Commentary: Kenneth Davidson, The Disquieting Antitrust of the AMC





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April 11, 2007


Author: Kenneth M. Davidson, AAI Senior Fellow


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The Disquieting Antitrust Consensus of the AMC



I have taken this occasion to write this Commentary on what I see as general failings of the Antitrust Modernization Commission Report.  That Report is probably a reasonable reflection of a consensus among Washington’s large defense-oriented private antitrust firms.  It spells out both what that consensus is and how it could be implemented more fully.  My concern here is less with the details that are in the Report than with the subjects that are not even referred to that are in need of intensive and immediate study.  As this Commentary will argue, this century will require the United States and the world to resolve ominous challenges to our economic survival.  I believe antitrust law and competition policy have potentially great contributions to make to how governments should respond to these problems.  If the subject is modernization, the issues of our future should dominate any modernization report.  Instead, this Report tinkers with the past.


For example, in the International Section, the Report makes only two small recommendations for change and suggests that the rest of antitrust law is in good enough hands to muddle through.  One of the changes advocated eliminating IAEAA, to remove what appears to be a confusing, unnecessary and probably inappropriate precondition for information sharing with foreign antitrust authorities.  The IAEAA appears to require that all information sharing agreements with foreign countries grant a right to the United States and the foreign government receiving confidential antitrust information to use that information for more than enforcement of antitrust laws, that is, the right to use the information to enforce any of its laws.  It appears that the unpredictable breadth of this requirement makes it difficult to come to comprehensive antitrust information sharing agreements with foreign governments, although it has not prevented cooperation particular investigations.  Getting rid of that impediment, as recommended by the AMC, seems sensible.  The other recommendation – to provide direct funding to the US antitrust agencies for their foreign assistance activities (rather than through USAID grants) strikes me as wrong because antitrust (or competition) law is not separate from a country’s commercial laws and judicial system and ought to be integrated with a more comprehensive package of aid to have any prospect of assisting the transitional economies at which the aid is directed.  (See my AAI Commentary, “Assisting Foreign Competition Agencies and the AMC Recommendations,” 10/1/2006)


In the context of the International Section of the Report, these recommendations are perhaps the correction of a minor and obvious statutory error and my personal and perhaps idiosyncratic disagreement about funding procedures.  These two comments on the recommendations in the International Section, my original reason for looking at the Report, did not seem worth my time in writing a Commentary or the time of internet readers.  What struck me as more significant was what appears to me as a misplaced calmness or complacency that pervades this section of the Report.  The Report exudes an aura that there is a world consensus on the meaning of antitrust or competition law; that with a little effort and goodwill we can resolve outstanding issues by comity and deference with developed nations and quickly bring along transitional economies with non-controversial training of foreign competition agencies.  This presentation reminds me of a statement attributed to Secretary of State John Foster Dulles at a foreign ministers meeting of CENTO countries in the 1950s.  CENTO was a US/British military alliance with predominantly Moslem Middle Eastern countries.  Dulles was alleged to have opened his remarks by saying, “I feel confident that, as we are all good god fearing Christian gentlemen, we will be able to resolve the difficult issues facing us at this conference.”


One of the most characteristic qualities of American antitrust law is an almost universal agreement that the words of our antitrust statutes have little or no intrinsic meaning.  The extent to which the laws have become workable is the result of relying on judicial interpretations that have changed dramatically over the past hundred plus years, sometimes within very short time periods.  At one time the often acerbic and acute Justice Potter Stewart said, “The sole consistency that I can find is that under sec. 7 [of the Clayton Act], the Government always wins.”  That consistency, at least, no longer exists.  What then gives this Commission such confidence that there is, even in the United States, a consensus on how the antitrust law should be interpreted and applied? 


I do not know the answer to this question.  I am told by persons who know the members of the AMC personally and/or have followed their careers more closely than I have that this group does have a consensus (except where noted in footnotes to their Report).  They agree about the general meaning of US antitrust law and how it should be applied.  I find this conclusion a little hard to understand given the Report’s calls for greater transparency in merger decision-making by the US antitrust agencies and the elimination of preliminary injunctions for FTC administrative trials in merger cases.  This latter recommendation seems an anomalous way to gain more uniformity in merger cases when cases would be decided by any of the hundreds of District Court Judges that can hear merger injunction cases.  Even in the international area, the AMC reports that American law is in some disarray.  Congress apparently increased confusion about the extraterritorial jurisdiction of the Sherman Act when it passed the FTAIA, or at least the Supreme Court increased confusion when it applied that act.  Nevertheless, the AMC does not advocate legislation to clarify this potentially controversial issue.  It is confident that the courts can muddle through, perhaps with the help of briefs written by them and their law firms.


As a fairly regular reader of the American Antitrust Institute web site, I can report that there are a lot of people -- scholars, lawyers, business groups -- who do not agree with much of the consensus that the AMC seems to assume.  See, for example, the recent article by Neil Averitt and Robert Lande, Using the “Consumer Choice Approach” to Antitrust Law, 74 Antitrust L.J. 175 (2007).  The differences are not just about doctrines in particular cases, whether per se rules should, or should not, be used but more fundamental differences about how markets work, how businesses and consumers make decisions.  They seek to integrate non-price consumer choice criteria and reintroduce non-economic values into the antitrust decision making process.  Others, such as Michael Porter and Elizabeth Teisberg, assert in their new book, REDEFINING HEALTH CARE, that the benefits of competition – lower prices, better quality, and innovation – can be achieved only by transforming the structure of the health care industry.  These views are large departures from the current consensus of the large Washington antitrust law firms.  History shows such differences have been reflected in changing court decisions as conventional antitrust wisdom and political winds shift.


