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!
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.
Many in the anti-monopoly movement are celebrating the recent DOJ victory against the Northeast Alliance (NEA). It’s a rare enforcement action in the airline industry, and a rare decision that gives a clear victory to the DOJ.
But I will not be celebrating. What follows is my attempt to read the potential tea leaves from the NEA decision in looking forward to the JetBlue/Spirit merger. The TLDR: Don’t count the JetBlue/Spirit merger down and out based upon the NEA decision. While I’m pleased with DOJ’s victory, one step forward does not eradicate the giant leaps backward that have befallen the airline industry in the past few decades.
Fake Remedies and Abdication of Responsibility
In every instance of past consolidation in the airline industry, the DOJ (a) did nothing; (b) compelled the divestiture of slots and gates; or (c) filed a complaint, then got spanked by politicians into settling for slots and gates.
A couple of examples should suffice.
In 2013, the DOJ entered into a consent decree in the proposed merger of U.S. Air and American Airlines. The remedy, as is often the case, focused on the sale of slots and gates at LaGuardia Airport, as well as gates at other airports.
Yet the complaint stated that competition would have been enhanced with the emergence from bankruptcy of American Airlines as a standalone competitor. The complaint also argued that the industry had suffered from consolidation (from nine to five majors), and that fares increased due to that consolidation.
So, it’s only natural that slots and gates at a few airports would fix that, right? Not according to the complaint. Head-to-head competition would be eradicated. And it’s hard to start a network carrier, I might add, even with access to slots and gates.
One other example is in order. In the United-Continental merger, despite 18 overlapping markets (routes), the DOJ closed the investigation into the merger with the parties’ agreeing to sell slots and other assets in Newark to Southwest Airlines.
Slots and gates solve all ills in the airline industry. Got it. Unless you’re in one of those overlapping markets, where there is no obligation of the winning bidder of said slot to service the same route. Or unless you’re in rural America, where service has either disappeared completely or is much more expensive.
I don’t want to rehash the entire history of consolidation in the airline industry or the significant role that DOJ has played in shaping that development, but these two transactions are just a few on the path of placating the airlines by essentially creating a “tax” on the transaction that did not cure the anticompetitive ills of the mergers whatsoever. I do not, by the way, blame my former colleagues on staff at the DOJ for this. My blame goes higher up than the trial attorneys and paralegals who work those cases.
Given these data points, does the decision by Judge Sorokin represents a “sea change” in antitrust enforcement in the airline industry? I think not. Let’s break the decision down by some key elements: Concentration, efficiencies, and entry. I’ll also add a comment about the role of economists in that analysis.
Concentration Is Not New
Judge Sorokin discovered what many of us know already: “The industry is highly concentrated. Four carriers control more than eighty percent of the market for domestic air travel: the three GNCs (American, Delta, and United) and Southwest. The remainder of the market—less than twenty percent—is generally split among nine smaller carriers.”
At mainstream antitrust conferences, where consultants are rewarded for taking positions aligned with the most powerful, one might find a variety of people telling you that the airline industry is not concentrated. Since 2001, American bought TWA, U.S. Airways bought America West, American merged with U.S. Air, Delta with Northwest, United with Continental, and Southwest with AirTran. The full list can be found here. In each instance, DOJ was complicit. And, by the way, the market was highly concentrated before those decisions. Take DOJ’s complaint in U.S Air/American: “In 2005, there were nine major airlines. If this merger were approved, there would be only four. The three remaining legacy airlines and Southwest would account for over 80% of the domestic scheduled passenger service market, with the new American becoming the biggest airline in the world.” Indeed, many of the HHIs in the markets in question in that merger exceeded 2,500, or what the Merger Guidelines consider to be “highly concentrated markets.”
After that merger, others followed. Alaska and Virgin merged, Southwest bought some locals, and United bought ExpressJet.
