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The Antitrust Paradigm: Restoring a Competitive Economy
A new and urgently needed guide to making the American economy more competitive at a time when tech giants have amassed vast market power.
The U.S. economy is growing less competitive. Large businesses increasingly profit by taking advantage of their customers and suppliers. These firms can also use sophisticated pricing algorithms and customer data to secure substantial and persistent advantages over smaller players. In our new Gilded Age, the likes of Google and Amazon fill the roles of Standard Oil and U.S. Steel.
Jonathan Baker shows how business practices harming competition manage to go unchecked. The law has fallen behind technology, but that is not the only problem. Inspired by Robert Bork, Richard Posner, and the “Chicago school,” the Supreme Court has, since the Reagan years, steadily eroded the protections of antitrust. The Antitrust Paradigm demonstrates that Chicago-style reforms intended to unleash competitive enterprise have instead inflated market power, harming the welfare of workers and consumers, squelching innovation, and reducing overall economic growth. Baker identifies the errors in economic arguments for staying the course and advocates for a middle path between laissez-faire and forced the revival of pro-competitive economic regulation, of which antitrust has long been the backbone.
Drawing on the latest in empirical and theoretical economics to defend the benefits of antitrust, Baker shows how enforcement and jurisprudence can be updated for the high-tech economy. His prescription is straightforward. The sooner courts and the antitrust enforcement agencies stop listening to the Chicago school and start paying attention to modern economics, the sooner Americans will reap the benefits of competition.
The U.S. economy is growing less competitive. Large businesses increasingly profit by taking advantage of their customers and suppliers. These firms can also use sophisticated pricing algorithms and customer data to secure substantial and persistent advantages over smaller players. In our new Gilded Age, the likes of Google and Amazon fill the roles of Standard Oil and U.S. Steel.
Jonathan Baker shows how business practices harming competition manage to go unchecked. The law has fallen behind technology, but that is not the only problem. Inspired by Robert Bork, Richard Posner, and the “Chicago school,” the Supreme Court has, since the Reagan years, steadily eroded the protections of antitrust. The Antitrust Paradigm demonstrates that Chicago-style reforms intended to unleash competitive enterprise have instead inflated market power, harming the welfare of workers and consumers, squelching innovation, and reducing overall economic growth. Baker identifies the errors in economic arguments for staying the course and advocates for a middle path between laissez-faire and forced the revival of pro-competitive economic regulation, of which antitrust has long been the backbone.
Drawing on the latest in empirical and theoretical economics to defend the benefits of antitrust, Baker shows how enforcement and jurisprudence can be updated for the high-tech economy. His prescription is straightforward. The sooner courts and the antitrust enforcement agencies stop listening to the Chicago school and start paying attention to modern economics, the sooner Americans will reap the benefits of competition.
368 pages, Hardcover
Published May 6, 2019
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May 30, 2019
Although many lament the increasing monopolization of the economy, one admittedly narrow market is defying this trend: books about the monopolization of the economy. The last year has seen excellent contributions to the topic including Can American Capitalism Survive?: Why Greed Is Not Good, Opportunity Is Not Equal, and Fairness Won't Make Us Poor, The Curse of Bigness: Antitrust in the New Gilded Age, The Myth of Capitalism: Monopolies and the Death of Competition and Radical Markets: Uprooting Capitalism and Democracy for a Just Society. We can now add Jonathan Baker’s The Antitrust Paradigm to the list. The competition for books about monopoly may not have resulted in lower prices, but it is ample testimony to the ways that competition can benefit consumers through variety and quality.
The Antitrust Paradigm is about as passionate and readable as a book with 976 footnotes can be. Nine reasons to believe market power has increased? Check. Rebuttals of nine Chicago-school style arguments against more vigorous antitrust enforcement? Check. Five high-level exclusionary behaviors by platforms, with four subsets of exclusionary behavior just under the heading of “exclusivity through vertical merger and exclusive dealing”? Check. Five proposed new rebuttable presumptions or rules? Check.
