Competition is the driving force behind the success of markets. It’s hard to imagine a thriving market economy without the presence of competitive forces.

But how do we actually measure competition? I use the term all the time, but do we actually have a measure of it? This question is more complex than it may seem at first glance.

Read the full piece here.

We are grateful for the opportunity to respond to the California Law Revision Commission’s Study of Antitrust Law with these comments on the Single-Firm Conduct Working Group’s report (the “Expert Report”).[1]

The International Center for Law & Economics (ICLE) is a nonprofit, nonpartisan global research and policy center based in Portland, Oregon. ICLE was founded with the goal of building the intellectual foundations for sensible, economically grounded policy. ICLE promotes the use of law & economics methodologies to inform public-policy debates, and has longstanding expertise in the evaluation of competition law and policy. ICLE’s interest is to ensure that competition law remains grounded in clear rules, established precedents, a record of evidence, and sound economic analysis.[2]

I. Introduction

The urge to treat antitrust as a legal Swiss Army knife—capable of correcting all manner of economic and social ills—is difficult to resist. Conflating size with market power, and market power with political power, recent calls for regulation of large businesses are often framed in antitrust terms, although they rarely are rooted in cognizable legal claims or sound economic analysis.

But precisely because antitrust is such a powerful regulatory tool, we should be cautious about its scope, process, and economics, as well as its politicization. For the last 50 or so years, U.S. law has maintained a position of relative restraint in the face of novel, ambiguous conduct, while many other jurisdictions (particularly the European Union) have tended to read uncertainty as the outward expression of a lurking threat. This has led to a sharp policy divergence in the area of competition policy, with the EU passing the Digital Markets Act,[3] while the United States has, to date, continued to rely on tried-and-tested principles crafted by courts over years on a case-by-case basis.

Despite—or perhaps because of—this divergence, many advocates of more aggressive antitrust intervention assert that the United States or individual states should emulate the EU’s approach. This disposition underpins much of the California Law Review Commission’s Report on Single Firm Conduct.[4] Despite some reassuring conclusions—such as the recognition that “protecting competing businesses, even at the expense of consumers and workers” would not “provide a good model for California”[5]—the policies that the report proposes would significantly broaden California antitrust law, bringing it much closer to the European model of competition enforcement than the U.S. one.

Unfortunately, this European-inspired approach to competition policy is unlikely to serve the interests of California consumers. As explained below, the European model of competition enforcement has at least three features that tend to chill efficient business conduct, with few competitive benefits in return (relative to the U.S. approach).

A. ‘Precautionary Principle’ vs Error-Cost Framework

Differentiating pro- from anticompetitive conduct has always been the central challenge of antitrust. When the very same conduct can either benefit or harm consumers, depending on complex and often unknowable circumstances, the potential cost of overenforcement is at least as substantial as the cost of underenforcement.

The U.S. Supreme Court has repeatedly recognized that the cost of “false positive” errors might be greater than those attributable to “false negatives” because, in the words of Judge Frank Easterbrook, “the economic system corrects monopoly more readily than it corrects judicial errors.”[6] The EU’s “precautionary principle” approach is the antithesis of this. It is rooted in a belief that markets are generally unlikely to function well, and certainly are not better at mitigating harm than technocratic regulatory intervention.

The key question is whether, given the limits of knowledge and the errors that such limits may engender, consumers are better off with a more discretionary regime or one in which enforcement is limited to causes of action that policymakers are fairly certain will serve consumer interests. This is a question about changes at the margin, but it is far from marginal in its significance. As we explain below, the U.S. approach to antitrust law performs better in this respect. Departing from it would not benefit California consumers.

B. Presumptions vs Effects-Based Analysis

EU antitrust rests heavily on presumptions of harm, while U.S. courts require plaintiffs to demonstrate that the conduct at-issue actually has anticompetitive effects.

Crucially, the U.S. approach is more consistent with learnings from modern economics, which almost universally counsel against presuming competitive harm on the basis of industry structure and, in particular, in favor of presuming benefit from vertical conduct. Indeed, the EU approach often disregards these findings and presumes the contrary. As evidenced by its recent Intel decision, even the EU’s highest court has finally recognized the paucity of the European Commission’s analysis in this area. But because judicial review of antitrust decisions in the EU is so attenuated, it is not clear if the high court’s admonition will actually affect the Commission’s approach in any substantial way.

California policymakers would be wrong to emulate the European model by introducing more presumptions to California antitrust law.

C. Extraction of Rents vs Extension of Monopoly

U.S. monopolization law prohibits only predatory or exclusionary conduct that results in harm to consumers. The EU, by contrast, also regularly punishes the mere possession of monopoly power, even where lawfully obtained. Indeed, the EU goes so far as to target companies that may lack monopoly power, but merely possess an innovative and successful business model. For example, in actions involving companies ranging from soda manufacturers to digital platforms, the EU repeatedly has required essential-facilities-style access to companies’ private property for less-successful rivals.

As we explain below, the Expert Report essentially calls on California lawmakers to replicate the European model by seeking to protect even those competitors that are less efficient, thus challenging the very existence of legitimately earned monopolies. Unfortunately, this approach would diminish the incentives to create successful businesses in the first place. Such an outcome would be particularly unfortunate for California, which is host to arguably the most vibrant startup ecosystem in the world.

D. The Danger of the European Approach

In endorsing the European approach to antitrust in order to justify high-profile cases against large firms, California would effectively be prioritizing political expediency over the rule of law and consumer well-being.

The risk of an EU-like approach in California is that it would thwart technological progress and enshrine mediocrity. This is particularly true in the digital economy, where innovative practices with positive welfare effects—such as building efficient networks or improving products and services as technologies and consumer preferences evolve—are often the subject of demagoguery, especially from inefficient firms looking for a regulatory leg up.

While advocates for a more European approach to antitrust assert that their proposals would improve economic conditions in California (and the United States, more generally), economic logic and the available evidence suggest otherwise, especially in technology markets.

Once antitrust is expanded beyond its economic constraints, it ceases to be a uniquely valuable tool to address real economic harms to consumers, and becomes instead a tool for evading legislative and judicial constraints. This is hardly the promotion of democratic ideals that proponents of a more EU-like regime claim to desire.

In the following sections, we expand upon these distinctions between EU and U.S. law and explain how elements of the Expert Report’s analysis and proposed statutory language would shift California’s antitrust law toward the EU model in problematic ways. We urge the California Law Revision Commission to consider not just whether emulating the EU approach would permit the state to reach a preconceived outcome—i.e., placing large firms under increased antitrust scrutiny—but whether doing so would ultimately benefit California and its consumers.

II. The EU ‘Precautionary Principle’ Approach vs the US Error-Cost Framework

The U.S. Supreme Court has repeatedly recognized the limitations that courts face in distinguishing between pro- and anticompetitive conduct in antitrust cases, and particularly the risk this creates of reaching costly false-positive (Type I) decisions in monopolization cases.[7] As the Court has noted with respect to the expansion of liability for single-firm conduct, in particular:

Against the slight benefits of antitrust intervention here, we must weigh a realistic assessment of its costs…. Mistaken inferences and the resulting false condemnations “are especially costly because they chill the very conduct the antitrust laws are designed to protect.” The cost of false positives counsels against an undue expansion of § 2 liability.[8]

The Court has also expressed the view—originally laid out in Judge Frank Easterbrook’s seminal article “The Limits of Antitrust”—that the costs to consumers arising from Type I errors are likely greater than those attributable to Type II errors, because “the economic system corrects monopoly more readily than it corrects judicial errors.”[9]

The EU’s more “precautionary” approach to antitrust policy is the antithesis of this.[10] It is rooted in a belief that markets do not—or, more charitably, are unlikely to—function well in general, and certainly not sufficiently to self-correct in the face of monopolization.

While the precautionary principle may generally prevent certain fat-tailed negative events,[11] these potential benefits come, almost by definition, at the expense of short-term growth.[12] Adopting a precautionary approach is thus a costly policy stance in those circumstances where it is not clearly warranted by underlying risk and uncertainty. This is an essential issue for a state like California, whose economy is so reliant on the continued growth and innovation of its vibrant startup ecosystem.

While it is impossible to connect broad macroeconomic trends conclusively to specific policy decisions, it does seem clear that Europe’s overarching precautionary approach to economic regulation has not served it well.[13] In that environment, the EU’s economic performance has fallen significantly behind that of the United States.[14] “[I]n 2010 US GDP per capita was 47 percent larger than the EU while in 2021 this gap increased to 82 percent. If the current trend of GDP per capita carries forward, in 2035, the average GDP per capita in the US will be $96,000 while the average EU GDP per capita will be $60,000.”[15]

Of course, no one believes that markets are perfect, or that antitrust enforcement can never be appropriate. The question is the marginal, comparative one: Given the realities of politics, economics, the limits of knowledge, and the errors to which they can lead, which imperfect response is preferable at the margin? Or, phrased slightly differently, should we give California antitrust enforcers and private plaintiffs more room to operate, or should we continue to cabin their operation in careful, economically grounded ways, aimed squarely at optimizing—not minimizing—the extent of antitrust enforcement?

This may be a question about changes at the margin, but it is far from marginal. It goes to the heart of the market’s role in the modern economy.

While there are many views on this subject, arguments that markets have failed us in ways that more antitrust would correct are poorly supported.[16] We should certainly continue to look for conditions where market failures of one kind or another may justify intervention, but we should not make policy on the basis of mere speculation. And we should certainly not do so without considering the likelihood and costs of regulatory failure, as well. In order to reliably adopt a sound antitrust policy that might improve upon the status quo (which has evolved over a century of judicial decisions, generally alongside the field’s copious advances in economic understanding), we need much better information about the functioning of markets and the consequences of regulatory changes than is currently available.

To achieve this, antitrust law and enforcement policy should, above all, continue to adhere to the error-cost framework, which informs antitrust decision making by considering the relative costs of mistaken intervention compared with mistaken nonintervention.[17] Specific cases should be addressed as they come, with an implicit understanding that, especially in digital markets, precious few generalizable presumptions can be inferred from the previous case. The overall stance should be one of restraint, reflecting the state of our knowledge.[18] We may well be able to identify anticompetitive harms in certain cases, and when we do, we should enforce the current laws. But we should not overestimate our ability to finetune market outcomes without causing more harm than benefit.

Allegations that the modern antitrust regime is insufficient take as a given that there is something wrong with antitrust doctrine or its enforcement, and cast about for policy “corrections.” The common flaw with these arguments is that they are not grounded in robust empirical or theoretical support. Indeed, as one of the influential papers that (ironically) is sometimes cited to support claims for more antitrust puts it:

An alternative perspective on the rise of [large firms and increased concentration] is that they reflect a diminution of competition, due to weaker U.S. antitrust enforcement. Our findings on the similarity of trends in the United States and Europe, where antitrust authorities have acted more aggressively on large firms, combined with the fact that the concentrating sectors appear to be growing more productive and innovative, suggests that this is unlikely to be the primary explanation, although it may be important in some industries.[19]

Rather, such claims are little more than hunches that something must be wrong, conscripted to serve a presumptively interventionist agenda. Because they are merely hypotheses about things that could go wrong, they do not determine—and rarely even ask—if heightened antitrust scrutiny and increased antitrust enforcement are actually called for in the first place. The evidence strongly contradicts the basis for these hunches.

Critics of U.S. competition policy sometimes contend that markets have become more concentrated and thus less competitive.[20] But there are good reasons to be skeptical of the national-concentration and market-power data.[21] Even more importantly, the narrative that purports to find a causal relationship between these data and reduced competition is almost certainly incorrect.

Competition rarely takes place in national markets; it takes place in local markets. Recent empirical work demonstrates that national measures of concentration do not reflect market structures at the local level.[22] To the extent that national-level firm concentration may be growing, these trends are actually driving increased competition and decreased concentration at the local level, which is typically what matters for consumers:

Put another way, large firms have materially contributed to the observed decline in local concentration. Among industries with diverging trends, large firms have become bigger but the associated geographic expansion of these firms, through the opening of more plants in new local markets, has lowered local concentration thus suggesting increased local competition.[23]

The rise in national concentration is predominantly a function of more efficient firms competing in more—and more localized—markets. Thus, rising national concentration, where it is observed, is a result of increased productivity and competition that weed out less-efficient producers. Indeed, as one influential paper notes:

[C]oncentration increases do not correlate to price hikes and correspond to increased output. This implies that oligopolies are related to an offsetting and positive force—these oligopolies are likely due to technical innovation or scale economies. My data suggest that increases in market concentration are strongly correlated with innovations in productivity.[24]

Another important paper finds that this dynamic is driven by top firms bringing productivity increases to smaller markets, to the substantial (and previously unmeasured) benefit of consumers:

US firms in service industries increasingly operate in more local markets. Employment, sales, and spending on fixed costs have increased rapidly in these industries. These changes have favored top firms, leading to increasing national concentration. Top firms in service industries have grown by expanding into new local markets, predominantly small and mid-sized US cities. Market concentration at the local level has decreased in all US cities, particularly in cities that were initially small. These facts are consistent with the availability of new fixed-cost-intensive technologies that yield lower marginal costs in service sectors. The entry of top service firms into new local markets has led to substantial unmeasured productivity growth, particularly in small markets.[25]

Similar results hold for labor-market effects. According to one recent study, while the labor-market power of firms appears to have increased:

labor market power has not contributed to the declining labor share. Despite the backdrop of stable national concentration, we… find that [local labor-market concentration] has declined over the last 35 years. Most local labor markets are more competitive than they were in the 1970s.[26]

In short, it is inappropriate to draw conclusions about the strength of competition and the efficacy of antitrust laws from national-concentration measures. This is a view shared by many economists from across the political spectrum. Indeed, one of the Expert Report’s authors, Carl Shapiro, has raised these concerns regarding the national-concentration data:

[S]imply as a matter of measurement, the Economic Census data that are being used to measure trends in concentration do not allow one to measure concentration in relevant antitrust markets, i.e., for the products and locations over which competition actually occurs. As a result, it is far from clear that the reported changes in concentration over time are informative regarding changes in competition over time.[27]

It appears that overall competition is increasing, not decreasing, whether it is accompanied by an increase in national concentration or not.

A. The Expert Report’s Treatment of Error Costs

Implicitly shunning the evidence that demonstrates markets have become more, not less, competitive, the Expert Report proposes that California adopt a firm stance in favor of false positives over false negatives—in other words, that it tolerate erroneously condemning procompetitive behavior in exchange for avoiding the risk of erroneously accepting anticompetitive conduct:

Whereas the policy of California is that the public is best served by competition and the goal of the California antitrust laws is to promote and protect competition throughout the State, in interpreting this Section courts should bear in mind that the policy of California is that the risk of under-enforcement of the antitrust laws is greater than the risk of over-enforcement.[28]

Of course, it is possible that, in some markets, there are harms being missed and for which enforcers should be better equipped. But advocates of reform have yet to adequately explain much of what we need to know to make such a determination, let alone craft the right approach to it if we did. Antitrust law should be refined based on an empirical demonstration of harms, as well as a careful weighing of those harms against the losses to social welfare that would arise if procompetitive conduct were deterred alongside anticompetitive conduct.

Dramatic new statutes to undo decades of antitrust jurisprudence or reallocate burdens of proof with the stroke of a pen are unjustified. Suggesting, as the Expert Report does, that antitrust law should simply “err on the side of enforcement when the effect of the conduct at issue on competition is uncertain”[29] is an unsupported statement of a political preference, not one rooted in sound economics or evidence.

The primary evidence adduced to support the claim that underenforcement (and thus, the risk of Type II errors) is more significant than overenforcement (and thus, the risk of Type I errors) is that there are not enough cases brought and won. But even if superficially true, this is, on its own, just as consistent with a belief that the regime is functioning well as it is with a belief that it is functioning poorly. Indeed, as one of the Expert Report’s authors has pointed out:

Antitrust law [] has a widespread effect on business conduct throughout the economy. Its principal value is found, not in the big litigated cases, but in the multitude of anticompetitive actions that do not occur because they are deterred by the antitrust laws, and in the multitude of efficiency-enhancing actions that are not deterred by an overbroad or ambiguous antitrust.[30]

At the same time, some critics (including another of the Expert Report’s authors) contend that a heightened concern for Type I errors stems from a faulty concern that “type two errors… are not really problematic because the market itself will correct the situation,” instead asserting that “it is economically naïve to assume that markets will naturally tend toward competition.”[31]

Judge Easterbrook’s famous argument for enforcement restraint is not based on the assertion that markets are perfectly self-correcting. Rather, his claim is that the (undeniable) incentive of new entrants to compete for excess profits in monopolized markets operates to limit the social costs of Type II errors more effectively than the legal system’s ability to correct or ameliorate the costs of Type I errors. The logic is quite simple, and not dependent on the strawman notion that markets are perfect:

If the court errs by condemning a beneficial practice, the benefits may be lost for good. Any other firm that uses the condemned practice faces sanctions in the name of stare decisis, no matter the benefits. If the court errs by permitting a deleterious practice, though, the welfare loss decreases over time. Monopoly is self-destructive. Monopoly prices eventually attract entry. True, this long run may be a long time coming, with loss to society in the interim. The central purpose of antitrust is to speed up the arrival of the long run. But this should not obscure the point: judicial errors that tolerate baleful practices are self-correcting while erroneous condemnations are not.[32]

Moreover, anticompetitive conduct that is erroneously excused may be subsequently corrected, either by another enforcer, a private litigant, or another jurisdiction. Ongoing anticompetitive behavior will tend to arouse someone’s ire: competitors, potential competitors, customers, input suppliers. That means such behavior will be noticed and potentially brought to the attention of enforcers. And for the same reason—identifiable harm—it may also be actionable.

By contrast, procompetitive conduct that does not occur because it is prohibited or deterred by legal action has no constituency and no visible evidence on which to base a case for revision. Nor does a firm improperly deterred from procompetitive conduct have any standing to sue the government for erroneous antitrust enforcement, or the courts for adopting an improper standard. Of course, overenforcement can sometimes be corrected, but the institutional impediments to doing so are formidable.

The claim that concern for Type I errors is overblown further rests on the assertion that “more up-to-date economic analysis” has undermined that position.[33] But that learning is, for the most part, entirely theoretical—constrained to “possibility theorems” divorced from realistic complications and the real institutional settings of decision making. Indeed, the proliferation of these theories may actually increase, rather than decrease, uncertainty by further complicating the analysis and asking generalist judges to choose from among competing theories, without any realistic means to do so.[34]

Unsurprisingly, “[f]or over thirty years, the economics profession has produced numerous models of rational predation. Despite these models and some case evidence consistent with episodes of predation, little of this Post-Chicago School learning has been incorporated into antitrust law.”[35] Nor is it likely that the courts are making an erroneous calculation in the abstract. Evidence of Type I errors is hard to come by, but for a wide swath of conduct called into question by “Post-Chicago School” and other theories, the evidence of systematic problems is virtually nonexistent.[36]

Moreover, contrary to the Expert Report’s implications,[37] U.S. antitrust law has not ignored potentially anticompetitive harm, and courts are hardly blindly deferential to conduct undertaken by large firms. It is impossible to infer from the general “state of the world” or from perceived “wrong” judicial decisions that the current antitrust regime has failed or that California, in particular, would benefit from a wholesale shifting of its antitrust error-cost presumptions.[38]

III. The Reliance on Presumptions vs the Demonstration of Anticompetitive Effects

While U.S. antitrust law generally requires a full-blown, effects-based analysis of challenged behavior—particularly in the context of unilateral conduct (monopolization or abuse of dominance) and vertical restraints—the EU continues to rely heavily on presumptions of harm or extremely truncated analysis. Even the EU’s highest court has finally recognized the paucity of the European Commission’s analysis in this area in its recent Intel decision.[39]

The degree to which the United States and EU differ with respect to their reliance on presumptions in antitrust cases is emblematic of a broader tendency of the U.S. regime to adhere to economic principles, while the EU tends to hold such principles in relative disregard. The U.S. approach is consistent with learnings from modern economics, which almost universally counsel against presuming competitive harm on the basis of industry structure—particularly from the extent of concentration in a market. Indeed, as one of the Expert Report’s own authors has argued, “there is no well-defined ‘causal effect of concentration on price,’ but rather a set of hypotheses that can explain observed correlations of the joint outcomes of price, measured markups, market share, and concentration.”[40]

Concerns about excessive concentration are at the forefront of current efforts to expand antitrust enforcement, including through the use of presumptions. There is no reliable empirical support for claims either that concentration has been increasing, or that it necessarily leads to, or has led to, increased market power and the economic harms associated with it.[41] There is even less support for claims that concentration leads to the range of social ills ascribed to it by advocates of “populist” antitrust. Similarly, there is little evidence that the application of antitrust or related regulation to more vigorously prohibit, shrink, or break up large companies will correct these asserted problems.

Meanwhile, economic theory, empirical evidence, and experience all teach that vertical restraints—several of which would be treated more harshly under the Expert Report’s recommendations[42]—rarely harm competition. Indeed, they often benefit consumers by reducing costs, better distributing risk, better informing and optimizing R&D activities and innovation, better aligning manufacturer and distributor incentives, lowering price, increasing demand through the inducement of more promotional services, and/or creating more efficient distribution channels.

As the former Federal Trade Commission (FTC) Bureau of Economics Director Francine Lafontaine explained in summarizing the body of economic evidence analyzing vertical restraints: “it appears that when manufacturers choose to impose [vertical] restraints, not only do they make themselves better off but they also typically allow consumers to benefit from higher quality products and better service provision.”[43] A host of other studies corroborate this assessment.[44] As one of these notes, while “some studies find evidence consistent with both pro- and anticompetitive effects… virtually no studies can claim to have identified instances where vertical practices were likely to have harmed competition.”[45] Similarly, “in most of the empirical studies reviewed, vertical practices are found to have significant pro-competitive effects.”[46]

At the very least, we remain profoundly uncertain of the effects of vertical conduct (particularly in the context of modern high-tech and platform industries), with the proviso that most of what we know suggests that this conduct is good for consumers. But even that worst-case version of our state of knowledge is inconsistent with the presumptions-based approach taken by the EU.

Adopting a presumptions-based approach without a firm economic basis is far more hostile to novel business conduct, especially in the innovative markets that distinguish California’s economy. EU competition policy errs on the side of condemning novel conduct, deterring beneficial business activities where consumers would be better served if authorities instead tried to better understand them. This is not something California should emulate.

A. The Expert Report’s Quantification of Anticompetitive Harm and Causation

European competition law imposes a much less strenuous burden on authorities to quantify anticompetitive harm and establish causation than does U.S. law. This makes European competition law much more prone to false positives that condemn efficiency-generating or innovative firm behavior. The main cause of these false positives is the failure of the EU’s “competitive process” standard to separate competitive from anticompetitive exclusionary conduct.

While the Expert Report rightly recognizes that adopting an abuse-of-dominance standard (similar to that which exists in Europe) would be misguided, its proposed focus on “competitive constraints,” rather than consumer welfare, would effectively bring California antitrust enforcement much closer to the EU model.[47]

At the same time, the Expert Report counsels adopting a “material-risk-of-harm” standard, which is foreign to U.S. antitrust law:

(e) Anticompetitive exclusionary conduct includes conduct that has or had a material risk of harming trading partners due to increased market power, even if those harms have not yet arisen and may not materialize.[48]

While such a standard exists in U.S. standing jurisprudence,[49] antitrust plaintiffs (and private plaintiffs, in particular) must typically meet a higher bar to prove actual antitrust injury.[50] Moreover, the focus is generally on output restriction, rather than the risk of “harm” to a trading partner:

The government must show conduct that reasonably seems capable of causing reduced output and increased prices by excluding a rival. The private plaintiff must additionally show an actual effect producing an injury in order to support a damages action or individually threatened harm to support an injunction. The required private effect could be either a higher price which it paid, or lost profits from market exclusion.[51]

Again, this is a fairly concrete application of the error-cost framework: Lowering the standard of proof required to establish liability increases the risk of false positives and decreases the risk of false negatives. But particularly in California—where so much of the state’s economic success is built on industries characterized by large companies with substantial procompetitive economies of scale and network effects, novel business models, and immense technological innovation—the risk of erroneous condemnation is substantial, and the potential costs significant.

Further, defining antitrust harm in terms of “conduct [that] tends to… diminish or create a meaningful risk of diminishing the competitive constraints imposed by the defendant’s rivals”[52] opens the door substantially to the risk that procompetitive conduct could be enjoined. For example, such an approach would seem at odds with the concept of antitrust injury for private plaintiffs established by the Supreme Court’s Brunswick case.[53] “Competitive constraints” may “tend” to be reduced, as in Brunswick, by perfectly procompetitive conduct; enshrining such a standard would not serve California’s economic interests.

Similarly, the Expert Report’s proposed statutory language includes a provision that would infer not only causation but also the existence of harm from ambiguous conduct:

5) In cases where the trading partners are customers…, it is not necessary for the plaintiff to specify the precise nature of the harm that might be experienced in the future or to quantify with specificity any particular past harm. It is sufficient for the plaintiff to establish a significant weakening of the competitive constraints facing the defendant, from which such harms to direct or indirect customers can be presumed.[54]

The Microsoft case similarly held that plaintiffs need not quantify injury with specificity because “neither plaintiffs nor the court can confidently reconstruct a product’s hypothetical technological development in a world absent the defendant’s exclusionary conduct.”[55] But Microsoft permits the inference only of causation in such circumstances, not the existence of anticompetitive conduct. Most of the decision was directed toward identifying and assessing the anticompetitiveness of the alleged conduct. Inference is permitted only with respect to causation—to the determination that such conduct was reasonably likely to lead to harm by excluding specific (potential) competitors. Establishing merely a “weakening of the competitive constraints facing the defendant,” by contrast, does not permit an inference of anticompetitiveness.

Such an approach is much closer to the European standard of maintaining a system of “undistorted competition.” European authorities generally operate under the assumption that “competitive” market structures ultimately lead to better outcomes for consumers.[56] This contrasts with American antitrust enforcement which, by pursuing a strict consumer-welfare goal, systematically looks at the actual impact of a practice on economic parameters, such as prices and output.

In other words, European competition enforcement assumes that concentrated market structures likely lead to poor outcomes and thus sanctions them, whereas U.S. antitrust law looks systematically into the actual effects of a practice. The main consequence of this distinction is that, compared to the United states, European competition law has established a wider set of per se prohibitions (which are not discussed in the Expert Report) and sets a lower bar for plaintiffs to establish the existence of anticompetitive conduct (which the Expert Report recommends California policymakers emulate).[57] Because of this lower evidentiary threshold, EU competition decisions are also subject to less-stringent judicial review.

The EU’s competitive-process standard is similar to the structuralist analysis that was popular in the United States through the middle of the 20th century. This view of antitrust led U.S. enforcers frequently to condemn firms merely for growing larger than some arbitrary threshold, even when those firms engaged in conduct that, on net, benefited consumers. While EU enforcers often claim to be pursuing a consumer-welfare standard, and to adhere to rigorous economic analysis in their antitrust cases,[58] much of their actual practice tends to engage in little more than a window-dressed version of the outmoded structuralist analysis that U.S. scholars, courts, and enforcers roundly rejected in the latter half of the 20th century.

To take one important example, a fairly uncontroversial requirement for antitrust intervention is that a condemned practice should actually—or be substantially likely to—foster anticompetitive harm. Even in Europe, whatever other goals competition law is presumed to further, it is nominally aimed at protecting competition rather than competitors.[59] Accordingly, the mere exit of competitors from the market should be insufficient to support liability under European competition law in the absence of certain accompanying factors.[60] And yet, by pursuing a competitive-process goal, European competition authorities regularly conflate desirable and undesirable forms of exclusion precisely on the basis of their effect on competitors.

As a result, the Commission routinely sanctions exclusion that stems from an incumbent’s superior efficiency rather than from welfare-reducing strategic behavior,[61] and routinely protects inefficient competitors that would otherwise rightly be excluded from a market. As Pablo Ibanez Colomo puts it:

It is arguably more convincing to question whether the principle whereby dominant firms are under a general duty not to discriminate is in line with the logic and purpose of competition rules. The corollary to the idea that it is prima facie abusive to place rivals at a disadvantage is that competition must take place, as a rule, on a level playing field. It cannot be disputed that remedial action under EU competition law will in some instances lead to such an outcome.[62]

Unfortunately, the Expert Report’s repeated focus on diminished “competitive constraints” as the touchstone for harm may (perhaps unintentionally) even enable courts to impose liability for harm to competitors caused by procompetitive conduct. For example, the Expert Report would permit a determination that:

[C]onduct tends to… diminish or create a meaningful risk of diminishing the competitive constraints… [if it] tends to (i) increase barriers to entry or expansion by those rivals, (ii) cause rivals to lower their quality-adjusted output or raise their quality-adjusted price, or (iii) reduce rivals’ incentives to compete against the defendant.[63]

But market exit is surely an example of a reduced incentive to compete, even if it results from a rival’s intense (and consumer-welfare-enhancing) competition. Depending on how “barrier to entry” is defined, innovation, product improvement, and vertical integration by a defendant—even when they are procompetitive—all could constitute a barrier to entry by forcing rivals to incur greater costs or compete in multiple markets. Similarly, increased productivity resulting in less demand for labor or other inputs or lower wages could enable a “defendant [to] profitably make a less attractive offer to that supplier or worker… than the defendant could absent that conduct,”[64] even though the increase in market power in that case would be beneficial.[65]

It is true that the Expert Report elsewhere notes that “it is sometimes difficult for courts to distinguish between anticompetitive exclusionary conduct, which is illegal, from competition on the merits, which is legal even if it weakens rivals or drives them out of business altogether.”[66] Thus, it is perhaps unintentional that the report’s proposed language could nevertheless support liability in such circumstances. At the very least, California should not adopt the Expert Report’s proposed language without a clear disclaimer that liability will never be based on “diminished competitive constraints” resulting from consumer-welfare-enhancing conduct or vigorous competition by the defendant.

IV. Penalizing the Existence of Monopolies vs Prohibiting Only the Extension of Monopoly Power

While U.S. monopolization law prohibits only predatory or exclusionary conduct that results in both the unlawful acquisition or maintenance of monopoly power and the creation of net harm to consumers, the EU also punishes the mere exercise of monopoly power—that is, the charging of allegedly “excessive” prices by dominant firms (or the use of “exploitative” business terms). Thus, the EU is willing to punish the mere extraction of rents by a lawfully obtained dominant firm, while the United States punishes only the unlawful extension of market power.

There may be multiple reasons for this difference, including the EU’s particular history with state-sponsored monopolies and its unique efforts to integrate its internal market. Whatever the reason, the U.S. approach, unlike the EU’s, is grounded in a concern for minimizing error costs—not in order to protect monopolists or large companies, but to protect the consumers who benefit from more dynamic markets, more investment, and more innovation:

The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system. The opportunity to charge monopoly prices—at least for a short period is what attracts “business acumen” in the first place; it induces risk taking that produces innovation and economic growth. To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct.[67]

At the same time, the U.S. approach mitigates the serious risk of simply getting it wrong. This is incredibly likely where, for example, “excessive” prices are in the eye of the beholder and are extremely difficult to ascertain econometrically.

This unfortunate feature of EU competition enforcement would likely be, at least in part, replicated under the reforms proposed by the Expert Report. Indeed, the report’s focus on the welfare of “trading partners”—and particularly its focus on trading-partner welfare, regardless of whether perceived harm is passed on to consumers—comes dangerously close to the EU’s preoccupation with reducing the rents captured by monopolists.[68] While the Expert Report does not recommend an “excessive pricing” theory of harm—like the one that exists in the EU—it does echo the EU’s fixation on the immediate fortunes of trading partners (other than consumers) in ways that may ultimately lead to qualitatively equivalent results.

V. The Emulation of European Competition Law in the Expert Report’s Treatment of Specific Practices and Theories of Harm

Beyond the high-level differences discussed above, European and U.S. antitrust authorities also diverge significantly on numerous specific issues. These dissimilarities often result from the different policy goals that animate these two bodies of law. As noted, where U.S. case law is guided by an overarching goal of maximizing consumer welfare (notably, a practice’s effect on output), European competition law tends to favor structural presumptions and places a much heavier emphasis on distributional considerations. In addition, where the U.S. approach to many of these specific issues is deeply influenced by its overwhelming concern with the potentially chilling effects of intervention, this apprehension is very much foreign to European competition law. The result is often widely divergent approaches to complex economic matters in which the United States hews far more closely than does the EU to the humility and restraint suggested by economic learning.

Unfortunately, the recommendations put forward in the Expert Report would largely bring California antitrust law in line with the European approach for many theories of harm. Indeed, the Expert Report rejects the traditional U.S. antitrust-law concern with chilling procompetitive behavior, even proposing statutory language that would hold that “courts should bear in mind that the policy of California is that the risk of under-enforcement of the antitrust laws is greater than the risk of over-enforcement.”[69] Not only is this position unsupported, but it also entails an explicit rejection of a century of U.S. antitrust jurisprudence:

[U]sing language that mimics the Sherman Act would come with a potentially severe disadvantage: California state courts might then believe that they should apply 130 years of federal jurisprudence to cases brought under California state law. In recent decades, that jurisprudence has substantially narrowed the scope of the Sherman Act, as described above, so relying on it could well rob California law of the power it needs to protect competition.[70]

The evidence suggesting that competition has been poorly protected under Sherman Act jurisprudence is generally weak and unconvincing,[71] however, and the same is true for the specific theories of harm that the Expert Report would expand.

A. Predatory Pricing

Predatory pricing is one area where the Expert Report urges policymakers to copy specific rules in force in the EU. In its model statutory language, the Expert Report proposes that California establish that:

liability [for anticompetitive exclusionary conduct] does not require finding… that any price of the defendant for a product or service was below any measure of the costs to the defendant for providing the product or service…, [or] that in a claim of predatory pricing, the defendant is likely to recoup the losses it sustains from below-cost pricing of the products or services at issue[.][72]

U.S. antitrust law subjects allegations of predatory pricing to two strict conditions: 1) monopolists must charge prices that are below some measure of their incremental costs; and 2) there must be a realistic prospect that they will be able to recoup these first-period losses.[73] In laying out its approach to predatory pricing, the Supreme Court identified the risk of false positives and the clear cost of such errors to consumers. It therefore particularly stressed the importance of the recoupment requirement because, without recoupment, “predatory pricing produces lower aggregate prices in the market, and consumer welfare is enhanced.”[74]

Accordingly, in the United States, authorities must prove that there are constraints that prevent rival firms from entering the market after the predation scheme or that the scheme itself would effectively foreclose rivals from entering in the first place.[75] Otherwise, competitors would undercut the predator as soon as it attempts to charge supracompetitive prices to recoup its losses. In such a situation—without, that is, the strong likelihood of recouping the lost revenue from underpricing—the overwhelming weight of economic learning (to say nothing of simple logic) makes clear that predatory pricing is not a rational business strategy.[76] Thus, apparent cases of predatory pricing in the absence of the likelihood of recoupment are most likely not, in fact, predatory, and deterring or punishing them would likely actually harm consumers.

In contrast, the legal standard applied to predatory pricing in the EU is much laxer and almost certain, as a result, to risk injuring consumers. Authorities must prove only that a company has charged a price below its average variable cost, in which case its behavior is presumed to be predatory.[77] Even when a firm imposes prices that are between average variable and average total cost, it can be found guilty of predatory pricing if authorities show that its behavior was part of “a plan to eliminate competition.”[78] Most significantly, in neither case is it necessary for authorities to show that the scheme would allow the monopolist to recoup its losses.[79]

[I]t does not follow from the case-law of the Court that proof of the possibility of recoupment of losses suffered by the application, by an undertaking in a dominant position, of prices lower than a certain level of costs constitutes a necessary precondition to establishing that such a pricing policy is abusive.[80]

By affirmatively dispensing with each of these limitations, the Expert Report effectively recommends that California legislators shift California predatory-pricing law toward the European model. Unfortunately, such a standard has no basis in economic theory or evidence—not even in the “strategic” economic theory that arguably challenges the dominant, “Chicago School” understanding of predatory pricing.[81] Indeed, strategic predatory pricing still requires some form of recoupment and the refutation of any convincing business justification offered in response.[82] As Bruce Kobayashi and Tim Muris emphasize, the introduction of new possibility theorems, particularly uncorroborated by rigorous empirical reinforcement, does not necessarily alter the implementation of the error-cost analysis:

While the Post-Chicago School literature on predatory pricing may suggest that rational predatory pricing is theoretically possible, such theories do not show that predatory pricing is a more compelling explanation than the alternative hypothesis of competition on the merits. Because of this literature’s focus on theoretical possibility theorems, little evidence exists regarding the empirical relevance of these theories. Absent specific evidence regarding the plausibility of these theories, the courts… properly ignore such theories.[83]

The case of predatory pricing illustrates a crucial distinction between European and American competition law. The recoupment requirement embodied in U.S. antitrust law essentially differentiates aggressive pricing behavior that improves consumer welfare by leading to overall price decreases from predatory pricing that reduces welfare due to ultimately higher prices. In other words, it is entirely focused on consumer welfare.

The European approach, by contrast, reflects structuralist considerations that are far removed from a concern for consumer welfare. Its underlying fear is that dominant companies could, through aggressive pricing—even to the benefit of consumers—by their very success, engender more concentrated market structures. It is simply presumed that these less-atomistic markets are invariably detrimental to consumers. Both the Tetra Pak and France Télécom cases offer clear illustrations of the European Court of Justice’s reasoning on this point:

[I]t would not be appropriate, in the circumstances of the present case, to require in addition proof that Tetra Pak had a realistic chance of recouping its losses. It must be possible to penalize predatory pricing whenever there is a risk that competitors will be eliminated… The aim pursued, which is to maintain undistorted competition, rules out waiting until such a strategy leads to the actual elimination of competitors.[84]

Similarly:

[T]he lack of any possibility of recoupment of losses is not sufficient to prevent the undertaking concerned reinforcing its dominant position, in particular, following the withdrawal from the market of one or a number of its competitors, so that the degree of competition existing on the market, already weakened precisely because of the presence of the undertaking concerned, is further reduced and customers suffer loss as a result of the limitation of the choices available to them.[85]

In short, the European approach leaves much less room for analysis of a pricing scheme’s concrete effects, making it much more prone to false positives than the Brooke Group standard in the United States. It ignores not only the benefits that consumers may derive from lower prices, but also the chilling effect that broad predatory-pricing standards may exert on firms that attempt to attract consumers with aggressive pricing schemes. There is no basis for enshrining such an approach in California law.

B. Refusals to Deal

Refusals to deal are another area where the Expert Report’s recommendations would bring California antitrust rules more in line with the EU model. The Expert Report proposes in its example statutory language that:

[L]iability… does not require finding (i) that the unilateral conduct of the defendant altered or terminated a prior course of dealing between the defendant and a person subject to the exclusionary conduct; [or] (ii) that the defendant treated persons subject to the exclusionary conduct differently than the defendant treated other persons[.][86]

The Expert Report further highlights “Discrimination Against Rivals, for example by refusing to provide rivals of the defendant access to a platform or product or service that the defendant provides to other third-parties” as a particular area of concern.[87]

U.S. and EU antitrust laws are hugely different when it comes to refusals to deal. While the United States has imposed strenuous limits on enforcement authorities or rivals seeking to bring such cases, EU competition law sets a far lower threshold for liability. The U.S. approach is firmly rooted in the error-cost framework and, in particular, the conclusion that avoiding Type I (false-positive) errors is more important than avoiding Type II (false-negative) errors. As the Supreme Court held in Trinko:

[Enforced sharing] may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities. Enforced sharing also requires antitrust courts to act as central planners, identifying the proper price, quantity, and other terms of dealing—a role for which they are ill suited.[88]

In that case, the Court was unwilling to extend the reach of Section 2, cabining it to a very narrow set of circumstances:

Aspen Skiing is at or near the outer boundary of §2 liability. The Court there found significance in the defendant’s decision to cease participation in a cooperative venture. The unilateral termination of a voluntary (and thus presumably profitable) course of dealing suggested a willingness to forsake short-term profits to achieve an anticompetitive end.[89]

This highlights two key features of American antitrust law concerning refusals to deal. To start, U.S. antitrust law generally does not apply the “essential facilities” doctrine—indeed, as the Court held in Trinko, “we have never recognized such a doctrine.”[90] Accordingly, in the absence of exceptional facts, upstream monopolists are rarely required to supply their product to downstream rivals, even if that supply is “essential” for effective competition in the downstream market.

Moreover, as the Court observed in Trinko, the Aspen Skiing case appears to concern only those limited instances where a firm’s refusal to deal stems from the termination of a preexisting and profitable business relationship.[91] While even this is not likely to be the economically appropriate limitation on liability,[92] its impetus—ensuring that liability is found only in situations where procompetitive explanations for the challenged conduct are extremely unlikely—is appropriate for a regime concerned with minimizing the cost to consumers of erroneous enforcement decisions.

As in most areas of antitrust policy, EU competition law is much more interventionist. Refusals to deal are a central theme of EU enforcement efforts, and there is a relatively low threshold for liability.[93] In theory, for a refusal to deal to infringe EU competition law, it must meet a set of fairly stringent conditions: the input must be indispensable, the refusal must eliminate all competition in the downstream market, and there must not be objective reasons that justify the refusal.[94] Moreover, if the refusal to deal involves intellectual property, it must also prevent the appearance of a new good.[95] In practice, however, all of these conditions have been significantly relaxed by EU courts and the Commission’s decisional practice. This is best evidenced by the lower court’s Microsoft ruling. As John Vickers notes:

[T]he Court found easily in favor of the Commission on the IMS Health criteria, which it interpreted surprisingly elastically, and without relying on the special factors emphasized by the Commission. For example, to meet the “new product” condition it was unnecessary to identify a particular new product… thwarted by the refusal to supply but sufficient merely to show limitation of technical development in terms of less incentive for competitors to innovate.[96]

Thus, EU competition law is far less concerned about its potential chilling effect on firms’ investments than is U.S. antitrust law.

The Expert Report’s wording suggests that its authors would like to see California’s antitrust rules in this area move towards the European model. This seems particularly misguided for a state that so heavily relies on continued investments in innovation.

In discussing its concerns with the state of refusal-to-deal law in the United States, the Expert Report notes that:

[E]ven a monopolist can normally choose the parties with which it will deal and [] a monopolist’s selective refusal to deal with another firm, even a competitor, violates antitrust law only in unusual circumstances…. [The Court] explained that courts are ill-equipped to determine the terms on which one firm should be required to deal with another, so a bright line is necessary to preserve the incentives of both the monopolist and the competitor to compete aggressively in the marketplace. Such a rule may have been reasonable in a setting where “dealing” often meant incurring a large fixed cost to coordinate with the other firm. In an economy containing digital “ecosystems” that connect many businesses to one another, and digital markets with standardized terms of interconnection, such as established application program interfaces (APIs), that rule may immunize much conduct that could be anticompetitive.[97]

This approach is unduly focused on the welfare of specific competitors, rather than the effects on competition and consumers. Indeed, in the Aspen Skiing case (which did find a duty to deal on the defendant’s part), the Supreme Court is clear that the assessment of harm to competitors would be insufficient to establish that a refusal to deal was anticompetitive: “The question whether Ski Co.’s conduct may properly be characterized as exclusionary cannot be answered by simply considering its effect on Highlands. In addition, it is relevant to consider its impact on consumers and whether it has impaired competition in an unnecessarily restrictive way.”[98]

The Expert Report’s additional proposal that liability should not turn on whether the defendant treated particular parties differently in exercising exclusionary conduct (including refusal to deal)[99] is a further move away from effects-based analysis and toward the European model. As Einer Elhauge has noted, there is an important distinction between unconditional and discriminatory exclusionary conduct:

Efforts to simply improve a firm’s own efficiency and win sales by selling a better or cheaper product at above-cost prices should enjoy per se legality without any general requirement to share that greater efficiency with rivals. But exclusionary conditions that discriminate on the basis of rivalry by selectively denying property or products to rivals (or buyers who deal with rivals) are not necessary to further ex ante incentives to enhance the monopolist’s efficiency, and should be illegal when they create a marketwide foreclosure that impairs rival efficiency.[100]

By arguing to impose liability regardless of whether conduct is exercised in a discriminatory fashion, the Expert Report would remove the general protection under U.S. antitrust law for unconditional refusals to deal, and would instead apply the conditional standard to all exclusionary conduct.

It seems quite likely, in fact, that this provision is proposed as a rebuke to the 9^th U.S. Circuit Court of Appeals’ holding in FTC v. Qualcomm, which found no duty to deal, in part, because the challenged conduct was applied to all rivals equally.[101] At least three of the Expert Report’s authors are on record as vigorously opposing the holding in Qualcomm.[102] But far from supporting a challenge to Qualcomm’s conduct on the grounds that it harmed competition by targeting threatening rivals, the Expert Report authors’ apparent preferred approach to Qualcomm’s alleged refusal to deal was to attempt to force a wholesale change in Qualcomm’s vertically integrated business model.

In other words, the authors would find liability regardless of how Qualcomm enforces its license terms, and would prefer a legal standard that does not condition that finding on exclusionary conduct against only certain rivals. In essence, they see operating at all in the relevant market as a harm.[103] Whatever the merits of this argument in the Qualcomm case, it should not be generalized to undermine the sensible limits that U.S. antitrust has imposed on the refusal-to-deal theory of harm.

