement is a straightforward execution of that mission. It defines an unfair method of competition as business conduct that goes beyond competition on the merits. The FTC provides a general definition of what that phrase means and offers historical examples of such conduct. The FTC also has the tools to study and publish further guidelines and rules that will elucidate Section 5 proscriptions. Administrative law is nothing new, even if neoliberals treat it as a stunning development in the realm of antitrust law.
The Policy Statement stresses that the FTC seeks to address anticompetitive practices in their incipiency (a major goal of Congress in passing the Act) and an area where the Sherman Act and the Clayton Act has been particularly deficient. One major stumbling block for addressing the future effects of business behavior is Justice Powell’s herculean standards for succeeding in a potential competition challenge to a merger. The FTC’s statement is particularly valuable because it offers a solution to this impediment.
Commissioner Wilson’s Dissent
All this seems like sensible mainstream competition policy. But not to Commissioner Wilson and like-minded thinkers. Her dissent characterizes the Policy Statement as “the work of an academic or a think tank fellow who dreams of banning unpopular conduct and remaking the economy. It does not reflect the thinking of litigators who know that legal precedent cannot be ignored, case-specific facts and evidence must be analyzed, and the potential for anticompetitive effects must be assessed.” After reading the Policy Statement, these comments defy comprehension. Although it is understandable that Commissioner Wilson reverts yet again to ad hominem, there is nothing about unpopular conduct or remaking the economy in the Policy Statement, nor does the statement ignore legal precedent. So, what is going on?
Commissioner Wilson’s dissent makes clear that she is concerned that the Policy Statement is returning antitrust policy to more faithful deference to Congressional intent and Supreme Court precedent, and away from the radical neoliberal approach of deference to big business.
Commissioner Wilson’s Plea For Adoption of The Rule of Reason Standard to…Clarify Ambiguity
Commissioner Wilson argues that the Policy Statement is defective because it should require a Section 5 action to follow the rule of reason. Rather than the certainty Commissioner Wilson claims she desires, adopting the rule of reason will result in the opposite. As Jessie Markham writes, “the rule of reason is no rule at all, but rather a set of vague and inconsistent objectives.” In Maurice Stucke’s estimation, “The rule of reason has been criticized for its inaccuracy, its poor administrability, its subjectivity, its lack of transparency, and its yielding inconsistent results.”
The only consistent thing about the Rule of Reason is that big business always wins. Michael Carrier calculates that in recent decades defendants win in rule-of-reason cases 99 percent of the time. This result is because the rule of reason allows numerous avenues for the defendant to escape liability and relies on consultants and experts—a domain that creates advantages to large corporations.
Commissioner Wilson emphasizes the business justification component of the rule of reason. The Policy Statement makes clear that business justifications remain part of the Section 5 analysis. Yet Commissioner Wilson wants any business justification to be permissible. As John Newman has shown, the courts have already been remarkably deferential to defendants’ justifications for anticompetitive conduct. They have accepted such things as a taste for amateurism, cardholder benefits, the health and welfare of horses, better market penetration, ensuring undivided loyalty, and many other defenses.
In sum, Congressional concern in 1914 about the future of the rule of reason has been prescient, and its solution, the passage of the FTC Act, is still the right remedy for that concern.
Commissioner Wilson’s Fear that the Consumer Welfare Standard Has Been Abandoned
Commission Wilson also faults the Policy Statement for abandoning the Consumer Welfare Standard, and advancing “the welfare of inefficient competitors, ‘workers’ [the quotations surrounding workers are hers, by the way], and other unnamed but politically favored groups – at the expense of consumers.” Perhaps many would have preferred that the FTC repudiated the Consumer Welfare Standard. As we have shown, it is a flawed, biased, and inconsistent theory.
While unfortunate from our point of view, the Policy Statement is fully consistent with the Consumer Welfare Standard. Nowhere does the Policy Statement advocate new goals for antitrust policy. It never mentions or implies anything about inefficient competitors. While the Statement does mention workers and other market participants, the Consumer Welfare Standard can include, at least in theory, the economic surplus of workers and sellers. (In practice, the Consumer Welfare Standard condones a wage-fixing conspiracy against college athletes.)
Perhaps Commissioner Wilson believes that the Consumer Welfare Standard simply means that antitrust applies only to output markets. At one point, she says workers can be protected only “at the expense of consumers.” This statement is patently false.
Commissioner Wilson on Congressional Intent
The dissent does not seriously challenge the Policy Statement’s discussion of Congressional intent or prevailing precedent. At one point Commissioner Wilson states “all legislative history analyses must be taken with a grain of salt,” citing Scalia.
