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Competition in Freight Rail: Unpacking Consolidation, Concentration, and Remedies in a Critical Part of the U.S. Transportation System

In this episode, AAI President Diana Moss sits down with two experts to discuss the state of play in competition in freight rail. Freight rail is a vital part of the U.S. transportation system. It is the second largest mode of transportation in the U.S. and industry sources estimate that freight rail shipments will increase 30% by 2040. Railroads, and the shippers that transport on them, are responsible for the movement of critical commodities and products involving agriculture, energy, automotive, chemical, construction, and forestry. But we don’t hear much in the news about competition in freight rail, despite the fact that the sector has been home to massive consolidation over the last half a century. Since about 1950, over 80 railroad mergers were consummated in the U.S. Today, there are only five domestic Class I railroads operating in the U.S.—two in the west, two in the east, and one down the middle. AAI’s guests on this episode are experts in rail competition and they will unpack what consolidation means for shippers and consumers. They start at the 10,000 foot level and take deeper dives into the adverse effects of railroad mergers, remedies for lost competition, and regulatory policy initiatives for addressing competition, such as reciprocal switching, and others.

Moderator:

Diana Moss, President, American Antitrust Institute

Guests:

Russell Pittman earned his Ph.D. in economics from the University of Wisconsin in 1979. He is Director of Economic Research in the Antitrust Division of the U.S. Department of Justice and a visiting professor at the Kyiv School of Economics. Dr. Pittman has consulted regularly with antitrust enforcers and economic reformers in transition and developing economies, and has acted as an advisor on railroad restructuring projects in Brazil, China, Mexico, Poland, and Russia. He served on the Core Team of the World Development Report 2002, Building Institutions for Markets. He also served on the team of experts for the Russian Regulatory Reform Review carried out by the OECD and the European Conference of Ministers of Transport in 2003-2004 and was one of the three co-authors of its report, Regulatory Reform of Railways in Russia. He is the author of the chapter on railways in the Oxford Handbook of the Russian Economy (2013). He served on the team of experts for a project of the OECD and the International Transport Forum on freight rail regulation in Mexico, co-authoring two reports, Establishing Mexico’s Regulatory Agency for Rail Transport (2016) and Regulatory Governance of the Rail Sector in Mexico (2020).  Most recently he is the author of the chapter on the US in the Handbook on Rail Regulation: Concepts and Practice (2020).

 

Jeffrey Sloan is a Senior Director for Regulatory Affairs at the American Chemistry Council (ACC), a national association representing the leading companies engaged in the business of chemistry.  He focuses on transportation policy, overseeing a broad range of advocacy initiatives on freight rail and hazmat transportation safety. He is the staff lead for ACC’s Distribution Committee and a member of the U.S. Department of Transportation’s Rail Safety Advisory Committee. Jeffrey has been with ACC since 1996, with various roles including Policy Director for ACC’s Chlorine Chemistry Division. Before coming to ACC, he worked as a staff member in the U.S. House Of Representatives. He earned a Master’s degree in Environmental Policy from Indiana University and a Bachelors degree in Political Science from James Madison University.

 

 

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AAI Asks D.C. Circuit to Overturn Dismissal of States’ Monopolization Case Against Facebook (New York v. Facebook)

AAI has submitted an amicus brief urging the D.C. Circuit to overturn a district court ruling granting Facebook’s motion to dismiss a monopolization lawsuit brought by 46 states, the District of Columbia, and the territory of Guam (“States”).

In New York v. Facebook, the States allege that Facebook acquired some of its potential rivals and intentionally injured others as part of a coordinated scheme to deter future entry in the personal social networking services market.  The alleged two-prong “buy or bury” scheme was comprised of actual and attempted exclusionary acquisitions, a deceptive “open first–closed later” network-access strategy, discriminatory API-access policies, dealing on anticompetitive terms, and sabotaging rivals’ content.  Although some of the alleged acts included in the scheme injured or eliminated existing rivals, the alleged goal of the scheme was to build a competitive “moat” around the company in the markets where it competes, in an effort to thwart nascent and future competitors and deter entry.