C. Vertical and Platform Restraints

Finally, the Expert Report would take a leaf out of the European book when it comes to vertical restraints, including rebates, exclusive dealing, “most favored nation” (MFN) clauses, and platform conduct. Here, again, the Expert Report singles these practices out for attention:

Loyalty Rebates, which penalize a customer that conducts more business with the defendant’s rivals, as opposed to volume discounts, which are generally procompetitive;

Exclusive Dealing Provisions, which disrupt the ability of counterparties to deal with the defendant’s rivals, especially if such provisions are widely used by the defendant;

Most-Favored Nation Clauses, which prohibit counterparties from dealing with the defendant’s rivals on more favorable terms and conditions than those on which they deal with the defendant, especially if such clauses are widely used by the defendant.[104]

There are vast differences between U.S. and EU competition law with respect to vertical restraints. On the one hand, since the Supreme Court’s Leegin ruling, even price-related vertical restraints (such as resale price maintenance, or “RPM”) are assessed under the rule of reason in the United States.[105] Some commentators have gone so far as to say that, in practice, U.S. case law almost amounts to per se legality.[106] Conversely, EU competition law treats RPM as severely as it treats cartels. Both RPM and cartels are considered restrictions of competition “by object”—the EU’s equivalent of a per se prohibition.[107] This severe treatment also applies to nonprice vertical restraints that tend to partition the European internal market.[108] Furthermore, in the Consten and Grundig ruling, the ECJ rejected the consequentialist (and economically grounded) principle that inter-brand competition is the appropriate touchstone to assess vertical restraints:

Although competition between producers is generally more noticeable than that between distributors of products of the same make, it does not thereby follow that an agreement tending to restrict the latter kind of competition should escape the prohibition of Article 85(1) merely because it might increase the former.[109]

This especially stringent stance toward vertical restrictions flies in the face of the longstanding mainstream-economics literature addressing the subject. As Patrick Rey and Jean Tirole (hardly the most free-market of economists) saw it as long ago as 1986: “Another major contribution of the earlier literature on vertical restraints is to have shown that per se illegality of such restraints has no economic foundations.”[110]

While there is theoretical literature (rooted in so-called “possibility theorems”) that suggests firms can engage in anticompetitive vertical conduct, the empirical evidence strongly suggests that, even though firms do impose vertical restraints, it is exceedingly rare that they have net anticompetitive effects. Nor is the relative absence of such evidence for a lack of looking: countless empirical papers have investigated the competitive effects of vertical integration and vertical contractual arrangements and found predominantly procompetitive benefits or, at worst, neutral effects.[111]

Unlike in the EU, the U.S. Supreme Court in Leegin took account of the weight of the economic literature and changed its approach to RPM to ensure that the law no longer simply precluded its arguable consumer benefits: “Though each side of the debate can find sources to support its position, it suffices to say here that economics literature is replete with procompetitive justifications for a manufacturer’s use of resale price maintenance.”[112] Further, “[the prior approach to resale price maintenance restraints] hinders competition and consumer welfare because manufacturers are forced to engage in second-best alternatives and because consumers are required to shoulder the increased expense of the inferior practices.”[113]

By contrast, the EU’s continued per se treatment of RPM strongly reflects its precautionary-principle approach to antitrust, under which European regulators and courts readily condemn conduct that could conceivably injure consumers, even where such injury is, according to the best economic understanding, unlikely (at best).[114] The U.S. approach to such vertical restraints, which rests on likelihood rather than mere possibility,[115] is far less likely to erroneously condemn beneficial conduct.

There are also significant differences between the U.S. and EU stances on the issue of rebates. This reflects the EU’s relative willingness to disregard complex economics in favor of noneconomic, formalist presumptions (at least, prior to the ECJ’s Intel ruling). Whereas U.S. antitrust has predominantly moved to an effects-based assessment of rebates,[116] this is only starting to happen in the EU. Prior to the ECJ’s Intel ruling, the EU implemented an overly simplistic approach to assessing rebates by dominant firms, where so-called “fidelity” rebates were almost per se illegal.[117] Likely recognizing the problems inherent in this formalistic assessment of rebates, the ECJ’s Intel ruling moved the European case law on rebates to a more evidence-based approach, holding that:

[T]he Commission is not only required to analyse, first, the extent of the undertaking’s dominant position on the relevant market and, secondly, the share of the market covered by the challenged practice, as well as the conditions and arrangements for granting the rebates in question, their duration and their amount; it is also required to assess the possible existence of a strategy aiming to exclude competitors that are at least as efficient as the dominant undertaking from the market.[118]

As Advocate General Nils Wahl noted in his opinion in the case, only such an evidence-based approach could ensure that the challenged conduct was actually harmful:

In this section, I shall explain why an abuse of dominance is never established in the abstract: even in the case of presumptively unlawful practices, the Court has consistently examined the legal and economic context of the impugned conduct. In that sense, the assessment of the context of the conduct scrutinised constitutes a necessary corollary to determining whether an abuse of dominance has taken place. That is not surprising. The conduct scrutinised must, at the very least, be able to foreclose competitors from the market in order to fall under the prohibition laid down in Article 102 TFEU.”[119]

The Expert Report, however, contains a direct refutation of Intel, thus “out-Europing” even Europe itself in its treatment of vertical restraints:

7) Plaintiffs need not show that the rivals whose ability to compete has been reduced are as efficient, or nearly as efficient, as the defendant. Harm to competition can arise when the competitive constraints on the defendant are weakened even when those competitive constraints come from less efficient rivals. Indeed, harm to competition can be especially great when a firm that faces limited competition further weakens its rivals.[120]

If adopted, this language would significantly limit the need for California courts to show actual anticompetitive harm arising from challenged vertical conduct. Similarly, the Expert Report’s rejection of the “no-economic-sense” test—“liability…does not require finding… that the conduct of the defendant makes no economic sense apart from its tendency to harm competition”[121]—removes another mechanism to ensure that vertical restraints lead to actual consumer harm, rather than simply injury to a competitor.

As Thom Lambert persuasively demonstrates, there are imperfections with both the “as efficient competitor” test and the “no economic sense” test. But these commonly applied tools do at least help to ensure that courts undertake to find actual anticompetitive harm.[122] The rejection of both simultaneously is decidedly problematic, suggesting a preference for no serious economic constraints on courts’ discretion to condemn practices solely on the ground of structural harm—i.e., harm to certain competitors.

By contrast, the alternative definition that Lambert proposes “would deem conduct to be unreasonably exclusionary if it would exclude from the defendant’s market a ‘competitive rival,’ defined as a rival that is both as determined as the defendant and capable, at minimum efficient scale, of matching the defendant’s efficiency.”[123] While this test may appear to have some traits in common with the Expert Report’s “diminishing competitive constraints” approach, it incorporates a much more robust set of principles and limitations, designed to more clearly distinguish conduct that merely excludes from exclusions that actually cause anticompetitive harm, while minimizing administrative costs.[124] The Expert Report, by contrast, explicitly removes such limitations.

A related problem concerns the Expert Report’s proposal that “when a defendant operates a multi-sided platform business, [liability does not turn on whether] the conduct of the defendant presents harm to competition on more than one side of the multi-sided platform[.]”[125] This provision is meant to reverse the Supreme Court’s holding on platform vertical restraints in Ohio v. American Express that:

Due to indirect network effects, two-sided platforms cannot raise prices on one side without risking a feedback loop of declining demand. And the fact that two-sided platforms charge one side a price that is below or above cost reflects differences in the two sides’ demand elasticity, not market power or anticompetitive pricing. Price increases on one side of the platform likewise do not suggest anticompetitive effects without some evidence that they have increased the overall cost of the platform’s services. Thus, courts must include both sides of the platform—merchants and cardholders—when defining the credit-card market….

…For all these reasons, “[i]n two-sided transaction markets, only one market should be defined.” Any other analysis would lead to “mistaken inferences” of the kind that could “chill the very conduct the antitrust laws are designed to protect.”[126]

As Greg Werden notes, “[a]lleging the relevant market in an antitrust case does not merely identify the portion of the economy most directly affected by the challenged conduct; it identifies the competitive process alleged to be harmed.”[127] Particularly where novel conduct or novel markets are involved, and thus the relevant economic relationships are poorly understood, market definition is crucial to determine “what the nature of [the relevant] products is, how they are priced and on what terms they are sold, what levers [a firm] can use to increase its profits, and what competitive constraints affect its ability to do so.”[128] This is the approach the Supreme Court employed in Amex.

The Expert Report’s proposal to overrule Amex in California is deeply misguided. The economics of two-sided markets are such that “there is no meaningful economic relationship between benefits and costs on each side of the market considered alone…. [A]ny analysis of social welfare must account for the pricing level, the pricing structure, and the feasible alternatives for getting all sides on board.”[129] Assessing anticompetitive harm with respect to only one side of a two-sided market will arbitrarily include and exclude various sets of users and transactions, and incorrectly assess the extent and consequences of market power.[130]

Indeed, evidence of a price effect on only one side of a two-sided platform can be consistent with either neutral, anticompetitive, or procompetitive conduct.[131] Only when output is defined to incorporate the two-sidedness of the product, and where price and quality are assessed on both sides of a sufficiently interrelated two-sided platform, is it even possible to distinguish between procompetitive and anticompetitive effects. In fact, “[s]eparating the two markets allows legitimate competitive activities in the market for general purposes to be penalized no matter how output-enhancing such activities may be.”[132]

Notably, while some scholars have opposed the Amex holding that both sides of a two-sided market must be included in the relevant market in order to assess anticompetitive harm, some of these critics appear to note that the problem is not that both sides should not be taken into account at all, but only that they should not be included in the same relevant market (thus, permitting a plaintiff to make out a prima facie case by showing harm to just one side).[133] The language proposed in the Expert Report, however, would go even further, seemingly permitting a finding of liability based solely on harm to one side of a multi-sided market, regardless of countervailing effects on the other side. As in the Amex case itself, such an approach would confer benefits on certain platform business users (in Amex, retailers) at the direct expense of consumers (in Amex, literal consumers of retail goods purchased by credit card).

Adopting such an approach in California—whose economy is significantly dependent on multisided digital-platform firms, including both incumbents and startups[134]—would imperil the state’s economic prospects[135] and exacerbate the incentives for such firms to take jobs, investments, and tax dollars elsewhere.[136]

[1] Antitrust Law — Study B-750, California Law Revision Commission (last revised Apr. 26, 2024), available at http://www.clrc.ca.gov/B750.html.

[2] We welcome the opportunity to comment further or to respond to questions about our comments. Please contact us at [email protected].

[3] Regulation (EU) 2022/1925 of the European Parliament and of the Council of 14 September 2022 on Contestable and Fair Markets in the Digital Sector and amending Directives (EU) 2019/1937 and (EU) 2020/1828, 2022 O.J. (L 265) 1.

[4] See Aaron Edlin, Doug Melamed, Sam Miller, Fiona Scott Morton, & Carl Shapiro, Expert Report on Single Firm Conduct, 2024 Cal. L. Rev. Comm’n (hereinafter “Expert Report”), available at ExRpt-B750-Grp1.pdf.

[5] Id. at 14.

[6] Frank H. Easterbrook, The Limits of Antitrust, 63 Tex. L. Rev. 1, 15 (1984).

[7] See, especially, Pac. Bell Tel. Co. v. linkLine Commc’ns, Inc., 555 U.S. 438 (2009); Credit Suisse Sec. (U.S.A) LLC v. Billing, 551 U.S. 264, 265 (2007); Verizon Comm. v. Law Offices of Trinko, 540 U.S. 398 (2004).

[8] Trinko, 540 U.S. at 414 (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 594 (1986)).

[9] Easterbrook, supra note 6, at 7.

[10] See, e.g., Aurelien Portuese, The Rise of Precautionary Antitrust: An Illustration with the EU Google Android Decision, CPI EU News November 2019 (2019) at 4 (“The absence of demonstrated consumer harm in order to find antitrust injury is not fortuitous, but represents a fundamental alteration of antitrust enforcement, predominantly when it comes to big tech companies. Coupled with the lack of clear knowledge, a shift in the burden of proof, and the lack of a consumer harm requirement in order to find abuse of dominance all reveal the precautionary approach that the European Commission has now embraced.”).

[11] See Nassim Nicholas Taleb, Rupert Read, Raphael Douady, Joseph Norman, & Yaneer Bar-Yam, The Precautionary Principle (With Application to the Genetic Modification of Organisms), arXiv preprint arXiv:1410.5787, 2 (2014). (“The purpose of the PP is to avoid a certain class of what, in probability and insurance, is called “ruin” problems. A ruin problem is one where outcomes of risks have a non-zero probability of resulting in unrecoverable losses.”).

[12] The precautionary principles implies that policymakers should bar certain mutually advantageous transactions due to the social costs that they might impose further down the line. Moreover, the precautionary principle has historically been associated with anti-growth positions. See, e.g., Jaap C Hanekamp, Guillaume Vera?Navas, & SW Verstegen, The Historical Roots of Precautionary Thinking: The Cultural Ecological Critique and ‘The Limits to Growth’, 8 J. Risk Res. 295, 299 (2005) (“The first inklings of today’s precautionary thinking as a means of creating a sustainable society can be traced historically to ‘The Limits to Growth’…”).

[13] See, e.g., Greg Ip, Europe Regulates Its Way to Last Place, Wall St. J. (Jan. 31, 2024), https://www.wsj.com/economy/europe-regulates-its-way-to-last-place-2a03c21d. (“Of course, Europe’s economy underperforms for lots of reasons, from demographics to energy costs, not just regulation. And U.S. regulators aren’t exactly hands-off. Still, they tend to act on evidence of harm, whereas Europe’s will act on the mere possibility. This precautionary principle can throttle innovation in its cradle.”) (emphasis added).

[14] See, e.g., id.; Eric Albert, Europe Trails Behind the United States in Economic Growth, Le Monde (Nov. 1, 2023), https://www.lemonde.fr/en/economy/article/2023/11/01/europe-trails-behind-the-united-states-in-economic-growth_6218259_19.html (“For the past fifteen years, Europe has been falling further and further behind…. Since 2007, per capita growth on the other side of the Atlantic has been 19.2%, compared with 7.6% in the eurozone. A gap of almost twelve points.”).

[15] Fredrik Erixon, Oscar Guinea, & Oscar du Roy, If the EU Was a State in the United States: Comparing Economic Growth Between EU and US States, ECIPE Policy Brief No. 07/2023 (2023), available at https://ecipe.org/publications/comparing-economic-growth-between-eu-and-us-states.

[16] Among other things, the Expert Report argues that antitrust should be used to address alleged policy concerns broader than protecting competition, and should accept reductions in competition to do so. See Expert Report, supra note 1, at 2 (“Nonetheless, these important values [‘broader social and political goals’] can influence the evidentiary standards that the Legislature instructs the courts to apply when handling individual antitrust cases. For example, the California Legislature could instruct the courts to err on the side of enforcement when the effect of the conduct at issue on competition is uncertain.”). But as one of the authors of the Expert Report has himself noted elsewhere: “while antitrust enforcement has a vital role to play in keeping markets competitive, antitrust law and antitrust institutions are ill suited to directly address concerns associated with the political power of large corporations or other public policy goals such as income inequality or job creation.” Carl Shapiro, Antitrust in a Time of Populism, 61 Int’l J. Indus. Org. 714, 714 (2018) (emphasis added).

[17] See generally Easterbrook, supra note 6, at 14-15. See also Geoffrey A. Manne & Joshua D. Wright, Innovation and the Limits of Antitrust, 6 J. Comp. L. & Econ. 153 (2010).

[18] See Robert W. Crandall & Clifford Winston, Does Antitrust Policy Improve Consumer Welfare? Assessing the Evidence, 17 J. Econ. Persp. 3, 4 (2003) (“[T]he economics profession should conclude that until it can provide some hard evidence that identi?es where the antitrust authorities are signi?cantly improving consumer welfare and can explain why some enforcement actions and remedies are helpful and others are not, those authorities would be well advised to prosecute only the most egregious anticompetitive violations.”).

[19] David Autor, David Dorn, Lawrence F. Katz, Christina Patterson & John Van Reenen, The Fall of the Labor Share and the Rise of Superstar Firms, 135 Q.J. Econ. 645, 651 (2020) (citations omitted) (emphasis added).

[20] See, e.g., Thomas Philippon, The Great Reversal: How America Gave Up on Free Markets (2019); Jan De Loecker, Jan Eeckhout, & Gabriel Unger, The Rise of Market Power and the Macroeconomic Implications, 135 Q. J. Econ. 561 (2020); David Wessel, Is Lack of Competition Strangling the U.S. Economy?, Harv. Bus. Rev. (Apr. 2018), https://hbr.org/2018/03/is-lack-of-competition-strangling-the-u-s-economy; Adil Abdela & Marshall Steinbaum, The United States Has a Market Concentration Problem, Roosevelt Institute Issue Brief (2018), available at https://rooseveltinstitute.org/wp-content/uploads/2020/07/RI-US-market-concentration-problem-brief-201809.pdf.

[21] A number of papers simply do not find that the accepted story—built in significant part around the famous De Loecker, Eeckhout, & Unger study, id.—regarding the vast size of markups and market power is accurate. The claimed markups due to increased concentration are likely not nearly as substantial as commonly assumed. See, e.g., James Traina, Is Aggregate Market Power Increasing? Production Trends Using Financial Statements, Stigler Center Working Paper (Feb. 2018), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3120849; see also World Economic Outlook, April 2019 Growth Slowdown, Precarious Recovery, International Monetary Fund (Apr. 2019), available at https://www.imf.org/en/Publications/WEO/Issues/2019/03/28/world-economic-outlook-april-2019. Another study finds that profits have increased, but are still within their historical range. See Loukas Karabarbounis & Brent Neiman, Accounting for Factorless Income, 33 NBER Macro. Annual 167 (2019). And still another shows decreased wages in concentrated markets, but also that local concentration has been decreasing over the relevant time period, suggesting that lack of enforcement is not a problem. See Kevin Rinz, Labor Market Concentration, Earnings, and Inequality, 57 J. Hum. Resources S251 (2022).

[22] See Esteban Rossi-Hansberg, Pierre-Daniel Sarte, & Nicholas Trachter, Diverging Trends in National and Local Concentration, 35 NBER Macro. Annual 115, 116 (2020) (“[T]he observed positive trend in market concentration at the national level has been accompanied by a corresponding negative trend in average local market concentration…. The narrower the geographic definition, the faster is the decline in local concentration. This is meaningful because the relevant definition of concentration from which to infer changes in competition is, in most sectors, local and not national.”).

[23] Id. at 117 (emphasis added).

[24] Sharat Ganapati, Growing Oligopolies, Prices, Output, and Productivity, 13 Am. Econ. J. Micro. 309, 323-24 (2021) (emphasis added).

[25] Chang-Tai Hsieh & Esteban Rossi-Hansberg, The Industrial Revolution in Services, 1 J. Pol. Econ. Macro. 3, 3 (2023) (emphasis added). See also id. at 39 (“Over the past 4 decades, the US economy has experienced a new industrial revolution that has enabled ?rms to scale up production over a large number of establishments dispersed across space. The adoption of these technologies has particularly favored productive ?rms in nontraded-service industries. The industrial revolution in services has had its largest effect in smaller and mid-sized local markets…. The gain to local consumers from access to more, better, and novel varieties of local services from the entry of top ?rms into local markets is not captured by the BLS. We estimate that such ‘missing growth’ is as large as 1.6% in the smallest markets and averages 0.5% per year from 1977 to 2013 across all US cities.”) (emphasis added).

[26] David Berger, Kyle Herkenhoff & Simon Mongey, Labor Market Power, 112 Am. Econ. Rev. 1147, 1148-49 (2022).

[27] Shapiro, Antitrust in a Time of Populism, supra note 16, at 727-28.

[28] Expert Report, supra note 1, at 15 (emphasis added).

[29] Id. at 2.

[30] A. Douglas Melamed, Antitrust Law and Its Critics, 83 Antitrust L.J. 269, 285 (2020).

[31] Herbert J. Hovenkamp & Fiona Scott Morton, Framing the Chicago School of Antitrust Analysis, 168 U. Penn. L. Rev. 1843, 1870-71 (2020).

[32] Easterbrook, supra note 6, at 2-3.

[33] Hovenkamp & Scott Morton, supra note 31, at 1849.

[34] See generally Geoffrey A. Manne, Error Costs in Digital Markets, in Global Antitrust Institute Report on the Digital Economy (Joshua D. Wright & Douglas H. Ginsburg eds., 2020), available at https://gaidigitalreport.com/wp-content/uploads/2020/11/Manne-Error-Costs-in-Digital-Markets.pdf.

[35] Bruce H. Kobayashi & Timothy J. Muris, Chicago, Post-Chicago, and Beyond: Time to Let Go of the 20th Century, 78 Antitrust L.J. 147, 166 (2012).

[36] See id. at 166 (“[T]here is very little empirical evidence based on in-depth industry studies that RRC is a significant antitrust problem.”); id. at 148 (“Because of [the Post-Chicago School] literature’s focus on theoretical possibility theorems, little evidence exists regarding the empirical relevance of these theories.”).

[37] See Expert Report, supra note 1, at 7 (“The history of federal antitrust enforcement of single-firm conduct illustrates that when courts are uncertain about how to assess conduct, they often find in favor of defendants even if the conduct harms competition simply because the plaintiff bears the burden of proof.”).

[38] See supra notes 19-27, and accompanying text.

[39] See Case C-413/14 P Intel v Commission, ECLI:EU:C:2017:788.

[40] See Steven Berry, Martin Gaynor, & Fiona Scott Morton, Do Increasing Markups Matter? Lessons from Empirical Industrial Organization, 33 J. Econ. Persp. 48 (2019). See also Jonathan Baker & Timothy F. Bresnahan, Economic Evidence in Antitrust: Defining Markets and Measuring Market Power in Handbook of Antitrust Economics 1 (Paolo Buccirossi ed., 2008) (“The Chicago identification argument has carried the day, and structure-conduct-performance empirical methods have largely been discarded in economics.”).

[41] See, e.g., Gregory J. Werden & Luke Froeb, Don’t Panic: A Guide to Claims of Increasing Concentration 33 Antitrust 74 (2018), https://ssrn.com/abstract=3156912, and papers cited therein. As Werden & Froeb conclude: No evidence we have uncovered substantiates a broad upward trend in the market concentration in the United States, but market concentration undoubtedly has increased significantly in some sectors, such as wireless telephony. Such increases in concentration, however, do not warrant alarm or imply a failure of antitrust. Increases in market concentration are not a concern of competition policy when concentration remains low, yet low levels of concentration are being cited by those alarmed about increasing concentration…. Id. at 78. See also Joshua D. Wright, Elyse Dorsey, Jonathan Klick, & Jan M. Rybnicek, Requiem for a Paradox: The Dubious Rise and Inevitable Fall of Hipster Antitrust, 51 Ariz. St. L.J. 293 (2019).

[42] See, e.g., Expert Report, supra note 1, at 15.

[43] Francine Lafontaine & Margaret Slade, Exclusive Contracts and Vertical Restraints: Empirical Evidence and Public Policy, in Handbook of Antitrust Economics 391 (Paolo Buccirossi ed., 2008).

[44] See, e.g., Daniel P. O’Brien, The Antitrust Treatment of Vertical Restraints: Beyond the Possibility Theorems, in The Pros and Cons of Vertical Restraints 40, 72-76 (Swedish Competition Authority, 2008) (“[Vertical restraints] are unlikely to be anticompetitive in most cases.”); James C. Cooper, et al., Vertical Antitrust Policy as a Problem of Inference, 23 Int’l J. Indus. Org. 639 (2005) (surveying the empirical literature, concluding that although “some studies find evidence consistent with both pro- and anticompetitive effects… virtually no studies can claim to have identified instances where vertical practices were likely to have harmed competition”); Benjamin Klein, Competitive Resale Price Maintenance in the Absence of Free-Riding, 76 Antitrust L.J. 431 (2009); Bruce H. Kobayashi, Does Economics Provide a Reliable Guide to Regulating Commodity Bundling by Firms? A Survey of the Economic Literature, 1 J. Comp. L. & Econ. 707 (2005).

[45] James Cooper, Luke Froeb, Daniel O’Brien, & Michael Vita, Vertical Restrictions and Antitrust Policy: What About the Evidence?, Comp. Pol’y Int’l 45 (2005).

[46] Id.

[47] Expert Report, supra note 1, at 16: (b) Conduct, whether by one or multiple actors, is deemed to be anticompetitive exclusionary conduct, if the conduct tends to (1) diminish or create a meaningful risk of diminishing the competitive constraints imposed by the defendant’s rivals and thereby increase or create a meaningful risk of increasing the defendant’s market power, and (2) does not provide sufficient benefits to prevent the defendant’s trading partners from being harmed by that increased market power.

[48] Id.

[49] See TransUnion LLC v. Ramirez, 141 S. Ct. 2190, 2210-11 (2021) (“The plaintiffs rely on language from Spokeo where the Court said that ‘the risk of real harm’ (or as the Court otherwise stated, a ‘material risk of harm’) can sometimes ‘satisfy the requirement of concreteness…. [but] in a suit for damages, the mere risk of future harm, standing alone, cannot qualify as a concrete harm—at least unless the exposure to the risk of future harm itself causes a separate concrete harm.”) (citations omitted).

[50] In essence, for uncertain future effects, U.S. antitrust law applies something like a “reasonableness” standard. See U.S. v. Microsoft Corp., 253 F.3d 34, 79 (D.C. Cir. 2001) (enjoining “conduct that is reasonably capable of contributing significantly to a defendant’s continued monopoly power”) (emphasis added). Of course, “material risk” is undefined, so perhaps it is meant to accord with this standard. If so, it should use the same language.

[51] Herbert Hovenkamp, Antitrust Harm and Causation, 99 Wash. U. L. Rev. 787, 841 (2021). See also id. at 788 (“While a showing of actual harm can be important evidence, in most cases the public authorities need not show that harm has actually occurred, but only that the challenged conduct poses an unreasonable danger that it will occur.”) (emphasis added).

[52] Expert Report, supra note 1, at 16.

[53] See Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 487-88 (1977) (“If the acquisitions here were unlawful, it is because they brought a ‘deep pocket’ parent into a market of ‘pygmies.’ Yet respondents’ injury—the loss of income that would have accrued had the acquired centers gone bankrupt—bears no relationship to the size of either the acquiring company or its competitors. Respondents would have suffered the identical ‘loss’—but no compensable injury—had the acquired centers instead obtained refinancing or been purchased by ‘shallow pocket’ parents, as the Court of Appeals itself acknowledged. Thus, respondents’ injury was not of ‘the type that the statute was intended to forestall[.]’”) (citations omitted).

[54] Expert Report, supra note 1, at 17.

[55] Microsoft, 253 F.3d at 79.

[56] Treaty on European Union, Protocol (No27) on the internal market and competition, Official Journal 115.

[57] See especially Expert Report supra note 1, at 17, §§ (f)(8) & (g) through (i).

[58] See, e.g., Joaquín Almunia, Competition and Consumers: The Future of EU Competition Policy, Speech at European Competition Day, Madrid (May 12, 2010), available at http://europa.eu/rapid/press-release_SPEECH-10-233_en.pdf (“All of us here today know very well what our ultimate objective is: Competition policy is a tool at the service of consumers. Consumer welfare is at the heart of our policy and its achievement drives our priorities and guides our decisions.”). Even then, however, it must be noted that Almunia elaborated that “[o]ur objective is to ensure that consumers enjoy the benefits of competition, a wider choice of goods, of better quality and at lower prices.” Id. (emphasis added). In fact, expanded consumer choice is not necessarily the same thing as consumer welfare, and may at times be at odds with it. See Joshua D. Wright & Douglas H. Ginsburg, The Goals of Antitrust: Welfare Trumps Choice, 81 Fordham L. Rev. 2405 (2013).

^[59] See Commission Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty to Abusive Exclusionary Conduct by Dominant Undertakings, 2009 O. J.(C 45)7 at n. 5, §6 (“[T]he Commission is mindful that what really matters is protecting an effective competitive process and not simply protecting competitors.”).

^[60] See Case C-209/10, Post Danmark A/S v Konkurrencerådet, ECLI:EU:C:2012:172, §22 (“Competition on the merits may, by definition, lead to the departure from the market or the marginalisation of competitors that are less efficient and so less attractive to consumers….”).

[61] See Pablo Ibáñez Colomo, Exclusionary Discrimination Under Article 102 TFEU, 51 Common Market L. Rev. 153 (2014).

[62] Id.

[63] Expert Report, supra note 1, at 16.

[64] Id.

[65] See Brian Albrecht, Dirk Auer, & Geoffrey A. Manne, Labor Monopsony and Antitrust Enforcement: A Cautionary Tale, ICLE White Paper No. 2024-05-01 (2024) at 21, available at https://laweconcenter.org/wp-content/uploads/2024/05/Labor-Monopsony-Antitrust-final-.pdf (“[Conduct] that creates monopsony power will necessarily reduce the prices and quantity purchased of inputs like labor and materials. But this same effect (reduced prices and quantities for inputs) would also be observed if the [conduct] is efficiency enhancing. If there are efficiency gains, the [] entity may purchase fewer of one or more inputs than [it would otherwise]. For example, if the efficiency gain arises from the elimination of redundancies in a hospital…, the hospital will buy fewer inputs, hire fewer technicians, or purchase fewer medical supplies.”). See also Ivan Kirov & James Traina, Labor Market Power and Technological Change in US Manufacturing, conference paper for Institute for Labor Economics (Oct. 2022), at 42, available at https://conference.iza.org/conference_files/Macro_2022/traina_j33031.pdf (“The labor [markdown] therefore increases because ‘productivity’ rises, and not because pay falls. This suggests that technological change plays a large role in the rise of the labor [markdown].”).

[66] Expert Report, supra note 1, at 15 (emphasis added).

[67] Trinko, 540 U.S. at 407.

[68] See Expert Report, supra note 1, at 16 (“‘Trading partners’ are parties with which the defendant deals, either as a customer or as a supplier. In [assessing anticompetitive exclusionary conduct], a trading partner is deemed to be harmed or benefited even if that trading partner passes some or all of that harm or benefit on to other parties.”).

[69] Id. at 15 (emphasis added).

[70] Id. at 13.

[71] See supra Section II.

[72] Expert Report, supra note 1, at 17. As the Expert Report acknowledges elsewhere, recoupment is a “requirement for a predatory pricing claim under federal antitrust law.” Id. at 15.

^[73] See Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 222-27 (1993).

^[74] Id. at 224.

^[75] On entry deterrence, see Steven C. Salop, Strategic Entry Deterrence, 69 Am. Econ. Rev. 335 (1979).

[76] See generally John S. McGee, Predatory Pricing Revisited, 23 J.L. Econ 289 (1980). Some economists have more recently posed a “strategic” theory of predatory pricing that purports to expand substantially (and redirect) the scope of circumstances in which predatory pricing could be rational. See, e.g., Patrick Bolton, Joseph F. Brodley, & Michael H. Riordan, Predatory Pricing: Strategic Theory and Legal Policy, 88 Geo. L. J. 2239 (2000). While this and related theories have, indeed, likely expanded the theoretical scope of circumstances conducive to predatory pricing, they have not established that these conditions are remotely likely to occur. See Bruce H. Kobayashi, The Law and Economics of Predatory Pricing, in 4 Encyclopedia of Law and Economics (De Geest, ed. 2017) (“The models showing rational predation can exist and the evidence consistent with episodes of predation do not demonstrate that predation is either ubiquitous or frequent. Moreover, many of these models do not consider the welfare effects of predation, and those that do generally find the welfare effects ambiguous.”). From a legal perspective, particularly given the risk of error in discerning the difference between predatory pricing and legitimate price cutting, it is far more important to limit cases to situations likely to cause consumer harm rather than those in which harm is a remote possibility. The cost of error, of course, is the legal imposition of artificially inflated prices for consumers.

^[77] Case C-62/86, AKZO v Comm’n, EU:C:1991:286, ¶¶ 71-72.

[78] Id. at ¶ 72 (“[P]rices below average total costs, that is to say, fixed costs plus variable costs, but above average variable costs, must be regarded as abusive if they are determined as part of a plan for eliminating a competitor.”).

^[79] Case C-333/94 P, Tetra Pak v Comm’n, EU:C:1996:436, ¶ 44. See also, Case C-202/07 P, France Télécom v Comm’n, EU:C:2009:214, ¶ 110.

^[80] Id. at ¶ 107.

[81] See, e.g., Bolton, Brodley, & Riordan, supra note 76.

[82] See id. at 2267 (“[A]nticipated recoupment is intrinsic in [strategic] theories, because without such an expectation predatory pricing is not sensible economic behavior.”). See also Kenneth G. Elzinga & David E. Mills, Predatory Pricing and Strategic Theory, 89 Geo. L.J. 2475, 2483 (2001) (“Of course, no proposed scheme of predation is credible unless it embodies a plausible means of recoupment, but this does not justify taking shortcuts in analysis. In particular, it is unwise to presume that a plausible means of recoupment exists just because facts supporting other features of a strategic theory, such as asymmetric information, are evident. Facts conducive to probable recoupment ought to be established independently.”).

[83] Kobayashi & Muris, supra note 35, at 166.

[84] Tetra Pak, supra note 79, at ¶ 44.

[85] France Télécom, supra note 79, at ¶ 112.

[86] Expert Report, supra note 1, at 17.

[87] Expert Report, supra note 1, at 15.

[88] Trinko, 540 U.S. at 408.

^[89] Trinko, 540 U.S. at 409.

^[90] Trinko, 540 U.S. at 411. See also Phillip Areeda, Essential Facilities: An Epithet in Need of Limiting Principles, 58 Antitrust L.J. 841 (1989).

[91] Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 610-11 (1985).

[92] See Alan J. Meese, Property, Aspen, and Refusals to Deal, 73 Antitrust L. J. 81, 112-13 (2005).

[93] See Joined Cases 6/73 & 7/73, Instituto Chemioterapico Italiano S.p.A. and Commercial Solvents Corporation v. Comm’n, 1974 E.C.R. 223, [1974] 1 C.M.L.R. 309.

^[94] See Case C-7/97, Oscar Bronner GmbH & Co. KG v Mediaprint Zeitungs, EU:C:1998:569, §41.

^[95] See Case C-241/91 P, RTE and ITP v Comm’n, EU:C:1995:98, §54. See also, Case C-418/01, IMS Health, EU:C:2004:257, §37.

^[96] John Vickers, Competition Policy and Property Rights, 120 Econ. J. 390 (2010).

[97] Expert Report, supra note 1, at 7.

[98] Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 605 (1985).

[99] Expert Report, supra note 1, at 17.

[100] Einer Elhauge, Defining Better Monopolization Standards, 56 Stan. L. Rev. 253, 343 (2003).

[101] See Fed. Trade Comm’n v. Qualcomm Inc., 969 F.3d 974, 995 (9th Cir. 2020) (“Finally, unlike in Aspen Skiing, the district court found no evidence that Qualcomm singles out any specific chip supplier for anticompetitive treatment in its SEP-licensing. In Aspen Skiing, the defendant refused to sell its lift tickets to a smaller, rival ski resort even as it sold the same lift tickets to any other willing buyer (including any other ski resort)…. Qualcomm applies its OEM-level licensing policy equally with respect to all competitors in the modem chip markets and declines to enforce its patents against these rivals…. Instead, Qualcomm provides these rivals indemnifications…—the Aspen Skiing equivalent of refusing to sell a skier a lift ticket but letting them ride the chairlift anyway. Thus, while Qualcomm’s policy toward OEMs is ‘no license, no chips,’ its policy toward rival chipmakers could be characterized as ‘no license, no problem.’ Because Qualcomm applies the latter policy neutrally with respect to all competing modem chip manufacturers, the third Aspen Skiing requirement does not apply.”)

[102] Carl Shapiro was an economic expert for the FTC in the case, and Fiona Scott Morton was an economic expert for Apple in related litigation against Qualcomm. Doug Melamed was co-author of an amicus brief supporting the FTC in the 9^th U.S. Circuit Court of Appeals. (In the interests of full disclosure, we authored an amicus brief, joined by 12 scholars of law & economics, supporting Qualcomm in the 9^th Circuit. See Brief of Amici Curiae International Center for Law & Economics and Scholars of Law and Economics in Support of Appellant and Reversal, FTC v. Qualcomm, No. 19-16122 (9^th Cir., Aug. 30, 2019), available at https://laweconcenter.org/wp-content/uploads/2019/09/ICLE-Amicus-Brief-in-FTC-v-Qualcomm-FINAL-9th-Cir-2019.pdf).

[103] For a discussion of the frailties of these arguments, see Geoffrey A. Manne & Dirk Auer, Exclusionary Pricing Without the Exclusion: Unpacking Qualcomm’s No License, No Chips Policy, Truth on the Market (Jan. 17, 2020), https://truthonthemarket.com/2020/01/17/exclusionary-pricing-without-the-exclusion-unpacking-qualcomms-no-license-no-chips-policy (“The amici are thus left with the argument that Qualcomm could structure its prices differently, so as to maximize the profits of its rivals. Why it would choose to do so, or should indeed be forced to, is a whole other matter.”). For a response by one of the Expert Report authors, see Mark A. Lemley, A. Douglas Melamed, & Steve Salop, Manne and Auer’s Defense of Qualcomm’s Licensing Policy Is Deeply Flawed, Truth on the Market (Jan. 21, 2020), https://truthonthemarket.com/2020/01/21/manne-and-auers-defense-of-qualcomms-licensing-policy-is-deeply-flawed.

[104] Expert Report, supra note 1, at 15.

^[105] See Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877 (2007).

^[106] See, e.g., D. Daniel Sokol, The Transformation of Vertical Restraints: Per Se Illegality, The Rule of Reason, and Per Se Legality, 79 Antitrust L.J. 1003, 1004 (2014) (“[T]he shift in the antitrust rules applied to [vertical restraints] has not been from per se illegality to the rule of reason, but has been a more dramatic shift from per se illegality to presumptive legality under the rule of reason.”).

^[107] See Commission Regulation (EU) No 330/2010 of 20 April 2010 on the Application of Article 101(3) of the Treaty on the Functioning of the European Union to Categories of Vertical Agreements and Concerted Practices, 2010 O.J. (L 102) art.4 (a).

[108] See, e.g., Case C-403/08, Football Association Premier League and Others, ECLI:EU:C:2011:631, §139. (“[A]greements which are aimed at partitioning national markets according to national borders or make the interpenetration of national markets more difficult must be regarded, in principle, as agreements whose object is to restrict competition within the meaning of Article 101(1) TFEU.”).

[109] Joined Cases-56/64 and 58/64, Consten SARL & Grundig-Verkaufs-GMBH v. Commission of the European Economic Community, ECLI:EU:C:1966:41, at 343.

[110] Patrick Rey & Jean Tirole, The Logic of Vertical Restraints, 76 Am. Econ. Rev. 921, 937 (1986) (emphasis added).

[111] These papers are collected and assessed in several literature reviews, including Lafontaine & Slade, supra note 43; O’Brien, supra note 44; Cooper et al., supra note 44; Global Antitrust Institute, Comment Letter on Federal Trade Commission’s Hearings on Competition and Consumer Protection in the 21st Century, Vertical Mergers (George Mason Law & Econ. Research Paper No. 18-27, Sep. 6, 2018). Even the reviews of such conduct that purport to be critical are only tepidly so. See, e.g., Marissa Beck & Fiona Scott Morton, Evaluating the Evidence on Vertical Mergers 59 Rev. Indus. Org. 273 (2021) (“[M]any vertical mergers are harmless or procompetitive, but that is a far weaker statement than presuming every or even most vertical mergers benefit competition regardless of market structure.”).

[112] Leegin, 551 U.S. at 889.

^[113] Id. at 902.

[114] See, e.g., Lafontaine & Slade, supra note 43.

[115] See Leegin, 551 U.S. at 886-87 (holding that the per se rule should be applied “only after courts have had considerable experience with the type of restraint at issue” and “only if courts can predict with confidence that [the restraint] would be invalidated in all or almost all instances under the rule of reason” because it “‘lack[s]… any redeeming virtue’”) (citations omitted).

[116] See Bruce Kobayashi, The Economics of Loyalty Rebates and Antitrust Law in the United States, 1 Comp. Pol’y Int’l 115, 147 (2005).

^[117] See, e.g., Case C-85/76, Hoffmann-La Roche & Co. AG v Commission of the European Communities, EU:C:1979:36, at 7.

^[118] See Intel, supra note 39, at ¶ 139 (emphasis added).

[119] Opinion of AG Wahl in Case C-413/14 P Intel v Commission, ECLI:EU:C:2016:788, para 73.

[120] Expert Report, supra note 1, at 17.

[121] Id.

[122] See, e.g., Thomas A. Lambert, Defining Unreasonably Exclusionary Conduct: The Exclusion of a Competitive Rival Approach, 92 N.C. L. Rev. 1175, 1175 (2014) (“This Article examines the proposed definitions or tests for identifying unreasonably exclusionary conduct (including the non-universalist approach) and, finding each lacking, suggests an alternative definition.”).

[123] Id.

[124] Id. at 1244 (“Drawing lessons from past, unsuccessful attempts to define unreasonably exclusionary conduct, this Article has set forth a definition that identifies a common thread tying together all instances of unreasonable exclusion, comports with widely accepted intuitions about what constitutes improper competitive conduct, and generates specific safe harbors and liability rules that would collectively minimize the sum of antitrust’s decision and error costs.”).

[125] Expert Report, supra note 1, at 17.

[126] Ohio v. Am. Express Co., 138 S. Ct. 2274, 2286-87 (2018).

[127] Gregory J. Werden, Why (Ever) Define Markets? An Answer to Professor Kaplow, 78 Antitrust L.J. 729, 741 (2013).

[128] Geoffrey A. Manne, In Defence of the Supreme Court’s ‘Single Market’ Definition in Ohio v. American Express, 7 J. Antitrust Enforcement 104, 106 (2019).

[129] David S. Evans, The Antitrust Economics of Multi-Sided Platform Markets, 20 Yale J. Reg. 325, 355-56 (2003). See also Jean-Charles Rochet & Jean Tirole, Platform Competition in Two-Sided Markets, 1 J. Eur. Econ. Ass’n 990, 1018 (2003).

[130] See, e.g., Michal S. Gal & Daniel L. Rubinfeld, The Hidden Cost of Free Goods, 80 Antitrust L.J. 521, 557 (2016) (discussing the problematic French Competition Tribunal decision in Bottin Cartographes v. Google Inc., where “[d]isregarding the product’s two-sided market, and its cross-network effects, the court possibly prevented a welfare-increasing business strategy”).

[131] See, e.g., Brief of Amici Curiae Prof. David S Evans and Prof. Richard Schmalensee in Support of Respondents in Ohio, et al. v. American Express Co., No. 16-1454 (Sup. Ct. Jan. 23, 2018) at 21, available at https://www.supremecourt.gov/DocketPDF/16/16-1454/28957/20180123154205947_16-1454%20State%20of%20Ohio%20v%20American%20Express%20Brief%20for%20Amici%20Curiae%20Professors%20in%20Support%20of%20Respondents.pdf (“The first stage of the rule of reason analysis involves determining whether the conduct is anticompetitive. The economic literature on two-sided platforms shows that there is no basis for presuming one could, as a general matter, know the answer to that question without considering both sides of the platform.”).

[132] United States, et al. v. Am. Express Co., et al., 838 F.3d 179, 198 (2^nd Cir. 2016).

[133] See, e.g., Michael Katz & Jonathan Sallet, Multisided Platforms and Antitrust Enforcement, 127 Yale L.J. 2142, 2161 (2018) (“[I]t is essential to account for any significant feedback effects and possible changes in prices on both sides of a platform when assessing whether a particular firm has substantial market power.”).

[134] California earned 10% of its statewide GDP from the tech industry in 2021, and just over 9% in 2022. See SAGDP2N Gross Domestic Product (GDP) by State, Bureau of Economic Analysis (last visited May 1, 2024), https://tinyurl.com/ysaf6rfc.

[135] See Joseph Politano, California Is Losing Tech Jobs, Apricitas Economics (Apr. 14, 2024), https://www.apricitas.io/p/california-is-losing-tech-jobs (“[California’s] GDP fell 2.1% through 2022, the second-biggest drop of any state over that period, driven by a massive deceleration across the information sector. That allowed states like Texas to overtake California in the post-pandemic GDP recovery, creating a gap that California still hasn’t been able to close despite its economic rebound in 2023.”).

[136] See id. (“[T]he Golden State has been bleeding tech jobs over the last year and a half—since August 2022, California has lost 21k jobs in computer systems design & related, 15k in streaming & social networks, 11k in software publishing, and 7k in web search & related—while gaining less than 1k in computing infrastructure & data processing. Since the beginning of COVID, California has added a sum total of only 6k jobs in the tech industry—compared to roughly 570k across the rest of the United States.”).

Executive Summary

In recent years, there has been growing interest among economists, lawyers, and policymakers in the concept of monopsony power, particularly in labor markets. This interest has been spurred partially by academic research suggesting that labor-market concentration may be more prevalent than previously thought, as well as policy developments signaling a more aggressive approach by antitrust authorities to labor-monopsony issues. Despite this momentum, however, significant empirical and conceptual challenges remain in the use of antitrust law to address labor monopsony.

A. Economics Challenges

On the empirical front, the evidence on the extent and impact of labor monopsony is mixed. While some studies have found evidence of labor-market concentration and its effects on wages, these studies often rely on indirect measures that have limited applicability to antitrust cases. More direct estimates of monopsony power are rare, and often rely on stylized economic models that may not capture the complexities of real-world labor markets. Moreover, the economics literature has not reached a clear consensus on the appropriate framework to assess labor-market power in antitrust contexts.

Conceptually, there are important differences between monopoly and monopsony that complicate the application of traditional antitrust tools and standards to labor markets. One key difference is that monopsony and monopoly markets do not sit at the same place in the supply chain. This matters because all supply chains end with final consumers, and antitrust policy must grapple with how to balance effects at different levels of the distribution chain. In evaluating monopsony, authorities must consider the “pass through” to final product markets, a complication that does not arise in the mirror-image case of monopoly.

Another conceptual challenge is how to handle merger efficiencies in labor-market cases. In input markets, traditional efficiencies and increased buyer power are often two sides of the same coin, presenting difficult tradeoffs for authorities. Additionally, market definition—a cornerstone of modern antitrust policy—becomes more complex in labor markets, where the boundaries between different occupations, industries, and geographic areas can be blurry.

B. Policymakers’ Response

Despite these challenges, antitrust authorities have recently signaled a more aggressive approach to labor-monopsony issues. The Federal Trade Commission’s (FTC) noncompete ban, challenge to the Kroger/Albertsons merger, and the 2023 Merger Guidelines’ discussion of labor-market effects are all prominent examples of this trend. But these enforcement actions and policy statements often gloss over the unsettled state of the economics literature and the legal difficulties of proving labor-market harms under existing antitrust standards.