Just about every argument made in The Antitrust Paradigm could, or at least should, hold up in a court of law. This is to be expected given Baker’s combination of academic economics, law, and substantial experience in government (including as the Director of the Bureau of Economics at the Federal Trade Commission as well as stints at the Department of Justice, the Federal Communications Commission and the Council of Economic Advisers).
All of these specific arguments are embedded in a broader theme, that antitrust emerged as a “centrist” alternative to laissez faire and regulation, culminating in the “structural” period of antitrust that began around 1950 but has (partially) ended with rise of the Chicago School. Baker argues that this intellectual revolution has been invalidated by the outcome it has contributed to: increased concentration in the economy, slower productivity growth, and, in a particularly detailed analysis, reduced innovation.
Baker does accept the Chicago School premise that antitrust should be grounded in economics but shows that modern economics justifies a tougher approach both to mergers and enforcement against existing businesses. He further argues that best way to step up enforcement in an efficient and administrable manner would be to rely on the types of presumptions that have guided antitrust, but to reformulate these in a manner that is more consistent with the modern economic literature and more pro-competition. Although Baker does not explicitly frame his arguments against the renewed “neo-Brandesian” or “structuralist” approach to antitrust advanced by people like Tim Wu, Lina Kahn, and Barry Lynn, there are enough stray references to it that you can tell that he finds its arguments somewhat wanting and also unnecessary in building the case for more vigorous action.
If forced to quibble with The Antitrust Paradigm, I would cite two places where Baker’s deep grounding may come at the cost of his contributing to expanding the broader policy debate. The first is his (de facto) argument that we do not need to change the law but just its application. As Baker writes, “I have therefore emphasized the sort of arguments that can convince the [Supreme] Court: economic ones... the justices will be most responsive to economic arguments and evidence concerning competition and welfare.” For someone sitting at the FTC, this is the right approach. Given the challenges to changing the Court’s attitude, however, changes in the law itself may be warranted and I would love to know what Baker thinks those changes should be and how he would widen the debate to make them more acceptable in the future.
The second quibble is that Baker focuses almost exclusively on competition policy and dismisses regulation. At times Baker’s exclusive reliance on competition policy seemed like a carpenter with a hammer for whom everything looks like a nail. But not everything is a nail and in some cases regulation may be warranted. This is certainly the case for natural monopolies where utility-style regulation may be warranted. I do not believe the natural monopoly designation applies to the leading digital platforms, but in that area there is also substantial scope for pro-competition regulation to facilitate entry and switching, as I outlined in recommendations for the UK government.
These quibbles reflect more a desire to hear more from Baker and see him expand the debate further, not a disagreement with any of his analysis or ideas. And his analysis and ideas are so rigorously and carefully argued that The Antitrust Paradigm will be the standard text on a revived economic approach to antitrust for some time to come.
The Antitrust Paradigm is about as passionate and readable as a book with 976 footnotes can be. Nine reasons to believe market power has increased? Check. Rebuttals of nine Chicago-school style arguments against more vigorous antitrust enforcement? Check. Five high-level exclusionary behaviors by platforms, with four subsets of exclusionary behavior just under the heading of “exclusivity through vertical merger and exclusive dealing”? Check. Five proposed new rebuttable presumptions or rules? Check.
Just about every argument made in The Antitrust Paradigm could, or at least should, hold up in a court of law. This is to be expected given Baker’s combination of academic economics, law, and substantial experience in government (including as the Director of the Bureau of Economics at the Federal Trade Commission as well as stints at the Department of Justice, the Federal Communications Commission and the Council of Economic Advisers).
All of these specific arguments are embedded in a broader theme, that antitrust emerged as a “centrist” alternative to laissez faire and regulation, culminating in the “structural” period of antitrust that began around 1950 but has (partially) ended with rise of the Chicago School. Baker argues that this intellectual revolution has been invalidated by the outcome it has contributed to: increased concentration in the economy, slower productivity growth, and, in a particularly detailed analysis, reduced innovation.
