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Towards a More Complete Understanding of Market Power and Consumer Harm in Antitrust Law

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Antitrust law currently tends to disregard non-consumer harms and the potential influence of companies on policymaking. A new paper explores how antitrust law can be reformed to better serve the general interests of the population. It also proposes an alternative approach that links competition-relevant variables like firm size and influence on the political process.


Antitrust law, or competition law as it is known in most of the world, is one of the tools that a government has to prevent and correct consumer harm related to the acquisition and exercise of market power— the ability of a company to earn profits above those that can be obtained in a competitive market. Consumer harm can be caused by other sources of market failure such as negative externalities and information asymmetries. Competition law, however, deals only with harm connected with the abuse of market power.

There are many roads that lead to such power and its maintenance. A firm can make a risky investment to develop a better and new product that has strong consumer demand. In this case, monopoly profits are a reward to business acumen and/or luck. A firm can also resort to strategies aimed at excluding competitors that do not benefit consumers on balance, which is normally captured as anticompetitive conduct under antitrust laws. In some cases, government regulation can limit the number of firms that can profitably operate in a market—one such example can be mobile carriers, where government rules on auctioning radioelectric spectrum, through which wireless signals are sent, determine how many firms have access to it. 

Antitrust law tends to treat regulation as an exogenous factor that affects the degree of market power. In other words, the law assumes that firms with market power do not have an influence on the rules that public officials ultimately enact or how those rules are enforced. In many cases, if not most, this would be an inaccurate picture. In short, the risk can be described as follows: part of the profits earned by firms with market power may be used to promote legislation that may not be aligned with the interests of the electorate. 

If antitrust law disregards harm from negative externalities from powerful firms—such as environmental spillovers—and how supra-competitive profits can be used to influence policymaking, can we affirm that it is a suitable tool to serve the general interest of the population? In my latest research, I attempt to provide an overview of why this is not the case and how we can make adjustments to the law in order to better fulfill its promise. 

As a starting point, we can take a look at antitrust’s focus on harm that comes from market power. As stated above, such focus may be considered narrow since the same conduct can have effects on other sources of consumer harm. A prominent recent case is the agreement between car manufacturers in Germany to restrict competition on the development of technology that reduced emissions of nitrogen oxide from diesel cars. In another recent case, the Supreme Court of Hungary recently confirmed a fine on five firms that install solar panels for colluding to win government contracts. 

These antitrust infringements not only affect consumer welfare in terms of price and quality of the products but also have an impact on environmental goals. One can argue that other areas of the law can complement antitrust enforcement to address these instances. However, the problem arises when the effects from negative externalities run in the opposite direction to those caused by efficiency gains as they are understood in antitrust cases (for more on this see Markovitz [2014] Vol. I Chapters 5 and 6). A good example can be seen in FTC’s consistent use of its powers to require divestitures in markets such as oil and tobacco to ensure lower prices for consumers. This is quite a solid basis on which to impose such remedies. On the other hand, greater consumption of these goods can lead to negative externalities in terms of environmental and public health harm. The solution is certainly not to turn a blind eye to market power in these markets, but interventions can be made under a more holistic approach by giving the antitrust authority the power to address both types of market failures at the same time.  

The focus on harm arising from market power alone can be justified under the umbrella of administration costs—in other words, the litigation costs related to assessing additional and complex points. The more complex the litigation, the more room there is for erroneous judgments that send the wrong signals to firms. 

If we assume, for the sake of argument, that the costs of introducing additional points around issues such as environmental externalities outweigh the expected gains from having a more holistic approach to market efficiency, one can still argue that the concept of market power used in antitrust analysis is incomplete. That is because we currently leave out, for better or worse, the mutual feedback that exists between economic and political power. A firm can use its profits in benign ways, such as investing in research and development activities that may lead to new and better products. However, these profits may also be used to invest in political connections —for example, to hire former regulators, donate to political parties, and hire professional lobbyists—with the purpose of influencing legislation that affects the firm’s profitability. There is empirical work that links competition law-related variables—e.g., relative firm size—to political activism of companies. This can be seen in the growth of lobbying expenditures in companies like Amazon and Facebook, which in the last ten years have seen their lobbying expenses multiply by a factor of 8 and 14, respectively. 

