In July, a proposed $13 billion mega-merger between Sanford Health, the largest rural health system in the county, and Fairview Health Services, one of the largest systems in Minnesota’s Twin Cities metro, was called off. Abandonment of the merger came after concerted opposition from farmers, healthcare workers, and medical students, emboldened by passage of state legislation that creates much stronger oversight of healthcare mergers. The new law addresses several of the challenges the Federal Trade Commission (FTC) has encountered while trying to block hospital mergers and demonstrates the important role states can play in policing monopoly power.
Hospital consolidation has been rapid and relentless over the past two decades, with over 1,800 hospital mergers since 1998 leaving the United States with around 6,000 hospitals instead of 8,000. This consolidation has raised healthcare costs, reduced access to care, and lowered wages for healthcare workers. Although nearly half of all FTC merger challenges between 2000 and 2018 involved the healthcare industry, that effort still only amounted to challenging around one percent of hospital mergers.
While the FTC has made efforts to protect competition among hospitals and health systems over the years, it has faced key obstacles, including (1) limits on pre-merger notification, (2) a self-imposed limit to focus exclusively on challenging mergers of hospitals within a single geographic region, and (3) exemptions in the FTC’s antitrust authority over nonprofits.
Parties to small healthcare mergers don’t have to notify the FTC before merging due to the limits on pre-merger notification under the Hart-Scott-Rodino Act. Thus, the FTC is unaware of many smaller healthcare mergers, and the agency is left trying to unwind those mergers after the fact.
The FTC’s election to refrain from challenging ”cross-market mergers,” which involve hospitals operating in different geographic markets, has enabled such systems to become the predominant health system nationwide. This hands-off approach occurs despite mounting evidence that cross-market mergers give health systems even more power to raise prices. A study in the RAND Journal of Economics found that hospitals acquired by out-of-market systems increased prices by about 17 percent more than unacquired, stand-alone hospitals; these mergers were also found to drive up prices at nearby rivals.
While the FTC has broad authority to challenge hospital mergers, the agency’s authority to prevent anticompetitive conduct is more limited. The FTC Act gives the agency the authority to prohibit “unfair methods of competition” and “unfair or deceptive acts or practices” but that authority does not extend to nonprofits, which account for 48.5 percent of hospitals nationwide. This has meant that antitrust cases like the one against Atrium Health in 2016 for entering into contracts with insurers that contained anti-steering and anti-tiering clauses, have been brought by the DOJ.
Minnesota Serves as a Testing Ground
Minnesota is no stranger to the hospital consolidation that has visited the rest of the country. Over two decades ago, 67 percent of Minnesota’s hospitals were independent, but because of a wave of consolidation that has bolstered the largest health systems, only 28 percent of Minnesota’s hospitals remain independent. Just six health systems control 66 of Minnesota’s 125 hospitals, compared to 51 a decade prior. Just three health systems (Fairview, The Mayo Clinic, Allina Health System) receive nearly half of all hospital operating revenue in Minnesota. Amidst this consolidation, Minnesota has lost ten hospitals since 2010 and seen per capita spending for hospital care rise from six percent below the national average in 1997 to over eight percent above the national average in 2021, according to Personal Consumption Expenditures data from the Bureau of Economic Analysis.
The Sanford-Fairview hospital merger would have doubled-down on these trends. The combination would have given Sanford control of a fifth of Minnesota’s hospitals, with a geographic footprint spanning across several corners of the state. The merger also would have established the largest operator of primary care clinics. In addition to the sheer size of the merger, Fairview’s control of the University of Minnesota Medical Center, which is home to the teaching hospital that trains 70 percent of Minnesota’s doctors, generated labor concerns and provided an opening for passage of tougher regulations on healthcare transactions.
The initial legislative activity around the Sanford-Fairview merger leveraged the work by Attorney General (AG) Keith Ellison when the transaction was first announced. Ellison’s office held four community meetings across the state to gather input from Minnesotans on the deal, and legislators followed with their own informational hearings. Initial legislative concerns specifically related to granting an out-of-state entity control over a teaching hospital. Because of the work of Ellison’s office alongside organizations like the Minnesota Farmers Union (the author’s employer), the Minnesota Nurses Association, and SEIU-Healthcare Minnesota, legislative discussions turned more broadly to fixing the lack of safeguards Minnesota law provided against healthcare consolidation.
Sanford and Fairview initially failed to provide information Ellison’s office needed to properly investigate the merger, which left Ellison publicly pleading with the systems to delay their initial timeline. While the entities agreed to do so, the delay created uncertainty over whether Ellison’s office would be able to conduct a proper review before the transaction was finalized.
The law that passed makes three critical changes that help address the obstacles the FTC has run into. First, the law created a robust pre-merger notification regime that will give the Minnesota AG access to a broader set of information than the FTC currently receives under the HSR Act. This requirement is also much broader than the minimal notice requirements that previously existed in state law, and should help avoid a repeat of a key issue during Ellison’s review of the merger. Healthcare entities will now be required to provide specific information to the AG’s Office at the outset. The law also makes the failure to provide this information a reason for blocking a proposed transaction. Health systems will be required to provide geographic information, details on any existing relationships between the merging systems, terms of the transaction, any plans for the new system to reduce workforce or eliminate services as a result of the transaction, any analysis completed by experts or consultants used to facilitate and evaluate the transaction, financial statements, and any federal filings pertaining to the merger including information filed pursuant to the Hart-Scott-Rodino Act.
Second, the new law requires that health systems provide a financial and economic analysis of the proposed transaction, as well as an impact analysis of the merger’s effects on local communities and local labor. This broad set of information in some ways resembles the changes that the FTC recently proposed to HSR filings. These first two requirements apply to any transaction that involves a healthcare entity that has average annual revenues of $80 million or more or will result in the creation of an entity with annual revenues of $80 million or more. This is a lower revenue threshold than contained in the HSR Act.
Third, the new law establishes a public interest standard for evaluating healthcare transactions. The law spells out a wide range of factors the AG can consider when determining whether a proposed transaction is in the public’s interest. These broad factors include a transaction’s potential impact on the wages, working conditions or collective bargaining agreements for healthcare workers, the impact on public health, access to care in affected communities, access to care for underserved populations, the quality of medical education, workforce training or research, access to health services, insurance or workers, costs for patients and broader healthcare costs trends.
This broad public interest standard helps ensure that the narrowness of current antitrust law and its mountains of bad case law, do not restrict Minnesota’s ability to address the harms of hospital monopolies. Instead of having to fight with courts over technical definitions of healthcare markets, the AG can point to the many harms flowing from consolidation, regardless of whether the transaction is a cross-market merger. In addition to the public interest standard, the law explicitly prohibits any transaction that would substantially lessen competition or tend to create a monopoly or monopsony.
The New Law Soon Will Be Put to Practice
While Sanford-Fairview will no longer provide a potential test case of the new law, two mergers in northern Minnesota were proposed just last month. As policymakers were told throughout the legislative session, Sanford-Fairview was far from the last healthcare merger with which Minnesota would need to grapple. One proposal would combine Minnesota-based Essentia Health with Wisconsin-based Marshfield Clinics Health System into a four-state system stretching across northern North Dakota, Michigan, Minnesota, and Wisconsin. The other proposed merger would fold the small two-hospital St. Luke’s Duluth system into the 17-hospital Wisconsin-based Aspirus Healthcare.
Whether in healthcare or elsewhere in the economy, mergers are not inevitable, nor are they beyond the capacity of state governments to address. With Congressional gridlock and legislative capture posing a challenge to any federal antitrust reforms, states are a necessary battleground for anti-monopolists. Minnesota’s battle with Sanford and Fairview can serve as an instructive model for the rest of the country. Mobilizing state legislators and state AGs to pass bold antitrust reforms and challenge corporate power not only creates a laboratory for these reforms, but also serves an important part of dealing with monopolists in a world where federal enforcers face significant resource and legal constraints.
Justin Stofferahn is Antimonopoly Director for the Minnesota Farmers Union.
If I were to draft new Merger Guidelines, I’d begin with two questions: (1) What have been the biggest failures of merger enforcement since the 1982 revision to the Merger Guidelines?; and (2) What can we do to prevent such failures going forward? The costs of under-enforcement have been large and well-documented, and include but are not limited to higher prices, less innovation, lower quality, greater inequality, and worker harms. It’s high time for a course correction. But do the new Merger Guidelines, promulgated by Biden’s Department of Justice (DOJ) and Federal Trade Commission (FTC), do the trick?
Two Recent Case Studies Reveal the Problem
Identifying specific errors in prior merger decisions can inform whether the new Guidelines will make a difference. Would the Guidelines have prevented such errors? I focus on two recent merger decisions, revealing three significant errors in each for a total of six errors.
The 2020 approval of the T-Mobile/Sprint merger—a four-to-three merger in a highly concentrated industry—was the nadir in the history of merger enforcement. Several competition economists, myself included, sensed something was broken. Observers who watched the proceedings and read the opinion could fairly ask: If this blatantly anticompetitive merger can’t be stopped under merger law and the existing Merger Guidelines, what kind of merger can be stopped? Only mergers to monopoly?
The district court hearing the States’ challenge to T-Mobile/Sprint committed at least three fundamental errors. (The States had to challenge the merger without Trump’s DOJ, which embraced the merger for dubious reasons beyond the scope of this essay.) First, the court gave undue weight to the self-serving testimony of John Legere, T-Mobile’s CEO, who claimed economies from combining spectrum with Sprint, and also claimed that it was not in T-Mobile’s nature to exploit newfound market power. For example, the opinion noted that “Legere testified that while T-Mobile will deploy 5G across its low-band spectrum, that could not compare to the ability to provide 5G service to more consumers nationwide at faster speeds across the mid-band spectrum as well.” (citing Transcript 930:23-931:14). The opinion also noted that:
T-Mobile has built its identity and business strategy on insulting, antagonizing, and otherwise challenging AT&T and Verizon to offer pro-consumer packages and lower pricing, and the Court finds it highly unlikely that New T-Mobile will simply rest satisfied with its increased market share after the intense regulatory and public scrutiny of this transaction. As Legere and other T-Mobile executives noted at trial, doing so would essentially repudiate T-Mobile’s entire public image. (emphasis added) (citing Transcript at 1019:18-1020:1)
In the court’s mind, the conflicting testimony of the opposing economists cancelled each other out—never mind such “cancelling” happens quite frequently—leaving only the CEO’s self-serving testimony as critical evidence regarding the likely price effects. (The States’ economic experts were the esteemed Carl Shapiro and Fiona Scott Morton.) It bears noting that CEOs and other corporate executives stand to benefit handsomely from the consummation of a merger. For example, Activision Blizzard Inc. CEO Bobby Kotick reportedly stands to reap more than $500 million after Microsoft completes its purchase of the video game publishing giant.