The district court dismissed the States’ claim because it believed the States did not allege harm to competition that could be redressed with injunctive relief.  It held that the alleged discriminatory API-access policies, standing alone, were not illegal as a matter of law; they were only potentially illegal to the extent they were actually implemented in specific instances, and here the last specific instance in which the policies were allegedly implemented occurred five years ago.  Therefore an injunction would be inappropriate because it would not remedy ongoing and contemporary harm.

The AAI brief calls attention to four errors in the district court’s analysis.  First, the district court failed to evaluate the alleged “buy or bury” scheme as a whole, as Supreme Court law requires.  It reviewed the alleged exclusionary acquisitions separately from the alleged conduct, notwithstanding that the States allege they were part of a unified scheme.  The district court’s improper approach led to its second error, which was to misclassify conditional dealing allegations as a refusal to deal.  The court treated the specific instances in which Facebook allegedly revoked network access to existing competitors as alleging refusals to deal harming existing competitors, when their relevance to the scheme was that they deterred future entrants.  The harm to existing competitors was a means to that end, not the end itself.

Viewed as a coordinated scheme, the States’ allegations make more sense as conditional dealing because of how they fit together with the alleged acquisitions.  Both acquisitions and conditional deals give a monopolist power to shape future entry decisions; refusals to deal eliminate any relationship the monopolist might lever to steer the other firm’s future behavior.  Moreover, the dealing allegations are clearly conditional: they allege that Facebook is willing to deal with developers and other complementors on the platform provided they promise not to facilitate entry into markets where Facebook competes, or to enter themselves.  Enjoining that kind of behavior does not trigger the same policy concerns that courts have raised in cabining liability for unilateral refusals to deal.

The district court’s third error was to fail to properly credit the States’ “open first-closed later” strategy.  The States allege that Facebook pledged a level playing field for apps that compete with Facebook as a means to attract valuable content and then reneged on its promise once the market tipped in its favor.  In a network market, profiting from dishonesty after inducing reliance on an open system is a well recognized form of deception, and courts assume that deception can support a monopolization claim on a motion to dismiss because it is categorically incapable of generating procompetitive benefits.

The district court’s fourth error was its failure to recognize that injunctive relief can redress ongoing harm.  It’s distinction between “having” and “implementing” anticompetitive policies has no basis in antitrust law; both policies and particular acts can support a Section 2 claim if they cause anticompetitive effects.  Moreover, deception is a “particular act” that can support a monopolization claim.  If the States’ allegations had been properly credited, the district court would have realized that injunctive relief can remedy ongoing harm by reopening an unlawfully closed system.

The brief was written by AAI Vice President of Legal Advocacy Randy Stutz, with assistance from AAI Vice President of Policy Laura Alexander and several AAI Advisory Board members.

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AAI Offers Guidance to Ninth Circuit on Defining Digital Markets (Epic v. Apple)

AAI filed an amicus brief urging the Ninth Circuit Court of Appeals to focus on antitrust first principles when defining technology product markets.

Epic Games, Inc., producer of the popular Fortnite video game franchise, sued Apple Inc., alleging that Apple monopolized markets for mobile app distribution and in-app payments on iPhones through a combination of contractual restraints on developers, technological barriers imposed on consumers, and anti-steering measures.  Epic alleged Apple’s conduct violated Sections 1 and 2 of the Sherman Act, as well as California’s Cartwright Act and Unfair Competition Law (“UCL”).  After a three-week bench trial, the district court found Apple had not violated the Sherman Act, but that its anti-steering measures violated California’s UCL.