Baker does accept the Chicago School premise that antitrust should be grounded in economics but shows that modern economics justifies a tougher approach both to mergers and enforcement against existing businesses. He further argues that best way to step up enforcement in an efficient and administrable manner would be to rely on the types of presumptions that have guided antitrust, but to reformulate these in a manner that is more consistent with the modern economic literature and more pro-competition. Although Baker does not explicitly frame his arguments against the renewed “neo-Brandesian” or “structuralist” approach to antitrust advanced by people like Tim Wu, Lina Kahn, and Barry Lynn, there are enough stray references to it that you can tell that he finds its arguments somewhat wanting and also unnecessary in building the case for more vigorous action.
If forced to quibble with The Antitrust Paradigm, I would cite two places where Baker’s deep grounding may come at the cost of his contributing to expanding the broader policy debate. The first is his (de facto) argument that we do not need to change the law but just its application. As Baker writes, “I have therefore emphasized the sort of arguments that can convince the [Supreme] Court: economic ones... the justices will be most responsive to economic arguments and evidence concerning competition and welfare.” For someone sitting at the FTC, this is the right approach. Given the challenges to changing the Court’s attitude, however, changes in the law itself may be warranted and I would love to know what Baker thinks those changes should be and how he would widen the debate to make them more acceptable in the future.
The second quibble is that Baker focuses almost exclusively on competition policy and dismisses regulation. At times Baker’s exclusive reliance on competition policy seemed like a carpenter with a hammer for whom everything looks like a nail. But not everything is a nail and in some cases regulation may be warranted. This is certainly the case for natural monopolies where utility-style regulation may be warranted. I do not believe the natural monopoly designation applies to the leading digital platforms, but in that area there is also substantial scope for pro-competition regulation to facilitate entry and switching, as I outlined in recommendations for the UK government.
These quibbles reflect more a desire to hear more from Baker and see him expand the debate further, not a disagreement with any of his analysis or ideas. And his analysis and ideas are so rigorously and carefully argued that The Antitrust Paradigm will be the standard text on a revived economic approach to antitrust for some time to come.
October 14, 2019
First, the big negative: this book is written for lawyers, not the general public. Not only is the reader assumed to be conversant with the basics of US antitrust law, but the English is legal English, with words like “chill” being used in their legal (as opposed to everyday) sense and with sentences rambling on forever to make sure no angle’s left uncovered. Oh, and there’s 125 pages of endnotes.
So if it’s a light read you’re after about market power in the US, you’ve definitely come to the wrong place.
You’ve also come to the wrong place if you want straight answers!
Things start conventionally, with the author spending the entire first chapter luring you, the reader, in. He decries the “market paroxysm” period we find ourselves in and details the harmful rise of market power both within the narrow setting of the markets it affects and the economy / society in general: we’ve gotten worse at stopping (i) anticompetitive behavior, (ii) anticompetitive mergers, and (iii) anticompetitive exclusion; oligopolies last; four asset managers intermediate the public’s control of more than half the stock market; most Internet business goes through a tiny bunch of platforms; innovation is accruing benefits to a select few; rent seeking is rampant. The result is that innovation and productivity are suffering. The ultimate section is entitled “A Serious Problem” and at that point you’d be entirely justified to be preparing yourself for a polemic against market power and monopoly.
The rest of the book is anything but. The author’s feelings for those who belong to a “camp” on the issue of antitrust are somewhere between contempt and pity. Lina Khan comes under fire here, for example, in no uncertain (if extremely civil) terms.
But here’s the thing. After 209 pages of the hardest reading I’ve endured in some time, some of which I’ll readily admit went over my head (remember I said that if you spot something backwards in what follows), I have come round to the author’s view: it ain’t that simple. I don’t share the author’s ideology, but he’s convinced me that you cannot tackle the topic of market power with a set of clear rules.
I’ve read a couple books on monopoly this year already (and I’m eagerly looking forward to receiving Matt Stoller’s.) Once the first chapter is out of the way (the last one in plain English, incidentally) author Jonathan Baker starts at the same place as his lay peers, with (i) the US Constitution that enshrines the right of inventors to patents (thereby conceding that the American way is to grant some limited monopoly power to those who innovate) and (ii) the clear need to break the trusts at the end of the nineteenth century. From there, however, he paints a much more nuanced picture.
