Antitrust Has Failed
By any measure, the last 40 years of U.S. antitrust enforcement has been an abject failure.
Despite a statutory regime supposedly designed to protect competition and protect consumer welfare, public antitrust enforcers have failed to achieve either goal. Responsibility for this gross dereliction of duty is decidedly non-partisan: For more than 20 years, enforcers loosely associated both political parties have boasted of general political agreement on antitrust policy, which has been largely influenced by the Chicago School’s hands-off approach to the market. Dissent was cabined at the margins, and no one questioned the orthodoxy, much to the detriment of our democracy. For the political and economic health of our society, an antitrust revival at both the federal and state level is long past due.
The consequences of our collective failure to enforce the antitrust laws to their fullest extent has been nothing short of catastrophic. Companies have gotten bigger and stronger, despite antitrust enforcers’ mandate to promote competition. The top 10% of companies generate more than 80% of profits; companies that generate more than $1 billion in annual revenues account for more than 65% of market capitalization. Simply put, big companies account for a much bigger piece of the pie than they used to. And they face less competition: The number of listed companies has halved over the last generation. The real-world effects of this curse of bigness are dramatic—the top 10% of companies see returns on investment that are five times the median, double what they were a generation ago.
In particular, market concentration is strangling small businesses, the lifeblood of the U.S. economy. Since 1970, the U.S. startup rate has fallen by half. Startups that seek to compete with dominant firms find that funding is unavailable for entrants who are attempting to enter into what investors appropriately call the “kill zone.” One only needs to look at the famous Silicon Valley culture of disruption that has now devolved into an “acquihire” business model, in which startups compete for engineering talent to best position themselves to be gobbled up by tech giants. The entrepreneurial spirit that characterized the U.S. for more than 150 years is now more illusion than reality.
Consolidating markets have also directly exacerbated wealth inequality, one of the signature problems of our age. A generation ago, the top 3 U.S. automakers generated revenues along the lines of what the top 3 U.S. tech firms do today. But the U.S. automakers employed 1.2 million Americans in 1990; the top 3 U.S. tech firms employed only 137,000 workers in 2014. Profits have flown increasingly to ownership and shareholders, while workers have been left behind. Historically, middle income workers shared a dominant portion of aggregate income in the United States. In 1970, the middle class earned approximately 60% of U.S. aggregate income. Today, that figure stands at only about 40%, while upper income families now share nearly 50% of income. Looking at aggregate wealth, the figures are even more dramatic and disturbing. Upper income families now control about 80% of all U.S. wealth, while the middle class’s share has halved over the last 40 years, falling to only 17% today. This enormous gap in income and wealth is not only increasing, but it is growing at a faster rate. The 90/10 income inequality ratio, which compares the income earned by the top 10% of individuals and the poorest 10% of individuals, now stands at an historic 12.6, making U.S. income inequality the highest of any G-7 nation. More than a century ago, when the Sherman Act became an entrenched feature of our legal framework, our society coalesced around the premise that without economic freedom, political freedom will wither on the vine. The events of the last two years in particular underscore that when Americans believe they have been locked out of economic success, they are susceptible to political extremists who threaten our democracy.
Admittedly, the problems of wealth and income inequality were not solely caused by lax antitrust enforcement. Nonetheless, antitrust law has a significant, if not leading, role to play if we are to dig ourselves out of this economic crisis. In the coming weeks and months, we will detail in this blog specific proposals on how to reinvigorate antitrust enforcement. Here are a few issues we will explore:
- Reversing the Presumption: Across the entire spectrum of antitrust law, presumptions favor the defense. Acquisitions of rivals (or a potential rival) are presumed to be procompetitive, unless proven otherwise. A dominant firm’s refusal to deal with smaller rivals are presumed to be legal, unless proven to be unprofitable. Large transfers of wealth by branded pharmaceutical companies to generic entrants are presumed to be legal, unless proven to be “unexplained.” Pricing designed to drive competition out of the market is presumed to be procompetitive unless proven to be below cost and likely to result in higher prices once monopoly power is achieved. These are just a few examples. Reversing these presumptions to require companies to defend the conduct in question would both serve as a necessary deterrent and ensure that more unilateral anticompetitive conduct is blocked.
- Recognize that Oligopolies are as Dangerous as Monopolies: Antitrust law is premised on the need to prevent companies with market power from harming the competitive process, thereby injuring consumers. Over the last 40 years, U.S. antitrust enforcement has focused largely on actions against companies that illegally collude to fix prices, to allocate markets and customers, or to rig bids. The pernicious effect of collusion is well-established— consumer surplus shrinks, creating deadweight loss, while producer surplus grows as market power is exploited to raise prices to anticompetitive levels. Yet the same result can be produced by oligopoly conduct, antiseptically referred to as “parallel conduct.” Spurred by the collective shrug that courts have given to tacit forms of collusive conduct, antitrust enforcers have increasingly allowed market concentrations that have reduced the number of competitors to three, including when disruptive firms have been acquired. Simply stated, we have allowed markets to become concentrated to a point where tacit collusion is likely, if not inevitable, with antitrust law turning a blind eye to the implications. The perils of this outcome are amplified in an increasingly digital economy where price signaling and price-fixing can be accomplished via algorithms that render the proverbial smoke-filled room a thing of the past. Against this backdrop, we need reinvigorated public antitrust enforcement in highly concentrated markets, enforcement that rigorously investigates practices such as price signaling, information sharing, and standard setting for anticompetitive effects, including the ability to “follow the leader.”
- Eliminate Most Market Definition Requirements: The 2010 Horizontal Merger Guidelines should have unleashed a revolution in antitrust law, obviating the need to define a relevant antitrust market (which often amounts to quantifying the number of angels dancing on the head of a pin) as a predicate requirement for the plaintiff to prove anticompetitive effects. The logic of that change was, and remains, undeniable—unless a firm possesses market power, it cannot profitably act anticompetitively. Put differently, since direct evidence that a firm has the power to harm competition also establishes that the firm must have market power, requiring plaintiffs to first define the relevant market makes no economic sense. Courts, as ever slow to embrace change, cling to market definition precedents, allowing gamesmanship at the pleading and subsequent stages of litigation to blunt legitimate enforcement efforts. Lest there be any doubt about this, consider the recent S. District Court decision dismissing the FTC’s initial complaint against Facebook for supposedly failing to allege sufficient facts showing that Facebook had monopoly power in a relevant market.
- Appreciate the Limits of Economic Prognostication and Analysis: Industrial Organization (IO) economics has proven to be a valuable ally in the development of antitrust law. Antitrust law, however, should not be subservient to economic theory, especially when used to predict future behavior. Economic models, no matter how sophisticated, rely on assumptions about human behavior that are not reasonable given history and experience. Companies do not always act rationally or in their economic best interest. The economic incentives of companies and their employees are often not aligned. Personal relationships often trump professional commitments. The need to be liked often outweighs the responsibility to act legally. Desiring to see a rival suffer is stronger than the desire to succeed. Law can account for these confounding factors; economics cannot.
Reversing our economic destiny will not be an easy process. Entrenched precedents will continue to stymie both public and private enforcement efforts absent legislative changes at the federal and state level. And the powerful entities birthed by our collective failure to enforce the antitrust laws will be loath to surrender their positions.
Yet wealth inequality in our society has created a moral and political imperative for economic justice. That cannot happen without a dramatic and comprehensive revision to antitrust law and policy. The future of our democracy depends on it.
Edited by Gary J. Malone
Tagged in: Antitrust Enforcement,