Market definition was central to the district court’s resolution of Epic’s Sherman Act claims.  Epic alleged that relevant markets limited to app-distribution services and in-app payments for iPhone exist because users are locked in to iPhone-specific services once they purchase an iPhone.  Apple prevents developers from distributing apps to iPhone users, except through its App Store, and prevents most apps in its App Store from using any in-app payment system except Apple’s.    The district court held that no such relevant markets exist, and that the relevant market applicable to Epic’s claims is the mobile gaming market, where Apple lacks market power.  The court found for Epic on its UCL claims, however, holding that Apple’s restrictions on app developer communications with iPhone users amounted to unfair competition, because they deprived consumers of critical information.  Apple and Epic cross-appealed.

The AAI brief argued that the district court’s approach to market definition was inconsistent with its findings that iPhone users face switching and information costs and that Apple’s conduct had anticompetitive effects on iPhone users’ and developers’ app-distribution and in-app payment choices.  The district court’s fundamental error was a failure to adhere to first principles and confront market realities when applying old precedents to new markets.  In its brief, AAI explained how the district court misunderstood the significance of its own findings of switching and information costs and market power in its holding that iPhone app-distribution and in-app payments are not relevant aftermarkets.  Instead, AAI urged, the district court should have realized that the presence of switching and information costs, and direct evidence of Apple’s ability to exercise market power over these products, necessarily suggests these are relevant antitrust aftermarkets.

The AAI brief also argued that the district court  fell into an analytical trap when held that mobile handsets and operating systems form a single product and thus a single market and its holding that app-distribution and in-app payments are part of a single product and thus a single market; it mistook Apple’s decision to limit consumer choices for an accurate reflection of what consumers would choose in a free market.  Instead, AAI urged, the district court should have focused on what consumers would choose if Apple did not artificially constrain those choices.

Finally, the AAI brief argued that the district court  applied Ohio v. American Express, 138 S.Ct. 2274 (2018) (“Amex”), without sufficient attention to whether the economic conditions underlying that decision applied to the markets at hand.  The AAI brief argued that Amex is rooted in a particular set of economic circumstances that are not satisfied by app-distribution services.  In addition, the AAI brief argued that the district court applied Amex too broadly, ignoring clear evidence of competition in a one-sided market because it wrongly found an expansive two-sided market under Amex.

The brief was written by AAI Vice President of Policy Laura Alexander and AAI Vice President of Advocacy Randy Stutz.

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AAI Issues 2021 Impact Report: Details Work to Strengthen Antitrust Enforcement and Advance Competition Policy

The American Antitrust Institute issued its 2021 Impact Report. The report highlights AAI’s work in 2021 to strengthen and invigorate enforcement of the antitrust laws and to support comprehensive competition policy. Over the past year, AAI’s progressive research, education, and advocacy programs once again produced some of the most respected, cited, and talked-about analysis. The report details how AAI’s work positively impacts the consumers, workers, and businesses that are at risk from the exercise of market power from mergers and by dominant firms and oligopolies. Looking forward to 2022, AAI will continue to expand its resources, networks, and impact to serve the public interest.
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Download the Impact Report

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AAI Asks Third Circuit to Remove Inappropriate Roadblocks to Pay-for-Delay Class Actions (In re Niaspan Antitrust Litigation)

AAI has submitted an amicus brief urging the Third Circuit Court of Appeals to overturn a district court ruling denying class certification to end-payer victims of an allegedly illegal reverse payment settlement on grounds that identifying class members would not be administratively feasible.

In In re Niaspan Antitrust Litigation, the plaintiffs are a proposed class of health insurers and health plans that pay for prescription drugs on behalf of patients.  They allege that the defendants, brand and generic manufacturers of the drug Niaspan, which is used to treat lipid disorders, entered an illegal pay-for-delay agreement, harming payors and patients.  The district court denied certification of the proposed class pursuant to the Third Circuit’s heightened “ascertainability” requirement, which requires an “administratively feasible mechanism” for identifying class members as well as an objective class definition.  Whereas all courts interpret Rule 23 to require an objective class definition, the Third Circuit’s administrative feasibility test is controversial and arguably grafts extra-legal requirements for class certification onto the requirements set forth in Rule 23.

