Reforming Antitrust Policy for an Era of Global Competitiveness

ITIF held a webinar on March 26, 2020 devoted to reforming antitrust policy in an era of global competitiveness. ITIF President Robert Atkinson; Aurelien Portuese, Senior Lecturer in Law at St. Mary’s University in London; and David Teece, Chairman and Principal Executive Officer at the Berkeley Research Group (and professor at the Haas School of Business at UC Berkeley), discussed the need for antitrust regulators to pay more attention to global markets, international competition, and innovation when evaluating mergers and antitrust policy generally.

The central purpose of antitrust law is to ensure the optimal amount, not the maximum amount, competition. In some industries globalization has created a global market in which customers effectively choose from suppliers all over the world. In many of these industries, the presence of large economies of scale and network externalities, coupled with aggressive mercantilist policies in nations like China, requires companies to become very large in order to maximize efficiency and even to survive. Yet regulators still mainly look at domestic markets when enforcing antitrust policy. Moreover, in many industries, innovation is a key driver and often requires scale for success.

Atkinson opened the event by citing George Mason University Professor David Hart’s work that divided the current state of the antitrust debate into “concentrationists” and “deconcentrationist” camps. In the latter camp are the post-Chicago and populist schools of antitrust that believe that the incentives to innovate are stronger in industries where firms have less market power. And for many of them any market power is inherently problematic. Today, deconcentrationists include more traditional antitrust practitioners and scholars, as well as more liberal ones like Federal Trade Commission member Rohit Chopra and European Commissioner for Competition Margrethe Vestager that focus on maximizing competition as the principal goal of antitrust. As professor Portuese noted, for some deconcentrationists, big firms themselves are suspect, particularly in the information technology industry. This has led to a “techlash” with proposals to look at regulate tech firms as public utilities, to treat data as a source of unfair competition, and to break them up. And finally some deconcentrationists, including scholars like Lina Khan, Joe Stiglitz and Tim Wu, have called for abandoning the consumer welfare standard in favor of a public interest standard. And many support their case by structuring the dialogue in an "us vs. them” framing, where the “us” is the people and the “them” big corporations.

Concentrationists, a camp to which ITIF subscribes, point to the work of economist Joseph Schumpeter, as well as research that shows that innovation is reduced when there is both too much concentration are too much competition.

The concentrationist view appears to gain ground in periods when foreign competition is heightened, leading policy makers to place more focus on domestic industrial competitiveness. For example, in the early 1990s when the U.S. faced stiff Japanese competition, Harvard’s Michael Porter wrote: “Since the role of competition is to increase a nation’s standard of living and long-term consumer welfare via rising productivity growth, the new standard for antitrust should be productivity growth, rather than price/cost margins or profitability. All combinations or practices scrutinized in antitrust should be subjected to the following question: how will they affect productivity growth? If a merger, joint venture, or other arrangement will significantly enhance productivity growth, it is probably good for society and for consumers (as well as the firms involved). Transactions with dubious benefits for productivity growth, or those that offer only a one-time productivity benefit, are likely to be net negatives for society if they pose any risk to the overall health of competition.” Likewise in 1999, McGowan and Cini wrote that “the EU approach to competition policy is to give more weight to industrial engineering — to creating particular kinds of market structures, particularly ones that favor EU competitiveness.”

For the past 40 years antitrust policy has tended to focus on maximizing consumer welfare by preventing price increases. The current challenge to this approach is that many who are skeptical of large companies seek to return antitrust to an era of protecting small companies from competition by larger firms even if the latter are more efficient. But might we need to go the other way? Should countries adopt a third approach in which they allow or even encourage the emergence of larger companies, especially in the face of robust foreign competitors, many of them backed by their state? Might such a policy actually benefit consumers in the long run by increasing innovation and strengthening the competitiveness of domestic firms? This policy would be invoked infrequently and only when a careful economic review of the market showed long-term productivity gains that would benefit society and allow domestic producers to survive against global competition.

Two recent decisions brought these issues into focus. China government has increasingly adopted a policy of promoting national champions that compete in foreign markets. It recently arranged the merger of two large Chinese rail construction companies into the state-owned Chinese Railway Rolling Stock Corporation (CRRC). CRRC enjoys favored access to China’s large domestic market and receives heavy government subsidies. In response, the European firms Alstom and Siemens proposed a merger that would enable them together to better compete with CRRC. The European competition regulator blocked this merger, claiming that it would limit domestic competition and hurt European consumers. Within the United States, the Federal Trade Commission forced semiconductor manufacturer NXP to sell its radio frequency power business before it could merge with Freescale Semiconductor Ltd. This allowed a Chinese firm to acquire the business and the strategic technology that came with it.