Second, although the primary theory of harm in T-Mobile/Sprint was that the merger would reduce competition for price-sensitive customers of prepaid service, most of whom live in urban areas, the court improperly credited speculative commitments to “provide 5G service to 85 percent of the United States rural population within three years.” Such purported benefits to a different set of customers cannot serve as an offset to the harms to urban consumers who benefited from competition between the only two facilities-based carriers that catered to prepaid customers.
Third, the court improperly embraced T-Mobile’s proposed remedy to lease access to Dish at fixed rates—a form of synthetic competition—to restore the loss in facilities-based competition. Within months of the consummated merger, the cellular CPI ticked upward for the first time in a decade (save a brief blip in 2016), and T-Mobile abandoned its commitments to Dish.
The combination of T-Mobile/Sprint represented the elimination of actual competition across two wireless providers. In contrast, Facebook’s acquisition of Within, maker of the most popular virtual reality (VR) fitness app on Facebook’s VR platform, represented the elimination of potential competition, to the extent that Facebook would have entered the VR fitness space (“de novo entry”) absent the acquisition. In disclosure, I was the FTC’s economic expert. (I commend everyone to read the critical review of the new Merger Guidelines by Dennis Carlton, Facebook’s expert, in ProMarket, as well as my thread in response.) The district court sided with the FTC on (1) the key legal question of whether potential competition was a dead letter (it is not), (2) market definition (VR fitness apps), and (3) market concentration (dominated by Within). Yet many observers strangely cite this case as an example of the FTC bringing the wrong cases.
Alas, the court did not side with the FTC on the key question of whether Facebook would have entered the market for VR fitness apps de novo absent the acquisition. To arrive at that decision, the court made three significant errors. First, as Professor Steve Salop has pointed out, the court applied the wrong evidentiary standard for assessing the probability of de novo entry, requiring the FTC to show a probability of de novo entry in excess of 50 percent. Per Salop, “This standard for potential entry substantially exceeds the usual Section 7 evidentiary burden for horizontal mergers, where ‘reasonable probability’ is normally treated as a probability lower than more-likely-than-not.” (emphasis in original)
Second, the court committed an error of statistical logic, by crediting the lack of internal deliberations in the two months leading up to Facebook’s acquisition announcement in June 2021 as evidence that Facebook was not serious about de novo entry. Three months before the announcement, however, Facebook was seriously considering a partnership with Peloton—the plan was approved at the highest ranks within the firm. Facebook believed VR fitness was the key to expanding its user base beyond young males, and Facebook had entered several app categories on its VR platform in the past with considerable success. Because de novo entry and acquisition are two mutually exclusive entry paths, it stands to reason that conditional on deciding to enter via acquisition, one would expect to see a cessation of internal deliberation on an alternative entry strategy. After all, an individual standing at a crossroads would consider alternative paths, but upon deciding which path to take and embarking upon it, the previous alternatives become irrelevant. Indeed, the opinion even quoted Rade Stojsavljevic, who manages Facebook’s in-house VR app developer studios, testifying that “his enthusiasm for the Beat Saber–Peloton proposal had “slowed down” before Meta’s decision to acquire Within,” indicating that the decision to pursue de novo entry was intertwined with the decision to entry via acquisition. In any event, the relevant probability for this potential competition case was the probability that Facebook would have entered de novo in the absence of the acquisition. And that relevant probability was extremely high.
Third, like the court in T-Mobile/Sprint, the district court again credited the self-serving testimony of Facebook’s CEO, Mark Zuckerberg, who claimed that he never intended to enter VR fitness apps de novo. For example, the court cited Mr. Zuckerberg’s testimony that “Meta’s background and emphasis has been on communication and social VR apps,” as opposed to VR fitness apps. (citing Hearing Transcript at 1273:15–1274:22). The opinion also credited the testimony of Mr. Stojsavljevic for the proposition that “Meta has acquired other VR developers where the experience requires content creation from the developer, such as VR video games, as opposed to an app that hosts content created by others.” (citing Hearing Transcript at 87:5–88:2). Because this error overlaps with one of the three errors identified in the T-Mobile/Spring merger, I have identified five distinct errors (six less one) needing correction by the new Merger Guidelines.
Although the court credited my opinion over Facebook’s experts on the question of market definition and market concentration, the opinion did not cite any economic testimony (mine or Facebook’s experts) on how to think about the probability of entry absent the acquisition.
The New Merger Guidelines
I raise these cases and their associated errors because I want to understand whether the new Merger Guidelines—thirteen guidelines to be precise—will offer the kind of guidance that would prevent a future court from repeating the same (or similar) errors. In particular, would either the T-Mobile/Sprint or Facebook/Within decision (or both) have been altered in any significant way? Let’s dig in!
The New Guidelines reestablish the importance of concentration in merger analysis. The 1982 Guidelines, by contrast, sought to shift the emphasis from concentration to price effects and other metrics of consumer welfare, reflecting the Chicago School’s assault on the structural presumption that undergirded antitrust law. For several decades prior to the 1980s, economists empirically studied the effect of concentration on prices. But as the consumer welfare standard became antitrust’s north star, such inquiries were suddenly considered off-limits, because concentration was deemed to be “endogenous” (or determined by the same factors that determine prices), and thus causal inferences of concentration’s effect on price were deemed impossible. This was all very convenient for merger parties.
Guideline One states that “Mergers Should Not Significantly Increase Concentration in Highly Concentrated Markets.” Guideline Four states that “Mergers Should Not Eliminate a Potential Entrant in a Concentrated Market,” and Guideline Eight states that “Mergers Should Not Further a Trend Toward Concentration.” By placing the word “concentration” in three of thirteen principles, the agencies make it clear that they are resuscitating the prior structural presumption. And that’s a good thing: It means that merger parties will have to overcome the presumption that a merger in a concentrated or concentrating industry is anticompetitive. Even Guideline Six, which concerns vertical mergers, implicates concentration, as “foreclosure shares,” which are bound from above by the merging firms’ market share, are deemed “a sufficient basis to conclude that the effect of the merger may be to substantially lessen competition, subject to any rebuttal evidence.” The new Guidelines restore the original threshold Herfindahl-Hirschman Index (HHI) of 1,800 and delta HHI of 100 to trigger the structural presumption; that threshold had been raised to an HHI of 2,500 and a change in HHI of 200 in the 2010 revision to the Guidelines.
This resuscitation of the structural presumption is certainly helpful, but it’s not clear how it would prevent courts from (1) crediting self-serving CEO testimony, (2) embracing bogus efficiency defenses, (3) condoning prophylactic remedies, (4) committing errors in statistical logic, or (5) applying the wrong evidentiary standard for potential competition cases.
Regarding the proper weighting of self-serving employee testimony, error (1), Appendix 1 of the New Guidelines, titled “Sources of Evidence,” offers the following guidance to courts:
Across all of these categories, evidence created in the normal course of business is more probative than evidence created after the company began anticipating a merger review. Similarly, the Agencies give less weight to predictions by the parties or their employees, whether in the ordinary course of business or in anticipation of litigation, offered to allay competition concerns. Where the testimony of outcome-interested merging party employees contradicts ordinary course business records, the Agencies typically give greater weight to the business records. (emphasis added)
If heeded by judges, this advice should limit the type of errors we observed in T-Mobile/Sprint and Facebook/Within, with courts crediting the self-serving testimony by CEOs and other high-ranking employees.
Regarding the embrace of out-of-market efficiencies, error (2), Part IV.3 of the New Guidelines, in a section titled “Procompetitive Efficiencies,” offers this guidance to courts:
Merging parties sometimes raise a rebuttal argument that, notwithstanding other evidence that competition may be lessened, evidence of procompetitive efficiencies shows that no substantial lessening of competition is in fact threatened by the merger. When assessing this argument, the Agencies will not credit vague or speculative claims, nor will they credit benefits outside the relevant market. (citing Miss. River Corp. v. FTC, 454 F.2d 1083, 1089 (8th Cir. 1972)) (emphasis added)
Had this advice been heeded, the court in T-Mobile/Sprint would have been foreclosed from crediting any purported merger-induced benefits to rural customers as an offset to the loss of competition in the sale of prepaid service to urban customers.
Regarding the proper treatment of prophylactic remedies offered by merger parties, error (3), footnote 21 of the New Guidelines state that:
These Guidelines pertain only to the consideration of whether a merger or acquisition is illegal. The consideration of remedies appropriate for otherwise illegal mergers and acquisitions is beyond its scope. The Agencies review proposals to revise a merger in order to alleviate competitive concerns consistent with applicable law regarding remedies. (emphasis added)
While this approach is very principled, the agencies cannot hope to cure a current defect by sitting on the sidelines. I would advise saying something explicit about remedies, including mentioning the history of their failures to restore competition, as Professor John Kwoka documented so ably in his book Mergers, Merger Control, and Remedies (MIT Press 2016).
Finally, regarding courts’ committing errors in statistical logic or applying the wrong evidentiary standard for potential competition cases, errors (4) and (5), the New Merger Guidelines devote an entire guideline (Guideline Four) to potential competition. Guideline Four states that “the Agencies examine (1) whether one or both of the merging firms had a reasonable probability of entering the relevant market other than through an anticompetitive merger.” Unfortunately, there is no mention that reasonable probability can be satisfied at less than 50 percent, per Salop, and the agencies would be wise to add such language in the Merger Guidelines. In defining “reasonable probability,” the Guidelines state that evidence that “the firm has successfully expanded into other markets in the past or already participates in adjacent or related markets” constitutes “relevant objective evidence” of a reasonable probably. In making its probability assessment, the court in Facebook/Within did not credit Facebook’s prior de novo entry in other app categories on Facebook’s VR platform. The Guidelines also state that “Subjective evidence that the company considered organic entry as an alternative to merging generally suggests that, absent the merger, entry would be reasonably probable.” Had it heeded this advice, the court would have ignored, when assessing the probability of de novo entry absent the merger, the fact that Facebook did not mention the Peloton partnership two months prior to the announcement of its acquisition of Within.
