The Stigler Center’s 2023 Antitrust and Competition conference seeks to answer the question: what lays beyond the consumer welfare standard? In advance of the discussions, ProMarket is publishing a series of papers with proposed alternatives to the infamous consumer welfare standard. This piece is part of that debate.
The consumer welfare standard’s days are numbered. Besides extending “consumer” welfare to the more general definition of “trading partner” welfare, some competing standards ideas include competitive process protection, effective competition, protecting competition, inclusive growth, anti-monopoly, and freedom from domination.
My own choice is the “Reasonable Competitive Conduct” (“RCC”) standard. The RCC is a hybrid standard that shares some concerns and features of these other standards, including a recognition of trading partner welfare as well as consumer welfare, while reflecting Sherman Act language, and the spirit of the Clayton and FTC Acts.
In this short article, I will focus my standard narrowly on what might be called “vertical coercion.” My starting point is two, sometimes conflicting, concerns. First, I am sympathetic to social and political concerns about excessive corporate power and asymmetric vertical power relationships, as well as the accompanying competitive concerns. Control over dominant communication and mass media outlets by owners who do not value democracy is perhaps the most obvious threat in this category. Second, I am an economist concerned about economic welfare, in particular, the welfare of downstream consumers, workers and other small input suppliers who might be harmed by unreasonable competitive conduct, and the resulting impact on inequality.
The RCC standard is designed to account for these possibly conflicting concerns and reach a satisfactory balance. It attacks and deters vertical domination, within the current structure of the Sherman and Clayton Acts where possible, though it does suggest consideration of one important expansion. I offer the RCC as a draft standard and request comments, rather than having to backtrack later.
The names of the competing standards are somewhat meaningless because they do not self-define what conduct should be condemned, viewed skeptically or blessed. The RCC is no different. It therefore is essential to evaluate the standards where the rubber meets the road, that is, the specific conduct and effects that are to be condemned or permitted, how conflicts among multiple goals are resolved, whether conduct is illegal per se or has defenses, what evidence is relevant, which side has the burden of proof, and the height of the burdens.
Setting the Stage: Concern With Asymmetric Vertical Power Relationships
The RCC standard includes rules to prohibit or countervail “coercive” conduct by firms that dominate their relationships with suppliers through buy-side market (monopsony) power or asymmetric bargaining power. These rules are generally consistent with both post-Chicago and Neo-Brandeisian concerns.
Sylvania sets the stage as a poster child of the Neo-Brandesian critique of modern antitrust and economists. Before Sylvania, the Court acted to protect “trader freedom” from coercion. Twenty years after the original Chicago-school articles, Sylvania was the watershed event and the Chicagoans’ prize. It was not simply that Sylvania gave voice to economic analysis, because economics was not previously absent. Instead, Sylvania went further, essentially deleting any weight on trader freedom but focusing exclusively on economic outcomes. The Chicagoan criticism of Sylvania is that it stopped short—it did not apply to price restraints and it adopted the rule of reason rather than per se legality. It took thirty more years for Leegin to reach that goal.
Unlike the Chicagoan narrow focus on collusive effects of vertical restraints, Leegin recognized the potential for exclusionary effects by dominating firms. Modern post-Chicago industrial organization analysis shows that “dominating” firms (i.e., firms with classical monopsony power or dominant bargaining power) can engage in profitable exclusionary conduct directed at input suppliers. A dominating firm might induce suppliers to deny or degrade access to its rivals or discriminate against them to gain or maintain exclusionary market power or facilitate tacit collusion. It then also might further exploit its power by pushing down the prices it pays for the inputs. Combatting these harms is central to a post-Chicago approach.
Moreover, many of my post-Chicago colleagues and I share the Neo-Brandeisian concern that the rule of reason in practice is overly forgiving of defendants. We also share the concern that antitrust until recently tended to over-focus on downstream consumer welfare. But whereas we tend to want to re-orient the rule of reason, Neo-Brandeisian prefer more per se rules (e.g., FTC non-compete clauses rulemaking).