For example, the 2023 Merger Guidelines assert that labor markets have unique features that may exacerbate the competitive effects of mergers, but do not fully grapple with the limitations of the economic models and empirical evidence underlying these claims. Similarly, while the FTC’s Kroger/Albertsons complaint advances a novel “union grocery labor” market definition, it is unclear whether this approach aligns with economic realities or legal precedent.

C. Legal Difficulties

More broadly, it remains uncertain whether demonstrating and remedying monopsony power is feasible under existing legal standards. While harms to workers can theoretically be cognizable under the antitrust laws, proving such harms is challenging, especially under the prevailing consumer-welfare standard. Recent criminal cases targeting wage fixing and no-poach agreements have faced difficulties, and civil cases require showing harm to downstream consumers, not just workers.

Addressing these issues may require rethinking the goals and methods of antitrust enforcement. The consumer-welfare standard becomes difficult to apply when a merger may harm workers but benefit consumers downstream. Weighing these cross-market effects raises unresolved questions about the proper balance between consumer and producer surplus. While the 2023 Merger Guidelines assert that harms to upstream competition cannot be offset by benefits to downstream consumers, the basis for this stance in case law is questionable.

There are also important differences between monopoly and monopsony that complicate the mirror-image application of antitrust tools to labor markets. Most fundamentally, authorities must grapple with how to balance effects at different levels of the supply chain—an issue that does not arise in the standard monopoly context.

Moreover, the unique features of labor markets—such as the importance of firm-specific investments in human capital—pose challenges for market definition and the assessment of competitive effects. Traditional concentration measures and econometric tools used in product markets may not readily translate to the labor context. And the potential for countervailing effects on workers and consumers creates difficult tradeoffs in merger review.

Given these complexities, this paper urges caution and further study before radically expanding labor-antitrust enforcement. Advocates of reform should engage seriously with the empirical and conceptual issues highlighted here, rather than assuming that current law and economics support their policy prescriptions. Courts and enforcers should carefully consider the limitations of existing approaches and develop more robust analytical frameworks suited to the realities of labor markets.

D. The Road to Antitrust Enforcement in Labor Markets

This does not mean that antitrust has no role to play in addressing labor-market power. But it does counsel against a rush to condemn mergers and practices based on simplistic models or tenuous evidence. A more gradual, case-by-case approach focused on building legal precedent and economic consensus may be warranted. In the meantime, further dialogue between labor economists, antitrust experts, and policymakers is essential to aligning theory, evidence, and doctrine.

Such an agenda might include:

• Developing more direct, antitrust-relevant measures of labor-market power beyond concentration ratios.
• Studying the effects of specific mergers and practices on labor-market outcomes, rather than simply correlating concentration with wages.
• Refining models of dynamic competition and firm-specific investments in labor markets and considering their implications for antitrust enforcement.
• Clarifying the goals of antitrust in labor markets and how to weigh effects on different stakeholders under the consumer-welfare standard (or alternative frameworks).

The paper concludes by noting that, while the road ahead is challenging, the growing interest in labor antitrust presents an opportunity for interdisciplinary research and policy innovation. By carefully building on existing knowledge and legal frameworks, academics and practitioners can help craft an antitrust regime that promotes competition and welfare in labor markets without unduly chilling procompetitive conduct. The key is to remain grounded in sound economics and committed to empirical rigor, while adapting to the unique features of labor markets. With such an approach, antitrust can play a valuable role in ensuring that workers share in the benefits of a well-functioning economy.

I. Introduction

Market power—traditionally discussed in terms of monopoly power on the sell side—has faced increasing scrutiny from the buy-side perspective. This is especially true regarding labor monopsony, where employers may exert undue control over employees, thereby influencing wages and working conditions. This shift in focus reflects a growing concern among economists, lawyers, and policymakers about the implications of such power dynamics in the labor market. The growing discourse around monopsony power in labor markets has been further marked by a keen interest in applying antitrust laws to combat these concerns.

Recent policy initiatives and enforcement decisions indicate a burgeoning will to leverage antitrust law against perceived labor-market power abuses. In the first half of 2024 alone, the Federal Trade Commission (FTC) has enacted a rule banning noncompete agreements for nearly all workers in the United States, justified on grounds that such agreements amount to “unfair methods of competition.”[1] The FTC has also brought an enforcement action challenging the proposed Kroger/Albertsons merger, in part predicated on concerns about the combination’s potential to diminish labor competition and exacerbate monopsony power in local labor markets.[2] At year-end 2023, meanwhile, the FTC and the U.S. Justice Department (DOJ) Antitrust Division published updated merger guidelines that, for the first time, included an expanded discussion of monopsony issues.[3] While the noncompete ban, the Kroger/Albertsons merger challenge, and the 2023 Merger Guidelines are the most prominent examples, they are far from the only ones.[4]

This paper argues that, despite growing interest in the use of antitrust law to address labor monopsony, such efforts are not supported by empirical and theoretical foundations sufficient to bear the weight of these galvanized efforts. While policy proceeds apace, the debate is far from settled on the economic evidence, analytical tools, and legal standards appropriate for understanding and addressing monopsony power in labor markets as an antitrust concern. In fact, the current state of economic research and antitrust jurisprudence raises more questions than answers about the appropriate framework for assessing labor-market power.

Examples of this disconnect are legion. Empirical data concerning the magnitude and impact of labor monopsonies is inconsistent. Evidence on the extent of labor-market power is mixed, with studies reaching divergent conclusions depending on the data, methodology, and markets analyzed. While the Biden administration has been quick to cite economic research on labor-market concentration and earnings as motivating factors,[5] the referenced studies provide only indirect evidence of monopsony power and have limited applicability to antitrust cases, while direct estimates of monopsony power are rare and often rely on economic models that have not yet been accepted within antitrust. A more complete analysis of the literature on concentration in labor markets, meanwhile, does not support the narrative that labor markets are extremely concentrated across wide swathes of the economy. From a theoretical standpoint, the economics literature has not reached a clear consensus on the appropriate antitrust framework for labor markets. Moreover, the distinct economics of monopsony contrast with those of monopoly, introducing unresolved complexities into customary modes of antitrust analysis, such as market definition, assessment of efficiencies, and the consumer-welfare standard.

The antitrust authorities have ignored these complications in their recent actions. For example, Guideline 10 of the 2023 Merger Guidelines states that labor markets frequently have unique characteristics that may exacerbate the competitive effects of mergers:

[L]abor markets often exhibit high switching costs and search frictions due to the process of finding, applying, interviewing for, and acclimating to a new job. Switching costs can also arise from investments specific to a type of job or a particular geographic location. Moreover, the individual needs of workers may limit the geographical and work scope of the jobs that are competitive substitutes.[6]

This implies that market attributes like switching costs, search costs, and transportation costs are unique to labor markets. Of course, this is not true. Nor is there any reason to think labor markets are even relatively more susceptible to such costs. At the same time, the guidelines’ statement implies that these labor-market costs are borne only by workers, rather than employers. But there is no reason why that should be the case. Indeed, switching costs do not always make markets less competitive.[7]

The guidelines further assert that relevant labor markets “can be relatively narrow,” and that “the level of concentration at which competition concerns arise may be lower in labor markets than in product markets, given the unique features of certain labor markets.”[8] Because these are the merger guidelines and are meant to cover a wide variety of situations, one could read “may” as implying something more than a possibility. Indeed, the guidelines clearly appear to indicate that, following mergers, anticompetitive effects are more of a concern in labor markets than in product markets.

Unfortunately, the models commonly employed in labor economics to support these claims rely on assumptions about worker mobility, employer conduct, and market structure that likely oversimplify real-world dynamics. All models are simplifications, but how important are those simplifications for antitrust? The economic models commonly used to study labor markets have not been subjected to the same level of antitrust scrutiny as those employed in industrial-organization (IO) economics to analyze product markets. Over the past several decades, IO models of imperfect competition have been rigorously adapted and applied to assess the competitive effects of mergers, collusive agreements, and exclusionary practices in antitrust matters. Empirical IO research has frequently focused on questions of direct relevance to antitrust enforcement, and IO economists have often played an active role in developing the analytical tools used by agencies and courts.

In contrast, most labor-economics research has been conducted without an explicit focus on antitrust policy and, until recently, labor economists were rarely involved in antitrust matters. As a result, the key assumptions and implications of labor-economics models have not been fully stress tested against the evidentiary burdens and legal standards of antitrust cases—at least, not in the same ways as their IO counterparts. This disconnect poses challenges to the effective application of labor economics to antitrust enforcement, as the models and empirical techniques most familiar to labor economists may not align well with the demands of antitrust law.

Moreover, it’s not just the economics that is more unsettled than the current administration would like to claim; the law is unsettled, too. It is unclear whether demonstrating and remedying monopsony power is feasible under existing legal standards, for example. It is true that harms to labor can be cognizable under the antitrust laws, which prohibit certain exercises of monopsony power, and not just monopoly power. There are, however, ambiguities in accurately defining the boundaries of relevant labor markets. And establishing tangible anticompetitive effects on workers as “consumers” of jobs also poses challenges.

Wage-fixing agreements are per se illegal, but the decisions in recent criminal no-poach and wage-fixing cases suggest difficulties in proving that such agreements amount to meaningful market allocation, rather than insignificant job-posting-policy changes, that would be inconsistent with a per se rule. For example, in United States v. DaVita Inc., the judge ruled that no-poach agreements could be an illegal market-allocation agreement.[9] But the jury acquitted the defendants of criminal no-poach charges, finding that the DOJ had failed to prove that the agreements at-issue were made with the purpose of allocating the market and ending meaningful competition for employees. The government has faced similar difficulties in other cases.[10]

Outside of per se cases, antitrust becomes even more complicated. Addressing labor-market power requires tradeoffs under established antitrust standards, raising unresolved questions about the goals of antitrust enforcement. As Herbert Hovenkamp notes, “it has been explicit from the start that antitrust’s concern is protection from reduced market output and, concurrently, higher prices.”[11] This focus on output and price effects in downstream product markets sits uneasily with concerns about labor market harms, which may not always manifest in higher consumer prices or reduced output in the downstream product market.

For example, the consumer-welfare standard becomes difficult to apply when a merger may harm workers, but benefit consumers downstream, as when wage reductions for workers accompany consumer benefits (such as lower prices) in downstream product and service markets. Do all mergers that reduce wages for one market of workers “substantially lessen competition” in a “line of commerce”?[12] In practice, weighing these cross-market effects raises unresolved questions about the goals of antitrust enforcement. Is the sole focus on final-product consumers, or should producer surplus also be considered? If so, how should we value and compare producer versus consumer harms?

The 2023 Merger Guidelines acknowledge these issues, but sidestep them, by asserting that:

If the merger may substantially lessen competition or tend to create a monopoly in upstream markets, that loss of competition is not offset by purported benefits in a separate downstream product market. Because the Clayton Act prohibits mergers that may substantially lessen competition or tend to create a monopoly in any line of commerce and in any section of the country, a merger’s harm to competition among buyers is not saved by benefits to competition among sellers.[13]

As we explain below, however, the issue is not so simple, and its resolution cannot be assumed simply by quoting the Clayton Act.[14]

While the guidelines propose treating labor markets similarly to product markets for analytical purposes, the Kroger/Albertsons complaint suggests that, in practice, the agency believes that labor markets should be defined more narrowly—for example, unionized workers in very narrow geographic areas.[15] This approach raises further conceptual issues in market definition, as labor markets may transcend traditional industry and geographic boundaries in complex ways. More work is needed to align labor economics with the realities of antitrust enforcement. Answering these questions may require revisiting foundational assumptions that currently guide antitrust policy. Caution is thus warranted before concluding that antitrust can or should seek to remedy monopsony, absent harm to consumers of final goods.

Therefore, while monopsony concerns are becoming more prevalent in academic and policy discussions, the agencies should be extremely hesitant as they move forward. Some have argued that “[m]ergers affecting the labor market require some rethinking of merger policy, although not any altering of its fundamentals.”[16] As we discuss below, however, while the economic “fundamentals” undergirding merger policy may not change for labor-market mergers, the “rethinking” required to properly assess such mergers entails fundamental changes that have not yet been adequately studied or addressed. As many have pointed out, there is only a scant history of merger enforcement in input markets in general, and even less in labor markets.[17] It is premature to offer guidelines or impose nationwide bans on labor practices, while purporting to synthesize past practice and the state of knowledge, when neither is well-established.

The following sections illustrate some of the significant disconnects between labor economics and antitrust enforcement, highlighting the need for further research and dialogue between the two fields. In short, while interest is growing, labor economics cannot yet be readily plugged into antitrust enforcement in the same way that IO theory and empirics have been.

II. The Contemporary Relationship Between Labor and Antitrust

As discussed in the previous section, the 2023 Merger Guidelines, Kroger/Albertsons complaint, and the FTC’s noncompete rule evidence an invigorated policy effort to address competition concerns in labor markets. The merger guidelines discuss the potential labor-market implications of mergers in multiple sections, and adopt a guideline specifically related to labor-market considerations that calls out the purportedly unique features of labor-monopsony markets “that can exacerbate the competitive effects of a merger.”[18] While the noncompete ban contains an extensive discussion of the labor-economics literature on noncompetes,[19] the sweeping nature of the ban suggests that policymakers view monopsony power as a pervasive issue affecting most workers, despite the nuances and ambiguity of the literature.[20] And the FTC’s complaint in the Kroger/Albertsons case argues that the merger would eliminate labor-market competition between Kroger and Albertsons and would increase their leverage in negotiations with local unions over wages, benefits, and working conditions in an asserted “union grocery labor” market—introducing a novel and remarkably narrow market definition and an untested, contentious theory of harm (reduction in bargaining leverage) particular to labor markets.[21]

While these efforts may signal a newly heightened attention to labor-market concerns, the antitrust focus on labor monopsony did not originate with them. In recent years, there has been growing interest in using the tools of antitrust to address labor issues, with both academic literature and enforcement actions paving the way for a more labor-centric approach to antitrust. This section provides an overview of some of the key developments in this area, illustrating the growing attention given to labor-market power by antitrust authorities and scholars.

Conceptually, the relationship between labor economics and antitrust law has also been a subject of growing academic attention in recent years. A number of law-review articles have highlighted the historical disconnect between the two fields, noting that labor markets have often been overlooked in antitrust analysis.[22] They also point, however, to some areas where labor economics has begun to make inroads into antitrust enforcement.

On the policy front, President Joe Biden explicitly called for greater scrutiny of “monopsony power” in labor markets in his 2021 executive order on competition.[23] The U.S. antitrust agencies have similarly been ramping up enforcement and other policy work at the intersection of labor and competition policy. For instance, the DOJ sued to block Penguin Random House’s acquisition of Simon & Schuster, in part based on monopsony concerns regarding the market for top-selling book authors.[24] Under the current leadership, the FTC has brought and settled several enforcement actions alleging that certain noncompete agreements violated the FTC Act’s prohibition on “unfair methods of competition.”[25] The day after announcing the first three of those settlements, the FTC first proposed a nationwide ban on the use of noncompetes via a notice of proposed rulemaking.[26]

As noted above, the DOJ has brought several recent wage-fixing cases, albeit with limited success.[27] Previously, during the Obama administration, the DOJ and FTC jointly issued antitrust guidance for human-resource professionals that warned that agreements among competing employers to fix terms of employment may violate the antitrust laws.[28] The DOJ also brought suits against major Silicon Valley employers for entering into anticompetitive “no-poach” agreements to restrict hiring of engineers and programmers from competitor firms.[29] The department alleged in those suits that the agreements amounted to unlawful allocation of the relevant labor market among horizontal competitors. The DOJ also challenged a hospital association’s members agreement to set uniform billing rates for certain nurses as an improper exertion of buyer power.[30] Although both the “no-poach” and nurse wage-setting actions ultimately settled, these cases demonstrated an increasing willingness to extend antitrust scrutiny to labor-market effects and to discipline allegedly monopsonistic practices by dominant buyers of labor.

Finally, in 2022, the FTC signed a memorandum of understanding with the National Labor Relations Board (NLRB) “regarding information sharing, cross-agency training, and outreach in areas of common regulatory interest.”[31] In 2023, the FTC signed a similar memorandum of understanding with the U.S. Labor Department.[32]

While these recent developments reflect growing interest in the application of antitrust law to labor-monopsony concerns, the linkage between labor economics and antitrust is not yet as developed as the one between antitrust law and IO and antitrust economics for output markets. Over the 20th century, the fields of IO economics and antitrust law evolved considerably. While the two fields are not co-extensive, the mutual influence has been considerable and ongoing, as strong connections have developed between economic theory, empirical study, and legal doctrine. Models of imperfect competition were incorporated into analyses of mergers, collusion, and exclusionary practices.[33] Notably, even the Chicago School, despite some scholars’ claims to the contrary,[34] made extensive use of models beyond perfect competition as a central part of its approach to antitrust.[35] Empirical IO research also frequently studied topics directly relevant to antitrust inquiries.[36] This close, co-evolutionary relationship does not yet exist—at least, not to the same extent—between labor economics and antitrust.[37]

While some scholars have worked to integrate labor and antitrust economics more closely, most empirical research remains focused on indirect concentration measures, rather than pricing conduct directly relevant to antitrust enforcement. Labor economics does not yet have IO’s established track record of successful application to assessing the competitive impact of mergers, restraints, or exclusionary practices. Before that sort of track record can be built, certain limitations must be overcome—not least that labor research has largely developed without a focus on, or involvement in, antitrust policy.

III. The Newly Developing Economic Literature on Labor-Market Power

Labor markets have become an increasingly popular topic in antitrust-policy debates. These debates have, at least in part, been spurred by academic research that purports to find widespread market power in labor markets, thus warranting the need for antitrust scrutiny.[38] For example, the U.S. Treasury Department’s report on “The State of Labor Market Competition” connects the economics research to “a description of Biden Administration actions to improve competition.”[39] Unfortunately, conclusions that the labor-market-power literature supports tougher antitrust enforcement often rely on indirect measures of market power, such as concentration figures, that are sometimes far-removed from the needs of antitrust enforcement, which usually requires more direct measures and more antitrust-relevant markets.[40]

Against this backdrop, this section reviews the scholarly evidence on labor-market power. Subsection A reviews economic papers that attempt to measure firms’ labor-market power directly, while Subsection B reviews papers that rely on such proxies as industry-concentration measures (i.e., indirect evidence of labor-market power). Ultimately, we find that these bodies of research say little about the need for tougher antitrust enforcement, largely because their measures of market power fail to indicate that there is an antitrust-relevant problem that is currently unaddressed in labor markets.

A. Direct Evidence: Do Employers Have Significant Labor-Market Power?

How do we measure labor-market power? While the bulk of the evidence on labor markets is only indirectly related to market power (if related at all), there have been a few explicit attempts to quantify the extent of labor-market power within U.S. markets.

The most popular way to directly estimate labor-market power is through the residual labor-supply elasticity that a firm faces. A labor-supply elasticity measures how responsive the supply of labor is to a change in wages. In the simplest model, a more elastic labor supply means workers have more outside options and employers have less wage-setting power. In the extreme, a perfectly competitive firm faces a perfectly elastic residual supply curve; in the baseline (two-firm) model, if one firm pays $0.01 less than the other employer, all the employees will leave for the other employer.

Outside of the perfectly competitive case, a firm may have some degree of labor-market power, which can be measured by the difference between the wage and the marginal revenue product, known as the wage “markdown.”[41] In the case of perfect competition (i.e., no market power), the firm is unable to pay wages below the marginal product of labor (the revenue generated for the firm by an additional worker), and thus the labor markdown of wages is zero. By contrast, the presence of a larger wage markdown (because of a lower labor elasticity) indicates greater labor-market power.[42]

Naidu, Posner, and Weyl summarize estimates of labor-supply elasticity from several studies, finding evidence of substantial market power in some labor markets, but by no means all.[43] Indeed, the underlying papers find residual labor elasticities ranging from 0.1 to 4.2, which would mean that workers are receiving between 9% and 81% of their marginal product, depending on the particular paper’s estimate.[44] While the list of papers estimating labor elasticity is too lengthy to detail in this paper, the upshot for antitrust policy is that low elasticity (and thus large labor-market power) is not universal (nor should we expect it to be; even if average market power is large, not every market is average).[45]

But even if the empirical labor-economics literature unanimously identified a large degree of labor-market power, which it does not, it would remain unclear what the implications are for antitrust policy. The crux of the problem is that the literature’s estimates of labor elasticities generally rely on assumptions that may not mirror those typically used in antitrust analysis. Applying these estimates to a simple antitrust model of monopsony generates implications that go against the data. For example, a labor-supply elasticity of 0.1 would imply a labor share of income of just 8% in the model described in Naidu, Posner, & Weyl.[46] That is far lower than the actual labor share observed in most countries, which has fallen, but is still closer to 60%, not 8%.[47] This suggests that the connection between the estimate and the model may not be appropriate. Thus, while labor-supply elasticities can provide valuable information about the degree of labor-market competition, antitrust practitioners should be wary of applying them mechanically to standard models of product-market competition without considering the unique features and dynamics of labor markets.

There can also be discrepancies between the tools employed to estimate labor-supply elasticities, on the one hand, and the needs of antitrust enforcement, on the other. For instance, a study by Ransom and Sims employs a search model—a standard tool in labor economics, but not a model generally seen in antitrust. The model is based on the idea of “search frictions,” which refers to the time and effort required for workers to find jobs and for employers to fill vacancies.[48] Because of these frictions, workers may accept lower-paying jobs while continuing to search for better opportunities.

This model assumes that, in the long run, the number of workers leaving a job is equal to the number of workers taking a new job. While this “steady state” assumption may hold in many contexts, it is not one typically seen in antitrust analysis of product markets. If the assumption is violated, estimates of labor-market power derived from the model could be biased in either direction, depending on the specific imbalance of worker flows. In the realm of antitrust enforcement, this could lead to both false positives and false negatives. It remains to be seen what courts would do when confronted with these new models.

Conversely, other papers attempt to apply the standard Cournot model from antitrust product-market analysis to labor markets.[49] In this approach, the authors take the median Herfindahl-Hirschman Index (HHI), a common measure of market concentration, and divide it by the aggregate labor-supply elasticity to estimate labor-market power. But there may be a mismatch here, as well. Indeed, it is unclear whether the Cournot model, where firms commit to hiring a certain number of workers each period, is a realistic representation of labor markets for antitrust purposes, because it relies on critical assumptions that may not be present in real-world markets, such as simple wage-posting, monopsony models. In fact, this may explain why search models, despite their flaws, remain the most common approach to assessing labor markets.

Recognizing these limitations, a burgeoning literature attempts to design labor-market competition models that better align with the needs and realities of antitrust analysis. But as yet, there is no silver bullet. Azar, Berry, and Marinescu, for example, combine elements of a static model of imperfect competition (commonly used in IO economics) with a labor-market model.[50] This approach aims to capture the dynamics of labor-market competition more accurately by considering the differentiation among jobs and workers’ preferences.

The authors use data on job vacancies from CareerBuilder.com (a popular online job board) to estimate a model of differentiated jobs and workers’ preferences for those jobs. Because of data limitations, however, they only have information on the elasticity of vacancy demand—i.e., the intensity of responses to posted job vacancies—not on actual wages. To overcome this, they assume a simple model where employers post wages and workers choose whether to accept those offers, similar to how firms post prices in the Cournot model of product-market competition. Using this approach, the authors estimate that workers are paid 21% less than their marginal product, suggesting significant labor-market power.[51] But their model relies on the same long-run-equilibrium assumption discussed earlier, where the number of workers leaving a job equals the number of workers taking a new job.

One final approach uses wage markdowns to estimate labor-market power, but this, too, is far from perfect. Yeh, Macaluso, and Hershbein, for example, use data from the U.S. Census Bureau to estimate markdowns in the manufacturing sector.[52] They find that, on average, workers earn about 65 cents for every dollar of value they generate for their employer.[53] This would imply a significant degree of labor-market power. The researchers also find that markdowns tend to be larger for bigger companies, suggesting that these firms have more power to set wages.[54] Interestingly, they find that markdowns decreased from the late 1970s to the early 2000s, but have increased sharply over the past 20 years.[55] This recent increase in markdowns could indicate a growing problem of labor-market power.

Unfortunately, interpreting markdowns as a clear sign of labor-market power is not always straightforward, and there are reasons to be skeptical of these results. To see why, imagine two hair salons: Salon A is a basic salon that charges $20 for a haircut, while Salon B is a luxury salon that charges $40 for a haircut that the econometrician believes is the same quality. If both salons hire hairdressers who can do one haircut per hour, Salon B might pay only slightly more than Salon A—say $21 per hour—to attract hairdressers. This means that the hairdressers at Salon B are receiving a wage that is far less than the $40 value of their marginal product. Superficially, this might look like a sign of labor-market power.

But where the price difference is attributable to non-labor factors—such as the salon’s luxury branding, posh environment, and free drinks—the apparent markdown might, in fact, reflect the salon owner’s return on investment, rather than its power to set wages. This is why some economists view markdowns as a “residual”—the leftover value after accounting for other factors.[56] In the real world, we do not know whether an apparent markdown comes from labor-market power due to weak competition, or whether it is a return to something the owner contributes that the economist does not see.

In fact, some evidence suggests that a significant portion of markdowns may be just that: a return to some technology the firm has rather than labor-market power. Kirov and Traina look at markdowns in U.S. manufacturing over time and find that workers received the full value of their output in 1972, but only about half in 2014.[57] They argue that this increase in markdowns was driven largely by rapid productivity growth due to technological advancements, not by slower wage growth. The authors find that markdowns were strongly correlated with measures of information technology, management practices, and automation. This suggests that the growing gap between worker pay and productivity might be more about technological change than about employers’ bargaining power—a very different issue than the monopsony problem that antitrust law could (potentially) address.

All of this is not to say that labor-economics tools are unsuitable for antitrust policy or enforcement. Rather, it highlights the need for further research and legal precedent to establish how these tools can be effectively adapted to meet the evidentiary standards and analytical frameworks of antitrust law. While proponents of increased labor-antitrust enforcement may be eager to apply insights from labor economics to antitrust cases, it is crucial to recognize that this translation is not always straightforward and may require careful consideration of the underlying assumptions and their implications for antitrust analysis.

In short, there is a gap between existing direct evidence on labor-market power and the needs of antitrust policy and enforcement. Labor economics generally relies on models that are not germane to antitrust enforcers, while the models that are common in antitrust enforcement might not fully capture the dynamics of labor markets. Further research and dialogue between labor economists and antitrust experts is needed to develop a consistent and reliable framework to analyze labor-market power in antitrust cases. Until then, the inapt assumptions and limitations of the models presented to antitrust authorities and courts call their predictive value into question.

Ultimately, the direct evidence from labor-elasticity estimates and other measures of labor-market power remains limited in scope and varies widely across studies. While these studies provide valuable insights, they are far from conclusive, and do not yet approach the level of evidence and analysis typically relied upon in the IO literature to assess product-market competition. Courts and policymakers are likely to expect a more robust and consistent body of evidence before making significant changes to antitrust enforcement in labor markets. The disputes over direct evidence on labor-market power underscore the need for further research and highlight the challenges of applying antitrust tools to labor markets based on the current state of knowledge. Antitrust enforcers should take policy insights gleaned from labor-economics studies with a grain of salt, as they may be of limited use when informing antitrust policy decisions.

B. Indirect Evidence: Are Labor Markets ‘Relatively Narrow’?

The 2023 Merger Guidelines assert that labor markets can be “relatively narrow” and that “the level of concentration at which competition concerns arise may be lower in labor markets than in product markets, given the unique features of certain labor markets.”[58] The academic literature, however, presents a more nuanced picture that casts doubt on some of these claims. This section provides an abbreviated review of that literature. A more thorough explanation is provided in the Appendix.[59]

Given the limited direct evidence discussed in the previous section, as well as the difficulties entailed in collecting and applying it, it is not surprising that many scholars have turned to indirect measures of market power to fill the evidentiary gap. There are, however, significant issues with these indirect measures, as they often rely on concentration metrics, such as the Herfindahl-Hirschman Index (HHI), which are more readily available, but considerably less reliable than direct estimates of market power.[60]

While all indirect data sources have limitations, some are more comprehensive and reliable than others. The most comprehensive data is administrative data. While these differ on the levels of concentration, depending on how narrowly the market is defined, they consistently document falling concentration levels in local labor markets, where most job search and hiring occurs. [61] These studies have the advantage of comprehensive coverage of employers and workers, but often define labor markets based on industry codes, rather than occupations, which may not fully capture the relevant competitors for specific types of labor.

On the other hand, the administrative data concern all employer establishments.[62] The administrative data directly measure employment levels and shares, instead of being restricted to online vacancies as a proxy for employment.[63] This distinction matters, because employment shares are the natural counterpart of market shares—a cornerstone of antitrust enforcement. Concentration measures based on vacancies will be systematically higher than those based on employment, because not all firms will hire in any particular period (in addition to any other issues with the data sample). Using the most direct comparison available, the governmental microdata finds an average HHI roughly one-tenth as large as that found using vacancy data.[64]

Unfortunately, no dataset is perfect, even the administrative data. For example, many rely on employment data organized by North American Industry Classification System (NAICS) codes for market definition, which are organized by establishment, not by occupation. For example, all Wal-Mart employees at a store are labeled as NAICS 4521 (Department Stores), instead of being broken out by different occupations (Standard Occupational Classifications or “SOC”) for different vacancies.[65] That makes their results better interpreted as local industrial-concentration measures, instead of true labor-market concentration measures.

For pure concentration measures, this may not matter too much. Berger, Herkenhoff, and Mongey argue that “there is little practical difference in defining a market at the occupation-city level rather than the industry-city level as these two measures are highly correlated.”[66] But at the more granular level of antitrust enforcement, the difference between measures may be significant. In particular, many workers may be able to easily substitute between employers located in different industries. An accountant, for instance, might be just as qualified to work for a bank as for a hotel or a tech company. This cross-industry substitution is obscured by market definition undertaken at the NAICS level.

With these caveats about market definition, what does the administrative data show about concentration? Rinz uses the Longitudinal Business Database, covering nearly all private-sector employers, to estimate labor-market concentration from 1976 to 2015.[67] At the beginning and end of the time period studied, unsurprisingly, Rinz finds rural labor markets to be more concentrated than urban markets.[68] He finds that the average local HHI, defined by commuting zones and four-digit NAICS industries, decreased from 0.16 in 1976 to 0.12 in 2015, indicating a shift toward less-concentrated local markets. Local concentration fell in all population quintiles.[69]

By contrast, national HHI increased modestly over the same period, driven by large firms entering more local markets.[70] Similarly, Lipsius documents falling local concentration from 1976 to 2015, using alternative market definitions based on five-digit NAICS codes and urban areas, rather than commuting zones.[71] Despite these definitional differences, the average local HHI remains consistently low, ranging from 0.14 to 0.17 depending on the year and market definition. Berger, Herkenhoff, & Mongey further corroborate these findings with a different way of averaging HHI measures across markets.[72] They estimate an average local HHI of 0.17 for the year 2014, with even lower concentration levels when analyzing individual sectors like manufacturing and services. The average local HHI levels documented in these studies are below the 1,800 (or 0.18) threshold associated with highly concentrated markets in the 2023 Merger Guidelines.[73]

Studies using job vacancies, rather than employment data, tend to find higher market concentration, but this may partly be driven by their omission of job openings that are not published online (or at all). Indeed, the most well-cited papers on labor-market concentration use online job postings to measure concentration.[74] These studies can define labor markets more granularly, but they may not capture all employers and job openings, particularly those that are not advertised online. This focus on vacancies rather than employment may not always reflect the actual options available to workers, as not all job vacancies are advertised (online).[75]

While the 2023 Merger Guidelines suggest that labor markets warrant a lower concentration threshold for competition concerns, they do not provide a clear basis for this assertion or specify what that threshold should be. The indirect evidence from local labor-market concentration metrics does not support the notion that labor markets are inherently more problematic than product markets, from a concentration perspective. Instead, these low and falling concentration levels suggest that many local labor markets are relatively competitive and do not necessarily require a lower concentration threshold for merger analysis. While the guidelines’ recognition of labor markets’ unique features is important, this acknowledgment should be coupled with a more precise and empirically grounded approach to defining concentration thresholds.

More fundamentally, regardless of the data source used, market-definition issues remain. The variety of concentration estimates stemming from different geographic units and shifting occupational groupings demonstrates the lack of clarity around reasonable market boundaries. Worker mobility also introduces questions about appropriate geographic scope. While some labor markets may be highly concentrated, it does not follow that relevant antitrust labor markets are often relatively narrow. Establishing narrowness, in the antitrust sense, requires specific proof that additional employer options do not provide meaningful competitive discipline against potential wage reductions—something these papers do not do.

The upshot is that antitrust enforcers will need to rely on case-specific evidence, rather than broad claims of high concentration levels and narrow labor markets. Concentration measures have long been considered imperfect indicators of market power in antitrust policy and IO debates.[76] While high concentration may be suggestive of market power, it is not conclusive evidence. Many factors other than concentration can affect wages, such as differences in firm productivity, local labor-market conditions (e.g., urban vs. rural), and institutional factors like unionization rates.

Moreover, there is good evidence that employer concentration does not lead to depressed wages.[77] For example, Kirov and Traina find that rising markdowns (the gap between worker productivity and wages) are more strongly associated with technology-related factors, such as automation and managerial practices, than with employer concentration.[78] Moreover, they caution that:

These results suggest the workhorse assumptions behind some of the labor-market power literature might need reevaluation, particularly work that uses cross-sectional variation to infer trends in labor-market power. Concentration is likely an inappropriate measure of labor-market power in this case.[79]

Their critique underscores the limitations of relying heavily on concentration metrics to assess labor-market competition, especially when making claims about trends over time. As Berry, Gaynor, and Scott Morton write:

A main difficulty in [the monopsony power literature] is that most of the existing studies of monopsony and wages follow the structure-conduct-performance paradigm; that is, they argue that greater concentration of employers can be applied to labor markets and then proceed to estimate regressions of wages on measures of concentration. For the same reasons we discussed above, studies like this may provide some interesting descriptions of concentration and wages but are not ultimately informative about whether monopsony power has grown and is depressing wages.[80]

This is not to say that indirect evidence of market power is entirely without value. These studies can provide useful background information to guide antitrust policy. Moreover, antitrust law itself often relies on indirect measures of market power, such as concentration ratios and HHIs. In the case of antitrust enforcement, however, these measures are typically derived from carefully defined relevant markets. Defining the relevant market for labor is a complex task that requires considering such factors as job characteristics, worker skills, worker mobility, and geographic scope. There is currently little consensus among labor economists about the best way to define labor markets for antitrust purposes.

Ultimately, the indirect evidence from concentration metrics does not support the merger guidelines’ strong claims about ubiquitous labor-market narrowness or the need for a lower concentration threshold in merger analysis. While concentration trends are not uniform across all markets and data sources, the weight of the evidence points toward falling local concentration and increasing labor-market competition over time (if concentration is a proxy for competition). Antitrust authorities should engage with this evidence and provide a stronger empirical basis for their policy recommendations, rather than relying on unsubstantiated assumptions about the inherent narrowness of labor markets.

IV. The Problems of Addressing Labor-Market Power Under Antitrust Law

The empirical literature that attempts to measure labor-market power remains unsettled and limited, and provides, at best, only indirect evidence of economy-wide monopsony power. But even if robust measures of labor monopsony were available, applying antitrust laws to remedy monopsony power would still face conceptual hurdles. Economic theory indicates important differences between monopoly and monopsony power that complicate simple policy translation.

While antitrust statutes technically apply equally both upstream and downstream,[81] the economics of monopoly versus monopsony raise thorny theoretical issues regarding dynamic efficiency, merger efficiencies, market definition, and more that may differ between the two. Just as the empirical questions remain far from settled, the theory provides little straightforward guidance on how to address these concerns.

U.S. antitrust agencies have nevertheless long sought to reinvigorate anti-monopsony enforcement. Before concluding that labor-monopsony enforcement should be a priority for antitrust enforcers, both the evidentiary limitations and conceptual challenges warrant careful consideration by enforcers, scholars, and the courts.

On the surface, it may appear that monopsony is simply the “mirror image” of monopoly.”[82] There are, however, several important differences between monopoly and monopsony, as well as several complications that monopsony analysis raises that significantly distinguishes it from monopoly analysis. Most fundamental among these, monopsony and monopoly markets do not sit at the same place in the supply chain.[83] This matters, because all supply chains end with final consumers. Accordingly, from a policy standpoint, it is essential to decide whether antitrust ultimately seeks to maximize output and welfare at that (final) level of the distribution chain (albeit indirectly); whether intermediate levels of the distribution chain (e.g., an input market) should be analyzed in isolation; or whether effects in both must be somehow aggregated and balanced.

This has important ramifications for antitrust enforcement against monopsonies. As we explain below, competitive conditions of input markets have salient impacts on prices and output in product markets. Given this, any evaluation of monopsony must consider the “pass through” to the final product market. There is, however, no such “mirror image” complication in the consideration of final-product monopoly markets. Along similar lines, treating the assessment of mergers in input markets as the simple mirror image of product-market mergers presents important problems for how authorities address merger efficiencies, as traditional efficiencies and increased buyer power are often two sides of the same coin. Finally, it is unclear how authorities should think about market definition—a cornerstone of modern antitrust policy—in labor markets, in particular.

The upshot is that, while monopsony concerns have become more prevalent in academic and policy discussions, the agencies should be extremely hesitant as they move forward. Some have argued that “[m]ergers affecting the labor market require some rethinking of merger policy, although not any altering of its fundamentals.”[84] As we discuss below, however, while the economic “fundamentals” undergirding merger policy may not change for labor-market mergers, the “rethinking” required to properly assess such mergers does entail fundamental changes that have not yet been adequately studied or addressed. As many have pointed out, there is only a scant history of merger enforcement in input markets in general, and even less in labor markets.[85] It is premature to offer guidelines that purport to synthesize past practice and the state of knowledge, when neither is well-established.

A. Theoretical Differences Between Monopoly and Monopsony

Before getting to the practical differences of a monopoly case versus a monopsony case, consider the theoretical differences between identifying monopsony power and monopoly power.[86] Suppose, for now, that a merger either generates efficiency gains or market power, but not both. In a monopoly case, if there are efficiency gains from a merger, the quantity sold in the output market will increase. With sufficient data, the agencies will be able to see (or estimate) the efficiencies directly in the output market. Efficiency gains result in either greater output at lower unit cost, or else product-quality improvements that increase consumer demand. In contrast, if the merger simply enhances monopoly power without efficiency gains, the quantity sold will decrease, either because the merging parties raise prices or quality declines. The empirical implication of the merger is seen directly in the market in question.

The monopsony case is, however, rather more complicated. Ultimately, we can be certain of the effects of monopsony only by looking at the output market, not the input market where the monopsony power is claimed. To see this, consider again a merger that generates either efficiency gains or market (now monopsony) power. A merger that creates monopsony power will necessarily reduce the prices and quantity purchased of inputs like labor and materials. But this same effect (reduced prices and quantities for inputs) would also be observed if the merger is efficiency enhancing. If there are efficiency gains, the merged entity may purchase fewer of one or more inputs than the parties did pre-merger. For example, if the efficiency gain arises from the elimination of redundancies in a hospital merger, the hospital will buy fewer inputs, hire fewer technicians, or purchase fewer medical supplies.

We have seen there are scale efficiencies associated with a hospital merger. As work from the FTC’s Bureau of Economics explains, there can be scale efficiencies associated with “surgical procedures that exhibit a volume-outcome relationship.”[87] Typically, these are high-risk, complex procedures. “By consolidating such procedures at fewer hospitals, or by sending experienced personnel from one hospital to another, a system potentially can reap the benefits of increased scale.”[88] That is, reassignment of personnel and/or consolidation of procedures (and attendant personnel) at fewer hospitals can facilitate more efficient, and higher quality, provision of services, even as it may decrease labor demand in certain geographic markets. This may even reduce the wages of technicians or the price of medical supplies, even if the newly merged hospitals do not exercise any market power to suppress wages.[89]

Decisionmakers cannot simply look at the quantity of inputs purchased in the monopsony case as the flip side of the quantity sold in the monopoly case, because the efficiency-enhancing merger can look like the monopsony merger in terms of the level of inputs purchased. The court can only differentiate a merger that generates monopsony power from a merger that increases productive efficiencies by looking at the output market. Once we look at the output market, as in a monopoly case, if the merger is efficiency-enhancing, there will be an increase in output-market quantity. If the merger increases monopsony power, by contrast, the firm perceives its marginal cost as higher than before the merger and will reduce output.[90]

In short, the assumption that monopsony analysis is simply the mirror image of monopoly analysis does not hold.[91] In both types of mergers—those that possibly generate monopoly and those that possibly generate monopsony—agencies and courts cannot look solely at the input market to differentiate them from efficiency-enhancing mergers; they must also look at the output market. Therefore, it is impossible to discuss monopsony power coherently without considering the output market.

This crucial conceptual difference in the theoretical understanding of monopsony versus monopoly has important implications for antitrust enforcement in labor markets. The need to look at output markets to distinguish efficiency-enhancing mergers from monopsonistic ones complicates the analysis and may require a different approach than traditional monopoly cases. Antitrust authorities and courts must carefully consider how a merger affects both output and input markets, and weigh potential efficiencies against anticompetitive effects.

This is particularly challenging under the consumer-welfare standard, which focuses on output-market effects. The potential for countervailing effects on output and input markets creates difficult tradeoffs for enforcers and courts, who must balance the interests of consumers, workers, and overall economic efficiency.

B. Monopsony and Merger Efficiencies

In real-world cases, mergers will not necessarily be either solely efficiency-enhancing or solely monopsony-generating, but a blend of the two. Any rigorous consideration of merger effects must account for both and make some tradeoff between them. It’s true that, in some cases, there will be output increases alongside labor-market increases and, in such scenarios, we can look simply at output.[92] In the standard monopsony models in economics, there is no offsetting effect; harm to sellers of inputs (workers) hurts consumers, as well.[93] This was the case in the recent successful action to block Penguin-Random House from merging with Simon & Schuster.[94] The parties agreed that, if there was harm to the authors, there would be fewer books, thereby harming consumers.[95] There was no need to think about offsetting harms. That’s the easy case.

But what about other cases where the effects are not so clearcut? The question of how guidelines should address monopsony power is inextricably tied to consideration of merger efficiencies—particularly given the point above that identifying and evaluating monopsony power will often depend on its effects in downstream markets.

This reality raises some thorny problems for monopsony-merger review that have not been well-studied to date:

Admitting the existence of efficiencies gives rise to a subsequent set of difficult questions central to which is “what counts as an efficiency?.” A good example of why the economics of this is difficult is considering the case in which a horizontal merger leads to increased bargaining power with upstream suppliers. The merger may lead to the merging parties being able to extract necessary inputs at a lower price than they otherwise would be able to. If so, does this merger enhance competition in a possible upstream market? Perhaps not. However, to the extent that the ability to obtain inputs at a lower price leads to an increase in the total output of the industry, then downstream consumers may in fact benefit. Whether the possible increase in the total surplus created by such a scenario should be regarded as off-setting any perceived loss in competition in a more narrowly defined upstream market is a question that warrants more attention than it has attracted to.[96]

With monopoly mergers, plaintiffs must show that a transaction will reduce competition, leading to an output reduction and increased consumer prices. This finding can be rebutted by demonstrating cost-saving or quality-improving efficiencies that lead to lower prices or other forms of increased consumer welfare. In evaluating such mergers, agencies and courts must weigh the upward pricing pressure from reduced competition against the downward pricing pressure associated with increased efficiencies and the potential for improved quality.

As we have explained above, this analysis becomes more complicated when a merger raises monopsony concerns. In a simple model, the monopsony merger would increase market power in the input market (e.g., labor), leading to a lower price paid for the input and a smaller quantity used of the input relative to pre-merger levels. Assuming no change in market power in the final product market, these cost savings would result in lower prices paid by consumers. Should such efficiency effects “count” in evaluating mergers alleged to lessen competition in input markets? It is surely too facile a response to assert that such efficiency effects would be “out of market” and thus irrelevant. If that were the case, the legality of a merger would turn arbitrarily on the choice of input or output market, while flatly ignoring evident and quantifiable effects in an equally affected market. No sensible approach to antitrust would countenance this arbitrariness.[97]

Some would argue these are the types of efficiencies that merger policy is meant to encourage. Others may counter that policy should encourage technological efficiencies, while discouraging efficiencies stemming from the exercise of monopsony power.

But this raises another complication: How do agencies and courts distinguish “good” efficiencies from “bad?” Is reducing the number of executives pro- or anticompetitive? Is shutting down a factory or health-care facility made redundant post-merger pro- or anticompetitive? Trying to answer these questions places agencies and courts in the position of second guessing not just the effects of business decisions, but also the intent of those decisions (to a first approximation, the observed outcomes are identical). But intent is far from dispositive in determining the competitive effects of business conduct, and it may be misleading.[98] Even worse, it can create a Catch-22 where an efficiencies defense in the product market is turned into an efficiencies offense in the input market—e.g., a hyper-efficient merged entity may outcompete rivals in the product market, possibly leading to monopsony in the input market. In ambiguous cases, this means the outcome may depend on whether it is challenged on the input or output side of the market. It even implies that overcoming a challenge by successfully identifying efficiencies in one case creates the predicate for a challenge based on effects on the other side of the market.

Hemphill and Rose argue that “harm to input markets suffices to establish an antitrust violation.”[99] But surely, this cannot be a general principle, at least not if markdowns are seen as a form of anticompetitive harm. To see why, consider a merger that has no effect on either monopoly or monopoly power; it solely improves the merging parties’ technology by removing redundancies. For example, suppose the merged firms require fewer janitors. By assumption, this merger lowers consumer prices and increases consumer and total welfare. But proponents of the Hemphill and Rose view would likely call it an antitrust violation, because it harms the input market for janitors. Fewer janitors will be hired, and janitors’ wages may fall (even though, by assumption, there is no monopsony power pushing down wages).