A Much Needed Improvement
In summary, I conclude that the new Merger Guidelines offer precisely the kind of guidance that would have prevented the courts in T-Mobile/Sprint and in Facebook/Within from committing significant errors. The additional language suggested here—taking a firm stance on remedies and defining reasonable probability—is really fine-tuning. While this review is admittedly limited to these two recent cases, the same analysis could be undertaken with respect to a broader array of anticompetitive mergers that have approved by courts since the structural presumption came under attack in 1982. The agencies should be commended for their good work to restore the enforcement of antitrust law.
The Federal Trade Commission’s scrutiny of Microsoft’s acquisition of game producer Activision-Blizzard did not end as planned. Judge Jacqueline Scott Corley, a Biden appointee, denied the FTC’s motion for preliminary injunction, ruling that the merger was in the public interest. At the time of this writing, the FTC has pursued an appeal of that decision to the Ninth Circuit, identifying numerous reversible legal errors that the Ninth Circuit will assess de novo.
But even critics of Judge Corley’s opinion might find agreement on one aspect: the relative lack of enforcement against anticompetitive vertical mergers in the past 40+ years. As Corley’s opinion correctly observes, United States v. AT&T Inc, 916 F.3d 1029 (D.C. Circuit 2019), is the only court of appeals decision addressing a vertical merger in decades. Absent evolution of the law to account for, among other recent phenomena, the unique nature of technology-enabled content platforms, the starting point for Corley’s opinion is misplaced faith in case law that casts vertical mergers as inherently pro-competitive.
As with horizontal mergers, the FTC and Department of Justice have historically promulgated vertical merger guidelines that outline analytical techniques and enforcement policies. In 2021, the Federal Trade Commission withdrew the 2020 Vertical Merger Guidelines, with the stated intent of avoiding industry and judicial reliance on “unsound economic theories.” In so doing, the FTC committed to working with the DOJ to provide guidance for vertical mergers that better reflects market realities, particularly as to various features of modern firms, including in digital markets.
The FTC’s challenge to Microsoft’s proposed $69 billion acquisition of Activision, the largest proposed acquisition in the Big Tech era, concerns a vertical merger in both existing and emerging digital markets. It involves differentiated inputs—namely, unique content for digital platforms that is inherently not replaceable. The FTC’s theories of harm, Judge Corley’s decision, and the now-pending appeal to the Ninth Circuit provide key insights into how the FTC and DOJ might update the Vertical Merger Guidelines to stem erosion of legal theories that are otherwise ripe for application to contemporary and emerging markets.
Beware of must-have inputs
In describing a vertical relationship, an “input” refers to goods that are created “upstream” of a distributor, retail, or manufacturer of finished goods. Take for instance the production and sale of tennis shoes. In the vertical relationship between the shoe manufacturer and the shoe retailer, the input is the shoe itself. If the shoe manufacturer and shoe retailer merge, that’s called a vertical merger—and the input in this example, tennis shoes, is characteristic of a replaceable good that vertical merger scrutiny has conventionally addressed. If such a merger were to occur and the newly-merged firm sought to foreclose rival shoe retailers from selling its shoes, rival shoe retailers would likely seek an alternative source for tennis shoes, assuming the availability of such an alternative.
When it comes to assessing vertical mergers in digital content markets, not all inputs are created equal. To the contrary, online platforms, audio and video streaming platforms, and—in the case of Microsoft’s proposed acquisition of Activision—gaming platforms all rely on unique intellectual property that cannot simply be replicated if a platform’s access to that content is restricted. The ability to foreclose access to differentiated content that flows from the merger of a content creator and distributor creates a heightened concern of anticompetitive effects, because rivals cannot readily switch to alternatives to the foreclosed product. This is particularly true when the foreclosed content is extremely popular or “must-have,” and where the goal of the merged firm is to steer consumers toward the platform where it is exclusively available. (See also Steven Salop, “Invigorating Vertical Merger Enforcement,” 127 Yale L.J. 1962 (2018).)
The 2020 Vertical Merger Guidelines fall short in their analysis of mergers involving highly differentiated products. The guidelines emphasize that vertical mergers are pro-competitive when they eliminate “double marginalization,” or mark-ups that independent firms claim at different levels of the distribution chain. For example, when game consoles purchase content from game developers, they may decide to add a mark-up on that content before offering it for consumer consumption. (In the real world of predatory pricing and cross-subsidization, the incentive to add such a mark-up is a more complex business calculation.) Theoretically, the elimination of those markups creates an incentive to lower prices to the end consumer.
But this narrow focus on elimination of double marginalization—and theoretical downward price pressure for consumers—ignores how the reduction in competition among downstream retailers for access to those inputs can also degrade the quality of the input. Let’s take Microsoft-Activision as an example. As an independent firm, Activision creates games and downstream consoles engage in some form of competition to carry those games. When consoles compete on terms to carry Activision games, the result to Activision includes greater investment in game development and higher quality games. When Microsoft acquires Activision, that downstream competition for exclusive or first-run access to Activision’s games is diminished. Gone is the pro-competitive pressure created by rival consoles bidding for exclusivity, as is the incentive for Activision to innovate and demand greater third-party investment in higher quality games.
Emphasizing the pro-competitive effects of eliminating double marginalization—even if that means lower prices to consumers—only provides half of the picture, because consumers will likely be paying for lower quality games. Previous iterations of the Vertical Merger Guidelines emphasize the consumer benefits of eliminating double marginalization, but they stop short of assessing the countervailing harms of mergers involving differentiated inputs. They should be updated accordingly.
Partial foreclosure will suffice
During the evidentiary hearings in the Northern District of California, the FTC repeatedly pushed back against the artificially high burden of having to prove that Microsoft had an incentive to fully foreclose access to Activision games. In the midst of an exchange during the FTC’s closing arguments, FTC’s counsel put it directly: “I don’t want to just give into the full foreclosure theory. That’s another artificially high burden that the Defendants have tried to put on the government.” And yet, in her decision, Judge Corley conflates the analysis for both full and partial foreclosure, writing, “If the FTC has not shown a financial incentive to engage in full foreclosure, then it has not shown a financial incentive to engage in partial foreclosure.”
Although agencies have acknowledged that the incentive to partially foreclose may exist even in the absence of total foreclosure (see, for instance, the FCC’s 2011 Order regarding the Comcast-NBCU vertical transaction), the Vertical Merger Guidelines do not make any such distinction. Again, that incomplete analysis hinges in part on the failure to distinguish between types of inputs. Take for instance a producer of oranges merging with a firm that makes orange juice. Theoretically, the merged firm might fully foreclose access to oranges to rival orange juice makers, who may then go in search for alternative sources of oranges. Or the merged firm might supply lower quality produce to rival firms, which may again send it in search of an alternative source.
But a merged firm’s ability and incentive to foreclose looks different when foreclosure takes the subtler form of investing less in the functionality of game content with a gaming console, subtly degrading game features, or adding unique features to the merged firm’s platforms in ways that will eventually drive more astute gamers to the merged firm (even though the game in question is technically still available on rival consoles). Such eventualities are perhaps easier to imagine in the context of other content platforms—for example, if news content were less readable on one social media platform than another. When a merged firm has unilateral control over those subtle design and development decisions, the ability and incentive to engage in more subtle forms of anticompetitive partial foreclosure is more likely and predictable.
In finding that Microsoft would not have a financial incentive to fully foreclose access to Activision games, Judge Corley’s analysis hinges on a near-term assessment of Microsoft’s financial incentive to elicit game sales by keeping games on rival consoles. (Never mind that Microsoft is a $2.5 trillion corporation that can afford near-term losses in service of its longer-view monopoly ambitions.) Regardless, a theory of partial foreclosure does not mean that Microsoft must forgo independent sales on rival consoles to achieve its ambitions. To the contrary, partial foreclosure would still allow users to purchase and play games on rival consoles. But it also allows for Microsoft’s incentive to gradually encourage consumers to use its own console or game subscription service for better game play and unique features.
Finally, Judge Corley’s analysis of Microsoft’s incentive to fully foreclosure is irresponsibly deferential to statements made by Activision Blizzard CEO Bobby Kotick that the merging entities would suffer “irreparable reputational harm” if games were not made available on rival consoles. Again, by conflating the incentives for full and partial foreclosure, the court ignores Microsoft’s ability to mitigate that reputational harm—while continuing to drive consumers to its own platforms—if foreclosure is only partial.
Rejecting private behavioral remedies
In a particularly convoluted passage in the district court’s order, the Court appears to read an entirely new requirement into the FTC’s initial burden of demonstrating a likelihood of success on the merits—namely, that the FTC must assess the adequacy of Microsoft’s proposed side agreements with rival consoles and third-party platforms to not foreclose access to Call of Duty. Never mind that these side agreements lack any verifiable uniformity, are timebound, and cannot possibly account for incentives for partial foreclosure. Yet, the Court takes at face value the adequacy of those agreements, identifying them as the principal evidence of Microsoft’s lack of incentive to foreclose access to just one of Activision’s several AAA games.
In its appeal to the Ninth Circuit, the FTC seizes on this potential legal error as a basis for reversal. The FTC writes, “in crediting proposed efficiencies absent any analysis of their actual market impact, the district court failed to heed [the Ninth Circuit’s] observation ‘[t]he Supreme Court has never expressly approved an efficiencies defense to a Section 7 claim.’” The FTC argues that Microsoft’s proposed remedies should only have been considered after a finding of liability at the subsequent remedy stage of a merits proceeding, citing the Supreme Court’s decision in United States v. Greater Buffalo Press, Inc., 402 U.S. 549 (1971). Indeed, federal statute identifies the Commission as the expert body equipped to craft appropriate remedies in the event of a violation of the antitrust laws.
In its statement withdrawing the 2020 Vertical Merger Guidelines, the FTC announced it would work with the Department of Justice on updating the guidelines to address ineffective remedies. Presumably, the district court’s heavy reliance on Microsoft’s proposed behavioral remedies is catalyst enough to clarify that they should not qualify as cognizable efficiencies, at least at the initial stages of a case brought by the FTC or DOJ.
If this decision has taught us anything, it is that the agencies can’t come out with the new Merger Guidelines fast enough. In particular, those guidelines must address the competitive harms that flow from the vertical integration of differentiated content and digital media platforms. Even so, updating the guidelines may be insufficient to shift a judiciary so hostile to merger enforcement that it will turn a blind eye to brazen admissions of a merging firm’s monopoly ambitions. If that’s the case, we should look to Congress to reassert its anti-monopoly objectives.
Lee Hepner is Legal Counsel at the American Economic Liberties Project.
