Needed: New Legal Ideas to Fight Megamergers
(Bloomberg View) -- Makan Delrahim, the new head of the U.S. Justice Department's antitrust division, made a speech at the National Press Club on Thursday, and the reporters who covered it all focused on one thing: Was he signaling that he was planning to block the merger of AT&T Inc. with Time Warner Inc.?
Although Delrahim didn’t mention either company, his answer sure sounded like "yes." But that wasn’t his main goal; rather, his purpose was to lay out the core principles that will guide antitrust policy under President Donald Trump. With a growing consensus among antitrust experts that the government has allowed too much concentration — a consensus with which I agree — those core principles are worth examining.
It turns out there’s good news and bad news. The good news is that the approach Delrahim outlined strongly suggests that the Trump administration will give mergers closer scrutiny than the last two presidencies. The bad news is that he remains wedded to an outdated antitrust framework.
That framework, first laid out by Robert Bork when he was a law professor in the late 1970s and eventually embraced by the Justice Department and the courts, is precisely why we have oligopolies in once-competitive industries like airlines. And it’s why the dominant tech companies such as Facebook Inc. have been able to squelch competitive threats with such impunity.
The most obvious change under Delrahim is likely to be a move away from remedies used often by previous administrations that were aimed at preventing merged companies from using their increased power to stifle competition. These are called behavioral remedies.
The Comcast-NBCUniversal merger, which took place during Barack Obama’s presidency, was a classic example. Justice Department guidelines held that this "vertical merger" — in which the two companies’ businesses don’t overlap — should be approved. But the antitrust enforcers feared that Comcast would use NBC’s content as a lever to give itself an unfair advantage. So Justice insisted that Comcast agree to over 100 limitations on its new power, like putting competitors' channels near its own on the channel guide.
Six years later, the conventional wisdom is that those remedies didn’t work. There is a sense among regulators (which Comcast disputes) that the company was constantly pushing the limits, while the government lacked the resources to keep the company on the straight and narrow. As the antitrust expert John Kwoka of Northeastern University has written, more generally, about remedies aimed at constraining a company’s behavior, "They are difficult to write, difficult to enforce and at the end of the day, they don't work."
Delrahim dislikes behavioral remedies for a second reason: In an administration devoted to deregulation, they amount to a form of regulation. Here’s how he framed it:
Behavioral remedies often require companies to make daily decisions contrary to their profit-maximizing incentives, and they demand ongoing monitoring and enforcement to do that effectively. It is the wolf of regulation dressed in the sheep’s clothing of a behavioral decree.
The consequence of abandoning behavioral remedies should be obvious: Presented with a merger they fear will give a company too much market power, antitrust enforcers must then either insist that the companies divest assets — that’s called a structural remedy — or try to block the merger altogether. This is clearly where the antitrust division is headed.
All of which is good so far as it goes. But there remain two big problems. The first is that a lot of damage has already been done.
Take airlines again. In 2001, when George W. Bush became president, there were about a dozen sizable airlines in the U.S. But the next 16 years saw one giant airline merger after another: Delta-Northwest, USAir-America West, American-USAir, United-Continental, and so on. Today there are only four big domestic airlines left. Think about how miserable flying has become, how the airlines all seem to add new charges in lockstep, how many fewer nonstop flights there are. The airline oligopoly is the single biggest reason why.
The second problem is that the reigning antitrust doctrine, which came not only from Bork but also from the law-and-economics movement championed by Richard Posner — the influential, recently retired appeals court judge — views mergers through the narrowest of prisms. As Posner once put it, "The proper lens for viewing antitrust problems is price theory." That is, will a merger cause prices to go up?
In a much talked-about Yale Law Review article earlier this year, the researcher Lina Khan pointed out that before Bork, antitrust policy held that the mere fact that a market was dominated by a small number of large companies meant it was “likely to be less competitive than a market populated with many small- and medium-sized companies.” Post-Bork, however, the only thing that mattered was the effect of the deal on consumers. If a merger was unlikely to raise prices, then it should be approved, no matter what its other consequences. That’s why, as the years went by, things like vertical mergers and predatory pricing, once viewed as inherently problematic, no longer seemed to bother regulators.
And it’s why antitrust enforcers have approved mergers they would once have summarily rejected. It’s not just airlines. There are only three drugstore chains today. Four major wireless companies. A half-dozen major cable companies. Incredibly, in 2012, the Justice Department allowed Facebook to buy Instagram, whose platform could have become a serious competitive threat. Now Facebook is adding features to Instagram to drive another potential threat, Snapchat, into the ground.
One of the people who believes that antitrust policy should move away from the Bork framework is Kwoka, the Northeastern University economist. His 2014 book, “Mergers, Merger Control and Remedies,” shows that Bork’s approach has been a failure even when judged on its own terms. He did an analysis of every study about every merger since 1985. As the Washington Monthly noted recently, he discovered that more than 60 percent of the mergers led, on average, to nine-percent price increases.
Those price hikes have come about because the oligopolies that now exist have both tremendous market power and every incentive not to compete with each other. And that’s also why antitrust theory needs to return to first principles: Namely, unless proven otherwise, it should be assumed that a merger that creates an oligopoly will lessen competition, and will thus harm consumers.
In addition, the rise of the big tech companies presents a set of issues that modern antitrust policy has never grappled with. For instance, neither Facebook nor Instagram charges consumers. So of course the Justice Department approved their merger — it had no effect on how much people would have to pay for the two services. Yet in retrospect, the deal was a terrible mistake, allowing Facebook to eliminate a potential competitor.
Another example is Amazon, which has built its dominant internet-shopping business on low prices and great customer service. Despite its growing power, its mergers and pricing policies have never been questioned by the government. Indeed, a few years ago when the major book publishers forced Amazon to abandon its standard $9.99 price for e-books — because the publishers feared they would lose their ability to charge any other price — the antitrust division sued the publishers (and their ally, Apple) but not Amazon. The thrust of Khan’s Yale Law School article is that the current antitrust framework simply isn’t equipped to deal with a powerful internet company like Amazon.
I still believe that the Justice Department should approve the AT&T-Time Warner merger. The law should be applied consistently, and under the Bork framework, which still applies, the deal passes muster. Not only do the two companies’ businesses not overlap, but even after the deal is completed, Time Warner will not have additional pricing power. Besides, it’s important for Delrahim to show his independence from Trump, and the only way he can do that is by approving the deal, which the president has vocally opposed — probably for unsavory reasons unrelated to the fine points of antitrust theory.
But I also think that this is the right time for a broad rethinking of antitrust policy, one that considers more than price, that devises a policy for breaking up the worst of the current oligopolies, and that comes up with an antitrust approach for dealing with powerful tech companies.
That’s going to require a lot of hard thought on the part of antitrust economists and academics. A persuasive body of literature is going to be necessary to move the needle. But it also requires the Justice Department to be willing to go to court to oppose mergers that previous administrations would probably have approved. The department will lose some battles, especially at first. But just as the courts once came to accept Bork’s antitrust thesis, they will eventually move in another direction if the antitrust community leads them there.
All of this will take awhile to accomplish. That’s why the time to start is now.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Joe Nocera is a Bloomberg View columnist. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. He is the co-author of "Indentured: The Inside Story of the Rebellion Against the NCAA."
To contact the author of this story: Joe Nocera at firstname.lastname@example.org.
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