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.
One dogged shortcoming of the consumer welfare standard is that it has been serially misapplied. And though this misapplication has significantly contributed to widespread antitrust policy failures, it is not a reason to scrap it.
Antitrust’s historical failures lie more at the feet of courts than at the feet of the law. They are the products of judicial error and, more specifically, of judges failing to understand, scrutinize, and apply the rudiments of economics. Because the consumer welfare standard presupposes that judges can employ economic reasoning, it is doomed to fail when judges cannot.
It seems then that the easiest way to avoid additional antitrust failures is to correct judicial errors, and the easiest way to do that is to improve the performance and capacities of judges adjudicating antitrust cases.
This is not an unfamiliar problem. Some have advocated developing specialized antitrust courts comprised of judges with antitrust expertise, but this idea has met strong resistance in the American framework, so much so that antitrust experts are among those have urged that judges “cannot become technocrats; they cannot hide behind specialized vocabulary and ‘insider’ concerns.”
An alternative, and perhaps simpler, way to improve the capacities of judges – in antitrust law and in other areas – is to consider these capacities and experiences when selecting judges. Unfortunately, given the priority of judicial politics, judges are now (and will be for the foreseeable future) appointed based on ideological measures that rarely correspond to a mastery of economics. Instead, to the degree judges are selected on expertise at all, they are selected their experiences in public law: constitutional law, election law, administrative law, government lawyering, policy advocacy, and the like.
Judges are, however, permitted to obtain guidance from experts as they manage their cases. And when a case involves matters that lie outside a judge’s training and experience, the judge should be encouraged to obtain assistance. It is ok to ask for help.
I advance a very simple proposition: If judges were encouraged, incentivized, and perhaps required to acquire technical assistance from economists when ruling in antitrust cases, they would generate rulings and a corpus of antitrust law that enhances competition, static and dynamic efficiency, and consumer welfare. And if the failure of antitrust policy lies at the courthouse door – if judicial decisions prove to be the weak link in the antitrust value chain – then reformers’ attention should be focused on the judge.
A Dismal Understanding of the Dismal Science
Virtually every antitrust professor and practitioner has their list of errant antitrust decisions. I highlight two below, not just because of their wayward reasoning but also because they illustrate some foundational barriers to developing effective antitrust policy.
FTC v. Butterworth Health Corp. In 1994, two of the four hospitals in Grand Rapids, Michigan, proposed a merger. After some quarreling over market and product definitions, it was agreed by all parties that the merged entity would control between 47 to 65% of the market for general acute care inpatient hospital services and the post-merger HHI would range from 2767 to 4521, reflecting an increase of between 1064 and 1889 points. At the time, the FTC Merger Guidelines suggested that a post-merger HHI above 1800 constituted a highly concentrated market and a merger increasing the HHI by more than 100 points was presumed to enhance market power.
All of this was conceded, yet the judge permitted the merger to proceed. The motivating logic was that because the merging hospitals were both nonprofits, they would not exploit any additional pricing power that the merger might bestow upon them. First, the judge rejected “the traditional presumption that a significant increase in market concentration will lead to higher prices in connection with the merger of nonprofit hospitals.” Then, the judge listed reasons why he was confident the hospital monopoly would not harm consumers: the hospital boards were “comprised of prominent community and business leaders whose employees depend on these facilities for services, and who have demonstrated their genuine commitment to serve the greater Grand Rapids community”; both boards signed a Community Commitment (a document that the FTC regarded as “unenforceable, illusory, or inadequate”) that pledged to limit price increases; and an “obligatory concern for the welfare of consumers as a whole” required an expansive assessment of community welfare over “the FTC’s more narrowly focused contentions” for “select groups of consumers.” And, in rejecting the argument that insurers seek savings on behalf of their subscribers, the opinion closed with a bewildering generalism: “In the real world, hospitals are in the business of saving lives, and managed care organizations are in the business of saving dollars.”
History has not treated this opinion kindly. For starters, the court relied on research that has since been directly and thoroughly debunked. More tragically, health economists attribute much of healthcare cost inflation to a rise in hospital market power (including, of course, market power enjoyed by nonprofits) with some scholars suggesting that health insurance and the critical need for hospital access allow hospital monopolists to exercise even more pricing power than monopolists in other markets. But the ruling, which capped a series of FTC hospital merger challenges that encountered unfriendly judges, set the Agency back as much as a decade in its enforcement efforts to curtail hospital market consolidation.
United States v. AT&T. In 2017, AT&T, a provider of telecommunication services and, with its U-verse and DirecTV offerings, video programming and distribution, proposed a merger with Time Warner, an owner of many broadcasting channels and entertainment content. The Department of Justice sued to stop the merger, fearing that AT&T’s control of certain “must have” content would have an anticompetitive impact on its rival distributors.
The government’s case relied on an economic model illustrating how the merged entity would exploit market power to foreclose competition. The court instead was persuaded by testimony of executives, who pledged at trial that they would not do so. Additional scorn was heaped on the government’s references to prior regulatory filings, which the judge derided as “so-called” real-world evidence. And in an affront to those who study the theory of the firm, the judge endorsed the proposition that “vertically integrated corporations have previously determined that the best way to increase company-wide profits is for [different divisions] to separately maximize their respected revenue.”
Both those supporting and those opposed to the merger castigated the judge’s opinion. An enthusiast of vertical mergers wrote that the judge “blew it,” whereas critics of a permissive approach to vertical mergers lamented that the opinion means there is a “need to rethink” antitrust laws, but the essence of both criticisms was the same: the opinion rested on a peculiar interpretation of facts and lacked any theoretical grounding. In its appeal, the Department of Justice succinctly said the judge “ignored economics and common sense.”