Ignoring legislative history is one thing, but remarkably, Commissioner Wilson does not credit the plain meaning of the words of the statute either, as Justice Scalia would have advised. As we pointed out above, the express language of Section 5 does not include any requirement of competitive effects or analysis of business justifications.
Instead, Commissioner Wilson claims that the 1914 Congress was mistaken because it didn’t anticipate the expanded use of the Sherman Act. But she confuses the role of Congress with that of the agency. Congress has shown no interest in altering the original mission of FTC. Commission Wilson raises the George Rublee memo to President Wilson. She finds the definition of unfair competition significant: “Fair competition is competition which is successful through superior efficiency. Competition is unfair when it resorts to methods which shut out competitors who, by reason of their efficiency, might otherwise be able to continue in business and prosper.”
What Commissioner Wilson seems to find significant is the use of the word “efficiency.” Otherwise, the quotation sounds like fair competition is competition on the merits, and unfair competition is preventing others from competing when they otherwise would be capable of effectively doing so. This is very close to what the Policy Statement says.
In addition, Commission Wilson cherry picks what she reports from the Rublee memo. The memo states in several places that a primary goal of the FTC Act is to protect small business, something Commission Wilson would surely eschew. Yet protecting small business is a part of the portion of legislative history that she endorses.
Commissioner Wilson on Legal Precedent
In the 1980s, the FTC lost several Section 5 cases at the appellate level. These were cases that followed the trend in scaling back antitrust enforcement in accord with the Chicago School and the Reagan administration.
Not coincidentally, Commission Wilson refers to two of these cases in her dissent, but not the earlier endorsement of a broad Section 5 authority found in Supreme Court cases such as Atlantic Refining Co. v. FTC, FTC v. Brown Shoe Co., and FTC v. Sperry & Hutchinson Co. The Court in Sperry stated that the Commission can prohibit practices regardless of their “effect on competition.” Commissioner Wilson dismisses binding Supreme Court precedent by claiming these cases are inconsistent with “modern analysis” (i.e., Chicago School influence).
Instead, Commissioner Wilson endorses three circuit cases from the early 1980s: Official Airline Guides v. FTC, Boise Cascade Corp. v. FTC, and E.I. Du Pont De Nemours v. FTC. It is no surprise that Commissioner Wilson focuses on these three cases. Yet even these cases acknowledge the wide authority of the FTC.
Conclusion
In sum, it is evident that Commissioner Wilson is animated by the Policy Statement’s return to Congressional intent and Supreme Court precedent. The FTC is no longer in the business of clipping its own wings in the interests of big business. Commissioner Wilson is a defender of big business, her own politically favored group. And the group that has benefited from lax antitrust enforcement for decades while everyone else–and the economy as a whole–has suffered.
With the potential for passage of the America Innovation and Choice Online Act (AICOA) and discussion of self-preferencing among Big-Tech platforms ought to come discussion of remedies for that self-preference. Apart from damages and injunctive relief, AICOA is small on discussion about what to do with repeat offenders. Indeed, while other aspects of the AICOA are important and promising, there is not much guidance for courts in the remedies provision, aside from generalist language about the court being able to enter relief as necessary to prevent and restrain the activity.
With or without AICOA, antitrust enforcers have means to eliminate bottleneck monopolies that enable self-preferencing. Bottleneck monopolies lie somewhere along the chain of production and distribution of goods or services. Usually both before and after the bottleneck, the markets are workably competitive. Although there may be many producers of basic inputs, processed in another workably competitive market, the products must pass through the essential facility to reach the final consumer. The monopoly then intervenes in the otherwise workably competitive sequence of markets and confers on its possessor control over access from upstream sources to downstream distribution or consumers. Such a monopoly can exact a substantial amount of wealth by imposing a monopoly charge on those seeking to use its essential facility.
We address the traditional means of curtailing monopoly power of bottleneck owners and their flaws. We propose two potential alternatives that could be better suited to modern day bottlenecks.
The Traditional Problem of Bottlenecks: Self-Preferencing
The problem of vertical integration has been present in virtually every regulated industry. Indeed, the principal reason for regulation has been to assure that a vertically integrated monopoly does not use its monopoly power to create prices that are out of the realm of competition or not in the public interest.
A monopolist in control over the essential facility will generally have an incentive to raise price and restrict output. However, a monopolist that controls the essential facility but competes in the market has tremendous incentive to capture shares of the downstream market.
Regulators have employed two traditional means of “eliminating” self-preferencing: (1) the “Cleaver” and (2) the “Watcher.”
