Frequent news of corporate mergers has generated an increased interest in antitrust issues in recent years. This paper examines the history of antitrust legislation in the U.S., discusses the longstanding debate around its purpose, and offers data to demonstrate that, in recent years, it has failed to stem the tide of corporate concentration or decreased competition—with serious consequences. The authors conclude by recommending four reforms to antitrust enforcement that should enjoy consensus.
TABLE OF CONTENTS
I. The monopoly moment
II. Rising concentration
III. Declining competition
IV. Consequences of rising concentration and declining competition
V. The goals of antitrust legislation and enforcement
VI. Reform proposals
The past few years have witnessed an upsurge of interest in antitrust issues. Research centers and policy-oriented journals have released a slew of briefings and symposia focused on the topic. But antitrust is not merely an object of scholarly concern; it has also become an important political talking point. During the 2016 U.S. presidential race, both candidates called for strengthening antitrust enforcement on the campaign trail.
Events over the past year have also inspired renewed attention. In July, the Democratic Party released an economic agenda that included an entire section devoted to reinvigorating antitrust enforcement. In November 2017, to the surprise of many, the new head of the Justice Department’s Antitrust Division intervened to block the planned merger between AT&T and Time-Warner. Since then, other deals have threatened further consolidation. In the month of December alone, plans for two megamergers were underway. CVS Health Corp., the drugstore retailer and pharmacy benefit manager, agreed to buy the health insurance company Aetna for $69 billion. Days later, a $52.4 billion deal between TV entertainment giants Disney and 21st Century Fox was announced.
As these dominant players take steps that would entrench their market position, recent developments on Capitol Hill suggest a serious re-evaluation of the purposes and powers of antitrust law and enforcement has begun. Bills seeking to bolster antitrust enforcement have been introduced in both chambers. Several members of Congress have even come together to form a Monopoly Caucus. And just this past December, the Subcommittee on Antitrust, Competition and Consumer Rights of the Senate Judiciary Committee convened a hearing to probe the adequacy of the “consumer welfare” standard that has guided antitrust enforcement and the judiciary for the past four decades.
In 1954, the top 60 firms accounted for less than 20 percent of GDP. Now, just the top 20 firms account for more than 20 percent.
A glance at history helps explain why this is happening. During the past 125 years, there have been three great waves of mergers and corporate concentration, each followed by a burst of political and legislative activity.
The emergence of the corporate-industrial economy: According to a study by law professor Carl Bogus, “In just a nine-year period beginning in 1895, more than 1,800 companies were eliminated through mergers and acquisitions. That mergers wave created scores of firms with more than forty percent of their respective markets, and forty-two firms with more than seventy percent of their markets.”1 This evoked a response by the federal government: stepped-up enforcement of the Sherman Antitrust Act—the first major piece of antitrust legislation—during the presidencies of Theodore Roosevelt and William Howard Taft. This was followed by the passage of the Clayton Antitrust Act, which strengthened Sherman Act provisions and introduced merger controls, as well as the creation of the Federal Trade Commission (FTC) under Woodrow Wilson.
World War II and its aftermath: Between 1940 and 1947, more than 2,450 manufacturing and mining firms were swallowed up by mergers and acquisitions. By the end of that period, the nation’s 78 largest firms held enough cash and government securities to purchase 90 percent of all the manufacturing firms in the country.2 This second wave of concentration also produced a governmental response: an expansive interpretation of key antitrust statutes by the Supreme Court as well as the Celler-Kefauver Act in 1950 and the Hart-Scott-Rodino Act in 1976, which both increased government powers to review and block mergers.
Post-1980: Since 1980, we have witnessed a surge of consolidation. In the past two decades, the pace of concentration has been accelerating. The Fortune 500’s revenue as a share of GDP has increased from 58 percent to 73 percent. The share commanded by the largest firms—the Fortune 100—has risen from 33 percent to 46 percent. The Fortune 100/500 ratio went up from 57 percent to 63 percent. In 1954, the top 60 firms accounted for less than 20 percent of GDP. Now, just the top 20 firms account for more than 20 percent.
Over the last two decades, over 75 percent of U.S. industries have seen an increase in concentration, with the number of firms competing against one another in precipitous decline.
A sectoral analysis confirms this trend. During the past decade, the chemical company Monsanto purchased more than 30 companies, Oracle more than 80, and Google more than 120. Between 1994 and 2000, more than 80 aerospace-defense firms merged into four dominant firms. In a field once densely populated with independent publishers, just five conglomerates now account for two-thirds of all the books published in the United States. After a flood of mergers and acquisitions, Anheuser-Busch Inbev and South African Breweries today control 80 percent of the domestic beer market.3 Between 1980 and 1994, there were more than 6,000 bank mergers. In the decade from 1988 to 1997, the share of nationwide assets held by the eight largest firms surged from 22.3 percent to 35.5 percent. And then, in 1988, eight of the largest firms consolidated into just four megabanks.4 Pull back the camera and take a long view: In 1984, the 10 largest banks in the country held less than 30 percent of total financial assets. By 2012, that figure had swelled to 54 percent.5
These startling figures speak for themselves, but multiple analyses, using a variety of measurements, reveal that rising market concentration is a troubling, economy wide phenomenon.