The 1912 election is presented (p. 37) as the original crossroads. The four presidential candidates all presented the American people with different solutions to the clear problem of the large trusts: Eugene Debs, a socialist, simply proposed that they be nationalized. Republican incumbent, and laissez-faire proponent, Taft did not think anything should be done at all. Woodrow Wilson, the eventual winner, ran on the premise that behemoths should be broken up via very aggressive antitrust legislation. Independent candidate, and former Republican President, Theodore Roosevelt, finally, recognized that large companies were often necessary, but ought to be reined in via regulation.
Wilson won the election, but by-and-large Roosevelt’s ideas won out, the author explains. This is a book that unashamedly celebrates this outcome.
Your first shock as a reader comes in chapter two. The author here essentially sympathizes with the Chicago school. He first concedes that Coase and Bork were right about the chilling effects antitrust had on innovation, that growth has benefited from the approach whereby the aim of our institutions is to maximize innovation and simply observes that politically we’re now at a turning point. Bottom line, we need to rein in business now or else a “leftist political mobilization” (p. 52) will “seek extensive government supervision.” In plain English, we need a Roosevelt to interpret harshly and enforce the current antitrust laws or else companies will be dismembered, in the fashion originally envisaged by Wilson. It’s a sharp turn from where this book starts, that’s for sure.
In the third chapter, Baker takes this argument further. Politics (the business of interest groups using influence to generate favorable outcomes) does not deserve its bad name, he says here. Not in the case of antitrust, at any rate, provided politics is mediated by ideology. The alternative to politics is technocratic enforcement. Technocratic enforcement the author deems inferior to politics, precisely because it cannot be underpinned by ideology. The point is made that technocratic enforcement of antitrust in the golden era of antitrust was characterized by a pursuit of non-economic, non-ideological goals, such as the protection of small businesses. The pursuit of non-economic goals is a bad thing, the author implies, because it’s ultimately futile. These days, besides, the losers in the game enjoy a safety net, he adds, that did not previously exist.
Next, the author tackles horizontal mergers. First he observes that in the US they’re basically all waved through, while in Europe the picture is more varied. Next comes his main point: the law regarding horizontal mergers should not operate through rules. These “bright line rules” do bring advantages (for example, you may refrain from pursuing a merger that violates them if they are clear enough) but the law should do more. It should ask that courts make an effort to weigh the efficiencies that will come from the merger against the dead weight losses stemming from the potential increase in prices / fall in output that will result from lower competition. Indeed, the court should ask the companies to lay out what savings they expect to make and use that as the maximum and then do the work to assess whether these savings do actually amount to more than the potential losses via lower competition. This work should take consideration of the already existing market concentration, of the type of merger that’s being mooted (is a maverick being taken out?) and of the existence of substitutes for the goods or services in question. (“the Germans?” “forget it, he’s rolling”)
In the fifth chapter, the author starts by listing and refuting five “erroneous arguments against enforcement,” namely
1. Markets Self-Correct through Entry
2. Markets Self-Correct Because Oligopolies Compete and Cartels Are Unstable
3. Monopolies Innovate
4. Monopolists Cannot Obtain More than a Single Monopoly Profit (an argument used to allow monopolists to make exclusive vertical agreements) and
5. Business Practices Prevalent in Competitive Markets Cannot Harm Competition.
From there, he proceeds to refute arguments made against the courts (who are alleged to have too much power, to be unable to judge on the potential harm of exclusionary conduct and to give the advantage to whoever can spend most to litigate) and against the enforcement agencies, who stand accused of being manipulated by complaining competitors.
In conclusion, both to this fifth chapter and to the first part of the book, the author rings the alarm. We are at risk of “rejecting antitrust by stealth.”
The second part of the book is comprised of four chapters and concerns two-sided platforms.
