Neoliberal columnist Matt Yglesias recently weighed into antitrust policy in Bloomberg, claiming falsely that the “hipsters” in charge of Biden’s antitrust agencies were abandoning consumers and the war on high prices. Yglesias thinks this deviation from consumer welfare makes for bad policy during our inflationary moment. I have a thread that explains all the things he got wrong. The purpose of this post, however, is to clarify how antitrust enforcement has changed under the current regime, and what it means to abandon antitrust’s consumer welfare standard as opposed to abandoning consumers.
Ever since the courts embraced Robert Bork’s demonstrably false revisionist history of antitrust’s goals, consumer welfare became antitrust’s lodestar, which meant that consumers sat atop antitrust’s hierarchy. Cases were pursued by agencies if and only if exclusionary conduct could be directly connected to higher prices or reduced output. This limitation severely neutered antitrust enforcement by design—with a two minor exceptions described below, there was not a single (standalone) monopolization case brought by the DOJ after U.S. v. Microsoft for over two decades—presumably because most harm in the modern (digital) age did not manifest in the form of higher prices for consumers. Under the Biden administration, the agencies are pursuing monopoly cases against Amazon, Apple, and Google, among others.
(For the antitrust nerds, the DOJ’s 2011 case against United Regional Health Care System included a Section 2 claim, but it was basically included to bolster a Section 1 claim. It can hardly be counted as a Section 2 case. And the DOJ’s 2015 case to block United’s alleged monopolization of takeoff and landing slots at Newark included a Section 2 claim. But these were just blips. Also the FTC pursued a Section 2 case prior to the Biden administration against Qualcomm in 2017.)
Even worse, if there was ever a perceived conflict between the welfare of consumers and the welfare of workers or merchants (or input providers generally), antitrust enforcers lost in court. The NCAA cases made clear that injury to college players derived from extracting wealth disproportionately created by predominantly Black athletes would be tolerated so long as viewers with a taste for amateurism were better off. And American Express stood for the principle that harms to merchants from anti-steering rules would be tolerated so long as generally wealthy Amex cardholders enjoyed more luxurious perks. (Patrons of Amex’s Centurian lounge can get free massages and Michelle Bernstein cuisine in the Miami Airport!) The consumer welfare standard was effectively a pro-monopoly policy, in the sense that it tolerated massive concentrations of economic power throughout the economy and firms deploying a surfeit of unfair and predatory tactics to extend and entrench their power.
Labor Theories of Harm in Merger Enforcement
In the consumer welfare era, which is now hopefully in our rear-view mirror, labor harms were not even on the agencies’ radars, particularly when it came to merger review. By freeing the agencies of having to construct price-based theories of harm to consumers, the so-called hipsters have unleashed a new wave of challenges, reinvigorating merger enforcement, particularly in labor markets. In October 2022, the DOJ stopped a merger of two book publishers on the theory that the combination would harm authors, an input provider in book production process. This was the first time in history that a merger was blocked solely on the basis of a harm to input providers.
And the DOJ’s complaint in the Live Nation/Ticketmaster merger spells out harms to, among other economic agents, musicians and comedians that flow from Live Nation’s alleged tying of its promotion services to access to its large amphitheaters. (Yglesias incorrectly asserted that DOJ’s complaint against Live Nation “is an example of the consumer-welfare approach to antitrust.” Oops.) The ostensible purpose of the tie-in is to extract a supra-competitive take rate from artists.
Not to be outdone, in two recent complaints, the FTC has identified harms to workers as a critical part of their case in opposition to a merger. In its February 2024 complaint, the FTC asserts, among other theories of harm, that for thousands of grocery store workers, Kroger’s proposed acquisition of Albertsons would immediately weaken competition for workers, putting downward pressure on wages. That the two supermarkets sometimes poach each other’s workers suggests that workers themselves could leverage one employer against the other. Yet the complaint focuses on the leverage of the unions when negotiating over collective bargaining agreements. If the two supermarkets were to combine, the complaint asserts, the union would lose leverage in its dealings with the merger parties over wages, benefits, and working conditions. Unions representing grocery workers would also lose leverage over threatened boycotts or strikes.
In its April 2024 complaint to block the combination of Tapestry and Capri, the FTC asserts, among other theories of harm, that the merger threatens to reduce wages and degrade working conditions for hourly workers in the affordable handbag industry. The complaint describes one episode in July 2021 in which Capri responded to a pubic commitment by Tapestry to pay workers at least $15 per hour with a $15 per hour commitment of its own. This labor-based theory of harm exists independently of the FTC’s consumer-based theory of harm.
Labor Theories of Harm Outside of Merger Enforcement
The agencies have also pursued no-poach agreements to protect workers. A no-poach agreement, as the name suggests, prevents one employer from “poaching” (or hiring away) a worker from its competitors. The agreements are not wage-fixing agreements per se, but instead are designed to limit labor mobility, which economists recognize is key to wage growth. In October 2022, a health care staffing company entered into a plea agreement with the DOJ, marking the Antitrust Division’s first successful prosecution of criminal charges in a labor-side antitrust case. The DOJ has tried three criminal no-poach cases to a jury, and in all three the defendants were acquitted. For example, in April 2023, a court ordered the acquittal of all defendants in a no-poach case involving the employment of aerospace engineers. (Disclosure: I am the plaintiffs’ expert in a related case brought by a class of aerospace engineers.) Despite these losses, AAG Jonathan Kanter is still committed as ever to addressing harms to labor with the antitrust laws.
And the FTC has promulgated a rule to bar non-compete agreements. Whereas a no-poach agreement governs the conduct among rival employers, a non-compete is an agreement between an employer and its workers. Like a no-poach, the non-compete is designed to limit labor mobility and thereby suppress wages. Having worked on a non-compete case for a class of MMA fighters against the UFC that dragged on for a decade, I can say with confidence (and experience) that a per se prohibition of non-competes is infinitely more efficient than subjecting these agreements to antitrust’s rule-of-reason standard. Again, this deviation from consumer welfare has proven controversial among neoliberals; even the Washington Post editorial board penned as essay on why high-wage workers earning over $100,000 per year should be exposed to such encumbrances.
Consumers Still Have a Cop on the Beat
If you take Yglesias’s depiction literally, it means that the antitrust agencies under Biden have abandoned the protection of consumers. But nothing can be further from the truth. Antitrust enforcers can walk and chew gum at the same time. The list of enforcement actions on behalf of consumers is too long to reproduce here, but to summarize a few recent highlights:
- FTC blocked Illumina’s acquisition of Grail on behalf of cancer patients;
- FTC induced Nvidia to call of its attempt to acquire Arm on behalf of direct and indirect purchasers of semiconducter chips;
- DOJ blocked a merger of JetBlue and Spirit to protect travelers;
- FTC persuaded a federal court to force generic drug maker Teva to delist five unlawful patent listings on asthma inhalers in the FDA’s Orange Book on behalf of asthma patients;
- FTC is pursuing Amazon for alleged subscription traps and dark patterns on behalf of subscribers of Amazon’s Prime video service; the FTC pursued fraud cases against firms, including Williams-Sonoma, for made in the USA claims;
- FTC took action against bill payment company Doxo for misleading consumers, tacking on millions in junk fees;
- DOJ has joined with multiple states to sue Apple for monopolizing smartphone markets on behalf of iPhone users;
- DOJ induced a subsidiary of Chiquita to abandon its proposed acquisition of Dole’s Fresh Vegetables division on behalf of vegetable consumers; and
- DOJ secured guilty pleas from two Michigan companies and two individuals for their roles in conspiracies to rig bids for asphalt paving services contracts in the State of Michigan.