So it is only natural that the DOJ allege concentrated markets in its complaint in the JetBlue/Spirit Merger: According to the agency’s calculations, the merger increases concentration in 150 routes, including 40 nonstop routes. The complaint alleges the risk of heightened coordination among the remaining airlines as well and lower innovation in service.
In short, there is nothing new on the concentration side. ‘Twas ever thus (at least the past 20 years). This suggests that high concentration is not predictive of stopping an anticompetitive merger.
Efficiencies Arising from the Elimination of Competition
Judge Sorokin was skeptical of the claimed efficiencies in the NEA: “American’s Chief Executive Officer (‘CEO’) described the numerous challenges created by mergers, as well as the “inordinate amount of management time and attention” required to integrate two airlines.” Prior mergers touted those great efficiencies. Some during that time period (me included) argued that those efficiencies do not pan out, take longer to achieve, and may be ethereal.
But the parties to the NEA claimed efficiencies even absent merger. Judge Sorokin rejected the claimed efficiencies, ruling they were insufficient to rebut the claimed harms in the NEA litigation. As Judge Sorokin pointed out: “These features arise only if the defendants mimic one carrier, elect not to compete with one another, and cooperate in ways that horizontal competitors normally would not. This elimination of competition negatively impacts the number and diversity of choices available to consumers in the northeast. As such, ‘benefits’ arising in this way cannot justify the defendants’ collusion.”
It’s hard to read that conclusion without thinking about the claims of merger efficiencies in the past. It suggests that the efficiency claim would have been stronger if the NEA members had merged rather than formed an alliance. If that’s the right reading, that could spell trouble for the DOJ in JetBlue/Spirit.
So again, nothing new here, except it was defendants arguing that merger efficiencies are hard to achieve, and in essence claimed that the NEA achieved the same efficiencies without requiring integration. Again, the U.S. Air/American complaint was skeptical of such purported efficiencies: “There are not sufficient acquisition-specific and cognizable efficiencies that would be passed through to U.S. consumers to rebut the presumption that competition and consumers would likely be harmed by this merger.”
Often times, those statements are made in hopes of “out of market” efficiencies counting in favor of the transaction. As the Commentary to the Merger Guidelines states, “Inextricably linked out-of-market efficiencies, however, can cause the Agencies, in their discretion, not to challenge mergers that would be challenged absent the efficiencies. This circumstance may arise, for example, if a merger presents large procompetitive benefits in a large market and a small anticompetitive problem in another, smaller market.” While that Commentary goes against everything that Philadelphia National Bank stands for, it is nonetheless continued policy. Just ignore the citation to Philadelphia National Bank in the complaint. That’s on presumptions.
Nonetheless, the complaint in Jet Blue/Spirit states that “Defendants have not yet described any procompetitive efficiencies in the alleged relevant markets.”
The American Antitrust Institute has been shouting this point for at least a decade. Take Diana Moss’s paper in 2013, explaining that: “System integration (e.g., integrating reservation and IT systems and combining workforces) in some past mergers has been difficult, protracted, and more costly than what was predicted by the airlines.” Others, including yours truly, have asserted the same.
Entry Is Not Easy
Judge Sorokin indicates that barriers to entry into the markets where NEA operates are significant, with likely entry not mitigating the anticompetitive effects. For example, in Boston and New York City, the judge describes the entry barriers as insurmountable: “By ending competition between American and JetBlue, the NEA means that seventy-three percent of domestic flights at Logan are controlled by two (rather than three) entities: Delta and the NEA. In New York, where entry or expansion by any airline is severely limited due to the FAA’s slot constraints at JFK and LaGuardia, the NEA ensures that eighty-four percent of the slots at JFK and LaGuardia are held by the same two (rather than three) entities that now dominate Logan.”
The JetBlue/Spirit complaint concurs: “New entrants into airline markets face significant barriers, including: difficulty in obtaining access to airport facilities or landing rights, particularly at congested airports; existing loyalty to particular airlines; and the risk of aggressive responses to new entry by a dominant incumbent.”
