Antitrust Bills Under Fire From Former Chief Economists
As Congress moves forward to adopt radical antitrust bills, these bills’ unintended consequences and welfare costs continue to be widely discussed. One of the last and most interesting discussions took place a few days ago: former chief economists of government antitrust agencies and prominent scholars set off the alarm bell and argued against those bills–especially the AICOA bill (S.2992) and the OAMA bill (S.2710) which have recently passed the Senate Judiciary Committee. ITIF’s Schumpeter Project too organized a panel with former chief economists who pointed out the complexity and problems of revising merger guidelines.
USC Gould University professor Daniel Sokol convened on April 20, 2022, in a panel composed of Berkeley university professors Richard Gilbert (chief economist at the DOJ under Bill Clinton and Advisory Board member of ITIF’s Schumpeter Project), Carl Shapiro (chief economist at the DOJ and member of the Council of Economic Advisors under Barack Obama), Michael Katz (chief economist at both the DOJ and FCC under Bill Clinton and George Bush), Daniel Rubinfeld (chief economist at the DOJ under Bill Clinton) and Joseph Farrell (who served at the DOJ, FTC, and FCC under the Obama and Clinton administrations). All served as chief economists at the U.S. Department of Justice’s Antitrust Division. All served during Democratic administrations. Now, they warn against antitrust bills, which the Biden administration supports.
What are their concerns? The panelists’ main concerns are that the antitrust bill imposes obligations and prohibitions that will inevitably generate unintended consequences on the innovation economy and consumer welfare. As Richard Gilbert put it, choosing the best bill among the antitrust bills currently discussed in Congress is “a little bit like asking you what is my favorite flavor of COVID-19: I think they all have some issues.”
First, these bills create unfair competition: A handful of companies would become subject to the bills’ harsh prohibitions whilst their direct competitors can engage in the very practices these bills despise. These companies are selected according to discretionary and questionable quantitative thresholds. Carl Shapiro clearly stated during the panel that he dislikes antitrust bills “based on size”–such size that uniquely characterizes the AICOA and OAMA bills as opposed to traditional antitrust laws.
These companies’ rivals cannot engage in the prohibited practices in the bills only because these practices ironically are pro-competitive and not anticompetitive. Should the bills’ prohibitions be applied indistinctly to all online platforms, companies would be harmed, and consumers made worse off. For instance, should the ban on self-preferencing of the AICOA bill be applied to the entire economy, shops would not be able to promote their private label products as cheaper alternatives to branded products, platforms would not be able to offer ancillary services to their core business models as a way to challenge incumbents in adjacent markets, and digital intermediaries would no longer be allowed to leverage their capabilities to create new markets hence enjoying a first-mover advantage.
To illustrate these examples, supermarkets would be prevented from offering private label products to compete with branded products, travel apps would be prohibited from innovating to compete with insurance companies, and multi-sided platforms would no longer be allowed to open up new technology markets. In short, it would generate an outcry should these bills prevent Target from offering its own products –thereby preventing price competition. But these pro-competitive and pro-innovation practices will no longer be available to the identified companies so that, say, Amazon will no longer promote Amazon Basics products at the expense of consumers’ purchasing power, Google will no longer provide Google Flights at the benefit incumbents insulated from competition, and Apple will be prevented from integrating its services with a potential creation of augmented reality products. And yet, because the antitrust bills prohibit these pro-growth, pro-competitive conduct only to a handful of tech giants, the supporters of the bill attempt to convince other members of Congress and the general public that these bills restore competition. These bills deny competition for a few arbitrarily identified companies, and they will stifle innovation.
In other words, the panelists identified the unintended consequences of these bills, which discriminate against companies based on size rather than preventing consumer harm pursuant to the tradition of antitrust laws. The size-thresholds inherent to these bills signal the drafters of the bills’ understanding that enlarging the prohibited practices to the entire economy would lead to banning pro-competitive, pro-growth practices. Therefore, following the prevailing populist techlash, which ignores economics and weaponizes antitrust, the drafters of the bills limited the prohibition of pro-competitive, pro-growth practices to corporate scapegoats which capture media attention. As Mickael Katz aptly noted, “drafters have no clue what those policies would mean in practice.”
Second, these bills revolve around the notion that the regulated firms ought not to “exclude” trading partners. So-called “fair and non-discriminatory” treatments are de facto imposed on these companies whenever they interact with other businesses. The risk is to treat these regulated companies as de facto essential facilities–a trend already materializing in the European Union, where the General Court judged in November 2021 that Google should be treated as an essential facility, thereby paving the odd way for public utility regulation in highly dynamic and innovation markets.
But, the bills prohibit “exclusionary conduct” with a broad understanding of exclusion which will inevitably be tantamount to, as Michael Katz argued during the panel, an “unlimited duty to deal” with rivals. Such duty contradicts the competitive process these bills pretend to preserve: It artificially forces companies to deal with some companies they do not want to deal with while depriving them of any value and practicality of exclusive dealings these companies could have had with other companies. Also, disruptive innovation per se harm rivals: It “strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives,” as Joseph Schumpeter eloquently foresaw. For instance, the ever-increasing integration of services such as GooglePay, ApplePay, or FacebookPay with their respective platforms constitutes a formidable challenge for historically powerful and well-entrenched financial institutions such as banks. Should these bills consider that the absence of the banks’ financial instruments on these platforms constitutes an “exclusionary conduct,” the bills will inevitably lead to reinstating the strategic positions of incumbents, thereby depriving the disrupters of the entrepreneurial incentives to innovate on the first place.
From a dynamic perspective, the bills’ broad and unhinged conception of “exclusionary conduct” will irremediably lead to a reduced ability to disrupt markets, a disincentive to innovate, massive opportunity costs for consumers, and, perhaps most ironically, a protection of incumbents in different markets in the name of competition. Mickael Katz lamented the absence of the bills’ “well-defined boundaries” while Richard Gilbert regretted the bills’ per se broad prohibitions “without saying exactly what that means”: These legal indeterminacies and regulatory uncertainties will have a chilling effect on innovation and a harmful impact on consumers.
Third, the panelists lamented the bills’ denigration of the role of the courts: Blanket legislative prohibitions ignore the balancing exercise inherently part of the rule of reason and overlook the Common law nature of antitrust enforcement. Daniel Sokol rightly highlighted that “the real decision-makers are the courts.” Carl Shapiro correctly emphasized that “anytime you have a bright-line rule, there is going to be a controversy…It is a fiction that you can simply fix things with bright-line rules.” Indeed, the best way to regulate competition and enforce antitrust to prevent anticompetitive conduct remains the judicial process: Judge-made law better preserves adherence to the rule of reason, efficiency considerations, and, more generally, to the rule of law, which provides greater legal certainty. In other words, the enforcement of antitrust laws ought to remain predominantly dynamic, using the evolutionary process of the court system. These procedural and substantive requirements to adhere to a dynamic perspective are essential to principles of dynamic antitrust.