In March 2016, The Economist released a feature story on rising concentration in the U.S. The cover captured America’s “monopoly moment,” depicting an anxious crew of businessmen fighting to preserve their territory on an overflowing pile of moneybags surrounded by a barbed wire fence. Atop the pile, one man stands above the rest, holding an American flag. The caption reads, “Winners take all: Why high profits are a problem for America.”
The story contains an Economist analysis of 893 industries and identifies the market share held by the four largest firms within each.6 It finds that between 1997 and 2012, two-thirds of industries became more concentrated.7 During this period, the weighted average share of the top four firms in each sector rose from 26 percent to 32 percent.
Research led by MIT economist David Autor confirms this trend. Between 1982 and 2012, the top four firms in the six major sectors of the U.S. economy became steadily and significantly more concentrated.8 In the manufacturing sector, the sales concentration ratio of the top four firms increased from 38 percent to 43 percent. Retail trade saw its sales concentration double to 30 percent from 15 percent, wholesale trade a change from 22 percent to 28 percent, services a rise from 11 percent to 15 percent, finance a substantial increase from 24 percent to 35 percent, and utilities and transportation a bump from 29 percent to 37 percent. Conducting this analysis for the same sectors looking at the sales concentration ratio of the top 20 firms in each sector yields similar results.
Studies relying on a different measure of concentration, the Herfindahl-Hirschman Index (HHI), reach the same conclusion—the American economy has become increasingly consolidated. Over the last two decades, over 75 percent of U.S. industries have seen an increase in concentration, with HHI rising across industries and the number of firms competing against one another in precipitous decline.9
Looking at sector-specific increases in HHI, research shows economy wide increases in concentration between 1982 and 2012.10 HHI in manufacturing rose from 800 to 875. In finance, HHI rose from 300 to 700, services 950 to 1,375, utilities and transportation 525 to 725, retail trade 125 to 625, and wholesale trade 325 to 350.
The fact that concentration is rising throughout the economy—and does not merely reflect the peculiarities of some markets—should give reason to pause.
Although these studies suggest the American economy is plagued by rising market concentration, Carl Shapiro, a former Deputy Assistant Attorney General for economics at the Antitrust Division of the U.S. Department of Justice, has urged caution. “I very much doubt that many antitrust economists would be concerned to learn that a market had experienced these types of increases in the … HHI,” he recently wrote in a paper entitled “Antitrust in a Time of Populism.”11 It’s true: The current Horizontal Merger Guidelines classify markets as highly concentrated if they reach above a 2,500 HHI threshold.12 Nevertheless, the fact that concentration is rising throughout the economy—and does not merely reflect the peculiarities of some markets—should give reason to pause. The problem may not lie in documented HHI levels failing to breach the point at which antitrust scrutiny is triggered, but in a threshold insufficiently concerned with the threat posed by concentration levels below those identified by current agency guidelines. Research suggests the latter.
John Kwoka’s comprehensive study of merger activity finds that in narrowly focusing on the highest concentration cases, antitrust enforcement has failed to capture the anti-competitive effects of allowing mergers at the enforcement margin to proceed. This permissive approach, he concludes, has directly contributed to rising concentration.13
And while enforcement against mergers at the margin could use strengthening, other studies find that concentration levels that would ordinarily trigger antitrust scrutiny haven’t. A Wall Street Journal analysis identifies several markets whose concentration levels now stand above the 2,500 HHI level deemed “highly concentrated” by the 2010 Horizontal Merger Guidelines.14 In the food and staples retail industry, HHI stood at 2,000 in 1996, and by 2013, the number rose to 3,000. The internet software industry saw an even more dramatic surge, from 750 HHI in 1996 to 2,500 HHI in 2013. The Federal Communications Commission finds the wireless market has also seen a dramatic rise in concentration. In 2008, HHI stood below 2,700, but by 2013, it had risen above 3,000 HHI.15
But rising concentration is only the first half of the story. The other half tells how the competition so fundamental to our dynamic, free market system is now under threat.
Several trends indicate competition across the economy is in decline. Taken individually, each trend might not elicit serious concern, but taken together as pieces of the same puzzle, they paint a troubling picture.
Today’s firms are astoundingly profitable. Corporate profits as a share of GDP have been rising steadily over the last 30 years. While in the mid-1980s, corporate profits made up seven-to-eight percent of GDP, today that share has risen dramatically to 11-12 percent of GDP.16 One could read this surge as a sign of healthy corporate success that antitrust policy should not punish. However, the trend also suggests firms may be earning returns above competitive levels. In this case, weakened competition has yielded supra-normal profits. Additional evidence bolsters this suspicion.
Not only are profits on the rise, but American firms today are persistently profitable. While a profitable American firm in the 1990s had a 50 percent chance of finding itself similarly successful 10 years on, a very profitable American firm today enjoys over an 80 percent chance.17 When the forces of competition are at work, rivals regularly displace incumbents. That persistently high profits remain unchallenged suggests many firms may be receiving a return on market power.
Rising concentration is only the first half of the story. The other half tells how the competition so fundamental to our dynamic, free market system is now under threat.
Declining competition is also evidenced by labor’s falling share of GDP. While many assume the decline in labor’s share has been offset by an increase in capital share, University of Chicago’s Simcha Barkai clarifies that the labor and capital share have been declining simultaneously between 1984 and 2014, offset by rising profits in the non-financial corporate sector.18 This is a set of trends for which declining competition is the most plausible explanation.