Curious. If entry is as difficult as the current DOJ and Judge Sorokin now suggest, where were those concerns in the prior two decades, when gate and slot sales were held out as the great elixir to lost actual competition?
Not All Economists
Judge Sorokin found defendant economists’ testimony problematic, lacking in nuance, and biased: “The apparent bias of the defendants’ retained experts is reason enough to reject the
opinions and conclusions they rendered in this case.” Again, this is not a surprise. Matt Stoller’s description of people in lab coats who never get graded on their assignments is apt.
Much has been written about the repeated use of economists to weave magical models that later result in unhappiness for consumers. ProPublica had a piece on the expert economist market four years ago, titled “These Professors Make More Than A Thousand Bucks an Hour Peddling Mega Mergers.” The title is a bit dated, due to the inflationary effects in the economic expert market—$1,000 is considered affordable now. Regardless, this practice is ages old. Agencies almost expect certain economists to walk in the door peddling particular mergers. I should disclose my own personal experience getting stomped by Dan Rubinfeld as I sought to stop the United/Continental merger. Consolidation in 18 nonstop markets was simply insufficient to be a problem for defendants’ economist, who was far more prepared, diligent, and careful.
I do not take Judge Sorokin’s judgment of defendants’ economists as a judgment of all experts. I take it to mean that economists must do more to shore up their assertions and conclusions apart from merely proclaiming themselves to be gods of knowledge. In other words, experts should not engage in “sweeping assertions,” “unnuanced and poorly reasoned conclusions,” “overly simplistic view[s],” “absurd” reasoning, or other analysis the court finds is entitled to ultimately “no weight.”
In short, maybe courts will start treating defendant’s economic experts like they treat plaintiff’s economic experts. And yes, that means they’ll get the blame for losing, even if it not deserved. It might also mean that JetBlue/Spirit should think about its expert reports carefully, and who gives those reports.
Conclusion
Before I get emails pointing out that policies and administrations change: I know. But those policies have an effect on the law as it is applied. Just as one example, there is no meaningful or substantive judicial review of consent decrees. And thus, when the DOJ became the Surface Transportation Board of the friendly skies (blessing all mergers that came before it), there was no countervailing power to stop it. Those impacts cannot be undone. They are permanent.
So, while I’m happy about Judge Sorokin’s decision, it doesn’t predict the future. The DOJ may very well still lose JetBlue/Spirit if it goes to trial. And if does lose, it only has its prior self to blame.
In the last thirty years, the United States has experienced a whirlwind of concentration among food suppliers. This elimination of competition is an urgent problem not only because consumers are faced with higher prices and less food choices in grocery stores, but also because the largest agribusinesses on Earth (“Big Ag”), as a result of their massive economic and political power, clog up the workings of our political system to the detriment of democracy and the planet.
Big Ag’s rising profits have been shown to be a driving force behind inflationary food prices again and again. A recent analysis by the White House explained that “If rising input costs were driving rising meat prices, those profit margins would be roughly flat, because higher prices would be offset by the higher costs.”
In addition to these already egregious displays of power and control, Big Ag also destroys the planet’s natural resources, violates existing labor laws, engages in atrocious and inhumane animal processing practices, and puts small farms out of business. Both the legal and economic arrangements that enable this behavior create an unfair political economy that’s immensely profitable and partial to large agribusinesses; these forces allow massive corporations like Monsanto, Tyson, Cargill, and John Deere to largely evade antitrust scrutiny.
As a result, Big Ag players garner enormous market power and uneven political clout, positioning themselves to create even more favorable legislation with which to entrench their dominance in each sector of agriculture, from beef to farming equipment to poultry to seeds.