Presumably Yglesias and his neoliberal clan have access to Google Search, Lina Khan’s Twitter handle, or the Antitrust Division’s press releases. It only takes a few keystrokes to learn of countless enforcement actions brought on behalf of consumers. Although this view is a bit jaded, one interpretation is that this crowd, epitomized by the Wall Street Journal editorial board and its 99 hit pieces against Chair Khan, uses the phrase “consumer welfare” as code for lax enforcement of antitrust law. In other words, what really upsets neoliberals (and libertarians) is not the abandonment of consumers, but instead any enforcement of antitrust law, particularly when it (1) deprives monopolists from expanding their monopolies to the betterment of their investors or (2) steers profits away from employers towards workers. In my darkest moments, I suspect that some target of an FTC or DOJ investigation funds neoliberal columnists and journals—looking at you, The Economist—to cook up consumer-welfare-based theories of how the agencies are doing it wrong. All such musings should be ignored, as the antitrust hipsters are alright.
As the name implies, Congress passed the antitrust laws to remedy the problem of the trusts—the great agglomerations of capital harming working people. Yet, from that very beginning, the forces of corporate power and oligarchy have used the antitrust laws to attack working people. When the federal government first deployed the antitrust laws against coordinated economic power, they did not use them against trusts like Standard Oil or railroad monopolists; instead, they used them against people organizing workers to fight for better wages. By doing so, the federal government created a threat that haunted the labor movement for decades—the threat of the “labor injunction.” That threat remains today. And the federal government can take a simple step to combat it.
In 1999, while Bill Clinton was serving his second term, port truck drivers across the country decided to get organized and go on strike. But instead of solidarity with their strike action, they received a subpoena from the Federal Trade Commission (FTC) and the threat of a lawsuit under the antitrust laws from their employers. Faced with the threat of legal action from the government and their employers, they abandoned their strike.
The FTC investigated the port truckers even though the antitrust laws specifically exempt labor organizing. These truckers are not the only workers that have been targeted by antitrust authorities. Music teachers, ice skating coaches, and public defenders have all faced the wrath of the FTC. Why? Because they were classified as independent contractors—a classification dictated by their employers. These cases raise a question central to American political economy: which workers have the right to organize?
The answer should be all workers. But, in reality, fewer and fewer workers can organize without the threat of a lawsuit under the antitrust laws.
Today, more and more workers are classified not as employees but as independent contractors in a practice called “workplace fissuring.” This practice is most visible for gig workers. Companies like Uber have fought tooth and nail to preserve their workers’ independent contractor status. But this practice is not limited to gig work companies. It has become a common tactic employed by predatory corporations in every industry. By doing so, they believe they can legally prevent collective action through the antitrust laws. And if you ask antitrust scholars like Herbert Hovenkamp, that Uber drivers are “selling a combination of their labor and usage of their cars” implies the labor exemption to antitrust might not protect them.
But the law and history prove those who would expose workers to antitrust liability wrong. In passing the labor exemption, Congress did not intend to just exempt employees, it aimed to cover all workers organizing to vindicate their rights. Indeed, the text of the Norris LaGuardia Act explicitly states the exemption is not limited to just those “stand[ing] in the proximate relation of employer and employee.” And the Clayton Act does not restrict the exemption’s coverage to employees, but instead states that “[n]othing contained in the antitrust laws shall be construed to forbid the existence and operation of labor…organizations, instituted for the purposes of mutual help[.]” (emphasis added)
Fortunately, this historically accurate interpretation of the law is gaining ground. In 2022, the First Circuit found that a group of independent contractor jockeys could legally organize and strike, rejecting a title-based approach in favor of one that focuses on whether or not workers were selling labor or goods. FTC Commissioner Alvaro Bedoya drew attention to this interpretation of the labor exemption in a speech at a Utah Project event in 2023 and a law review article published this month. (Full disclosure, I worked on this speech while in Commissioner Bedoya’s office and am co-author on the article). A detailed analysis by two NYU scholars has grounded a reading of the exemption which would cover many independent contractors in court precedent and textualist methods.
But this view of the law should be formalized. The FTC and Department of Justice (DOJ) should issue a policy statement declaring that the labor exemption covers independent contractors that are treated like workers, rather than like independent businesspeople, by the company that hired them. While such a policy statement would not be precedential, it would be important persuasive authority for any court examining this issue. It would also provide crucial cover for workers uncertain about whether or not their employers’ threats of legal action are valid. It could not stop an employer from seeking an old-school labor injunction against their workers, but it could help those workers win in court—especially if the enforcement agencies back up the statement with amicus briefs in those cases.
Most importantly, it would remove the real threat of federal prosecution hanging over the heads of American workers. It is the duty of “the most pro-union President…in American history” to remove that threat. The FTC and DOJ must state affirmatively: All workers, not just those granted employee status, have the right to organize and that right will not be abridged by the antitrust authorities. The Biden administration must bury the labor injunction once and for all.
Bryce Tuttle is a student at Stanford Law School. He previously worked in the office of FTC Commissioner Bedoya and in the Bureau of Competition.
Since the boycott of the U.S. News and World Report Rankings (“U.S. News Rankings”) by a group of law schools, the U.S. News Rankings have gone a bit haywire. The top law schools, all highly ranked, refused to submit data to U.S. News. Other schools followed their lead. As a result, U.S. News changed its rankings, perhaps focusing a bit more on publicly available data.
But that has led to speculation of potentially wild results. In the past, such dramatic ranking shifts were somewhat limited, but with the changing rankings, and the apparent new norm of frequent changes to methodologies, such radical changes might be in our future. It is striking, though, how the fluctuations rarely seem to affect the higher ranked schools.
Meanwhile, prospective law students, perhaps largely unaware of these fluctuations because the top-ranked law schools barely change, are likely still invested in the U.S. News Rankings for determination of what makes a good law school. A quick check assures that the schools they know are prestigious like Harvard and Yale are in the top ten, with little variation year to year.
And, despite the understanding in the legal academy about the inconsistency and other problems, the U.S. News Rankings are still used by some schools as an aspirational goal and a publication goal (with some schools offering anti-intellectual publication bonuses for high-rank placement). Others use the rankings for marketing materials to prospective faculty candidates and students.
In this essay, I list five problems with the U.S. News Rankings, and I offer a few concrete solutions.
Problem 1: Information Asymmetries between Prospective Students and U.S. News
Prospective students know little about the ranking methodology or its impact. For example, students may know what percentage of the rankings is based upon peer assessment, but not know that the peer assessment has problems, such as the monopoly power a few schools wield in the law professor labor market. Students likely do not know of relative changes in rankings over time, so are unable to determine whether a rapid change is a mere blip or a genuine trend downward or upward. In short, the prospective student may be deceived by the nature of the rankings and the changes in how rankings are calculated.
Problem 2: Information Asymmetries between the Law Schools and U.S. News
As the dominant player in the market for rankings, U.S. News has little incentive to expend resources to monitor the data that law schools provide, to correct inaccurate data, or to make algorithmic adjustments unless the results produced by its formula are egregiously false or schools flagrantly manipulate the data that they submit. In fact, the value of the rankings endures by virtue of having little change at the top of the list. Should a school experience an unexpected drop in ranking, however, dramatic effects may occur, including dean resignations. Schools seeking to climb the rankings to attract high-quality students, or faced with habitually low rankings, may succumb to pressure to manipulate data to improve their rank. For example, it has been past practice for schools to employ their former students to inflate post-graduation employment statistics.
