In a September 20 speech at the high profile Georgetown Global Antitrust Enforcement Symposium, Acting Assistant Attorney General Renata Hesse sent the wrong signals to the business community and to foreign enforcers (see here) regarding U.S. antitrust policy. Admittedly, a substantial part of her speech was a summary of existing U.S. antitrust doctrine. In certain other key respects, however, Ms. Hesse’s remarks could be read as a rejection of the mainstream American understanding (and the accepted approach endorsed by the International Competition Network) that promoting economic efficiency and consumer welfare are the antitrust lodestar, and that non-economic considerations should not be part of antitrust analysis. Because foreign lawyers, practitioners, and enforcement officials were present, Ms. Hesse’s statement not only could be cited against U.S. interests in foreign venues, it could undermine longstanding efforts to advance international convergence toward economically sound antitrust rules.
Let’s examine some specifics.
Ms. Hesse’s speech begins with a paean to “economic fairness” – a theme that runs counter to the theme that leading federal antitrust enforcers have consistently stressed for decades, namely, that antitrust seeks to advance the economic goal of consumer welfare (and efficiency). Consider this passage (emphasis added):
[E]nforcers [should be] focused on the ultimate goal of antitrust, economic fairness. . . . The conservative leaning “Chicago School” made economic efficiency synonymous with the goals of antitrust in the 1970s, which incorporated theoretical economics into mainstream antitrust scholarship and practice. Later, more centrist or left-leaning post-Chicago and Harvard School scholars showed that sophisticated empirical and theoretical economics tools can be used to support more aggressive enforcement agendas. Together, these developments resulted in many technical discussions about what impact a business practice will have on consumer welfare mathematically measured – involving supply and demand curves, triangles representing “dead weight loss,” and so on. But that sort of conversation is one that resonates very little – if at all – with those engaged in the straightforward, popular dialogue about the dangers of increasing corporate concentration. The language of economic theory does not sound like the language of economic fairness that is the raw material for most popular discussions about competition and antitrust.
Unfortunately, Ms. Hesse’s references to the importance of “fairness” recur throughout her remarks, driving home again and again that fairness is a principle that should play a key role in antitrust enforcement. Yet fairness is an inherently subjective concept (fairness for whom, and measured by what standard?) that was often invoked in notorious and illogical U.S. Supreme Court decisions of days of yore – decisions that were rightly critiqued by leading scholars and largely confined to the dustbin of bad precedents, starting in the mid-1970s.
Equally bad are the speech’s multiple references to “high concentration” and “bigness,” unfortunate terms that also cropped up in economically irrational pre-1970s Supreme Court antitrust opinions. Scholarship demonstrating that neither high market concentration nor large corporate size is necessarily associated with poor economic performance is generally accepted, and the core teaching that “bigness” is not “badness” is a staple of undergraduate industrial organization classes and introductory antitrust law courses in the United States. Admittedly the speech also recognizes that bigness and high concentration are not necessarily harmful, but merely by giving lip service to these concepts, it encourages interventionists and foreign enforcers who are seeking additional justifications for antitrust crusades against “big” and “powerful” companies (more on this point later).