It Begins on the Farm
An immediate example of Big Ag’s might is in farming equipment. Before the 1930s, over 160 companies sold farm equipment in response to growing industrialization and mechanization of farming. Through industry consolidation, however, John Deere emerged as the leading supplier of agricultural machinery in the United States. Today, John Deere stands alone as the dominant player, commanding roughly 53 percent of the market for large tractors and 60 percent for combines. From 2005 to 2018, John Deere acquired a staggering twelve companies that specialized in sectors ranging from farm equipment to precision technology.
In February, the Department of Justice filed six lawsuits in an effort to crack down on Deere’s monopoly power, engaging in a right-to-repair battle in four states. The lawsuits allege that Deere has illegally attempted to control the repair of Deere equipment, such as tractors and combines, using electronic-control units. The filing contends that the farming equipment giant and its dealerships monopolize the market for repair and maintenance services by designing proprietary Deere equipment, which requires Deere-controlled software for the diagnosis and maintenance functions. That software is exclusively available to technicians authorized by Deere. This arrangement leaves many independent shops and farmers beholden to Deere-authorized vendors when repairing their equipment. In this way, Big Ag poses a sort of private tyranny over those who have to rely on their equipment to make a living, and they are largely left unaccountable to the public and consumers.
Merger Mania
The tentacles of Big Ag reach beyond equipment into our milk and meat supply. Industry concentration in dairy has led to fewer farms and more mega-dairy operations, diminishing the profits of small family farms. The beef industry similarly has become more heavily concentrated. Today, only four firms—Tyson, Cargill, JBS, and National Beef Packing Co.—control over 70 percent of the nation’s beef supply, and they processed roughly 85 percent of cattle in the United States in 2018.
The level of concentration occurred at such a breakneck pace since the 1980s that Department of Agriculture economists characterized this wave of mergers as “merger mania,” during which concentration soared from 35.7% in 1980 to 71.6% by 1990 in the beef packing sector.
For instance, through mergers in the agriculture industry, “the four largest meatpackers have increased their share of the market from 36% to 85%, and the largest four sellers of corn seed accounted for 85% of U.S. corn seed sales in 2015, up from 60% in 2000.
Due to the resulting power over consumers and input providers, these mega-corporations are doing better than ever. The level of concentration, and the control over factory farming that it grants, are partially responsible for Tyson Foods’ beef sales jumping to $5 billion in the first quarter of 2022, lifting overall sales to $12.93 billion. Tyson Foods realized over a billion dollars in new dividends and stock buybacks. Add this to the more than $3 billion already they paid out to shareholders since the pandemic. In beef processing, corporate profits skyrocketed by $96.9 billion in the third quarter of 2021 alone.
Economic Power Translates into Political Power
Though it is hard to pinpoint a specific and clear approximation of the political power large agribusiness has achieved, each industry as a whole has immense political power resulting from their economic growth and profits from concentration. This is malfeasance in the highest order. Food monopolists and other dominant players in our agriculture system have the ability to contribute a large amount of campaign funds to key lawmakers in charge of legislating the sectors where mega corporations have a direct interest.
Farm subsidies in the United States largely support private associations and large corporations. These subsidies account for roughly 39 percent of farm income while the biggest agriculture firms continue to make record-breaking profits. The United States government gives away free money to private corporations that continue to increase their profits without contributing back into the public coffers or without providing adequate care to farm animals or adequate compensation (or safety) to the labor that generates the profit.
One example is the National Cattlemen’s Beef Association (NCBA). Researchers have long understood how clear the intent to monopolize is through the political clout of large, private trade associations, like the NCBA, which is directly paid a proportion of the proceeds from the U.S. government from every beef sale (like supermarkets steaks or hamburgers from a fast-food restaurant). In addition to lobbying for the further consolidation of the meat-processing industry, the NCBA uses these proceeds to lobby for Americans to eat more meat and to oppose district court judges who are sympathetic to animal rights.