A breakdown in the competitive process is also demonstrated by today’s lackluster start up activity. U.S. startup formation rates have fallen dramatically over the last thirty years and among startups that are formed, more are failing compared to previous decades. This shift suggests start ups today are encountering barriers to entry and researchers find that consolidation helps explain the widespread fall in firm formation rates across economic sectors and geographic areas.19 The mechanisms of creative destruction are breaking down, with today’s start ups failing to displace incumbents and the market position of dominant firms becoming more entrenched.
Lastly, a paper by Germán Gutiérrez and Thomas Philippon finds a causal relationship between competition and investment. Today’s business sector underinvestment indicates insufficient competition.20
Taken in its entirety, evidence of rising concentration and declining competition suggests the time has come to reinvigorate antitrust law and its enforcement. The need to correct course becomes particularly clear in light of the economy wide consequences that have resulted from under-enforcement.
In a comprehensive study, John Kwoka examined the price changes of 119 products before and after mergers and the establishment of joint ventures.21 He found that for nearly two-thirds of products, prices rose. In nearly one-third of cases, the price increase was equal to or greater than 10 percent, and in one-fifth of cases, the price increase was equal to or greater than 20 percent. Among the cases studied, the antitrust agencies only pursued action against 38 percent of them. Unless consumer welfare is simply equated with GDP maximization, an assumption that undercuts the basic motivation for antitrust enforcement, these price increases suggest that under-enforcement has had negative consequences that should corrected.
Declining competition has also resulted in rising income inequality. Consolidation in the health-care industry, for instance, has meant that for some patients, the cost of routine health services have increased by as much as several hundred percent.22 Facing few competitors, today’s cable providers have raised the price of subscriptions.23 Concentration in the airline industry has led to fare surges for some routes. These kinds of price increases for routine expenses are particularly burdensome for individuals and families on the lower end of the income distribution.
But rising concentration does not merely hurt consumers at the bottom, it is further increasing the economic disparity among workers.
For all Occupy Wall Street did to place income inequality at the center of the national conversation, its focus on CEO versus typical worker compensation missed the even starker disparity between similarly positioned workers earning different incomes based on where they work. As multiple studies show, earnings inequality occurs largely between firms rather than within firms.24 What’s behind this trend? Former Council of Economic Advisers Chair Jason Furman and former Director of the Office of Management and Budget Peter Orszag find that, because today’s top firms enjoy super-normal returns to capital, workers employed by top firms often benefit from the higher wages that result from increased economic rents. This inter-firm inequality is widening the earnings disparities among workers.25
Declining startup formation, corporate ossification, and underinvestment
Declining dynamism has stark implications for the labor market, with a 30 percent drop in the share of U.S. employment accounted for by young firms over the last 30 years.26 With dominant firms taking in a greater share of total revenue, today’s employers tend to be large, national firms. This consolidation threatens potential competitors that have historically served as a major source of job creation.
From the beginning, the purpose of antitrust has been subject to multiple interpretations. The language of the Sherman Act is rightly described as quasi-constitutional, and its meaning was to be clarified through a common-law process of adjudication. The floor debate on the Sherman Act offered a stew of economic, political, and moral aims that individual supporters hoped it would promote. In the course of the debate, Sen. John Sherman, the bill’s lead sponsor, had this to say:
The popular mind is agitated with problems that may disturb social order, and among them none is more threatening than the inequality of condition, of wealth, and opportunity that has grown within a single generation out of the concentration of capital into vast combinations to control production and trade and to break down competition.
If the concentrated powers of [a] combination are intrusted to a single man, it is a kingly prerogative, inconsistent with our form of government. … If we will not endure a king as a political power, we should not endure a king over the production, transportation, and sale of the necessities of life.
Sherman objected to excessive economic concentration, both on principle and for what he saw as its negative consequences. Others emphasized the importance of preserving local businesses, protecting consumers (and small producers) against the superior market power of large corporations, and safeguarding the competitive process.
For decades, the language of court decisions reflected this mix of public purposes.
When the Supreme Court banned the proposed merger between the Great Northern and Northern Pacific railroad companies, Justice John Marshall Harlan argued: “The mere existence of such a combination, and the power acquired by the holding company as its trustee, constitute a menace to, and a restraint upon, that freedom of commerce which Congress intended to recognize and protect.”27
Siding with the Justice Department’s Sherman Section 2 suit against the Aluminum Company of America for unlawful monopolization, Judge Learned Hand argued that the purpose of antitrust law was not merely to preserve the freedom of commerce but to encourage a particular form of industrial organization. In the Second Circuit’s decision, he wrote:
We have been speaking only of the economic reasons which forbid monopoly; but … there are others, based on the belief that great industrial consolidations are inherently undesirable, regardless of their economic results. … Throughout the history [of the Sherman Act and other antitrust laws] it has constantly been assumed that one of their purposes was to perpetuate and preserve, for its own sake and in spite of possible cost, an organization of industry in small units which can effectively compete with each other.28
Echoing this argument, Chief Justice Earl Warren wrote that antitrust should prioritize maintaining a decentralized economy over achieving cost and price efficiencies. Delivering the majority opinion for the 1961 Brown Shoe Company case, which prevented a vertical merger between a shoe manufacturer and retailer on the grounds that such a combination would threaten competition in the industry, Chief Justice Warren wrote:
Throughout the recorded discussion [of the Celler-Kefauver Act of 1950] may be found examples of Congress’ fear not only of accelerated concentration of economic power on economic grounds, but also of the threat to other values a trend toward concentration was thought to pose.