This problem was famously addressed by George Stigler in his 1971 article “The Theory of Economic Regulation,” which led to an extensive body of literature in the field of political economy. This literature, however, did not make any inroads into antitrust enforcement in influential jurisdictions such as the US. This is remarkable given the fact that Stigler’s other strand of work on price theory became immensely influential in our current legal framework. On the contrary, the Noerr-Pennington doctrine, developed by the Supreme Court in Eastern R. Conf. v. Noerr Motors (1961) and United Mine Workers v. Pennington (1965), provides antitrust immunity to firms attempting to influence legislation, regardless of the purpose, as long as these efforts are not considered a sham. Nowadays, however, there are many voices advocating for a more complete understanding of market power in antitrust analysis—such as Eleanor Fox, Tim Wu, Ioannis Lianos, FTC Chair Lina Khan, and Luigi Zingales, to name a few—and the cross-fertilization with political economy and neo-institutional literature is taking wind. 

“This alignment with the teachings of price theory earned the Chicago School the label of the ‘economic approach’ to antitrust law. This is a misnomer.”

How did we end up with our current incomplete concept of market power in antitrust cases? A technocratic answer is that it is easier to come up with manageable legal standards under the framework of analysis provided by modern industrial organization and price theory, which focuses on the interactions between firms along the value chain and consumers. Another part of the answer lies in politics and rhetoric. The concepts we now use to analyze consumer harm are part of what we call the Chicago School of antitrust, which took hold in the US during the Reagan presidency, when supporters of this school of thought were appointed to key government and judicial positions. Grounded in basic tenets of price theory, the Chicago School revolution changed the law and required plaintiffs to present evidence of harm in instances where this was previously presumed—for example, in the case of resale price maintenance and predatory pricing. It also gave defendants the opportunity to present evidence on the procompetitive effects of their conduct. 

This alignment with the teachings of price theory earned the Chicago School the label of the “economic approach” to antitrust law. This is a misnomer. The economics science has a diversity of fields—among them political economy and neo-institutionalism—that study the functioning of markets and the power of firms to determine their conditions. Given that our current legal framework disregards these other fields and is shaped only by price theory and industrial organization, our current approach would be more accurately described as the “partial economic approach” to competition law. 

US antitrust law used to be guided by the mutual feedback between economic and political power. This was done, however, the wrong way. In decisions such as Brown Shoe (1962) and Philadelphia National Bank (1963), the Supreme Court declared that even a moderate increase in concentration was incompatible with US democracy. The law used to be focused on market structures that were assumed to lead to more intense competition processes and openness of markets. Some scholars, such as Kahn, seem to suggest that we should return to this framework of analysis. Although we do need a more complete picture of the economic power of firms, the pre-Chicago era’s approach was grounded on presumptions of incompatibility between market concentration and the political system and not on a case-by-case basis. This approach was incorrect, because law enforcement based on presumptions can only be justified to the extent that we know that most instances of a type of conduct cause harm that we wish to avoid, such as undue influence in the political process. The evidence that suggests a link in almost every case between market concentration or exclusionary conduct and greater political influence of incumbents is not yet conclusive. 

There is an alternative approach, based on the extant literature in the political economy realm, that links competition-relevant variables—like market concentration and firm size—to influence on the political process. In each antitrust case, we could conduct an evidence-based inquiry into whether political power is an issue, using as a basis the empirical models already developed in the literature. Political influence can be roughly captured by expenses on lobbying efforts, campaign contributions, and the hiring activity of former regulators (which can be done, for example, to exploit their connections within public authorities). This is information that antitrust authorities can have access to. 

The above proposal would, of course, increase litigation costs given the need for expert testimony to test hypotheses of political influence, information requirements, and so on. On the other hand, this is the heart of the problem: The ability of firms to influence legislation is an obstacle to introducing solutions to important problems such as the environmental impact of the production of goods and services. Environmental regulation can increase a firm’s costs and reduce profitability by requiring the use of technologies that reduce pollution. This gives firms a reason to oppose such regulation, which may lead public officials to adopt policies that in the aggregate may be harmful. When incumbents are successful in promoting regulation that goes against the general interest of the population, reform tends to be an uphill battle. Therefore, we can expect special-interest legislation to be much more harmful than the types of exclusionary conduct typically covered by competition law. 

Antitrust as an academic field is currently experiencing a newfound degree of openness to other areas of economic analysis, such as political science and behavioral economics. However, it is necessary that this discussion makes its way into policy and law enforcement circles and that this discussion is centered around how potential legal standards might look like and which evidence is available to introduce a more complete approach to economic power in monopolistic and oligopolistic markets. We should not underestimate the complexity of balancing the other interests involved, such as political participation, but this should not deter us from continue inquiring. 

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