The Social Costs Are Adding Up
Food production and industrial farming pose existential threats to critical ecosystems and rural populations, accelerating climate change by polluting and contributing massively to greenhouse gasses. The natural resources needed to sustain the increasing industrialization of our agricultural infrastructure are exhausted at the behest of large industry titans not in the least bit compelled to employ sustainable environmental practices. These effects are undesirable to everyone but to large agribusiness polluters, which perversely gain a greater capacity to pollute and contribute to climate change to a meaningful degree as they grow in scale and size.
The broader societal costs of the size, power, and dominance of food monopolies are far reaching. Economic power garnered from consolidating food industries, especially during the ongoing COVID-19 pandemic, yields uneven political influence—where corporations shape laws to get enacted in their favor, which in turn garners them more control of the food system. In the legal system, the problem of agriculture monopolies cannot be adequately dealt with on purely economic grounds either. This is because of the popularized role that economic analysis plays in assessing anticompetitive harm. With its fixation on short-run consumer price effects, the current economic lens cannot fully capture the ways in which Tyson, Bayer, or Monsanto grow their market power. Like other dominant players in industries, major corporations within Big Ag also mold political outcomes in their favor to avoid critical enforcement. They achieve this by influencing the anti-monopoly policies enacted to proscribe and limit their size in the first place, positioning themselves to dictate the terms for which market activity is stimulated.
When applying the law, antitrust courts should abandon the antiquated Chicago School dogma, which naively assumes that markets are self-correcting and that consumer welfare is paramount. When it comes to assessing the true harms of food monopolies and food barons, which undermine the rights of local farming operations, antitrust authorities should instead consider a broader set of anti-monopoly goals in order to disperse power more evenly among local farming operations nationwide.
To continue to permit consolidation in the aforementioned ways is anti-democratic. A strategy to implement these tools simply requires the political will to hold Big Ag corporate titans accountable by legally compelling them to relinquish control of their hordes of wealth, industry control, and attendant political influence.
Tyler Clark is an economist working on anti-monopoly, corporate power, and antitrust research. A recent graduate of the M.S. program in economics at the University of Utah, Tyler hopes to return and pursue a JD specializing in antitrust law. You can follow him on Twitter @traptamagotchi.
Just weeks after a series of high profile train derailments headlined by the disaster in East Palestine, Ohio, the Surface Transportation Board (STB) decided to double down on the current railroad oligopoly. The STB approved a merger between Canadian Pacific Railway and Kansas City Southern Railway Company, cutting the number of major “Class I” rail companies in the United States from seven down to six. This decision is diametrically opposed to the public interest and seriously undermines trust in rail regulators.
The merger approval clearly violates President Biden’s Executive Order on Promoting Competition in the American Economy, which explicitly directed the STB to begin rulemaking to make it harder for railroads to engage in anticompetitive practices. The order instructed the chair to “consider rulemakings pertaining to any other relevant matter of competitive access, including bottleneck rates, interchange commitments, or other matters.” Instead, the STB has abetted concentration that makes it harder to regulate.
Because the decision goes against Biden’s overarching competition agenda, the Revolving Door Project today released a letter with RootsAction and FreedomBLOC calling for President Biden to relieve Martin Oberman from his chairmanship at the STB. This backtracking requires a major course correction that can only be achieved by a change in leadership.
Besides being antithetical to one of the defining policies of the Biden administration, the STB’s decision breaks from other parts of the administration. As the FTC and DOJ Antitrust Division have redoubled their efforts to push back on monopolization across the economy, the STB approved the first big freight-rail merger since the 1990s. But it’s not just the FTC and DOJ going in the opposite direction of the STB; Secretary Pete Buttigieg and his Department of Transportation have recently raised their scrutiny of transportation mergers, highlighted by blocking airline consolidation.
And while Buttigieg has not explicitly chimed in on the rail merger, other regulators did, warning the STB against approval. The DOJ Antitrust Division warned against the merger, saying it could “empower the merged railroad to deny shippers access to the lowest cost or fastest end-to-end routings. […] The railroad sector in particular, with its relatively high fixed and sunk costs, often enjoys substantial structural entry barriers and advantages that may facilitate or incentivize anticompetitive behavior.”
