Antitrust: Dilatancy Before the Earthquake?

Antitrust: Dilatancy Before the Earthquake?

Antitrust: Dilatancy Before the Earthquake?

Many years ago, I learned that “dilatancy” is a stage in the build-up before an earthquake, when rocks have been pushed together as tightly as possible under the pressures of shifting tectonic plates. Antitrust regulation may be experiencing its own dilatancy before an earthquake.

The underlying problem here is that the actual antitrust laws (the Sherman and Clayton antitrust acts) lay out general guidelines, but not in a level of detail that necessarily offers clear guidance in specific cases. Thus, since 1968 the federal antitrust authorities at the Federal Trade Commission and the US Department of Justice have spelled out more detailed guidelines for what mergers will be deemed acceptable and which ones may be challenged by the regulators. However, FTC and DoJ don’t have a blank slate for writing these guidelines; instead, the guidelines are strongly shaped by past court decisions, which in turn are influenced by legal and economic arguments. Thus, the guidelines are updated from time to time, maybe every 10-20 years or so.

The guidelines now come in two parts: the Horizontal Merger Guidelines published in 2010 look at mergers happening between two firms in the same industry. The Vertical Merger Guidelines published in 2020 look at mergers happening between two firms where one is “upstream” and another is “downstream” in the same supply chain.

However, the FTC antitrust regulators under Lina M. Khan withdrew support of the vertical merger guidelines in 2021, although the US DoJ antitrust regulators did not officially do so. Then in January 2022, the FTC and DoJ antitrust regulators announced plans to “modernize” both sets of antitrust guidelines. But here we are, 18 months later, without a concrete proposal for these new guidelines. The talk is that the current antitrust regulators would like to shift the existing guidelines quite substantially, but because the existing guidelines are built on decades of actual court precedents, they are struggling with how to phrase the rules they prefer in a way that has a chance of passing judicial muster.

In broad terms, what’s at stake here? Timothy J. Muris was chair of the Federal Trade Commission from 2001-2004, and thus writes as (on the whole) a defender of the existing approach in “Neo-Brandeisian Antitrust: Repeating History’s Mistakes” (AEI Economic Policy Working Paper Series, January 30, 2023). Here are a few of his points that struck me in particular.

1) Beware of oversimplified histories of how antitrust regulation has developed.

A standard and often-repeated story is that the antitrust regulators used to be “tough,” which was good, but then a bunch of free-market ideologues (many based at the University of Chicago) ensorcelled the courts and academia and made antitrust “weak,” which was bad. According to this story, it’s time to cast off the ideological blinder and go back to the good old days.

This story has a certain rhetorical appeal, but even a cursory appreciation of US history suggests that it has some severe holes. Back in the 1950s, when giant firms like General Motors, Ford, US Steel, Exxon, AT&T, General Electric, and DuPont were dominating markets across the US, this is supposed to be the timeframe of exceptionally aggressive antitrust enforcement? Sure doesn’t look like it. I wrote about a more nuanced history of the evolution of antitrust doctrine at the start of this year in “Complexifying Antitrust.

Muris adds the additional useful point that while University of Chicago scholars were certainly involved in critiquing the prevailing antitrust in the 1960s, they were neither the first to do so, nor were they the ones who led the way in actually formulating the new rules. As Muris writes: “The Chicago scholars, like the revolutionaries of 1776, agreed on what they opposed, but not on what the world post- revolution should look like …”

I guess the names of antitrust critics who predated the University of Chicago critique won’t mean much, unless you read the Muris paper about their arguments, but for the sake of naming some names, the earlier critics of antitrust in the 1950s and 1960s include Fred Rowe (Yale), Morris Adelman (MIT), Donald Turner (Harvard), Robert Pitofsky (NYU), Milton Handler (Columbia), Thomas Kauper (Michigan) ,and a critique from the American Bar Association published reports in 1956–among others. Muris also points out that the leading legal treatise on antitrust doctrine starting in the late 1960s was Philip Areeda of Harvard, who was later joined as a co-author by Herbert Hovenkamp of the University of Pennsylvania, which through multiple editions remains what Muris calls “by far the most influential source on antitrust law for courts, scholars, and practitioners alike.” Former Supreme Court Justice Stephen Breyer, appointed by Bill Clinton in 1994 and usually regarded as leaning toward the left side of the court, was generally a prominent advocate of the antitrust that has been conventional for the last half-century or so.