This likely explains why Marinescu and Hovenkamp recognize that assessing a monopsony claim requires looking at both input and output markets:

To have a chance of succeeding, an efficiency case for a merger affecting a labor market must show that post-merger reorganization will decrease the need for workers and will not lower total production. Both of these requirements are essential. A merger that decreases the need for workers may represent nothing more than an exercise of monopsony power, but in that case, ceteris paribus, it will also reduce production. By contrast, a merger that eliminates duplication can also reduce the need for workers, but production will not go down. Indeed, it should go up to the extent that the post-merger firm has lower costs.[100]

The complications only multiply once we move beyond a classical, wage-posting monopsony. For example, many labor-market models include some form of wage bargaining.[101] Labor economists believe this captures important aspects of labor markets that are not purely about wage-posting.[102] With bargaining—as compared to classical monopsony—when firms achieve more product-market power, they generate higher profits and, therefore, more potential surplus to be split between employers and employees.[103] Workers (at least those who keep their jobs), may welcome greater monopoly power, as they are able to extract higher wage rents, which would not be the case for a firm earning thin or no margins in an extremely competitive product market. Consequently, this generates the opposite implication at the firm level: more product market power puts upward, not downward, pressure on wages. Yet, presumably, no one would argue that courts should allow mergers simply because they raises wages. But then the reverse should also be true: courts should not block mergers simply because they lower wages.

Far from being a theoretical curiosity, bargaining is of first-order importance when we are thinking about unions and labor markets. In its Kroger/Albertsons complaint, for example, the FTC defines the relevant labor market as “union grocery labor” and alleges that the merger would harm competition specifically for these workers.[104] But through their collective-bargaining agreements, unions exercise monopoly power in labor negotiations that likely counterbalances any attempted exercise of monopsony power by the merged firm.[105] If there is no increase in monopsony power, but there is an increase in monopoly power, the union will bargain to split that profit and increase wages.

How likely is this outcome? One local union endorsed the merger and divestiture package, arguing that “[e]mployees of Kroger and C&S will be better off than employees of other potential buyers.”[106] Of course, it is possible that most unions do not believe wages will increase; after all, delegates of the UFCW unanimously voted to oppose the merger.[107] And yet, rather than citing concern over monopsony power or lower wages, the union delegates’ stated reason for their opposition was lack of transparency.[108] The point is not to draw a conclusion about this particular merger’s likely effects on wages; it is to point out the complex tradeoffs inherent in applying antitrust to labor markets.

And there are further complications. When dynamic effects are taken into account, for example, even apparent harms confined to the seller side of an input market may turn into benefits:

[T]he presence of larger buyers can make it more profitable for a supplier to reduce marginal cost (or, likewise, to increase quality). This result stands in stark contrast to an often expressed view whereby the exercise of buyer power would stifle suppliers’ investment incentives. In a model with bilateral negotiations, a supplier can extract more of the profits from an investment if it faces more powerful buyers, though the supplier’s total profits decline. Furthermore, the presence of more powerful buyers creates additional incentives to lower marginal cost as this reduces the value of buyers’ alternative supply options.[109]

Of course, none of this is to say that creation of monopsony power should categorically be excluded from the scope of antitrust enforcement. But it is quite apparent that this sort of enforcement raises complicated tradeoffs that are elided or underappreciated in the current discourse, and manifestly underexplored in the law.[110]

C. Determining the Relevant Market for Labor

Even in the most basic monopoly cases, agencies and courts face enormous challenges in accurately identifying relevant markets. These challenges are multiplied in input markets—especially labor markets—in which monopsony is alleged. Many inputs are highly substitutable across a wide range of industries, firms, and geographies. For example, changes in technology—such as the development of PEX tubing and quick-connect fittings—allow laborers and carpenters to perform work previously done exclusively by plumbers. Technological changes have also expanded the relevant market in skilled labor. Remote work during the COVID-19 pandemic, for example, demonstrates that many skilled workers are not bound by geography and compete in national—if not international—labor markets.

When Whole Foods attempted to acquire Wild Oats, the FTC defined (and the court accepted) the relevant market as “premium natural and organic supermarkets,” as a way to exclude larger firms, such as Walmart and Kroger, from the relevant product market.[111] But even if one were to accept the FTC’s product-market definition, it is unlikely that anyone would consider employment at a “premium natural and organic supermarket” as a distinct input market.[112] Even the narrowest industries considered in the economics literature would never be defined that narrowly. This is because the skillset required to work at Whole Foods overlaps considerably with the skillset demanded by myriad other retailers and other employers, and virtually completely overlaps with the skillset needed to work at Kroger or another grocer.

As noted above, the FTC’s complaint in Kroger/Albertsons defines the relevant labor market as “union grocery labor” in “local CBA areas” (i.e., the geographic areas covered by each collective-bargaining agreement’s jurisdiction).[113] While the alleged product-market definition aligns with the FTC’s approach in past supermarket mergers, the labor-market definition is novel and does not appear to have a direct precedent in prior cases.[114] By focusing on unionized workers in specific localized areas, the FTC is implicitly arguing that the merger’s potential anticompetitive effects on labor are limited to these narrow categories of workers.

This approach to labor-market definition diverges from much of the economic literature on labor monopsony, which often defines markets based on industry or occupation codes that may not capture the full scope of competition for workers.[115] The FTC’s narrow market definition may reflect the practical challenges of bringing a labor-monopsony case under existing antitrust frameworks. But it also risks overlooking the fluid and dynamic nature of labor markets, where workers may have employment options across different industries, occupations, and geographies.[116]

We can see the difficulty with pursuing a labor-monopsony case by recognizing that the usual antitrust tools—such as merger simulation—cannot be easily applied to the labor market. Unlike the DOJ’s recent success in blocking Penguin-Random House from merging with Simon & Schuster on grounds that the merger would hurt authors with advances above $250,000,[117] the labor market for most employees is much larger than the two merging companies. This fact alone likely renders the DOJ’s successful challenge in that case more of an aberration than a model for future labor-market enforcement actions, as is sometimes claimed.[118]

Indeed, the relevant market often cannot be narrowed down to even a handful of readily identifiable companies. For the vast majority of workers, a great number of potential employers would remain following a merger. This “potential competition”—the range of feasible employers that present an outside option to the merged companies’ present employees—limits the merged firm’s ability to exercise monopsony power in its labor negotiations. While we are not aware of publicly available data that would more comprehensively illustrate worker flows among different companies (and industries), such flows of retail workers into and out of roughly adjacent labor markets make intuitive sense. As economist Kevin Murphy has explained:

If you look at where people go when they leave a firm or where people come from when they go to the firm, often very diffuse. People go many, many different places. If you look at employer data and you ask where do people go when they leave, often you’ll find no more than five percent of them go to any one firm, that they go all over the place. And some go in the same industry. Some go in other industries. Some change occupations. Some don’t. You look at plant closings, where people go. Again, not so often a big concentration of where they go to. If you look at data on where people are hired from, you see much the same patterns. That’s kind of a much more diffuse nature.[119]

In any particular merger—such as between Kroger and Albertsons, for example—an overwhelming majority of Kroger workers’ next best option (i.e., what they would do if a store closed) will not be at an Albertsons store, but something completely outside of the market for grocery-store labor (or even outside the retail-food industry more broadly). Where that is the case, the merger would not take away those workers’ next best option, and the merger cannot be said to increase labor-monopsony power to the extent necessary to justify blocking it.[120]

Fundamentally, the labor-economics literature has offered little guidance to date on how to define markets in labor cases. As explained above, concentration varies greatly, depending on the exact definition of the relevant market, especially the geographic market.[121] It is virtually impossible to know what outside options to include in the relevant market, and it may not always be possible to identify even where such potential employers are located (e.g., are commuting zones, for example, better proxies for the relevant geographic labor market than metropolitan areas?). These market-definition issues are far more acute in monopsony cases than in traditional monopoly cases, both because the intrinsic question of substitutes is more complicated and because there is far less precedent to guide parties and enforcers.

D. Labor Markets Are Not Spot Markets

The merger guidelines stress that labor markets are not simple spot markets where each side calls out a price and the two make an exchange when bid/ask prices align. As the guidelines state, “labor markets often exhibit high switching costs and search frictions due to the process of finding, applying, interviewing for, and acclimating to a new job.”[122] Moreover, “finding a job requires the worker and the employer to agree to the match. Even within a given salary and skill range, employers often have specific demands for the experience, skills, availability, and other attributes they desire in their employees.”[123]

The typical employment contract is often more complicated than the typical end-user purchase agreement. Employment contracts are, indeed, not spot contracts, and thus contain a temporal dimension often absent from the product markets at-issue in monopoly cases. The terms of employment contracts are also rarely purely monetary, and the value of any given employment contract (and especially of aggregated “employment data”) may not be reflected in the nominal “price” (i.e., wage) of the agreement. Various benefits, deferred compensation, location, start date, moving costs and the like can dramatically complicate identifying the value of employment contracts. Complicating matters further is that the value of these terms to any given employee may vary widely, as people’s preferences for employment terms are significantly idiosyncratic. All of which makes the analysis of observable employment terms inordinately complicated and assessments of market power fraught with error.

There are, however, additional relevant aspects of labor markets that distinguish them from spot markets and that warrant consideration in antitrust analysis. One crucial factor is that employment relationships frequently involve mutual investments by both parties that develop over time. Employers often make substantial investments to build workers’ firm-specific skills through training, knowledge sharing, and opportunities to form client relationships.[124] Some of these skills are general and portable across firms, while others are firm specific and have limited value to other employers.

Firm-specific investments can increase workers’ productivity at their current firms, but also make it more costly for them to switch jobs, potentially giving employers some labor-market power. This “lock in” effect exists because the worker’s current role is more valuable due to firm-specific investments and, in some cases, this increased value cannot be ported to a new employer.

In other cases, however, employers can and do invest in training that provides workers with general—and thus transferable—skills.[125] In such examples, there is a risk that those workers will leave for a competitor before the employer can fully recoup its investment. A higher wage may be justified for a subsequent employer, as the employee comes with the added value provided by the former employer (e.g., training, knowledge of competitively valuable information, relationships with potential customers). This “holdup” problem can lead firms to underinvest in worker training, even when such training would be socially beneficial.

To mitigate this risk, firms and workers may seek contractual solutions that incentivize workers to stay long enough for the firm to earn a return on its investment. These arrangements could include promises of future wage increases, promotions, or other benefits that are contingent on the worker remaining with the firm. In turn, these contractual mechanisms create a new problem: once the investment is made and the worker has acquired valuable skills, they may be “locked in” to their current employer through the promise (implicit or explicit) of future wage gains or other benefits.

Of course, to the extent these arrangements give firms some ex-post market power, they are accompanied by terms implicitly or explicitly sharing the benefits with employees. But if a merger enhances employers’ ability to make such productivity-enhancing investments, it could simultaneously increase labor-market power while generating efficiencies, which may be shared with employees in ways that are difficult to identify or to value. Assessing the competitive effects of such a merger requires identifying and weighing these competing effects, which may be extremely difficult.

The FTC’s complaint against the proposed Kroger/Albertsons merger provides a concrete example of how antitrust enforcers must grapple with these issues in practice.[126] In defining the relevant labor markets, the FTC focuses on “union grocery labor” in “local CBA areas” (i.e., the geographic areas covered by each collective-bargaining agreement’s jurisdiction).[127] By narrowing the market to unionized workers covered by specific CBAs, the FTC appears to be making a form of lock-in argument. The complaint alleges that “[u]nion grocery workers can move between grocery employers covered by their union while retaining their pension and healthcare benefits, as well as other valuable workplace benefits and protections provided by the CBAs. If a union grocery worker leaves for a non-union employer, however, the worker will lose any non-vested CBA benefits and protections.”[128] In other words, the CBA-specific benefits function similarly to firm-specific investments in tying workers to a particular set of employers, or a contractual solution to the holdup problem involving promised future benefits, potentially giving those employers monopsony power.

From an antitrust perspective, assessing such a merger’s effect on firm-specific investments is complex. Will the merger increase or decrease employers’ incentive to provide worker training? How should antitrust balance potential productivity gains against increased labor-market power over workers? Efficiency arguments by merging parties should be met with appropriate skepticism, but such investments may be more than a rounding error in calculating overall effects. Indeed, the concept of firms investing in building worker skills is more than just a theoretical curiosity; there is clear empirical evidence that these investments occur, affect human capital, and have effects on wages.[129] These dynamic investment effects are first-order factors in labor markets, but are not easily captured in a static monopsony framework. Further study on these tradeoffs within merger analysis is essential.

The complications caused by the importance of investment in workers show up in antitrust contexts beyond merger enforcement, such as the FTC’s noncompete rulemaking.[130] The FTC recognized as much, noting that “[t]here is some empirical evidence that non-competes increase investment in human capital of workers, capital investment, and R&D investment,”[131] and citing numerous studies indicating such effects.[132] Of course, the commission nevertheless adopted a rule banning all noncompete agreements outright, despite this recognition.

All of this makes the simple monopsony model difficult to apply and map to the actual competition that occurs in the market. For example, to estimate labor-supply elasticities, many papers take a traditional monopsony model that assumes a spot market where the buyer sets a price and lets as many people buy as are willing.[133] Such analysis can be informative, but it may say little about the competitive effects of various practices in real-world antitrust markets.

The point is not to establish the proper model of human-capital formation. Instead, it is simply to point out that human-capital development is of first-order importance in labor markets. How should antitrust treat it? Contrary to the impression from the merger guidelines (and the short shrift given this point in the proposed NCA rules), not every feature of the labor market simply points toward a need for more enforcement.

V. Monopsony and the Consumer-Welfare Standard

As discussed in the previous sections, using antitrust enforcement to thwart potential monopsony harms is a task full of evidentiary difficulties and complex, poorly understood tradeoffs. Perhaps more problematically, it is also unclear whether (and, if so, how) such an endeavor is consistent with the consumer-welfare standard—the lodestar of antitrust enforcement, at least as it is currently understood and implemented by courts.[134]

Marinescu & Hovenkamp assert that:

Properly defined, the consumer welfare standard applies in exactly the same way to monopsony. Its goal is high output, which comes from the elimination of monopoly power in the purchasing market.… [W]hen consumer welfare is properly defined as targeting monopolistic restrictions on output, it is well suited to address anticompetitive consequences on both the selling and the buying side of markets, and those that affect labor as well as the ones that affect products. In cases where output does not decrease, the anticompetitive harm to trading partners can also be invoked.[135]

And Hemphill & Rose state that:

Overall, then, a trading partner welfare approach accords well with the case law and economic reasoning, and under this approach, a merger that results in increased classical monopsony power may be condemned on account of harm to the input market.[136]

But this is far from self-evident. There are at least two problems with this reasoning.

To start, the assertion that harm to input providers that does not result in reduced product output is actionable is based on a tenuous assertion that a mere pecuniary transfer is sufficient to establish anticompetitive harm.[137] This is problematic, because such “harms” actually benefit consumers in the baseline model. In the extreme example, all of the benefits of a better negotiating position are passed on to consumers, and the firm is more of a direct intermediary trading on behalf of consumers, rather than a monopolistic reseller.[138]

The main justification for ignoring these cross-market effects (as with all market-definition exercises) is primarily a pragmatic one (although it is rather weakened in light of modern analytical methods).[139] But particularly in the context of inputs to a specific output market, these cross-market effects are inextricably linked and hardly beyond calculation. As the enforcement agencies have previously recognized, “[i]nextricably linked out-of-market efficiencies, however, can cause the Agencies, in their discretion, not to challenge mergers that would be challenged absent the efficiencies.”[140]

The assertion that pecuniary transfers of bargaining power are actionable is also inconsistent with the fundamental basis for antitrust enforcement, which seeks to mitigate deadweight loss, but not mere pecuniary transfers that do not result in anticompetitive effects.[141]

Second, it is unclear whether the consumer-welfare standard applies to input markets. At its heart, the consumer-welfare standard focuses on the effects that a(n) (incipient) monopolist’s behavior may have on consumers. And courts have extended this welfare calculation to all direct purchasers affected by anticompetitive behavior. Less clear is whether courts have consistently extended (or would extend) this notion of anticompetitive harm to all “trading partners” in input markets.[142] This goes to the very heart of the consumer-welfare standard:

[I]f only consumers matter, then a buying cartel should be perfectly legal and indeed should be encouraged. Monopsony power would not matter in antitrust cases, because the fact that sellers are harmed is irrelevant under a consumer surplus standard. I know of no proponent of the consumer surplus standard who endorses buyer cartels, or who believes that monopsony is not harmful. Instead, proponents of a consumer surplus rule tend to argue that buyer cartels and monopsony are exceptions to the otherwise sensible rule of maximizing consumer surplus. However, the need for these exceptions illustrates the lack of a coherent logic for the consumer surplus standard.[143]

Other scholars appear too ready to accept that there is a “coherent logic” of the consumer-welfare standard that unquestionably contemplates upstream trading-partner welfare because their interests align with those of consumers:

A useful definition of “consumer welfare” is that antitrust should be driven by concerns for trading partners, including intermediate and final purchasers, and also sellers, including sellers of their labor. These all benefit from high output, high quality, competitive prices, and unrestrained innovation. Higher output and lower prices are good indicators of competitive benefit, and there is little practical difference between the way courts talk about antitrust harm and the idea of “consumer welfare.”[144]

As we explain above, however, this coincidence of interest is far from complete, and lower wages could be consistent with both efficiency and monopsony.[145] As the FTC summarized in closing the investigation of a merger between two pharmacy benefit managers, “[a]s a general matter, transactions that allow firms to reduce the costs of input products have a high likelihood of benefitting consumers, since lower costs create incentives to lower prices.”[146] “Higher output and lower prices [may be] good indicators of competitive benefit,” but it seems problematic to assume they reflect a clear benefit to workers if they result from lower wages. Indeed:

Larger buyers may also be able to reduce their purchasing costs at the expense of suppliers…. The concept of buyer power as an efficiency defence rests squarely on such a presumption. What is more, the argument also posits that the exercise of buyer power will not only have distributional consequences, but also increase welfare and consumer surplus by reducing deadweight loss. As we spell out in detail below, welfare gains may arise both at the upstream level, i.e., in the transactions between the more powerful merged firm and its suppliers, as well as at the downstream level, where the creation of buyer power may translate into increased rivalry and lower prices. The extent to which final consumers ultimately benefit is of particular importance if antitrust authorities rely more on a consumer standard when assessing mergers. If total welfare is the standard, however, distributional issues are not directly relevant and any pass-on to consumers is thus only relevant in as much as it contributes to total welfare.[147]

This raises an obvious question: can the consumer-welfare standard (and thus antitrust authorities and courts) reach a finding of anticompetitive harm if consumers (at least, in the narrow market under investigation) are ultimately charged lower prices?

Consider Judge Breyer’s Kartell opinion. As Steve Salop explains:

The famous Kartell opinion written by Judge (now Justice) Stephen Breyer provides an analysis of a buyer-side “cartel” (comprised of final consumers and their “agent” insurance provider, Blue Cross) that also is consistent with the true consumer welfare standard.… Buyer-side cartels generally are inefficient and reduce aggregate economic welfare because they reduce output below the competitive level…. However, a buyer-side cartel. comprised of final consumers generally would raise true consumer welfare (i.e., consumer surplus) because gains accrued from the lower prices would outweigh the losses from the associated output reduction, even though the conduct inherently reduces total welfare (i.e., total surplus).…

… Judge Breyer treated Blue Cross essentially as an agent for the customers it insured, rather than as an intermediary firm that purchased inputs and sold outputs as a monopolistic reseller. The court apparently assumed (perhaps wrongfully) that Blue Cross would pass on its lower input costs to its customers in the form of lower insurance premiums….

… In permitting Blue Cross to achieve and exercise monopsony power by aggregating the underlying consumer demands for medical care—i.e., permitting Blue Cross to act as the agent for final consumers—the Kartell court implicitly opted for the true consumer welfare standard. Blue Cross’s assumed monopsony conduct on behalf of its subscribers would thus lead to higher welfare for its subscribers despite reduced efficiency and lower aggregate economic welfare. Thus, this result represents a clear (if only implicit) judicial preference for the true consumer welfare standard rather than the aggregate economic welfare standard.[148]

By this logic, it seems, the relevant “consumer” welfare in antitrust analysis—including that of mergers that increase either monopoly or monopsony power—is that of the literal consumer: the final product’s end-user. But this contrasts quite sharply with the standard mode of analysis in monopsony cases as the mirror image of monopoly, in which the merging parties’ trading partner (whether upstream or downstream) is the relevant locus of welfare analysis.

Indeed, extended to other current potential cases, this mode of analysis raises a distinct problem for the agencies. Consider, for example, a hypothetical case against Kroger-Albertsons that did not mention the product market and in which the merger was alleged to increase monopsony power, but not monopoly power. Should such a challenge fail regardless of the effect on input providers because Kroger can be considered “an agent for the customers it [sells to]”? There is, as Salop seems to suggest,[149] some merit in such an approach, but it is certainly not how similar cases have been evaluated in the past.

Indeed, the rule of reason arguably contemplates some sort of balancing of effects across markets.

Critically, the balancing required by the rule of reason is neither quantitative nor precise. In California Dental Association, the Supreme Court described a court’s task as reaching a “conclusion about the principal tendency of a restriction” on competition. If a restraint suppresses competition in one market and promotes competition in a related market, the Chicago Board of Trade and Sylvania statements of the rule of reason can be read to hold that legality turns on which effect predominates in a qualitative sense.[150]

The U.S. Supreme Court’s Alston case highlights this dynamic, and in a case involving labor-market monopsony, no less. Despite the NCAA’s undisputed monopsony power in the “market for athletic services” (an upstream labor market), the Court considered its proferred procompetitive justification of preserving amateurism in college sports—an effect avowedly in the downstream, output market.[151] As the Court described the proceedings below:

The NCAA’s only remaining defense was that its rules preserve amateurism, which in turn widens consumer choice by providing a unique product—amateur college sports as distinct from professional sports. Admittedly, this asserted benefit accrues to consumers in the NCAA’s seller-side consumer market rather than to student-athletes whose compensation the NCAA fixes in its buyer-side labor market. But, the NCAA argued, the district court needed to assess its restraints in the labor market in light of their procompetitive benefits in the consumer market—and the district court agreed to do so.[152]

Tellingly, the district court’s rejection of the NCAA’s procompetitive justification turned on the lack of connection between it and the challenged conduct in the input market. “As the court put it, the evidence failed ‘to establish that the challenged compensation rules, in and of themselves, have any direct connection to consumer demand.’”[153] The plain implication is that, where restraints in one market are sufficiently connected to benefits in another market, those benefits will be considered—and may turn out to justify—the challenged restraints.[154]

There is perhaps no easy answer to the difficulty of assessing harm in upstream markets when downstream markets benefit. At first blush, excluding deadweight losses that stem from monopsony power (or, at least, forcing plaintiffs to show that downstream purchasers are also harmed) seems like legalistic reasoning largely incompatible with the welfarist ancestry of the consumer-welfare standard.[155] Indeed, the consumer-welfare standard is largely premised on the assumption that increased output is desirable, and deadweight losses are harmful to society, regardless of their second-order effects.

There is no tension here when output and labor both benefit from an action; sometimes, output reduction goes directly with labor harms.[156] But what about the cases that are not so neat? It seems odd to depart from this focus on output as the lodestar of antitrust just because a supplier, rather than a consumer, is being harmed.

Faced with what may potentially be intractable economic questions, antitrust courts have, for the sake of administrability, often decided to limit antitrust analysis to what economics generally refer to as partial-equilibrium analysis.[157] This largely explains, e.g., why only direct purchasers can claim antitrust damages.[158] Perhaps it also explains why the Court in Ohio v. American Express chose to simply ignore potential harm to cash purchasers in limiting the market in that case to the “market for credit-card transactions,” even though the district court found that Amex’s conduct would increase retail prices for cash consumers [159]

But much to some commentators’ chagrin,[160] the Court in Amex did take account of cross-market effects—in that case, by combining both sides of a two-sided market into a single market—and noted that failing to do so would lead to error.[161] While the Court limited its holding to two-sided, “simultaneous transaction” markets,[162] it is difficult to escape the realization that the logic of the holding—and the arbitrariness of considering effects on one side in isolation—would apply as well to the analysis of upstream and downstream trading partners:

Absent consideration of both sides of a platform, the analysis will arbitrarily include and exclude various sets of users and transactions, and incorrectly assess the extent and consequences of market power. Indeed, evidence of a price effect on only one side of a two-sided platform can be consistent with either neutral, anticompetitive, or procompetitive conduct. Only when output is defined to incorporate the two-sidedness of the product, and where price and quality are assessed on both sides of a sufficiently interrelated two-sided platform, is it even possible to distinguish between procompetitive and anticompetitive effects.[163]

The upshot is that, with some notable exceptions (such as the case of two-sided markets in Amex), antitrust courts have been reluctant to analyze competitive effects in adjacent markets. Alas, it is unclear where that line is appropriately drawn, or whether it has been drawn somewhat arbitrarily in the past.

What might seem like an arbitrary decision appears more reasonable, of course, when one considers the sheer complexity of the task at-hand. Economic behavior will often have second-order effects that run in an opposite direction to its first-order or “partial equilibrium” ones. A coal monopoly may cause buyers to opt for cleaner energy sources; a conservation cartel may maximize the long-term value of scarce resources.[164] Yet surely there are cases where out-of-market effects are “inextricably linked” to in-market effects, and where extending the analysis would not create insurmountable burdens. A practical approach—and one consistent with the broad scope of the rule of reason—would at least consider out-of-market effects when they are a direct and identifiable consequence of conduct challenged in a separate market.

The question is further complicated in merger cases where the Clayton Act’s “any line of commerce” language seems to limit merger analysis to a single market, and where the Court’s holding in Philadelphia National Bank clearly reiterates this apparent constraint.[165] But those legal rules do not address the economic propriety of so limiting merger analysis, and neither is predicated on the complexity of undertaking the requisite economic analysis. Indeed, whatever the merits of such an approach at the time Philadelphia National Bank was decided, both the law and the economics have moved past them:

Despite the incorporation of efficiencies analysis into modern merger evaluation, and the advances in economics that allow efficiencies to be identified and calculated more accurately than at the time of Philadelphia National Bank, antitrust doctrine in the United States still supports a regime that fails to take into account efficiencies arising outside of the relevant market. Only a handful of federal court cases since Philadelphia National Bank raise the issue of out-of-market efficiencies, and those that address the merits quickly dispatch such efficiencies as being precluded by the Supreme Court precedent. In light of the advances in the ability to identify and measure efficiency benefits, the federal courts should update antitrust doctrine to support a serious and committed treatment of out-of-market efficiencies in merger analysis.[166]

In part reflecting this change in approach, the Court in Baker Hughes held that “[t]he Supreme Court has adopted a totality-of-the-circumstances approach to the statute [Section 7], weighing a variety of factors to determine the effects of particular transactions on competition.”[167] And lower courts have been increasingly willing to consider efficiencies in evaluating the application of Section 7 to proposed mergers.[168] It is even arguable that the district court in New York v. Deutsche Telekom (reviewing the T-Mobile/Spring merger) credited out-of-market efficiencies in approving the merger.[169]

Moreover, as with virtually all legislative language, the Clayton Act’s language is not as clear as some make it out to be. The phrase “in any line of commerce” need not be interpreted to constrain the permissible zone of analysis, or to condemn effects in a single “line of commerce” regardless of its effects in another. Rather, the phrase’s most obvious meaning is to indicate that no area of commercial activity is exempted from the Clayton Act. Indeed, the use of the word “line” to refer to the indicated area rather than “market” seems clearly to indicate general categories of business that are to be included in the law’s prescriptions, rather than specific markets for identifying effects.

In other words, “it is plain that Section 7 does not limit the range of ‘lines of commerce’ that can trigger a merger’s prohibition.”[170] But it is by no means clear that Section 7 proscribes liability when a merger “lessen[s] competition” in a single market, regardless of whether it may enhance competition elsewhere in the same “line of commerce.”[171] As the Court suggested in Amex, the relevant “line of commerce” may incorporate distinct markets that need not exist on the same side of a given transaction. Indeed, modern “business ecosystem” theories suggest that conglomerate businesses with widely different “markets,” interrelated by an overarching business model that “inextricably links” them, may constitute something like a single “line of commerce,” despite the superficial distinctions between the components that comprise them.[172]

The question remains whether antitrust law has a comparative advantage in dealing with more “systemic” issues (like worker welfare, environmental effects, or even the “amateurism” offered by the NCAA in Alston), or whether other legal frameworks are better adapted. Put differently, antitrust law’s main strength might be that it is mostly a consumer-oriented body of law that focuses on a single tractable problem: the prices consumers and other direct purchasers pay for goods. If that is true, then other bodies of law (such as, e.g., labor and environmental laws) may be better suited to deal with broader harms. Indeed, in the case of each of these fields, there exists a massive regulatory apparatus specifically designed to implement government standards. Under the law as it stands, where antitrust law and a regulatory regime conflict, antitrust must give way.[173]

We do not purport to have a satisfactory answer to this complicated question. In fact, it is probably fair to say that one does not exist. Antitrust law can either depart from its welfarist underpinnings—a large loss for its economic consistency—or it can follow those principles toward difficult problems that may ultimately impair its administrability. At this juncture, it is not clear there is a compromise that would enable enforcers to thread the needle to solve this complex conundrum. And if such as solution exists, it has yet to be articulated in a convincing manner that may lead to actionable insights for enforcers or courts. But it is crucial to note that some cross-market analysis may be unavoidable under a welfarist approach if antitrust is going to continue to attempt to address potential harms in upstream markets, including labor markets.

Given all of this, the FTC and DOJ’s update of their merger guidelines to address monopsony harms, while clearly important, also appears to be premature, compared to the state of the economic literature, and potentially unactionable (or, at least, incoherent as stated) under the consumer-welfare standard. This is not to say the antitrust-policy world should simply ignore monopsony harms, but rather that more research, discussion, and case law are needed before definitive guidelines can be written. Ultimately, it may well be that legislative change is needed before any such guidelines will be enforceable before the courts.

VI. A Path Forward: An Agenda for Antitrust and Labor Markets

The previous sections have highlighted the empirical and conceptual challenges that complicate the application of antitrust law to labor monopsony. While the growing interest in this area presents opportunities for research and policy innovation, it is important to approach these issues with a mix of enthusiasm and skepticism. The current state of economic knowledge and antitrust doctrine suggests that we are not yet ready for a major expansion of enforcement in labor markets. This, however, does not mean that antitrust has no role to play or that the status quo is optimal. Rather, it suggests the need for a thoughtful and incremental approach that prioritizes the development of better analytical tools, evidence-based policymaking, and inter-disciplinary collaboration.

The recent FTC complaint against the proposed Kroger/Albertsons merger underscores the importance of the issues raised in this paper, as well as the ongoing challenges that antitrust authorities face when assessing labor-market effects in merger cases.[174] While the complaint reflects an increased focus on labor issues in merger enforcement, it also highlights the complexities of defining markets, assessing competitive effects, and weighing efficiency claims in this context. The Kroger/Albertsons case provides a real-world example of how the FTC is grappling with these issues in practice, but also raises questions about the rigor of its proposed market definitions, the sufficiency of evidence required, and the theories of harm proposed.

Perhaps most notably, although the complaint proposes two distinct markets, one on either side of the supermarket business (“union grocery labor” on the one hand, and “the retail sale of food and other grocery products,” on the other), it fails to note that both are simultaneously intrinsic to the operation of supermarkets. It also fails to offer any suggestion for how a court should respond if, for example, harm is found in one market but not the other. Of course, as noted, the complaint does not even contemplate the possibility that its alleged theory of harm in the labor market could result in procompetitive effects in the retail market.[175]

As labor-market concerns continue to arise in antitrust cases, it will be critical for the FTC and other enforcers to develop more robust analytical frameworks and evidentiary standards to support their claims, and for courts and policymakers to provide clearer guidance on how labor-market harms should be assessed under existing legal standards. While the FTC’s increased focus on labor issues is noteworthy, the Kroger/Albertsons complaint also demonstrates that the agency’s approach needs to be further refined and clarified.

One key priority should be to develop more direct, antitrust-relevant measures of labor-market power. While some recent studies have proposed measures such as labor-supply elasticity[176] and wage markdowns,[177] these tools have not been widely validated in antitrust contexts. Moreover, as discussed earlier, these measures may be sensitive to assumptions about the nature of competition.[178] Further refinement and testing of these measures, with a focus on their robustness and applicability to antitrust cases, is needed.

In addition, scholars should continue to study the effects of specific mergers and practices on labor-market outcomes, using more sophisticated research designs that can isolate causal impacts. While some recent studies have taken steps in this direction,[179] much more work is needed to build a body of evidence that can inform antitrust enforcement. In particular, studies that can disentangle the effects of labor-market concentration from other factors, such as firm-specific investments and productivity differences, would be valuable.

Scholars and policymakers should also continue to refine models of dynamic competition and firm-specific investments in labor markets, with an eye toward their implications for antitrust enforcement. As discussed earlier, standard static models of monopsony may not fully capture the complexities of labor-market competition, such as the role of search frictions, bargaining, and human-capital investments. Some recent papers have started to incorporate these features,[180] but more work is needed to develop tractable models that can guide enforcement decisions. It remains to be seen to what extent the FTC’s lock-in argument in the Kroger/Albertsons complaint will be supported with such models.[181]

Another key priority should be to clarify the goals and legal standards for antitrust enforcement in labor markets. The consumer-welfare standard, which has long guided antitrust policy, becomes difficult to apply when a merger or practice may harm workers but benefit consumers.[182] While some have argued for a “worker-welfare standard” that would prioritize the interests of workers,[183] it is not clear whether this would be consistent with the goals of antitrust law, nor how it would be reconciled with simultaneous findings of countervailing consumer effects.[184] Policymakers, courts, and scholars should continue to grapple with these normative questions and work toward developing a coherent and administrable framework for weighing labor-market effects in antitrust cases.

Finally, it is important to foster dialogue and collaboration between antitrust and labor experts to develop a shared understanding of the issues at-stake. Economists, lawyers, and policymakers approaching these issues from different perspectives must find common ground and a common language to assess concerns about labor-market power.

While these challenges are significant, there are reasons for cautious optimism. The increased attention to labor-market power from scholars, policymakers, and the public has created a unique opportunity to reexamine long-held assumptions and explore new approaches. By pursuing an agenda that emphasizes empirical rigor, legal clarity, and interdisciplinary collaboration, we can make progress toward more competitive labor markets. This will not happen overnight, just as the development of the consumer-welfare standard and the integration of antitrust with economic theory did not happen overnight. By staying focused on the ultimate goal of promoting the welfare of both workers and consumers, and being willing to adapt to new evidence and insights, we can move closer to an antitrust regime that is suited to the realities of the modern labor market.

Given that these complex tradeoffs still lack anything approaching definitive resolution in research or precedent, antitrust authorities would best serve the integrity of enforcement standards by exercising restraint. The disregard of difficult tradeoffs and the premature or overzealous application of questionable theories both risk distorting competition and innovation incentives more than protecting them. This is not an argument against addressing labor-market power entirely through uncertain means, as further co-evolution of economic and legal understanding may resolve some quandaries. It is, however, an argument that threading the needle to expand prohibitions into input markets requires a cautious, studious approach—especially when they conflict with the consumer interests that antitrust ultimately aims to safeguard.

Appendix: Detailed Discussion of Labor-Market Concentration Research and Its Implications for Antitrust

The 2023 Merger Guidelines assert that labor markets can be “relatively narrow” and that “the level of concentration at which competition concerns arise may be lower in labor markets than in product markets, given the unique features of certain labor markets.”[185] The academic literature presents a more nuanced picture, however, and casts doubt on these claims. This section provides a more thorough review of the literature discussed in Section III.B, infra.

By examining the strengths and limitations of each approach, we aim to provide a balanced assessment of what the current evidence can (and cannot) tell us about the extent of labor-market power in the U.S. economy. Our review suggests that, while some labor markets may indeed be highly concentrated, the evidence does not support a blanket characterization of labor markets as “narrow.” Antitrust authorities should carefully consider the specific contours of the relevant labor market in each case, drawing on multiple data sources and methodologies. The broad pattern does not support general presumptions that mergers systematically make already-narrow labor markets dramatically more concentrated over time. If anything, concentration data indicate that labor markets are growing more competitive.

I. Administrative Data

The narrative of rising employer dominance and increasing labor-market concentration has been challenged by recent research using comprehensive administrative data. These studies generally find that, while national labor-market concentration has been rising, local concentration levels have declined or remained stable over recent decades.

Papers leveraging datasets like the Longitudinal Business Database, which covers nearly all private-sector employers, point to falling concentration within local labor markets, such as commuting zones and urban areas. Rinz[186] and Lipsius^[187] both used this data and estimated decreasing local concentration from 1976-2015, even as national measures increased. Their explanation is the entry of large firms into more local markets over time.

Autor, Patterson, and Van Reenen reinforce these findings using Economic Census data across major sectors. They estimated local-employment concentration fell from 0.35 in 1992 to 0.30 in 2017, contrary to rising national concentration.^[188] This divergence was partly driven by employment shifts away from the highly concentrated manufacturing sector toward more competitive services sectors.

Focusing on just manufacturing, Benmelech, Bergman, and Kim found relatively stable average local concentration from 1978-2016 in the Longitudinal Business Database.^[189] Importantly, their wage data allowed them to examine concentration’s direct earnings impact, suggesting a 3% wage decrease when moving from a low to high concentration market, or 9-14% using mergers as an instrument. This correlation, even with an instrument, should be interpreted with caution.

Modeling by Berger, Herkenhoff, and Mongey highlighted weighting concentration by payroll, rather than employment.[190] Though producing lower estimates, their approach still showed the diverging national/local trends.

While mixed, this literature consistently finds declining or stable local-labor market concentration when leveraging government-collected microdata. This casts doubt on claims of pervasive local-monopsony power and suggests national trends may be more relevant for assessing competitiveness. These findings have antitrust-policy implications regarding employer concentration and merger effects.

The papers that use administrative data find a trend that contradicts the popular narrative. They generally find a decline in local-labor market concentration, alongside a rise at the national level. Such findings suggest that employer dominance in the labor market may not be as pervasive or detrimental at the local level as it is nationally, complicating the narrative of widespread monopsony power in labor markets.

A. Rinz (2022) and Lipsius (2018)

First, let us consider papers that use administrative data, generally considered to be the best when available. Rinz uses administrative data from the Longitudinal Business Data and finds that local labor-market concentration has been declining, while national concentration has been increasing.[191] Lipsius uses the same dataset and finds the same result, but focuses on connecting labor-market concentration to changes in labor share of income.[192] Both papers have data on employment at the firm level for the years 1976-2015, so they are able to study the evolution over time. The data cover the near universe of non-farm, private establishments with employees.

The two papers use different levels of aggregation. Rinz uses four-digit NAICS for the job description and commuting zones for the location. Lipsius used 5-digit NAICS codes and urban areas, which are smaller than commuting zones but based on economic integration instead of political lines, such as counties.

Rinz assesses concentration using HHI measures. He finds that, at the national level, HHI declined roughly 40 percent from 1976 to 1983, stayed flat through the 1980s and has risen since. When divided into commuting zones, however, he finds a falling trend in concentration. The difference in trends has various explanations, but the simplest is that large firms are entering more and more labor markets. For example, when Wal-Mart enters a small town with one retail store, national concentration may rise, even though the town’s concentration falls.

Source: Rinz (2022)^[193]

B. Autor, Patterson, & Van Reenen (2023)

Recent work by Autor, Patterson, and Van Reenen provides additional evidence on trends in local labor-market concentration using establishment-level data from the Economic Census.[194] Autor, et al. analyze six broad sectors—manufacturing, retail trade, wholesale trade, services, utilities/transportation, and finance—that comprise roughly 80% of U.S. employment and GDP. The authors have data covering the period from 1982-2017 for manufacturing, retail, wholesale, and services, and going back to 1992 for the others. They define markets by county and by six-digit NAICS industry, and find that employment-based HHI fell from 0.35 in 1992 to 0.30 in 2017.[195] Similar results hold for three- and four-digit NAICS.[196] This contrasts with the rise in national employment concentration over the same period, which rose by 1.7 points for employment (from 0.025 in 1992 to 0.042 in 2017).[197] The authors also show substantial divergence between national and local concentration trends over the longer 1982 to 2017 period for the four sectors with available data. Moreover, the local-employment HHI exhibits a consistent downward trend over most five-year intervals between 1992 and 2017. Overall, the results point to a robust fall in local employment concentration that runs counter to the rise in national concentration.

Some of this trend is structural. A key element of Autor et al.’s analysis is distinguishing between changes occurring within industries, versus those across industries. The divergence between national and local employment-concentration trends is largely attributable to the reallocation of economic activity from more-concentrated manufacturing industries to less-concentrated service industries. In fact, the authors show that, holding industry structure fixed at 1992 levels, local employment concentration would have risen by about 9%, rather than falling by 5%.[198] This between-industry reallocation had a smaller dampening effect on sales concentration, since the shift from manufacturing to services was greater for employment than sales. At the same time, Autor et al. find that concentration has risen within detailed industries and localities for both employment and sales.

C. Benmelech, Bergman, & Kim (2022)

Diving into manufacturing, specifically. Benmelech, Bergman, and Kim uses administrative, micro-level data on manufacturing establishments (“plants”), covering the period 1978-2016.[199] To calculate concentration measures, they use the Longitudinal Business Database (as did Rinz and Lipsius).[200] They use four-digit standard industry-classification codes (the predecessor of NAICS codes). For concentration measures, their data shares all the costs and benefits of the Longitudinal Business Database discussed above.

For manufacturing, they find the average levels of concentration have remained relatively stable, with employment-weighted HHI being 0.569 for the period 1978-1987 and 0.587 for 2008-2016.[201] One should be careful when extrapolating from manufacturing to the whole U.S. economy, given that manufacturing has been declining and the forces changing manufacturing may not apply to the rest of the economy. According to the U.S. Bureau of Labor Statistics, the percentage of employment in manufacturing sector dropped from roughly 22% in 1980 to slightly more than 10% in 2012 (Lipsius 2018, p. 4).

They supplement the concentration measures with two data sets: the Census of Manufacturers, which covers all plants in years ending in 2 and 7, and the Annual Survey of Manufacturers, which covers about 50,000 plants with a threshold of 250-1000 employees for the non-Census years. Other smaller firms are sampled randomly. The Annual Survey of Manufacturers is mandatory reporting, subject to fines for misreporting. They collected data on many things, such as value of shipments. For our discussion, the important thing is that they collect data on actual wages and labor hours, compared to simply posted wages. Moreover, since they are looking at manufacturing, they have better estimates of productivity of firms, as they have better data on inputs and outputs at the plant level. In their baseline regression, moving from a market that is one standard deviation below the median to one standard deviation above is associated with a 3% decline in wages.

Moreover, they are able to use mergers and acquisitions to instrument for concentration to potentially estimate a causal effect of concentration on wages. Using their instrumental-variable approach, they estimate that moving from a market that is one standard deviation below the median to one standard deviation above is associated with a decline in wages of between 9% and 14%.

D.  Berger, Herkenhoff, & Mongey (2022)

Berger, Herkenhoff, and Mongey estimate a general-equilibrium model to measure labor-market power.[202] In the process, their model suggests a certain way to average HHI across markets. They start with LBD at the 3-digit industry level within commuting zones, but they are still left with the problem of how to weight different markets. Instead of weighting by employment level or vacancies level, they weight by market-level payroll, which lowers concentrations slightly, although the trend remains the same.

They find that local concentration is declining over the full period, while national-concentration measures are more complicated. For tradeable sectors, national concentration is falling. For non-tradeable sectors, after falling in the early 1980s, it has slowly risen. But non-tradeables are larger, so the overall national concentration measure has also been rising since the mid 1980s.

In the data (model) weighted average concentration measured in terms of employment is 0.15 (0.16) and in terms of payroll is 0.17 (0.17). In the data (model) unweighted average concentration measured in terms of employment is 0.45 (0.32) and in terms of payroll is 0.48 (0.33).

Source: Berger, Herkenhoff, & Mongey (2022)^[203]

E. Handwerker & Dey (2023)

Handwerker and Dey use microdata from the Occupational Employment and Wage Statistics, mapped to the Quarterly Census of Employment and Wages, which records quarterly employment levels for each establishment in the United States that reports to state-level Unemployment Insurance departments.[204] They define markets by 6-digit SOC by metropolitan area. They also look by industry, instead of occupation. They focus on the case where they weight markets by payroll shares, following the theory of Berger, Herkenhoff, and Mongey.[205]

They find an average HHI that is relatively stable and low. They also only look at the private sector and weight by employment, so their results are more directly comparable to some other papers. For example, they directly compare the concentration measures in their data to the 26 occupations of Azar, Marinescu, and Steinbaum.[206] Handwerker and Dey find an HHI in the private sector of one-tenth that found in Azar, Marinescu, and Steinbaum (0.0383 vs. 0.3157).[207] This is the clearest example of how the different data sources matter for concentration numbers.

Source: Handwerker & Dey (2023)^[208]

II. Online Job Vacancies

While the above papers use administrative data, other papers on labor-market concentration use online job vacancies (postings) to measure concentration.

A. Azar, Marinescu, Steinbaum, & Taska (2020)

Azar, Marinescu, Steinbaum, and Taska use data on job openings from Burning Glass Technologies (BGT), which collects online job-posting data from 40,000 websites.[209] They restrict their analysis to calendar year 2016, which was the most recent year with available data when the paper was first written. They claim the years 2007-2015 show similar concentration measures (footnote 4).

The papers that use job openings, compared to measures of employment levels, claim openings are a better way to gauge how easy it is for searching workers to find a new job.[210] The nearest government-data product to BGT’s is the Job Opening and Labor Turnover Survey (JOLTS), which is a nationally representative sample of employers. When comparing BGT’s collected job postings to the job postings in JOLTS, the authors estimate that they captured roughly 85% of the job openings in the United States during 2016.

BGT cleans the data to remove double postings and consolidate different spellings for the same employer; i.e., “Bausch and Lomb”, “Bausch Lomb”, and “Bausch & Lomb” are marked as the same employer. After cleaning, 35.9% of employer names are missing, especially if staffing companies do not want to disclose the employer. They assume that all of these with missing employer names are different employers. This means that they have a lower bound on market-concentration measures.