These are but two antitrust rulings that raise the hackles of economists, but their similarities go beyond the audience they frustrate. Both opinions ignore and ridicule economic modeling, preferring instead to credit unenforceable and obviously biased pledges from individuals. They reject the simple tenet that organizations under unified leadership maximize in accordance with the leader’s directive; they instead adopt convoluted notions that firms are home to conflicting and independent forces and thus do not pursue unified interests.
These cases are not just instances of preferring alternative theories over economic orthodoxy. They amount to wholesale rejections of economic logic and instead, almost spitefully, embrace an economic counter-logic. They do not reflect a failure of the consumer welfare standard; they reflect a judicial refusal to adopt economic reasoning altogether.
A Proposal: The Antitrust Rooney Rule
If the above cases mean anything, they reflect a need – at least for antitrust law to reflect any economic coherence – for judges to think in ways that do not come naturally to them. They require injecting an economist’s perspective into the judicial chambers. One easy solution would be to encourage inviting an independent economist to assist a judge ruling in antitrust cases.
The NFL’s Rooney Rule, coming up on its 20th year, reflected a similar effort to encourage the adoption of an expanded perspective. The Rule was adopted in 2009 when the NFL recognized the need to redress the historically low number of racial minorities in head coaching positions; at that time, only two of the NFL’s head coaches were African American, in contrast to 67 percent of its players, were African American. But NFL owners, like judges, are notoriously independent and resist most any instructions from outsiders. For that reason, the League instituted only a basic requirement that owners hear from voices they otherwise would have ignored.
The original Rooney Rule required every team with a head coaching vacancy to interview at least one or more minority candidates before making a new hire. Appropriately, the Rooney Rule was forged by an economist, who found that black head coaches have a higher winning percentage than their white NFL counterparts but were still more likely to be fired. The initial results from the Rooney Rule were promising, with the percentage of African-American or Black head coaches in the NFL rising from 6% to 22% within three seasons.
More recent examinations of the Rooney Rule, however, have been far less laudatory. A 2010 study found “no evidence that the Rooney Rule has increased the number of minority head coaches,” and an extensive investigation by the Washington Post called it “The failed NFL diversity ‘rule’ corporate America loves.” In this sense, the NFL is not alone, as scholars have found widespread failures in over fifty years of antibias and diversity training programs.
Nonetheless, there are reasons why a Rooney antitrust rule might succeed where the NFL’s failed. First, the NFL tried to affect the hiring of a signature position, a long term decision to a single individual; many owners enter into this hiring process already committed to a particular person. An antitrust Rooney rule, in contrast, would only ask judges to consider engaging temporarily with an economist , one with a specific role that lasted no longer than a particular legal matter.
Second, the purpose of an antitrust Rooney rule is simply to make additional resources available to a judge, and perhaps to emphasize the general usefulness of those resources for particular cases. If free food tastes better, then judges might be predisposed to free help. And third, if the primary objective is to inject a different perspective, then judges interviewing economists – even without any obligation to hire – might itself do the job. The purpose is to encourage the judge to pause and allow an economist to offer a perspective that might be unintuitive or meet irrational resistance. In that sense, the rule might work even if the judge ultimately declines hiring an economist.
I propose that the judiciary should adopt a version of the Rooney Rule, one that requires judges sitting in antitrust cases to interview independent economists – ones that are not engaged or conflicted with the case – as prospective assistants or consultants before proceeding with the litigation. Rule 53 of the Federal Rules of Civil Procedure even gives judges broad latitude to appoint economists as special masters, a practice that has won praise from practitioners and judges alike. Encouraging judges to at least converse with an economist before delving into a complex antitrust matter offers a procedural reform that preserves judicial independence while conveying the importance of technical expertise in antitrust cases.
This modest reform is designed to massage judicial overconfidence, which might be the driver of the hostility to and distain for economics reflected in the cases above. If ignorance breeds contempt, perhaps a soft introduction might facilitate receptivity.
More aggressive incentives are possible, of course, and even the NFL has moved on to new mechanisms to encourage diversity hiring. In November 2020, the League adopted a system that rewards teams with compensatory draft picks if one of their minority staff was hired by another team to become a GM or head coach. The federal judiciary could explore similar rewards to judges that consider economic reasoning before issuing rulings. If the judiciary is resistant to relegating antitrust judges to specialized technocrats, perhaps it could model and reward what effective judging should look like.
Judges are not economists, and as long as that remains the case, they will struggle to apply economic reasoning. Indeed, some will struggle more than others, and this essay highlights two cases in which today’s judiciary failed to properly apply today’s antitrust law. The takeaway from this brief history is that even under the consumer welfare standard, antitrust courts impose self-inflicted wounds onto antitrust law. To the degree that this history reflects a widespread problem, American markets would be more competitive and less concentrated if this problem were corrected.
Critically, the problem is not the law but the judiciary. An antitrust Rooney rule, one that requires judges to at least interview and consider hiring an economist as an assistant or special master, is a gentle nudge towards effective reform without demanding broader controversies and systemic changes to antitrust practice. At the risk of relying on an antitrust metaphor, I propose that we pursue this less restrictive alternative: rather than reforming the corpus of antitrust law, and rather than revolutionizing the judiciary, I argue that we simply give judges the help they need – and encourage them to accept that help – to get the law right.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.