Problem 3: Favoring Well-Endowed Schools
To the extent that U.S. News alters variables as to what makes a “good school,” it favors wealthier schools that can deploy more resources and adapt quickly to the moving goal posts. But those at the top end of the rankings do not need to worry, as they are virtually guaranteed their spot. Other schools are subject to the potential of rapid fluctuations.
Schools also make significant time investments by creating committees tasked with benchmarking competitive schools, collecting employment data from recent graduates, and grappling with the impact of how varying analyses of the information might affect the U.S. News Rankings.
Part of the methodological shift as such is the post-boycott need to access publicly available data. That need, however, may not be a great basis for the methodology put forward. It may merely be a streetlight effect on methodology road.
Problem 4: The Problem of Potential Retaliation
To the extent that the variables that inform U.S. News Rankings are subject to change, they are potentially subject to abuse. It would be easy to add variables punishing schools that complain about the ranking’s methodology.
Just two examples should suffice. When Reed College refused to provide data to U.S. News for the general college rankings, instead of omitting the institution from its ranking, U.S. News “arbitrarily assigned the lowest possible value to each of Reed’s missing variables, with the result that Reed dropped in one year from the second quartile to the bottom quartile.” In subsequent rankings, U.S. News allegedly ranked Reed College on information available from other sources, noting that the institution did not complete the requested survey. In the law school context, when Pepperdine discovered an error in its submission, it sought to correct it. As a result of its innocent mistake, its ranking plummeted for a year.
Problem 5: Lack of Competition in Rankings
There are no substitutes for U.S. News Rankings, at least for U.S. law schools. The vast majority of prospective students use them. The vast majority of schools look to them. To the extent it is a monopoly, it has a unique role in shaping legal education. Indeed, not only is it a unique ranking, much effort is made by Spivey Consulting and others to predict those rankings, rather than create new ones.
As Sahaj Sharda has pointed out in The Sling, rankings matter. And it is rife with the possibility of hijinks, both from the university side and from the side of U.S. News.
Solution: An FTC Unfair or Deceptive Act or Practice (UDAP) Rule
Section 5 of the FTC Act states that “unfair or deceptive acts or practices in or affecting commerce . . . are . . . declared unlawful.” Deceptive acts or practices require a “material representation, omission or practice that is likely to mislead a consumer acting reasonably in the circumstances.” An act or practice is “unfair” if it “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.”
The FTC UDAP rules cover common consumer experiences, such as wash-and-dry labels, octane ratings for gasoline, funeral prices, eyeglasses, auto fuel ratings, used cars, energy ratings, door-to-door sales, identity theft, free credit report, contact lenses and eyeglasses, and child protection. In each of these instances, informational and other barriers barred consumers from realizing important information or availing themselves of alternatives.
Why not apply the same principles to rankings? An FTC UDAP rule related to law school rankings could involve three components.
First, the FTC should require U.S. News to disclose the algorithm it uses or to explain in greater detail the amount of weight it puts on each factor that goes into its overall rankings. An algorithm is a mathematical formula that allows data factors to be compiled into an order, based on the relative importance of each input. If an end user has different values or priorities than U.S. News, the algorithm makes a major difference in the list’s outcome. Disclosing the algorithm protects the consumer from false, deceptive, and misleading information.
The FTC should mandate that any alteration of methodology should provide law schools with at least two year’s notice. At present, much of the methodology could be ex-post, surprising schools attempting to climb the rankings.
Second, the rule should eliminate conflict of interest voting and should mandate disclosure of other data. Schools are not in a position to rank themselves; nor are faculty of a school that is dominant in the production of law professors. The bulk of law professors hail from a few schools. Absent a horrific experience, it stands that the bulk of reputation scores favor those schools. This self-perpetuating cycle is not known to prospective students, and ought to be halted.
To the extent post-graduation employment is used, schools ought to be forced to disclose that number. Thus far, U.S. News has been reluctant and unable to determine the extent of such gaming. Subjecting such data submission to a UDAP rule raises the potential risk to a school that such manipulation might become subject to an investigation and an amplified public notice.
Third, the FTC’s rule should impose penalties on schools and U.S. News for violations of the rule. Another feature of a UDAP rule would be consistent deterrence, as opposed to arbitrary punishments that U.S. News might impose upon schools. If such penalties are not linked to the ranking itself, a UDAP rule would still benefit consumers of the ranking, whereas displacing the ranking of a school that misbehaves might penalize beyond the group involved in the decision to manipulate the ranking.
If the FTC were to adopt such a rule, it would bring some much-needed relief to law school applicants and the schools themselves.
The views expressed in this piece do not reflect the views of my employer.
Correction 2/28/24: Since publication, Spivey Consulting reached out to correct an entry error related to Buffalo Law School’s ranking in their post, when Spivey converted that information from their software to the blog. We have corrected the entry here as well. Other schools will still face such drops.
The news of the layoffs was stunning: Three months after consummating its $68 billion acquisition of Activision, Microsoft fired 1,900 employees in its gaming division. The relevant question, from a policy perspective, is whether these terminations reflect the exercise of newfound buying power made possible by the merger? If so, then Microsoft may have just unwittingly exposed itself to antitrust liability, as mergers can be challenged after the fact in light of clear anticompetitive effects.
The Merger Guidelines recognize that mergers in concentrated markets can create a presumption of anticompetitive effects. When studying the impact of a merger on any market, including a labor market, the starting place is to determine whether the merged firm collectively wielded market power in some relevant antitrust market. That inquiry can be informed with both direct and indirect evidence.
Direct evidence of buying power, as the name suggests, is evidence that directly shows a buyer has power to reduce wages or exclude rivals. Indirect evidence of buying power can be established by showing high market shares (plus entry barriers) in a relevant antitrust market. It bears noting that, when it comes to labor markets, high market shares are not strictly needed to infer buying power due to high search and switching costs (often absent in output markets).
Beginning with the direct evidence, Activision exhibited traits of a firm with buying power over its workers. For example, before it was acquired, Activision undertook an aggressive anti-union campaign against its workers’ efforts to organize a union. Moreover, workers at Activision complained about their employer’s intransigent position on granting raises, often demanding proof of an outside offer. A recent article in Time recounted that “Several former Blizzard employees said they only received significant pay increases after leaving for other companies, such as nearby rival Riot Games, Inc. in Los Angeles.” Activision also entered a consent decree in 2022 with the Equal Employment Opportunity Commission to resolve a complaint alleging Activision subjected its workers to sexual harassment, pregnancy discrimination, and retaliation related to sexual harassment or pregnancy discrimination.
Moving to the indirect evidence, one could posit a labor market for video game workers at AAA gaming studios. Both Microsoft and Activision are AAA studios, making them a preferred destination for industry labor. Independent studios are largely regarded as temporary stepping stones toward better positions in large video game firms.
To estimate the merged firm’s combined share in the relevant labor market, in a forthcoming paper, Ted Tatos and I study CareerBuilder’s Supply and Demand data, filtering on the term “video game” in the United States to recover job applications and postings over the last two years. The table summarizes the results of our search in the Spring 2022, a few months after the Microsoft-Activision deal was announced. Our analysis conservatively includes small employers that workers at a AAA studio such as Activision likely would not consider to be a reasonable substitute.