For job description, the BGT dataset uses the Standard Occupational Code (SOC). In the baseline, they consider 200 occupations, which capture 90% of the vacancies in their dataset.[211] For occupations, the authors use six-digit SOC codes for their baseline, but argue that is likely too broad.[212] For location, they use commuting zones, which are geographic definitions based on groups of counties and were developed by the U.S. Department of Agriculture (USDA) to capture local economies and labor markets.[213]

In the SOC-6 occupation by commuting zone by quarter, they find an average HHI of 0.44. For reference, the 2010 Horizontal Merger Guidelines defined markets with post-merger HHIs exceeding 2,500 or 0.25 as “highly concentrated,” and held that mergers in such markets that also increase the HHI level by at least 100 points “raise significant competitive concerns and often warrant scrutiny.”[214] Using the 2010 thresholds, they find that 60% of markets were considered “highly concentrated.”[215] They calculate many other measures of concentration, including at different percentiles and how they vary across the country.[216]

B. Schubert, Stansbury, & Taska (2024)

Schubert, Stansbury, and Taska also use BGT data on vacancies, but with data from 2011 through 2019.[217] They define markets by SOC-6, but use metropolitan area as the location. They do not focus on trends in concentration but on the distribution of concentration and its relationship to wages through outside options to other markets. While the median market has an HHI of 0.0882, the 75^th percentile market has an HHI of 0.2143 and the 95^th percentile market has an HHI of over 0.8025.[218]

If, however, you weight by level of employment—since many markets have low levels of employment but high levels of concentration—the 50^th percentile worker works in a market with an HHI of 0.0137; the 75^th percentile worker in a market with an HHI of 0.0404; and the 95^th percentile worker in a market with an HHI of 0.1845.[219] That means that under their data and definition of markets, around 5% of workers are in markets that cross the merger-guidelines threshold for a structural presumption (an HHI greater than 1,800 or 0.18, along with an increase of HHI of 100 or 0.01).[220]

When weighting each labor market equally, instead of by size, they find around 25% of markets are over the new threshold.[221] In contrast, using the same data source (BGT) but defining markets differently, Azar, Marinescu, Steinbaum, and Taska find 60% of markets were above the 2,500 threshold.[222]

Source: Schubert, Stansbury, & Taska (2024)^[223]

C. Azar, Marinescu, & Steinbaum (2022)

Azar, Marinescu, and Steinbaum use data from CareerBuilder.com, which is a large online job board.[224] The total number of vacancies on CareerBuilder.com represents 35% of the total vacancies in the US in January 2011, as counted by JOLTS. They consider the SOC-5 definition and pick the 13 most frequent occupations over the 2009 to 2012 window, plus the three most frequent occupations in manufacturing and construction. They then consider the SOC-6 definition, which further splits the SOC-5, and end up with 26 occupations in total.[225]

Like Azar, Marinescu, Steinbaum, and Taska,[226] they use commuting zones. They also have data on the number of applicants, which allows measures of “tightness” as (number of vacancies)/(number of applications). They calculate an average HHI for vacancies of 0.3157. When they look at the average based on applications, they find a higher HHI of 0.3480.[227] Again, this is significantly higher than the HHI measure found for the same occupations but using the administrative microdata.[228]

[1] Non-Compete Clause Rule, Final Rule (RIN 3084-AB74, adopted Apr. 23, 2024) (to be codified at 16 C.F.R. Part 910), available at https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete-rule.pdf.

[2] Complaint, In the Matter of the Kroger Company and Albertsons Companies, Inc., FTC Docket No. D-9428 (Feb. 26, 2024), https://www.ftc.gov/legal-library/browse/cases-proceedings/kroger-companyalbertsons-companies-inc-matter.

[3] U.S. Dep’t. of Just. & Fed. Trade Comm’n, Merger Guidelines 27 (2023), available at https://www.justice.gov/d9/2023-12/2023%20Merger%20Guidelines.pdf.

[4] See infra Part II.

[5] See generally U.S. Dep’t of the Treas., The State of Labor Market Competition (Mar. 7, 2022), available at https://home.treasury.gov/system/files/136/State-of-Labor-Market-Competition-2022.pdf.

[6] Merger Guidelines, supra note 3, at 27.

[7] See Jean-Pierre Dubé, Günter J. Hitsch, &Peter E. Rossi, Do Switching Costs Make Markets Less Competitive?, 46 J. Marketing Rsrch. 435, 435 (2009) (“In the simulations, prices are as much as 18% lower with than without switching costs. More important, equilibrium prices do not increase even in the presence of switching costs that are of the same order of magnitude as product price.”).

[8] Merger Guidelines, supra note 3, at 27.

[9] United States v. DaVita Inc., et al., Case No. 21-cr-00229 (D. Colo. 2021).

[10] See, e.g., United States v. Patel, et al., Case No. 21-cr-00220 (D. Conn. 2021) (acquitting all defendants and holding that the evidence did not permit a reasonable jury to conclude there was an agreement to meaningfully allocate the labor market for engineers); United States v. Manahe, et al., Case No. 22-cr-00013 (D. Me. 2022) (acquitting all defendants of charges of a wage-fixing conspiracy among home-healthcare agencies); United States v. Surgical Care Affiliates LLC, et al., Case No. 21-cr-00011 (N.D. Tex. 2021) (DOJ voluntarily dismissed its indictment of a no-poach conspiracy of senior-level surgical facility employees).

[11] Herbert Hovenkamp, The Slogans and Goals of Antitrust Law, 25 Leg. & Pub. Pol’y 705, 705 (2023).

[12] See 15 U.S.C. § 18 (2018) (“No person… shall acquire… the whole or any part of the stock… of another person…, where in any line of commerce…, the effect of such acquisition may be substantially to lessen competition….”).

[13] Merger Guidelines, supra note 3, at 27 (bold/italics emphasis added; italics-only emphasis in original).

[14] See infra Sections IV.B and V.

[15] Complaint, In the Matter of Kroger/Albertsons, supra note 2.

[16] Ioana Marinescu & Herbert J. Hovenkamp, Anticompetitive Mergers in Labor Markets, 94 Indiana L.J. 1031, 1034 (2019).

[17] See, e.g., id. (“While the use of section 7 to pursue mergers among buyers is well established, there is relatively little case law.”).

[18] Merger Guidelines, supra note 3, at 26-27.

[19] See Non-Compete Clause Rule, Final Rule, supra note 1.

[20] For an extensive review of the noncompete literature relied upon by the FTC and a discussion of the nuances and limitations of that literature, see Alden Abbott, et al., Comments of Scholars of Law & Economics and ICLE in the Matter of Non-Compete Clause Rulemaking, FTC Matter No. P201200 (Apr. 19, 2023), https://laweconcenter.org/resources/comments-of-scholars-of-law-economics-and-icle-in-the-matter-of-non-compete-clause-rulemaking.

[21] Complaint, In the Matter of Kroger/Albertsons, supra note 2, at ¶¶ 63 & 70.

[22] See, e.g., Suresh Naidu, Eric A. Posner, & Glen Weyl, Antitrust Remedies for Labor Market Power, 132 Harv. L. Rev. 536 (2018), (“As far as we know, the DOJ and FTC have never challenged a merger because of its possible anticompetitive effects on labor markets, or even rigorously analyzed the labor market effects of mergers as they do for product market effects. Nor have we found a reported case in which a court found that a merger resulted in illegal labor market concentration.”). Ioana Marinescu & Eric A. Posner, Why Has Antitrust Law Failed Workers?, 105 CORNELL L. REV. 1343 (2020)

[23] Exec. Order No.14036, 86 FR 36987 (2021).

[24] See United States v. Bertelsmann SE & Co. KGaA, et al., 646 F. Supp. 3d 1 (D.D.C. 2022).

[25] See Press Release, FTC Cracks Down on Companies That Impose Harmful Noncompete Restrictions on Thousands of Workers, Fed. Trade. Comm’n, (Jan. 4, 2023), https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-cracks-down-companies-impose-harmful-noncompete-restrictions-thousands-workers. See also, e.g., Complaint and Decision and Order, In the Matter of Anchor Glass Container Corp., et al., Fed. Trade. Comm’n (Jun. 2, 2023), https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-cracks-down-companies-impose-harmful-noncompete-restrictions-thousands-workers https://www.ftc.gov/legal-library/browse/cases-proceedings/2110182-anchor-glass.

[26] See Non-Compete Clause Rule, Notice of Proposed Rulemaking, 88 Fed. Reg. 3482 (RIN 3084, proposed Jan. 19, 2023) (to be codified at 16 C.F.R. Part 910).

[27] See cases referenced supra note 10.

[28] Dept of Just. & Fed. Trade Comm’n, Antitrust Guidance For Human Resource Professionals (2016), https://www.justice.gov/atr/file/903511/download.

[29] Press Release, Justice Department Requires Six High Tech Companies to Stop Entering into Anticompetitive Employee Solicitation Agreements, U.S Dept. of Just. (Sep. 24, 2010), https://www.justice.gov/opa/pr/justice-department-requires-six-high-tech-companies-stop-entering-anticompetitive-employee.

[30] United States v. Arizona Hosp & Healthcare Ass’n & AzHHA Service Corp., No. CV07-1030-PHX (D. Az. May 22, 2007).

[31] Memorandum of Understanding Between the Fed. Trade Comm’n and the Nat’l Labor Relations Bd. Regarding Information Sharing, Cross-Agency Training, and Outreach in Areas of Common Regulatory Interest (Jul. 19, 2022), available at https://www.ftc.gov/system/files/ftc_gov/pdf/ftcnlrb%20mou%2071922.pdf.

[32] Memorandum of Understanding Between the U.S. Dep’t of Labor and the Fed. Trade Comm’n (Aug. 30, 2023), available at https://www.ftc.gov/system/files/ftc_gov/pdf/23-mou-146_oasp_and_ftc_mou_final_signed.pdf.

[33] See generally Herbert Hovenkamp, The Antitrust Enterprise: Principle and Execution 38-9 (2005) (citing examples and noting that “post-Chicago theory typically models strategic behavior by use of game theory, with alternatives that reach far beyond the conventional Cournot oligopoly analysis”). See also, e.g., Edward J. Green & Robert H. Porter, Noncooperative Collusion under Imperfect Price Information, 52 Econometrica 87 (1984); Thomas G. Krattenmaker & Steven C. Salop, Anticompetitive Exclusion: Raising Rivals’ Costs to Achieve Power over Price, 96 Yale L.J. 209 (1986).

[34] Herbert J. Hovenkamp & Fiona Scott Morton, Framing the Chicago School of Antitrust Analysis, 168 U. Pa. L. Rev. 1843, 1847 (2020) (“Built into Chicago School doctrine was a strong presumption that markets work themselves pure without any assistance from government. By contrast, imperfect competition models gave more equal weight to competitive and noncompetitive explanations for economic behavior….”).

[35] See, e.g., Lester G. Telser, Why Should Manufacturers Want Fair Trade?, 3 J.L. & Econ. 86 (1960); George J. Stigler, A Theory of Oligopoly, 72 J. Pol. Econ. 44 (1964); Howard Marvel, Exclusive Dealing, 25 J. L. Econ. 1 (1982).

[36] See, e.g., Gregory J. Werden & Luke M. Froeb, The Effects of Mergers in Differentiated Products Industries: Logit Demand and Merger Policy, 10 J.L. Econ. & Org. 407 (1994); Jonathan B. Baker & Timothy F. Bresnahan, The Gains from Merger or Collusion in Product-Differentiated Industries, 33 J. Indus. Econ. 427 (1985).

[37] To be clear, this is merely a descriptive claim about the present state of the relationship between labor economics and antitrust, not a normative claim that the two fields should not develop stronger connections.

[38] See, e.g., Jose Azar, Iona Marinescu, & Marshall Steinbaum, Labor Market Concentration, 57 J. Hum. Res. S167, S197 (Supp. 2022) (“The type of analysis we provide could be used to incorporate labor market concentration concerns as a factor in antitrust analysis.”).

[39] See U.S. Dep’t of the Treas., supra note 5.

[40] See, e.g., Azar, Marinescu, & Steinbaum, supra note 38, at S174 (“Our baseline measure of market power in a labor market is the Herfindahl–Hirschman index (HHI)….”); Carl Shapiro, Protecting Competition in the American Economy: Merger Control, Tech Titans, Labor Markets, 33 J. Econ. Persp. 69, 75-76 (2019). (“Measures of industry concentration based on data from the US Economic Census are simply not very informative for merger analysis because these data are available only at an aggregated level. The modest increases in concentration observed when using these data confirm that the largest firms are responsible for a greater portion of economic activity in many industries, but they tell us very little about concentration in properly defined relevant antitrust markets… Furthermore, it is important to remember that an increase in concentration in a properly defined relevant market does not prove that competition in that market has declined.”).

[41] This is effectively the labor-market equivalent of markups that measure whether firms enjoy market power in the market for goods or services. See, e.g., Naidu, Posner, & Weyl, supra note 22, at 556 (“The firm’s absolute markup is the gap between this price and the firm’s cost. The markup equals the difference between the monopoly price and the competitive price, and thus serves as a natural gauge of market power… As in the monopoly case, a monopsonist will not internalize this effect on workers and will choose an “absolute markdown” of wages below the marginal revenue product.”).

[42] As we will discuss later, this connection between labor-supply elasticities, marginal products, and wages is more complicated. For example, the markdown could be a mismeasured return to technology, not traditional market power. See, e.g., Ivan Kirov & James Traina, Labor Market Power and Technological Change in US Manufacturing, conference paper for Institute for Labor Economics (Oct 2022), at 42, available at https://conference.iza.org/conference_files/Macro_2022/traina_j33031.pdf (“The labor [markdown] therefore increases because “productivity” rises, and not because pay falls. This suggests that technological change plays a large role in the rise of the labor [markdown].”).

[43] See Naidu, Posner, & Weyl, supra note 22.

[44] Id. at 567. See also Douglas O. Staiger, Joanne Spetz, & Ciaran S. Phibbs, Is There Monopsony in the Labor Market? Evidence from a Natural Experiment, 28 J. LAB. ECON. 211 (2010); Arindrajit Dube, Laura Giuliano, & Jonathan Leonard, Fairness and Frictions: The Impact of Unequal Raises on Quit Behavior, 109 AM. ECON. REV. 620 (2019).

[45] For one example, Matsudaira uses a natural experiment around the introduction of state minimum-nurse-staffing laws and evidence consistent with perfect competition and zero market power for nurse-aides. High and low market power can exist at the same time. See Jordan D. Matsudaira, Monopsony in the Low-Wage Labor Market? Evidence from Minimum Nurse Staffing Regulations, 96 Rev. Econ. & Stat. 92 (2014).

[46] See Naidu, Posner, & Weyl, supra note 22, at 564-566.

[47] Loukas Karabarbounis & Brent Neiman, The Global Decline of the Labor Share, 129 Quarterly J. of Econ. 61, 71 (2013).

[48] Michael R. Ransom & David P. Sims, Estimating the Firm’s Labor Supply Curve in a “New Monopsony” Framework: Schoolteachers in Missouri, 28 J. LAB. ECON. 331 (2010).

[49] See, e.g., Efraim Benmelech, Nittai K. Bergman, & Hyunseob Kim, Strong Employers and Weak Employees, How Does Employer Concentration Affect Wages?, 57 J. Hum. Res. S200 (Supp. 2022). See also David Berger, Kyle Herkenhoff, & Simon Mongey, Labor Market Power, 112 Am. Econ. Rev. 1147 (2022).

[50] José A. Azar, Steven T. Berry, & Ioana Marinescu, Estimating Labor Market Power (Nat’l Bureau of Econ. Rsch., Working Paper No. 30365, 2022).

[51] Id. at 35.

[52] Chen Yeh, Claudia Macaluso, & Brad Hershbein, Monopsony in the US Labor Market, 112 Am. Econ Rev. 2099 (2022).

[53] Id. at 2099.

[54] Id. at 2114.

[55] Id. at 2099.

[56] See Steven Berry, Market Structure and Competition Redux, Presentation at Fed. Trade. Comm’n Micro Conference (Nov. 2017), available at https://www.ftc.gov/system/files/documents/public_events/1208143/22_-_steven_berry_keynote.pdf; See also Brian Albrecht, Markups as Residuals, Economic Forces (Nov. 17, 2022), www.economicforces.xyz/p/markups-as-residuals.

[57] See Kirov & Traina, supra note 42.

[58] 2023 Merger Guidelines, supra note 3.

[59] See infra Appendix.

[60] In order to evaluate concentration, the relevant market must be defined. For labor markets, the relevant market is usually defined as both the job description (e.g., nurse) and the location of the job (e.g., Portland area). Using this, one can calculate some measure of concentration, such as the HHI. Economics papers tend to report HHI as a percentage, instead of as a cardinal number out of 10,000, as used in the merger guidelines. For example, an HHI of 1,800 would be written as “0.18.”

[61] See, e.g., Kevin Rinz, Labor Market Concentration, Earnings, and Inequality, 57 J. Hum. Res. S251 (Supp. 2022); David Autor, Christina Patterson, & John Van Reenen, Local and National Concentration Trends in Jobs and Sales: The Role of Structural Transformation, 5 (Nat’l Bureau of Econ. Rsch., Working Paper No. 31130, 2023) at 7 (“The employment-based HHI fell by 2.3 points, from 33.3 in 1992 to 31.0 in 2017, which stands in contrast to the 3.4 point rise in the sales HHI. Our estimates for local employment concentration echo those of Rinz (2022), who uses the LBD.”) (emphasis in original).

[62] Rinz, id. at S256.

[63] See Azar, Marinescu, & Steinbaum, supra note 38.

[64] Handwerker & Dey directly compare the concentration measures in their data to the 26 occupations studied by Azar, Marinescu, & Steinbaum. They find an HHI in the private sector of 0.0383, compared to 0.3157 in Azar, Marinescu, & Steinbaum. See Elizabeth Weber Handwerker & Matthew Dey, Some Facts About Concentrated Labor Markets in the United States, 63 Indus. Rel. 132, 135 (2023); Azar, Marinescu, & Steinbaum, supra note 38.

[65] A firm may have multiple establishments, and the data allow different NAICS codes for each establishment, so, in some cases and to some extent, different types of workers can be separated out if they work in different locations.

[66] Berger, Herkenhoff, & Mongey, supra note 49, at 1169 (citing Elizabeth Handwerker & Matthew Dey, Megafirms and Monopsonists: Not the Same Employers, Not the Same Workers (Unpublished)).

[67] Rinz, supra note 61.

[68] Id. at S264 (“In both years, the areas that are most concentrated tend to be rural. In particular, the Great Plains region has a relatively large number of highly concentrated commuting zones in both 1976 and 2015. The least concentrated markets tend to be in urban areas.”).

[69] Kevin Rinz, Labor Market Concentration, Earnings Inequality, and Earnings Mobility, National Bureau of Economic Research Summer Institute (Jul. 23, 2019) (slides obtained from author).

[70] Rinz, supra note 61 at S253.

[71] See Ben Lipsius, Labor Market Concentration Does Not Explain the Falling Labor Share, Working Paper (2018), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3279007.

[72] See Berger, Herkenhoff, & Mongey, supra note 49.

[73] See 2023 Merger Guidelines, supra note 3.

[74] See, e.g., Azar, Marinescu, and Steinbaum, supra note 38; Jose Azar, Iona Marinescu, Marshall Steinbaum, & Bledi Taska, Concentration in US Labor Markets: Evidence from Online Vacancy Data, 66 Labor Econ. 101886 (2020).

[75] For a more detailed discussion of these papers and their limitations, see Appendix Section II, infra.

[76] See Harold Demsetz, Industry Structure, Market Rivalry, and Public Policy, 16 J. L. & Econ. 1 (1973). See also, e.g., Richard Schmalensee, Inter-Industry Studies of Structure and Performance, in 2 Handbook of Industrial Organization 951 (Richard Schmalensee & Robert Willig, eds., 1989); William N. Evans, Luke M. Froeb, & Gregory J. Werden, Endogeneity in the Concentration-Price Relationship: Causes, Consequences, and Cures, 41 J. Indus. Econ. 431 (1993); Berry, supra note 56; Nathan Miller, et al., On the Misuse of Regressions of Price on the HHI in Merger Review, 10 J. Antitrust Enf. 248 (2022).

[77] Some papers find lower wages in markets with higher employer concentration, but do not differentiate rural from urban labor markets. Rural and urban labor markets can differ significantly in terms of their economic structures, job opportunities, and wage levels. Any regression of wages on concentration is likely picking up something unrelated to concentration directly. See Benmelech, Bergman, & Kim, supra note 49.

[78] Kirov & Traina, supra note 42.

[79] Id. at 46 (emphasis added).

[80] Steven Berry, Martin Gaynor, & Fiona Scott Morton, Do Increasing Markups Matter? Lessons from Empirical Industrial Organization, 33 J. Econ. Persp. 44, 57 (2019) (emphasis added).

[81] The antitrust statutes do not distinguish buy-side and sell-side behavior, besides the partial exception in Section 6 of the Clayton Act, which provides that workers do not violate antitrust laws when they organize unions. See 15 U.S.C. § 17 (“The labor of a human being is not a commodity or article of commerce. Nothing contained in the antitrust laws shall be construed to forbid the existence and operation of labor… organizations, instituted for the purposes of mutual help…, or to forbid or restrain individual members of such organizations from lawfully carrying out the legitimate objects thereof….”). In practice, however, it seems the agencies have historically treated labor markets differently. See, e.g., Naidu, Posner, & Weyl, supra note 22.

[82] See, e.g., Roger G. Noll, Buyer Power and Economic Policy, 72 Antitrust L.J. 589, 589 (2005) (“[B]uyer power arises from monopsony (one buyer) or oligopsony (a few buyers), and is the mirror image of monopoly or oligopoly.”); id. at 591 (“Asymmetric treatment of monopoly and monopsony has no basis in economic analysis.”).

[83] Of course, monopoly markets in intermediate products (i.e., products sold not to end users, but to manufacturers who use them as inputs for products that are, in turn, sold to end users) may indeed sit in the same place in the supply chain as the typical monopsony market. Some, but not all, of the complications associated with monopsony analysis are relevant to these monopoly situations, as well.

[86] For purposes of this discussion, “monopoly” refers to any merger (or other conduct) that would increase market power by a seller in a product market, and “monopsony” refers to any merger (or other conduct) that would increase market power by a buyer in an input market (including a labor market).

[87] Keith Brand, Martin Gaynor, Patrick McAlvanah, David Schmidt, & Elizabeth Schneirov, Economics at the FTC: Office Supply Retailers Redux, Health Care Quality Efficiencies Analysis, and Litigation of an Alleged Get Rich Quick Scheme, 45 Rev. Indus. Org. 325 (2014).

[88] Id.

[89] Some efficiency-enhancing mergers will be identifiable, of course. For example, if the merger raises quantities and prices for all inputs, that must be efficiency enhancing. The problem, as always, is with the hard cases.

[90] See C. Scott Hemphill & Nancy L. Rose, Mergers that Harm Sellers, 127 Yale L.J. 2078 (2018).

[91] In theory, one could force a monopsony model to be identical to monopoly. The key difference is about the standard economic form of these models that economists use. The standard monopoly model looks at one output good at a time, while the standard factor-demand model uses two inputs, which introduces a tradeoff between, say, capital and labor. See Sonia Jaffe, Robert Minton, Casey B. Mulligan, and Kevin M. Murphy, Chicago Price Theory (2019) at Ch. 10. One could generate harm from an efficiency for monopoly (as we show for monopsony) by assuming the merging parties each produce two different outputs, apples and bananas. An efficiency gain could favor apple production and hurt banana consumers. While this sort of substitution among outputs is often realistic, it is not the standard economic way of modeling an output market.

[92] Herbert Hovenkamp, Worker Welfare and Antitrust, 90 U. CHI. L. REV. 511, 529 (2023) (“To the extent that such actions lead to higher prices or reduced product output, labor as well as consumers suffer.”).

[93] Marinescu & Hovenkamp, supra note 16 at 1042 (“The key message from economic theory is that as one moves away from the competitive equilibrium towards a situation of monopsony in the labor market, wages and production both generally tend to decrease.”).

[94] See United States v. Bertelsmann SE & Co. KGaA, et al., supra note 24.

[95] Id. at 23 (“The defendants do not dispute that if advances are significantly decreased, some authors will not be able to write, resulting in fewer books being published, less variety in the marketplace of ideas, and an inevitable loss of intellectual and creative output.”)

[96] John Asker & Volker Nocke, Collusion, Mergers, and Related Antitrust Issues, in 5 HANDBOOK oF INDUSTRIAL ORGANISATION 177, 221-22 (Kate Ho, Ali Hortasçu & Alessandro Lisseri eds., 2021).

[97] But see United States v. Bertelsmann SE & Co. KGaA, et al., supra note 24, at 28 (“Thus, even if alternative submarkets exist at other advance levels, or if there are broader markets that might be analyzed, the viability of such additional markets does not render the one identified by the government unusable.”). Of course, in that case, the parties (and the court) did identify downstream harms. See id. at 23.

[98] See generally, Geoffrey A. Manne & E. Marcellus Williamson, Hot Docs vs. Cold Economics: The Use and Misuse of Business Documents in Antitrust Enforcement and Adjudication, 47 Ariz. L. Rev. 609, 619 (2005).

[99] Hemphill & Rose, supra note 90. The authors make a useful distinction between mergers that generate classical monopsony and those that increase buyer leverage. As explained below, however, increased buyer bargaining leverage is just a transfer from sellers to buyers. If it truly has no effect on output, as supposed for Hemphill & Rose, it is not anticompetitive. If antitrust is to weigh in on splitting the surplus and conclude that a merger that leads to more of the surplus going to the buyer is anticompetitive, the courts would be implicitly saying that either the division before the merger was optimal or that more surplus going to sellers is always better. While people may have an intuition that more surplus going to sellers of labor (i.e., workers) is better, do we have the same intuition for all types of sellers? Moreover, would we be willing to apply the same logic to mergers to monopoly? If so, and mergers that increase buyer leverage are bad and mergers that increase seller leverage are bad (again with no effect on output), are we concluding all mergers are bad, full stop?

[100] Marinescu & Hovenkamp, supra note 16, at 1040 (emphasis added).

[101] Such bargaining models have been awarded Nobel prizes. See Peter Diamond, Wage Determination and Efficiency in Search Equilibrium, 49 Rev. Econ. Stud. 217 (1982); Christopher A. Pissarides, Equilibrium Unemployment Theory (2017).

[102] See, e.g., Richard Rogerson, Robert Shimer, & Randall Wright, Search-Theoretic Models of the Labor Market: A Survey, XLIII J. ECON. LIT. 959,961 (2005) (“Bargaining is one of the more popular approaches to wage determination in the literature…”).

[103] See, e.g., John Van Reenan, Labor Market Power, Product Market Power and the Wage Structure: A Note 224 (Program on Innovation and Diffusion, Working Paper No. 085, 2023), https://poid.lse.ac.uk/PUBLICATIONS/abstract.asp?index=10529, (“Here, when firms achieve more product market power there are higher profits and therefore more of a potential surplus to be split between employers and employees. Workers (at least those who keep their jobs), may welcome greater monopoly power as they are able to extract higher wage rents, which would not be the case for a firm earning thin or no margins in an extremely competitive product market. Consequently, this generates the opposite implication at the firm level – more product market power generates higher, not lower, wages.”).

[104] Complaint, In the Matter of Kroger/Albertsons, supra note 2, at ¶ 63 (“Union grocery labor is a relevant market in which to analyze the probable effects of the proposed acquisition.”).

[105] Indeed, increased bargaining power is the purpose of a union. Whether the coordination leads to equivalent, lesser, or greater bargaining power than that of employers in a given case depends on many specifics. But the whole point of both the union and the labor antitrust exemption is to facilitate the exercise of this increased bargaining power on the labor side.

[106] Lynn Petrak, Local Union Supports Kroger-Albertsons Merger, Progressive Grocer (Feb. 21, 2024), https://progressivegrocer.com/local-union-supports-kroger-albertsons-merger.

[107] Press Release, America’s Largest Union of Essential Grocery Workers Announces Opposition to Kroger and Albertsons Merger, United Food and Commercial Workers (May 5, 2023), https://www.ufcw.org/press-releases/americas-largest-union-of-essential-grocery-workers-announces-opposition-to-kroger-and-albertsons-merger.

[108] See Petrak, supra note 106.

[109] Roman Inderst & Christian Wey, Countervailing Power and Dynamic Efficiency, 9 J. Eur. Econ. Ass’n 702, 715 (2011).

[110] For further discussion of the problems of reconciling upstream and downstream market effects when labor markets are taken into account, see Section V, infra.

[111] FTC v. Whole Foods Mkt., Inc., 548 F.3d 1028, 1063 (D.C. Cir. 2008). See also Geoffrey Manne, Premium, Natural, and Organic Bullsh**t, Truth on the Market (Jun. 6, 2007), https://truthonthemarket.com/2007/06/06/premium-natural-and-organic-bullst (“In other words, there is a serious risk of conflating a ‘market’ for business purposes with an actual antitrust-relevant market.”).

[112] Unsurprisingly, there is no SOC code that corresponds to such a market definition, and the FTC did not allege it. See Occupational Employment and Wage Statistics, May 2023 Occupation Profiles, Bureau of Labor Statistics (last visited Apr. 23, 2024), https://www.bls.gov/oes/current/oes_stru.htm#41-0000.

[113] Complaint, In the Matter of Kroger/Albertsons, supra note 2, at ¶ 63.

[114] See Brian Albrecht, Dirk Auer, Eric Fruits, & Geoffrey A. Manne, Food-Retail Competition, Antitrust Law, and the Kroger/Albertsons Merger, Int’l. Ctr. for Law & Econ. White Paper 2023-10-17 (2023), https://laweconcenter.org/resources/food-retail-competition-antitrust-law-and-the-kroger-albertsons-merger.

[115] See generally Section A, infra.

[116] See, e.g., Amos Golan, Julia Lane, & Erika McEntarfer, The Dynamics of Worker Reallocation within and across Industries, 74 Economica. 1 (2007). (“About 27% of workers who had previously exhibited a substantial degree of attachment to their employer reallocate in a given year. About two-thirds of this reallocation is job-to-job reallocation, split roughly evenly between, within and across broadly defined industries.)

[117] See United States v. Bertelsmann SE & Co. KGaA, et al., supra note 24.

[118] See, e.g., Press Release, Justice Department Obtains Permanent Injunction Blocking Penguin Random House’s Proposed Acquisition of Simon & Schuster, US Dep’t of Justice (Oct. 31, 2022), https://www.justice.gov/opa/pr/justice-department-obtains-permanent-injunction-blocking-penguin-random-house-s-proposed (“‘The decision is also a victory for workers more broadly,’ said AAG Kanter. ‘It reaffirms that the antitrust laws protect competition for the acquisition of goods and services from workers.’”). Notably, both the complaint and the court’s decision also noted (rightly or wrongly) downstream effects in the product market. See id. at 23.

[119] Transcript: Public Workshop on Competition in Labor Markets, Antitrust Div. of the U.S. Justice Dep’t (Sep. 23, 2019), available at https://www.justice.gov/atr/page/file/1209071/download.

[120] See, Albrecht, Auer, Fruits, & Manne, supra note 114.

[121] See infra Section III.B (“More fundamentally, regardless of the data source that is used, market definition issues remain. The variety of concentration estimates stemming from different geographic units and shifting occupational groupings demonstrates the lack of clarity around reasonable market boundaries.”).

[122] 2023 Merger Guidelines, supra note 3, at 27.

[123] Id.

[124] For a recent summary, see Carl Sanders & Christopher Taber, Life-Cycle Wage Growth and Heterogeneous Human Capital, 4 Ann. Rev. Econ. 399 (2012).

[125] See, e.g., Edward Lazear, Firm?Specific Human Capital: A Skill?Weights Approach, 117 J. Pol. Econ. 914 (2009) (noting that “no skills need be truly ‘firm specific’ in the sense of there being no other firm at which they have value. On the contrary, the skills appear to be general because in isolation they are used at a number of firms in the market. But the weights differ by firm”). See also Jesper Bagger, François Fontaine, Fabien Postel-Vinay, & Jean-Marc Robin, Tenure, Experience, Human Capital, and Wages: A Tractable Equilibrium Search Model of Wage Dynamics, 104 Am. Econ. Rev. 1551 (2014).

[126] Complaint, In the Matter of Kroger/Albertsons, supra note 2.

[127] Id. at ¶ 63.

[128] Id.

[129] See, e.g., Robert Topel, Specific Capital, Mobility, and Wages: Wages Rise with Job Seniority, 99 J. Pol. Econ. 145 (1991).

[130] See Non-Compete Clause Rule, Final Rule, supra note 1, at 283. See also Comments of Scholars of Law & Economics and ICLE in the Matter of Non-Compete Clause Rulemaking, supra note 20, at 29.

[131] Non-Compete Clause Rule, Final Rule, id., at 283.

[132] See id. at 283-86 (citing Evan Starr, Consider This: Wages, Training, and the Enforceability of Covenants Not to Compete, 72 Indus. & Labor Rel. Rev. 783 (2019) (finding that moving from mean NCA enforceability to no NCA enforceability would decrease the number of workers receiving training by 14.7% in occupations that use NCAs at a relatively high rate); Jessica Jeffers, The Impact of Restricting Labor Mobility on Corporate Investment and Entrepreneurship, Working Paper (Sep. 7, 2022), https://ssrn.com/abstract=3040393 (finding that knowledge-intensive firms invest 32% less in capital equipment following decreases in the enforceability of NCAs); Matthew S. Johnson, Michael Lipsitz, & Alison Pei, Innovation and the Enforceability of Non-Compete Agreements, NBER Working Paper Series (Jul. 2023) (finding that greater non-compete enforceability increases R&D expenditure). At least one more study finding similar results was previously cited in the proposed Non-Compete Clause Rule (see supra note 1, at 3505), but not included in the final rulee. See Matthew S. Johnson & Michael Lipsitz, Why Are Low-Wage Workers Signing Noncompete Agreements?, J. Human Resources 0619-10274R2 (May 12, 2020) (finding that hair salons that use NCAs train their employees at a higher rate and invest in customer attraction through the use of digital coupons at a higher rate, both by 11 percentage points)).

[133] Naidu, Posner, & Weyl, supra note 22.

[134] See especially Section I.B, infra.

[135] Marinescu & Hovenkamp, supra note 16, at 1062-63. See also Hovenkamp, Worker Welfare and Antitrust, supra note 92, at 521.

[136] Hemphill & Rose, supra note 90, at 2092.

[137] As Marinescu & Hovenkamp note (attributing the point to Hemphill & Rose), “[i]n this case, there is merely a transfer away from workers and towards the merging firms. Yet… such a transfer is a harm for antitrust law as it results from a reduction in competition.” Id. at 1062 (citing Hemphill & Rose, id., at 2104-05).

[138] See, e.g., Kartell v. Blue Shield of Mass., Inc., 749 F.2d 922 (1st Cir. 1984). See also Steven C. Salop, Question: What Is the Real and Proper Antitrust Welfare Standard? Answer: The True Consumer Welfare Standard, 22 Loy. Consumer L. Rev. 336, 342 (2010) (“However, Judge Breyer treated Blue Cross essentially as an agent for the customers it insured, rather than as an intermediary firm that purchased inputs and sold outputs as a monopolistic reseller. The court apparently assumed (perhaps wrongfully) that Blue Cross would pass on its lower input costs to its customers in the form of lower insurance premiums.”).

[139] See Jan M. Rybnicek & Joshua D. Wright, Outside In or Inside Out?: Counting Merger Efficiencies Inside and Out of the Relevant Market, in 2 William E. Kovacic: An Antitrust Tribute—Liber Amicorum (Nicolas Charbit & Elisa Ramundo, eds., 2014) at 10 (“Despite the incorporation of efficiencies analysis into modern merger evaluation, and the advances in economics that allow efficiencies to be identified and calculated more accurately than at the time of Philadelphia National Bank, antitrust doctrine in the United States still supports a regime that fails to take into account efficiencies arising outside of the relevant market.”).

[140] U.S. Dep’t. of Justice & Fed. Trade Comm’n, Commentary on the Horizontal Merger Guidelines (2006) at 57. See also Gregory J. Werden, Cross-Market Balancing of Competitive Effects: What Is the Law, and What Should It Be?, 43 J. Corp. L. 119, 121 (2017) (“Since 1997, however, the Horizontal Merger Guidelines have asserted the inextricably linked exception.”); U.S. Dep’t. of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines (2010) at § 10, n.14 (“In some cases, however, the Agencies in their prosecutorial discretion will consider efficiencies not strictly in the relevant market, but so inextricably linked with it that a partial divestiture or other remedy could not feasibly eliminate the anticompetitive effect in the relevant market without sacrificing the efficiencies in the other market(s). Inextricably linked efficiencies are most likely to make a difference when they are great and the likely anticompetitive effect in the relevant market(s) is small so the merger is likely to benefit customers overall.”).

[141] See, e.g., Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 487 (1977) (“Every merger of two existing entities into one, whether lawful or unlawful, has the potential for producing economic readjustments that adversely affect some persons. But Congress has not condemned mergers on that account; it has condemned them only when they may produce anticompetitive effects.”). See also Robert H. Bork, The Antitrust Paradox: A Policy at War with Itself (2021) at 110 (“Those who continue to buy after a monopoly is formed pay more for the same output, and that shifts income from them to the monopoly and its owners, who are also consumers. This is not dead-weight loss due to restriction of output but merely a shift in income between two classes of consumers. The consumer welfare model, which views consumers collectively, does not take this income effect into account.”).

[142] See, e.g., Herbert Hovenkamp & Fiona Scott Morton, The Life of Antitrust’s Consumer Welfare Model, ProMarket (Apr. 10, 2023), https://www.promarket.org/2023/04/10/the-life-of-antitrusts-consumer-welfare-model (“A useful definition of ‘consumer welfare’ is that antitrust should be driven by concerns for trading partners….”).

[143] Dennis Carlton, Does Antitrust Need to Be Modernized?, 21 J. Econ. Persp. 155, 158 (2007).

[144] Hovenkamp & Scott Morton, supra note 34.

[145] See also Hemphill & Rose, supra note 90, at 2106. Hemphill & Rose distinguish monopsony power from increased buyer leverage, which does not result in a deadweight loss but is simply a redistribution from sellers to buyers. Leverage will be partially passed through to consumers as lower prices. Standard monopsony increases in bargaining power will not generate lower prices, since “[a]n increase in monopsony power increases the firm’s perceived marginal cost and reduces output. Far from lowering output prices, the increased monopsony power raises price in output markets (if the firm faces downward sloping demand for its output) or else leaves it unchanged.”

[146] Statement of the Federal Trade Commission Concerning the Proposed Acquisition of Medco Health Solutions by Express Scripts, Inc., FTC File No. 111-0210 (Apr. 2, 2012) at 7, available at https://www.ftc.gov/sites/default/files/documents/closing_letters/proposed-acquisition-medco-health-solutions-inc.express-scripts-inc./120402expressmedcostatement.pdf.

[147] Roman Inderst & Greg Shaffer, Buyer Power in Merger Control, in ABA Antitrust Section Handbook, Issues in Competition Law and Policy (Wayne Dale Collins, ed. 2008) at 1611, 1612-13 (emphasis added).

[148] Salop, supra note 138, at 342 (“Efficiency benefits count under the true consumer welfare standard, but only if there is evidence that enough of the efficiency benefits pass through to consumers so that consumers (i.e., the buyers) would directly benefit on balance from the conduct.”).

[149] It is worth noting that, although the analogy between Blue Cross and Kroger here seems quite apt and powerful, there can be little doubt that Salop would not condone this mode of analysis in a case against Kroger. Whether (if correct) that is a function of one person’s idiosyncratic preferences or an expression of the complication inherent in assessing consumer welfare in monopsony cases is uncertain.

[150] Werden, Cross-Market Balancing of Competitive Effects, supra note 140, at 129. The referenced language from Chicago Board of Trade and Sylvania is: “The true test for legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition.” Chi. Bd. of Trade v. U.S., 246 U.S. 231, 238 (1918); “Under this rule, the factfinder weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition.” Cont’l T.V. v. GTE Sylvania, 433 U.S. 36, 49 (1977).

[151] Nat’l Collegiate Athletic Ass’n v. Alston, 141 S. Ct. 2141, 2154 (2021).

[152] Id. at 2152.

[153] Id.

[154] To be clear, the legal process for evaluating this tradeoff is not a strict balancing, but a “less-restrictive alternative” test—exactly as the Court laid out and applied in Amex. See id. at 2162 (“The court then proceeded to what corresponds to the third step of the American Express framework, where it required the student-athletes ‘to show that there are substantially less restrictive alternative rules that would achieve the same procompetitive effect as the challenged set of rules.’”).

[155] See, e.g., Gregory J. Werden, Monopsony and the Sherman Act: Consumer Welfare in a New Light, 74 Antitrust L.J. 707, 735 (2007) (“Predatory pricing that excludes competitors and results in monopsony is condemned by the Sherman Act, just as the Act condemns predatory pricing that excludes competitors and obtains a monopoly.… Protecting consumer welfare is the principal goal of the Sherman Act, but it is only a goal: The Sherman Act protects the people by protecting the competitive process. The competitive process could not be undermined any more clearly than it is when competing buyers conspire to eliminate the competition among themselves, and it matters not one whit under the Sherman Act whether the conspiracy threatens the welfare of conspirators’ customers or the welfare of end users. It is enough that the conspiracy threatens the welfare of the trading partners exploited by the conspiracy. Harm to them implies harm to people protected by the Sherman Act.”).

[156] See discussion supra, text at notes 11 and 92.

[157] See, e.g., Sean P. Sullivan, Modular Market Definition, 55 U.C. Davis L. Rev. 1091, 1118 (2021) (“One traditional purpose of market definition has been to act like a microscope trained upon a specific area of concern. The full, interconnected web of commerce—of all possible products and technologies and consumptive uses and trading partners—is simply too big and too overwhelming to provide useful context for antitrust analysis.”).

[158] See Illinois Brick Co. v. Illinois, 431 U.S. 720, 731-32 (1977) (“The principal basis for the decision in Hanover Shoe was the Court’s perception of the uncertainties and difficulties in analyzing price and output put decisions… and of the costs to the judicial system and the efficient enforcement of the antitrust laws of attempting to reconstruct those decisions in the courtroom.”); Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481, 493 (1968).

[159] Ohio v. Am. Express Co., 138 S. Ct. 2274, 2287 (2018) (“Accordingly, we will analyze the two-sided market for credit-card transactions as a whole to determine whether the plaintiffs have shown that Amex’s anti-steering provisions have anticompetitive effects.”). See also U.S. v. Am. Express Co., 88 F. Supp. 3d 143, 216-17 (E.D.N.Y. 2015) (“Merchants facing increased credit card acceptance costs will pass most, if not all, of their additional costs along to their customers in the form of higher retail prices…. [C]ustomers who do not carry or qualify for an Amex card are nonetheless subject to higher retail prices at the merchant, but do not receive any of the premium rewards or other benefits conferred by American Express on the cardholder side of its platform…. Thus, in the most extreme case, a lower-income shopper who pays for his or her groceries with cash… is subsidizing, for example, the cost of the premium rewards conferred by American Express on its relatively small, affluent cardholder base in the form of higher retail prices.”).

[160] See, e.g., Michael Katz & Jonathan Sallet, Multisided Platforms and Antitrust Enforcement, 127 Yale L.J. 2142 (2018).

[161] Id. (“For all these reasons, ‘[i]n two-sided transaction markets, only one market should be defined.’ Any other analysis would lead to ‘mistaken inferences’ of the kind that could ‘chill the very conduct the antitrust laws are designed to protect.’”) (cleaned up and citations omitted).

[162] Id. at 2286.

[163] Geoffrey A. Manne, In Defence of the Supreme Court’s “Single Market” Definition in Ohio v American Express, 7 J. Antitrust Enf. 104, 110 (2019).

[164] See Jonathan H. Adler, Conservation Through Collusion: Antitrust as an Obstacle to Marine Resource Conservation, 61 Wash. & Lee L. Rev 3, 78 (2004) (“The purported aim of antitrust law is to improve consumer welfare by proscribing actions and arrangements that reduce output and increase prices. Conservation aims to improve human welfare by maximizing the long-term productive use of natural resources, an aim that often requires limiting consumption to sustainable levels. While such conservation measures might increase prices in the short-run, when successful they enhance consumer welfare by increasing long-term production and ensuring the availability of valued resources over time.”)

[165] See Clayton Act, 15 U.S.C. § 18 (2018); U.S. v. Philadelphia Nat’l Bank, 374 U.S. 321 (1963). See also Daniel A. Crane, Balancing Effects Across Markets, 80 Antitrust L.J. 397, 397 (2015) (noting that PNB is usually read to hold that “it is improper to weigh a merger’s procompetitive effects in one market against the merger’s anticompetitive effects in another.”). See also Merger Guidelines, supra note 3, at 27.

[166] Rybnicek & Wright, supra note 139, at 10.

[167] U.S. v. Baker Hughes Inc., 908 F.2d 981, 984 (D.C. Cir. 1990).

[168] See, e.g., Saint Alphonsus Med. Ctr.-Nampa v. St. Luke’s Health Sys., 778 F.3d 775, 790 (9th Cir. 2015) (“[A] defendant can rebut a prima facie case with evidence that the proposed merger will create a more efficient combined entity and thus increase competition.”); FTC v. Tenet Health Care, 186 F.3d 1045, 1054-55 (8th Cir. 1999) (“[Courts should consider] evidence of enhanced efficiency in the context of the competitive effects of the merger… [as] the merged entity may well enhance competition.”).