It is competition, not competitors, which the Act protects. But we cannot fail to recognize Congress’ desire to promote competition through the protection of viable, small, locally owned businesses. Congress appreciated that occasional higher costs and prices might result from the maintenance of fragmented industries and markets. It resolved these competing considerations in favor of decentralization (authors’ italics).29
Finally, in the Supreme Court’s opinion in U.S. v. Von’s Grocery, Justice Hugo Black went even further, arguing that antitrust laws are meant specifically keep small competitors in business:
The basic purpose of the 1950 Celler-Kefauver Act was to prevent economic concentration in the American economy by keeping a large number of small competitors in business. [Congress sought to do this] by arresting a trend toward concentration in its incipiency before that trend developed to a point that a market was left in the grip of a few big companies.30
Until nearly the end of the 1970s, in sum, court decisions reflected two basic principles: first, that antitrust enforcement was designed to serve multiple purposes, political as well as economic; and second, that it was the courts’ responsibility to balance these purposes in light of the facts in particular cases.
Starting in the 1960s, however, a counter-movement developed, based on the proposition that law should reflect, and should be interpreted in light of, economic theory. This burgeoning Law and Economics movement challenged the underpinnings of many areas of law.
Rising concentration and declining competition suggests the time has come to reinvigorate antitrust law and its enforcement. The need to correct course becomes particularly clear in light of the economy wide consequences that have resulted from under-enforcement.
Robert Bork’s 1978 book, “The Antitrust Paradox: A Policy at War with Itself,” crystallized the Law and Economics-inspired revolt against decades of antitrust jurisprudence. “Certain of its doctrines preserve competition,” Bork argued, “while others suppress it, resulting in a policy at war with itself.”31 Multiple and incompatible goals, moreover, opened the door to judicial activism untethered from principle, leading to the acceleration of what he termed the “protectionist, anticompetitive strain in the law.”32
To remedy these ills, Bork proposed to eliminate the qualitative and pluralist dimensions of antitrust enforcement. “The only legitimate goal of American antitrust law,” he famously declared, is the “maximization of consumer welfare.”33 But “consumer welfare” is not a self-explicating concept, and Bork advanced an additional specification: “Consumer welfare … is merely another term for the wealth of the nation.”34 So, if a proposed economic arrangement maximizes total output, it meets the standard—even if it ends up transferring wealth from consumers to producers.
It will be observed that this thesis stood at some remove from most people’s intuitive understanding of what antitrust laws were designed to promote—or prevent. Bork had an explanation for this discrepancy. “Antitrust is a subset of ideology,” he asserted at the beginning of his book.35 He returned to this theme at the end: “To claim, as I have, that antitrust is a subcategory of ideology is necessarily to assert that it connects with the central political and social concerns of our time.”36
In hindsight, we can see that Bork’s “time” represented a hinge moment in post-war history when U.S. business felt increasingly beleaguered by foreign competition. Business leaders concluded that they could no longer afford the accommodations they had made, either to the interests of workers and local communities or to the interests served by laws and regulations that imposed additional costs on the private sector. The post-war system of trilateral accommodation among business, labor, and government weakened, business resistance to labor intensified, and conservative political leaders promised a better business climate, including less resort to antitrust action against mergers and acquisitions.
That was then. In the four decades since the publication of Bork’s book, new concerns have arisen about the consequences of growing corporate concentration, which include not only increased inequality and decreased entrepreneurship, but also the concentration of economic growth into a small number of geographical areas. In 2016, Hillary Clinton won just 472 counties, but they represented 64 percent of the GDP, compared to 36 percent for the 2,584 counties that Donald Trump carried.37 In many small towns and rural counties, a single “big box” store owned by a national firm has replaced a multiplicity of locally owned small businesses. As was the case a century ago, scholars and community leaders worry about the civic consequences of concentration, both for localities and for national governance.
It is hard to miss the references to the civic and political consequences of economic concentration that suffused congressional debates over antitrust legislation, but in our deeply polarized circumstances, the need to make political judgments could tie administrations in knots.
These developments have led to a division of expert opinion that Diana Moss, the president of the American Antitrust Institute, described lucidly in her recent testimony before the Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights. Until recently, she observed, there were two major camps. Conservatives invoke Bork’s total welfare standard and regard efficiency-enhancing mergers as presumptively legitimate, even if they involve anti-competitive conduct. For their part, progressives employ a consumer welfare standard broad enough to encompass “non-price dimensions of competition such as quality and innovation.” Progressives also back the “structural presumption” that mergers combining players with large market shares are presumptively illegal.