Job Postings Among Top Studios in Video Game Industry – CareerBuilder Data
| Company Name | Number of Job Postings | Percent of Postings | Corporate Entity |
| Activision Blizzard, Inc. | 1,270 | 26.0% | Microsoft |
| Electronic Arts Inc. | 856 | 17.5% | |
| Rockstar Games, Inc. | 287 | 5.9% | Take-Two |
| Ubisoft, Inc. | 258 | 5.3% | |
| 2k, Inc. | 143 | 2.9% | Take-Two |
| Zenimax Media Inc. | 128 | 2.6% | Microsoft |
| Epic Games, Inc. | 112 | 2.3% | |
| Lever Inc | 106 | 2.2% | |
| Wb Games Inc. | 101 | 2.1% | |
| Survios, Inc. | 100 | 2.0% | |
| Riot Games, Inc. | 91 | 1.9% | Tencent |
| Zynga Inc. | 84 | 1.7% | Take-Two |
| Funcom Inc | 79 | 1.6% | Tencent |
| 2k Games, Inc. | 74 | 1.5% | Take-Two |
| Complete Networks, Inc. | 65 | 1.3% | |
| Gearbox Software | 58 | 1.2% | Embracer |
| Digital Extremes Ltd | 43 | 0.9% | Tencent |
| Naughty Dog, Inc. | 43 | 0.9% | Sony |
| Mastery Game Studios, LLC | 26 | 0.5% | |
| Crystal Dynamics Inc | 25 | 0.5% | Embracer |
| Skillz Inc. | 25 | 0.5% | |
| Microsoft Corporation | 24 | 0.5% | Microsoft |
| Others | 887 | 18.2% | |
| TOTAL | 4,885 | 100.0% |
As indicated in the first row, Activision lies at the top in number of job postings in the CareerBuilder data, with 26.0 percent. Prior to the Activision acquisition, Microsoft accounted for 3.1 percent of job postings (the sum of Zenimax Media and Microsoft rows). Based on these figures, Microsoft’s acquisition of Activision significantly increased concentration (by more than 150 points) in an already concentrated market (post-merger HHI above 1,200). This finding implies that the merger could lead to anticompetitive effects in the relevant labor market, including layoffs.
It bears noting that the HHI thresholds established in the 2023 Merger Guidelines (Guideline 1) were most likely developed with product markets in mind. Indeed, the Guidelines recognize in a separate section (Guideline 10) that labor markets are more vulnerable to the exercise of pricing power than output markets: “Labor markets frequently have characteristics that can exacerbate the competitive effects of a merger between competing employers. For example, labor markets often exhibit high switching costs and search frictions due to the process of finding, applying, interviewing for, and acclimating to a new job.” High switching costs are also present in the video game industry: Almost 90 percent of workers at AAA studios in the CareerBuilder Resume data indicate that they did not want to relocate, making them more vulnerable to an exercise of market power than the HHI analysis above implies.
As any student of economics recognizes, a monopsonist not only reduces wages below competitive levels, but also restricts employment relative to the competitive level. So the immediate firing of 1,900 workers is consistent with the exercise of newfound monopsony power. In technical terms, the layoffs could reflect a change in the residual labor supply curve faced by the merged firm.
Why would Microsoft exercise its newfound buying power this way? To begin, many Microsoft workers, prior to the merger, could have switched to Activision in response to a wage cut. Indeed, we were able find in the CareerBuilder data that a substantial fraction of former Microsoft workers left Microsoft Game Studios to work for Activision. (More details on the churn rate to come in our forthcoming paper.) Post-merger, Microsoft was able to internalize this defection, weakening the bargaining position of its employees, and putting downward pressure on wages. In other words, Microsoft is more disposed to cutting Activision jobs than would a standalone Activision. Moreover, by withholding Activision titles from competing multi-game subscription services—the FTC’s primary theory of harm in its litigation, now under appeal—Microsoft can give an artificial boost to its platform division. This input foreclosure strategy would compel Microsoft to downsize its gaming division and thus its gaming division workers.
Alternative Explanations Don’t Ring True
The contention that these 1,900 layoffs flowed from the merger, as opposed to some other force, is supported in the economic literature in other labor markets. A recent paper by Prager and Schmitt (2021) studied the effect of a competition-reducing hospital merger on the wages of hospital staff. Consistent with economic theory, the merger had a substantial negative effect on wages for workers whose skills are much more useful in hospitals than elsewhere (e.g., nurses). In contrast, the merger had no discernable effect on wages for workers whose skills are equally useful in other settings (e.g., custodians). As Hemphill and Rose (2018) explain in their seminal Yale Law Journal article, “A merger of competing buyers can exacerbate the merged firm’s incentive to buy less in order to drive down input prices.”
Microsoft has its defenders in academia. According to Joost van Dreunen, a New York University professor who studies the gaming business, the video game industry is “suffering through a winter right now. If everybody around you is cutting their overhead and you don’t, you’re going to invoke the wrath of your shareholders at some point.” (emphasis added) This point—which sounds like it was fed by Microsoft’s PR firm—is intended to suggest that the firings would have occurred absent the merger. But there are two problems with this narrative. First, Microsoft’s gaming revenues are booming (up nine percent in the first quarter of its 2024 fiscal year), which makes industry comparables challenging. What were the layoffs among video game firms that also grew revenues by nine percent? Second, video programmers and artists are not “overhead,” such as HR workers or accountants. (Apologies to those workers.) Thus, their firing cannot be attributed to some redundancy in deliverables.
Microsoft’s own press statement about the layoffs vaguely states that it has “identified areas of overlap” across Activision and its former gaming unit. But that explanation is just as consistent with the labor-market harm articulated here as with the “eliminating redundancy” efficiency.
Bobby Kotick, the former CEO of Activision, received a $400 million golden parachute at the end of the year for selling his company to Microsoft. That comes to about $210,500 per fired employee, or about two years’ worth of severance for each worker laid off. Too bad those resources were so regressively assigned.
The FTC just secured a big win in its IQVIA/Propel case, the agency’s fourth blocked merger in as many weeks. This string of rapid-fire victories quieted a reactionary narrative that the agency is seeking to block too many deals and also should win more of its merger challenges. (“The food here is terrible, and the portions are too small!”) But the case did a lot more than that.
Blocking Anticompetitive Deals Is Good—Feel Free to Celebrate!
First and foremost, this acquisition, based on my read of the public court filings, was almost certainly illegal. Blocking a deal like this is a good thing, and it’s okay to celebrate when good things happen—despite naysayers grumbling about supporters not displaying what they deem the appropriate level of “humility.” Matt Stoller has a lively write-up explaining the stakes of the case. In a nutshell, it’s dangerous for one company to wield too much power over who gets to display which ads to healthcare professionals. Kudos to the FTC caseteam for securing this win.
Judge Ramos Gets It Right
A week ago, the actual opinion explaining Judge Ramos’s decision dropped. It’s a careful, thorough analysis that makes useful statements throughout—and avoids some notorious antitrust pitfalls. Especially thoughtful was his treatment of the unique standard that applies when the FTC asks to temporarily pause a merger pending its in-house administrative proceeding. Federal courts are supposed to play a limited role that leaves the final merits adjudication to the agency. That said, it’s easy for courts to overreach, like Judge Corley’s opinion in Microsoft/Activision that resolved several important conflicts in the evidence—exactly what binding precedent said not to do. This may seem a little wonky, but it’s playing out against the backdrop of a high-stakes war against administrative agencies. So although “Judge Does His Job” isn’t going to make headlines, it’s refreshing to see Judge Ramos’s well-reasoned approach.
