The Department of Justice recently filed a notice to appeal a federal judge’s decision to permit an $85.4 billion merger between AT&T and Time Warner. Though the judge rejected the government’s argument that the merger will raise prices for consumers and limit competition, the decision to appeal sends a clear signal that the Justice Department plans to aggressively pursue antitrust cases.
The appeal also exemplifies a recent resurgence of antitrust activism. Along with the AT&T and Time Warner deal, over the past year there has been renewed interest in antitrust, particularly in regards to tech giants like Google and Facebook. This resurgence represents a shift away from the consensus that government should not intervene in firm concentration unless it is clear that consumers are being harmed, and towards the conception that “big is bad,” regardless of whether consumer harm can be demonstrated.
But, as University of Chicago law professor and later federal judge Frank Easterbrook outlined in a seminal 1984 paper, a key question at the core of antitrust cases is the impact of Type I (false positive) and Type II (false negative) errors. A Type I error is the incorrect finding that firm concentration is causing consumer harm while a Type II error is the opposite, the incorrect finding that firm concentration is not causing consumer harm. Easterbrook argued that Type II errors are less harmful—though a firm’s practices are causing harm, in a dynamic market competing firms will find ways to offset the harmful advantage. But the government intervention impelled by a Type I error is not as easily offset. Thus antitrust policy should err on the side of allowing practices rather than declaring them illegal.
A conception of antitrust that expands the justifications for government action opens the door for more Type I errors and, thus, greater harms to consumers and the large firms that serve them. In the current issue, and going back to 2001, Regulation has published a series of articles discussing the underlying principles and impacts of antitrust law and policy:
- Daniel Crane argues that the politics of antitrust does not fit into a traditional left/right conception. Instead, antitrust enforcement receives support from factions that exist on both the left and right; one that supports large government and large businesses to increase efficiency, on one hand, and a different faction that supports limiting the size of both government and businesses, on the other.
- Alan Reynolds argues in favor of the consumer-welfare framework for antitrust and refutes recent arguments that government should intervene because “big is bad.”
- David Evans and Richard Schmalensee discuss “network effects” and the idea that tech early movers, like Google and Facebook, are especially able to concentrate market power. The authors contend that the current fears of tech firms’ market power are the product of political slogans.
- Ike Brannon recounts the Justice Department’s 2014 challenge of John Deere’s plan to purchase a small competitor and discusses how a market is defined and whether the antitrust enforcement stifles innovation.
- Daniel Crane examines claims that a major cause of income inequality is lax antitrust enforcement. Looking at the history of U.S. antitrust, he contends that greater market power often results in higher wages for workers. Thus, the use of antitrust to reduce income inequality has little intellectual foundation.
- Timothy Sandefur argues against Parker immunity, the exemption by federal courts of cartels sanctioned by state law from federal antitrust laws, and contends that the courts should restrict immunity to cases where states have explicitly chosen to restrict competition for legitimate reasons.
- Erwin Blackstone, Larry Darby, and Joseph Fuhr review theories of duopoly and oligopoly and examine the idea that concentrated industries are inherently monopolistic. The authors find that many duopolies are highly competitive and argue that industry structure alone is not enough to justify antitrust regulation.
- In another article, Daniel Crane discusses the early antitrust agenda of the Obama administration and outlines the beginnings of the ideological shift away from the Chicago school’s antitrust perspective towards a more active antitrust regime.
- Thomas Lambert examines the court’s rejection of an FTC challenge to a merger between Whole Foods and Wild Oats, and outlines four principles that regulators should use when investigating mergers: relying on econometric evidence instead of business documents, adhering to economic theories when deciding whether to define unique distribution channels as “markets,” accounting for business trends and economies of scale when determining whether a merger will harm consumers, and raising the standard of proof for injunctive relief to limit the advantages enjoyed by regulators.
- Richard Epstein discusses the 2006 Wright Amendment Reform Act, which demolished several gates at Love Field Airport in Dallas and, in so doing, distributed market power to American Airlines and Southwest Airlines.
- Richard Epstein and Thomas Brown outline a continuous succession of antitrust lawsuits against credit card companies and contend that antitrust law works best when it concentrates on horizontal agreements like bid rigging and price fixing. They argue that, in this case, governments are attacking the business arrangements that make platform industries work.
- Johnathan Adler contends that antitrust enforcement against “conservation cartels,” which form to maximize the long-term productive use of natural resources, undermines the creation of ecologically valuable and socially beneficial arrangements among resource users.
- Fred McChesney discusses the trend towards an economic view of antitrust’s role and away from political or social objectives, but highlights three developments that deleteriously separate antitrust from economics: antitrust suits that interfere with private attempts to manage the commons, increased involvement in antitrust enforcement by state and European regulators leading to harmful suits that make no economic sense, and the desire by foreign enforcers and state attorney generals to play a larger role on the global antitrust stage.
- George Bittlingmayer makes the case that, though antitrust policy has improved since the 1960s and 70s, despite a consensus under the Clinton and Bush administrations there is still little compelling evidence that antitrust laws improve consumer welfare.
- David Evans examines antitrust under the Clinton administration and discusses the challenges facing the then new Bush administration: to retain the Clinton administration’s antitrust regime in the name of policy continuity or to pursue a level of agency interventionism more in line with Bush’s business philosophy.
- David Henderson reviews The Microsoft Case: Antitrust, High Technology, and Consumer Welfare and discusses the justification for the antitrust case against Microsoft and its legacy.
Furthermore, over the years I have also reviewed working papers on antitrust:
- In my review of working papers by Daniel Crane and Joshua Wright on the FTC’s antitrust case against intel, I discuss Type I and Type II errors as defined by Frank Easterbrook and argue that the literature shows that the case against Intel cannot be justified under the error-correction framework.
- I review Lawrence White’s paper on “Too Big to Fail” and outline his contention that Too Big to Fail financial firms have nothing to do with market power. Instead, the problems of the banks stem from subsidies and negative externalities and should be dealt with directly rather than through antitrust action.
- And in the Spring 2018, issue of Regulation I review a paper by Ann Bradford, Robert Jackson, and Johnathon Zytnick that examines 5,000 proposed mergers in Europe between 1990 and 2014 and finds no effect on the incidence or intensity of merger challenges by the EU if the acquiring firm was non-EU.
The DOJ’s appeal and recent concerns about the market power of tech firms exemplify an ascendant conception of antitrust as a proactive tool to reduce market power. The past 17 years of articles and reviews in Regulation, however, support an antitrust policy that is invoked only because of unambiguous and demonstrated harms to consumer welfare. This notion, and the limits it imposes on costly and inflexible government action, offers the best outcomes for consumers and competition.
Written with research assistance from David Kemp.