At some point soon, the Federal Trade Commission is very likely to sue Amazon over the many ways the e-commerce giant abuses its power over online retail, cloud computing and beyond. If and when it does, the agency would be wise to lean hard on the useful and powerful law at the core of its anti-monopoly authority.
The agency’s animating statute, the Federal Trade Commission Act and its crucial Section 5, bans “unfair methods of competition,” a phrase Congress deliberately crafted, and the Supreme Court has interpreted, to give the agency broad powers beyond the traditional antitrust laws to punish and prevent the unfair, anticompetitive conduct of monopolists and those companies that seek to monopolize industries.
Section 5 is what makes the FTC the FTC. Yet the agency hasn’t used its most powerful statute to its fullest capability for years. Today, with the world’s most powerful monopolist fully in the commission’s sights, the time for the FTC to re-embrace its core mission of ensuring fairness in the economy is now.
The FTC appears to agree. Last year, the agency issued fresh guidance for how and why it will enforce its core anti-monopoly law, and the 16-page document read like a promise to once again step up and enforce the law against corporate abuse just as Congress had intended.
Why Section 5?
The history of the Section 5—why Congress included it in the law and how lawmakers expected it to be enforced—is clear and has been spelled out in detail: Congress set out to create an expert antitrust agency that could go after bad actors and dangerous conduct that the traditional anti-monopoly law, the Sherman Act, could not necessarily reach. To do that, Congress crafted Section 5 so that the FTC could stop tactics that dominant corporations devise to sidestep competition on the merits and instead unfairly drive out their competitors. Congress gave the FTC the power to enforce the law on its own, to stop judges from hamstringing the law from the bench, as they have done to the Sherman Act.
As I’ve detailed, the Supreme Court has issued scores of rulings since the 1970s that have collectively gutted the ability of public enforcement agencies and private plaintiffs to sue monopolists for their abusive conduct and win. These cases have names—Trinko, American Express, Brooke Group, and so on—and, together, they dramatically reshaped the country’s decades-old anti-monopoly policy and allowed once-illegal corporate conduct to go unchecked.
Many of these decisions are now decades old, but they continue to have outsized effects on our ability to policy monopoly abuses. The Court’s 1984 Jefferson Parish decision, for example, made it far more difficult to successfully prosecute a tying case, in which a monopolist in one industry forces customers to buy a separate product or service. The circuit court in the government’s monopoly case against Microsoft relied heavily on Jefferson Parish in overturning the lower court’s order to break Microsoft up. More recently, courts deciding antitrust cases against Facebook, Qualcomm and Apple all relied on decades of pro-bigness court rulings to throw out credible monopoly claims against powerful defendants.
Indeed, the courts’ willingness to undermine Congress was a core concern for lawmakers when drafting and passing Section 5. Three years before Congress created the FTC, the U.S. Supreme Court handed down its verdict in the government’s monopoly case against Standard Oil, breaking up the oil trust but also establishing the so-called “rule of reason” standard for monopoly cases. That standard gave judges the power to decide if and when a monopoly violated the law, regardless of the language of, or democratic intent behind, the Sherman Act. Since then, the courts have marched the law away from its goal of constraining monopoly power, case by case, to the point that bringing most monopolization cases under the Sherman Act today is far more difficult than it should be, given the simple text of the law and Congress’ intent when it wrote, debated, and passed the act.
That’s the beauty and the importance of Section 5. Congress knew that the judicial constraints put on the Sherman Act meant it could not not reach every monopolistic act in the economy. That’s now truer than ever. Section 5 can stop and prevent unfair, anticompetitive acts without having to rely on precedent built up around the Sherman Act. It’s a separate law, with a separate standard and a separate enforcement apparatus. What’s more, the case law around Section 5 has reinforced the agency’s purview. In at least a dozen decisions, the Supreme Court has made clear that Congress intended for the law to reach unfair conduct that falls outside of the reach of the Sherman Act.
So the law is on solid footing, and after decades of sidestepping the job Congress charged it to do, the FTC appears ready to once again take on abuses of corporate power. And not a moment too soon. After decades of inadequate antitrust enforcement, unfairness abounds, particularly when it comes to the most powerful companies in the economy. Amazon perches atop that list.
A Recidivist Violator of Antitrust Laws
Investigators and Congress have repeatedly identified Amazon practices that appear to violate the spirit of the antitrust laws. The company has a long history of using predatory pricing as a tactic to undermine its competition, either as a means of forcing companies to accept its takeover offers, as it did with Zappos and Diapers.com, or simply as a way to weaken vendors or take market share from competing retailers, especially small, independent businesses. Lina Khan, the FTC’s chair, has called out Amazon’s predatory pricing, both in her seminal 2017 paper Amazon’s Antitrust Paradox, and when working for the House Judiciary Committee during its big tech monopoly investigation.
Under the current interpretation of predatory pricing as a violation of the Sherman Act, a company that priced a product below cost to undercut a rival must successfully put that rival out of business and then hike up prices to the point that it can recoup the money it lost with its below-cost pricing. Yet with companies like Amazon—big, rich, with different income streams and sources of capital—it might never need to make up for its below-cost pricing by hiking up prices on any one specific product, let alone the below-cost product. Indeed, as Jeff Bezos’s vast fortune can attest, predatory pricing can generate lucrative returns simply by sending a company’s stock price soaring as it rapidly gains market share.
If Amazon wants to sell products from popular books to private-label batteries at a loss, it can. Amazon makes enormous profits by taxing small businesses on its marketplace platform and from Amazon Web Services. It can sell stuff below cost forever if it wants to–a clearly unfair method of competing with any other single-product business–all while avoiding prosecution under the judicially weakened Sherman Act. Section 5 can and should step in to stop such conduct.
Amazon’s marketplace itself is another monopolization issue that the FTC could and should address with Section 5. The company’s monopoly online retail platform has become essential for many small businesses and others trying to reach customers. To wit, the company controls at least half of all online commerce, and even more for some products. As an online retail platform, Amazon is essential, suggesting it should be under some obligation to allow equal access to all users at minimal cost. Of course, that’s not what happens; as my organization has documented extensively, Amazon’s captured third-party sellers pay a litany of tolls and fees just to be visible to shoppers on the site. Amazon’s tolls can now account for more than half of the revenues from every sale a small business makes on the platform.
The control Amazon displays over its sellers mirrors the railroad monopolies of yesteryear, which controlled commerce by deciding which goods could reach buyers and under what terms. Antitrust action under the Sherman Act and legislation helped break down the railroad trusts a century ago. But if enforcers were to declare Amazon’s marketplace an essential facility today, the path to prosecution under the Sherman Act would be difficult at best.
Section 5’s broad prohibition of unfair business practices could prevent Amazon’s anticompetitive abuses. It could ban Amazon from discriminating against companies that sell products on its platform that compete with Amazon’s own in-house brands, or stop it from punishing sellers that refuse to buy Amazon’s own logistics and advertising services by burying their products in its search algorithm. The FTC could potentially challenge such conduct under the Sherman Act, as a tying case, or an essential facilities case. But again, the pathway to winning those cases is fraught, even though the conduct is clearly unfair and anticompetitive. If Amazon’s platform is the road to the market, then the rules of that road need to be fair for all. Section 5 could help pave the way.
These are just a few of the ways we could see the FTC use its broad authority under Section 5 to take on some of Amazon’s most egregious conduct. If I had to guess, I imagine the FTC in a potential future Amazon lawsuit will likely charge the company under both the Sherman Act and the FTC Act’s Section 5 for some conduct it feels the traditional anti-monopoly statute can reach, and will rely solely on Section 5 for conduct that it believes is unfair and anticompetitive, but beyond the scope of the Sherman Act in its current, judicially constrained form. For example, while the FTC could potentially use the Sherman Act to address Amazon’s decision to tie success on its marketplace to its logistics and advertising services, the agency’s statement makes clear that Section 5 has been and can be used to address “loyalty rebates, tying, bundling, and exclusive dealing arrangements that have the tendency to ripen into violations of the antitrust laws by virtue of industry conditions and the respondent’s position within the industry.”
Might this describe Amazon’s conduct? Very possibly, but that will ultimately be up to the FTC to decide. Suing Amazon under both statutes would invite the court to make better choices around the Sherman Act that are more critical of monopoly abuses, and help develop the law so that the FTC can eagerly embark on its core mission under Section 5: to help ensure markets are fair for all.
Ron Knox is a Senior Researcher and Writer for ILSR’s Independent Business Initiative.
Paradigm change is hard. It took over a year to overcome significant ridicule from neoliberal economists and pundits for the evidence to be so compelling as to flip the consensus on the causes of inflation. Business press outlets from the Wall Street Journal to Bloomberg to Business Insider now perceive what some heterodox economists have recognized for a while—that companies in concentrated industries were exploiting an inflationary environment to hike prices in excess of any cost increases they were incurring. (Alas, The Economist refuses to see the light.) Even Biden’s director of the National Economic Council, Lael Brainard, refers to this bout of inflation as a “price-price spiral, whereby final prices have risen by more than the increases in input prices.”
It’s hard to assign credit for flipping the script, but a few brave economists deserve mention. Isabella Weber, an economist at the University of Massachusetts, published a provocative article, co-authored with Evan Wasner, titled “Sellers’ Inflation, Profits and Conflict: Why Can Large Firms Hike Prices in an Emergency?” They explain how firms with market power only engage in price hikes if they expect their competitors to follow, which requires an implicit agreement that can be coordinated by sector-wide cost shocks and supply bottlenecks.
Josh Bivens of Economic Policy Institute debunked the neoliberal claim that wage demand was driving inflation, showing instead that corporate profit was responsible for more than one third of the price growth. Mike Konzcal and Niko Lusiani of the Roosevelt Institute demonstrated that U.S. firms that increased markups in 2021 the most were those with the higher mark-ups prior to the economic shocks, an indication that concentration was facilitating coordination. (If one were to expand the list of thought influencers beyond economists, you’d have to start with Lindsay Owens of the Groundwork Collaborative, who has been analyzing what CEOs say on earnings calls since the onset of inflation.)
With the new consensus, we need think creatively about attacking inflation. We have more than one tool at our disposal. Rate hikes might ultimately slow inflation, but at enormous social costs, as that mechanism requires putting people out of work so they have less money to spend. What’s worse, rate hikes are regressive, with the most vulnerable among us bearing the largest costs. Solving the inflationary puzzle calls for a scalpel not a chainsaw: We need to identify the industries that contribute the most to inflation (e.g. rental, electricity, certain foods), and then tailor remedies that attack inflation at its source. To use one analogy, it wouldn’t make sense to bulldoze a house because a fire was burning in one room. You’d find that room and put out the fire. I am calling for seven policies in particular.