Four Specific Proposals for Implementing the RCC Standard for Dominating Firms
Neo-Brandeisians want to counter this domination because the asymmetric power and the resulting hierarchical structure harms trader freedom and democracy as well as competition. They want to re-establish trader freedom as an explicit antitrust goal. I would not privilege trader freedom while ignoring economic welfare effects. As Justice Brandeis opined, all contracts restrain trade. Not all agreements are truly coerced, and some plaintiffs may be opportunists rather than worthy victims. I also do not recommend formal balancing in specific cases. Weighing and balancing conflicting effects on consumer (or other counterparty) welfare versus trader freedom requires a proper metric since the two goals are not directly commensurable.
The RCC standard instead attempts partially to bridge post-Chicago and Neo-Brandeisian approaches with four separate proposals. The first proposal de-privileges (downstream) consumer welfare and prohibits multi-market balancing when anticompetitive conduct harms the firm’s (upstream) input suppliers (e.g., workers or other suppliers), even if it benefits (downstream) consumers. The second proposal mandates more interventionist antitrust constraints on exclusionary conduct by dominating buyers. The third proposal recommends more interventionist merger enforcement to avoid creating dominating buyers or enhancing their power.
These three proposals can be reached under current antitrust law. The fourth proposal would combat dominating buyers’ exploitative conduct by permitting a firm’s small input suppliers to countervail the firm’s power by forming associations to collectively bargain under certain circumstances. Since exploitative conduct by a buyer that legitimately gained monopsony power is permitted (and even blessed) by antitrust law, and because this proposal involves some complexity, I offer it more tentatively. But it is worth considering in light of current market power and rising inequality concerns.
Proposal #1: De-Privileging Downstream Consumer Benefits Over Competitive Harms to the Targeted Trading Partners
The ancillary restraints doctrine has been interpreted to permit benefits gained by downstream consumers to justify as reasonable agreements harming workers or other small input suppliers. This defective approach has been applied to joint purchasing agreements and no-poach provisions in subcontracts and franchise agreements.
Some Neo-Brandeisians might condemn such agreements outright simply because they interfere with workers’ freedom to change jobs and reinforce hierarchy. Laura Alexander and I instead recommend interpreting the ancillary restraints doctrine to prohibit agreements that harm workers (or other input suppliers) by anticompetitive conduct that lowers wages, irrespective of any benefits to downstream purchasers. The workers are counterparties in a proper buy-side relevant market and deserve antitrust standing. The defendants would be permitted to rebut only by showing that there are offsetting benefits to the workers, such that workers are benefited on balance. This is not novel. In resale price maintenance cases, the possible benefits and harms both apply to retail consumers. Privileging benefits to downstream consumers over anticompetitive harms to the workers, or multi-market balancing, would not be permitted. (Others agree, here and here.)
Proposal #2: Combatting Exclusionary Vertical Conduct
A dominating manufacturer may reduce downstream competition by demanding restraints such as exclusivity, discriminatory prices, most favored nations (MFN) provisions, or resale price maintenance from input suppliers (including retailers providing distribution). A dominant online platform might require analogous restraints from vendors.
The RCC standard could set a relatively low evidentiary burden on plaintiffs to show that the exclusionary conduct disadvantages rivals and harms platform, retail or wholesale competition. One way to lower the plaintiff’s evidentiary burden is by mandating a rebuttable anticompetitive presumption on exclusionary conduct by a dominant firm when it is likely to significantly raise the costs of (or otherwise materially disadvantages) actual or potential competitors (as provided in Senator Klobuchar’s CALERA bill). The rebuttal burden would be a burden of proof, not simply a burden of production. The defendant might rebut by showing either (i) the restraint leaves sufficient other unrestrained input suppliers to prevent adverse downstream competitive effects or (ii) purchasers would be benefitted by better products or lower prices, despite the exclusionary effects on rivals.
Neo-Brandeisians might prefer to condemn exclusionary vertical restraints as illegal per se for dominant firms or when there is substantial foreclosure. By contrast, a Chicago-School approach might have courts apply a procompetitive presumption, impose a high evidentiary burden on plaintiffs and be more open to efficiency justifications. It might also want to apply a total welfare standard, rather than a “true” consumer welfare standard that is premised on avoiding wealth transfers. Thus, the RCC standard can be seen as a middle ground.
Proposal #3: Combatting Mergers that Increase Market Concentration and Market Power
Mergers can raise concerns about supplier coercion and exclusion, as well as reductions in downstream market competition. The 2010 Merger Guidelines already condemn mergers that lead to market power over input suppliers, including coercion over suppliers that reduce downstream competition. However, buy-side market power (particularly, power over workers) was given fairly short shrift until recently.
