| Jonathan Baker
Competition Policy, Public Enforcement, Private Enforcement, Mergers, Collusion, Buyer Power
AAI sat down recently with Jonathan Baker, Research Professor of Law at the American University Washington College of Law and long time member of the AAI Advisory Board. His forthcoming volume, The Antitrust Paradigm, is due for release on May 6, 2019 from the Harvard University Press. In this seminal and comprehensive work, Dr. Baker poses key questions on one of the most pressing topics of our day, the role and importance of antitrust, and provides his recommendations on how to revitalize and strengthen this critical area of the law.
You’ve worked in the antitrust field – as a scholar, government enforcer, and expert economist – for a long time. Why did you decide to write The Antitrust Paradigm now?
For much of my professional career, arguments about antitrust law and enforcement policy rarely gained attention outside the antitrust tent. Less interventionist Republican administrations and more interventionist Democratic administrations differed the most on exclusionary conduct. But the D.C. Circuit’s en banc decision in Microsoft, which strongly supported enforcement in an exclusion case, was, notably, joined by prominent antitrust conservatives. That high profile decision pointed to a broad consensus over antitrust principles.
I wrote The Antitrust Paradigm because I’m no longer so complacent. Instead I’m worried about growing market power and about whether we can sustain public support for antitrust. My book explains why we should worry and what to do about it.
Why did your views change?
My views have changed because recent economic evidence – much of it from the past five years – shows that market power has been growing for decades.
Can you give an example?
The U.S. brewing industry illustrates the problem. Two firms – the owners of Budweiser and Miller – now account for three-quarters of all beer sold, aggregating over their brands. There are some smaller firms, including a large number of craft brewers. But in general, craft brewers are small, have high costs, and can’t easily expand. They don’t place a strong competitive constraint on the major firms.
As the brewing industry has grown more concentrated, the major brewers have increased their ability to exercise market power. A good recent study employing the modern empirical economic toolkit finds that a recent horizontal merger augmented their market power. The merger led to higher prices in two ways: through its unilateral effects and by facilitating coordination. The economic evidence shows that the problem we see in brewing is occurring in other economic sectors too.
What kind of economic evidence is now available?
Recent studies identify market power in a range of major industries like brewing and hospitals. Other studies show an upward spike in average price-cost margins economy-wide. Still others attribute a secular decline in business investment and the increasing share of GDP that goes to profits to growing market power. Market power is also a plausible explanation, at least in part, for a slowing rate of business startups and other types of diminishing economic dynamism. I discuss additional economic evidence of market power in my book. Each study has strengths and weaknesses, but the weaknesses are not the same, so the whole of the evidence is much greater than the sum of its parts.
Aren’t there other possible explanations for what we are seeing in the economy?
Some of the evidence is also consistent with growing scale economies and temporary returns to first movers in information technology, but those benign explanations are only part of the story. Taken as a whole, the recent economic evidence makes it clear that market power is on the rise.
Isn’t antitrust law supposed to rein in market power?
You’re right to suggest that growing market power means that antitrust isn’t working as well as it should be. For example, market power in brewing can be attributed, at least in part, to horizontal mergers that were not challenged. I think of what we are now seeing in the economy as today’s antitrust paradox: substantial and widening market power notwithstanding our extensive antitrust institutions.
Why didn’t antitrust enforcement prevent the problem?
We got to this place in part because of the way antitrust policy changed in the late 1970s and 1980s, under the influence of Chicago school commentators. The 1970s had been a difficult decade economically. In part for that reason, the political coalition governing regulatory policy switched from center-left to center-right. The political system then took what was in effect a bet offered by the Chicagoans: if antitrust rules were modified to allow firms to capture more efficiencies, that would boost the economy with little or no increase in the risk of market power.
The recent evidence on growing market power unaccompanied by greater economic dynamism shows that the Chicagoans lost that bet. While growing market power has a number of causes, inadequate antitrust rules and insufficient enforcement are likely important ones.
By calling your book The Antitrust Paradigm, were you encouraging a comparison with Robert Bork’s book?
In part. As my subtitle, “Restoring a Competitive Economy,” suggests, I think that antitrust rules must be made stronger than the ones Bork and other Chicagoans recommended in order to attack today’s problem of growing market power.
You said you are worried about sustaining political support for antitrust. Why is that?
Inadequate antitrust rules that permit a growing exercise of market power may benefit large businesses on average, but they slow overall economic growth and give consumers, workers, and farmers a smaller share of the resulting economic benefits. I worry that in response, many people will give up relying on antitrust to protect competition and begin to look instead to policies like thoroughgoing economic regulation or breaking up big companies simply because of their size.
Why would a loss of political support for antitrust be harmful?
That outcome could usher in a political battle between advocates of extensive regulation, on the one hand, and advocates of a hands-off policy of business self-regulation, on the other, that squeezes out antitrust policy. In other words, if the overall economic benefits of markets are not shared widely, the policy framework that now allows large businesses to pursue efficiencies, while relying on antitrust enforcement to prevent them from acting anticompetitively, will be threatened.