(1) More Bully Pulpit. The President should use the bully pulpit more—recall JFK’s turning back steel price hikes in 1962. Biden called out junk fees in his state of the union address, causing airlines to remove unwarranted fees for families sitting together. Clearly, Biden can’t hold a press conference about a misbehaving industry daily. But he has not come close to tapping this well.
(2) More Congressional Hearings. Congress should hold hearings to call executives to account for price gouging. Although Congress has held hearings with experts, they have yet to summon the CEOs of industries employing massive price hikes, seemingly in coordination—as if they were some tacit agreement to raise prices in unison. I’d start by calling the CEOs of the packaged food makers, PepsiCo, Unilever, and Nestlé, who bragged last week to investors about record profits, massive price hikes, and enduring pricing power.
(3) The FTC to the Rescue. The FTC should investigate firms for announcing current or future price hikes (or capacity reductions) during earnings calls under the agency’s unique Section 5 authority to police “invitations to collude.” These cases of “tacit collusion” are much harder to prosecute under the Sherman Act. If the FTC were to publicly announce an investigation into a firm or industry—airlines (admittedly outside the FTC’s jurisdiction) or retail would be a good place to start—it would force CEOs economywide to exercise more caution about sharing competitively sensitive information on earnings calls.
(4) Limits on Concentrated Holdings: The cost of shelter makes up a significant share of the core CPI. Cities or states should move to limit the holdings of any individual firm within a given census tract. My OECD paper, co-authored with Jacob Linger and Ted Tatos, showed the nexus between rental inflation and concentration in Florida. A natural cap for a single owner would be five or ten percent of all rental properties in a neighborhood. Raising interest rates, our default anti-inflation tool, perversely puts home ownership out of reach of millions of families, driving them to the rental markets, which bids up rental rates, which is one of the primary drivers of inflation.
(5) Price Controls Should Be on the Table. Price controls are the ugly stepsister in economics. But when backed by a public campaign, they have proven to be effective. Congress imposed price caps for insulin copays in the Inflation Reduction Act, but only for those patients covered by Medicare. Insulin makers, beginning with Eli Lilly, saw the writing on the wall, and voluntarily imposed the $35 cap on all patients. So long as caps are sparingly used in mature industries, the standard investment concerns of economists should be mitigated. The lesson from insulin is that the mere talk of price controls can induce an industry to temper their enthusiasm for price hikes.
(6) Government Provisioning. The threat of government provisioning is another lever that may force private industry to behave. To wit, California offered a $50 million contract to makes its own insulin, which coincided with Eli Lilly, Sanofi and Novo Nordisk preemptively reducing their prices. This playbook could be used in other industries where inflation remains stubbornly high. We can anticipate libertarians screaming “socialism,” but if the cost of inaction is more rate hikes and unemployment, I’d take the libertarian jeers any day.
(7) Fix Antitrust Law. Congress should amend the Sherman Act to give the DOJ, state attorneys general, and private enforcers a better shot at policing tacit collusion among firms in concentrated industries. Courts have implicitly adopted the notion that oligopolistic interdependence is just as likely to achieve prices inflated over competitive conditions as agreement, and so “merely” alleging or putting forward evidence of parallel pricing, excess capacity, and artificially inflated prices is insufficient to prove agreement under Section 1. But why should we presume that it is just as easy to maintain artificially inflated prices tacitly than through agreement?
Congress should flip the presumption. In particular, Section 1 of the Sherman Act should be amended so that the following shall create a presumption of agreement: Evidence of parallel pricing accompanied by evidence of (a) inter-firm communications containing competitively sensitive information, or (b) other actions that would be against the unilateral interests of firms not otherwise colluding, or (c) prices exceeding those that would be predicted by fundamentals of supply or demand. Moreover, the Sherman Act should be amended to permit courts to sanction corporate executives who participated in any price-fixing conspiracy upon a guilty verdict, by barring the executives from working in the industries in which they broke the law, either indefinitely or for a period of time.
Industrial organization gatekeepers like to poo-poo the idea of using competition tools to attack inflation, noting that antitrust moves too slowly. This is needlessly pessimistic. It bears noting that none of the seven remedies suggested here involve bringing a traditional antitrust case against a set of firms pursuant to the Sherman Act. The common thread that binds the first six remedies is inducing a short-run shift in industry behavior. A forced divestiture of rental properties over a holding limit would inject downward-pressure on rents in the short run. CEOs don’t want to be called out by the president or called to testify before Congress to explain their record-breaking profits attributable to massive price hikes above any cost increases. A public investigation by the FTC into invitations to collude via earnings calls would also have an immediate effect on CEOs. Nor would CEOs take lightly to being barred for life from an industry for participating in a price-fixing scheme.
The seven interventions outlined here will require an all-of-government approach. Biden should create a task force to carry out these policies and issue an executive order to signal his seriousness to other agencies. There are two paths for Biden’s legacy: Do nothing about inflation and leave it to the Fed to engineer a recession that likely ends his presidency, or grab the reins himself. With the new consensus emerging that profits (and not wage demands) are driving inflation, the time has come to change our approach.
As the frontline against illegal monopolies and deceptive corporate behavior, the Federal Trade Commission (FTC) has a critical role to play in building an economy that works for consumers and small businesses. Since becoming FTC Chair, Lina Khan’s efforts to rein in anti-competitive behavior and protect consumers has been met with fierce resistance from powerful special interests and hostile editorials in the The Wall Street Journal.
Unfortunately, given the FTC’s role in combating unfair corporate behavior, this pushback is to be expected. I should know: I had the privilege of being an FTC commissioner, serving in both the Clinton and Bush administrations. I’ve seen fair, and unfair, criticism targeted at Republican and Democratic FTC chairs alike.
As a commissioner, I served under Chair Tim Muris, who was appointed by George W. Bush and whose aggressive stewardship of the agency resembled in many ways the current leadership of Chair Lina Khan. While at the helm of the FTC, Chair Muris pursued one of the most aggressive regulatory agendas of any Bush-appointed agency heads. His agenda was assisted by his chief of staff, Christine S. Wilson, who went on to be appointed to the FTC by Donald Trump.
Despite this history, Wilson made big news when, as part of her resignation announcement, she attacked Chair Khan’s “honesty and integrity” and accused her of “abuses of government power” and “lawlessness.” This turned many heads in Washington, particularly mine because of how detached this viewpoint was from my prior experience of serving at the FTC under Wilson’s own stewardship of the agency.
In his 2021 Executive Order on Promoting Competition in the American Economy, President Biden acknowledged that “a fair, open, and competitive marketplace has long been a cornerstone of the American economy.” Unfortunately, corporate concentration has grown under both parties for many years, especially in the technology industry. It is fortunate, and past time, to see the White House, the FTC, Department of Justice, and other agencies working to swing back the pendulum and reinvigorate competition in the American economy.
Despite the ongoing crisis of corporate concentration, Ms. Wilson took objection to an antitrust policy statement the FTC adopted in November and to Chair Khan’s statements in favor of strong enforcement. I found this odd having seen up close Ms. Wilson zealously advance Chair Muris’s enforcement agenda. In office, Muris “challenged mergers in markets from ‘ice cream to pickles,’” as the Wall Street Journal once noted, including in the technology industry, where Lina Khan has devoted significant attention.
During his tenure, Muris used the power available to him as Chair on behalf of consumers and for the good of the economy. He evolved the theory behind FTC regulatory authority so he could take new action to protect consumers—like creating the DO NOT CALL registry—over frivolous legal objections by the telecommunications industry. Like Khan, he coordinated with the DOJ to ensure that they were addressing anticompetitive behavior.
Ms. Wilson claims that Chair Khan should have recused herself from a Facebook acquisition case because of opinions she had expressed as a Congressional staffer. But both a federal judge and the full Commission found no basis to these claims of impropriety, and it is clear that Chair Khan had no legal or ethical obligation to recuse in this case. FTC Commissioners including Khan, like judges, are required to set their personal opinions aside and evaluate cases on the merits, and they do. The FTC Ethics Guidelines tells commissioners to ”not work on FTC matters that affect your interests: financial, relational, or organizational.” When it comes to ethics guidelines, it doesn’t get any plainer than that, and Chair Khan’s participation in the case clearly does not violate these guidelines.
In a hyper-partisan environment, Ms. Wilson’s attacks on the FTC’s credibility appear to me as an attempt to slow antitrust enforcement and ultimately obfuscate Chair Khan’s pro-consumer agenda.
The U.S. Chamber of Commerce, which lobbies against pro-consumer regulations, sent an open letter to Senate oversight committees demanding an investigation of “mismanagement” at the FTC, including congressional hearings. No wonder the Chamber is upset. The Biden Administration is taking the crisis of corporate concentration seriously and is taking steps to bolster antitrust and consumer protection enforcement. That’s a development American consumers should cheer, because when corporate consolidation rises, competition is inevitably diminished, leading to higher prices and fewer choices for consumers.
Fortunately, Chair Khan is building on the legacy of strong leaders like Muris to build an economy that works for consumers, not harmful monopolies. Ultimately, she will be remembered for that and not cynical, distracting attacks on her.
Sheila Foster Anthony, a FTC commissioner from 1997-2003, previously served as Assistant Attorney General for Legislation at the U.S.Department of Justice. Prior to her government service, she practiced intellectual property law in a D.C. firm.
Over the last 40 years, antitrust cases have been increasingly onerous and costly to litigate, yet if plaintiffs can prevail on one single issue, they dramatically enhance their chances of obtaining a favorable judgment. That issue is market definition.
Market definition is straightforward to explain because it’s just what it sounds like. Litigants and judges must be able to delineate the market in question in order to determine how much control a corporation exercises over it. Defining a relevant market essentially answers, depending on the conduct courts are analyzing, whether computers that run Apple’s MacOS operating system or Microsoft Windows are in the same market or, similarly, if Coca-Cola competes with Pepsi.
A corporation’s degree of control over any particular market is then typically measured by how much market share it has. In antitrust litigation, calculating a firm’s market share is the simplest and most common way to determine a firm’s ability to adversely affect market competition, including its influence over output, prices, or the entry of new firms. While the issue may seem mundane and even somewhat technocratic, defining a relevant market is the single most important determination in antitrust litigation. Indeed, many antitrust violations turn on whether a defendant has a high market share in the relevant market.