The Cleaver
Structural attempts to remove self-preferencing have led to remedies that sought to sharply cleave the ability and the incentive of holders of essential facilities. Bifurcation of ownership provides, in theory, a neatly carved and observable remedy.
But the problems with such a remedy are threefold. First, as AT&T demonstrates, what was broken up can reunite. Second, cleavers have a way of multiplying the problem rather than remedying it. For example, in DOJ’s initial proposed Microsoft remedy, two monopolies would have been created in the proposed remedy by the DOJ, one over the operating system and one over applications. Third, some bottlenecks are not so easily cleavable.
The Watcher
Conduct requirements that regulate control but not ownership have the potential for remedying the issue, in theory. As an example, when electricity dispatch is done by a vertically integrated firm, its incentives are to exclude independent generators despite regulatory rules that deter such conduct.
But regulatory solutions require the combination of oversight and penalty sufficient to deter future conduct. In many instances in the past, the penalty has merely been to disgorge ill-gotten gains. In prior instances where this has been the remedy, “crime pays.”
Also, regulatory solutions in antitrust are frequently not permanent. To the extent that there is insufficient continued progress in the market toward competition, elimination of the decree can be perilous.
Some Modest Alternatives
If the ownership and control of the bottleneck is redesigned to curtail the incentives to exclude or discriminate, this changes the goals of the operator or owner of capacity. In this revised world, the owner of unused capacity has every incentive to sell it to the highest bidder because it can gain little or nothing by withholding a small piece of the capacity. Similarly, if many owners control a bottleneck that is expandable, they will have the incentive to expand its capacity because they gain little or nothing by restricting capacity. Their gains come from lower cost, easier access to their downstream or upstream markets.
Thus, redefining the ownership and control of the bottleneck is central to harnessing the ordinary incentives of the market process to induce conduct that approximates what would have happened in a functionally competitive market. Yet some bottlenecks involve situations where the users would be best off to have participation in the decisions regarding the structure and operation of the bottleneck itself. These are situations in which shared governance of some kind is important. Such situations call for a collective ownership of the facility involved. We have labeled this the “cooperative” model.
In contrast, in other contexts the operation of the bottleneck is relatively distinct from the activity of its users. In these situations, the central incentive rests in the ownership or control of the capacity of the bottleneck itself. If no one owns (controls) much of that capacity and the rights of use are transferable, then those with initial ownership will have the incentive to sell or assign the use right whenever the price (value) exceeds their own value for the right. This will not eliminate “monopoly” prices at times of scarcity, but the use rights will be distributed based on the value to the buyer-user and not for longer run strategic reasons. We refer to this remedy as the “condominium” solution to the bottleneck problem.
Alternative 1: The Cooperative Model
This model envisions shared user ownership of the bottleneck. Such transformation of ownership should change the incentives governing the operation and potential expansion of the bottleneck.
The individual owner-user stands to gain little by trying to impose a monopoly price on users including itself or by restricting access to the bottleneck by new entrants. So long as there are many owners, the primary objective should be to manage the entity so that it operates efficiently and with as much capacity as possible. The owner’s gains come from their upstream or downstream commercial activity. The bottleneck is a transaction cost and potential constraint.
An example includes grain elevators in the early 1900s. When it was very costly and time consuming for farmers to move grain very far from the farm to a grain elevator on a railroad line, competition among rural elevators was limited. Any region was likely to produce only enough grain on average to support one or two elevators. In only a few areas did farmers have access to as many as three elevators. This conferred on the elevators, especially when only one or two served the area, considerable power to exploit farmers.
Farmers, with help from some grain trading firms, resolved the issue by establishing cooperative elevators. These elevators had on average greater storage capacity than either the vertically integrated elevators or the independent elevators. The results were that farmer revenue went up because the monopsonistic buying practices could be circumvented. The cooperative elevator had sufficient grain that it could fill rail cars and ship to several alternative markets. Thus, the monopsony bottleneck was eliminated.
This and other examples involve enterprises that require substantial continued engagement of the participants in the governance of the enterprise. With such shared governance, the enterprise will be developed and operated with the objective of serving the interest of all participants.
Two characteristics are significant to determining whether a cooperative model for addressing bottleneck power is appropriate. First, when the structure and operation of the bottleneck is complex and interdependent with the users’ activities, the users are likely to find it very important to be directly engaged in the decisions about those issues. Second, where the size of the bottleneck can vary substantially from highly restrictive to very open, again the users’ interest is to be engaged with the decision about scale and that in turn is best implemented by participating in the governance of the enterprise.