As AAI chronicled in the most recent issue of its biannual Class Action Issues Update, each of the last six circuit courts to consider a heightened administrative feasibility requirement have rejected it, including the Second, Sixth, Seventh, Eighth, Ninth, and Eleventh Circuits.  Mindful of criticism from other circuits and the potential for inconsistency, the Third Circuit’s more recent ascertainability cases have softened the administrative feasibility requirement.  The district court’s decision in Niaspan, which was based entirely on administrative feasibility, put the issue squarely before the appellate court in an antitrust case.

The AAI brief argues that the Third Circuit’s administrative feasibility requirement has been evolving to focus on practical considerations, which is necessary for the court’s ascertainability rules to accord with the language of Rule 23.  Among other things, the Third Circuit’s recent cases show that classes are sufficiently ascertainable when class members are capable of being identified using data in combination with affidavits, which was true in this case.  Under a proper reading of the court’s standards, end-payor classes are very likely to be ascertainable in the pharmaceutical industry in particular, because a combination of legal and regulatory requirements, practical business needs, and financial incentives all ensure that rich data involving prescription drug purchases is collected and retained.  Moreover, sound policy reasons support the recognition of administrative feasibility to help combat the harm caused by pay-for-delay agreements, which has been a top priority of the federal government and leading health policy advocates.

The brief was written Berger Montague Shareholder and UC Hastings Research Professor Joshua Davis, with assistance from AAI Vice President of Legal Advocacy Randy Stutz.

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New AAI Report Unpacks Acquisitive Growth in the Digital Sector, Warns of Up-and-Coming Players, Further Expansion, and Need for Sector-Wide Approach to Competition Policy

AAI has issued the new report Anticipating the Next Generation of Powerful Digital Players: Implications for Competition Policy. The U.S. confronts large “digital business ecosystems” (DBEs) that exercise their market power to maintain dominant positions in search, social media, services, app stores, and eCommerce—to the detriment of competition, consumers, workers. The digital sector poses enormous challenges for competition policy and antitrust enforcement in restraining harmful consolidation and deterring anticompetitive conduct. These hurdles are growing. For example, in failing as the first line of defense against rising concentration and dominance, lax merger enforcement has put enormous pressure on already impaired monopoly law to address market power concerns in the digital sector. Yet the U.S. is making relatively slow progress in addressing the significant competition concerns in the digital sector. While political attention and legislative initiatives remain focused on the largest players, empirical analysis in this report indicates that a growing “next generation” of powerful digital players is on their heels. Competition policy in the digital sector should not overlook them.

Previous AAI research reveals that the DBE business model is host to unique economic features and “growth by acquisition” that make it a formidable source of market power. Up-and-coming digital players will therefore raise the same market power concerns as the current large, incumbents. his report seeks to identify this group of players and explore their characteristics. It identifies a sample of public and private digital companies that have the distinctive features of DBEs and other specialized digital players that could grow to dominance or provide rich acquisition targets. Once identified, we evaluate their key characteristics, such as age, value, and acquisitiveness. We then examine those features using a number of comparisons, including digitals v. non-digital firms, digitals v. “super-digitals,” and public v. private digitals, to identify key trends in business creation and expansion, and what they might mean for competition policy in the U.S.

Major takeaways from the analysis in this AAI report reveal that digital companies are far higher in value and grow more through acquisition than non-digital companies. Moreover, a subset of super-digital firms with specialized focus on critical DBE technologies and capabilities are more valuable and acquisitive than all digital firms. Trends in business creation and acquisitions by large, first-generation DBEs indicate that while they may be mature and acquiring at a lower rate, smaller digital firms continue to grow rapidly through acquisition. Some of these firms will present rich take-over targets that could accelerate the growth of other up-and-coming digital players. Others represent the next generation of potentially powerful firms that pose the same market power risks as today’s large players. They are less likely to challenge the entrenched market position of today’s largest DBEs and more likely to grow to dominance in niche markets such as fintech, online real estate, internet-based healthcare, B2B services, and others.