Chapter six first demonstrates how two algorithms might work that allow companies who ought to be competing on price to actually collude. In the simpler one of the two algorithms we have two companies competing on one product in one market. The way the algorithm works is you have in mind a price above which you won’t go and there is a price below with you can’t go, or you will lose money. What you do is you immediately match any downward move by your competitor, to make sure you don’t lose market share, but every once in a while, out of the blue, you nudge up your price in the hope that he will follow you upward. Finally, whenever the competitor nudges his price up, and provided you are not at your ceiling, you follow him up. The process, if followed by both sides, ends up at the lower of the two ceilings. The second algorithm works across two markets, with each competitor having an advantage in one of the two markets and again there is an optimum behavior, whereby prices end up even higher than they would if each market’s price was clearing independently. The author’s insight here is simple:
1. If prices move as they would under an algorithm, the law should not care if the price movement is intended or not, it should assume collusion
2. It is the competitors who will have to prove they are not engaging in collusion.
3. When considering mergers, the court will have to judge whether a merger is potentially eliminating a maverick in this game of anti-competitive algorithmic price-setting
Chapter seven is the hardest, but also the most fascinating, in the whole book. It’s also the longest. And ultimately the most frustrating. You get treated to a long list of ways dominant platforms exclude their competitors: vertical mergers (like Amazon buying Zappos), not sharing data with the very partners it came through, targeting through data analysis those customers of platform participants who are liable to respond to discounts (for example, showing lower prices on own-brand diapers only to customers who the data says must have had a baby, but not passing that information to other diaper vendors, thereby fishing back producer surplus without much affecting the market-clearing price), not accepting advertising from firms advertising on a competitive platform, imposing platform “most-favored-nation” provisions (“nobody can have lower prices on your products than we do”), predatory pricing etc. Unfortunately, the author is almost as bad at making recommendations as he is good at identifying the problems. On the question of predatory pricing, for example, the reason is simple: lots of these platforms will probably never make money. Uber is a charity to the middle class, but to end up hurting us (or even cab drivers in the long run) it will have to avoid bankruptcy. In the meantime, we all understand why cabbies are frustrated, but for them to be vindicated Uber first needs to be able to turn on the screws and act like the existing cartel they are supplanting. A single ray of light is offered here: the defense that “I’m charging more than my cost” should not suffice to prove you are not engaging in predatory pricing.
The title of chapter eight, “Threats to Innovation from Lessened Competition,” makes you think Jonathan Baker will take on Peter Thiel. Lessened competition is bad for innovation, surely, no? Frustratingly, the issue is framed very narrowly and the author chooses to primarily address whether mergers between innovative competitors should be allowed. Second, the question the courts need to answer, apparently, is “will the world spend less money on R&D following this merger?” The author recommends that the courts assume it will and that the onus should be on the merging firms to demonstrate that they will not. A few pages are dedicated to harms from exclusionary conduct, such as foreclosure of access to inputs or consumers (example: what Microsoft did with Netscape), exclusionary conduct involving patents, the pure Peter Thiel argument that you need money in your pocket before you can think about innovating and of course the classic argument that nobody will bother to innovate if there are no rewards to innovation. The recommendation here is that the courts do the work to weigh the pros and cons, on the basis that “the anticompetitive effects and potential procompetitive benefits of reduced innovation competition … are susceptible to analysis.” Yikes!
Chapter nine, the last of four about two-sided platforms asks a simple question and provides a surprising answer, given what went before. The question is posed: if a two-sided platform (my example: OpenTable, who serves both diners and restaurants) is acting anticompetitively on one side of the platform, but is creating true value on the other side, even more than the dead weight loss it creates on the side where it’s acting in an anticompetitive way, what are the courts to do? The author answers that courts are not in possession of vast macroeconomic models of the entire economy. Their job is to assess if you are acting anticompetitively. If you are, they must punish you.
And then he adds that, well, if you’re creating a whole lot of value, then perhaps not.
It’s that kind of book.