Market definition is a throughline in antitrust litigation. All violations that require a rule of reason analysis under Section 1 of the Sherman Act, such as resale price maintenance and vertical territorial restraints, require a market to be defined. All claims under Section 2 of the Sherman Act require a relevant market. And all claims under Sections 3 and 7 of the Clayton Act require a relevant market to be defined.
Defining relevant markets stems from the language of the antitrust laws. Section 2 of the Sherman Act states that monopolization tactics are illegal in “any part of the trade or commerce[.]” Sections 3 and Section 7 prohibit exclusive deals and tyings involving commodities and mergers, respectively in “any line of commerce or…in any section of the country[.]” “[A]ny” “part” or “line of commerce” inherently requires some description of a market that is at issue.
As I more thoroughly described in a newly released working paper, the process of defining relevant markets has a long and winding history stemming from the inception of the Sherman Act in 1890. Between 1890 and 1944, the Supreme Court took a highly generalized approach, requiring as it stated in 1895, only a description of “some considerable portion, of a particular kind of merchandise or commodity[.]” In subsequent cases during this initial era, the Supreme Court provided little additional guidance, maintaining that litigants merely needed to provide a generalized description of “any one of the classes of things forming a part of interstate or foreign commerce.”
In 1945, after Circuit Court Judge Learned Hand found the Aluminum Company of America (commonly known as ALCOA) liable for monopolization in a landmark case, the market definition process started to become more refined, primarily focusing on how products were similar and interchangeable such that they performed comparable functions. At the same time market definition took on more complexity, antitrust enforcement exploded and courts became flooded with antitrust litigation. Given the circumstances, the Supreme Court felt that it needed to provide litigants with more structure to the antitrust laws, not only to effectuate Congress’s intent of protecting freedom of economic opportunity and preventing dominant corporations from using unfair business practices to succeed, but also to assist judges in determining whether a violation occurred. Throughout the 1940s and 1950s, the Supreme Court repeatedly expressed its frustration that there was no formal process for litigants to help the courts define markets.
It took until 1962 for the Supreme Court to comprehensively determine how markets should be defined and bring some much-needed structure to antitrust enforcement. The process, known as the Brown Shoe methodology after the 1962 case, requires litigants to present information to a reviewing court that describes the “nature of the commercial entities involved and by the nature of the competition [firms] face…[based on] trade realit[ies].” With this information, judges are required to engage in a heavy review of the information they are presented with and make a reasonable decision that accurately reflects the actual market competition between the products and services at issue in the litigation.
Constructing a relevant market for the purposes of antitrust litigation using the Brown Shoe methodology can be made using a variety of commonly understood and accessible information sources. For example, previous markets in antitrust litigation have been constructed from reviewing consumer preferences, consumer surveys, comparing the functional capabilities of products, the uniqueness of the buyers or production facilities, or trade association data. In a series of cases between 1962 to the present, the Supreme Court has rigorously refined its Brown Shoe process to ensure both litigants and judges had sufficient guidance to define markets. Critically, in no way did the Supreme Court intend for its Brown Shoe methodology to restrict or hinder the enforcement of the antitrust laws, and the fact that the process relies on readily accessible and commonly understood information is indicative of that goal.
But 1982 was a watershed year. Enforcement officials in the Reagan administration tossed aside more than a decade of carefully crafted jurisprudence from the Supreme Court in favor of complex, unnecessary, and arbitrary tests to define a relevant market. The new test, known as the hypothetical monopolist test (HMT), which is often informed by econometric models, asks whether a hypothetical monopolist of the products under consideration could profitably raise prices over competitive levels. It is tantamount to asking how many angels can dance on the head of a pin. They primarily accomplished this economics-laden burden through the implementation of a new set of guidelines that detailed how the Department of Justice would analyze mergers, determine whether to bring an enforcement action, and how the agency would conduct certain parts of antitrust litigation, one of those aspects being the market definition process.
From the 1982 implementation of new merger guidelines to the present, judges and litigants, predominantly federal enforcers, have ignored the Brown Shoe methodology and instead have embraced the HMT and its navel-gazing estimation of angels. As a result, courts now entertain battles of econometric experts, over what should amount to a straightforward inquiry.
As scholar Louis Schwartz aptly described, the relegation of the Brown Shoe methodology and its brazen replacement with econometrics under the 1982 guidelines represented a “legal smuggling” of byzantine economic criteria into antitrust litigation.
Besides facilitating the de-economization of antitrust enforcement, abandoning the econometric process would have other notable benefits. First, relying entirely on the Brown Shoe methodology would restrict the power of judges, lawyers, and economists by making the law more comprehensible to litigants. Giving power back to litigants would contribute to making antitrust law less technocratic and abstruse and more democratically accountable. For example, in some cases, economists have great difficulty explaining their findings to judges in intelligible terms. In extreme cases, judges are required to hire their own economic experts just to decipher the material presented by the litigants. Simply stated, the law is not just for economists, judges, or lawyers; it is also for ordinary people. Discarding the econometric tests for market definition facilitates not only the understanding of antitrust law, but also how to stay within its boundaries.
Second, reverting to the Brown Shoe methodology would make antitrust law fairer and promote its enforcement. The only parties that stand to gain from employing econometric tests are the economists conducting the analysis, the lawyers defending large corporations, and corporations who wish to be shielded from the antitrust laws. Frequently charging more than a $1,000 dollars an hour, economists are also extraordinarily expensive for litigants to employ, creating an exceptionally high barrier to otherwise meritorious legal claims.
Since 1982, market definition in antitrust litigation has lingered in a highly nebulous environment, where both the econometric tests informing the HMT and the Brown Shoe methodology co-exist but with only the Brown Shoe methodology having explicit approval by the Supreme Court. Even in its highly contentious and confusing 2018 ruling in Ohio v. American Express, the Supreme Court did not mention or cite the econometric processes currently employed by courts and detailed in the merger guidelines to define relevant markets. In fact, in a brief statement, the Court reaffirmed the controlling process it developed in Brown Shoe, yet lower courts continue to cite the failure of plaintiffs to meet the requirements of the econometric market definition process as one of the primary reasons to dismiss antitrust cases. Putting it aptly, Professor Jonathan Baker has stated that the “outcome of more [antitrust] cases has surely turned on market definition than on any other substantive issue.”
While the econometric process is not the exclusive process enforcers use to define markets in antitrust litigation and is often used in conjunction with the Brown Shoe methodology, completely abandoning it is critical to de-economizing antitrust law more generally. Since the late 1970s, primarily due to the work published by Robert Bork and other Chicago School adherents, economics and economic thinking more generally have become deeply entrenched in antitrust litigation. Chicago School thought has essentially made antitrust enforcement of nearly all vertical restraints like territorial limitations per se legal, and since the 1970s, the Supreme Court has overturned many of its per se rules. Contravening controlling case law on vertical mergers, Chicago School thinking has resulted in judges viewing them as almost always benign or even beneficial and failing to condemn them by applying the antitrust laws. Dubious economic assumptions have significantly restricted antitrust liability for predatory pricing, a practice described by the Supreme Court in 1986 as “rarely tried, and even more rarely successful.” As a result, economic thinking and econometric methodologies, though running contrary to Congress’s intent, have served to undermine the enforcement of the antitrust laws. This is not to say there is no role for economists. Economists can engage in essential fact gathering activities or provide scholarly perspective on empirical data that shows how specific business conduct can adversely affect prices, output, consumer choice, or innovation. For example, economic research has found that mergers and acquisitions habitually lead to higher prices and increased corporate profit margins – repudiating the idea that mergers are beneficial for consumers. But economists have little value to add when it comes to market definition.
Reinstituting many of the overturned per se antitrust rules all but require a change of precedent from the Supreme Court, which appears highly unlikely given the ideology of most of the current justices. However, modifying the process that enforcers use to determine relevant markets does not require overcoming such a seemingly insurmountable hurdle. Ridding antitrust litigation of the econometric process would simply require enforcers, particularly those at the Federal Trade Commission and the Department of Justice, to completely abandon the process altogether in their enforcement efforts (particularly in the merger guidelines) and instead exclusively rely on the Brown Shoe methodology. Neither the law nor the jurisprudence would need to be modified to effectuate this change—although it might be helpful, before unilaterally disarming, to first explain the new policy in the agencies’ forthcoming revision to the merger guidelines.
While some judges currently ignore or dismiss the Brown Shoe methodology, were enforcers to completely abandon the econometric process for defining markets, courts effectively would have no choice but to rely on the controlling Brown Shoe process. Unlike other aspects of antitrust law, enforcement officials can and should fully embrace the controlling law, in this case Brown Shoe, and use it readily, leaving private litigants to employ the econometric process if they so chose. Nevertheless, history indicates that courts are highly deferential to the methods used by federal enforcers—especially when explicated in the merger guidelines—and private litigants would likely follow the lead of federal enforcers in deciding which method to use to define relevant markets.
Currently, the Department of Justice and the Federal Trade Commission are redoing and updating their merger guidelines. To continue facilitating the progressive antitrust policy that began with President Biden’s administration and to start broadly de-economizing antitrust litigation, both agencies should seize the opportunity to jettison the econometric-heavy market definition tests and enshrine this change within the updated merger guidelines. Enforcers should instead exclusively rely on the sensible, practical, and fair approach the Supreme Court developed in Brown Shoe.
I love eggs. I really do. There was a year in law school where I religiously made and ate an egg sandwich for breakfast every day. To this day, I believe an egg fried in olive oil until the yolks are jammy and the edges are crispy is a perfect food.
Since last year, however, my egg-loving style has been cramped. As everyone knows, the price of eggs at the grocery store more than doubled in 2022, increasing from $1.78 a dozen in December 2021 to over $4.25 in December 2022. This 138-percent increase in egg prices far outstripped the 12-percent increase Americans saw in grocery prices generally over the same period. And some Americans have had it much worse, as average egg prices reached well over $6 a dozen in states ranging from Alabama to California and Florida to Nevada.
What’s behind the skyrocketing retail price of the incredible edible egg? Well, for one thing, the skyrocketing wholesale price of that egg. Between January 2022 and December 2022, wholesale egg prices went from 144 cents for a dozen Grade-A large eggs to 503 cents a dozen. This was the highest price ever recorded for wholesale eggs. Over the entire year, wholesale egg prices averaged 282.4 cents per dozen in 2022. When we consider that average retail egg prices for the same year were only about 3 cents higher at 285.7 cents per dozen, it becomes clear that the primary contributor to rising egg prices at the grocery store has been the dramatic increase in the wholesale prices charged by egg producers.