The analysis in this report has important, and immediate, implications for competition policy, including:

  • Broad Scope for Competition Policy. Competition policy in the digital sector should focus on pre-emptively addressing the accretion of market power by acquisitive digital firms. It should be based on forward-looking analysis of the next likely wave of expansion and focus on the entire sector, not just the largest of the first generation of DBEs.
  • Dedicated Digital Sector Regulator. Antitrust alone cannot address the market power issues raised in the digital sector. The complexity of the DBE business model, pervasive market failures, and technology-intensity of the sector supports the need for a dedicated digital sector regulator with technical expertise and rulemaking authority to set, monitor, and enforce competition rules for digital markets.
  • Strengthening Antitrust Enforcement. To adequately, and proactively, address market power problems in the digital sector, antitrust enforcers need more resources and authority. These include: support for the government’s ability to block more harmful mergers and acquisitions and to bring successful monopolization cases; stricter standards for acquisitions of potential competitors, and lower HSR reporting thresholds for the digital sector to flag smaller, accretive acquisitions.

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Efficiencies in Horizontal Mergers: 2020 Jerry S. Cohen Award Winners for Antitrust Scholarship, Nancy Rose and Jonathan Sallet, Unpack the Debate in Merger Enforcement with Guest Host Roger Noll 

In this episode, Roger Noll, AAI Senior Fellow and Professor Emeritus at Stanford University, talks with winners of the 2020 Jerry S. Cohen award for antitrust scholarship. Nancy Rose and Jonathan Sallet unpack key aspects of efficiencies in horizontal mergers in their article The Dichotomous Treatment of Efficiencies in Horizontal Mergers, Too Much? Too Little? Getting it Right (Vol. 168, Penn. L. Rev., 2020). The article highlights that the extent to which horizontal mergers deliver competitive benefits that offset any potential for competitive harm is a critical issue in antitrust enforcement. Based on their economic analysis of merger efficiencies, the authors find that a substantial body of work casts doubt on their presumed existence and size. Rose and Sallet discuss the major implications of their work in this Ruled by Reason conversation, including the likely need for changes in current enforcement approaches.

Antitrust scholarship that is considered and selected for the Jerry S. Cohen award reflects a concern for principles of economic justice, the dispersal of economic power, the maintenance of effective limitations upon economic power or the federal statutes designed to protect society from various forms of anticompetitive activity. Scholarship reflects an awareness of the human and social impacts of economic institutions upon individuals, small businesses and other institutions necessary to the maintenance of a just and humane society–values and concerns Jerry S. Cohen dedicated his life and work to fostering.

Moderator:
Roger Noll, AAI Senior Fellow and Professor Emeritus, Stanford University Department of Economics

Guests:
Nancy L. Rose, Charles P. Kindleberger Professor of Applied Economics, Massachusetts Institute of Technology Department of Economics
Jonathan Sallet, Senior Fellow, Benton Institute for Broadband & Society

 

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Grant Funds New AAI Report on Privacy and Big Tech

A new report from the American Antitrust Institute, Privacy and Antitrust at the Crossroads of Big Tech, explores the increasingly complex relationship between competition and privacy in the context of Big Tech.  The burgeoning growth of surveillance capitalism business models is leading to interactions between competition policy and privacy principles that reveal surprising synergies, gaps, and conflicts in what was once assumed to be a straightforward and symbiotic relationship.

The report was authored by Laura Alexander, AAI’s Vice President of Policy, and was supported by a grant from the Omidyar Network Fund, Inc.

Read the report. 

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AAI Issues Report: Privacy and Antitrust at the Crossroads of Big Tech

A new report from the American Antitrust Institute, Privacy and Antitrust at the Crossroads of Big Tech, explores the increasingly complex relationship between competition and privacy in the context of Big Tech.  The burgeoning growth of surveillance capitalism business models is leading to interactions between competition policy and privacy principles that reveal surprising synergies, gaps, and conflicts in what was once assumed to be a straightforward and symbiotic relationship.