The IQVIA decision is also great on market definition, another area where judges sometimes get tripped up. Judge Ramos avoided the trap defendants laid with their argument that all digital advertising purveyors must be included in the same relevant market because they all compete to some extent. That’s not the actual legal question—which asks only about “reasonable” substitutes—and the opinion rightly sidestepped it. We can expect to see similar arguments made by Big Tech companies in future trials, so this holding could be useful to both DOJ and FTC as they go after Meta, Google, and Amazon.
How Does This Decision Fit Into the Broader Project of Reinvigorating Antitrust?
One core goal shared by current agency leadership appears to be making sure that antitrust can play a role in all markets—whether they’re as traditional as cement or as fast-moving as VR fitness apps.
The cornerstone of IQVIA’s defense was that programmatic digital advertising to healthcare professionals is a nascent, fast-moving market, so there’s no need for antitrust enforcement. This has long been page one of the anti-enforcement playbook, as it was in previous FTC merger challenges like Meta/Within. But, in part because the FTC won the motion to dismiss in that case, we have some very recent—and very favorable—law on the books rejecting this ploy.
Sure enough, Judge Ramos’s IQVIA opinion built on that foundation. He cited Meta/Within multiple times to reject these defendants’ similar arguments that market nascency provides an immunity shield against antitrust scrutiny. “While there may be new entrants into the market going forward,” Judge Ramos explained, “that does not necessarily compel the conclusion that current market shares are unreliable.” Instead, the burden is on defendants to prove historical shifts in market shares are so significant that they make current data “unusable for antitrust analysis.” His opinion is clear, and clearly persuasive—DOJ and a group of state AGs already submitted it as supplemental authority in their challenge to JetBlue’s proposed tie-up of Spirit Airlines.
A second goal that appears to be top-of-mind for the new wave of enforcers is putting all of their legal tools back on the table. Here again, the IQVIA win fits into the broader vision for a reinvigorated antitrust enterprise.
Just a few weeks before this decision, the FTC got a groundbreaking Fifth Circuit opinion on its challenge to the Illumina/GRAIL deal. Illumina had argued that the Supreme Court’s vertical-merger liability framework is no longer good law because it’s too old. In other words, the tool had gotten so dusty that high-powered defense attorneys apparently felt comfortable arguing it was no longer usable. That happened in Meta/Within as well: Meta argued both of the FTC’s legal theories involving potential competition were “dead-letter doctrine.” But in both cases, the FTC won on the substance—dusting off three unique anti-merger tools in the process.
IQVIA adds yet another: the “30% threshold” presumption from Philadelphia National Bank. Like Meta and Illumina before it, IQVIA argued strenuously that the legal tool itself was invalid because it had long been out of favor with the political higher-ups at federal agencies. But yet again, the judge rejected that argument out of hand. The 30% presumption is alive and well, vindicating the agencies’ decision to put it back into the 2023 Merger Guidelines.
Stepping back, we’re starting to see connections and cumulative effects. The FTC won a motion to dismiss in Meta/Within, lost on the injunction, but made important case law in the process. IQVIA picked up right where that case left off, and this time, the FTC ran the table.
Positive projects take time. It’s easier to tear down than to build. And both agencies remain woefully under-resourced. But change—real, significant change—is happening. In the short run, it’s impressive that four mergers were blocked in a month. In the long run, it’s important that four anti-merger tools are now back on the table.
John Newman is a professor at the University of Miami School of Law. He previously served as Deputy Director at the FTC’s Bureau of Competition.
Right before Thanksgiving, Josh Sisco wrote that the Federal Trade Commission is investigating whether the $9.6 billion purchase of Subway by private equity firm Roark Capital creates a sandwich shop monopoly, by placing Subway under the same ownership as Jimmy John’s, Arby’s, McAlister’s Deli, and Schlotzky’s. The acquisition would allow Roark to control over 40,000 restaurants nationwide. Senator Elizabeth Warren amped up the attention by tweeting her disapproval of the merger, prompting the phrase “Big Sandwich” to trend on Twitter.
Fun fact: Roark is named for Howard Roark, the protagonist in Ayn Rand’s novel The Fountainhead, which captures the spirit of libertarianism and the anti-antitrust movement. Ayn Rand would shrug off this and presumably any other merger!
It’s a pleasure reading pro-monopoly takes on the acquisition. Jonah Goldberg writes in The Dispatch that sandwich consumers can easily switch, in response to a merger-induced price hike, to other forms of lunch like pizza or salads. (Similar screeds appear here and here.) Jonah probably doesn’t understand the concept, but he’s effectively arguing that the relevant product market when assessing the merger effects includes all lunch products, such that a hypothetical monopoly provider of sandwiches could not profitably raise prices over competitive levels. Of course, if a consumer prefers a sandwich, but is forced to eat a pizza or salad to evade a price hike, her welfare is almost certainly diminished. And even distant substitutes like salads might appear to be closer to sandwiches when sandwiches are priced at monopoly levels.
The Brown Shoe factors permit courts to assess the perspective of industry participants when defining the contours of a market, including the merging parties. Subway’s franchise agreement reveals how the company perceives its competition. The agreement defines a quick service restaurant that would be “competitive” for Subway as being within three miles of one of its restaurants and deriving “more than 20% of its total gross revenue from the sale of any type of sandwiches on any type of bread, including but not limited to sub rolls and other bread rolls, sliced bread, pita bread, flat bread, and wraps.” The agreement explicitly mentions by name Jimmy John’s, McAlister’s Deli and Schlotzky’s as competitors. This evidence supports a narrower market.
Roark’s $9.6 billion purchase of Subway exceeded the next highest bid by $1.35 billion—from TDR Capital and Sycamore Partners at $8.25 billion—an indication that Roark is willing to pay a substantial premium relative to other bidders, perhaps owing to Roark’s existing restaurant holdings. The premium could reflect procompetitive merger synergies, but given what the economic literature has revealed about such purported benefits, the more likely explanation of the premium is that Roark senses an opportunity to exercise newfound market power.
To assess Roark’s footprint in the restaurant business, I downloaded the Nation’s Restaurant News (NRN) database of sales and stores for the top 500 restaurant chains. If one treats all chain restaurants as part of the relevant product market, as Jonah Goldberg prefers, with total sales of $391.2 billion in 2022, then Roark’s pre-merger share of sales (not counting Subway) is 10.8 percent, and its post-merger share of sales is 13.1 percent. These numbers seem small, especially the increment to concentration owing to the merger.
Fortunately, the NRN data has a field for fast-food segment. Both Subway and Jimmy John’s are classified as “LSR Sandwich/Deli,” where LSR stands for limited service restaurants, which don’t offer table service. By comparison, McDonald’s, Panera, and Einstein are classified under “LSR Bakery/Café”. If one limits the data to the LSR Sandwich/Deli segment, total sales in 2022 fall from $391.1 billion to $26.3 billion. Post-merger, Roark would own four of the top six sandwich/deli chains in America. It bears noting that imposing this filter eliminates several of Roark’s largest assets—e.g., Dunkin’ Donuts (LSR Coffee), Sonic (LSR Burger), Buffalo Wild Wings (FSR Sports Bar)—from the analysis.