[169] Although its decision was not limited to the acceptance of “innovation” effects, the court rejected the contention that such “efficiencies” would not accrue to consumers in the relevant market, instead accepting that innovation itself was a cognizable efficiency. See New York v. Deutsche Telekom AG, 439 F. Supp. 3d 179, 215-16 (S.D.N.Y. 2020) (“Scott Morton stated that because these speeds are far beyond the levels that consumers now require, and because the value of speed to consumers diminishes the more that speeds exceed the level that consumers can practically use, there is no reliable way to determine how consumers would value speeds higher than roughly 250 mbps…. This argument is too limiting. The same may have been said about airplane speeds and pilotless flying machines in 1920. It unduly discounts the rate at which technological innovation, new products, and consumer applications develop to take advantage of enhanced capabilities, and the extent to which this merger might specifically help accelerate that process.”).

[170] Basel J. Musharbash & Daniel A. Hanley, Toward a Merger Enforcement Policy That Enforces the Law: The Original Meaning and Purpose of Section 7 of the Clayton Act, Working Paper (2024) at 58-59, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4745310.

[171] Indeed, as Musharbash & Hanley go on to note, the phrase “in any line of commerce” does not map onto the traditional conception of market definition used in merger analysis and defined by substitutability of products: “[A] ‘line of commerce’ is a category of business occupation which is defined by characteristics that separate or distinguish it from other categories of business occupation. Under this definition, the fact that a group of business occupations offer substitute products from the perspective of consumers certainly could, at least in theory, qualify them as a “line” of commerce, but nothing in the phrase signifies that such substitutability is the only permissible basis for identifying a line of commerce. Indeed, using other characteristics that reasonably distinguish one business occupation from another — such as distinct products or services, peculiar know-how and operations, or divergent supply chains and distribution channels — to identify a line of commerce would be more consistent with the phrase’s textual import. For the word line was ordinarily used to identify, with varying degrees of generality, the type of business a party was engaged in, not the markets it sold to or participated in.” Id. at 61.

[172] See, e.g., Viktoria H. S. E. Robertson, Antitrust Market Definition for Digital Ecosystems, Concurrences No. 2-2021 (2021) at 5, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3844551 (“However, the picture would not be complete without also considering the macro level of the digital ecosystem, which is needed in order to understand the various competitive constraints (or the absence of such constraints) that are at work. The dif?culty for market de?nition is to account for the various layers of competition that are present in the market realities of digital ecosystems in order to allow for the substantive analysis of a speci?c market behaviour or concentration. The challenge lies in providing an approach that does justice to the complexity of these markets, but without unnecessarily adding to that complexity.”).

[173] See Credit Suisse Securities (USA) v. Billing, 551 U.S. 264, *19-*20, *1-*2 (2007) (holding that where “(1) an area of conduct [is] squarely within the heartland of… regulations; (2) [there is] clear and adequate… authority to regulate; (3) [there is] active and ongoing agency regulation; and (4) [there is] a serious conflict between the antitrust and regulatory regimes…, [such] laws are ‘clearly incompatible’ with the application of the antitrust laws…[,]” thus “implicitly precluding the application of the antitrust laws to the conduct alleged”). See also Philadelphia Nat. Bank, 374 U.S. at 398-74 (Harlan, J. dissenting) (“Sweeping aside the ‘design fashioned in the Bank Merger Act’ as ‘predicated upon uncertainty as to the scope of § 7 of the Clayton Act,’ the Court today holds § 7 to be applicable to bank mergers and concludes that it has been violated in this case. I respectfully submit that this holding, which sanctions a remedy regarded by Congress as inimical to the best interests of the banking industry and the public, and which will in large measure serve to frustrate the objectives of the Bank Merger Act, finds no justification in either the terms of the 1950 amendment of the Clayton Act or the history of the statute.”).

 

[174] Complaint, In the Matter of Kroger/Albertsons, supra note 2.

[175] See supra, notes 137-140 and accompanying text.

[176] See, e.g., Naidu, Posner & Weyl, supra note 22.

[177] See, e.g., Yeh, et al., supra note 52; Kirov & Traina, supra note 42.

[178] Id.

[179] See, e.g., David Arnold, Mergers and Acquisitions, Local Labor Market Concentration, and Worker Outcomes, unpublished manuscript (April 2, 2021), available at https://darnold199.github.io/madraft.pdf.

[180] See, e.g., Bagger, et al., supra note 125.

[181] See Complaint, In the Matter of Kroger/Albertsons, supra note 2, at ¶ 63.

[182] See Section V, infra.

[183] See, e.g., Hovenkamp, Worker Welfare and Antitrust, supra note 92, at 543 (“Consumer welfare—when it is properly defined—and worker welfare travel in tandem. When a practice harms consumers by raising prices and reducing output, it harms labor as well. There is no a priori reason for thinking that worker harm is less severe than consumer harm. A properly designed antitrust policy must focus on both sets of interests.”).

[184] See infra, Section V.

[185] See 2023 Merger Guidelines, supra note 3.

[186] Rinz, supra note 61.

[187] Lipsius, supra note 71.

[188] Autor, Patterson, & Reenen, supra note 61.

[189] Benmelech, Bergman, & Kim, supra note 49.

[190] Berger, Herkenhoff, & Mongey, supra note 49.

[191] Rinz, supra note 61.

[192] Lipsius, supra note 71.

[193] Rinz, supra note 61, at S259.

[194] Autor, Patterson & Reenen, supra note 61.

[195] Id. at 13.

[196] Id. at 24, Figure A4.

[197] Id. at 6.

[198] Id. at 2

[199] Benmelech, Bergman, and Kim, supra note 49.

[200] Id.

[201] Id. at 202.

[202] Berger, Herkenhoff, & Mongey, supra note 49.

[203] Id.

[204] Handwerker & Dey, supra note 64.

[205] Berger, Herkenhoff, & Mongey, supra note 49.

[206] Azar, Marinescu, and Steinbaum, supra note 38.

[207] Handwerker & Dey, supra note 64, at 135.

[208] Id.

[209] Azar, Marinescu, Steinbaum, & Taska, supra note 74.

[210] Id. at *2 (According to this perspective, ease of finding when searching may be a better measure of the relevant outside option for workers. More job openings means more feasible outside options which is basically all models means less market power by employers: “we measure concentration using job openings rather than employment because we view vacancies as a better gauge of how likely searching workers (whether employed or unemployed) are to receive a job offer.”).

[211] Id. at Table 1.

[212] Id. at *5 (“Using online job board data from CareerBuilder.com, Marinescu and Wolthoff (2019) show that, within a 6-digit SOC, the elasticity of applications with respect to wages is negative. Therefore, the 6-digit SOC is too broad of a market according to the [small significant non-transitory reduction in wage test].”); Ioana Marinescu & Ronald Wolthoff, Opening the Black Box of the Matching Function: The Power of Words, 38 J. LAB. ECON. 535 (2020).

[213] Id. at *4 (“According to the USDA documentation, “commuting zones were developed without regard to a minimum population threshold and are intended to be a spatial measure of the local labor market.” Marinescu and Rathelot (2018) also show that 81% of applications on CareerBuilder.com are within the commuting zone, with the probability of submitting an application strongly declining in the distance between the applicant’s and the job’s zip code.”); Ioana Marinescu & Roland Rathelot, Mismatch Unemployment and the Geography of Job Search, 10 Am. Econ J. Macroeconomics 42 (2018).

[214] U.S. Dept. of Just. & Fed. Trade Comm’n, Horizontal Merger Guidelines (2010).

[215] Azar, Marinescu, Steinbaum, & Taska, supra note 74, at *13.

[216] Azar, Berry, & Marinescu, supra note 50 (The authors argue the SOC-6 by commuting zone is a plausible definition of a market, based on the market supply elasticity they back out from their estimated job vacancy elasticities).

[217] Gregor Schubert, Anna Stansbury, & Bledi Taska, Employer Concentration and Outside, Working Paper (2024), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3599454.

[218] Id. at Table 2, Panel A.

[219] Id.

[220] Merger Guidelines, supra note 3, at 6.

[221] Schubert, Stansbury, & Taska, supra note 217, at Table 2, Panel A.

[222] Azar, Marinescu, Steinbaum, & Taska, supra note 74, at 13.

[223] Schubert, Stansbury, & Taska, supra note 217.

[224] Azar, Marinescu, and Steinbaum, supra note 38.

[225] Id. at Table 1. The authors argue this market is likely too large. (“Using the vacancies data set from the same source as the one used in this paper, Marinescu and Wolthoff (2020) show that, within a six-digit SOC, the elasticity of applications to a given job posting with respect to posted wages is negative. Therefore, the six-digit SOC is likely too broad to be a labor market, since we would expect applications to increase in response to posted wages in a frictional labor market”) Marinescu & Wolthoff, supra note 212.

[226] Azar, Marinescu, Steinbaum, & Taska, supra note 74.

[227] Azar, Marinescu, and Steinbaum, supra note , at Table 2.

[228] See infra Appendix Section I.E

 

For six generations, Hermès has epitomized French luxury, making and selling its iconic scarves, belts, jewelry, and, of course, handbags. Some Hermès products, including its Birkin and Kelly bags, are so exclusive that they can’t be bought off the shelf. Customers first have to establish a relationship with the house to purchase these specialty bags. One way to do this is by buying other Hermès products.

Read the full piece here.

The Federal Trade Commission’s (FTC) recent complaint challenging the proposed merger of the supermarkets Kroger Co. and Albertsons Companies Inc. has important implications for antitrust enforcement in labor markets. Central to the FTC’s case is how it chooses to define the relevant markets, and particularly the commission’s focus on unionized grocery workers. The complaint alleges that the combined firm would dominate these markets, substantially lessening competition for unionized labor.

Read the full piece here.

tl;dr

Background: Concerns have been raised that the proposed merger of grocers Kroger and Albertsons may leave the combined firm with monopsony power in the markets for wholesale produce  and for grocery workers. This follows last year’s ruling by a federal court blocking the merger of Penguin Random House LLC and Simon & Schuster, similarly on grounds of labor-market monopsony. The argument is that the company would dominate in areas where the merging firms formerly competed for employees and other inputs. The combined firm could then use that power to suppress wages, reduce employment, or impose unreasonable working conditions on workers.

This isn’t the first time U.S. antitrust regulators have targeted monopsony in labor markets. In addition to merger review, other recent efforts have included lawsuits against “no-poach” agreements, as well as the Federal Trade Commission’s (FTC) recent proposal to ban  noncompete agreements in employment contracts.

But… Monopsony power often derives from labor-market frictions that antitrust can’t address. Most labor markets aren’t highly concentrated and most workers have multiple potential employers from which to choose. In other words, labor markets are generally poor targets for antitrust enforcement. As explained below, this raises several significant challenges for antitrust enforcers.

KEY TAKEAWAYS

MOST LABOR MARKETS ARE COMPETITIVE

So-called “company towns,” in which one firm dominates or actually owns a community, are rare. Most workers in the labor force have a broad range of employment opportunities across occupations, industries, and locations. A supermarket cashier can find employment at another supermarket, at another retail outlet, or shift their occupation to hospitality, food service, or distribution and logistics. They can also move to locations with better employment opportunities. A merger of supermarkets won’t suppress those opportunities.

The most compelling monopsony claims tend to concern labor markets that demand extensive or idiosyncratic skills, which couldn’t easily be transferred to other occupations or industries. For example, the Penguin/Simon & Schuster case centered on writers of bestsellers whose book advances exceed $250,000.

PRODUCT MARKETS IN ANTITRUST

All antitrust claims require defining a relevant market, but the endeavor is significantly more complicated in the context of labor markets. 

For example, what is the relevant labor market for supermarket employees? Surely, Costco employees should be included, even if Costco does not technically qualify as a “supermarket,” but what about employees of other retailers? What about hospitality and fast-food workers? When examining the labor market for workers who lack extensive or idiosyncratic skills, just about any reasonable definition of the relevant market would be too large to allege that any one firm possesses market power.

In a perfect world, these questions could be tested empirically. Unfortunately, antitrust enforcers often don’t have the requisite data and must rely on anecdotal evidence to delineate labor markets.

GEOGRAPHIC MARKETS IN ANTITRUST

U.S. workers are highly mobile. Roughly half of American adults live in a state other than the one in which they were born. Indeed, much of U.S. demographic history concerns people relocating for work. This makes it especially challenging to define a relevant geographic market for labor-monopsony claims. 

This is particularly true in urban environments, where there are many employment opportunities within commuting distance, especially for workers with fewer skills or less experience. Hence, stronger claims of labor-market monopsony tend to concern rural markets with limited job opportunities. It’s much easier to claim that Walmart holds labor-monopsony power in a small town than in even a medium-sized city.

UNION POWER AND ANTITRUST

Antitrust enforcers also need to account for the countervailing market power held by labor unions. Obtaining and exerting market power is unions’ raison d’être. As the old song says: “There is power in a union.”

For instance, if the FTC challenges the Kroger-Albertsons merger (as is expected) by alleging labor-market monopsony, the agency will have to contend with the fact that roughly 60% of the merged company’s workforce will be unionized. Attempts to exercise monopsony power would likely be dampened by the effects of unions collectively bargaining to maintain high wages and prevent layoffs.

BALANCING CONSUMER & WORKER WELFARE

The final challenge to labor-monopsony cases is that the primary purpose of antitrust enforcement is widely accepted to be protecting against harms to competition or to consumers. In labor cases, this will almost inevitably require important tradeoffs. 

While a merger might suppress the wages that would otherwise be paid by the merging companies, these wage reductions may then be passed on to consumers in the form of lower prices. Reduced labor input for a particular type of worker or workers does not mechanically translate into reduced output for consumers. This can be the case, for example, when a merger results in restructuring. 

In evaluating a merger, the agencies and the courts must balance the anticipated harms to employees against the potential benefits to consumers. This is a daunting task that may prove insurmountable in many cases.

For more on this issue, see the International Center for Law & Economics (ICLE) issue brief “Five Problems with a Potential FTC Challenge to the Kroger/Albertsons Merger.” See also, “FTC Should Allow Kroger-Albertsons Merger to Go Through” by Eric Fruits and Geoffrey Manne.

 

tl;dr

Background: The Federal Trade Commission (FTC) and 17 states this month filed a major antitrust complaint against Amazon. The much-anticipated suit comes more than two years after Lina Khan became FTC chair and more than six years since her student note criticizing Amazon’s practices. The complaint describes a broad scheme in which Amazon (1) used various practices to prevent sellers from offering prices at Amazon’s rivals below the level at Amazon (anti-discounting), and (2) conditioned a product’s eligibility for Amazon Prime on whether the seller used Fulfillment by Amazon (FBA). This conduct allegedly violates Section 5 of the FTC Act as an unfair method of competition, Section 2 of the Sherman Act as maintenance of monopoly, and various state laws.

But… It will be difficult for the FTC and the states to prove Amazon’s monopoly power and to discredit the procompetitive justifications for the challenged conduct. Retail competition is robust and the proposed narrow markets are ripe for criticism. Moreover, the challenged conduct is core to Amazon’s offer of important consumer benefits, such as fast and reliable shipping. Whatever remedy the FTC ultimately pursues, it risks undermining the benefits Amazon has created for consumers and sellers alike.

KEY TAKEAWAYS

SEEMINGLY TRADITIONAL THEORIES OF HARM

The complaint relies on two overarching theories of anticompetitive conduct: anti-discounting and conditioning Prime eligibility on a seller using FBA.

The first is reminiscent of a challenge to “most-favored nation” (MFN) provisions, in which a defendant demands terms that are equivalent to or better than those given to its rivals. However, MFNs are agreements typically challenged under Section 1 of the Sherman Act; the FTC doesn’t explicitly claim that Amazon’s unilateral policy constitutes an MFN.

The second theory appears similar to a tying claim. But the FTC doesn’t allege an actual tie between the sale of two distinct products, perhaps because sellers cannot buy the Prime badge; they must qualify for it by meeting the two-day shipping requirement (which FBA ensures).

NARROW RELEVANT MARKETS

Both of the relevant markets put forward in the FTC’s complaint fail to reflect real-world competition.

Amazon allegedly possesses monopoly power in the “online superstore market.” According to the FTC, online “superstores” provide a unique breadth and depth of products and unique services that brick-and-mortar stores and smaller online retailers don’t. Thus the commission alleges that these rivals cannot constrain Amazon’s market power over consumers. 

This alleged market is so narrowly drawn that it appears to include just Amazon, eBay, and the online stores offered by Walmart and Target. This excludes single-brand online retailers, product-category-specific online retailers, and all brick-and-mortar stores. It beggars belief that these rivals don’t exert competitive constraints on Amazon. After all, no consumers shop exclusively online, and price-comparison services like Google Shopping facilitate shopping across all online outlets. This will almost certainly prove to be a sticking point when the case goes to trial.

The FTC also defines a relevant market for “online marketplace services”—i.e., the services needed to sell products online (including access to shoppers, online interface, pricing capabilities, customer reviews). This excludes traditional wholesalers and e-commerce platforms like Shopify that offer software allowing sellers to create their own online stores.

As with the first market, it’s hard to imagine these claims will be borne out by the evidence. Most retail sales still occur offline and manufacturers and brands readily access these outlets. And the recent success of new marketplaces like Shein and Temu—which entered the U.S. market during the FTC’s investigation of Amazon—further undermines both the alleged market and Amazon’s market power.

OVERLOOKING THE BENEFITS OF AMAZON’S CONDUCT

While both unlawful MFNs and unlawful tying would be legitimate theories of harm, both are also vertical restrictions reviewed under the rule of reason, which requires weighing the anticompetitive and procompetitive effects.

The economics literature shows that MFNs can promote efficiency by protecting investments that couldn’t have been recouped without the protections offered by an MFN, such as Amazon’s substantial investment in the infrastructure to deliver products within two days. These provisions can benefit consumers by cutting their search costs and offering retailers incentives to improve the quality of their search and display capabilities.

Economic theory also suggests that it can be cheaper to offer some products together, rather than selling them separately; in some cases, it may be necessary to sell the products together in order to offer the products at all. If Amazon’s FBA services are critical for it to dependably deliver on Prime’s promise of two-day-shipping, then the alleged tying may be procompetitive. 

RESTORING ‘FAIR COMPETITION’

While the FTC’s complaint doesn’t explicitly ask for Amazon to be broken up, it does ask for the court to provide “equitable relief, including but not limited to structural relief, necessary to restore fair competition.” 

It’s anyone’s guess what this means. “Fair competition” isn’t part of U.S. antitrust case law or mainstream economic terminology.

This seemingly innocuous wording may be used to impose the FTC’s idiosyncratic—and nostalgic—vision of online retail on Amazon. Worse, it may be a euphemism for breaking up the company.

 

Executive Summary

We appreciate the opportunity to comment on the Draft Merger Guidelines (Draft Guidelines) released by the U.S. Department of Justice (DOJ or Division) and the Federal Trade Commission (FTC) (jointly, the agencies), Docket No. FTC-2023-0043. Our comments below mirror the structure of the main body of the Draft Guidelines: guidelines, market definition, and rebuttal evidence. Section by section, we suggest improvements to the Draft Guidelines, as well as background law and economics that we believe the agencies should keep in mind as they revise the Draft Guidelines. Our suggestions include, inter alia, the recission of some of the draft guidelines and the integration of others.

Much of the discussion around the guidelines focuses on whether enforcement should be more or less strict. But the stringency or rigor of antitrust scrutiny is not a simple dial to turn up or down. For example, what should be done with HHI thresholds? It may seem obvious that lower thresholds allow the agencies to challenge more mergers. In a world with limited agency resources, however, that may not be true. Under the 2010 Horizontal Merger Guidelines, the agencies did not challenge—much less block—all mergers leading to “moderately concentrated” or even “highly concentrated” markets. If we assume, as the Draft Guidelines appear to, that mergers leading to relatively high-concentration markets are generally more likely to be anticompetitive, lowering the thresholds would result in fewer of such challenges, to the extent that the agencies would necessarily allocate some of their scarce enforcement resources to matters that would not have raised competitive concerns under the thresholds specified in 2010.

Our main recommendations are as follows:

Guideline 1 places increased emphasis on structural presumptions and concentration measures. This rests on the assumption that the economy is becoming more concentrated, that this is problematic, and that lowering the thresholds would help to tackle this problem. But, as our comments explain, this seemingly simple story is not actually so simple. The changes contemplated by guideline 1 thus appear ill-founded. As written, guideline 1 could be used to block mergers without needing to show any actual harms to consumers or sellers/workers. Whether this is the intent or not, the answer should be made explicit. We argue that mergers should not be challenged based on concentration measures alone, given the long-known—but also recently empirically supported—disconnect between concentration measures and competitive harms.

Guideline 2: The guidelines mostly ignore the real distinctions between horizontal and vertical mergers. Guideline 2 is about horizonal mergers, as a footnote suggests, and provides an opportunity to make explicit that horizontal mergers exist, are unique, and will be treated differently than vertical mergers for reasons underlined by the guideline.

Guideline 6: To the extent that guideline 6 goes beyond what is included in guideline 5, it simply adds additional structural presumptions that are not justified by the law or the economics. In a part of the Brown Shoe decision ignored by the Draft Guidelines, the court wrote that “the percentage of the market foreclosed by the vertical arrangement cannot itself be decisive,” yet guideline 6 would make a structural-presumption decision. This is especially problematic in the context of vertical mergers, where the “foreclosure share” does not require an incentive to foreclose. As written, the guideline would treat as inevitable even foreclosure that was highly unprofitable.

Guideline 8: As concentration is not (by itself) harmful to consumers, neither is a trend toward concentration. As with guideline 1, guideline 8 should make explicit whether the intent is that it be used regardless of any harm to consumers. If an industry that has become more concentrated through more competition—as a large, recent economic literature documents is the norm—will the agencies block a merger that increases concentration but does not increase prices? Guideline 8 is especially problematic when paired with the statement that “efficiencies are not cognizable if they will accelerate a trend toward concentration.” This effectively negates any efficiency defense, since any efficiency will allow a merged party to win a larger share of the market. If these customers come from smaller competitors, that will increase concentration.

We conclude by explaining how the Draft Guidelines are not law and that it remains up to the courts whether to follow them. Historically, courts have followed such guidelines, given their reflection of current legal and economic understanding. These Draft Guidelines, by contrast, seem much more geared toward pursuing stronger merger enforcement. Rather than reflect current knowledge, the agencies are seemingly looking to reverse time and return to an outdated set of policies from which courts, enforcers, and mainstream antitrust scholars have all steered away. The net effect of these problems is to undermine confidence in the agency.

I.        Guideline 1: Mergers Should Not Significantly Increase Concentration in Highly Concentrated Markets

Draft Guideline 1 of the Draft Merger Guidelines (“Draft Guidelines”)[1] appears to suggest a standalone structural presumption[2] that mergers that “significantly increase” concentration in “highly concentrated” markets are unlawful; and it does so under a lower-threshold Herfindahl-Hirschman Index (“HHI”) for highly concentrated markets than that specified in the 2010 Horizontal Merger Guidelines, and a lower change in HHI than that specified in the 2010 Guidelines.

Several of these changes are salient. First, the Draft Guidelines replace a threshold HHI for “highly concentrated markets” of 2,500 with one of 1,800. Under the 2010 Guidelines, horizontal mergers that would increase HHI at least 100 points, resulting in an HHI of between 1,500 and 2,500 (inclusive), would be regarded as mergers that “potentially raise significant competitive concerns.” While they might warrant investigation, they would not implicate a structural presumption of illegality.

Second, under the considerably higher thresholds specified in 2010, mergers leading to highly concentrated markets that involved changes in HHI of between 100 and 200 would still be considered among those that “potentially raise significant competitive concerns,” and they would “often warrant scrutiny,” but they would not implicate a presumption of illegality. Only “[m]ergers resulting in highly concentrated markets that involve an increase in the HHI of more than 200 points [would] be presumed to be likely to enhance market power.”

Third, under the 2010 Guidelines, the presumption that mergers “likely to enhance market power” could be “rebutted by persuasive evidence showing that the merger is unlikely to enhance market power.” Draft guideline 1—even with lower thresholds for change and total market concentration, as measured by HHI—identifies no potential for rebuttal of the presumption.

Fourth, the 2010 Guidelines expressly identify mergers that are “unlikely to have adverse competitive effects and ordinarily require no further analysis”; namely, those involving increases in HHI of less than 100 and those resulting in an HHI less than 1,500. The Draft Guidelines do not identify any such mergers, whether under the 2010 thresholds or otherwise.

Fifth, the 2010 thresholds were specified in the Horizontal Merger Guidelines and, as such, applied to horizontal mergers. Other guidelines and agency practice recognized—correctly—that vertical mergers could raise competition concerns. At the same time, they recognized general distinctions between horizontal, vertical, and other “non-horizontal” mergers, such as “conglomerate mergers,” that are absent in—if not repudiated by—the Draft Guidelines. The lower thresholds and altered presumptions of the draft guideline 1 make no mention of horizontal-specific revisions; and, as we discuss below, draft guidelines 5-8 and 10 expressly extend the scope of the Draft Guidelines to vertical and other non-horizontal mergers.

If the Draft Guidelines’ “basis to presume that a merger is likely to substantially lessen competition” is not such a presumption of illegality, or is not so independent of market power, or is rebuttable, then revisions should say so. Also, if the agencies believe that there is any category of mergers that are unlikely to have adverse competitive effects, and unlikely to require further scrutiny, they should say so.

The Draft Guidelines state that this type of structural presumption provides a highly administrable and useful tool for identifying mergers that may substantially lessen competition. Unfortunately, this reasoning overlooks a crucial aspect of the antitrust apparatus (and of all regulation, for that matter): the error-cost framework. Administrability is a virtue, all things considered, but so is accuracy. Any given merger might be anticompetitive, but most are not, and enforcement should not routinely condemn benign and procompetitive mergers for the sake of convenience. As we explain below, the key insight is that policymakers should always consider antitrust enforcement as a whole. In other words, it is never appropriate to look at certain categories of judicial error in isolation (such as authorities wrongly clearing certain mergers). Instead, the challenge is to determine which set of rules and presumptions minimizes the sum of three social costs: false convictions, false acquittals, and enforcement costs.

When this is properly understood, it becomes clear that false negatives are only one part of the picture. It is equally important to ensure that new guidelines do not inefficiently chill or otherwise impede procompetitive deals. This is where proposals to lower current thresholds and alter existing presumptions run into trouble.

A.      Should Concentration Thresholds Be Lowered?

Draft guideline 1 puts concentration metrics front and center and introduces new structural presumptions. The Draft Guidelines evince a strong skepticism toward concentration that is unwarranted by the economic evidence. Two sets of questions are related: what, if anything, does the economic evidence say about the new HHI thresholds advanced by the Draft Guidelines? And what does the economic evidence indicate about strong structural presumptions in antitrust analysis?

Should new merger guidelines lower the HHI thresholds? We agree with comments submitted in 2022 by now-FTC Bureau of Economics Director Aviv Nevo and colleagues, who argued against such a change. They wrote:

Our view is that this would not be the most productive route for the agencies to pursue to successfully prevent harmful mergers, and could backfire by putting even further emphasis on market definition and structural presumptions.

If the agencies were to substantially change the presumption thresholds, they would also need to persuade courts that the new thresholds were at the right level. Is the evidence there to do so? The existing body of research on this question is, today, thin and mostly based on individual case studies in a handful of industries. Our reading of the literature is that it is not clear and persuasive enough, at this point in time, to support a substantially different threshold that will be applied across the board to all industries and market conditions. (emphasis added)[3]

Instead of following the economics literature, as summarized above, the Draft Guidelines lower the structural presumptions and add an additional one for when the merged firms share exceeds 30% and the HHI increase exceeds 100.

One argument for this increased emphasis on structural presumptions and concentration measures is that the economy is becoming more concentrated, that this is problematic, and that lowering the thresholds helps to tackle this problem. The following sections explain why the story is not so simple.

B.      Empirical Trends in Concentration

The first mistake is to suppose that concentration trends have reached unprecedented levels, that extant levels are generally harmful, and that current undue levels of concentration across the economy are due to lax antitrust enforcement. However, market concentration is not, in itself, a bad thing; indeed, recent research challenging the standard  account demonstrates that much observed concentration is driven by increased productivity, rather than by anticompetitive conduct or anticompetitive mergers. In addition, several recent studies show that local concentration—which is the most likely to affect consumers, and where most competition happens—has been steadily decreasing. In fact, as we show, increased concentration at the national level is itself likely the result of more vigorous competition at the local level. Further complicating matters for the “accepted” story (and exacerbated by these national/local distinctions) is the longstanding problem of drawing inferences from national-level concentration metrics for antitrust-relevant markets.

There is a popular narrative that lax antitrust enforcement has led to substantially increased concentration, strangling the economy, harming workers, and saddling consumers with greater markups in the process. Much of the contemporary dissatisfaction with antitrust arises from a suspicion that overly lax enforcement of existing laws has led to record levels of concentration and a concomitant decline in competition.

However, these beliefs—lax enforcement and increased anticompetitive concentration—wither under scrutiny.

1.        National versus local competition

Competition rarely takes place in national markets; it takes place in local markets. And although it appears that national-level firm concentration is growing, this effect is driving increased competition and decreased concentration at the local level, which typically is what matters for consumers. The rise in national concentration is predominantly a function of more efficient firms competing in more—and more localized—markets. Rising national concentration, where it is observed, is a result of increased productivity and competition, which weed out less-efficient producers.

This means it is inappropriate to draw conclusions about the strength of competition from national-concentration measures. This view is shared by economists across the political spectrum. Carl Shapiro (former deputy assistant attorney general for economics in the DOJ Antitrust Division under Presidents Obama and Clinton) for example, raises these concerns regarding the national-concentration data:

[S]imply as a matter of measurement, the Economic Census data that are being used to measure trends in concentration do not allow one to measure concentration in relevant antitrust markets, i.e., for the products and locations over which competition actually occurs. As a result, it is far from clear that the reported changes in concentration over time are informative regarding changes in competition over time.^[4]

The 2020 report from the President’s Council of Economic Advisors sounds a similar note. After critically examining alarms about rising concentration, it concludes they are lacking, and that:

The assessment of the competitive health of the economy should be based on studies of properly defined markets, together with conceptual and empirical methods and data that are sufficient to distinguish between alternative explanations for rising concentration and markups.^[5]

In general, competition is increasing, not decreasing, whether it is accompanied by an increase in concentration or not.

The narrative that increased market concentration has been driven by anticompetitive mergers and other anticompetitive conduct derives from a widely reported literature documenting increased national product-market concentration.^[6] That same literature has also promoted the arguments that increased concentration has had harmful effects, including increased markups and increased market power,^[7] declining labor share,^[8] and declining entry and dynamism.^[9]

There are good reasons to be skeptical of the national concentration and market-power data on their face.^[10] But even more important, the narrative that purports to find a causal relationship between these data and the depredations mentioned above is almost certainly incorrect.

To begin with, the assumption that “too much” concentration is harmful assumes both that the structure of a market is what determines economic outcomes, and that anyone knows what the “right” amount of concentration is. But as economists have understood since at least the 1970s (and despite an extremely vigorous, but futile, effort to show otherwise), market structure is not outcome determinative.^[11]

Once perfect knowledge of technology and price is abandoned, [competitive intensity] may increase, decrease, or remain unchanged as the number of firms in the market is increased.… [I]t is presumptuous to conclude… that markets populated by fewer firms perform less well or offer competition that is less intense.[12]

This view is well-supported, and it is held by scholars across the political spectrum.[13] To take one prominent, recent example, professors Fiona Scott Morton (deputy assistant attorney general for economics in the DOJ Antitrust Division under President Obama), Martin Gaynor (former director of the FTC Bureau of Economics under President Obama), and Steven Berry surveyed the industrial organization literature and found that presumptions based on measures of concentration are unlikely to provide sound guidance for public policy:

In short, there is no well-defined “causal effect of concentration on price,” but rather a set of hypotheses that can explain observed correlations of the joint outcomes of price, measured markups, market share, and concentration.…

Our own view, based on the well-established mainstream wisdom in the field of industrial organization for several decades, is that regressions of market outcomes on measures of industry structure like the Herfindahl-Hirschman Index should be given little weight in policy debates.[14]

Furthermore, the national concentration statistics that are used to justify invigorated antitrust law and enhanced antitrust enforcement are generally derived from available data based on industry classifications and market definitions that have limited relevance to antitrust. As Luke Froeb (former deputy assistant attorney general for economics in the DOJ Antitrust Division under President Trump and former director of the FTC Bureau of Economics under President Bush) and Greg Werden (former senior economic counsel in the DOJ Antitrust Division from 1977-2019) note:

[T]he data are apt to mask any actual changes in the concentration of markets, which can remain the same or decline despite increasing concentration for broad aggregations of economic activity. Reliable data on trends in market concentration are available for only a few sectors of the economy, and for several, market concentration has not increased despite substantial merger activity.[15]

Agency experience and staff research in the critical area of health-care competition represents a signal model of the application of applied industrial-organization research to policy development and law enforcement. Notably, the underlying research program has provided solid ground for blocking anticompetitive hospital mergers, while militating against SCP assumptions in provider mergers. Results suggest, for example, that various “the new screening tools (in particular, WTP and UPP) are more accurate than traditional concentration measures at flagging potentially anticompetitive hospital mergers for further review.”[16]

Most important, these criticisms of the assumed relationship between concentration and economic outcomes are borne out by a host of recent empirical studies.

The absence of a correlation between increased concentration and both anticompetitive causes and deleterious economic effects is demonstrated by a recent, influential empirical paper by Sharat Ganapati. Ganapati finds that the increase in industry concentration in non-manufacturing sectors in the United States between 1972 and 2012 is “related to an o?setting and positive force—these oligopolies are likely due to technical innovation or scale economies. [The] data suggests that national oligopolies are strongly correlated with innovations in productivity.”^[17] The result is that increased concentration results from a beneficial growth in firm size in productive industries that “expand[s] real output and hold[s] down prices, raising consumer welfare, while maintaining or reducing [these firms’] workforces.”^[18] Sam Peltzman’s research on increasing concentration in manufacturing has been on average associated with both increased productivity growth and widening margins of price over input costs. These two effects offset each other, leading to “trivial” net price effects.^[19]

Several other recent papers look at the data in detail and attempt to identify the likely cause of the observed national-level changes in concentration. Their findings demonstrate clearly that measures of increased national concentration cannot justify increased antitrust intervention. In fact, as these papers show, the reason for apparently increased concentration trends in the United States in recent years appears to be technological, not anticompetitive. And, as might be expected from that cause, its effects appear beneficial. More to the point, while some products and services compete at a national level, much more competition is local—taking place within far narrower geographic boundaries.

By way of illustration, it hardly matters to a shopper in, say, Portland, Oregon, that there may be fewer grocery-store chains nationally if she has more stores to choose from within a short walk or drive from her home. If you are trying to connect the competitiveness of a market and the level of concentration, the relevant market to consider is local. The same consumer, contemplating elective surgery, may search in a somewhat broader geographic area, but one that is still local, not national, and best determined on a merger-by-merger basis.[20]

Moreover, because many of the large firms driving the national-concentration data operate across multiple product markets that do not offer substitutes for each other, the relevant product-market definition is also narrower. In other words, Walmart’s market share in, e.g., “retail” or “discount” retail implies virtually nothing about retail produce competition. In the real world, Walmart competes for consumers’ produce dollars with other large retailers, supermarkets, smaller local grocers, and local produce markets. It also competes in the gasoline market with other large retailers, some supermarkets, and local gas stations. It competes in the electronics market with other large retailers, large electronic stores, small local electronics stores, and a plethora of online sellers large and small—and so forth. For example, when the FTC investigated the Staples/Office Depot merger, it analyzed a far-narrower market than simply “office supplies” or “retail office supplies”; it found that general merchandisers such as Walmart, K-Mart, and Target accounted for 80% of office-supply sales “in the market for “consumable” office supplies sold to large business customers for their own use.”^[21]

This conclusion is not mere supposition: In fact, recent empirical work demonstrates that national measures of concentration do not reflect market structures at the local level. Moreover, recent research published by the Federal Reserve Bank of New York concludes that a focus on nationwide trends may be misleading, to the extent that the data omit revenue earned by foreign firms competing in the United States.^[22] The authors note that accounting for foreign firms’ sales in the U.S. indicates that market concentration did not increase, but “remained flat” over the 20-year period studied. They argue that increasing domestic concentration was counteracted by increasing market shares associated with foreign firms’ sales.

In a recent paper,^[23] the authors look at both the national and local concentration trends between 1990 and 2014 and find that:

1. Overall, and for all major sectors, concentration is increasing nationally but decreasing locally.
2. Industries with diverging national/local trends are pervasive and account for a large share of employment and sales.
3. Among diverging industries, the top firms have increased concentration nationally, but decreased it locally.
4. Among diverging industries, opening of a plant from a top firm is associated with a long-lasting decrease in local concentration.^[24]

Source: Rossi-Hansberg, et al. (2020)^[25]

Importantly, all of the above applies not only to product markets, but to labor markets, as well:

The proportion of aggregate U.S. employment located in all SIC 8 industries with increasing national market concentration and decreasing ZIP code level market concentration is 43 percent. Thus, given that some industries have also had declining concentration at both the national and ZIP code level, 78 percent (or over 3/4) of U.S. employment resides in industries with declining local market concentration.^[26]

There are disputes about the data used in this study for sales concentration. Some authors argue it more likely reflects employment concentration, instead of sales concentration.[27] It is well-documented that employment concentration has been falling at the local level.[28]

Instead of relying on NAICS or SIC codes, Benkard, Yurukoglu, & Zhang construct concentration measures that are intended to capture consumption-based product markets.[29] They use respondent-level data from the annual “Survey of the American Consumer” available from MRI Simmons, a market-research firm. The survey asks specific questions about which brands consumers buy. They define markets into 457 product markets categories, separated into 29 locations. Product “markets” are then aggregated into “sectors.” Since they know the ownership of different products, even if the brand name is different, they can lump products into companies.

If antitrust enforcers want one paper to get a sense of aggregate trends, this is the one. Their study more closely matches and aggregates antitrust markets than studies that rely on NAICS codes. Against the narrative of the draft guidelines, they find falling concentration at the product-market level (the narrowest product), both at the local and the national level. At the sector level (which aggregates markets), there is a slight increase.

Source: Benkard, et al (2021)^[30]

With any concentration measure, one must define the relevant market. As in any antitrust case, this is not trivial when defining markets to measure concentration for the overall economy. Some work, such as Autor, et al., use industries with “time-consistent industry definitions.”[31] Other work finds falling concentration, even at the national level, between 2007 and 2017, when one includes the full sample of industries.[32]

The main implication of these studies for the merger guidelines is not that we need to take a stance on a technical debate in the academic literature, but to recognize that such a healthy debate exists and that it would be unwise to proceed as if we know for certain the direction of empirical trends (and that the agencies can reverse them).

2.        Larger national firms can lead to less-concentrated local markets

What is perhaps most remarkable about this data is the unique role large firms play in driving reduced concentration at the local level:

[T]he increase in market concentration observed at the national level over the last 25 years is being shaped by enterprises expanding into new local markets. This expansion into local markets is accompanied by a fall in local concentration as ?rms open establishments in new locations. These observations are suggestive of more, rather than less, competitive markets.^[33]

A related paper explores this phenomenon in greater detail.^[34] It shows that new technology has enabled large firms to scale production and distribution over a larger number of establishments across a wider geographic space. As a result, these large national firms have grown by increasing the number of local markets they serve, and in which they are relatively smaller players.^[35]

What appears to be happening is that national-level growth in concentration is driven by increased competition in certain industries at the local level. “The increasing presence of top ?rms has decreased local concentration in local markets as the new establishments of top ?rms gain market share from local incumbents.”^[36] The net effect is a decrease in the power of top firms relative to the economy as a whole, as the largest firms specialize more and are dominant in fewer industries.

These results turn the commonly accepted narrative on its head:

1. First, rising concentration, where it is observed, is a result of increased productivity and competition that weed out less efficient producers. This is emphatically a good thing.
2. Second, the rise in concentration is predominantly a function of more efficient firms competing in more—and more localized—markets. This means that competition is increasing, not decreasing, whether it is accompanied by an increase in concentration or not.
3. Third, in labor markets, the effect of these dynamics is a reduction in monopsony power: “[T]he industrial revolution in services has implications on the employment of workers of different skills across locations. If labor markets are industry speci?c and local, the decline in local concentration of employment caused by the entry of top firms should reduce the monopsony power of employers in small markets.”[37]

Another paper takes a similar approach to analyze the effect of increased firm size on labor-market share.^[38] In a complete refutation of the popular narrative, it finds that, while the labor-market power of firms appears to have increased, “labor market power has not contributed to the declining labor share because, despite an overall increase in national concentration, we ?nd that… local labor market concentration has declined over the last 35 years. Most local labor markets are more competitive than they were in the 1970s.”^[39]

Further studies have corroborated these findings, noting that, on an industry-by-industry basis, the explanatory power of increasing concentration (or increasing firm size) is extremely weak. For example, while Autor, et al. (2020) attribute the purported decline in the labor share of the U.S. economy to the rise of “superstar” firms,^[40] Stanford economist Robert Hall shows that the data is far more nuanced. Thus, comparing the employment shares of ?rms with 10,000 or more workers in the 19 NAICS sectors between 1998 and 2015, Hall finds that:

1. “In four of the 19 sectors, very high-employment ?rms declined in importance over the 17-year span of the data. The weighted-average increase across all sectors was only 1.8 percentage points, from 25.3 percent to 27.1 percent. Thus it seems unlikely that rising concentration played much of a role in the general increase in market power.…”; and
2. “[T]here is essentially no systematic relation between the mega-firm employment ratio… and the ratio of price to marginal cost.… Over the wide range of variation in the employment ratio, sectors with low market power and with high market power are found, with essentially the same average values. There is no cross-sectional support for the hypothesis of higher markup ratios in sectors with more very large ?rms and thus more concentration in the product markets contained in those sectors.”[41]

3.        It is not clear that industry concentration harms consumers

Economists have been studying the relationship between concentration and various potential indicia of anticompetitive effects—price, markup, profits, rate of return, etc.—for decades. There are, in fact, hundreds of empirical studies addressing this topic. Contrary to some common claims, however, when taken as a whole, this literature is singularly unhelpful in resolving our fundamental ignorance about the functional relationship between structure and performance: “Inter-industry research has taught us much about how markets look… even if it has not shown us exactly how markets work.”^[42]

Though some studies have plausibly shown that an increase in concentration in a particular case led to higher prices (although this is true in only a minority share of the relevant literature), assuming the same result from an increase in concentration in other industries or other contexts is simply not justified: “The most plausible competitive or efficiency theory of any particular industry’s structure and business practices is as likely to be idiosyncratic to that industry as the most plausible strategic theory with market power.”^[43]

As Chad Syverson recently summarized:

Perhaps the deepest conceptual problem with concentration as a measure of market power is that it is an outcome, not an immutable core determinant of how competitive an industry or market is… ??As a result, concentration is worse than just a noisy barometer of market power. Instead, we cannot even generally know which way the barometer is oriented.[44]

This does not mean that concentration measures have no use in merger enforcement. Instead, it demonstrates that market concentration is often unrelated to antitrust enforcement because it is driven by factors that are endogenous to each industry. Enforcers should be careful to not rely too heavily on structural presumptions based around concentration measures, as these may be poor indicators of the instances in which antitrust enforcement is most beneficial to consumers. The Draft Guidelines move in the opposite direction.

4.        Labor market concentration is falling; Should we decrease antitrust attention?

One way to see potential problems with structural presumptions is to consider labor markets. The best data aggregating labor-market concentration finds either low and/or falling concentration over recent decades at the local level. Studies that use administrative data from the Longitudinal Business Database find that local labor-market concentration has been declining, while national concentration has been increasing, across various definitions of “local.”[45]

Source: Rinz (2022)^[46]

This fall in concentration has happened even as firms’ labor-market power appears to be rising—which, again, illustrates the disconnect between concentration and market power. According to one recent study in the American Economic Review, while the average labor-market power of firms appears to have increased nationally, “despite the backdrop of stable national concentration, we… find that [local concentration] has declined over the last 35 years.”^[47]

Another study uses microdata from the Occupational Employment and Wage Statistics, mapped to the Quarterly Census of Employment and Wages, which records quarterly employment levels for each establishment in the United States that reports to state-level unemployment insurance departments.[48] They define markets using 6-digit SOC by metropolitan area. They find an average HHI that is relatively stable and low: the employment-weighted level of the employment HHI measure in the private sector is 0.0331.

In short, just as we should not use the low (or falling) average concentration as a reason to decrease HHI thresholds, we should not use high (or rising) average concentration to increase thresholds.

5.        Market structure and innovation.

The problem with the focus on market concentration can be seen clearly when looking at innovation. The draft guidelines rightly put increased innovation as a pro-competitive effect on par with increased output or investment, higher wages or improved working conditions, higher quality, and lower prices.[49]

However, this emphasis on innovation is in tension with the guidelines’ excessive focus on market concentration. How does a market’s structure affect innovation? This crucial question has occupied the world’s brightest economists for almost a century, from Schumpeter (who found that monopoly was optimal)[50] through Arrow (who concluded that competitive market structures were key),[51] to the endogenous-growth scholars (who empirically derived an inverted-U relationship between market concentration and innovation).[52] Despite these pioneering contributions to our understanding of competition and innovation, there is a growing consensus that no specific market structure is strictly superior at generating innovation. Just as the SCP paradigm ultimately faltered—because structural presumptions were a weak predictor of market outcomes[53]—so too have dreams of divining the optimal market structure for innovation.[54] Instead, in any given case, innovation depends on a plethora of sector- and firm-specific characteristics that range from the size and riskiness of innovation-related investments to regulatory compliance costs, the appropriability mechanisms used by firms, and the rate of technological change, among many others.

