Many of the economic assumptions of contemporary antitrust law are unsupported or false, as the executive branch and judiciary have remade the law in a corporate-friendly fashion through casual conjectures and little understanding of actual firms and markets.
In interpreting the antitrust laws since the late 1970s, the Supreme Court has declared that it will be guided by economics above all else. Before this momentous ideological shift, the Supreme Court used statutory text and legislative intent as interpretive aids, but high court deference to Congress on antitrust is a distant memory now. Economic theory has so thoroughly taken over the field that Justice Stephen Breyer, in a 2007 dissent, had to remind his colleagues that antitrust, a system of law and administration, should not “precisely replicate economists’ (sometimes conflicting) views.”
The effects of this economism are clear. Over the past four decades, antitrust officials and judges have deployed neoclassical theories to gut antitrust as a check against corporate power and lift historical restrictions on business practices such as mergers and below-cost pricing. As a result, even stopping mergers between competitors in highly concentrated markets is difficult. A good example is the recent unsuccessful multistate effort to block T-Mobile’s takeover of Sprint and to prevent the national wireless market from being dominated by just three carriers.
However, many of the economic assumptions of contemporary antitrust law are unsupported or false. The executive branch and judiciary have remade the law in a corporate-friendly fashion through casual conjectures and little understanding of actual firms and markets. Indeed, an almost fact-free hypothesizing defines debate in the field.
Take, for example, a line from the 2017 American Bar Association presidential transition report on antitrust. Authored by prominent antitrust economists and lawyers (including several who have served at the Department of Justice (DOJ) and Federal Trade Commission (FTC)), the report stated that, due to uncertainty over antitrust rules, “[b]usinesses may be less willing to engage in novel business activities that could benefit consumers.” It offered no evidence or examples, and merely cited a Supreme Court opinion making the same claim.
If present-day antitrust law and discourse represent economics and economic thinking, what value do economists bring to policymaking? Should they be expelled from the halls of power? The answer is a qualified no. The work of economists examining real-world mergers, Thomas Piketty and his colleagues analyzing income inequality, and social scientists at the Consumer Financial Protection Bureau (CFPB or Bureau) studying consumer credit (between 2011 and 2017) offers a vastly different and superior way. [The author served as a regulations counsel at the CFPB from 2015 to 2018.]
These researchers, rooted in careful study of the economy, have transformed our understanding of many important topics, and laid the groundwork for policymaking in the public interest.
In antitrust, economists and lawyers have developed and promoted simplistic hypotheses to defang the law against large corporations. Consider how the DOJ, the FTC, and the Supreme Court have undone historical laws against corporate mergers and predatory pricing.
Relying on economic theory, government officials and scholars have asserted that corporate mergers, in general, lead to productive efficiencies and so promise lower prices for consumers. Accordingly, the DOJ and the FTC have adopted a highly tolerant posture toward mergers since the early 1980s, treated mergers between competitors as problematic only in highly concentrated markets, and presided over multiple waves of mergers.
In their 2010 Horizontal Merger Guidelines, the two Obama-era antitrust agencies stated, “[A] primary benefit of mergers to the economy is their potential to generate significant efficiencies and thus enhance the merged firm’s ability and incentive to compete, which may result in lower prices, improved quality, enhanced service, or new products.” Herbert Hovenkamp, described as “the dean of American antitrust law” by the New York Times, captured how this claim rests on faith, not evidence: “[W]e tolerate most mergers because of a background, highly generalized belief that most—or at least many—do produce cost savings or improvements in products, services, or distribution.”
As an example of this pro-merger creed in practice, the FTC, in 2012, quickly cleared ventilator maker Covidien’s acquisition of Newport Medical Instruments, a rival that had agreed to manufacture lower-cost ventilators for the government’s stockpile for future pandemics. Two years later, Covidien called off the deal Newport had entered and thereby likely deprived the public of affordable, mobile ventilators that could have been used in the fight against Covid-19.
The theory in support of corporate consolidation appears shaky once a few basic questions are raised. Why assume that consumers are the only worthy beneficiaries of merger law and, contrary to congressional intent, ignore or discount the interests of workers, small firms, and competitors? Why presume that firms pursue mergers to become more productive? What about the pursuit of increased pricing power? After all, businesses do collude with each other. If greater pricing power is the goal, buying out a rival and centralizing control is more effective than trying to establish and maintain a price-fixing arrangement with the rival, which can balk or cheat so long as it remains independent. Why do firms need to buy out competitors, distributors, and suppliers to achieve scale and other productive efficiencies, when they can hire more workers and invest in new plant and facilities?
And what about other rationales for mergers, such as the social prestige that comes with being the chief executive or chair of a very large corporation? These important questions are generally ignored in debates among antitrust insiders.