Conservatives are sensitive to the charge that the total welfare standard fails to distinguish between static and dynamic analysis—that is, between the short-term and long-term effects of mergers and sectoral concentration. In his testimony at the Senate hearing, Abbott Lipsky Jr. from George Mason University’s Antonin Scalia Law School addressed this issue directly. “Given the absolutely critical role of innovation in improving our economic well-being,” he declared, the resolution of difficult antitrust issues must take into account “their long-run effect on economic productivity, including most specifically the possible effects on innovation, as well as output, product quality, and other key economic variables.”
This proposal moves the conservative position toward the dynamic realities of the modern economy, at the cost of reducing the enforcement clarity and predictability that conservatives have always highlighted as a key advantage of their position. In principle, it also opens conservative antitrust enforcement to the possibility of predatory pricing, when deep-pocketed firms lower prices to drive small competitors out of business, allowing them to raise prices later.
Recently, Moss observes, a third position—populism—has re-entered the fray. Contemporary populists regard the consumer welfare standard as inadequate, not only because it fails to deal with the modern internet-driven marketplace and the buyer power it creates, but also—and mainly—because it pays no attention to the political dimension of antitrust. If antitrust laws were designed to prevent the conversion of concentrated economic power into concentrated political power, then their enforcement should do so directly, as distinguished judges and justices had done for many decades.
Conservatives have long objected to the use of political standards in antitrust, on the grounds that they opened the door to arbitrary rulings based on the preferences of administrators and judges. Political standards are inherently unpredictable, conservatives argue, and do not give businesses the certainty they need to make long-term plans.
Progressives have their own objections to the populist proposal. They fear that replacing the consumer welfare standard would throw enforcement into disarray. Besides, they argue, firming up the consumer welfare standard, enforcing it vigorously, codifying the structural presumption, and requiring merging parties to justify their consumer welfare claims both before and after mergers take place would accomplish much of what populists seek at a fraction of the political and administrative costs the populist program would entail.
The populists offer a plausible account of the historical record, we believe. It is hard to miss the references to the civic and political consequences of economic concentration that suffused congressional debates over antitrust legislation—and decades of subsequent court decisions. At the same time, we share the progressives’ doubts about the wisdom of explicitly bringing political considerations back into antitrust enforcement. In our deeply polarized circumstances, the need to make political judgments could tie administrators in knots. As Carl Shapiro observed in his Senate testimony, “The core mission of antitrust, to promote competition, could easily be undermined if we ask antitrust to solve problems unrelated to competition.”
We cannot expect antitrust enforcement to do everything needed to rein in the political power of corporations. As Shapiro observed, agencies other than the Department of Justice and the FTC—such as the Federal Communications Commission, the Federal Energy Regulatory Commission, and the Department of Transportation—are responsible for ensuring competition in many sectors of the economy. Nor can antitrust enforcement bring about a society in which opportunity is available to all. Those who want a more progressive tax system or campaign finance reform cannot hope to attain their goals through indirection. Only legislation explicitly focused on these issues can get the job done. Effective antitrust enforcement based on sound standards and solid evidence is a big enough task to occupy reformers for years to come.
Before turning to specific proposals, we offer some general remarks about the perspective that guides our recommendations.
First: Although economic analysis is central to antitrust enforcement, economic theory is no substitute for empirical evidence about real-world behavior and consequences. Institutions matter—so do non-economic motives for business choices—and so do the kinds of cognitive distortions that the behavioral economics movement has highlighted. For decades, economic theory led former Federal Reserve Board Chair Alan Greenspan to excessive confidence in financial self-regulation. Greenspan’s rueful post-hoc reflections should serve as the epitaph for an era where theory blinded regulators and policymakers to facts on the ground.
The problems of today’s increasingly globalized, concentrated, and unequal economy are very different from those of the late 1970s, when the broad outlines of today’s antitrust regime took shape.
Second: As national circumstances change, antitrust enforcement must evolve. The problems of today’s increasingly globalized, concentrated, and unequal economy are very different from those of the late 1970s, when the broad outlines of today’s antitrust regime took shape.
Third: In practice, antitrust enforcement reflects basic presumptions. In recent decades, for example, administrators and courts have been driven by the fear of “false positives”—of actions that inadvertently sanction behavior that undermines neither competition nor the interests of consumers. In the process, enforcement has tolerated “false negatives”—instances of anti-competitive, anti-consumer behavior that should have been sanctioned but was not. The system has lurched from one extreme to the other and requires recalibration.
Fourth: In current circumstances where the evidence of increasing sectoral concentration is persuasive, prospective mergers and acquisitions should bear a higher burden of proof than they now do. Firms should be required to demonstrate how their proposed action will serve the interests of consumers, broadly understood, not just tomorrow but for the reasonably foreseeable future.
Below are four reform proposals for reinvigorating antitrust enforcement that should garner broad support.
Reinvigorate the structural presumption and tighten enforcement standards for horizontal mergers.
The current Horizontal Merger Guidelines state, “Mergers that cause a significant increase in concentration and result in highly concentrated markets are presumed to be likely to enhance market power.” In principle, this presumption places the burden of proof where it belongs, on firms whose proposed action would significantly increase concentration. The guidelines go on to state that only “persuasive evidence” will suffice to rebut this presumption.