Funnily enough, the concluding chapter, “Restoring a Competitive Economy” is a gem. It starts with the encouraging news that until recently the system has not served us too poorly. As recently as the Mircosoft case, which kept Bill Gates quiet enough for the Internet revolution to occur, it was doing precisely what it was meant to do. Even today, ideologues may be sitting on the Supreme Court, but they are judges first and there’s justification in believing that they are able to judge cases on their merits. The task is not ideological, besides, it is to enforce “deterrence of harmful conduct.” (p. 202) From there, Jonathan Baker briefly outlines three reasons why “doctrinal change” toward stronger enforcement is probably underway (1. It would be the third time the law has to respond to major developments in business practice 2. The electorate is ready for a realignment 3. There are more economic tools that before to help judges tally positives and negatives) and finally offers his five recommendations toward restoring a competitive economy:
• Increase awareness of market power
• Nurture a political mobilization against market power
• Have the antitrust enforcement agencies pick up the baton from the judges
• Use the space offered by lower courts to combat market power
• Rely heavily on economic arguments, not ideology, to argue the welfare benefits of stronger antitrust enforcement
So yeah, Jean Tirole this wasn’t, but I’m glad I read it.
So if it’s a light read you’re after about market power in the US, you’ve definitely come to the wrong place.
You’ve also come to the wrong place if you want straight answers!
Things start conventionally, with the author spending the entire first chapter luring you, the reader, in. He decries the “market paroxysm” period we find ourselves in and details the harmful rise of market power both within the narrow setting of the markets it affects and the economy / society in general: we’ve gotten worse at stopping (i) anticompetitive behavior, (ii) anticompetitive mergers, and (iii) anticompetitive exclusion; oligopolies last; four asset managers intermediate the public’s control of more than half the stock market; most Internet business goes through a tiny bunch of platforms; innovation is accruing benefits to a select few; rent seeking is rampant. The result is that innovation and productivity are suffering. The ultimate section is entitled “A Serious Problem” and at that point you’d be entirely justified to be preparing yourself for a polemic against market power and monopoly.
The rest of the book is anything but. The author’s feelings for those who belong to a “camp” on the issue of antitrust are somewhere between contempt and pity. Lina Khan comes under fire here, for example, in no uncertain (if extremely civil) terms.
But here’s the thing. After 209 pages of the hardest reading I’ve endured in some time, some of which I’ll readily admit went over my head (remember I said that if you spot something backwards in what follows), I have come round to the author’s view: it ain’t that simple. I don’t share the author’s ideology, but he’s convinced me that you cannot tackle the topic of market power with a set of clear rules.
I’ve read a couple books on monopoly this year already (and I’m eagerly looking forward to receiving Matt Stoller’s.) Once the first chapter is out of the way (the last one in plain English, incidentally) author Jonathan Baker starts at the same place as his lay peers, with (i) the US Constitution that enshrines the right of inventors to patents (thereby conceding that the American way is to grant some limited monopoly power to those who innovate) and (ii) the clear need to break the trusts at the end of the nineteenth century. From there, however, he paints a much more nuanced picture.
The 1912 election is presented (p. 37) as the original crossroads. The four presidential candidates all presented the American people with different solutions to the clear problem of the large trusts: Eugene Debs, a socialist, simply proposed that they be nationalized. Republican incumbent, and laissez-faire proponent, Taft did not think anything should be done at all. Woodrow Wilson, the eventual winner, ran on the premise that behemoths should be broken up via very aggressive antitrust legislation. Independent candidate, and former Republican President, Theodore Roosevelt, finally, recognized that large companies were often necessary, but ought to be reined in via regulation.
Wilson won the election, but by-and-large Roosevelt’s ideas won out, the author explains. This is a book that unashamedly celebrates this outcome.
Your first shock as a reader comes in chapter two. The author here essentially sympathizes with the Chicago school. He first concedes that Coase and Bork were right about the chilling effects antitrust had on innovation, that growth has benefited from the approach whereby the aim of our institutions is to maximize innovation and simply observes that politically we’re now at a turning point. Bottom line, we need to rein in business now or else a “leftist political mobilization” (p. 52) will “seek extensive government supervision.” In plain English, we need a Roosevelt to interpret harshly and enforce the current antitrust laws or else companies will be dismembered, in the fashion originally envisaged by Wilson. It’s a sharp turn from where this book starts, that’s for sure.