I am not suggesting that there are no signs of domestic or even international convergence with what appears to be the AMC view of antitrust law.  Without changing a word of Articles 81 or 82 of their treaty, the EU has recently issued merger guidelines that look remarkably like the joint guidelines issued by the US Department of Justice and the Federal Trade Commission.  They also appear to have abandoned earlier interpretations that would have made high prices charged by monopolists to be an abuse of dominance. (But see a recent contrary decision by the Competition Tribunal of South Africa, Harmony Gold Ltd., Case No. 13/CR/Feb 04, 27/3/2007)  As great as these instances of EU convergence with US law are, they do not resolve the problems of application in major cases like the Microsoft abuse of dominance case or the GE/Honeywell merger.  The Report concedes that these discrepancies are troublesome but exudes confidence that such differences will be worked out. 


I am not entirely pessimistic that, in the short run, we may reach workable agreements with OECD countries, but I am certainly less sanguine than the AMC that this convergence will be durable.  The history of the twentieth century shows that when international economic problems arise, the tendency of nations is to seek relief by protectionism, both in the creation of new laws and the application of existing laws such as competition laws.  There is less precedent for solving international economic crises by spreading the impact of economic hardship to lessen everyone’s economic burdens.  We live in a world whose economy will have to confront enormous problems in the next fifty years.  Quite apart from the dangers of international terrorism and of countries using control over oil supplies for political purposes, there are the dramatic and difficult to solve problems posed by global warming, rising sea levels, increased pollution by China, India and other rapidly developing nations, pandemic viruses, a global water shortage, and the prospect of collapsing social security networks as populations age in OECD countries.  The still unresolved reconstruction of New Orleans after the Katrina hurricane is but one example of our unpreparedness to deal with large disasters with existing public/private relationships.  You may ask what do these and other potentially impending disasters have to do with antitrust? 


My answer is that each of these problems could affect substantially the boundaries between what have been free markets and what may become regulated markets.  Chapter IV of the AMC report -- Government Exceptions to Free Market Competition -- has a one note theme that the presumptive answer should be deregulation in favor of a free market. This presents a rosy view of deregulation as a panacea that places the full burden of continued regulation on those who support existing regulation or proposed the need for new regulation.  Any analysis today of competition policy should aggressively look toward the future with an eye to applying competitive solutions as a way of resolving some of these problems.  The experiments in trading pollution rights and deregulation of electricity markets have begun that work but we have far to go in those and other problem areas that are rapidly approaching.  The very basis of a free market that encourages unlimited consumption is simply not sustainable.  It should be clear to all that predicted ecological disasters would occur if the rest of the world suddenly produced and consumed at the same rate as the United States does today. It is unwise to treat the regulation/competition debate as if it were over except for cleaning up antiquated and misguided efforts of the past.


The issue is, I think, whether we can redirect, alter, or limit consumption without losing the primary benefits of a free market.  First among these benefits, I would include choice (of consumer goods, jobs, and investment) and innovation.  It is not news that innovation has been the salvation of the modern world from the green revolution, to mass production and to inexpensive highly sophisticated electronic devices.  It will also be innovations that will rescue us, if anything does, during this century.


Antitrust has long given lip service to how a competitive economy, a free enterprise system, promotes innovation.  And at a certain level, we can see the operation of competition law by prohibiting agreements not to introduce innovations or not to support research.  But it is much harder to say that innovation is as well protected by merger law or monopolization law.  Merger cases have sometimes looked at competition in research markets but generally limited any remedy in those cases to instances of identifiable future products.  No recognition is given to the innovation/productivity theories of Michael Porter and others who insist that innovation is the product of clusters of competitors.  His theories might well form a basis for reversing the burden of proof on efficiencies.  The notion that monopolization or abuse of dominance law has no viable method of limiting profits is a confession of failure of competition-based thinking when we see large disasters like the absence of HIV-AIDs medicines for poor populations or food and shelter for populations devastated by tsunamis and other crises.  We need to develop ways of promoting market-based solutions that deal with real social problems.


Simply waiting for catastrophes that will force the adoption of non-market solutions will leave us more unprepared than we were for World War I and II when we assumed we might avoid involvement in those wars we had few or no armed forces.  We should learn from the remaining regulated sectors and the newly deregulated sectors the benefits as well as the impediments created by regulation.  Price controls during World War II for example, unlike those of the first World War, led to an economic boom not a bust.  The foreign aid of the Marshall Plan used very light regulation when it gave money to Western European countries that submitted redevelopment plans.  The billions of Marshall Plan dollars were effective seed money that gave those countries the confidence to invest many times greater amounts of their own money than was provided by the United States.


I am suggesting that the simplistic neoclassical free market answers advocated by the AMC are not adequate to the challenges we currently face and will be less adequate to resolve the challenges of the near future.  Nowhere is this failure to consider the realities of the world more clear to me than the casual attitude toward technical assistance to foreign competition agencies.  The clarity to me is simply a result of having visited transitional economies and worked with them to develop competition laws.  Without repeating all what I have said in earlier Commentaries, it is evident that moving to a market economy and the imposition of competition laws is a difficult and complex process requiring, in many cases, large cultural changes.  Before making its recommendation on supporting foreign assistance by the US antitrust agencies, the AMC should have looked at the scope of the problems of establishing market economies, the effectiveness of our assistance programs, and the magnitude of the resources required to address the problems.  The failures of the AMC here, as elsewhere, are principally ones of omission.