The issue is whether these facially sensible guidelines lead in practice to effective enforcement. The evidence suggests that they do not, for two reasons. First, the FTC has focused its efforts on the highest concentration industries—those with four or fewer competitors—while other enforcement actions have all but disappeared. But recent research has shown that mergers below the four-firm level have led to increased market power and higher consumer prices.38 Similarly, FTC enforcement has shifted to focus on cases creating the greatest change in HHI, even though cases at the margin have had anti-competitive effects. This suggests that antitrust enforcers should lower the threshold at which prospective mergers are subject to rigorous scrutiny. It is possible to reduce false negatives without significantly increasing the number of false positives.39
The second problem with current horizontal merger enforcement: The standard for “persuasive evidence” sufficient to rebut the structural presumption has been set too low. Because much of this evidence involves the future effects of actions taken or not taken, it will always involve an element of speculation and will rarely if ever be conclusive. The best remedy for this problem, we believe, is to make merger approvals conditional and reversible if evidence emerges, within a reasonable period, of anticompetitive effects that harm consumers through higher prices, lower quality, or slower innovation. As former FTC head Robert Pitofsky has stated, this “look-back” authority has been used in the past and seems especially well suited to dynamic markets in fast-changing industries.
Update the Non-Horizontal Merger Guidelines
As we indicated earlier in this policy brief, the Non-Horizontal Merger Guidelines have not been updated and reissued since 1984. This reflects, in part, economic theory that minimizes the incidence and impact of anti-competitive effects from non-horizontal mergers. But here as elsewhere, theory and evidence diverge. Vertical integration can have anti-competitive effects, and the guidelines should be revised to reflect this reality in its standards and practices.
The Justice Department’s recent move to block the AT&T/Time-Warner merger underscores the urgency of updating the guidelines to reflect changes in markets over the past 33 years.
We are hardly the first to make this proposal. In 2007, the Antitrust Modernization Commission recommended updating the guidelines, as did the American Bar Association’s Section of Antitrust in 2013. The Justice Department’s recent move to block the AT&T/Time-Warner merger underscores the urgency of updating the guidelines to reflect changes in markets over the past 33 years.
Although it is beyond the scope of this brief to offer a comprehensive revision of the guidelines, we can summarize relevant considerations that experts have identified. Among their recommendations:
- Do not rely on the presumption that non-horizontal mergers are pro-competitive, but rather base decisions on the facts and evidence of specific cases.
- Give more weight to potential harms, using a sliding scale for mergers that raise more significant concerns.
- Pay special attention to acquisitions by dominant firms.
- Place the burden of proof on the merging parties to demonstrate pro-consumer effects.
- Take barriers to entry into account in assessing the likely effects.
- Assess the merged firm’s incentive to raise prices on “downstream” rivals.
- Establish a clear process for post-merger review.
We note, in addition, a broad consensus on the skepticism that the Assistant Attorney General for Antitrust has recently expressed about the adequacy of “behavioral” remedies for the anticipated anti-competitive effects of proposed non-horizontal mergers. To pre-empt these effects, structural remedies are the preferred strategy, even—or perhaps especially—if they lead merging parties to walk away from the deal.
Institute an enforcement regime to deal with predatory pricing
Oligopolies and monopolies can engage in two different forms of anti-competitive activities. “Exclusionary” conduct prevents new competitors from entering a market, while “exploitative” conduct allows dominant parties to take advantage of their market power. Most countries have regimes addressing both kinds of abusive behavior. By contrast, the United States has few tools to wield against exploitation. When episodes such as Mylan’s 400 percent price hikes for its EpiPen product evoke public outrage, the government is forced to rely on hearings and public shaming to induce corporations to lower monopoly pricing, a strategy that often fails.
As John DeQ. Briggs argues, the government could seek expanded authority under Section 5 of the FTC Act to go to after firms that exploit their market power against the welfare of consumers. What many critics viewed as overly aggressive application of Section 5 during the Carter administration has chilled enforcement ever since. But here as elsewhere, the pendulum has swung from one extreme to the other while real-world circumstances have changed dramatically, warranting a renewed look at this potential tool for protecting consumers.
Most countries have regimes addressing a range of abusive, anti-competitive corporate behavior. By contrast, the United States has few tools to wield against exploitation.
Exploitation can also take a subtler form, known as “predatory pricing,” in which a strong firm will cut prices temporarily to force weaker parties to accept takeover bids or exit the market altogether, after which the firm uses its increased dominance to raise prices. Over the past 25 years, in the wake of the Supreme Court’s decision in Brooke Group Ltd. v. Brown and Williamson Tobacco, antitrust actions against predatory pricing have halted. In this case, the Supreme Court required plaintiffs to show that the firm both set its price below cost and had a substantial likelihood of recovering its losses once its actions had altered the market advantageously.
Relying on Chicago School economic theory, the Supreme Court also argued that because predatory pricing rarely occurs, an anti-predation regime would generate false positives, preventing price cuts that are good for consumers. The Supreme Court acknowledged that its framework would also yield false negatives, because price cuts that remain above the cost of production can also have anti-competitive effects. But its aversion to false positives, which would chill “legitimate price-cutting,” trumped its concern about permitting some anti-competitive practices.