Restaurant Chains in LSR Sandwich/Deli Sector, 2022
| Chain | Sales (Millions) | Units | Share of Sales |
| Subway* | 9,187.9 | 20,576 | 34.9% |
| Arby’s* | 4,535.3 | 3,415 | 17.2% |
| Jersey Mike’s | 2,697.0 | 2,397 | 10.3% |
| Jimmy John’s* | 2,364.5 | 2,637 | 9.0% |
| Firehouse Subs | 1,186.7 | 1,187 | 4.5% |
| McAlister’s Deli* | 1,000.4 | 524 | 3.8% |
| Charleys Philly Steaks | 619.8 | 642 | 2.4% |
| Portillo’s Hot Dogs | 587.1 | 72 | 2.2% |
| Jason’s Deli | 562.1 | 245 | 2.1% |
| Potbelly | 496.1 | 429 | 1.9% |
| Wienerschnitzel | 397.3 | 321 | 1.5% |
| Schlotzsky’s* | 360.8 | 323 | 1.4% |
| Chicken Salad Chick | 284.1 | 222 | 1.1% |
| Penn Station East Coast | 264.3 | 321 | 1.0% |
| Mr. Hero | 157.9 | 109 | 0.6% |
| American Deli | 153.2 | 204 | 0.6% |
| Which Wich | 131.3 | 226 | 0.5% |
| Capriotti’s | 122.6 | 142 | 0.5% |
| Nathan’s Famous | 119.1 | 272 | 0.5% |
| Port of Subs | 112.9 | 127 | 0.4% |
| Togo’s | 107.7 | 162 | 0.4% |
| Biscuitville | 107.5 | 68 | 0.4% |
| Cheba Hut | 95.0 | 50 | 0.4% |
| Primo Hoagies | 80.4 | 94 | 0.3% |
| Cousins Subs | 80.1 | 93 | 0.3% |
| Ike’s Place | 79.3 | 81 | 0.3% |
| D’Angelo | 75.4 | 83 | 0.3% |
| Dog Haus | 73 | 58 | 0.3% |
| Quiznos Subs | 57.8 | 165 | 0.2% |
| Lenny’s Sub Shop | 56.3 | 62 | 0.2% |
| Sandella’s | 51 | 52 | 0.2% |
| Erbert & Gerbert’s | 47.4 | 75 | 0.2% |
| Goodcents | 47.3 | 66 | 0.2% |
| Total | 26,298.60 | 230,629 | 100.0% |
Source: Nation’s Restaurant News (NRN) database of sales and stores for the top 500 restaurant chains. Note: * Owned by Roark
With this narrower market definition, Roark’s pre-merger share of sales (not counting Subway) is 31.4 percent, and its post-merger share of sales is 66.3 percent. These shares seem large, and the standard measure of concentration—which sums the square of the market shares—goes from 2,359 to 4,554, which would create the inference of anticompetitive effects under the 2010 Merger Guidelines.
One complication to the merger review is that Roark wouldn’t have perfect control of the sandwich pricing by its franchisees. Franchisees often are free to set their own prices, subject to suggestions (and market studies) by the franchise. So while Roark might want (say) a Jimmy John’s franchisee to raise sandwich prices after the merger, that franchisee might not internalize the benefits to Roark of diversion of some its customers to Subway. With enough money at stake, Roark could align its franchisees’ incentives with the parent company, by, for example, creating profit pools based on the profits of all of Roark’s sandwich investments.
Another complication is that Roark does not own 100 percent of its restaurants. Roark is the majority-owner of Inspire Brands. In July 2011, Roark acquired 81.5 percent of Arby’s Restaurant Group. Roark purchased Wendy’s remaining 12.3 percent holding of Inspire Brands in 2018. To the extent Roark’s ownership of any of the assets mentioned above is partial, a modification to the traditional concentration index could be performed, along the lines spelled out by Salop and O’Brien. (For curious readers, they show in how the change in concentration is a function of the market shares of the acquired and acquiring firms plus the fraction of the profits of the acquired firm captured by the acquiring firm, which varies according to different assumption about corporate control.)
When defining markets and assessing merger effects, it is important to recognize that, in many towns, residents will not have access to the fully panoply of options listed in the top 500 chains. (Credit to fellow Sling contributor Basel Musharbash for making this point in a thread.) So even if one were to conclude that the market was larger than LSR Sandwich/Deli chains, it wouldn’t be the case that residents could chose from all such restaurants in the (expanded) relevant market. Put differently, if you live in a town where your only options are Subway, Jimmy John’s, and McDonald’s, the merger could significantly concentrate economic power.
Although this discussion has focused on the harms to consumers, as Brian Callaci points out, the acquisition could allow Roark to exercise buying power vis-à-vis the sandwich shops suppliers. And Helaine Olen explains how the merger could enhance Roark’s power over franchise owners. The DOJ recently blocked a book-publisher merger based on a theory of harm to input providers (publishers), indicating that consumers no longer sit alone atop the antitrust hierarchy.
While it’s too early to condemn the merger, monopoly-loving economists and libertarians who mocked the concept of Big Sandwich should recognize that there are legitimate economic concerns here. It all depends on how you slice the market!
Over 100 years ago, Congress responded to railroad and oil monopolies’ stranglehold on the economy by passing the United States’ first-ever antitrust laws. When those reforms weren’t enough, Congress created the Federal Trade Commission to protect consumers and small businesses from predation. Today, unchecked monopolies again threaten economic competition and our democratic institutions, so it’s no surprise that the FTC is bringing a historic antitrust suit against one of the biggest fish in the stream of commerce: Amazon.
Make no mistake: modern-day monopolies, particularly the Big Tech giants (Amazon, Apple, Alphabet, and Meta), are active threats to competition and consumers’ welfare. In 2020, the House Antitrust Subcommittee concluded an extensive investigation into Big Tech’s monopolistic harms by condemning Amazon’s monopoly power, which it used to mistreat sellers, bully retail partners, and ruin rivals’ businesses through the use of sellers’ data. The Subcommittee’s report found that, as both the operator of and participant in its marketplace, Amazon functions with “an inherent conflict of interest.”
The FTC’s lawsuit builds off those findings by targeting Amazon’s notorious practice of “self-preferencing,” in which the company gathers private data on what products users are purchasing, creates its own copies of those products, then lists its versions above any competitors on user searches. Moreover, by bullying sellers looking to discount their products on other online marketplaces, Amazon has forced consumers to fork over more money than what they would have in a truly-competitive environment.
But perhaps the best evidence of Amazon’s illegal monopoly power is how hard the company has worked for years to squash any investigation into its actions. For decades, Amazon has relied on the classic ‘revolving door’ strategy of poaching former FTC officials to become its lobbyists, lawyers, and senior executives. This way, the company can use their institutional knowledge to fight the agency and criticize strong enforcement actions. These “revolvers” defend the business practices which their former FTC colleagues argue push small businesses past their breaking points. They also can help guide Amazon’s prodigious lobbying efforts, which reached a corporate record in 2022 amidst an industry wide spending spree in which “the top tech companies spent nearly $70 million on lobbying in 2022, outstripping other industries including pharmaceuticals and oil and gas.”
Amazon’s in-house legal and policy shops are absolutely stacked full of ex-FTC officials and staffers. In less than two years, Amazon absorbed more than 28 years of FTC expertise with just three corporate counsel hires: ex-FTC officials Amy Posner, Elisa Kantor Perlman and Andi Arias. The company also hired former FTC antitrust economist Joseph Breedlove as its principal economist for litigation and regulatory matters (read: the guy we’re going to call as an expert witness to say you shouldn’t break us up) in 2017.
It goes further than that. Last year, Amazon hired former Senate Judiciary Committee staffer Judd Smith as a lobbyist after he previously helped craft legislation to rein in the company and other Big Tech giants. Amazon also contributed more than $1 million to the “Competitiveness Coalition,” a Big Tech front group led by former Sen. Scott Brown (R-MA). The coalition counts a number of right-wing, anti-regulatory groups among its members, including the Competitive Enterprise Institute, a notorious purveyor of climate denialism, and National Taxpayers Union, an anti-tax group regularly gifted op-ed space in Fox News and the National Review.