Perhaps the most unfortunate passage in the speech is Ms. Hesse’s defense of the Supreme Court’s “Philadelphia National Bank” (1963) (“PNB”) presumption that “a merger which produces a firm controlling an undue percentage share of the relevant market, and results in a significant increase in the concentration of firms in that market is so inherently likely to lessen competition substantially” that the law will presume it unlawful. The PNB presumption is a discredited historical relic, an antitrust “oldie but baddy” that sound scholarship has shown should be relegated to the antitrust scrap heap. Professor Joshua Wright and Judge Douglas Ginsburg explained why the presumption should be scrapped in a 2015 Antitrust Law Journal article:
The practical effect of the PNB presumption is to shift the burden of proof from the plaintiff, where it rightfully resides, to the defendant, without requiring evidence – other than market shares – that the proposed merger is likely to harm competition. The problem for today’s courts in applying this semicentenary standard is that the field of industrial organization economics has long since moved beyond the structural presumption upon which the standard is based. That presumption is almost the last vestige of pre-modern economics still embedded in the antitrust law of the United States. Even the 2010 Horizontal Merger Guidelines issued jointly by the Federal Trade Commission and the Antitrust Division of the Department of Justice have abandoned the . . . presumption, though the agencies certainly do not resist the temptation to rely upon the presumption when litigating a case. There is no doubt the . . . presumption of PNB is a convenient litigation tool for the enforcement agencies, but the mission of the enforcement agencies is consumer welfare, not cheap victories in litigation. The presumption ought to go the way of the agencies’ policy decision to drop reliance upon the discredited antitrust theories approved by the courts in such cases as Brown Shoe, Von’s Grocery, and Utah Pie. Otherwise, the agencies will ultimately have to deal with the tension between taking advantage of a favorable presumption in litigation and exerting a reformative influence on the direction of merger law.
Ms. Hesse ignored this reasoned analysis in commenting on the PNB presumption:
[I]n the wake of the Chicago School’s influence, antitrust commentators started to call into question the validity of this common-sense presumption, believing that economic theory showed that mergers tended to be beneficial or, if they resulted in harm, that harm was fleeting. Those skeptics demanded more detailed proof of consumer harm in place of the presumption. More recent economics studies, however, have given new life to the old presumption—in several ways. First, we are learning more and more that mergers among substantial competitors tend to lead to higher prices. [citation omitted] Second, economists have been finding that mergers often fail to deliver on the gains their proponents sought to achieve. [citation omitted] Taking these insights together, we should be skeptical of the claim that mergers among substantial competitors are beneficial. The law – which builds this skepticism into it – provides an excellent tool for protecting competition from large, horizontal mergers.
Ms. Hesse’s discussion of the PNB presumption is problematic on several counts. First, it cites one 2014 study that purports to find price increases following certain mergers in some oligopolistic industries as supporting the presumption, without acknowledging a key critique of that study – that it ignores efficiencies and potential gains in producer welfare (see here). Second, it cites one 2001 study suggesting that financial performance may not be enhanced by some mergers while ignoring other studies to the contrary (see, for example, here and here). Third, and most fundamentally, Ms. Hesse’s statement that “we should be skeptical of the claim that mergers among substantial competitors are beneficial” misses the point of antitrust enforcement entirely, and, in so doing, could be read as discouraging efficiency-seeking acquisitions. It is not the role of antitrust enforcement to make merging parties prove that their proposed transaction will be beneficial – rather, enforcers must prove that a proposed transaction’s effect “may be substantially to lessen competition”, as stated in section 7 of the Clayton Act. Requiring “proof” that a merger between competitors “will be beneficial” after the fact, in response to a negative presumption, strongly discourages potential efficiency-seeking consolidations, to the detriment of economic growth and welfare. That was the case in the 1960s, and it could become so again today, if U.S. antitrust enforcers embark on a concerted campaign of touting the PNB presumption. Relatedly, an efficient market for corporate control (involving the strong potential of acquisitions to achieve synergies or to correct management problems in badly-run targets) is chilled when a presumption blocks acquisitions absent a “proof” of future benefit, to the detriment of the economy. Apart from these technical points, the PNB presumption in effect grants a government bureaucracy (exercising “the pretense of knowledge”) the right to condemn voluntary commercial transactions of a particular sort (horizontal mergers) that have not been shown to be harmful. Such a grant of authority ignores the superior ability of information-seeking market participants to uncover and apply knowledge (as the late Friedrich Hayek might have pointed out) and is fundamentally at odds with the system of voluntary exchange that lies at the heart of a successful market economy.