As C. Scott Hemphill and Philip Weiser point out, action against predation remains possible to a greater extent than many practitioners and public officials realize.40 The Brooke Group framework is flexible enough to permit case-specific evidence and more modern forms of economic analysis to prevail against offending firms. It would be useful, however, to bring a case that challenges the framework directly, especially the requirement that the contested pricing must be below cost. As Amazon’s acquisition of Quidsi shows, price cuts that reduce but do not eliminate a dominant actor’s profit margin can force weaker actors to capitulate, rendering the market less competitive.41
Reduce the costs of antitrust enforcement
Enforcing antitrust laws is typically slow and expensive. Individual cases, such as the Justice Department’s Microsoft and AT&T investigations, can last for a decade and consume an outsize share of an agency’s resources. In these circumstances, the government is understandably reluctant to initiate actions against large firms with deep pockets.
Prior to 1974, the rules allowed automatic appeals of district courts’ antitrust decisions to the Supreme Court, bypassing an entire level of appellate review. In light of the enforcement experience since this rule was repealed in 1974, the case for legislation that reinstates this rule is strong. This is particularly true for anti-monopoly cases arising under Section 2 of the Sherman Act. The longer monopoly abuses are allowed to persist, the more entrenched offenders become, and the more unlawful rents they can extract from consumers. Forcing firms to disgorge these ill-gotten gains after the fact is difficult at best, and there is no way of compensating potential entrepreneurs whom monopolistic firms deterred from starting new businesses.42
A fair reading of the historical record, we believe, will find both economic and civic/political motivations for the development and enforcement of antitrust legislation. It was perfectly reasonable to worry about the effect of interstate banking on the availability of credit to localities, and about the effect of large retail enterprises on the local businesses that bolstered the social capital of small communities. In light of this history, our focus on consumer welfare, broadly construed, may appear arbitrary.
But we are guided, in part, by the desire to craft a usable reform agenda. Working to improve a regime that enjoys considerable support across partisan and ideological lines is more likely to be effective than seeking to place the system on a new and highly controversial foundation.
Working to improve a regime that enjoys considerable support across partisan and ideological lines is more likely to be effective than seeking to place the system on a new and highly controversial foundation.
The Celler-Kefauver Act is still on the books. So is the Robinson-Patman Act. Still, we wonder whether it would be possible to reinvigorate the enforcement of national antitrust laws that reflect legitimate civic concerns without excessively impeding economic dynamism. That said, we reject national-level measures to pre-empt such actions at other levels of government. Nothing should prevent local communities from using zoning laws to prevent the construction of big box stores within their borders. Citizens should decide for themselves whether they are willing to pay somewhat higher prices to keep locally owned stores in business.
Federalism is the most practical means of balancing the often-competing claims of citizens, consumers, workers, and producers. But this is not always an easy course. Despite the long-term effects on local businesses and economic self-determination, hard-pressed communities will be tempted by the up-front jobs and revenues large firms can offer. There is no perfect solution for the asymmetrical bargaining power large firms often enjoy.
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Viewed as a leading, independent voice in the domestic policymaking sphere, the Governance Studies program at Brookings is dedicated to analyzing policy issues, political institutions and processes, and contemporary governance challenges. Our scholarship identifies areas in need of reform and proposes specific solutions to improve governance worldwide, but with a particular emphasis on the United States.
- Carl T. Bogus, “The New Road to Serfdom: The Curse of Bigness and the Failure of Antitrust,” University of Michigan Journal of Law Reform 49, no. 1 (Fall 2015): 53.
- Bogus, “The New Road to Serfdom,” 74.
- Bogus, “The New Road to Serfdom,” 7-9.
- Bogus, “The New Road to Serfdom,” 86.
- Bogus, “The New Road to Serfdom,” 89.
- There are various ways to measure market concentration (at the firm or industry level). Firm concentration ratios (like the CR4 or CR20 measurements used in the Economist analysis and by Autor et. al.) indicates the market share of the four or twenty largest firms relative to the rest of the industry. Concentration ratios can be measured using sales concentration and employment concentration (as the Autor et. al. analysis does) or by determining the top firms’ share of total industry revenue (as the Economist analysis does). The Herfindahl-Hirschman Index is another indicator of market concentration measured by squaring and then summing the market share of each firm in an industry. An industry with an HHI of 10,000 is controlled by a single monopoly and an industry with an HHI of 0 indicates perfect competition. Since 1981, HHI has served as the primary concentration measurement on which antitrust enforcers rely when assessing the competitive landscape.
- “Too much of a good thing,” The Economist, March 26, 2016, https://www.economist.com/news/briefing/21695385-profits-are-too-high-america-needs-giant-dose-competition-too-much-good-thing.
- David Autor, David Dorn, Lawrence F. Katz, Christina Patterson, and John Van Reenan, “Concentrating on the Fall of the Labor Share,” American Economic Review 107: 180-185, May 2017.
- Gustavo Grullon, Yelena Larkin, and Roni Michaely, “Are US Industries Becoming More Concentrated?,” October 2016, available at https://finance.eller.arizona.edu/sites/finance/files/grullon_11.4.16.pdf.
- David Autor, David Dorn, Lawrence F. Katz, Christina Patterson, and John Van Reenan, “The Fall of the Labor Share and the Rise of Superstar Firms,” May 1, 2017, available at https://economics.mit.edu/files/12979.
- Carl Shapiro in “Antitrust in a Time of Populism,” October 24, 2017, available at http://faculty.haas.berkeley.edu/shapiro/antitrustpopulism.pdf.