The discussion focused on several themes. One was on how antitrust addresses issues of “Big Tech”. Many governments have issued reports related to competition in this space and as Teece noted, they want to define the issue as platforms. But he notes, platforms are just one manifestation of tech industries. He worries that that agencies and policy makers will simply stop at developing a methodology for platforms and “n-sided markets” and think they have solved the problem. But they have not. He argues that what is needed is an understanding dynamic competition in all of its manifestation. This means that the whole concept of relevant markets should go out the door. These firms do not stay in “their swim lanes”. Apple, Google, Microsoft, Amazon, Netflix, and other firms all constantly competing against another. This is because in the digital world doesn’t respect boundaries and relevant markets. So those that jump to the conclusion that there is market power fail to understand the nature of competition in the digital economy. Moreover, as professor Portuese notes, the relevant market for many tech firms is the attention market: they are all in the same market of competing for people’s attention.

A second and related issue was the strategic threat posed by China. Competition regulators tend to ignore issues such as unfair trade and government subsidies. It is increasingly obvious that China intends to take advantage of global trade treaties to access foreign markets while at the same time violating those same treaties by protecting its own market. This protection includes excluding rivals from China, requiring companies to turn over sensitive technology, and heavily subsidizing domestic champions. Professor Portuese pointed out that DG Comp (Europe’s competition regulator) ignored the threat of Chinese competition when it reviewed the Alstom-Siemens merger in part because its internal guidelines limit its time frame to the foreseeable future which it defines as the next two years. Yet the threat posed by CRRC is likely to emerge in the medium-term, not the next two years. Moreover, at least in the EU, antitrust looks too much at the threat of entry by looking at past rates of entry, not future ones, particularly from nations like China. Moreover, EU authorities looked only at the EU market. But antitrust can no longer look at many industries without looking at China’s role in the national market but also the global market, and focus not on the short-term but the longer term. In other words, Chinese competition means that relevant markets are in much more flux that competition regulators assume. Any merger decision in telecommunications equipment in the 1990s and early 2000s would likely have ignored the impact of Huawei.

Some who defend the current approach to competition policy argue that the answer to unfair Chinese competition is the World Trade Organization (WTO) and more robust domestic industrial policies. Panelists agreed that the West should be much more forceful in its trade negotiations by, for example, insisting on reciprocity in access to government contracts. Unfortunately, they agreed that WTO lacks good mechanisms for dealing with unfair Chinese competition and the West seems unlikely, and perhaps unable, to unite behind a focused strategy to rein in Chinese behavior. Moreover, as Professor Portuese notes, the WTO has given inadequate attention to antitrust can be used in nations like China for protectionist ends. There are not working groups or studies at the WTO to address this issue.

Given their growing budget constraints, the United States and Europe also seem unlikely to be able to respond with an effective technology policy to counter Chinese companies. Antitrust policy may be the most effective tool left, especially since the Chinese use it as a tool to pursue their own national interests.

But since neither a WTO or domestic industrial policy agenda will likely be effective in countering Chinese innovation mercantilism, the West still must figure out how to respond to China in antitrust policy. This gets to a larger issue vis-à-vis China. As Teece noted, the Chinese government is not really interested in competition; they are interested in competitiveness. They are only concerned about having their companies be global leaders in their field. That is why we need an anti-trust policy that promotes competitiveness. He took US and European policymakers to task for not fully realizing that China has no intention of using antitrust the way the West does. And that EU and US policy makers have been naïve in thinking otherwise. This means, he said, that we have the “throw the antitrust rule book away” and look at China as a systematic competitor, in the sense that industry and government are intimately linked so that Chinese firms can dominate global markets. So competition from China is not from Chinese firms, but rather from at the Chinse system, and the tools we have of antitrust are wholly inadequate. Unfortunately, all too often that view of competition authorities is that the kind of competition from China is the kind of competition coming from elsewhere.

As a result, he argues we need a complete redo of antitrust, and unfortunately he seems very little effort to do so by the major agencies and practitioners. Unfortunately this new understanding is not likely to come from the mainstream economists who do not embrace the concept of dynamic competition. Most of the work on innovation that matters has migrated to business schools. But unfortunately they know little about antirust. So we are in a difficult situation in that most of those how know about innovation don’t know about antirust and the antirust trust folks don’t know very much about innovation.

Why has competition policy been so slow to change? Teece argues it is because antitrust is grounded in microeconomics. In this sense, the so-called “Chicago school” of antitrust (as well as the post-Chicago school) is innovation unfriendly because the analytical tools and model for looking at innovation are more complicated than those used by neoclassical economics. Innovation is left out of the analysis and doesn’t have a place at the table. In this sense, in the pursuit of science we have become unscientific and don’t pay attention to the evidence that truly matters. This is particular challenge in the case law and standard methodology of antitrust analysis lack a way to effectively consider innovation. So we have a challenge of rethinking antitrust from top to bottom. As profession Portuese noted, to get a more innovation based anti-trust system we need more qualitative evidence and arguments.