Another highly problematic statement is Ms. Hesse’s discussion of the Federal Trade Commission’s (FTC) final 2010 Intel settlement:
The Federal Trade Commission’s case against Intel a decade later . . . shows how dominant firms can cut off the normal mechanisms of competition to maintain dominance. In that case, the FTC alleged that Intel violated Section 5 of the FTC Act by maintaining its monopoly in central processing units (or CPUs) through a variety of payments and penalties (including loyalty or market-share discounts) to computer manufacturers to induce them not to purchase products from Intel’s rivals such as AMD and Via Technologies. [citation omitted] When a monopolist pays customers to disfavor its rivals and punishes those customers who nevertheless do business with a rival, that does not look like the monopolist is competing with its rivals on the merits of their products. Because these actions served only to foreclose competition from rival producers of CPUs, these actions distorted the competitive process.
Ms. Hesse ignores the fact that Intel involved a settlement, not a final litigated decision, and thus is lacking in precedential weight. Firms that believe their conduct was perfectly legal may nevertheless settle an FTC investigation if they deem the costs (including harm to reputation) of continuing to litigate outweigh the costs of the settlement’s terms. Furthermore, various learned commentators (such as Professor and then-FTC Commissioner Joshua Wright, see here) have pointed out that Intel’s discounts had tangible procompetitive effects and that there was a lack of evidence that Intel’s conduct harmed consumers or competitors (indeed, AMD, Intel’s principal competitor, continued to thrive during the period of Intel’s alleged “bad” behavior). In short, Ms. Hesse’s conclusion that Intel’s actions “served only to foreclose competition from rival producers of CPUs” lacks credibility. Moreover, Ms. Hesse’s reference to illegal “monopoly maintenance,” a Sherman Antitrust Act monopolization term of art, fails to note that the FTC stressed that Intel was brought purely under FTC section 5, “which is broader than the antitrust laws”.
Finally, the speech’s concluding section ends on a discordant note. In summing up what she deemed to be an appropriate, up-to-date approach to antitrust litigation, Ms. Hesse reemphasizes the “fairness” theme, making such statements as “ultimately the plaintiff’s story should highlight the moral underpinnings of the antitrust laws—fighting against the unfairness of concentrated economic power” and “attempts to obtain or keep economic power unfairly”. While such statements might be rationalized as having been made in the context of promoting a “non-technical” appreciation for antitrust by the general public, the emphasis on fairness as a rhetorical device in lieu of palpable economic harm and consumer welfare is quite troublesome.
On the domestic front, that emphasis may not have a direct impact on the exercise of prosecutorial discretion and on American judicial precedents in the short run (at least one hopes so). In the longer run, however, it cuts against efforts to constrain populist impulses that would transform antitrust once again into an unguided missile aimed at the heart of the American market system.
On the international front, things are even worse. A variety of major jurisdictions make explicit reference to “fairness” in their competition law statutes and decisions. Foreign officials with a strongly interventionist bent might well cite Ms. Hesse’s speech in justifying expansive and economically untethered “fairness-based” competition law prosecutions. Niceties as to whether their initiatives do not fall within the strict contours of Ms. Hesse’s analysis of the competitive process might be readily ignored, given the inherent elasticity (to say the least) of the “fairness” concept. What’s more, Ms. Hesse’s remarks seriously undermine arguments advanced by the United States and leading commentators in multilateral fora (such as the ICN and the OECD) that competition law enforcement should focus solely on consumer welfare, with other policies handled under different statutory schemes.
In sum, Ms. Hesse’s speech summons up not the comforting ghost of Christmas past, but rather the malevolent goblin of antitrust past (whether she meant to do so or not). Although her remarks concededly contain many well-reasoned and uncontroversial comments about antitrust analysis, her totally unnecessary application of a gaudy, un-economic populist gloss to the antitrust enterprise is what stares the reader in the face. One can hope that, as an experienced and accomplished antitrust practitioner and public servant, Ms. Hesse will come to realize this and respond by unequivocally disavowing and stripping away the rhetorical gloss in a future major address. Whether she chooses to do so or not, however, antitrust agency leadership in the next Administration should loudly and repeatedly make it clear that populist notions and “fairness” have no role in modern competition law analysis, whose lodestar should be consumer welfare and efficiency.
This piece first appeared in Truth on the Market.