Economists and lawyers informed by economics have also developed theories on why temporary below-cost pricing is not a rational business strategy. Think of Walmart offering prescription drugs at a money-losing price and driving independent pharmacies out of business.
According to neoclassical economic theory, eliminating or disciplining rivals through a burst of below-cost pricing is like setting a pile of money on fire. Even if a well-financed predator acquires monopoly power through this predation, other firms will enter the market when they see the abnormally high profits generated by monopoly and quickly erode the predator’s dominance. The predator incurs a certain loss today for an unlikely gain tomorrow, or so the story goes.
On these bases, the Supreme Court has announced that “there is a consensus among commentators that predatory pricing schemes are rarely tried, and even more rarely successful” and made holding price predators accountable extraordinarily difficult.
As with current policy toward mergers, existing law on predatory pricing is built on foundations that start to crumble under the most basic questions. Why assume market entry is easy? Do new entrants and small firms have the same access to financing that dominant incumbents do? What about the deterrence value of predatory pricing? Seeing how Amazon resorted to below-cost sales of diapers in response to competition from the small Diapers.com and ultimately forced it to accept a buyout, would-be rivals can reasonably anticipate a similar response from Amazon to entry and competition in other markets. Which rational actor would finance a new business venture to compete against a trillion-dollar price predator like Amazon?
Many economics-based antitrust theorists seem to serve as a priesthood for powerful corporations—defending and justifying business conduct that was historically viewed with suspicion by the public and prohibited by law. Given this function, one is bound to wonder: What, if any, real value can economists provide in antitrust and policymaking more generally?
Another Model: Economists as Fact Gatherers
The antitrust experience doesn’t mean we should cast out all economists. They offer real insight when they study firms, markets, and economies instead of offering just-so stories on existing power and privilege. The 2010s saw a surge in such empiricism. Industrial organization, the field of economics that studies firms and market structures, has seen a flowering of observational work. A raft of research has undercut many of the assumptions supporting current antitrust law and policy.
For instance, John Kwoka and other economists have found that corporate mergers frequently lead to higher prices and profit margins. Contrary to the prevailing view that mergers are only likely to hurt customers in highly concentrated markets, some mergers in markets with relatively low levels of concentration have harmed consumers. On top of giving corporations more pricing power, consolidation also generally does not yield the promised improvements in firm productivity.
The most famous economics book of the last decade—Thomas Piketty’s Capital in the Twenty-First Century—is a product of painstaking fact gathering. Piketty and his colleagues Emmanuel Saez and Gabriel Zucman have compiled statistics on income distribution for major countries over the past 90 years. In doing this important work, they documented the staggering rise in income inequality across the industrialized world since the 1970s.
From 2011 through 2017, a federal agency, the CFPB, used empiricism for public benefit. Bureau researchers studied payday and car title loans, bank overdrafts, and deferred interest credit cards, and revealed how they exploit economically vulnerable borrowers.
The CFPB also published a 700-page study of mandatory arbitration clauses in consumer finance contracts, documenting their terms, consumer unawareness and misunderstanding of them, and their role in frustrating dispute resolution. In addition to informing policymaking, this research had tangible effects on public debate. For instance, payday lender narratives on the consumer benefits of their product fell apart in the face of the CFPB’s research showing that many borrowers repeatedly rolled over their nominally short-term loans and got stuck in a debt trap.
The CFPB itself shows how economic analysis can be manipulated and used as an intellectual cloak for political choices. As the New York Timesreported last month, the quality and credibility of CFPB analysis has fallen off significantly under Republican directors Mick Mulvaney and Kathy Kraninger. In seeking to repeal consumer protections on payday and title loans, agency leadership has ignored inconvenient facts and resorted to the casual hypothesizing that has plagued antitrust. [The author worked on the payday and title loan rules proposed and adopted in 2016 and 2017, respectively.]
Economists are not preordained to rationalize corporate power as efficient or nonthreatening. Another model exists: Just look at some of the output of economists studying business consolidation, income inequality, and consumer finance. Through patient fact gathering, they have shown the public harms from mergers, the dramatic rise in economic inequality, and the exploitation at the heart of many consumer financial products.
In his 1930 classic Economic Possibilities for Our Grandchildren, John Maynard Keynes described such careful work as an aspiration for his field and wrote, “If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid!”
It is time for the entire economics profession to take up the call of Keynes and commit to performing, in partnership with accountants, historians, legal scholars, sociologists, and other specialists, close examinations of economic life.
Sandeep Vaheesan is the legal director at the Open Markets Institute. He previously served as a regulations counsel at the Consumer Financial Protection Bureau, where he helped develop and draft the first comprehensive federal rule on payday, vehicle title, and high-cost installment loans.
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