Another theme was the need for regulators to focus on the correct definition of a market. For instance, in the construction of train engines, the relevant market is global. Internet platforms also have a global market, but it is defined by their competition for the attention of their users, not over who has the best search engine or site for sharing photos. In the case of global markets, regulators need to look at the behavior and market power of foreign competitors, even if they currently have a small share of the domestic market.

Another theme focused on the need to move beyond market share as the key to market power and instead focus on firm capabilities and strengths. As Teece noted, a handmaiden of dynamic competition is the concept of dynamic capabilities scale. Right now we look at strengths of firms in terms of market share which makes little sense. We do that because there is data available on it. But really what matters is a firms capabilities and strengths. In fact, scale may or may not strengthen dynamic capabilities. If firms have strong dynamic capabilities competition authorities should be more likely trust firms to merge to achieve greater scale. But if they don’t, they should be more skeptical. He points out the British firms (in the 1960s and 70s) sought to merge to become more competitive, but this failed because they lacked dynamic capabilities. Competition authorities could make mergers contingent on certain promised behavior, such as investment in R&D.

This requires regulators to take a dynamic view of the market. In some markets companies need to acquire a larger size and market share in order to justify the heavy investments needed to increase efficiency. Not all of these gains get passed down to consumer in the short run. The consumer welfare standard does not take into account the benefits of these efficiency gains even though they have a significant impact on national competitiveness. Professor Teece argued that ideally competition authorities would embrace an overall economic welfare standard, rather than the consumer welfare standard. Just a simple focus on the consumer is not going to get us to examine properly all these issues on the table. But recognizing the difficulty of this, he argued that one solution would be to focus on long-term consumer welfare standard. If competition authorities took this view, they would be forced to consider innovation in a much more thorough way than it is currently considered.

Professor Portuese criticized current policy in both the EU and the United States for being excessively precautionary-based rather than innovation-based. In other words, the focus is on avoiding results that might harm competition, but this can prevent regulators from taking a hands-off approach that might spur innovation and competition. This shifts the burden of proof. He argued that the EU is moving more in this direction to require companies to prove that their actions are not anticompetitive and including implementing penalties while investigations are underway

This has limited its ability to deal with both large Internet platforms and dominant national champions such as CRRC. Despite being among the most innovative and research-focused companies in the world, firms including Google, Facebook, and Amazon have faced growing antitrust scrutiny in both Europe and the United States. For other industries, global markets create an opportunity for large efficiencies of scale, but only if companies are allowed to become big enough. Antitrust policy therefore needs to get away from the current view that zero marginal profits always represent the ideal and to reject the precautionary principle that mergers should be opposed if there is any chance of harm to consumers, even if there is a significant possibility of higher productivity.

A final theme was whether regulators can effectively promote productivity and innovation in their decisions. As Professor Teece noted, that since the 1980s competition policy has recognized that competition can promote innovation. But it has not yet recognized that innovation also spurs competition. As he noted, economist Joseph Schumpeter wrote that the competition that comes from innovation is the most powerful kind of competition. Unfortunately competition authorities prioritize the short-term risk of consumer harm over a longer-term threat to innovation. All of the panelists agreed that antitrust decisions should try to promote innovation and that this requires taking a longer-term view of competition. In some cases higher prices might be temporarily needed in order to give firms the resources and incentives they need to increase productivity. In other cases, domestic firms may need temporary protection so that they can prevent a foreign firm from essentially taking over the market.

How should policymakers weigh these concerns against short-term consumer welfare? How can they ensure that companies given the license to grow actually invest earnings into research and innovation rather than doing stock buybacks? Atkinson recognized the danger that companies would use the call for a national champion to limit competition and raise prices. He proposed creating an affirmative defense in which companies proposing a merger that would otherwise be ruled anticompetitive could demonstrate that efficiency gains outweigh the effects on competition. Professor Teece suggested that the commitment to invest a certain amount into research and machinery and equipment could be made a condition of approving the merger.

All three speakers argued that antitrust policy should be integrated with trade and innovation policy, not continue in their siloed way. Antitrust authorities don’t consider trade or technology policy. For example, in the second antitrust case against AT&T in the 1970s and 1980s, the biggest opponent of breaking up AT&T were other agencies in the U.S. government; in particular the Defense Department and Commerce Departments who worried about breaking up AT&T on dense and national competitiveness. But their voice was ignored because of the focus on short term consumer welfare.

In the absence of this coordination, antitrust must respond to anticompetitive actions by dominant foreign firms, especially those receiving government support. Finally, antitrust authorities need to focus on encouraging innovation. Measuring innovation requires tools other than neoclassical economics. Authorities must be open to the possibility that, under certain conditions, more market consolidation can sometimes result in more innovation and therefore greater benefits to both firms and consumers. In short, competition policy should promote competitiveness as well as competition.