The U.S. adopted that framework during the 1940s. It makes antitrust a positive sum economic policy. If it becomes undone under pressure from growing market power, public policy toward large firms could readily turn into a zero-sum distributional contest, overcorrecting back and forth. That’s one way of interpreting regulatory policy during the early decades of the 20th century. A return to that kind of politics would harm economic growth and overall prosperity.
Are you saying that we need to strengthen antitrust rules?
Yes. From an error-cost perspective, we have learned that the balance between deterring harmful conduct and not discouraging beneficial conduct is skewed. Today, in the name of protecting beneficial conduct, antitrust systematically under-deters competitive harms, so the rules need strengthening.
How should we decide which rules to make stronger?
Courts frequently rely on presumptions when applying the antitrust laws. That’s because presumptions, like the Philadelphia National Bank presumption for horizontal mergers, give courts a head start in understanding when injury to competition is more likely.
My book looks to economic theory and empirical evidence to identify presumptions that would improve antitrust enforcement. For example, with respect to horizontal merger law, I explain why courts should give greater weight to market concentration and its prospective increase from merger than they do today. I also explain why courts should supplement that structural presumption with two new presumptions, both suggested by the merger guidelines: first, that a merger between sellers of close substitutes creates unilateral anticompetitive effects and, second that the acquisition of a maverick creates coordinated anticompetitive effects.
Do your recommendations extend beyond horizontal merger policy?
Very much so. My book talks about ways to address a number of distinctive competitive threats posed by the information economy, often by recommending new presumptions to improve the error-cost balance. The book has chapters on algorithmic coordination; exclusionary conduct by dominant platforms; threats to innovation from lessened competition; and harms to suppliers, workers, and platform users.
Let me ask you about one of those topics. Why did you focus on exclusionary conduct by dominant platforms in addition to collusive threats like algorithmic price-fixing?
Anticompetitive exclusionary conduct is one of antitrust’s core concerns. It is a particular concern in markets in which strong network effects push toward a winner-take-most market, as in some markets with prominent online platforms. In that setting, we rely mainly on small and potential rivals to provide competitive constraints – in which case exclusionary conduct by dominant firms that impedes or eliminates those rivals can be particularly harmful.
Do dominant online platforms present new kinds of exclusionary threats?
As your question suggests, many familiar exclusionary mechanisms, like exclusive dealing or most favored nations provisions, can be employed by dominant platforms. But there are also novel exclusionary threats. One example involves the collection and use of big data, by which I mean detailed information about numerous individual buyers or suppliers. A dominant platform may be able to obtain such data from the end users that interact on its platform, which may include consumers, and use it to harm competition by excluding rivals.
How can big data be used to harm competition by excluding rivals?
Let me talk about data involving customers. To date, the antitrust conversation around such data has primarily involved three topics: whether privacy is an important non-price dimension of competition, the possibility of perfect price discrimination, and whether access to data is an entry barrier. The last possibility is an exclusionary issue. My book treats it as an example of the way that dominant firms can harm competition by denying rivals scale economies.
The book also adds a fourth concern: the possibility that a dominant platform can use superior access to customer data to discourage aggressive competition by rivals, by targeting their most loyal customers with discounts. That’s a mechanism by which a dominant platform like Amazon – to pick a company that may know more about customers than its rivals do – could hypothetically exclude competitors. The excluded rivals may be platform rivals like Walmart, or branded product producers who sell products that compete with Amazon’s private label products. I am mentioning Amazon because the example is easy to grasp, not to suggest that Amazon is doing this today or that its conduct is unusually troublesome.
Your book talks about improving the antitrust rules applied by the courts. What about new legislation?
My book is focused on persuading the courts, because that’s where antitrust rules are mainly formulated. Also, I wouldn’t expect the political branches to enact strong new antitrust legislation without a 1932-style political realignment. On the other hand, a legislative effort can pay dividends merely by increasing public awareness of market power and its costs, and nurturing an emerging p0litical mobilization against market power. These outcomes can encourage the political branches to support more enforcement, and indirectly influence the courts. And there is a chance that a legislative effort would succeed. So, I support efforts to revise the antitrust laws in Congress as well as to strengthen antitrust rules in the courts.
How can we convince the courts to strengthen antitrust along the lines you recommend?
The elephant in the room is the Supreme Court, which has not yet exhibited an understanding of the problem or signaled an interest in changing course. The unanimous en banc decision of the D.C. Circuit in the Microsoft case, from 2001, suggests one way forward. The decision shows that when strong facts support a sensible economic analysis, judges of all perspectives can reach a strong pro-enforcement result, even when the environment is highly politicized, the case is prominent, and the stakes are high. Today’s Supreme Court sees the antitrust laws as advancing economic goals. The best way to persuade it to strengthen antitrust is to rely on arguments rooted in modern economics and supported by strong evidence.
Where should we look to find good economic arguments for strengthening the antitrust laws?
Start with my book! One chapter takes on nine erroneous arguments about markets and institutions that have been used to defend under-enforcement. Other chapters defend pro-enforcement presumptions on economic grounds.
Of course, economics doesn’t stand still. As we learn more, we can and should refine and improve our views and the arguments we make. Based on what we know today, though, we must make the effort to strengthen antitrust. By looking to the antitrust paradigm, and renewing it with contemporary challenges in mind, we can hope to restore a competitive economy.