In the third chapter, Baker takes this argument further. Politics (the business of interest groups using influence to generate favorable outcomes) does not deserve its bad name, he says here. Not in the case of antitrust, at any rate, provided politics is mediated by ideology. The alternative to politics is technocratic enforcement. Technocratic enforcement the author deems inferior to politics, precisely because it cannot be underpinned by ideology. The point is made that technocratic enforcement of antitrust in the golden era of antitrust was characterized by a pursuit of non-economic, non-ideological goals, such as the protection of small businesses. The pursuit of non-economic goals is a bad thing, the author implies, because it’s ultimately futile. These days, besides, the losers in the game enjoy a safety net, he adds, that did not previously exist.
Next, the author tackles horizontal mergers. First he observes that in the US they’re basically all waved through, while in Europe the picture is more varied. Next comes his main point: the law regarding horizontal mergers should not operate through rules. These “bright line rules” do bring advantages (for example, you may refrain from pursuing a merger that violates them if they are clear enough) but the law should do more. It should ask that courts make an effort to weigh the efficiencies that will come from the merger against the dead weight losses stemming from the potential increase in prices / fall in output that will result from lower competition. Indeed, the court should ask the companies to lay out what savings they expect to make and use that as the maximum and then do the work to assess whether these savings do actually amount to more than the potential losses via lower competition. This work should take consideration of the already existing market concentration, of the type of merger that’s being mooted (is a maverick being taken out?) and of the existence of substitutes for the goods or services in question. (“the Germans?” “forget it, he’s rolling”)
In the fifth chapter, the author starts by listing and refuting five “erroneous arguments against enforcement,” namely
1. Markets Self-Correct through Entry
2. Markets Self-Correct Because Oligopolies Compete and Cartels Are Unstable
3. Monopolies Innovate
4. Monopolists Cannot Obtain More than a Single Monopoly Profit (an argument used to allow monopolists to make exclusive vertical agreements) and
5. Business Practices Prevalent in Competitive Markets Cannot Harm Competition.
From there, he proceeds to refute arguments made against the courts (who are alleged to have too much power, to be unable to judge on the potential harm of exclusionary conduct and to give the advantage to whoever can spend most to litigate) and against the enforcement agencies, who stand accused of being manipulated by complaining competitors.
In conclusion, both to this fifth chapter and to the first part of the book, the author rings the alarm. We are at risk of “rejecting antitrust by stealth.”
The second part of the book is comprised of four chapters and concerns two-sided platforms.
Chapter six first demonstrates how two algorithms might work that allow companies who ought to be competing on price to actually collude. In the simpler one of the two algorithms we have two companies competing on one product in one market. The way the algorithm works is you have in mind a price above which you won’t go and there is a price below with you can’t go, or you will lose money. What you do is you immediately match any downward move by your competitor, to make sure you don’t lose market share, but every once in a while, out of the blue, you nudge up your price in the hope that he will follow you upward. Finally, whenever the competitor nudges his price up, and provided you are not at your ceiling, you follow him up. The process, if followed by both sides, ends up at the lower of the two ceilings. The second algorithm works across two markets, with each competitor having an advantage in one of the two markets and again there is an optimum behavior, whereby prices end up even higher than they would if each market’s price was clearing independently. The author’s insight here is simple:
1. If prices move as they would under an algorithm, the law should not care if the price movement is intended or not, it should assume collusion
2. It is the competitors who will have to prove they are not engaging in collusion.
3. When considering mergers, the court will have to judge whether a merger is potentially eliminating a maverick in this game of anti-competitive algorithmic price-setting
Chapter seven is the hardest, but also the most fascinating, in the whole book. It’s also the longest. And ultimately the most frustrating. You get treated to a long list of ways dominant platforms exclude their competitors: vertical mergers (like Amazon buying Zappos), not sharing data with the very partners it came through, targeting through data analysis those customers of platform participants who are liable to respond to discounts (for example, showing lower prices on own-brand diapers only to customers who the data says must have had a baby, but not passing that information to other diaper vendors, thereby fishing back producer surplus without much affecting the market-clearing price), not accepting advertising from firms advertising on a competitive platform, imposing platform “most-favored-nation” provisions (“nobody can have lower prices on your products than we do”), predatory pricing etc. Unfortunately, the author is almost as bad at making recommendations as he is good at identifying the problems. On the question of predatory pricing, for example, the reason is simple: lots of these platforms will probably never make money. Uber is a charity to the middle class, but to end up hurting us (or even cab drivers in the long run) it will have to avoid bankruptcy. In the meantime, we all understand why cabbies are frustrated, but for them to be vindicated Uber first needs to be able to turn on the screws and act like the existing cartel they are supplanting. A single ray of light is offered here: the defense that “I’m charging more than my cost” should not suffice to prove you are not engaging in predatory pricing.