- “Herfindahl-Hirschman Index,” Department of Justice Antitrust Division, last modified July 29, 2015, https://www.justice.gov/atr/herfindahl-hirschman-index.
- Joseph Farrell and John Kwoka, “Resetting merger policy in the new Administration,” Competition Law Review’s Concurrences 4 (2016), https://pdfs.semanticscholar.org/c6bd/846d8fbb855203c6498a66f94a44b2c59acc.pdf.
- Theo Francis and Ryan Knutson, “Wave of Megadeals Tests Antitrust Limits in U.S.,” Wall Street Journal, October 18, 2015, https://www.wsj.com/articles/wave-of-megadeals-tests-antitrust-limits-in-u-s-1445213306.
- Federal Communications Commission, “Ninteenth Report,” available at https://apps.fcc.gov/edocs_public/attachmatch/DA-16-1061A1.pdf.
- Shapiro, “Antitrust in a Time of Populism.”
- “Too much of a good thing.”
- Simcha Barkai, “Declining Labor and Capital Shares,” available at http://home.uchicago.edu/~barkai/doc/BarkaiDecliningLaborCapital.pdf.
- Robert E. Litan and Ian Hathaway, “What’s Driving the Decline in the Firm Formation Rate? A Partial Explanation,” November 20, 2014, available at https://www.brookings.edu/wp-content/uploads/2016/06/driving_decline_firm_formation_rate_hathaway_litan.pdf.
- Germán Gutiérrez and Thomas Philippon, “Investment-less Growth: An Empirical Investigation,” Brookings Papers on Economic Activity, BPEA Conference Drafts, September 7-8, 2017, available at https://www.brookings.edu/wp-content/uploads/2017/09/2_gutierrezphilippon.pdf.
- John Kwoka, Mergers, Merger Control, and Remedies (Cambridge, Massachusetts: MIT Press, 2015).
- Martin Gaynor and Robert Town, “The impact of hospital consolidation,” June 2012, available at https://www.rwjf.org/content/dam/farm/reports/issue_briefs/2012/rwjf73261. Steven Brill, “Bitter Pill: Why Medical Bills Are Killing Us,” Time, April 4, 2013, http://time.com/198/bitter-pill-why-medical-bills-are-killing-us/.
- S. Derek Turner, “Combating the Cable Cabal,” Free Press, May 2013, available at https://www.freepress.net/sites/default/files/resources/Combating_The_Cable_Cabal_0.pdf.
- Erling Barth, Alex Bryson, James C. Davis, and Richard Freeman, “It’s Where You Work: Increases in the Dispersion of Earnings across Establishments and Individuals in the United States,” Journal of Labor Economics 34, no. S2 (April 2016), http://www.journals.uchicago.edu/doi/abs/10.1086/684045.
Jae Song, David J. Price, Fatih Guvenen, Nicholas Bloom, and Till von Wachter, “Firming Up Inequality,” NBER Working Paper No. 21199, 2015, available at http://www.nber.org/papers/w21199.
- Jason Furman and Peter Orszag, “A Firm-Level Perspective on the Role of Rents in the Rise in Inequality,” Presentation at “A Just Society” Centennial Event in Honor of Joseph Stiglitz, October 16, 2015, available at http://gabriel-zucman.eu/files/teaching/FurmanOrszag15.pdf.
- Ryan Decker, John Haltiwanger, Ron Jarmin, and Javier Miranda, “The Role of Entrepreneurship in US Job Creation and Economic Dynamism,” Journal of Economic Perspectives, Summer 2014.
- Northern Securities Co. v. United States, 193 U.S. 197 (1903).
- United States v. Alcoa, 148 F.2d 416 (1945).
- Brown Shoe Co., Inc. v. United States, 370 U.S. 294 (1962).
- United States v. Von’s Grocery Co., 384 U.S. 270 (1966).
- Robert H. Bork, The Antitrust Paradox: A Policy at War with Itself (New York: Basic Books, 1978), 7.
- Bork, The Antitrust Paradox, 7.
- Bork, The Antitrust Paradox, 77.
- Bork, The Antitrust Paradox, 90.
- Bork, The Antitrust Paradox, 3.
- Bork, The Antitrust Paradox, 408.
- “Another Clinton-Trump divide: High-output America vs low-output America,” Mark Muro and Sifan Liu, The Avenue, Brookings Institution, published November 29, 2016, available at https://www.brookings.edu/blog/the-avenue/2016/11/29/another-clinton-trump-divide-high-output-america-vs-low-output-america/.
- Kwoka, Mergers, Merger Control, and Remedies.
- Kwoka, “The Structural Presumption and Safe Harbor in Merger Review: False Positives, or Unwarranted Concerns?,” May 19, 2016, available at https://ssrn.com/abstract=2782152.
- C. Scott Hemphill and Phil Weiser, “Bringing Reality to the Law of Predatory Pricing,” Yale Law Journal forthcoming, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3079039.
- Lina Khan, “Amazon’s Antitrust Paradox,” Yale Law Journal 126, no. 3 (January 2017): 712-805. For an analysis of Amazon’s acquisition of Quidsi, see pages 768-774.
- Robert E. Litan, “Entrepreneurship, Innovation, and Antitrust,” The Antitrust Bulletin 61, no. 4 (2016): 580-594.