If this gives you hope that relief might be around the corner because you’ve heard something about a recent “collapse” in wholesale egg prices, sadly your hope would be misplaced. Despite this much-ballyhooed collapse, the average wholesale egg price has simply gone from 4-to-5 times what it was in January of last year to 2-to-3 times that number. If that weren’t enough, prices are expected to spike again when egg demand picks up in the run-up to Easter. Ultimately, the USDA is projecting that the average wholesale egg price in 2023 will be 207 cents a dozen—or only about 25% lower than the average price for 2022. So much for a collapse.
Are you wondering who sets these wholesale prices? Why, an oligopoly, of course. The production of eggs in America is dominated by a handful of companies led by Cal-Maine Foods. With nearly 47 million egg-laying hens, Cal-Maine controls approximately 20% of the national egg supply and dwarfs its nearest competitor. The leading firms in the industry have a history of engaging in “cartelistic conspiracies” to limit production, split markets, and increase prices for consumers. In fact, a jury found such a conspiracy existed as recently as 2018, and a wide-ranging lawsuit was brought just a couple of years ago accusing several of the largest egg producers (including Cal-Maine) of colluding to increase prices during the COVID-19 pandemic.
When asked about the multiplying price of their product, these dominant egg producers and their industry association, the American Egg Board, have insisted it’s entirely outside their control; an avian flu outbreak and the rising cost of things like feed and fuel, they say, caused egg prices to rise all on their own in 2022. And, sure enough, those were real headaches for the egg industry last year—about 43 million egg-laying hens were lost due to bird flu through December 2022, and input costs for producers certainly increased over 2021 levels. As my organization, Farm Action, detailed in letters to federal antitrust enforcers last month, however, the math behind those explanations for the steep increase in wholesale egg prices just doesn’t add up.
The reality, we argued, is that wholesale egg prices didn’t triple in 2022, and aren’t projected to stay elevated through 2023, because of “supply chain, ‘act of God’ type stuff,” as one industry executive has tried to spin it. Rather, the true driver of record egg prices has been simple profiteering, and more fundamentally, the anti-competitive market structures that enable the largest egg producers in the country to engage in such profiteering with impunity.
According to the industry’s leading firms, rising egg prices should be blamed on two things: avian flu and input costs. We can stipulate for the sake of argument that, if a massive amount of egg production and, hence, potential revenue were lost due to avian flu, the largest producers would be justified in trying to recoup some of that lost revenue by raising prices on their remaining sales. Likewise, if there were a sharp rise in egg production costs, we can stipulate that producers would be justified in trying to pass them on to wholesale customers. But was there a nosedive in egg production? Did the cost of egg inputs multiply dramatically? Short answer: No, and No.
The bottom line on the avian flu outbreak is that it simply did not have a substantial effect on egg production. Although about 43 million egg-laying hens were lost due to avian flu in 2022, they weren’t all lost at once, and there were always over 300 million other hens alive and kicking to lay eggs for America. The monthly size of the nation’s flock of egg-laying hens in 2022 was, on average, only 4.8 percent smaller on a year-over-year basis. If that isn’t enough, the effect of losing those hens on production was itself blunted by “record high” lay rates throughout the year, which were, on average, 1.7 percent higher than the lay rate observed between 2017 and 2021. With substantially the same number of hens laying eggs faster than ever, the industry’s total egg production in 2022 was—wait for it—only 2.98 percent lower than it was in 2021.
Turning to input costs, it’s true they were higher in 2022 than in 2021, but they weren’t that much higher. Farm production costs at Cal-Maine Foods—the only egg producer that publishes financial data as a publicly traded company—increased by approximately 20 percent between 2021 and 2022. Their total cost of sales went up by a little over 40 percent. At the same time, Cal-Maine produced roughly the same number of eggs in 2022 as it did in 2021. If we take Cal-Maine Foods as the “bellwether” for the industry’s largest firms, we can be pretty sure that the dominant egg producers didn’t experience anywhere near enough inflation in egg production costs to account for the three-fold increase in wholesale egg prices.
Against the backdrop of these facts, the industry’s narrative simply crumbles. It’s clear that neither rising input costs nor a drop in production due to avian flu has been the primary contributor to skyrocketing egg prices. What has been the primary contributor, you ask? Profits. Lots and lots of profits.
Gross profits at Cal-Maine Foods, for example, increased in lockstep with rising egg prices through every quarter of the last year. They went from nearly $92 million in the quarter ending on February 26, 2022, to approximately $195 million in the quarter ending on May 28, 2022, to more than $217 million in the quarter ending on August 27, 2022, to just under $318 million in the quarter ending on November 26, 2022. The company’s gross margins likewise increased steadily, from a little over 19 percent in the first quarter of 2022 (a 45 percent year-over-year increase) to nearly 40 percent in the last quarter of 2022 (a 345 percent year-over-year increase).
The most telling data point, however, is this: For the 26-week period ending on November 26, 2022—in other words, for the six months following the height of the avian flu outbreak in March and April—Cal-Maine reported a five-fold increase in its gross margin and a ten-fold increase in its gross profits compared to the same period in 2021. Considering the number of eggs Cal-Maine sold during this period was roughly the same in 2022 as it was in 2021, it follows that essentially all of this profit expansion came from—you guessed it—higher prices.
On their own, these numbers plainly show that dominant egg producers have been gouging Americans, using the cover of inflation and avian flu to extract profit margins as high as 40 percent on a dozen loose eggs.
Some agriculture economists and market analysts, however, have questioned whether this price gouging should raise antitrust concerns. The dramatic escalation in egg prices over the past year, they’ve argued, has just been “normal economics” at work. Per Angel Rubio, a senior analyst at the industry’s go-to market research firm, Urner Barry, the runaway increase in wholesale egg prices was simply a function of the “compounding effect” of “avian flu outbreaks month after month after month.” These outbreaks repeatedly disrupted egg deliveries, he presumes, driving customers to assent to spiraling price demands from alternative suppliers. In a blog post on Urner Barry’s website, Mr. Rubio further hypothesized that jittery customers may have “increased their ‘normal’ purchase levels to secure more supply,” goosing up prices even higher.
There are several reasons to doubt this theory of the case. To begin with, Mr. Rubio’s analysis presumes that avian flu outbreaks caused significant disruptions in the supply of eggs even though, as discussed above, the aggregate production data suggests that was not the case. But let’s assume that there were supply disruptions, and that these disruptions did lead to a glut of demand for reliable suppliers, giving them pricing power. If that were the case, it would stand to reason that Cal-Maine—which did not report a single case of avian flu at any of its facilities in 2022—had an opportunity to sell a whole lot more eggs in 2022 than in 2021, and to sell them at record-high profit margins. But Cal-Maine didn’t sell a whole lot more eggs. It sold roughly the same number of eggs. If Mr. Rubio’s theory were right, why did Cal-Maine leave money on the table?
Once we start applying this question to the pricing and production behavior of the egg industry’s dominant firms more broadly, a whole variety of competition red flags start cropping up
Let’s talk about pricing first. In a truly competitive market, one would have expected rival egg producers to respond to a near-tripling of average market prices with efforts to undercut Cal-Maine’s skyrocketing profit margin and capture market share. Alas, that did not happen. In researching Farm Action’s letter to antitrust enforcers, we found no evidence of aggressive price competition for business among the largest egg producers. Yet everything about the mechanics of egg sales suggests that they should be competitive. Wholesale customers generally buy their eggs directly from producers. Long-term or exclusive contracts for egg supplies are rare. And the price of eggs in each purchase is individually negotiated. In other words, for each delivery of eggs they need, a wholesale customer is in all likelihood free to shop around and give rival suppliers an opportunity to undercut their incumbent supplier. Given this fluid sales environment, how did Cal-Maine manage to raise prices so much that its profit margin quintupled in one year without any other major producer coming to eat its lunch?
Another head-scratcher has been how the industry has managed to throttle production in the face of sustained high egg prices. As early as August of last year, the USDA was observing that favorable conditions existed, both in terms of moderating input costs and record-high egg prices, for producers to invest in expanding their egg-laying flocks. Yet such investment never materialized.
Even as prices reached unprecedented levels between October and December of last year, the number of eggs in incubators and the number of egg-laying chicks hatched by upstream hatcheries both remained flat, and were even below 2021 levels in December. As the year drew to a close, the USDA observed that “producers—despite the record-high wholesale price—are taking a cautious approach to expanding production in the near term.” The following month, it pared down its table-egg production forecast for the entirety of 2023—while raising its forecast of wholesale egg prices for every quarter of the coming year—on account of “the industry’s [persisting] cautious approach to expanding production.”
Because of this “caution” among egg producers, the total number of egg-laying hens in the U.S. has recovered from the losses caused by avian flu outbreak of 2022 at less than one-third of the pace it recovered from the (relatively more severe) avian flu outbreak of 2015, according to data from the USDA’s National Agricultural Statistics Service. At its lowest point in the aftermath of the 2022 avian flu outbreak—in June of last year—the egg-laying flock counted a little under 300.5 million hens, or around 30 million (or 9%) fewer hens than it started the year with (330.8 million). For comparison, at its lowest point following the 2015 outbreak—which was also in June of that year—the egg-laying flock totaled 280.2 million and had nearly 35 million (or 11%) fewer hens than it did at the start of 2015 (315 million).
As you can see from the chart above (Fig. 1), in 2015, it took the industry less than 8 months to rebuild the egg-laying flock from its June low point; by the end of February 2016, producers had added over 30 million hens, bringing the total size of the egg-laying flock back up to 310.2 million. Contrast this pace of flock recovery between 2015 and 2016 with the pace of recovery we’ve seen over the past year. In the 8 months that have passed since June of last year, the industry has added less than 9 million hens—leaving the flock at an anemic 309.4 million at the start of February 2023.
On its own, this comparison shows that large egg producers almost certainly could have rebuilt their hen flocks in the wake of last year’s avian flu outbreaks much faster than they have. When considered alongside the fact that, in 2015, the monthly average wholesale price reached its highest point in August and never exceeded $2.71 per dozen, the sluggishness of the 2022-2023 recovery becomes objectively suspicious. According to Urner Barry, in 2015, wholesale egg prices rose 6-8% for every 1% decrease in the number of egg-laying hens caused by the avian flu; that is barely half the 15% price increase for every 1% decrease in hens observed last year. The monthly price for a dozen wholesale eggs in 2022 cleared the 2015 high of $2.71 per dozen as early as April, and stayed at comparable or higher levels through the rest of the year. And yet, egg producers have been “cautiously” adding hens at a third of pace they did in 2015-2016 since June of last year. What gives?