2) Will we see the return of Robinson-Patman antitrust arguments?

Lina Khan at the FTC has repeatedly praised the Robinson-Patman Act of 1936. In contrast, as Muris notes: “Virtually all antitrust enforcers, commentators, and practitioners have condemned this statute for over 50 years.”

For some insight into the issues here, it’s useful to consider the the A&P grocery chain, which started in the mid-19th century and became the largest retail chain store in the US for over 40 years. Muris quotes Mark Levinson, a biographer of the company, with this reminder:

By 1929, when it became the first retailer ever to sell $1 billion of merchandise in a single year, A&P owned nearly 16,000 grocery stores, 70 factories, and more than 100 warehouses. It was the country’s largest coffee importer, the largest butter buyer, and the second-largest baker. Its sales were more than twice those of any other retailer.

How did A&P get so big? It set up its own purchasing and distribution network, buying directly from farmers and cutting out wholesalers and middlemen. It bought in large and predictable volumes, and thus got good prices as a buyer–which were passed along to consumers. It set up the most efficient distribution system of its time: for example, the same trucks that delivered bread from A&P-owned bakeries to A&P stores were also used by the company for other distributions. It used its massive sales data to reduce the share of unsold products and spoilage. It also customized products for varying tastes across the country: for example, Philadelphians like their butter with less salt and a lighter color than do most New England markets.

In short, A&P expanded its markets by selling high-quality groceries at lower prices. Of course, it was cordially hated by both the wholesalers/middlemen and by the smaller stores it drove out of business. In general, A&P was the leader of a rise in chain stores during the 1920s and 1930s, driving out smaller single-store businesses. Many states imposed special taxes to limit chain stores; some states proposed laws to block them altogether. Indeed, references to “monopoly” or “anticompetitive behavior” in this time frame often refer to bigger stores attracting customers with low prices, high quality, and improved selection.

As Muris notes, the Robinson-Patman Act of 1936 was originally titled the Wholesale Grocer’s Protection Act; in fact it was drafted by lawyers for the Wholesale Grocers Association, which represented the wholesalers and smaller retailers who were losing market share to the chain stores. Patman famously said: “Chain stores are out. There is no place for chain stores in the American economic picture.”

In 1944, the federal government indicted A&P and its executive for violating the Sherman antitrust act. The company was essentially convicted of expanding its sales though more efficient methods of operating and lower prices, and thus of causing harm to competitors. The government also advanced a theory of “predatory pricing,” which was that although the A&P prices had been lower for decades, this was all part of a longer-run plot where–after driving out competitors–A&P would then be able to charge much higher prices for decades into the future. To block the theoretical scenario of higher future prices, it was necessary to prevent actual current prices from being so low.

As innumerable commentators pointed out, then and now, consumers were clearly better-off for decades as a result of A&P. But that was no defense under the antitrust doctrine of the time. Indeed, under the antitrust rules that prevailed up through the 1960s, a company that used efficiency gains to compete with lower prices would often deny doing so. Muris writes:

Lawyers arguing for mergers certainly performed handstands 60 years ago to avoid claiming their mergers reduced costs and prices. They feared they would be accused of planning to lower prices, therefore taking market share from competitors, harming rivals, and thus committing the paramount sin of the era: increasing concentration. Both the harm to rivals and the increased concentration could themselves have been enough to jeopardize a merger, and they thus prompted such vigorous denials from the merging parties. Will such arguments be the new requirement for merging firms, de jure or de facto?