Despite this complex economic evidence, several antitrust agencies, including the FTC and the European Commission, believe they have cracked the innovation-market-structure conundrum. Throughout several recent decisions and complaints, these and other authorities have concluded that more firms in any given market will produce greater choice and more innovation for consumers. This could be referred to as the “Structuralist Innovation Presumption.”[55] This presumption notably plays an important role in the FTC’s recent case against Facebook, where the agency argues that:

Competition benefits users in some or all of the following ways: additional innovation (such as the development and introduction of new features, functionalities, and business models to attract and retain users); quality improvements (such as improved features, functionalities, integrity measures, and user experiences to attract and retain users); and consumer choice…[56]

Unfortunately, the Structuralist Innovation Presumption is a misguided heuristic that antitrust authorities around the globe would do well to avoid, as it is at odds with the mainstream economics of innovation.^[57]

There is a vast empirical literature examining the relationship between market structure and innovation. While a comprehensive survey of the literature is beyond the scope of our comments, the top-level findings clearly suggest that  the relationship between market structure and innovation is not monotonic, and that it depends on several other parameters. For instance, surveying the econometric literature concerning the effect of industry structure on innovation, Richard Gilbert concludes that it is indeterminate:

Table 6.1 summarizes the conclusions from these interindustry studies for the effects of competition and industry structure on innovation. Unfortunately, these studies do not reach a consensus, other than to note that innovation effects can differ dramatically for firms that are at different levels of technological sophistication. Although some studies find a positive relationship between measures of innovation and competition (alternatively, a negative relationship between innovation and industry concentration), others find that the relationship exhibits an inverted-U, with the largest effects at moderate levels of industry concentration or competition, and at least one study reports a negative relationship between competition (measured by Chinese import penetration) and innovation (measured by citation-weighted patents and R&D investment. One consistent finding is that an increase in competition has less of a beneficial effect, and may have a negative effect, on innovation incentives for firms that are far behind the industry technological frontier.[58]

Along similar lines, high-profile studies reach opposite conclusions. For instance, looking at the semiconductor industry, Ronald Goettler and Brett Gordon find that concentrated market structures lead to higher innovation:

The rate of innovation in product quality would be 4.2 percent higher without AMD present, though higher prices would reduce consumer surplus by $12 billion per year. Comparative statics illustrate the role of product durability and provide implications of the model for other industries.[59]

Mitsuru Igami reaches the opposite conclusion while studying the hard-disk-drive industry:

The results suggest that despite strong preemptive motives and a substantial cost advantage over entrants, cannibalization makes incumbents reluctant to innovate, which can explain at least 57 percent of the incumbent-entrant innovation gap.[60]

Looking at the hospital industry, Elena Patel & Nathan Seegert find a negative relationship between competition and investment:

In particular, hospitals in concentrated markets increased investment by 5.1 percent ($2.5 million) more than firms in competitive markets in response to tax incentives. Further, firms’ investment responses monotonically increased with market concentration.[61]

Finally, some of the most universally recognized articles in this field stem from the empirical research of Aghion and coauthors.[62] Their work famously found that the relationship between product-market competition and innovation had an inverted-U shape. Stated differently, increased product-market competition is associated with higher innovative output, up to a point of diminishing returns.[63] According to some, this strand of research warrants a policy of greater antitrust enforcement, relying upon patents to generate ex post profits for innovators.[64]

This conclusion appears somewhat misguided, as Aghion et al.’s seminal paper paints a far more nuanced picture. The authors’ main finding is that product-market concentration has an ambiguous effect on innovation—on average.[65] This last qualification is often omitted in policy discussions. As a result, what is true for the economy as a whole does not necessarily hold on a case-by-case basis. Some comparatively concentrated industries may score highly in terms of innovation, while some moderately concentrated ones do not.[66] In other words, there are several endogenous factors that affect how increased product-market competition will influence innovation in a given case. For example, the authors show that greater product-market competition is more likely to have a positive effect on innovation in industries where firms are technologically “neck and neck” before an innovation takes places (as opposed to those industries where “laggard” firms can innovate to overtake incumbents).[67] In the first case, more competition mostly decreases pre-innovation rents, while in the second case it has a larger effect on post-innovation rents (this is because increased competition would have little to no effect on laggard firms’ pre-innovation rents, which are likely to be small). [68]

The upshot is that empirical economics do not paint a clear or consistent picture of the relationship between market structure and innovation. Antitrust authorities and courts should thus avoid the presumption that more concentrated-market structures hinder innovation to the detriment of consumers.

6.        Market structure and investment: lessons from telecom

As the previous section explained, mergers may lead to diverging price and innovation effect—as increased concentration might sometimes (though certainly not always) increase both market power and innovation output. This is not the only area where price and “non-price” effects may cut in opposite directions. Price competition and investments can also be inversely correlated.

Mergers among mobile-wireless providers provide a rich source of information to evaluate these effects. In a recent paper, ICLE scholars reviewed the sizable empirical literature on this topic, with much of the research focused on so-called “4-to-3” mergers that reduce the number of large, national carriers from four firms to three (though some have also persuasively argued that such a characterization may not be accurate).[69]

Of the 18 studies ICLE reviewed, eight analyzed changes in market concentration across multiple jurisdictions between 2000 and 2015, while 10 analyzed specific mergers. ICLE’s paper also reviewed a more recent study that considered the effects of U.S. market concentration in spectrum ownership on measures of quality.

Of the 10 studies that looked at specific mergers, about half found that short-term prices decreased following a merger, whereas half found that short-term prices increased. Even different studies of the same merger found wildly different effects on short-term prices, ranging from significant price decreases to significant price increases. Thus, looking at these price effects alone, the studies are, collectively, inconclusive.

The ICLE paper identified several reasons for these apparently divergent results, including:

1. a lack of common measures of prices and price effects across studies;
2. differences in the time period chosen; and
3. difficulties accounting for variations in geography, demography, and regulatory regimes among jurisdictions (the latter also creates a potential for endogeneity bias).

Of those studies that considered the effect on long-term investment of such mergers, all found that capital expenditures—a proxy for investment and, presumably, long-term dynamic welfare—increased post-merger.

Indeed, several recent studies that looked more broadly at the effects of market concentration in the mobile-telecommunications industry suggest that increased concentration is correlated with increased investment and may therefore be correlated with greater dynamic benefits. These studies indicate that the highest levels of long-term country-wide investment occurred in markets with three facilities-based operators (though total investment was not significantly lower in markets with four facilities-based operators). In addition, a recent analysis found that U.S. markets with higher concentration of spectrum ownership had faster, more reliable cellular service (reflecting an increase in dynamic welfare effects).

Studies of investment also found that markets with three facilities-based operators had significantly higher levels of investment by individual firms. The implication is that, in such markets, individual firms have stronger incentives to make capital investments that enable long-term competition through expanded infrastructure and technological innovation, which affect the range, quality, and quantity of services provided to consumers. Studies also suggest this effect may be strengthened when the merger results in a more symmetrical market structure (i.e., the various facilities-based providers become more equal in market share). It is argued that increases in the number of competitors in asymmetric markets leads to disproportionately lower levels of investment by smaller firms. Thus, a merger between two smaller firms that results in greater market symmetry could result in higher levels of investment by the merged firms relative to the unmerged entities.

The results of ICLE’s review indicate that a merger that involves products or firms that compete along a variety of dimensions, in addition to price, must evaluate the effects of the merger across these dimensions, as well. In addition, relying on past empirical research to evaluate a current merger may overlook economic, technological, or regulatory changes that diminish the reliability of past experience to inform current events. This review of mobile-wireless-provider mergers reveals a number of factors that should be considered when seeking to understand the likely welfare effects of a given merger. These include:

1. Whether the effects to be evaluated are limited to static price effects or also include qualitative measures, such as capital expenditures and other investment in quality of service, suggesting dynamic innovation effects;
2. The timeframe over which the effects are evaluated;
3. The effects on different tiers of service, especially those measured by hypothetical consumption profiles (known as “baskets” in mobile-wireless-provider mergers);
4. The extent to which the effects of previous mergers may confound projected effects of the merger at hand; and
5. Whether a transaction occurs during, or even as part of, a transition between different generations of technology (e.g., during an upgrade from 3G to 4G networks).

Further, it is well-known that process and product innovation does not arise solely from new entry; incumbent firms frequently are important sources of innovation, as well as of increased market competitiveness.[70] Dynamic analysis takes entry seriously, but it is much more sensitive to potential entry as a constraint on incumbents than a structuralist view would permit. Thus, for example, an incumbent mobile-wireless provider that offers wide coverage of 4G service must consider the potential capabilities of an existing competitor that currently has only sparse 4G coverage; it must incorporate potential threats from that competitor in its decision matrix when evaluating whether to upgrade its network to 5G in order to retain its customer base. An incumbent’s dominant position can quickly erode thanks to imperfect in-market substitutes, as well as from out-of-market firms that may decide to enter in the future.[71]

When evaluating the merits of a merger, authorities are charged with identifying the effects on the welfare of consumers. Crucially, this analysis must consider not only short-term price effects, but also long-term and dynamic effects, particularly in markets (like mobile telecommunications) in which competition occurs over both price and innovation. Based on the studies that we reviewed, 4-to-3 mergers appear to generate net long-term benefits to consumer welfare in the form of increased investment (presumably—although not conclusively, based on these studies—resulting in increased innovation), while the short-term effects on price are resolutely inconclusive.

II.      Guideline 2: Mergers Should Not Eliminate Substantial Competition Between Firms

While it is reasonable to consolidate the horizontal and vertical merger guidelines into one document, the draft essentially writes away the distinction between them. Footnote 30 suggests that Guideline 2 is about horizontal unilateral effects. If so, the application of the guideline to horizontal mergers specifically should be made explicit. Otherwise, readers are left with the impression that the Draft Guidelines intentionally avoid specificity, perhaps hoping to enhance the agencies’ prosecutorial discretion. That would be problematic, notwithstanding the possibility of line-blurring cases. In brief, a significant body of economic literature and judicial precedent recognizes the competitive importance of the distinction, and requires that the agencies treat horizontal and vertical mergers differently.

As Aviv Nevo and colleagues summarized, the distinction is especially important when thinking about efficiencies and other potential merger benefits:

Applying the same sort of skepticism about efficiencies in a vertical merger as in a horizontal merger can amount to assuming away a portion of the economics that is at the heart of the vertical investigation.

One clear example of this dual nature of vertical theories is the model of linear pricing, which generates a raising rivals’ cost incentive and also generates a potential procompetitive incentive in the form of elimination of double marginalization (“EDM”). Not every merger will present facts that fit this particular model. But, if that model is the basis of an investigation, its full range of implications should be considered.[72]

By rejecting—or implying a rejection of—a general distinction between horizontal and vertical mergers, the Draft Guidelines effectively enact a “horizontalization” of merger enforcement. The following subsection explains the importance of explicitly delineating horizontal and vertical mergers at certain points in the Draft Guidelines.

A.      Horizontal Mergers Are Different Than Vertical Mergers

Antitrust merger enforcement has long relied on a fundamental distinction between horizontal and vertical mergers (or horizontal and vertical theories of harm, to be more precise). Policymakers widely assume the former are more likely to cause problems for consumers than the latter. However, this distinction increasingly has been challenged by some antitrust scholars and enforcers. In recent years, antitrust authorities on both sides of the Atlantic—and several high-profile scholars—have put forward theories of harm that obscure the traditional distinctions among horizontal, vertical, and conglomerate mergers. This is epitomized by an alarmist 2020 article by Cristina Caffarra and co-authors that portrays nearly all tech mergers as horizontal, based on the supposition that, but for the acquisition, one of the merging firms likely would launch its own competing vertical product..[73] But the claim seems manifestly implausible, and the paper offers no evidence on its behalf. Of course, in a given case, under specific facts and circumstances, a large, diversified tech firm might consider or achieve entry into a vertical market. But a possibility under some facts and circumstances is a far cry from a general likelihood. The implication of this (and other) research is that mergers between firms that are either vertically related or active in unrelated markets routinely or typically have significant horizontal effects.[74] This can be the case, either when merging firms are potential competitors or when they compete in innovation markets (i.e., they have overlapping R&D pipelines, or may have them in the future).[75]

These concerns are compounded in the digital economy, where ostensibly non-competing firms may become competitors on one side of their platforms. For instance, it has been argued that Giphy, which offers a library of gif files, may ultimately compete with Facebook in ad markets.[76] Similarly, it has been claimed that Google’s acquisition of Fitbit—a producer of wearable health-monitoring devices—raises horizontal theories of harm, because Google would otherwise have developed its own wearable devices.[77] Such hypotheticals are sometimes deemed to be “reverse killer acquisitions,” on grounds that acquiring a rival enables the incumbent to not produce a good itself. Endorsing this approach to merger review wholeheartedly would have profound policy ramifications. Indeed, should authorities assume the counterfactual to a merger is that the acquirer will compete with the target directly, then every merger effectively becomes a horizontal one.

The influence of this research can be seen in the FTC’s loss in blocking Meta’s acquisition of Within Unlimited and the ongoing case against Meta, which centers on the company’s acquisitions of WhatsApp and Instagram.[78] For the Within case, the FTC wanted to turn a vertical merger (software and hardware) into a horizontal merger between potential competitors. The court was unwilling to accept the claim that, if the Within deal were blocked, Meta would likely develop its own VR fitness app to compete against Supernatural. Meta had no such product poised to enter the market, or even in late-stage development. The contingent probability of timely, competitively significant entry—inherent in a potential competition case—was simply too small or speculative to conclude that Meta was a potential competitor, and was further undermined by internal emails suggesting that they should partner with Peloton—an idea that got so little traction that they never even ran it past Peloton.

At the time of the WhatsApp and Instagram acquisitions, competition authorities around the world tended to analyze them (and the potential theories of harm they might give rise to) primarily as vertical. For instance, looking at Facebook’s purchase of WhatsApp, the European Commission concluded that “while consumer communications apps like Facebook Messenger and WhatsApp offer certain elements which are typical of a social networking service, in particular sharing of messages and photos, there are important differences between WhatsApp and social network services.” This suggested the merging firms were likely active in separate markets.[79] The FTC’s clearance of that deal suggests that the agency largely adhered to the view that the merging entities were not close competitors.[80] Similarly, when the UK CMA reviewed Facebook’s acquisition of Instagram, it concluded that the two firms exercised only weak competitive constraints on each other:

To conclude, there are several relatively strong competitors to Instagram in the supply of camera and photo editing apps, and those competitors appear at present to be a stronger constraint on Instagram than Facebook’s new app.[81]

Reevaluating these deals almost a decade later, the FTC reached a diametrically opposite conclusion. In its Facebook complaint, the agency concluded that:

Failing to compete on business talent, Facebook developed a plan to maintain its dominant position by acquiring companies that could emerge as or aid competitive threats. By buying up these companies, Facebook eliminated the possibility that rivals might harness the power of the mobile internet to challenge Facebook’s dominance….

…As Instagram soared, Facebook’s leaders began to focus on the prospect of acquiring Instagram rather than competing with it….

…In sum, Facebook’s acquisition and control of WhatsApp represents the neutralization of a significant threat to Facebook Blue’s personal social networking monopoly, and the unlawful maintenance of that monopoly by means other than competition on the merits.[82]

While this change of heart could be characterized as the agency updating its position in light of new evidence concerning the nature of competition between the merging firms, there is also a clear sense that times have changed. Indeed, both antitrust agencies and scholars appear more willing to assume (i) that firms could become competitors absent a merger, and (ii) that mergers between them are likely to reflect efforts by the acquirer to anticompetitively maintain its market position. We address both these claims in the subsequent sections.

The most important difference between a horizontal merger and a vertical merger is the merging parties’ relationships with each other. A horizontal merger is between firms that compete in the same product and geographic market. A vertical merger is between firms with an upstream-downstream (e.g., seller-buyer) relationship. These distinctions are well-known and widely accepted. There has been no economic trend that would justify a redefinition of these distinctions.

Drawing on an example provided by Steve Salop, consider a hypothetical orange-juice market with firms that manufacture and engage in the wholesale distribution of orange juice, as well as firms that own the orchards that supply the oranges to be juiced.^[83] A merger between manufacturer/wholesalers would be a horizontal merger; a manufacturer/wholesaler’s purchase of a firm owning orchards would be a vertical merger.

A horizontal merger removes a competing firm from the market and thereby eliminates substitute products or firms that produce the products.^[84],[85] By definition, horizontal mergers reduce competition, but the attendant harm to consumers may be large, small, or infra-marginal, depending on the facts and circumstances of a given merger; and any consumer harms may be offset by benefits, such as economies of scale and other efficiencies.^[86]

In contrast, in most cases, a vertical merger does not eliminate a competing firm from the market and does not involve substitutes.^[87] In fact, vertical mergers typically involve complements, such as a product plus distribution or a critical input to a complex device.^[88] In Salop’s orange-juice hypothetical, the manufacturer juices oranges, cans the juice, and operates a wholesaling operation to sell the canned juice to retailers. In this example, the wholesaling operations is a complement to the manufacturing process.

Although not necessarily “by definition,” in most cases, vertical mergers are undertaken to achieve efficiencies and reduce costs. For example, through the elimination of double marginalization and the resulting downward pressure on prices, vertical mergers present a stronger likelihood of improving competition than horizontal mergers.^[89]

In a statement during the 2018 FTC hearings, FTC Commissioner Christine Wilson concluded that “we know that competitive harm is less likely to occur in a vertical merger than in a horizontal one,” and echoed some of Hoffman’s points:^[90]

[I]n contrast to horizontal guidelines, the economics in vertical mergers indicate efficiencies are much more likely. Professor Shapiro went so far as to call them “inherently” likely at our hearing. Given this dynamic, it may be appropriate to presume that certain vertical efficiencies are verifiable and substantial in the absence of strong evidence to the contrary, even if we would not do so in a horizontal merger case.^[91]

The economics of horizontal mergers comprises a long, well-established literature of theoretical models and empirical research. In contrast, there are fewer quantitative theoretical models that can be used to predict outcomes in vertical mergers. Moreover, those models that do exist have a far shorter track record than those used to assess horizontal mergers.^[92]

Naturally, the real world is much more complicated. For example, Salop points out that some mergers involve firms that are already vertically integrated prior to the merger.^[93] In these cases, the merger would involve both vertical and horizontal elements. Such mergers may lead to horizontal and vertical efficiencies that reinforce each other. They also may lead to horizontal and vertical harms that reinforce each other. Or they may lead to mix of horizontal and vertical efficiencies and harms that counteract each other. That may explain why empirical research on vertical mergers, discussed below, can yield sometimes wildly different results—even when using seemingly similar sets of data.

To be sure, there are no economic trends that would lead one to revisit the distinction between horizontal and vertical mergers. Nevertheless, there have been advances in economic theory that have led some to conclude that vertical mergers may not be as beneficial as once thought or that they may lead to anticompetitive consumer harm.

Some critics of the current state of vertical-merger enforcement assert a vertical merger can effectively become a horizontal merger—or have horizontal effects. If that is the case, then it is argued that vertical mergers should be evaluated in the same way as horizontal mergers. According to Salop, “[f]or the type of markets that are normally analyzed in antitrust, the competitive harms from vertical mergers are just as intrinsic as are harms from horizontal mergers.”^[94] Thus, a vertically integrated firm faces an “intrinsic incentive”^[95] to foreclose downstream competition “by raising the input price it charges to the rivals of its downstream merger partner” in the same way that horizontal firms face “inherent upward pricing pressure from horizontal mergers in differentiated products markets, even without coordination.”^[96]

In an implicit acknowledgement of the distinction between horizontal and vertical mergers, Salop describes the competition between an upstream firm and a downstream partner as indirect: “the upstream merging firm that supplies a downstream firm is inherently an ‘indirect competitor’ of the future downstream merging firm. That indirect competition is eliminated by merger. This unilateral effect is exactly parallel to the unilateral effect from a horizontal merger.”^[97]

But the two are not “exactly parallel,” of course, because indirect competition is different from direct competition—Salop himself make the distinction. Even in Salop’s telling, the mechanism by which his vertical-leads-to-horizontal theory operates requires that (1) the upstream firm has market power and (2) post-merger, the merged firm forecloses supply or raises costs to the downstream firm’s horizontal rivals. While this is possible, it is not a necessary consequence of the transaction; and the risk of competitive harm, at the very least, must be a function of both the likelihood and degree of foreclosure. The presence of downstream horizontal competitors operates as an immediate and present constraint on the vertically integrated merged firm.

It may be helpful to explain using Salop’s orange-juice hypothetical:

Company A is a manufacturer and wholesale supplier of orange juice to retailers. It seeks to acquire Company B, an owner of orange orchards.… The merged firm may find it profitable to raise the price or cease supplying oranges to one or more rival orange juice suppliers.… This input foreclosure may lessen competition in the wholesale orange juice market, for example, by raising the price or reducing the quality of some or all types of orange juice.^[98]

This is an excellent example because it highlights how complex even a straightforward hypothetical of raising rivals’ costs can get. Under the standard formulation, the vertically integrated firm would produce oranges at the orchard’s marginal cost—in theory, the price it pays for oranges would be the same both pre- and post-merger. Under this theory, if the vertically integrated orchard does not sell its oranges to the non-integrated manufacturer/wholesalers, then the other non-vertically integrated orchards will be able to charge a price greater than their marginal cost of production and greater than the pre-merger market price for oranges. The higher price of oranges used by non-integrated manufacturer/wholesalers will then be reflected in higher prices for orange juice sold by the manufacturer/wholesalers.

The merged firm’s juice prices will be higher post-merger because its unintegrated rivals’ juice prices will be higher, thus increasing the merged firm’s profits. The merged firm and unintegrated orchards would be the “winners;” unintegrated manufacturer/wholesalers and consumers would be the “losers.” Under a consumer welfare standard, the result could be deemed anticompetitive. Under a total welfare standard, anything goes.

But this classic example of raising rivals’ costs is based on some strong assumptions. It assumes that, pre-merger, all upstream firms price at marginal cost, which means there is no double marginalization. It assumes all the upstream firm’s products are perfectly identical. It assumes unintegrated firms do not respond by integrating themselves. If one or more of these assumptions is not correct, more complex models—with additional (potentially unprovable) assumptions—must be employed. What begins as a seemingly straightforward theoretical example is now a model-selection problem: which economic models best fit the facts and best predict the likely outcome.

In Salop’s example, it is assumed the merged firm would raise the price or refuse to sell oranges to rival downstream wholesalers. However, if rival orchards charge a sufficiently high price, the merged firm would profit from undercutting its rivals’ orange prices, while still charging a price greater than its own marginal cost. Thus, it is not obvious that the merged firm has an incentive to cut off supply to downstream competitors or charge a higher price. The extent of the pricing pressure on the merged firm to cheat on itself is an empirical matter that depends on how upstream and downstream firms will or might react. Depending on how other manufacturer/wholesalers and orchard firms react, the merged firm’s attempt at foreclosure may have no effect and there would be no harm to competition.

The hypothetical also assumes that commercial juicing is the only use for oranges and that juice oranges are the only thing that can be produced by citrus groves. It is possible that, rather than raising prices or foreclosing competitors, the merged firm would divert some or all of its juice oranges to a “secondary” market, such as the retail market for those who juice at home. They also could convert groves used to grow juice oranges to the production of strains of oranges and other citrus fruits that are sold as fresh produce. Indeed, fresh citrus fruits currently account for 10% of Florida’s crop and 75% of California’s.^[99] This diversion would lead to a decline in the supply of juice oranges and the price of this key input would rise.

This strategy would raise the merged firm’s costs along with its rivals. Moreover, rival orchards can respond to this strategy by diverting their own groves from the production of fresh produce citrus to the juice market, in which case there may be no significant effect on the price of juice oranges. What begins as a seemingly straightforward theoretical example is now a complicated empirical matter and raises the antitrust question of whether selling into a “secondary” market constitutes anticompetitive conduct.

Moreover, the merged firm may have legitimate business reasons for the merger and legitimate business reasons for reducing the supply of oranges to juice wholesalers. For example, “citrus greening,” an incurable bacterial disease, has caused severe damage to Florida’s citrus industry, significantly reducing crop yields.^[100] A vertical merger could be one way to reduce supply risks. On the demand side, an increase in the demand for fresh oranges would guide firms to shift from juice and processed markets to the fresh market. What some would see as anticompetitive conduct, others would see as a natural and expected response to price signals.

Furthermore, it is not actually the case that the incentive to foreclose downstream rivals is “intrinsic,” nor is it the case that the effect is necessarily deleterious. In fact, as we discuss below, even when foreclosure can be shown, empirical evidence indicates that the consumer benefits from efficiencies tend to be greater than the harms from foreclosure.

A key difference between horizontal and vertical mergers is that any efficiency gains from a horizontal merger are not automatic and must be established. On the other hand, the realization of certain vertical-merger efficiencies, at least from the elimination of double marginalization, is automatic.^[101] And, of course, additional merger benefits may be established for any given vertical merger.

The logic is simple: Potentially welfare-reducing vertical mergers are those that involve an upstream firm with market power. Thus, pre-merger, all downstream firms bear presumptively higher input costs. To realize their own profits, they must increase final-product prices to consumers by even more.[102] But after the merger, the merged downstream entity no longer pays the markup. As a result, it “enjoys lower input costs and thus increases its output, thereby increasing welfare.”[103] At the same time, of course, non-merged downstream firms bear a higher input price, and it is an empirical question whether the net consumer welfare effect will be positive or negative. But it is never a question that the two effects operate simultaneously, and that the reduction of double marginalization necessarily occurs. Indeed, it is most likely to arise and to lead to net consumer-welfare benefits precisely where there is the greatest potential for anticompetitive price increases to downstream rivals.[104]

All else being equal, the effect of removing a horizontal competitor by merger is automatic: less competition. That isn’t necessarily bad. It may be offset, and it may also enable innovation, more competition, or other results that benefit consumers. But in the first instance, former head-to-head competitors that merge are no longer competing. With vertical mergers, however, the effect is not to automatically reduce competition (indirect, potential, or otherwise). A vertically integrated firm might (or might not) choose to hurt unaffiliated downstream competitors by more than it benefits its integrated downstream firm—that might (or might not) be feasible and advantageous–but nothing is automatic. Assessing the competitive effect of such a merger necessarily means incorporating an added layer of uncertainty, complexity, and distance between cause and effect. In the absence of a few particular, tenuous, and stylized circumstances, “[i]n this model, vertical integration is unambiguously good for consumers.”[105]

In response, proponents of invigorated vertical-merger enforcement argue, in part, that:

[T]he claim that vertical mergers are inherently unlikely to raise horizontal concerns fails to recognize that all theories of harm from vertical mergers posit a horizontal interaction that is the ultimate source of harm. Vertical mergers create an inherent exclusionary incentive as well as the potential for coordinated effects similar to those that occur in horizontal mergers.[106]

But this fails to resolve anything. Moreover, the “analogy with horizontal mergers is misleading.”[107] It is uncontroversial (and far from “[un]recognized”) that “all theories of harm from vertical mergers posit a horizontal interaction that is the ultimate source of harm.”[108] All this says is that there could be harm of the sort that horizontal mergers might cause. But it does not acknowledge that the likelihood and extent of that harm are different in the vertical and horizontal contexts. Moreover, it does not note that the mechanism by which harm might arise is different and more complex in the vertical case. All in all, the probability of that outcome is lower in the case of a vertical merger, where it is dependent on an additional step that may or may not arrive and that may or may not cause harm.

III.    Guideline 4: Mergers Should Not Eliminate a Potential Entrant in a Concentrated Market

The wording of the guideline should be changed to reflect the fact that we are dealing with probabilities, as the body of the guideline makes clear. “Mergers should not eliminate a potential entrant with probable future entry in a concentrated market” would more closely match the body of the guideline.

The distinction between 4.A and 4.B should be eliminated. The only way for a potential entrant to exert competitive pressure is if the current competitors perceive the potential entrant to be a threat. Are the agencies claiming otherwise? Are there firms that no current competitors think about yet somehow still exert competitive pressure on the market? If the agencies mean as much, it should be explicit.

One difficulty with treating all potential competitors like actual competitors is that it assumes that all vertically related (or even non-related) firms could eventually threaten the acquiring incumbent. In other words, potential competition from a particular firm is probabilistic, with the likelihood varying according to the facts and circumstances of the individual case. This forces agencies to make complex assessments regarding the potential future evolution of competition. Beyond the scale that “for mergers involving one or more potential entrants, the higher the market concentration, the lower the probability of entry that gives rise to concern,” the guidelines do not offer guidance about how the relevant probabilities will be assessed.

A.      Potential Competition Is Inherently Probabilistic

The uncertainty involved in any merger involving a potential competitor has important ramifications for policymaking. Anticompetitive mergers are, by definition, possible (under the above theories) only when the acquired rival could effectively challenge the incumbent.[109] But these are, of course, only potential challengers; there is no guarantee that any one of them could or would mount a viable competitive threat.[110]

A first important consequence is that, while potential competitors are important constraints on existing markets, they do not generally offer the same degree of constraint as actual competitors.[111] As such, any analysis of a merger involving a potential competitor would have to assess and incorporate the probability of competition.[112] High-quality analysis of the effects of potential competition are few and far between but, according to at least one literature review, a potential competitor may have between one-eighth to one-third the effect on competition as an actual competitor. [113] Likelihoods may vary by industry, product category, and the specific facts and circumstances of the product market and firms at issue. The strength of this competitive constraint also depends on the firms’ perceptions: If both the incumbent and the rival heavily discount the probability of entry, then potential competition is unlikely to affect their behavior.[114]

This leads to a second important issue. Because the loss of a potential competitor will, in expectation, lead to less harm than that of an actual competitor, it is crucial that agencies tailor their responses accordingly. While the traditional remedies for anticompetitive horizontal mergers include divestments or outright prohibition, these remedies may no longer be appropriate in the face of potential competition theories of harm (although such remedies might sometimes remain necessary to fully remove potential anticompetitive harm). Decisionmakers should look at mergers from a cost/benefit standpoint, which, in turn, counsels weighing anticompetitive harms against procompetitive benefits. Because one would expect anticompetitive harms in potential-competition cases to be only a fraction of those in actual-competition cases, there is—all else being equal—a higher likelihood in the former that efficiencies will outweigh harms.

It is not clear how this can be addressed in terms of remedies: neither divestures nor prohibitions can realistically be made probabilistic or conditioned on future market outcomes, as firms could easily game this. At the very least, this probably means judges should set a high evidentiary bar for claims that a merger will reduce potential competition, and agencies should, at the margin, focus more heavily on traditional theories that involve more tangible risks of consumer harm.

This restrained approach to enforcement is—perhaps surprisingly, given the agency’s generally interventionist track record in digital markets—encapsulated by the European Commission’s stance in the Google /Fitbit merger, which many sought to frame as a potential competition case. Instead, the commission found that:

As regards Fitbit’s ability to compete in innovation with regard to smartwatches, the Commission notes that [Fitbit’s product strategy], there are also no competitive relationships that would lead to the Transaction reducing Google’s incentives to innovate in the future. Based on the Notifying Party’s submission, the Commission considers that there is no possible market assessed in this Decision where Fitbit is the only or main source of pressure on Google to innovate. For these reasons, the Commission considers that the Transaction would not unduly restrict competition in… innovation as regards the supply of smartwatches. This issue will, therefore, not be further discussed in this Decision.[115]

Review of mergers that involve potential competitors require agencies to make speculative assessments as to how competition will likely play out in a given market. Absent the ability to condition remedies on these future evolutions, error-cost considerations will often dictate that authorities clear mergers, despite a limited risk of future competitive harm.[116] Failing this, agencies and courts should, at the very least, set a high evidentiary bar for plaintiffs to bring forward such claims, or else numerous mergers will wrongly be prohibited as anticompetitive, to the detriment of consumers.

B.      Buying Up Every Potential Competitor Is Unlikely to Be a Successful Business Strategy

One cannot simply assume that mergers involving potential competitors are harmful. It is becoming a common theory of harm regarding non-horizontal acquisitions that they are, in fact, horizontal acquisitions in disguise. This is a form of the “horizontalization” discussed above. The acquired party may not be a direct competitor today but may become one in the future. Therefore, the theory goes, to reduce the competitive pressure they would otherwise face in the future, the incumbent will acquire a company that does not appear to be a competitor.

This argument to strengthen enforcement against mergers involving potential competitors is intuitive but it involves restrictive assumptions that weaken its applicability. The argument is laid out most completely by Steven Salop in his paper, Potential Competition and Antitrust Analysis: Monopoly Profits Exceed Duopoly Profits.[117] In it, he argues that:

Acquisitions of potential or nascent competitors by a dominant firm raise inherent anticompetitive concerns. By eliminating the procompetitive impact of the entry, an acquisition can allow the dominant firm to continue to exercise monopoly power and earn monopoly profits. The dominant firm also can neutralize the potential innovation competition that the entrant would provide.

Under the model that Salop puts forward, there should, in fact, be a presumption against any acquisition, since any firm is a potential competitor with a sufficiently small probability.[118] Given that a model like Salop’s animates lots of skepticism toward mergers with potential entrants, it is important to examine the model’s assumptions, including that, because monopoly profits exceed duopoly profits, incumbents have an incentive to eliminate potential competition for anticompetitive reasons.

The notion that monopoly profits exceed joint duopoly profits rests upon two restrictive assumptions that hinder the simple application of Salop’s model to antitrust in general and to the merger guidelines, in particular.

First, even in a simple model, it is not always true that monopolists have both the ability and incentive to eliminate any potential entrant simply because monopoly profits exceed duopoly profits. For the simplest complication, suppose there are two possible entrants, rather than the common assumption of just one entrant at a time. The monopolist must now pay each of the entrants enough to prevent entry. But how much? If the incumbent has already paid one potential entrant not to enter, the second could then enter the market as a duopolist, rather than as one of three oligopolists. Therefore, the incumbent must pay the second entrant an amount sufficient to compensate a duopolist, not their share of a three-firm oligopoly profit. The same is true for buying the first entrant. To remain a monopolist, the incumbent would have to pay each possible competitor duopoly profits.

Because monopoly profits exceed duopoly profits, it is profitable to pay a single entrant half of the duopoly profit to prevent entry. It is not, however, necessarily profitable for the incumbent to pay both potential entrants half of the duopoly profit to avoid entry by either.[119] With enough potential entrants, the monopolist in any market will not want to buy any of them out. In that case, the outcome involves no acquisitions.

If we observe an acquisition in a market with many potential entrants, which any given market may or may not have, there must be another reason for that deal besides monopoly maintenance. The presence of multiple potential entrants overturns the antitrust implications of the truism that monopoly profits exceed duopoly profits. The question turns instead to empirical analysis of the merger and market in question as to whether it would be profitable to acquire all potential entrants.

The second simplifying assumption that restricts applicability of Salop’s baseline model is that the incumbent has the lowest cost of production. He rules out the possibility of lower-cost entrants in Footnote 2: “Monopoly profits are not always higher. The entrant may have much lower costs or a better or highly differentiated product. But higher monopoly profits are more usually the case.” If one allows the possibility that an entrant may have lower costs (even if those lower costs won’t be achieved until the future, when the entrant gets to scale), it does not follow that monopoly profits (under the current higher-cost monopolist) necessarily exceed duopoly profits (with a lower-cost producer involved).

One cannot simply assume that all firms have the same costs or that the incumbent is always the lowest-cost producer. This is not just a modeling choice but has implications for how we think about mergers. As Manne, Bowman, & Auer argue:

Although it is convenient in theoretical modeling to assume that similarly situated firms have equivalent capacities to realize profits, in reality firms vary greatly in their capabilities, and their investment and other business decisions are dependent on the firm’s managers’ expectations about their idiosyncratic abilities to recognize profit opportunities and take advantage of them—in short, they rest on the firm managers’ ability to be entrepreneurial.[120]

Given the assumptions that all firms have identical costs and there is only one potential entrant, Salop’s framework would find that all possible mergers are anticompetitive and that there are no possible efficiency gains from any merger. Since the acquired firm cannot, by assumption, have lower costs of production, it cannot improve the incumbent’s costs of production. But, in fact, whether a merger is efficiency-reducing and bad for competition and consumers needs to be proven, not assumed.

If we take Salop’s acquisition model literally, every industry would have just one firm. Every incumbent would acquire every possible competitor, no matter how small—after all, monopoly profits are higher than duopoly profits, and so the incumbent both wants to and can preserve its monopoly profits. The model gives us no way to disentangle when mergers would stop. The merger, again by assumption, does not affect the production side of the economy but exists only to gain market power to manipulate the price. Since the model offers no downside to the incumbent of acquiring a competitor, it would acquire every last potential competitor, no matter how small, unless prevented by law.

Once we allow for the possibility that firms differ in productivity, however, it is no longer true that monopoly profits are greater than industry duopoly profits. We can see this most clearly in situations where there is “competition for the market” and the market is winner-take-all. If the entrant to such a market has lower costs, the profit under entry (when one firms wins the whole market) can be greater than the original monopoly profits. In such cases, monopoly maintenance alone cannot explain an entrant’s decision to sell. An acquisition could therefore be procompetitive and increase consumer welfare. For example, the acquisition could allow the lower-cost entrant to get to scale quicker. The acquisition of Instagram by Facebook, for example, brought the photo-editing technology that Instagram had developed to a much larger market of Facebook users and provided it with a powerful monetization mechanism that was otherwise unavailable to Instagram.

In short, the notion that incumbents can systematically and profitably maintain their market position by acquiring potential competitors rests on assumptions that, in practice, will regularly and consistently fail to materialize. It is thus improper to assume that most of these acquisitions reflect efforts by an incumbent to anticompetitively maintain its market position.

IV.    Guideline 5: Mergers Should Not Substantially Lessen Competition by Creating a Firm That Controls Products or Services That Its Rivals May Use to Compete

The word “may” in this context is much too open, appearing to include products that no firm would imagine using to compete—but may use—and products that have close substitutes that constrain competition. A better wording would be “likely use to compete” or, at least, “plausibly use to compete.” Alternatively, the guideline could use the language from the body of the guideline “have the ability and incentive,” since the incentive to restrict products and services that competitors use is what matters for predicting whether the merged party will restrict products and services.

The guideline should not use the phrase “make it harder for rivals to compete,” since that will include many pro-competitive mergers. If the merged firm is more productive and can outbid competitors for inputs, that merger makes it harder for rivals to compete. Would the agencies challenge such a merger? A better phrase would be that the “merged firm would have the ability and incentive to restrict access and thereby harm competition” or “merged firm would have the ability and incentive to weaken or exclude rivals and thereby harm competition.”

A.      Vertical Mergers Often Create Efficiencies That Make It Harder for Rivals to Compete

The language of “make it harder for rivals to compete” is especially problematic in vertical mergers, which guideline 5 is about, without saying as much. The reason is that vertical mergers often have pro-competitive effects that make it harder for rivals to compete. Most of the time, vertical mergers are benign or beneficial, often leading to cost reductions, synergies, new or improved products, and lower prices for consumers.[121] Again, as Aviv Nevo and colleagues summarized:

Applying the same sort of skepticism about efficiencies in a vertical merger as in a horizontal merger can amount to assuming away a portion of the economics that is at the heart of the vertical investigation.[122]

Critics of the “Chicago school orthodoxy” on vertical mergers pay special attention to “oligopoly” markets,^[123] contending that “[a] stronger overarching procompetitive presumption for vertical mergers does not make sense in oligopoly markets where vertical merger enforcement would be focused.”^[124] But the critics are simply wrong that the empirical evidence supports greater condemnation of vertical mergers, even in oligopoly markets. At best, the evidence from oligopoly markets is mixed. Rather than a rush to condemnation, there is a need for further research before adopting any new policies based on such ambivalent (at best) evidence.

Emerging criticisms of the so-called “orthodoxy” must either ignore or dismiss the hundreds of econometric studies famously reviewed by Lafontaine and Slade.^[125] Indeed, this longstanding work is criticized by some as irrelevant or insufficient.^[126] But the reality is that these studies constitute the overwhelming majority of the evidence we have; many, if not most, of the studies are well-done, even by modern standards.^[127] The upshot of these studies, as Lafontaine & Slade put it, is that:

[C]onsistent with the large set of efficiency motives for vertical mergers that we have described so far, the evidence on the consequences of vertical mergers suggests that consumers mostly benefit from mergers that firms undertake voluntarily.^[128]

Francine Lafontaine, while acknowledging the limitations of some of the evidence used for these studies, recently reiterated the relevance of the studies to vertical mergers, and restated the overall conclusions of the literature:

We were clear that some of the early empirical evidence is less than ideal, in terms of data and methods.

But we summarized by saying that the empirical literature reveals consistent evidence of efficiencies associated with the use of vertical restraints (when chosen by market participants) and, similarly, with vertical integration decisions.^[129]

Margaret Slade reiterated this same conclusion in June 2019 at the OECD, where she noted that, even in light of further studies, “[t]he empirical evidence leads one to conclude that most vertical mergers are efficient.”^[130] Moreover, as Slade noted, forecasting likely effects from vertical mergers using more modern tools—such as assessment of vertical upward pricing pressure—is a fraught and unreliable endeavor.^[131]

Nonetheless, critics forward the claim that many newer studies demonstrate harm from vertical mergers. The implication is that the balance of evidence taken from these studies tips the scales against a presumption of benefits from vertical mergers:

Surveys of earlier economic studies, relied upon by commenters who propose a procompetitive presumption, reference studies of vertical mergers in which the researchers sometimes identified competitive harm and sometimes did not. However, recent empirical work using the most advanced empirical toolkit often finds evidence of anticompetitive effects.^[132]

The implication is that the balance of evidence taken from these studies tips the scales against a presumption of benefits from vertical mergers. Yet the newer literature is no different than the old in finding widely procompetitive results overall, intermixed with relatively few seemingly harmful results. As scholars at the Global Antitrust Institute at George Mason Law School have noted in a thorough canvassing of the more-recent literature:

In sum, these papers from 2009-2018 continue to support the conclusions from Lafontaine & Slade (2007) and Cooper et al. (2005) that consumers mostly benefit from vertical integration. While vertical integration can certainly foreclose rivals in theory, there is only limited empirical evidence supporting that finding in real markets.^[133]

Below, we briefly review the actual results of several of these recent studies—including, in particular, studies that were referenced at the recent 2018 FTC hearings to support claims that the “econometric evidence does not support a stronger procompetitive presumption.”^[134]

Fernando Luco and Guillermo Marshall examined Coca-Cola and PepsiCo’s acquisitions of some of their downstream bottlers.^[135] At the time, Dr Pepper Snapple Group remained independent in selling inputs to bottlers. Bottlers, even those that are vertically integrated with one of their upstream suppliers, purchased inputs from competing upstream suppliers. Based on their statistical analysis, the authors conclude that vertical integration in the carbonated-beverage industry was associated with price increases for Dr Pepper Snapple Group products and price decreases for both Coca-Cola and PepsiCo products bottled by vertically integrated bottlers. However, the market share of the products associated with higher prices was no more than 2%. Thus, the authors conclude: “vertical integration did not have a significant effect on quantity-weighted prices when considering the full set of products.”^[136] Overall, the effect on consumers was either an efficiency gain or no change. As Francine Lafontaine notes, “in total, consumers were better off given who was consuming how much of what.”^[137]

Justine Hastings and Richard Gilbert conclude that vertical integration is associated with statistically significant higher wholesale gasoline prices.^[138] Using data from 1996-1998, their study examined the wholesale prices charged by a vertically integrated refiner/retailer and found the firm charged higher wholesale prices in cities where its retail outlets competed more with independent gas stations. Hastings and Gilbert conclude that their observations are consistent with a theory of raising rivals’ costs.^[139]

In subsequent research, Christopher Taylor, Nicolas Kreisle, and Paul Zimmerman examine retail gasoline prices following the 1997 acquisition of an independent gasoline retailer by a vertically integrated refiner/retailer.^[140] They estimate the merger was associated with a price increase of 0.4 to 1.0 cents per-gallon—about 1% or less—and was economically insignificant.^[141] These results were at odds with Hastings’ earlier review of the same merger, which concluded that the replacement of independent retailers with branded vertically integrated retailers would result in higher prices.^[142]

To explain the conflicting results between Hastings and Taylor et al., Hastings^[143] highlights the challenges of evaluating vertical mergers with incomplete data or using different sets of data—even seemingly similar data can yield wildly different results. Because of the wide range of reported results and their sensitivity to the data used, caution should be exercised before inferring any general conclusions from this line of research.

Other commonly cited studies for the proposition that the more recent evidence on vertical mergers shows a greater likelihood of harm fare no better.

Gregory Crawford, Robin Lee, Michael Whinston, & Ali Yurukoglu examine vertical mergers between cable-programming distributors (MVPDs) and regional sports networks (RSNs).^[144] Margaret Slade characterizes the findings of the paper as “mixed,” in that integration can be associated with both beneficial and harmful effects.^[145] In a purely semantic sense, that is an accurate characterization. But the overall results in Crawford et al. overwhelmingly find procompetitive consumer-welfare effects:

In counterfactual simulations that enforce program access rules, we find that vertical integration leads to signi?cant gains in both consumer and aggregate welfare… Averaging results across channels, we find that integration of a single RSN with effective program access rules in place would reduce average cable prices by 1.2% ($0.67) per subscriber per month in markets served by the RSN, and increase overall carriage of the RSN by 9.4%. Combined, these effects would yield, on average, a $0.43 increase in total welfare per household from all television services, representing approximately 17% of the average consumer willingness to pay for a single RSN. We also predict that consumer welfare would increase….

…On net, we find that the overall effect of vertical integration in the absence of effective program access rules—allowing for both efficiency and foreclosure incentives—is to increase consumer and total welfare on average, resulting in (statistically significant) gains of approximately $0.38–0.39 per household per month, representing 15–16% of the average consumer willingness to pay for an RSN….^[146]

The implications of this well-designed and carefully executed study are clear. Indeed, Harvard economist Robin Lee, one of the study’s authors, concluded that the findings demonstrate that the consumer benefits of efficiency gains outweighed any harms from foreclosure.[147]

Ayako Suzuki reviewed the vertical merger between Time Warner and Turner Broadcasting in programming and distribution in the cable-television market.^[148] The paper examined the merger’s effects on foreclosure, per-channel prices, basic-bundle product mix, and basic-bundle penetration.