Additionally, a majority of the Federal Maritime Commission opposed the merger, arguing that “the proposed consolidation does not ensure that the anticompetitive effects of the transaction outweigh the public interest in meeting significant needs.” As I’ve written before, the FMC has a history of serious dovishness on consolidation, making such a strong position all the more notable. The merger is even being opposed by another railroad; Union Pacific is suing to block the STB’s decision.
Besides undermining the administration’s broader policy agenda, the STB’s decision will also undermine safety in the rail industry. What’s the basis for such a strong claim? The STB’s own analysis found the merger would “slightly increase” risks of derailments. Taking their analysis at its word, even slight increases in such risks seem folly after Norfolk Southern set East Palestine ablaze with a single derailment. That incident highlighted how underequipped and unprepared regulators were to deal with any derailment. Allowing an increase in that risk just to enable more corporate profits is a bad trade for the American people.
Another cost of the merger is less effective oversight. As I wrote in The Sling in March, “More industry concentration makes effective regulation harder. As firms increase in size, they gain more and more of a resource advantage over their regulators. One behemoth corporation can often hire more lawyers and cultivate more relationships with lawmakers in order to obfuscate enforcement measures than multiple smaller ones could.”
Of course, there are corporate-friendly defenders of the merger. The Economist argued that the merger “may end up enhancing competition” because the two rail companies do not directly compete—there are no overlapping tracks—and because the merged entity “will provide the first train lines running from Canadian ports through the heart of the United States into Mexico. This is poppycock: A merger that doesn’t involve head-to-head competitors can still be harmful if it enables the merged firm to engage in anticompetitive behavior such as blocking rival’s market access.
Indeed, The Economist gives the game away in the very next paragraph, admitting the rail “industry is also consolidating, which leads to greater pricing power.” There’s only one consolidation going on and it’s the one they’re seeking to defend. If pricing power will increase simply by virtue of consolidation, that means that even though the current lines don’t overlap, the merger facilitates anti-competitive behavior. Full stop.
This is exactly the point the DOJ made in its statement to the STB as well. As they put it:
Even beyond the elimination of head-to-head competition, mergers that increase market power can harm competition in several ways. The merger can empower the merged railroad to deny shippers access to the lowest cost or fastest end-to-end routings. Likewise, in the absence of a complete refusal to interchange traffic, mergers may enable firms to foreclose competition in other ways, such as raising costs for their rivals through control over inputs or access. Such mergers also can create a more conducive structure for post-merger coordination between direct competitors by facilitating communication or discipline through the new integrated asset. The railroad sector in particular, with its relatively high fixed and sunk costs, often enjoys substantial structural entry barriers and advantages that may facilitate or incentivize anticompetitive behavior. For example, railroads may anticompetitively refuse to interchange traffic and/or favor the newly integrated company’s long-haul route over a more efficient joint line route.
Four of the other five Class I railroads agree, having opposed the merger because of how it would enable the new CPKC to block competitors from accessing important junctions, particularly Houston. This comes after earlier concerns from Union Pacific and BNSF around the Houston terminal. In short, the massive market power the merger grants CPKS will allow for the firm to undermine competition by blocking other railroads from readily accessing interchanges and other rail that Kansas City Southern currently shares with other shippers. Despite the two firms not directly competing in their current routes, the vertical integration creates the opportunity to force business away from other railroads because of the degree of control over their competitors’ ability to operate competing routes.
The Canadian Pacific-Kansas City Southern merger undermines administration policy and directly contributes to further anticompetitive practices in the rail industry. It is also likely to cause worse service, job cuts, weaker oversight, and higher prices, among other harms. President Biden should heed his Transportation Department, Justice Department, and Federal Maritime Commission and appoint new leadership at the STB.
Dylan Gyauch-Lewis is a researcher at the Revolving Door Project.