The Neo-Brandeisians have echoed the concerns in the legislative history of the 1950 Section 7 amendments that increases in market concentration pose risks to democracy. Applying this democracy concern raises several related questions: whether the risk flows from market concentration versus aggregate concentration; what concentration level raises concerns; whether the concern applies more to concentration in some markets versus others; and whether prohibiting mergers that otherwise would increase consumer and worker welfare also would threaten support of democracy.
These concerns about market concentration and market shares can be incorporated generally into the current merger law framework by (i) applying a “reasonable probability” standard that encompasses “appreciable danger” where “doubts are to be resolved against the transaction” and (ii) applying the Philadelphia National Bank framework whereby high market share and concentration trigger an anticompetitive structural presumption. Enforcement can be made more interventionist, for example, by (i) lowering the threshold level of concentration and including alternative economic criteria to trigger the presumption; and (ii) raising the evidentiary burden on the parties to rebut the presumption. These adjustments could return the standard to the original Philadelphia National Bank requirement that the defendant make a “clear showing” that the merger would not have anticompetitive effects, a burden which has been lightened over time.
An approach of prohibiting mergers that would benefit consumers (and workers) while beating out and harming smaller, weaker competitors “on the competitive merits” raises a serious conflict between goals. I share the view of former-FTC Chair Pitofsky that this flavor of “competitor protection” should not be given weight. It collides directly with the value of competition underpinning antitrust law. Thus, the RCC standard would not endorse the decision in Vons. If weaker competitors are to be protected beyond the approach in Philadelphia National Bank, that goal is better pursued with subsidies.
Proposal #4: Combatting Dominating Buyer Exploitative Conduct
Dominating buyers can force down their suppliers’ prices and welfare surplus even without exclusionary or collusive conduct. Current antitrust law would not interfere with this exploitation of a buyer’s power, even if it involves classical monopsony power that leads to economically inefficient lower output and higher downstream prices. By contrast, Neo-Brandeisians condemn this exploitative conduct as coercive. The transfer of wealth from workers and small suppliers to large dominating firms also can be harmful to democracy.
Rather than attempting to regulate prices, a more market-oriented policy to address these concerns could allow small input suppliers of dominating firms to form joint associations to collectively bargain prices. The association would be treated as a single entity, that is, a supplier-owned firm. Melamed & Salop propose this policy for worker associations that gain only “moderate” countervailing bargaining power (i.e., not monopoly power), against dominating employers (i.e., employers with classical monopsony power or dominant bargaining power). In contrast to seller cartels or alleged 1960s monopolistic trade unions, the Nash bargaining equilibrium with rising labor supply curves leads to increased input purchases, despite a higher negotiated wage. And this will lead in turn to higher downstream output and lower downstream prices. Thus, downstream consumers are benefited as well. There is no welfare conflict between downstream consumers and the workers. Such associations thus might pass muster under the Sherman Act, though an antitrust exemption (as there is for unions and farm coops) with bright-line limits would avoid litigation and eliminate association formation risk.
This same approach might be applied to small input suppliers facing large dominating buyers, as proposed by others (e.g., Grimes; Kirkwood; Paul). The policy might be applied to small vendors who supply products to a dominant marketplace platform like Amazon. But application to small input suppliers raises a complicating and possibly limiting issue: A necessary condition for downstream consumer benefits to accompany supplier benefits is a rising input supply curve. If the input supply curve instead is perfectly elastic, then higher input prices will lead to higher output prices, leading to consumer/input supplier welfare conflicts.
The economic questions thus are (i) whether the buyer has classical monopsony or dominant bargaining power, (ii) whether the small suppliers’ input supply curve is upward sloping, and (iii) whether the countervailing bargaining power likely would be moderate. Bright line standards would avoid litigation over these issues.
This approach also might be used as a standalone remedy. If a merger benefits consumers while harming (say) workers through monopsony power, the merger might be permitted but with a remedy that permits worker associations. If, as the FTC suggests, a franchisor unilaterally changes its contract in ways adverse to locked-in franchisees, this “installed base opportunism” might be evidence of monopsony power and also a Section 5 violation. If so, the remedy might allow franchisees to join together to countervail the power and prevent a recurrence of the conduct.