The more the bottleneck interacts directly with other aspects of the users’ or suppliers’ activity, the more those parties will benefit from active involvement in the decisions about the nature and scope of the activity. Examples could include an operating system, an electric transmission system, or social media platform. In each, there are a myriad of choices to be made about design and/or location. Different stakeholders will have different needs and desires.
For example,Twitter is currently discussed in terms of singular incentives that fail both users, advertisers, employees and other stakeholders. A cooperative model would require input from users as to changes that devolve the platform (paid checkmarks that allow for impersonation, for example.)
This method requires that no party or group dominates the decision process and all parties recognize their mutual need to make the bottleneck as effective as possible for all users. Enhancing use is a shared goal, and the competing experiences and needs could be negotiated without unilateral action that could devalue the platform.
Alternative 2: The Condominium Model
The condominium model is one in which a distinct entity administers the “facility” in which the occupants “own” their specific units. Examples of such structures include the current rights to capacity on natural gas pipelines, rights to space on container ships, and administration for standard essential patents. These examples all involve situations in which the user has a right to use some capacity or right but the administration of the system rests with a distinct party rather than the kind of cooperative arrangement discussed earlier. In a full condominium analogy, the owners of the units would have the right to terminate the manager and replace it. Thus, if there are several potential managers, the prices of the managerial service would ideally be set by the market.
The central difference between a condominium model and the cooperative one is that the management of the bottleneck is readily separable from the uses being made. Thus, a pipeline manager can operate the pipe while individual rights holders deliver gas to be transported. Such separability between operation and use often involves a facility with fixed capacity such as the pipeline or rail line. The manager can coordinate the use and the owners of access rights are able to use the facility as needed. But this is also a feature of some other more open-ended bottlenecks especially those involving patents or copyrights. There the user is interested in having the right to use the IP, but the management of the licensing process particularly when it involves many potential users is quite distinct. Thus, BMI and ASCAP provide administrative services that link licensees to rights owners beyond anything that any pair of users and owners might accomplish.
Another feature of this model is that it implies that the rights of use/access when constrained will be tradable. Much as a condo owner may elect to rent the condo to someone who values it more. Scarcity creates the potential for discriminatory exploitation when a single monopolist holds those rights. By distributing access rights to many owners, the opportunity for discriminatory or exclusionary conduct is removed and the owner has only the opportunity to earn rents (high prices) from the sale or lease of its capacity entitlement. This dispersion of interests results in a clear change in the incentives of a rights holder. Thus, the finite capacity of the bottleneck should be allocated to the highest and best users as measured by their willingness to pay.
Potential applications of this model in addition to the examples already given include such disparate bottlenecks as trash dumps, airport gates, or an online platform for the sale of goods. Trash dumps provide an interesting parallel to some modern issues. The barriers to entry into trash collecting are low. But there are very few locations for disposing of trash. Private ownership of those facilities confers substantial power on those trash haulers that are vertically integrated. But it would not be hard to require that dumping rights be separated from ownership and operation of the dump. In that case, each rights holder would have the entitlement to deliver a set quantity of trash each year. Provided that such entitlements are sufficiently dispersed, no owner would have an incentive to try to exclude competition but would be willing to sell or lease its rights if other potential users were willing to pay a sufficient premium.
Human genome research could also work under a condo model. The operator would collect and publish data. Such an endeavor would potentially enhance research. Patent pools provide another example. For example, In Re Ciba-Geigy, the FTC required compulsory licensing of certain IP to competitors. An easier remedy would be to have an independent controller with a goal to maximize research.
In the context of Amazon, a controller could optimize product placement, with premium placement occurring for those who value the placement the most, rather than based on who owns the platform. Thus the controller would have as their goal to maximize the value of the platform.
Conclusion
We do not present these solutions as panacea. We anticipate some initial difficulties in implementation. And they may not work for every situation. However, they offer a decidedly better chance of achieving good overall results compared to traditional remedies.
Stakeholders will have incentives to monitor and call out transgressions that go against their interests. This should reduce monitoring costs. Because of the threat of calling out violations, remedying any transgression ought to be more efficient. Abuse would potentially be remedied without any intervention that could draw resources. Moreover, such a remedy would potentially be durable beyond a decree period. However, we propose that such a decree be presumptively renewable with review every five years. And ownership that goes wayward could be “rebooted.” Distortions in the balance of ownership could be reset in the decree review process.
In sum, there is potential for our proposed remedies to prove workable. Highly contentious markets with multiple diverse stakeholders have great potential for success.