As Senator Elizabeth Warren and Representative Katie Porter noted in recent letters to dominant egg producers seeking answers about ballooning prices, producers appear to be “impervious to the basic laws of supply and demand.” This is the case not only in terms of their willingness to invest in new capacity, but also in terms of their willingness to utilize existing capacity. The rate at which hens lay eggs is the basic measure of flock productivity in the industry. Several factors can affect lay rates, including hen genetics and age, but within physical limits, producers can speed or slow egg-laying by their hens through nutrition, lighting, and other flock management choices. Yet, even as millions of hens were being lost to avian flu and eggs were fetching unprecedented prices last year, producers seemed to make choices that depressed, rather than maximized, their remaining hens’ lay rates.
The average table-egg lay rate reached its highest level ever (around 83.5 eggs per 100 hens per day) in the early, most severe, months of the avian flu epidemic—between March and May of last year—but then it nosedived. By June, the national average lay rate had dropped to about 82.5 eggs per 100 hens per day. This was consistent with seasonal trends in years past; it’s typical for lay rates to moderate as Spring turns to Summer. What happened after June, however, was curious. Normally, the average lay rate would start climbing again in July and stay on an upward trend through the end of the year, with the strongest lay rates often reported in the last 2 or 3 months of the year. In 2022, however, the opposite occurred. Lay rates flat-lined from June through the Fall before dipping to their weakest level in the last three months of the year. In other words, during the exact period when egg prices were hitting their stride—the last six months of 2022—the industry somehow managed to orchestrate a wholesale deviation from historical trends in the direction of getting fewer eggs out of the hens they already had.
Together, these dynamics of throttled production and unrestrained pricing are unmistakable red flags that deserve investigation by enforcers. Take Cal-Maine as an example again. They are the leader in a mostly commoditized industry. They presumably have the most efficient operations and the greatest financial power of any firm in the industry—allowing them to stand up hen capacity as fast as anyone and sell at competitive prices to capture unmet or up-charged demand. Instead of doing that, however, it appears they simultaneously abandoned price competition and refrained from expanding production to satisfy demand last year. This begs the question: What made Cal-Maine so confident that other large producers wouldn’t produce more eggs and undercut its prices? More to the point, why didn’t they?
Whatever the answers to these questions might be, this much is clear: Cal-Maine behaved as if its dominant position were entrenched, and its strategy worked. As rival egg producers have gone along instead of competing on price and production, the industry has been able to sustain elevated egg prices from one year to the next without any legitimate justification. Even as egg prices have started ameliorating this year, the USDA is still forecasting an average wholesale price for 2023 that is 70-to-80% higher than the 2021 average, suggesting that whatever “bottom” egg prices might reach this year will, in all likelihood, be at least an order of magnitude higher than 2021 levels.
This pattern of behavior by dominant egg producers over the past year is consistent with longstanding research beginning in the 1970s—from Blair (1972) to Sherman (1977) to Kelton (1980)—on how leading firms in consolidated industries “administer prices” to achieve higher-margin “focal points” during economic shocks and periods of high inflation. And, make no mistake, the egg industry is consolidated. While the top 10 egg producers control 53%—and Cal-Maine alone controls 20%—of all egg-laying hens in the U.S., these numbers understate concentration in actual egg markets. Smaller egg operations (the ones that control the other 47% of America’s hens) tend to produce specialty, not conventional, eggs for sale at premium price points; as such, they typically have neither the scale nor the capacity to supply national grocery chains with the conventional eggs bought by most consumers. Only the largest egg producers can fill this need—a fact that likely makes the submarket for conventional eggs sold to national customers substantially more concentrated than the total egg supply. Was it pure coincidence that prices barely climbed In the fragmented specialty-egg segment but skyrocketed in the consolidated conventional-egg segment?
The honest answer is that I don’t know. In the end, I’m just a country lawyer with a laptop and a love for fried eggs. But smart people at the Boston Fed, the University of Utah, and a few other places have recently shown—empirically, I’m told—that it’s easier for competitors to coordinate for higher profits during a crisis when their industry is concentrated. Maybe that’s what happened here. Maybe it’s not. The only people who can find out for sure—and get the American people some restitution if it is what happened—are the fine public servants at the Federal Trade Commission, the Justice Department Antitrust Division, and state Attorneys General offices across the country. They should do nothing less.
For nearly 12 months now, dominant egg producers have demonstrated their ability to charge exorbitant prices for a staple we all need for no reason beyond having the power to do it. The “philosophy” of our antitrust laws, as Justice Douglas once reminded his colleagues on the Supreme Court, is that such power “should not exist.” With hundreds of millions of dollars missing from Americans’ pockets to enrich the profits of a handful of robber barons in the egg industry, antitrust enforcers owe the public a duty to investigate, and to see to it that the nation’s laws are enforced—even against entrenched giants.
Basel Musharbash is Legal Counsel at Farm Action, a farmer-led advocacy organization dedicated to building a food and agriculture system that works for everyone rather than a handful of powerful corporations. Basel is also the Managing Attorney of Basel PLLC, a mission-driven law firm in Paris, Texas, focused on the intersection of community development and antitrust law.
On Wednesday, the UK Competition and Markets Authority (CMA) provisionally concluded that Microsoft’s proposed acquisition of Activision could result in higher prices, fewer choices, or less innovation for UK gamers. It also released a set of proposed remedies to address the likely anticompetitive harms, including a mandatory divestiture of (1) Activision’s business associated with its popular Call of Duty franchise; (2) the entirety of the Activision segment; or (3) the entirety of both the Activision segment and the Blizzard segment, which would also cover the World of Warcraft franchise.
Assuming Microsoft won’t go for any structural remedy, the deal is likely on ice, and the U.S. Federal Trade Commission (FTC) would not have to bring any enforcement action against Microsoft. Although this is likely the right outcome from a competition perspective, the antitrust geeks (myself included) will suffer dearly from not getting to observe the theatrics around a hearing and the associated written decisions.
Setting aside Microsoft’s significant holdings in gaming studios, Microsoft’s attempted purchase of Activision can be understood as a vertical merger, in the sense that Microsoft sells its Xbox gaming platform (the downstream division) to consumers, in competition against Sony’s PlayStation and Nintendo’s Switch—and Activision supplies compelling games (the upstream division) for the various gaming platforms. The Xbox platform can be understood either as Microsoft’s traditional gaming console or as its nascent cloud-based Xbox Game Pass platform.
Challenges of vertical mergers have not been successful of late, prompting many scholars to call for new vertical merger guidelines. Among the suggested remedies would be a “dominant platform presumption,” advocated by antitrust law professor Steve Salop, which would shift the burden of proof to the acquiring firm whenever it was deemed a dominant platform.
It’s All About the Departure Rate
Input foreclosure is the term used by economists to describe how a vertically integrated firm—think post-merger Microsoft—might withhold a key input from distribution rivals, thereby impairing the rivals’ ability to compete for customers. When the theory of harm is input foreclosure, proof of anticompetitive effects largely turns on how special or “must-have” the potentially withheld input is for downstream rivals. Economists define the “departure rate” as the share of the rival’s customers who would defect if they could not access the withheld input. Under these models, anticompetitive effects also require that the downstream firm possess a significant market share.
In the Justice Department’s attempt to block AT&T’s acquisition of Time Warner in 2018, the agency’s economic expert leaned on an estimated departure rate generated by a third-party consultant. That third-party consultant originally produced results consistent with a low departure rate, suggesting that losing CNN would not cause too much customer defection, only to be changed to a high departure rate before being handed to the economic expert for incorporation into his work. Regardless of how the work was performed, it strained credulity that CNN was considered a must-have input by cable distribution rivals and their customers. Moreover, AT&T’s (local) share of the distribution market, even in its limited footprint, was not substantial.
In contrast, Microsoft wields a commanding share of gaming platforms, by some estimates as high as 60 to 70 percent of global cloud gaming, but only 25 percent of gaming consoles per Ampere Analytics. Call of Duty is considered a must-have input among gaming platforms, based in part on CMA’s analysis of internal “data on how Microsoft measures the value of customers in the ordinary course of business.” For modeling purposes, it still would be incumbent on the agency’s economist to measure the departure rate, and here it might be difficult to find a natural experiment—for example, where a platform temporarily lost access to Call of Duty—to exploit. As part of its investigation, CMA “commission[ed] an independent survey of UK gamers,” which could have been used to asked Call of Duty users whether they might leave a platform if they couldn’t access their favorite game. CMA noted that Microsoft has already employed a strategy “of buying gaming studios and making their content exclusive to Microsoft’s platforms … following several previous acquisitions of games studios.”
Microsoft has made commitments to Sony and Nintendo to continue releasing its new Call of Duty games for ten years. Yet such commitments are hard to enforce, and could be undermined through trickery. For example, Microsoft could offer access only at some unreasonable price, or only under unreasonable conditions in which (say) the rival platform also agreed to purchase a set of boring games, alongside Call of Duty, at a supracompetitive price. Without a regulator to oversee access, the commitment could be ephemeral, much like T-Mobile’s access commitment to Dish, to remedy T-Mobile’s acquisition of Sprint, which is widely recognized as a farce. Despite its disfavor of behavioral remedies, CMA noted in its notice of possible remedies that it would nevertheless “consider a behavioural access remedy as a possible remedy,” yet concludes that the agency is “of the initial view that any behavioural remedy in this case is likely to present material effectiveness risks.”
Microsoft reportedly entered into a neutrality agreement with organized labor, under which Microsoft would not impair progress towards unionization of Activision employees. Whatever benefits such an agreement might generate for workers, those benefits could not be used to offset the harms suffered by consumers in the product markets under Philadelphia National Bank. Unfortunately, the treatment of offsets is not as clear under monopolization law.
What Goes Around Comes Around
If CMA’s actions ultimately stop the Microsoft-Activision merger, the relatively weaker merger enforcement in the United States would get a pass. U.S. antitrust agencies are readying a revised and more stringent set of merger guidelines, which would bring U.S. standards in line with European authorities. In the meantime, the global reach of the dominant tech platforms—and thus exposure to foreign antitrust regimes—might ironically protect U.S. consumers from the platforms’ most audacious lockups.
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:
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.