But under pressure from a wide array of critics, the idea that efficiency and price-cutting should be considers as anti-competitive was fading by the early 1960s. As Muris notes:

In 1977, this growing criticism led the DOJ to publish a major attack on Robinson- Patman, finding the act “protectionist” with a “deleterious impact on competition” and, ultimately, on consumers. The FTC, which had issued nearly 1,400 Robinson- Patman complaints over the preceding four decades, was reaching the same conclusion: The agency dramatically slowed enforcement in the 1970s and all but ended it thereafter.

3) Protecting competitors or consumers?

The official mission of the Federal Trade Commission is “Protecting America’s Consumers,” which may seem straightforward. But in a prominent essay about Amazon back in 2017, Lina Khan argued for the possibility that while Amazon might seem to be benefiting consumers in the short run, it maybe possibly might be setting consumers up to be worse off in the long run. This is the Robinson-Patman logic resurrected and brought up the present in a different context.

Indeed, the underlying logic of the Robinson-Patman arguments as antitrust legislation and practice evolved into the 1950s and 1960s was that a reduction in the number of competitors in a market was an antitrust violation–even if competition in that market still seemed quite robust.

The Brown Shoe case is one of many prominent examples. Two shoe companies, Brown Shoe and GR Kinney, wished to merge. Muris describes the state of competition in the shoe market at the time:

Brown Shoe was the third-largest retailer nationwide, and it made about 4 percent of all shoes. Kinney was the eighth-largest retailer and manufacturer, although it accounted for less than 2 percent of retail sales and was the manufacturer of only 0.5 percent of all shoes. Moreover, manufacturing overall was not concentrated, as the four largest firms made 23 percent of the country’s shoes and the 24 largest firms accounted for only 35 percent of all shoes manufactured. At retail, the two combined for 2.3 percent of all stores selling shoes.

Notice that both companies made shows and also had retail outlets. The idea was that the retail outlets could offer shoes from both companies. However, the government antitrust regulators argued that having one company producing 4.5% of shoes was excessive concentration. Moreover, it argued that greater efficiency from the merger would allow the prices for shoes to be cut–which would disadvantage other shoe companies.

Again, this old-style argument seems to support a version of competition in which no firms lose out–and especially that firms do not lose out because they are less efficient or have higher prices. The old-style theory is that consumers benefit from having lots of places to shop, but that consumers do not benefit if many of them choose to shop at places with lower prices, and thus drive some firms out of business.

4) How does resurrecting these older and discredited theories of antitrust relate to the modern economy?

Many of the current issues in antitrust are about digital companies: Amazon, Google, Facebook, Netflix, Apple, and others. Other topics are about large retailers like WalMart, Target, and Costco. Still other topics are about mergers in local areas: for example, if a small metro area has only two hospitals, and they propose a merger, how will that affect both prices to consumers and wages for health care workers in that area? Another set of topics involves how to make sure that when drug patents expire, generic drugs have a fair opportunity to compete. Another topic is about tech companies that pile up a “thicket” of patents, with new patents continually replacing those that expire, as a way of holding off new competitors.

None of these issues require returning to the old antitrust argument that passing along efficiency gains to consumers in the form of lower prices should be prosecuted by antitrust authorities. None of them imply that the goal of antitrust should be to protect competitors, rather than consumers. If the antitrust powers-that-be at the Federal Trade Commission and the US Department of Justice try to revise the existing merger guidelines back to the 1940s, 1950s, and 1960s, it will be a seismic shock to this body of law. Such an effort would almost certainly be blocked by the courts. Perhaps the cynical prediction is that the new horizontal and vertical merger guidelines, if and when they emerge, will involve a blast of old-style populist rhetoric but relatively few major substantive changes.

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Timothy Taylor

Global Economy Expert

Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.

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