The title of chapter eight, “Threats to Innovation from Lessened Competition,” makes you think Jonathan Baker will take on Peter Thiel. Lessened competition is bad for innovation, surely, no? Frustratingly, the issue is framed very narrowly and the author chooses to primarily address whether mergers between innovative competitors should be allowed. Second, the question the courts need to answer, apparently, is “will the world spend less money on R&D following this merger?” The author recommends that the courts assume it will and that the onus should be on the merging firms to demonstrate that they will not. A few pages are dedicated to harms from exclusionary conduct, such as foreclosure of access to inputs or consumers (example: what Microsoft did with Netscape), exclusionary conduct involving patents, the pure Peter Thiel argument that you need money in your pocket before you can think about innovating and of course the classic argument that nobody will bother to innovate if there are no rewards to innovation. The recommendation here is that the courts do the work to weigh the pros and cons, on the basis that “the anticompetitive effects and potential procompetitive benefits of reduced innovation competition … are susceptible to analysis.” Yikes!
Chapter nine, the last of four about two-sided platforms asks a simple question and provides a surprising answer, given what went before. The question is posed: if a two-sided platform (my example: OpenTable, who serves both diners and restaurants) is acting anticompetitively on one side of the platform, but is creating true value on the other side, even more than the dead weight loss it creates on the side where it’s acting in an anticompetitive way, what are the courts to do? The author answers that courts are not in possession of vast macroeconomic models of the entire economy. Their job is to assess if you are acting anticompetitively. If you are, they must punish you.
And then he adds that, well, if you’re creating a whole lot of value, then perhaps not.
It’s that kind of book.
Funnily enough, the concluding chapter, “Restoring a Competitive Economy” is a gem. It starts with the encouraging news that until recently the system has not served us too poorly. As recently as the Mircosoft case, which kept Bill Gates quiet enough for the Internet revolution to occur, it was doing precisely what it was meant to do. Even today, ideologues may be sitting on the Supreme Court, but they are judges first and there’s justification in believing that they are able to judge cases on their merits. The task is not ideological, besides, it is to enforce “deterrence of harmful conduct.” (p. 202) From there, Jonathan Baker briefly outlines three reasons why “doctrinal change” toward stronger enforcement is probably underway (1. It would be the third time the law has to respond to major developments in business practice 2. The electorate is ready for a realignment 3. There are more economic tools that before to help judges tally positives and negatives) and finally offers his five recommendations toward restoring a competitive economy:
• Increase awareness of market power
• Nurture a political mobilization against market power
• Have the antitrust enforcement agencies pick up the baton from the judges
• Use the space offered by lower courts to combat market power
• Rely heavily on economic arguments, not ideology, to argue the welfare benefits of stronger antitrust enforcement
So yeah, Jean Tirole this wasn’t, but I’m glad I read it.
September 10, 2022
There have been a few books on this topic; they attempt to offer an explanation for the goliaths of the digital realm. These focus on the USA, though the digital titans of China, stand on the opposite side of the Pacific. Given the nature of the economics, it is hard to see how a Baby-Bell like breakup could occur here, or restrictions placed ala. Microsoft. There appeared to be a coordinated attempt to do this on both sides of the USA vs. China divide at one point- this effort has stalled. It would be difficult to coordinate in any event, especially with the trade war.
April 30, 2023
Good reference book for antitrust enforcement through the courts with legal analysis. Informative but mostly theoretical and kind of dry.
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