This goes to show the lengths to which Amazon will go to avoid oversight from any government authority. True, the FTC has finally filed suit against Amazon, and that is a good thing. But Amazon, throughout their pursuance of ever growing monopoly power, hired their team of revolvers precisely for this moment. These ex-officials bring along institutional knowledge that will inform Amazon’s legal defense. They will likely know the types of legal arguments the FTC will rely on, how the FTC conducted its pretrial investigations, and the personalities of major players in the case.
This knowledge is invaluable to Amazon. It’s like hiring the assistant coach of an opposing team and gaining access to their playbook — you know what’s coming before it happens and you can prepare accordingly. Not only that, but this stream of revolvers makes it incredibly difficult to know the dedication of some regulators towards enforcing the law against corporate behemoths. How is the public expected to trust its federal regulators to protect them from monopoly power when a large swath of its workforce might be waiting for a monopoly to hire them? (Of course, that’s why we need both better pay for public servants as well as stricter restrictions on public servants revolving out to the corporations they were supposedly regulating.)
While spineless revolvers make a killing defending Amazon, the actual people and businesses affected by their strong arming tactics are applauding the FTC’s suit. Following the FTC’s filing, sellers praised the Agency on Amazon’s Seller Central forum, calling it “long overdue” and Amazon’s model as a “race to the bottom.” One commenter even wrote they will be applying to the FTC once Amazon’s practices force them off the platform. This is the type of revolving we may be able to support. When the FTC is staffed with people who care more about reigning in monopolies than receiving hefty paychecks from them in the future (e.g., Chair Lina Khan), we get cases that actually protect consumers and small businesses.
The FTC’s suit against Amazon signals that the federal government will no longer stand by as monopolies hollow-out the economy and corrupt the inner-workings of our democracy, but the revolvers will make every step difficult. They will be in the corporate offices and federal courtrooms advising Amazon on how best to undermine their former employer’s legal standing. They will be in the media, claiming to be objective as a former regulator, while running cover for Amazon’s shady practices that the business press will gobble up. The prevalence of these revolvers makes it difficult for current regulators to succeed while simultaneously undermining public trust in a government that should work for people, not corporations. Former civil servants who put cash from Amazon over the regulatory mission to which they had once been committed are turncoats to the public good. They should be scorned by the public and ignored by government officials and media alike.
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. Max Moran is a Fellow at 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.
The Federal Trade Commission has accused Amazon of illegally maintaining its monopoly, extracting supra-competitive fees on merchants that use Amazon’s platform. If and when the fact-finder determines that Amazon violated the antitrust laws, we propose structural remedies to address the competitive harms. Behavioral remedies have fallen out of favor among antitrust scholars. But the success of a structural remedy cannot be taken for granted.
To briefly review the bidding, the FTC’s Complaint alleges that Amazon prevents merchants from steering customers to a lower-cost platform—that is, a platform that charges a lower take rate—by offering discounts off the price it charges on Amazon. Amazon threatens merchants’ access to the Buy Box if merchants are caught charging a lower price outside of Amazon, a variant of a most-favored-nation (MFN) restriction. In other words, Amazon won’t allow merchants to share any portions of its savings with customers as an inducement to switch platforms; doing so would put downward pressure on Amazon’s take rate, which has climbed from 35 to 45 percent since 2020 per ILSR.
The Complaint also alleges that Amazon ties its fulfillment services to access to Amazon Prime. Given the importance of Amazon Prime to survival on Amazon’s Superstore, Amazon’s policy is effectively conditioning a merchant’s access to its Superstore on an agreement to purchase Amazon’s fulfillment, often at inflated rates. Finally, the Complaint alleges that Amazon gives its own private-label brands preference in search results.
These are classic exclusionary restraints that, in another era, would be instinctively addressed via behavioral remedies. Ban the MFN, ban the tie-in, and ban the self-preferencing. But that would be wrongheaded, as doing so would entail significant oversight by enforcement authorities. As the DOJ Merger Remedies Manual states, “conduct remedies typically are difficult to craft and enforce.” To the extent that a remedy is fully conduct-based, it should be disfavored. The Remedies Manual appears to approve of conduct relief to facilitate structural relief, “Tailored conduct relief may be useful in certain circumstances to facilitate effective structural relief.”
Instead, there should be complete separation of the fulfillment services from the Superstore. In a prior piece for The Sling, we discussed two potential remedies for antitrust bottlenecks—the Condo and the Coop. In what follows, we explain that the Condo approach is a potential remedy for the Amazon platform bottleneck and the Coop approach a good remedy for the fulfillment center system. Our proposed remedy has the merit of allowing for market mechanisms to function to bypass the need for continued oversight after structural remedies are deployed.
Breaking Up Is Hard To Do
Structural remedies to monopolization have, in the past, created worry about continued judicial oversight and regulation. “No one wants to be Judge Greene.” He spent the bulk of his remaining years on the bench having his docket monopolized by disputes arising from the breakup of AT&T. Breakup had also been sought in the case of Microsoft. But the D.C. Circuit, citing improper communications with the press prior to issuance of Judge Jackson’s opinion and his failure to hold a remedy hearing prior to ordering divestiture of Microsoft’s operating system from the rest of the company, remanded the case for determination of remedy to Judge Kollar-Kotelly.
By that juncture of the proceeding, a new Presidential administration brought a sea change by opposing structural remedies not only in this case but generally. Such an anti-structural policy conflicts with the pro-structural policy set forth in Standard Oil and American Tobacco—that the remedy for unlawful monopolization should be restructuring the enterprises to eliminate the monopoly itself. The manifest problem with the AT&T structural remedy and the potential problem with the proposed remedy in Microsoft is that neither removed the core monopoly power that existed, thus retaining incentives to engage in anticompetitive conduct and generating continued disputes.
The virtue of the structural approaches we propose is that once established, they should require minimal judicial oversight. The ownership structures would create incentives to develop and operate the bottlenecks in ways that do not create preferences or other anticompetitive conduct. With an additional bar to re-acquisition of critical assets, such remedies are sustainable and would maximize the value of the bottlenecks to all stakeholders.
Turn Amazon’s Superstore into a Condo
The condominium model is one in which the users would “own” their specific units as well as collectively “owning” the entire facility. But a distinct entity would provide the administration of the core facility. Examples of such structures include the current rights to capacity on natural gas pipelines, rights to space on container ships, and administration for standard essential patents and for pooled copyrights. These examples all involve situations in which participants have a right to use some capacity or right but the administration of the system rests with a distinct party whose incentive is to maximize the value of the facility to all users. In a full condominium analogy, the owners of the units would have the right to terminate the manager and replace it. Thus, as long as there are several potential managers, the market would set the price for the managerial service.
A condominium mode requires the easy separability of management of the bottleneck from the uses being made of it. The manager would coordinate the uses and maintain the overall facility while the owners of access rights can use the facility as needed.
Another feature of this model is that when the rights of use/access are constrained, they can be tradable; much as a condo owner may elect to rent the condo to someone who values it more. Scarcity in a bottleneck creates the potential for discriminatory exploitation whenever a single monopolist holds those rights. Distributing access rights to many owners removes the incentive for discriminatory or exclusionary conduct, and the owner has only the opportunity to earn rents (high prices) from the sale or lease of its capacity entitlement. Thus, dispersion of interests results in a clear change in the incentives of a rights holder. This in turn means that the kinds of disputes seen in AT&T’s breakup are largely or entirely eliminated.