Combatting exploitative conduct raises the potential pushback claim that the lower profits of the dominating firm would reduce its investment incentives, thereby harming downstream consumers by more than any consumer benefits from the lower prices, as Trinko cautioned. However, the investment incentives door swings both ways. The higher returns to the small sellers would increase their investment incentives, so it is not clear that total investment would fall. Input suppliers’ investments in their businesses, as well as investments in health care and education for their children also have social value, perhaps more than some investments by the firm, such as increased advertising, marginal product differentiation, or acquisitions.
In sum, while this idea of permitting workers, and possibly also small input suppliers, to form associations to countervail the power of dominating buyers is novel, it is worth considering.
I hope that Neo-Brandeisians can embrace these post-Chicago recommendations, even if they are said to fall short. I also hope that post-Chicagoans will embrace and refine the association collective bargaining proposal.
I also want to briefly address the Neo-Brandeisian overarching criticism of post-Chicago economists. Every generation puts a hero on the pop charts, and villains too. While the primary villains are Robert Bork and his minions, Neo-Brandeisians also accuse post-Chicago economists’ of villainy by reinforcing the economic approach to antitrust. Since we are economists, it is no surprise that we focused on Borkians’ economic errors.
But Neo-Brandeisians also might recognize that an economics-based counterattack was the strongest game in town. The purist anti-economists had already lost. Prominent critics of Bork’s purely economic approach like Harlan Blake & William Jones, Eleanor Fox, and Robert Pitofsky did not advocate rejecting economics outright but rather balancing economic welfare effects with other goals.
Beginning with the work publicized and advanced at the FTC’s 1980 “Strategy, Predation and Antitrust” conference, the post-Chicago economics counterattack on the Borkian approach has succeeded in rebutting and substantially weakening the economic foundation of that non-interventionist, pro-defendant antitrust agenda. While there have been many bitter pills like American Express, Trinko, Brooke Group, PREI, and Qualcomm, there also have been some notable successes, such as Microsoft, Kodak, McWane, Meritor and Actavis. The failures of the past 40 years have resulted from an inability of lawyers to convince the courts, not from failures of economic criticisms of Chicago-oriented antitrust.
It also seems clear that without formulating these modern industrial organization economics tools and explaining them in journal articles and books, the path to more interventionist antitrust would be even rockier. If the goal is to win in the courts, having economic analysis and articles that support more interventionist antitrust obviously is essential.
Addendum: Selected Post-Chicago Contributions
Post-Chicago economics work is extensive. I have listed some contributions here. While this list is an incomplete and non-random sample, it can be useful for footnotes for briefs and for fact-checking anti-economist tweets.
Networks effects analysis (here and here) that formed the economic basis for the Microsoft case and created the pathway for the Google cases. Rigorous economic explanations of how dominant firms erect entry barriers by building excess capacity (here, here, here and here) or pre-empting or buying innovative technologies. Rigorous economic theory of anticompetitive conduct and vertical foreclosure (here and here). Rebuttals of the single monopoly profit theory. Support for cases involving tying, bundled rebates (here and here), exclusive dealing (here and here), MFNs (here, here, and here) platform MFNs, loyalty discounts, or other contracts that reference rivals (CRRs). Economic basis for the anticompetitive inference from “reverse payments” that defeated the “scope of the patent” defense in Actavis. Rebuttals of Chicago-school error cost theory biases (here and here). Explanation of predatory reputation to rebut Brooke Group’s skeptical view of recoupment. Anticompetitive merger theories based on unilateral effects (here and here) and controlling mavericks. Competition justifications for lowering concentration thresholds. Economic support for anticompetitive presumptions applied to potential entry mergers (here, here and here) and vertical mergers (here, here and here). Economic support for enforcement against partial and common ownership (here, here and here). Development of informational market power (even by small firms) and other information-based market failures (here and here). And so on.
Steven Salop is Professor of Economics and Law Emeritus, Georgetown Law Center. This article will be presented at the 2023 Stigler Center Antitrust and Competition Conference, April 20-21, 2023. I am grateful to Jonathan Baker, Brian Callaci, Daniel Francis, Andrew Gavil, Filippo Lancieri, Doug Melamed, Eric Posner, Fiona Scott Morton, Carl Shapiro, Sandeep Vaheesan, and Spencer Weber Waller, for helpful comments.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.