This report investigates and unpacks this intersection between privacy principles and antitrust law.  It rejects the notion that aggressive enforcement of the antitrust laws, alone, will provide a complete solution to modern privacy concerns.  Absent a legal framework allocating and defining privacy rights, market-based tools, such as antitrust law and competition policy, are of limited utility in guaranteeing optimal levels of privacy.  Moreover, market forces cannot account for the strong public interest in data privacy, which must be separately addressed through other legislative and policy tools.  Finally, numerous market failures surrounding privacy and limitations in current antitrust tools make antitrust an incomplete tool for policing privacy concerns.

The report further explores how, despite these challenges, antitrust law and competition policy can and should be used to guard against competition-based privacy harms.  Competitive markets for the consumer goods and services supplied by surveillance capitalists, protected by strong antitrust laws, provide consumers with the ability to walk away from companies that exploit their data and invade their privacy, providing a critical countervailing force to the incentives these companies otherwise face to harvest and exploit consumer data.  Aggressive merger policy that recognizes the threat of market power and anticompetitive harm posed by the aggregation of personal data is also integral to competition and privacy.

Finally, the report delves into the potential conflict between privacy laws and principles and antitrust laws and competition policy.  It discusses areas of potential discord, and highlights the need for antitrust and privacy policymakers to engage with one other to minimize negative interactions between these areas of law, to design thoughtful laws and policies that account for potential conflicts, and to make considered policy choices where conflict cannot be entirely avoided.

Principal policy recommendations of the report include:

  • Legislators and policymakers must move beyond notice-and-consent privacy regimes toward direct regulation of consumer data collection or strong property rights of consumers in their data.
  • In crafting privacy legislation and rules, legislators and policymakers should account for potential impacts on competition.
  • Antitrust complaints about the deployment of privacy practices and tools must be evaluated on the basis of their competitive impact.
  • Antitrust enforcers, legislators, and policymakers should develop mechanisms to better account for privacy harms as anticompetitive effects.
  • Antitrust enforcers, legislators, and policymakers should continue to develop merger policy that accounts for stores of personal data as a source of market power and degradation of privacy as an anticompetitive effect.

The report was authored by Laura Alexander, AAI’s Vice President of Policy, and was supported by a grant from the Omidyar Network Fund, Inc.

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Diana Moss Testifies Before Senate Judiciary Subcommittee on Consolidation, Monopolies, and Innovation

AAI President Diana Moss will testify on December 15, 2021 before the U.S. Senate Committee on the Judiciary, Subcommittee on Antitrust, Competition and Consumer Rights. The hearing takes up the important topic: “The Impact of Consolidation and Monopoly Power on American Innovation” Her testimony will address the following major issues:
  • Overwhelming economic and business evidence shows that competition spurs innovation. And because innovation drives economic productivity, competition is therefore essential for realizing economic growth in the U.S.
  • Innovation competition is diminished by anticompetitive conduct and harmful consolidation, making antitrust enforcement and competition policy vital tools for promoting innovation.
  • Weak antitrust enforcement and outdated standards put innovation competition at risk in a number of key areas, including: digital technology, pharmaceuticals, agricultural biotechnology, healthcare, and content and media.
  • Policy priorities include: more standalone innovation competition cases, increasing the probability of success of such cases by discounting tenuous efficiencies claims in harmful mergers, and stronger standards for blocking harmful acquisitions of disruptive, innovative rivals.

WATCH TESTIMONY

AAI has been at the forefront of maintaining antitrust’s historic concern with concentration, monopolies, exclusionary conduct, and harmful vertical restraints. Courts and antitrust enforcers have significantly narrowed the scope of monopoly enforcement under Section 2 of the Sherman Act. AAI and its progressive approach is a long-standing counterweight that has become all the more important in light of the increasing market concentration and the dramatic growth of technology platform companies. AAI advocates for aggressive enforcement toward exclusionary conduct by dominant firms and a renewal of antitrust’s historic skepticism of durable monopolies. Learn more about AAI’s work on monopolies.