The FTC suggests skullduggery in the operation of the Amazon Superstore. Namely, degrading suggestions via self-preferencing:
Amazon further degrades the quality of its search results by buying organic content under recommendation widgets, such as the “expert recommendation” widget, which display Amazon’s private label products over other products sold on Amazon.
Moreover, in a highly redacted area of the complaint, the FTC alleges that Amazon has the ability to “profitably worsen its services.”
The FTC also alleges that Amazon bars customers from “multihoming:”
[Multihoming is] simultaneously offering their goods across multiple online sales channels. Multihoming can be an especially critical mechanism of competition in online markets, enabling rivals to overcome the barriers to entry and expansion that scale economies and network effects can create. Multihoming is one way that sellers can reduce their dependence on a single sales channel.
If the Superstore were a condo, the vendors would be free to decide how much to focus on this platform in comparison to other platforms. Merchants would also be freed from the MFN, as the condo owner would not attempt to ban merchants from steering customers to a lower-cost platform.
Condominiumization of the Amazon Superstore would go a long way to reducing what Cory Doctorow might call the “enshittification” of the Amazon Superstore. Given its dominance over merchants, it would probably be necessary to divest and rebrand the “Amazon basics” business. Each participating vendor (retailer or direct selling manufacturer) would share in the ownership of the platform and would have its own place to promote its line of goods or services.
The most challenging issue is how to handle product placement on the overall platform. Given the administrator’s role as the agent of the owners, the administrator should seek to offer a range of options. Or leave it to owners themselves to create joint ventures to promote products. Alternatively, specific premium placement could go to those vendors that value the placement the most, rather than based on who owns the platform. The revenue would in turn be shared among the owners of the condo. Thus, the platform administrator would have as its goal maximizing the value of the platform to all stakeholders. This would also potentially resolve some of the advertising issues. According to the Complaint,
Amazon charges sellers for advertising services. While Amazon also charges sellers other fees, these four types constitute over [redacted] % of the revenue Amazon takes in from sellers. As a practical matter, most sellers must pay these four fees to make a significant volume of sales on Amazon.
Condo ownership would mean that the platform constituents would be able to choose which services they purchase from the platform, thereby escaping the harms of Amazon’s tie-in. Constituents could more efficiently deploy advertising resources because they would not be locked-into or compelled to buy from the platform.
Optimization would include information necessary for customer decision-making. One of the other charges in the Complaint was the deliberate concealment of meaningful product reviews:
Rather than competing to secure recommendations based on quality, Amazon intentionally warped its own algorithms to hide helpful, objective, expert reviews from its shoppers. One Amazon executive reportedly said that “[f]or a lot of people on the team, it was not an Amazonian thing to do,” explaining that “[j]ust putting our badges on those products when we didn’t necessarily earn them seemed a little bit against the customer, as well as anti-competitive.”
Making the platform go condo does not necessarily mean that all goods are treated equally by customers. That is the nature of competition. It would mean that in terms of customer information, however, a condominiumized platform would enable sellers to have equal and nondiscriminatory access to the platform and to be able to promote themselves based upon their non-compelled expenditures.
Turn Amazon’s Fulfillment Center in a Coop
The Coop model envisions shared user ownership, management, and operation of the bottleneck. Such transformation of ownership should change the incentives governing the operation and potential expansion of the bottleneck.
The individual owner-user stands to gain little by trying to impose a monopoly price on users including itself or by restricting access to the bottleneck by new entrants. So long as there are many owners, the primary objective should be to manage the entity so that it operates efficiently and with as much capacity as possible.
This approach is for enterprises that require substantial continued engagement of the participants in the governance of the enterprise. With such shared governance, the enterprise will be developed and operated with the objective of serving the interest of all participants.
The more the bottleneck interacts directly with other aspects of the users’ or suppliers’ activity, the more those parties will benefit from active involvement in the decisions about the nature and scope of the activity. Historically, cooperative grain elevators and creameries provided responses to bottlenecks in agriculture. Contemporary examples could include a computer operating system, an electric transmission system, or social media platform. In each, there are a myriad of choices to be made about design or location or both. Different stakeholders will have different needs and desires. Hence, the challenge is to find a workable balance of interests. That maximizes the overall value of the system for its participants rather than serving only the interests of a single owner.
This method requires that no party or group dominates the decision processes, and all parties recognize their mutual need to make the bottleneck as effective as possible for all users. Enhancing use is a shared goal, and the competing experiences and needs should be negotiated without unilateral action that could devalue the collective enterprise.
As explained above, Amazon tie-in effectively requires that all vendors using its platform must also use Amazon’s fulfillment services. Yet distribution is distinct from online selling. Hence, the distribution system should be structurally separated from the online superstore. Indeed, vendors using the platform condo may not wish to participate in the distribution system regardless of access. Conversely, vendors not using the condo platform might value the fulfillments services for orders received on their platforms. Still other vendors might find multi-homing to be the best option for sales. As the Complaint points out, multi-homing may give rise to other benefits if not locked into Amazon Distribution:
Sellers could multihome more cheaply and easily by using an independent fulfillment provider- a provider not tied to any one marketplace to fulfill orders across multiple marketplaces. Permitting independent fulfillment providers to compete for any order on or off Amazon would enable them to gain scale and lower their costs to sellers. That, in turn, would make independent providers even more attractive to sellers seeking a single, universal provider. All of this would make it easier for sellers to offer items across a variety of outlets, fostering competition and reducing sellers’ dependence on Amazon.
The FTC Complaint alleges that Amazon has monopoly power in its fulfillment services. This is a nationwide complex of specialized warehouses and delivery services. The FTC is apparently asserting that this system has such economies of scale and scope that it occupies a monopoly bottleneck for the distribution of many kinds of consumer goods. If a single firm controlled this monopoly, it would have incentives to engage in exploitative and exclusionary conduct. Our proposed remedy to this is a cooperative model. Then, the goal of the owners is to minimize the costs of providing the necessary service. These users would need to be more directly involved in the operation of the distribution system as a whole to ensure its development and operation as an efficient distribution network.
Indeed, its users might not be exclusively users of the condominiumized platform. Like other cooperatives, the proposal is that those who want to use the service would join and then participate in the management of the service. Separating distribution from the selling platform would also enhance competition between sellers who opt to use the cooperative distribution and those that do not. For those that join the distribution cooperative, the ability to engage in the tailoring of those distribution services without the anticompetitive constraints created by its former owner (Amazon) would likely result in reduced delivery costs.
Separation of Fulfillment from Superstore Is Essential for Both Models
We propose some remedies to the problems articulated in the FTC’s Amazon Complaint—at least the redacted version. Thus, we end with some caveats.
First, we do not have access to the unredacted Complaint. Thus, to the extent that additional information might make either of our remedies improbable, we certainly do not have access to that information as of now.
Second, these condo and cooperative proposals go hand in hand with other structural remedies. There should be separation of the Fulfillment services from the Superstore and Amazon Brands might have to be divested or restructured. Moreover, their recombination should be permanently prohibited. These are necessary conditions for both remedies to function properly.
Third, in both the condo and coop model, governance structures must be in place to assure that both fulfillment services and the Superstore are not recaptured by a dominant player. In most instances, a proper governance structure would bar that. The government should not hesitate to step in should capture be evident.
Peter C. Carstensen is a Professor of Law Emeritus at the Law School of University of Wisconsin-Madison. Darren Bush is Professor of Law at University of Houston Law Center.
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.