The author found foreclosure following the merger in Time Warner markets for those rival channels that were not integrated with any cable distributors. After the merger, two independent channels, the Disney Channel and the Fox News Channel, were foreclosed from Time Warner markets. The paper notes that prior to the merger, two Turner channels (TBS and TCM) were foreclosed by Time Warner, but the foreclosure was ended after the merger: “Turner suffered from the low market shares of TBS and TCM in Time Warner markets, therefore it integrated itself with Time Warner in order to recover their market shares.”^[149]

Suzuki concludes that per-channel prices decreased more in Time Warner markets than they would have in the absence of the merger.^[150] The paper suggests transaction-cost efficiencies lowered the implicit cost to the channels’ distributor, causing input prices to shift downward, and in turn resulted in reduced cable prices to consumers.^[151]

V.      Guideline 6: Vertical Mergers Should Not Create Market Structures That Foreclose Competition

Guideline 6 appears to add additional structural presumptions that are not justified by the law or the economics. On the law, the guideline says “If the foreclosure share is above 50 percent, that factor alone is a sufficient basis to conclude that the effect of the merger may be to substantially lessen competition, subject to any rebuttal evidence…” However, the section of Brown Shoe immediately following the one cited states:

Between these extremes, in cases such as the one before us, in which the foreclosure is neither of monopoly nor de minimis proportions, the percentage of the market foreclosed by the vertical arrangement cannot itself be decisive.[152]

On the economics, guideline 6 shares all the issues of the structural presumptions discussed around guideline 1 and more. The “foreclosure share” is the amount the merged firm could foreclose. It does not require an incentive to foreclose. If guideline 6 remains, foreclosure share needs to include an incentive to foreclose. Otherwise, the agencies could challenge a merger of a firm with 51 percent of an upstream market and a firm with 0.001 percent of a downstream market since “the foreclosure share is above 50 percent, [and] that factor alone is a sufficient basis to conclude that the effect of the merger may be to substantially lessen competition.”

The courts have recently rejected such arguments, so it is surprising to see them in the Draft Guidelines. In the recent Microsoft-Activision merger, the Draft Guidelines would certainly flag it to be blocked since Microsoft could pull Call of Duty from the Sony PlayStation consoles. But the courts concluded that Microsoft would not have an incentive to pull Call of Duty, since Sony has the biggest market share.[153]

VI.    Guideline 8: Mergers Should Not Further a Trend Toward Concentration

The agencies are well-justified to think about the dynamics of the market, not just the static snapshot. Unfortunately, guideline 8 maintains all the flaws of guideline 1 and adds a few more.

It is important to reiterate: concentration need not be harmful to consumers. In fact, the trade and industrial-organization literature that explicitly studies changes (or trends) in competition finds that increased competition increases concentration. As Chad Syverson summarizes:

Many empirical studies in varied settings have found that greater substitutability/competition—resulting from, say, reductions in trade, transport, or search costs—shifts activity away from smaller, higher-cost producers and toward larger, lower-cost producers.. [We] demonstrate that search cost reductions reallocate market share toward lower-cost and larger sellers, increasing market concentration even as margins fall. It is not an exaggeration to say that there are scores, perhaps hundreds, of such studies.[154]

This literature does not imply that every increase in concentration is pro-competitive. Instead, it simply means that a previous trend toward concentration need not be anticompetitive in any way. If there is an industry that has become more concentrated through more competition, will the agencies block a merger that increases concentration but does not increase prices?

Guideline 8 is especially problematic when paired with the statement “efficiencies are not cognizable if they will accelerate a trend toward concentration.”[155] Such a statement effectively negates any efficiency defense available to all but the very smallest firms. Efficiencies will almost always increase concentration—especially if those efficiencies come from economies of scale. If a merger creates efficiencies, the merged firm can lower costs, cut prices, and attract more customers. Attracting more customers with better products and prices will likely increase competition. The economic evidence is quite strong that efficiency increases concentration.

VII.  Guideline 11: When a Merger Involves Competing Buyers, the Agencies Examine Whether It May Substantially Lessen Competition for Workers or Other Sellers

Guideline 11 should be commended for mentioning lower wages as an anticompetitive harm. The other guidelines would benefit from focusing more on effects on prices, quality, and innovation, instead of structural presumptions.

Guideline 11 should, however, be restricted to the first two paragraphs: the first stating that merger analysis applies to buyer markets and the second (if there was any confusion) that labor markets are buyer markets. The rest of the guideline is a digression on the nature of labor markets that cites neither law nor economics. For example, the guidelines say, “labor markets are often relatively narrow.”[156] What is the justification for this claim in the merger guidelines, of all documents?

If the agencies have demonstrated a loss of competition in the labor market, the guidelines make clear that the Clayton Act does not allow for the consideration of offsetting effects in output markets. In the standard monopsony models in economics, there is no offsetting effect, so the point is irrelevant. Harm to sellers of inputs (workers) hurts consumers as well. This was the case in the recent successful action to  block Penguin-Random House from merging with Simon & Schuster.[157] The parties agreed that, if there was harm to the authors, there would be fewer books, harming consumers.[158] There was no need to think about offset harms.

The hard part is when the agencies have yet to prove loss of competition in the labor market, but that putative loss is being adjudicated. Thorny issues arise that make competition among buyers different from competition among sellers, but the guidelines do not offer any guidance here. For example, will the agencies consider a reduction in wages to be evidence of harm in labor markets? A merger that increases efficiency but does not decrease competition could still end up reducing workers’ wages if the efficiency gains require fewer workers. Perhaps the merger does not require fewer workers overall, but it does reduce employment of a subset of workers. Will the agencies regard that as a labor-market harm? The guidelines may not be the right place for these clarifications, but providing guidance on such tough issues would be more beneficial than making blanket statements about the nature of labor markets.

A.        Monopsony Is More Than the Mirror Image of Monopoly

The application of antitrust to monopsony is significantly more complicated than it might seem. On the surface, it may appear that monopsony is simply the “mirror image” of monopoly.”[159] There are, however, several important differences between monopoly and monopsony, and several complications raised by monopsony analysis that significantly distinguish the analysis required for each. Most fundamental among these, monopsony and monopoly markets do not sit at the same place in the supply chain.[160] This matters because all supply chains end with final consumers. Accordingly, from a policy standpoint, it is essential to decide whether antitrust ultimately seeks to maximize output and welfare at that (final) level of the distribution chain (albeit indirectly); whether intermediate levels of the distribution chain (e.g., an input market) should be analyzed in isolation; or whether effects in both must be somehow aggregated.

This has important ramifications for antitrust enforcement against monopsonies. As we explain below, competitive conditions of input markets have salient impacts on prices and output in product markets. Given this, any evaluation of monopsony must consider the “pass-through” to the final product market, while there is no such “mirror image” complication in the consideration of final-product monopoly markets. Along similar lines, treating the assessment of mergers in input markets as the simple mirror image of product-market mergers presents important problems for the way authorities address merger efficiencies, as traditional efficiencies and increased buyer power are often two sides of the same coin. Finally, it is unclear how authorities should think about market definition—a cornerstone of modern antitrust policy—in labor markets, in particular.

The upshot is that, while monopsony concerns are becoming more prevalent in academic and policy discussions, the agencies should be extremely hesitant as they move forward. Some have argued that “[m]mergers affecting the labor market require some rethinking of merger policy, although not any altering of its fundamentals.”[161] As we discuss below, however, while the economic “fundamentals” undergirding merger policy may not change for labor-market mergers, the “rethinking” required to properly assess such mergers does entail fundamental changes that have not yet been adequately studied or addressed. As many have pointed out, there is only a scant history of merger enforcement in input markets in general, and even less in labor markets.[162] It is premature to offer guidelines purporting to synthesize past practice and the state of knowledge when neither is well established.

1.        Theoretical differences between monopoly and monopsony

Before getting to the practical differences of a monopoly case versus a monopsony case, consider the theoretical differences between identifying monopsony power versus monopoly power.[163] Suppose, for now, that a merger either generates efficiency gains or market power but not both. In a monopoly case, if there are efficiency gains from a merger, the quantity sold in the output market will increase. With sufficient data, the agencies will be able to see (or estimate) the efficiencies directly in the output market. Efficiency gains result in either greater output at lower unit cost or else product-quality improvements that increase consumer demand. In contrast, if the merger simply enhances monopoly power without efficiency gains, the quantity sold will decrease, either because the merging parties raise prices or quality declines. The empirical implication of the merger is seen directly in the market in question.

The monopsony case is more complicated, however. Ultimately, we can be certain of the effects of monopsony only by looking at the output market, not the input market where the monopsony power is claimed. To see this, consider again a merger that generates either efficiency gains or market (now monopsony) power. A merger that creates monopsony power will necessarily reduce the prices and quantity purchased of inputs like labor and materials. But this same effect (reduced prices and quantities for inputs) could be observed if the merger is efficiency-enhancing, as well. If there are efficiency gains, the merged parties may purchase fewer of one or more inputs. For example, if the efficiency gain arises from the elimination of redundancies in a hospital merger, the hospital will buy fewer inputs, hire fewer technicians, or purchase fewer medical supplies. This may even reduce the wages of technicians or the price of medical supplies, even if the newly merged hospitals are not exercising any market power to suppress wages.[164]

Decisionmakers cannot simply look at the quantity of inputs purchased in the monopsony case as the flip side of the quantity sold in the monopoly case, because the efficiency-enhancing merger can look like the monopsony merger in terms of the level of inputs purchased. The court can differentiate a merger that generates monopsony power from a merger that increases productive efficiencies only by looking to the output market. Once we look at the output market, as in a monopoly case, if the merger is efficiency-enhancing, there will be an increase in the output-market quantity. If the merger increases monopsony power, the firm perceives its marginal cost as higher than before the merger and will reduce output.[165]

In short, the assumption that monopsony analysis is simply the mirror image of monopoly analysis does not hold.[166] In both types of mergers—those that possibly generate monopoly or monopsony—the agencies and courts cannot look to the input market to differentiate them from efficiency-enhancing mergers; they must look at the output market. Therefore, it is impossible to discuss monopsony power coherently without considering the output market.

2.        Monopsony and merger efficiencies

In real world cases, mergers will not necessarily be either just efficiency-enhancing or just monopsony-generating, but a blend of the two. Any rigorous consideration of merger effects must account for both and make some tradeoff between them. The question of how guidelines should address monopsony power is inextricably tied to the consideration of merger efficiencies—particularly given the point above that identifying and evaluating monopsony power will often depend on its effects in downstream markets.

This reality raises some thorny problems for monopsony merger review that have not been well studied to date:

Admitting the existence of efficiencies gives rise to a subsequent set of difficult questions central to which is “what counts as an efficiency?.” A good example of why the economics of this is difficult is considering the case in which a horizontal merger leads to increased bargaining power with upstream suppliers. The merger may lead to the merging parties being able to extract necessary inputs at a lower price than they otherwise would be able to. If so, does this merger enhance competition in a possible upstream market? Perhaps not. However, to the extent that the ability to obtain inputs at a lower price leads to an increase in the total output of the industry, then downstream consumers may in fact bene?t. Whether the possible increase in the total surplus created by such a scenario should be regarded as off-setting any perceived loss in competition in a more narrowly de?ned upstream market is a question that warrants more attention than it has attracted to date.[167]

With “monopoly” mergers, plaintiffs must show that a transaction will reduce competition, leading to an output reduction and increased prices to consumers. This finding can be rebutted by demonstrating cost-saving or quality-improving efficiencies that would lead to lower prices or other forms of increased consumer welfare. In evaluating such mergers, agencies and courts must weigh the upward pricing pressure from reduced competition against the downward pricing pressure associated with increased efficiencies and the potential for improved quality.

As we have explained above, this analysis becomes more complicated when a merger raises monopsony concerns. In a simple model of monopsony, the merger would increase market power in the input market (e.g., labor), leading to a lower price paid for the input and a smaller quantity used of the input relative to pre-merger levels. Assuming no change in market power in the final product market, these cost savings would result in lower prices paid by consumers. Should such efficiency effects “count” in evaluating mergers alleged to lessen competition in input markets? It is surely too facile a response to assert that such efficiency effects would be “out of market” and thus irrelevant. Indeed, if antitrust enforcement truly seeks to promote consumer welfare, any evaluation of a “monopsony” merger must weigh these effects against the effects in the input market.

Some would argue these are the types of efficiencies that merger policy is meant to encourage. Others may counter that policy should encourage technological efficiencies while discouraging efficiencies stemming from the exercise of monopsony power.

But this raises another complication: How do agencies and courts distinguish “good” efficiencies from “bad?” Is reducing the number of executives pro- or anticompetitive? Is shutting down a factory or healthcare facility made redundant post-merger pro- or anticompetitive? Trying to answer these questions places agencies and courts in the position of second guessing not just the effects of business decisions, but the intent of those decisions (to a first approximation, the observed outcomes are identical). Even worse, it can create a Catch-22 where an efficiencies defense in the product market is turned into an efficiencies offense in the input market—e.g., a hyper-efficient merged entity may outcompete rivals in the product market, possibly leading to monopsony in the input market. In ambiguous cases this means the outcome may depend on whether it is challenged on the input or output side of the market, and it even implies that overcoming a challenge by successfully identifying efficiencies in one case creates the predicate for a challenge based on effects on the other side of the market.

A further complication arises when dynamic effects are considered, which may convert apparent harms even on only the seller side of an input market into benefits:

[T]he presence of larger buyers can make it more profitable for a supplier to reduce marginal cost (or, likewise, to increase quality). This result stands in stark contrast to an often expressed view whereby the exercise of buyer power would stifle suppliers’ investment incentives. In a model with bilateral negotiations, a supplier can extract more of the profits from an investment if it faces more powerful buyers, though the supplier’s total profits decline. Furthermore, the presence of more powerful buyers creates additional incentives to lower marginal cost as this reduces the value of buyers’ alternative supply options.[168]

None of this is to say the creation of monopsony power should categorically be excluded from the scope of antitrust enforcement, of course. But it is quite apparent that this sort of enforcement raises extremely complicated tradeoffs that are elided over or underappreciated in the current discourse and under-explored in the law. It would be deeply problematic to attempt to enshrine a particular view of these tradeoffs into guidelines given the current state of knowledge and practice in this area. Perhaps worse, it would almost surely undermine the efficacy and authority of guidelines in general, as courts are unlikely to find such guidelines to be the helpful distillation of economic and legal principles that they are today.

3.        Determining the relevant market for labor

In monopoly cases, agencies and courts face an enormous challenge in accurately identifying a relevant market. These challenges are multiplied in input markets—especially labor markets—in which monopsony is alleged. Many inputs are highly substitutable across a wide range of industries, firms, and geographies. For example, changes in technology, such as the development of PEX tubing and quick-connect fittings, allows for laborers and carpenters to perform work previously done exclusively by plumbers. Technological changes have also expanded the relevant market in skilled labor: Remote work during the COVID-19 pandemic, for example, demonstrates that many skilled workers are not bound by geography and compete in national—if not international—labor markets.

When Whole Foods attempted to acquire Wild Oats, the FTC defined the relevant market as “premium natural and organic supermarkets” as a way to exclude larger firms, such as Walmart and Kroger, from the relevant product market.[169] Yet even if one were to accept the FTC’s product market definition, it is unlikely that anyone would consider employment at a “premium natural and organic supermarket” as a distinct input market. This is because the skill set needed to work at Whole Foods overlaps with the skill set demanded by myriad retailers and other employers—and certainly overlaps with the skillset needed to work at Kroger.

Moreover, policies such as occupational licensing have the effect of arbitrarily defining the work that can be performed or the services provided by a wide range of workers. This raises the question whether firms should be scrutinized for exercising monopsony power when regulations may be limiting the scope of the relevant market and contributing to the monopsony conditions. A “whole-of-government” approach to competition,[170] in other words, would certainly work to reduce these artificial barriers to market scope before thwarting possibly efficiency enhancing mergers that appear monopsonistic only because of such government constraints.

Contrary to what some have claimed, applying the SSNIP test to input markets—in the form of a “small and significant but non-transitory reduction in wages” or “SSNRW”—would also raise significant difficulties.[171] For a start the necessary datapoints required to conduct a SSNRW test are much harder to obtain than is the case for the SSNIP. The SSNIP test asks whether a hypothetical monopolist could profitably raise prices 5-10% above the competitive baseline, whereas the SSNRW test questions whether a hypothetical monopsonist could profitably decrease wages by 5-10%. The former question is far more tractable than the latter. Indeed, under the SSNIP, profitability hinges on the quantity sold, as well as the difference between prices and costs—both of which are relatively amendable to measurement. This is less true of the SSNRW, which depends on the difference between prices paid for inputs and their “marginal revenue product.” The second of these two factors would prove extremely challenging, perhaps impossible, to measure. This makes the SSNRW significantly harder to apply than the SSNIP. At the same time, “wages” in many labor contexts consist of a complicated mix of factors, including some (e.g., “work environment”) that defy easy quantification. While there are, of course, issues with measuring quality changes in product markets, the problems are significantly magnified in labor markets, and laborers’ preferences are invariably more heterogenous across many more dimensions of the elements of labor’s “price.” Furthermore, the marginal revenue product of an input hinges on competitive conditions in the output market. This reinforces the sense that monopsony analysis inherently raises cross-market effects that are less prevalent in the monopoly case.

4.        Monopsony and the consumer welfare standard

As discussed in the previous sections, using antitrust enforcement to thwart potential monopsony harms is a task full of evidentiary difficulties, as well as complex tradeoffs. Perhaps more problematically, it is also unclear whether (and, if so, how) such an endeavor is consistent with the consumer welfare standard—the lodestar of antitrust enforcement—at least as it is currently understood and implemented by courts.

Marinescu & Hovenkamp assert that:

Properly defined, the consumer welfare standard applies in exactly the same way to monopsony. Its goal is high output, which comes from the elimination of monopoly power in the purchasing market.… [W]hen consumer welfare is properly defined as targeting monopolistic restrictions on output, it is well suited to address anticompetitive consequences on both the selling and the buying side of markets, and those that affect labor as well as the ones that affect products. In cases where output does not decrease, the anticompetitive harm to trading partners can also be invoked.”[172]

But this is far from self-evident. There are at least two problems with this reasoning.

For a start, the assertion that harm to input providers that does not result in reduced product output is actionable is based on a tenuous assertion that a mere pecuniary transfer is sufficient to establish anticompetitive harm.[173] This is problematic because such harms may actually benefit consumers. In the extreme example, all of the benefits of a better negotiating position are passed on to consumers.[174] The main justification for ignoring these cross-market effects (as with all market-definition exercises) is primarily a pragmatic one (though it is rather weakened in light of modern analytical methods).[175] Particularly in the context of inputs into a specific output market, these cross-market effects are inextricably linked and hardly beyond calculation. And as the enforcement agencies have previously recognized, “[i]nextricably linked out-of-market efficiencies, however, can cause the Agencies, in their discretion, not to challenge mergers that would be challenged absent the efficiencies.”[176]

The assertion that pecuniary transfers are actionable is also inconsistent with the fundamental basis for antitrust enforcement, which seeks to mitigate deadweight loss, but not mere pecuniary transfers that do not result in anticompetitive effects.[177]

Second, it is unclear whether the consumer welfare standard applies to input markets. At its heart, the consumer welfare standard focuses on the effects that a(n) (incipient) monopolist’s behavior may have on consumers. And courts have, arguably, extended this welfare calculation to all direct purchasers affected by anticompetitive behavior. Much less clear is whether courts have extended (or would extend) this notion of anticompetitive harm to input markets. This goes to the very heart of the consumer welfare standard.

As we explain above, lower wages could be consistent with both efficiency and monopsony.[178] Somewhat more problematically, these lower wages may also be accompanied by lower prices passed through to consumers (or at least the monopsonist’s direct purchasers, downstream).

Larger buyers may also be able to reduce their purchasing costs at the expense of suppliers…. The concept of buyer power as an efficiency defence rests squarely on such a presumption. What is more, the argument also posits that the exercise of buyer power will not only have distributional consequences, but also increase welfare and consumer surplus by reducing deadweight loss. As we spell out in detail below, welfare gains may arise both at the upstream level, i.e., in the transactions between the more powerful merged firm and its suppliers, as well as at the downstream level, where the creation of buyer power may translate into increased rivalry and lower prices. The extent to which final consumers ultimately benefit is of particular importance if antitrust authorities rely more on a consumer standard when assessing mergers. If total welfare is the standard, however, distributional issues are not directly relevant and any pass-on to consumers is thus only relevant in as much as it contributes to total welfare.[179]

This raises an obvious question: can the consumer welfare standard (and thus antitrust authorities and courts) reach a finding of anticompetitive harm if consumers (at least in the narrow market under investigation) are ultimately being charged lower prices? As the FTC summarized in closing the investigation of a merger between two pharmacy benefit managers, “[a]s a general matter, transactions that allow firms to reduce the costs of input products have a high likelihood of benefitting consumers, since lower costs create incentives to lower prices.”[180]

Consider Judge Breyer’s Kartell opinion. As Steve Salop explains:[181]

The famous Kartell opinion written by Judge (now Justice) Stephen Breyer provides an analysis of a buyer-side “cartel” (comprised of final consumers and their “agent” insurance provider, Blue Cross) that also is consistent with the true consumer welfare standard.… Buyer-side cartels generally are inefficient and reduce aggregate economic welfare because they reduce output below the competitive level…. However, a buyer-side cartel. comprised of final consumers generally would raise true consumer welfare (i.e., consumer surplus) because gains accrued from the lower prices would outweigh the losses from the associated output reduction, even though the conduct inherently reduces total welfare (i.e., total surplus).…

…Judge Breyer treated Blue Cross essentially as an agent for the customers it insured, rather than as an intermediary firm that purchased inputs and sold outputs as a monopolistic reseller. The court apparently assumed (perhaps wrongfully) that Blue Cross would pass on its lower input costs to its customers in the form of lower insurance premiums….

…In permitting Blue Cross to achieve and exercise monopsony power by aggregating the underlying consumer demands for medical care—i.e., permitting Blue Cross to act as the agent for final consumers—the Kartell court implicitly opted for the true consumer welfare standard. Blue Cross’s assumed monopsony conduct on behalf of its subscribers would thus lead to higher welfare for its subscribers despite reduced efficiency and lower aggregate economic welfare. Thus, this result represents a clear (if only implicit) judicial preference for the true consumer welfare standard rather than the aggregate economic welfare standard.

By this logic, it seems, the relevant “consumer” welfare in antitrust analysis—including mergers that increase either monopoly or monopsony power—is that of the literal consumer: the end-user of the final product. But this contrasts quite sharply with the standard mode of analysis in monopsony cases as the mirror image of monopoly, in which the merging parties’ “trading partner” (whether upstream or downstream) is the relevant locus of the welfare analysis.

Indeed, extended to more current potential cases, this mode of analysis raises a distinct problem for the agencies. Consider, for example, a hypothetical case against Kroger surrounding practices that exploit its buyer power.[182] Should such a challenge fail regardless of the effect on input providers because Kroger can be considered “an agent for the customers it [sells to]”? There is, as Salop seems to suggest,[183] some merit in such an approach, but it is certainly not how similar cases have been evaluated in the past.

There is no easy answer to the difficulty of assessing harm in upstream markets when downstream markets benefit. At first blush, excluding deadweight losses that stem from monopsony power (or at least forcing plaintiffs to show that downstream purchasers are also harmed) seems like legalistic reasoning that is largely incompatible with the welfarist ancestry of the consumer welfare standard.[184] Indeed, the consumer welfare standard is largely premised on the assumption that increased output is desirable, and deadweight losses are harmful to society, regardless of their second-order effects. It seems odd to depart from this reasoning just because a supplier, rather than a consumer, is being harmed. Not to mention that, from a welfare standpoint, inefficient switching, caused by a deadweight loss, is no less harmful in the monopsony context than the monopoly one.

But at least when it comes to law and antitrust practice, things are more complicated than that. Faced with what may potentially be intractable economic questions, antitrust courts have often decided to limit antitrust analysis to what economics generally refer to as partial equilibrium analysis. This likely explains why only direct purchasers can claim antitrust damages,[185] and why the Amex court chose to overlook potential harm to cash purchasers (as they were deemed to lie outside of the relevant market).[186] The upshot is that, with some notable exceptions (such as the case of two-sided markets in Amex), antitrust courts have been reluctant to analyze competitive effects in adjacent markets.

What might seem like an arbitrary decision appears more reasonable when one considers the sheer complexity of the task at hand. Economic behavior will often have second-order effects that run in an opposite direction to its first-order or “partial equilibrium” ones. A charcoal monopoly may cause buyers to opt for cleaner energy sources; a conservation cartel may maximize the long-term value of scarce resources.[187]

The question is whether antitrust law has a comparative advantage in dealing with these more “systemic” issues, or whether other legal frameworks are better adapted. Put differently, antitrust law’s main strength might be that it is mostly a consumer-oriented body of law that focuses on a single tractable problem: the prices consumers and other direct purchasers pay for goods. If that is true, then maybe other bodies of law (such as, e.g., labor and environmental laws) may be better suited to deal with broader harms. Indeed, in the case of each of these fields there exists a massive regulatory apparatus specifically designed to implement government standards. And, under the law as it stands, where antitrust law and a regulatory regime conflict, antitrust must give way.[188]

We do not purport to have a satisfactory answer to this complicated question. In fact, it is probably fair to say one does not exist. Antitrust law can either depart from its welfarist underpinnings—a large loss for its economic consistency—or it can follow those principles towards potentially intractable problems that may ultimately undermine its administrability and thus its usefulness as a policy tool. At this juncture, it is not clear there is a compromise that might enable enforcers to thread the needle to solve this complex conundrum. And if such a solution exists, it has yet to be articulated in a convincing manner that may lead to actionable insights for enforcers or courts.

Given all of this, the FTC and DOJ’s desire to adopt merger guidelines that address monopsony harms, while clearly important, seems premature compared to the state of the economic literature, and potentially unactionable under the consumer welfare standard. This is not to say the antitrust policy world should suddenly ignore monopsony harms, but rather that more research, discussion, and case law is needed before definitive guidelines can be written. And, ultimately, it may well be that legislative change is needed before any such guidelines will be enforceable before the courts.

VIII.     Market Definition

The difficulties discussed above should serve as a good reminder that market definition is but a means to an end. As William Landes, Richard Posner, and Louis Kaplow have all observed, market definition is merely a proxy for market power, which in turn enables policymakers to infer whether consumer harm (the underlying question to be answered) is likely in a given case.[189]

Given the difficulties inherent in properly defining markets, policymakers should redouble their efforts to precisely measure both potential barriers to entry (the obstacles that may lead to market power) or anticompetitive effects (the potentially undesirable effect of market power), under a case-by-case analysis that looks at both sides of a platform.

Unfortunately, this is not how the FTC has proceeded in recent cases or the current Draft Guidelines. The FTC’s Facebook complaint, to cite but one example, merely assumes the existence of network effects (a potential barrier to entry) with no effort to quantify their magnitude.[190] Likewise, the agency’s assessment of consumer harm is just two pages long and includes superficial conclusions that appear plucked from thin air:

The benefits to users of additional competition include some or all of the following: additional innovation…; quality improvements…; and/or consumer choice…. In addition, by monopolizing the U.S. market for personal social networking, Facebook also harmed, and continues to harm, competition for the sale of advertising in the United States.[191]

Not one of these assertions is based on anything that could remotely be construed as empirical or even anecdotal evidence. Instead, the FTC’s claims are presented as self-evident. Given the difficulties surrounding market definition in digital markets, this superficial analysis of anticompetitive harm is simply untenable.

In short, discussions around attention markets emphasize the important role of case-by-case analysis underpinned by the consumer welfare standard. Indeed, the fact that some of antitrust enforcement’s usual benchmarks are unreliable in digital markets reinforces the conclusion that an empirically grounded analysis of barriers to entry and actual anticompetitive effects must remain the cornerstones of sound antitrust policy. Or, put differently, uncertainty surrounding certain aspects of a case is no excuse for arbitrary speculation. Instead, authorities must meet such uncertainty with an even more vigilant commitment to thoroughness.

IX.   Rebuttal Evidence Showing That No Substantial Lessening of Competition Is Threatened by the Merger

Starting at page 39, we discussed how vertical mergers often are pro-competitive and introduce efficiencies. Even in the case of horizontal mergers, however, the best recent empirical work finds that efficiencies in many mergers.[192] While procompetitive efficiencies could be oversold by the merging parties, they cannot be assumed away, and the Draft Guidelines raise the burden on any efficiency defense beyond what is justified by the law or the economics. For example, the Draft Guidelines require that cognizable efficiencies “could not be achieved without the merger under review.”[193] First, “could not” is too high of a burden. Second, what if there were many similar mergers available that offered efficiencies, all of which were pro-competitive? The wording of draft guideline would not recognize those efficiencies, since they were not unique to the merger being considered. The wording of the 2010 HMGs is better: “The Agencies credit only those efficiencies likely to be accomplished with the proposed merger and unlikely to be accomplished in the absence of either the proposed merger or another means having comparable anticompetitive effects” (emphasis added).[194]

The most extreme version of “raising the burden of proof” is the statement: “efficiencies are not cognizable if they will accelerate a trend toward concentration (see Guideline 8) or vertical integration (see Guideline 6).”[195] Until that is removed, there effectively is no rebuttal, since most efficiencies will accelerate a trend toward concentration or involve vertical integration. As such, the above statement should be removed.

X.     Avoiding Damage to the Credibility of the Merger Guidelines

Conceptually, the role of guidelines is to codify the accepted knowledge in a particular area of antitrust for the sake of legal certainty, and not to drive the law toward a particular unsettled frontier of the discipline. It is highly doubtful, however, whether some of the issues raised in the Draft Guidelines enjoy anywhere near the level of consensus needed to justify being codified into guidelines. The problem with pretending that they do is that it risks turning “guidelines” into an opportunity for agencies to advocate for new antitrust law and set new antitrust policy, rather than offer a useful, albeit comparatively modest, tool for legal interpretation.

Relatedly, it is somewhat puzzling that the agencies feel compelled and empowered to issue new merger guidelines now. Typically, guidelines are issued in the face of new learnings or new jurisprudence with the potential to overhaul an area of antitrust law. Adoption of the 1982 guidelines, for instance, was preceded by a series of Supreme Court opinions that indicated a marked embrace of economic analysis in the Court’s antitrust analysis.[196] Nothing of this sort has, to our knowledge, preceded the agencies’ current proposals. If new economic or legal learning is not guiding the new guidelines, then what is? It is not cited in the Draft Guidelines. The most plausible explanation is that it is politics. This idea is further reinforced by the limited public debate surrounding the current process for adopting new guidelines, and the pervasiveness of certain contentious assumptions which indicate a clear political bias and preordained political intent.

Not that there isn’t precedent for this sort of approach. But the last time merger guidelines were (arguably) employed to advance a contentious political objective was more than 40 years ago.[197] By virtually any measure, subsequent updates to the guidelines have been aimed at attempting to incorporate relatively new-but-well-established learning and to synthesize updates to longstanding agency practice aimed at “getting it right,” particularly with respect to basic and ever-evolving procedural issues, like the use of thresholds. There has been, in other words, an overarching humility to the process, which has lent it a crucial authority in both courts and among practitioners and economic actors.

The 2010 [HMGs] are noteworthy because, although the agencies’ views are not binding on the judiciary, courts adjudicating merger challenges routinely cite them as persuasive. The Guidelines derive their persuasive value from laying out a consensus view on the framework that the FTC and DOJ have developed, over decades of experience, to analyze the effects of mergers. Reflecting precedent from courts and the agencies, and based on accepted economic principles, they garnered support at adoption and in case after case, serving as the touchstone for merging parties, enforcers, and judges alike.[198]

Indeed, where previous guidelines have strayed perhaps a bit too far into novelty, their influence on the courts has been minimal. Perhaps the best example of this has been the reception by courts of the 2010 Horizontal Merger Guidelines (“2010 HMGs”), particularly the intended diminishment of the role of technical analysis of market definition and the heightened reliance on relatively novel methods of direct evidence of competitive effects.[199] Although the 2010 HMGs have generally proved to be significantly influential,[200] courts’ have been decidedly reluctant to replace consideration of market definition with measures like the gross upward pricing pressure index (“GUPPI”) to assess unilateral effects.[201] Indeed, reliance on market shares to determine case outcomes has arguably increased.[202]

By contrast, the FTC’s recent rejection of the 2020 Vertical Merger Guidelines (“2020 VMGs”) was grounded in an obvious distaste for the specific outcomes it might have engendered.[203] Although nominally justified by a claimed lack of scholarly support,[204] that rhetoric was transparently faulty, particularly given the process by which the withdrawal was accomplished.[205] Indeed, as Carl Shapiro and Herbert Hovenkamp put it: “The Federal Trade Commission’s recent withdrawal of its 2020 vertical merger guidelines is flatly incorrect as a matter of microeconomic theory and is contrary to an extensive economic literature about vertical integration.”[206] To be sure, there was (and always will be) disagreement at the margins over best practices in merger analysis and enforcement. But nothing in the 2020 VMGs was unsupported by longstanding scholarship and practice (except, ironically, to the extent they may have gone too far at times toward repudiating the FTC majority’s preferences).[207]

And the same preference for simply stronger—not necessarily better—enforcement seems to be animating the agencies’ “very tendentious” (in the words of Doug Melamed) effort to produce new merger guidelines now.[208]  Indeed, in the press release announcing the guidelines-revision process, FTC Chair Khan and AAG Kanter declare at the outset that they have “launched a joint public inquiry aimed at strengthening enforcement against illegal mergers.”[209]

The Draft Guidelines are overwhelmingly concerned with the presumed dangers of underenforcement, but inexplicably pays almost no heed to the possibility, let alone the cost, of overenforcement. Leaving aside the fact that—in merger enforcement, as in antitrust law more generally—a sound error-cost framework takes a holistic view of the likelihood and cost of errors, underpinning the agencies’ slanted view are two popular, albeit unjustified, narratives that dissolve upon closer examination.

Ultimately, both these narratives appear designed to bolster the case for the type of politically motivated overhaul of the merger guidelines that the agencies have pre-committed themselves to, rather than to fulfill what is—and should remain—the primary purpose of merger guidelines: i.e., to codify state-of-the-art knowledge and practice in one area of antitrust law as a means to increase legal certainty.

Before the FTC and DOJ consider what recommendations should be incorporated into a new set of merger guidelines, it would be appropriate to briefly consider what the current review process should aim to achieve. This raises two critical questions: What is the ultimate aim of merger guidelines, and what should the process leading up to them look like?

A.      The Role of Merger Guidelines

Merger guidelines attempt to provide an authoritative and practical guide for enforcement and adjudication by explicating two important inputs into those processes. First, guidelines attempt to coalesce established agency thinking and practice to inform potential merging parties—effectively seeking to improve legal certainty by prefiguring how agencies are likely to respond to given situations. They also describe the “accepted wisdom” of merger analysis (especially that which stems from jurisprudence). “To be as effective and persuasive as possible, the Guidelines should reflect our best thinking about the competitive effects of mergers and appropriate merger enforcement policy.”[210] Updating merger guidelines may thus be necessary when the consensus—the economic and legal “best thinking” or the underlying jurisprudence—surrounding certain practices has evolved. “Indeed, many commentators regard the guidelines’ credibility arising from this collected institutional wisdom as a foundational principle of any further revisions to the Guidelines. This caution doubtlessly preserves consumer welfare by reducing the costs associated with uncertain antitrust enforcement.”[211]

As the Antitrust Modernization Commission (“AMC”) described them:

There is general consensus that the Merger Guidelines have acted as the “blueprint for the architecture” of merger analysis and, overall, provide a guide that “functions well.” The Guidelines have had a significant influence on judicial development of merger law, which is reflected in their widespread acceptance by the courts as the relevant framework for analyzing merger cases.… The Guidelines have also provided useful guidance and transparency to the business community and antitrust bar. Finally, the Guidelines have helped to influence the development of merger policy by jurisdictions outside the United States.[212]

Given these twin goals—providing legal certainty and “codifying” the accepted knowledge concerning certain antitrust situations—guidelines are not the place to set out a novel, activist agenda or push the boundaries of knowledge and practice.

This is no small detail. There is a vast difference between what may fairly be described as new learning (i.e., a new consensus gleaned from extensive scholarship and rigorous debate), on the one hand, and new interrogations (i.e., unresolved questions that pique the interest of some scholars), on the other. As the rest of our comment suggests, many of the questions currently contemplated by the agencies fall squarely within the latter category. Accordingly, while they arguably constitute an interesting research agenda for scholars, there is virtually no sense in which they justify drafting guidelines that seek to settle these unresolved issues and that, in doing so, lead to a significant departure from existing practice.

Our assertion here is further supported by the fact that guidelines do not have binding authority, either on enforcers or courts. Courts are under no obligation to adhere to antitrust guidelines, and they will be far less likely to look to them even for guidance if they espouse politicized, un-rigorous concepts. Accordingly, by importing novel and unresolved enforcement concepts (as well as approaches to merger enforcement) into their guidelines, the agencies may render them of little use both to the public and to the courts. As Tim Muris & Bilal Sayyed put it, “the Merger Guidelines have succeeded in significant part because they do not try to do too much.”[213] In short, there is a risk that the resulting updated guidelines will not describe the “state of the art” of the economic and legal understanding. As a result, they would no longer shed light on either agency practice or likely litigation outcomes. The guidelines would thus be devoid of any tangible purpose.

This would be a real loss for consumers, as non-specialist courts currently do often look to guidelines in order to appropriately resolve complex merger issues. “The Guidelines accrued substantial institutional credibility and capital with courts due to their economic sophistication and consistency in application.”[214] As Christine Varney, assistant attorney general of the DOJ Antitrust Division in the Obama administration and a member of the Federal Trade Commission in the Clinton administration, put it: “many courts indicate that they consider the Guidelines in assessing mergers under the antitrust laws, some finding them more useful than others.”[215] Numerous scholars and practitioners echo this view and applaud the role of the HMGs in bringing focus and consensus to merger enforcement.[216] Given the speculative and politicized nature of the draft guidelines, there is good reason to doubt that many courts will find the resulting guidelines to fall on the “more useful” end of the scale.

B.      How Guidelines Are Adopted

The process the DOJ and FTC are following to produce their updated guidelines is also problematic. Indeed, if guidelines are released without real opportunity for input and without clear indication that that input has been considered in their formulation, they will be of little use.

It is not inherently problematic to revisit and revise the guidelines, of course; the agencies have done so on a somewhat regular basis since the first guidelines were issued in 1968. In all previous instances (and in the case of the agencies’ other guidelines), revisions were preceded by significant public input, debate, and consideration, leading to identification of an overarching consensus. To take one example, the FTC and DOJ ran an extensive series of workshops and consultations when they updated the HMGs in 2009-2010.[217] In a joint press release announcing the workshops, the agencies explained the goal of this process: “The goal of the workshops will be to determine whether the Horizontal Merger Guidelines accurately reflect the current practice of merger review at the Department and the FTC as well as to take into account legal and economic developments that have occurred since the last significant Guidelines revision in 1992.”[218] And as Christine Varney later elaborated on the agencies’ process and what they expected to glean from it:

In addition to inviting comments, [five] workshops have been held over the past two months.… Our nearly 100 panelists have included leading practitioners, economists, consumer advocates, industry executives, and academics. We have been fortunate to have both former and current government enforcers from the United States and around the world share their perspectives with us.… We’ve learned a lot from the workshops and the comments received so far, and this morning I would like to offer some views about what we’ve heard during this process and where I believe areas of consensus are emerging.”[219]

This is quite different from the perfunctory process seemingly contemplated, at least thus far, by those same agencies today.

One response may be that the substantial process used to develop the 2010 HMGs was itself unnecessary. Rather, the agencies are approaching the current revisions using the notice-and-comment procedures required by the Administrative Procedure Act (“APA”).[220] The problem with this view is that the APA only applies agency rulemaking authorized by Congress—and, even then, it sets the procedural floor. Congress has not authorized the antitrust agencies to develop legally binding merger guidelines. This does not mean that it is impermissible for them to develop such guidelines as informal policy statement. It does mean, however, that such guidelines carry no force of law beyond their ability to persuade courts of their approach. On this account, adopting a minimal notice-and-comment approach offers minimal support for the proposed changes when compared to past guidelines—especially when normalized relative to the extent of the proposed changes. Modest changes might be supported by more modest procedure; substantial changes should be supported by more robust procedure.

To make matters worse, it is difficult to escape the sense that, whatever nominal process is employed by the agencies, the current guidelines-reform effort is intended to effect a predetermined, political outcome, irrespective of any actual consensus (or lack thereof) that emerges. We cannot know precisely how this process will unfold, of course, but there is considerable basis for concern. In particular, the FTC majority’s seriousness about engaging in apolitical, rigorous analysis must be called into question based on the inescapable pattern that has emerged from its recent conduct. In brief, the current FTC majority has undertaken a series of actions and adopted a series of governance policies that reveal an agency focused myopically on advancing a radical revision of antitrust law, as far as possible from the strictures of judicial review and without consultation from the antitrust community.[221]

This sense that politics, rather than evidence, is driving the current review process is further reinforced by the contents of the Draft Guidelines. Many of the claims therein demonstrate substantial bias and heavy reliance on contentious and unsupported assumptions. Indeed, the Draft Guidelines operate from the apparent assumptions (among others) that more enforcement is inherently better, that merger efficiencies are inconsistent with Section 7, and that distributional concerns should factor into merger review. The Draft Guidelines are overwhelmingly concerned with how the status quo may lead to false acquittals; the notions that authorities may err in the other direction, and that excessive enforcement may chill beneficial business activity, are conspicuously absent. Further, the inquiries of those questions often rely on cases that are woefully outdated and not reflective of a massive amount of subsequent economic learning and case law. Citations to cases throughout the draft guidelines are often one-sided and omit or ignore contrary authority.[222] This is notably the case of the guidelines’ repeated citations to Brown Shoe[223] (15 citations), Philadelphia National Bank[224] (eight citations), and Procter and Gamble[225] (six citations)—three mid-20th century cases that are widely decried as being out of tune with modern economics and social science.[226] In short, in their pursuit of strong merger enforcement, the agencies are seemingly looking to reverse time and return to an old set of learnings from which courts, enforcers, and mainstream antitrust scholars have all steered away.

The net effect of these problems is to undermine confidence in the agency. That effect that will carry over to the courts as they are confronted with the resulting guidelines, all the more so if the sanitizing effect of legitimate process is not applied going forward. Such undermining of confidence is a serious problem for effective guidelines, so much so that the FTC’s unremitting willingness to maneuver outside the bounds of established antitrust law and economics reveals perhaps a fundamental disdain for the opinion of the courts.

 

[1] U.S. Dep’t of Justice & F.T.C., Draft Merger Guidelines for Public Comment (Jul. 18, 2023), https://www.regulations.gov/comment/FTC-2023-0043-0001 [hereinafter “Draft Merger Guidelines” or “Draft Guidelines”].

[2] Draft Merger Guidelines, supra note 1, at 31 (“The Agencies may assess whether a merger may substantially lessen competition or tend to create a monopoly based on a fact-specific analysis under any one or more of the Guidelines discussed above.”)

[3] John Asker et al, Comments on the January 2022 DOJ and FTC RFI on Merger Enforcement, available at https://www.regulations.gov/comment/FTC-2022-0003-1847 at 15-6.

[4] Gregory J. Werden & Luke M. Froeb, Don’t Panic: A Guide to Claims of Increasing Concentration, 33 Antitrust 74, 74 (2018).

[5] Executive Office of the President, Council of Economic Advisers, Economic Report of the President 215 (Feb. 2020).

[6] See, e.g., Germán Gutiérrez and Thomas Philippon, Declining Competition and Investment in the U.S., NBER Working Paper No. 23583 (2017), https://www.nber.org/papers/w23583; Simcha Barkai, Declining Labor and Capital Shares, 75 J. Fin. 2021 (2020).

[7] See Jan De Loecker, Jan Eeckhout & Gabriel Unger, The Rise of Market Power and the Macroeconomic Implications, 135 Q. J. Econ. 561 (2020).

[8] See David Autor, et al., The Fall of the Labor Share and the Rise of Superstar Firms, 135 Q. J. Econ. 635 (2020).

[9] Ryan A. Decker, John Haltiwanger, Ron S. Jarmin & Javier Miranda, Where Has All the Skewness Gone? The Decline in High-Growth (Young) Firms in the U.S, 86 Eur. Econ. Rev. 4, 5 (2016).

[10] Several papers simply do not find that the accepted story—built in significant part around the famous De Loecker and Eeckhout study, see De Loecker, et al., supra note 2 —regarding the vast size of markups and market power is accurate. Among other things, the claimed markups due to increased concentration are likely not nearly as substantial as commonly assumed. See, e.g., James Traina, Is Aggregate Market Power Increasing? Production Trends Using Financial Statements, Stigler Center Working Paper (Feb. 2018), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3120849; see also World Economic Outlook, April 2019 Growth Slowdown, Precarious Recovery, International Monetary Fund (Apr. 2019), https://www.imf.org/en/Publications/WEO/Issues/2019/03/28/world-economic-outlook-april-2019. Another study finds that profits have increased but are still within their historical range. See Loukas Karabarbounis & Brent Neiman, Accounting for Factorless Income, 33 NBER Macroeconomics Annual 167 (2018). And still another shows decreased wages in concentrated markets but also that local concentration has been decreasing over the relevant time period. See Kevin Rinz, Labor Market Concentration, Earnings, and Inequality, 57 J. Human Resources S251 (2022), available at http://jhr.uwpress.org/content/57/S/S251.full.pdf+html. 

[11] See Harold Demsetz, Industry Structure, Market Rivalry, and Public Policy, 16 J. L. & Econ. 1 (1973). See also, e.g., Richard Schmalensee, Inter-Industry Studies of Structure and Performance, in 2 Handbook of Industrial Organization 951-1009 (Richard Schmalensee & Robert Willig, eds., 1989); William N. Evans, Luke M. Froeb & Gregory J. Werden, Endogeneity in the Concentration-Price Relationship: Causes, Consequences, and Cures, 41 J. Indus. Econ. 431 (1993); Steven Berry, Market Structure and Competition, Redux, FTC Micro Conference (Nov. 2017), available at https://www.ftc.gov/system/files/documents/public_events/1208143/22_-_steven_berry_keynote.pdf; Nathan Miller, et al., On the Misuse of Regressions of Price on the HHI in Merger Review, 10 J. Antitrust Enforcement 248 (2022).

[12] Harold Demsetz, The Intensity and Dimensionality of Competition, in Harold Demsetz, The Economics of the Business Firm: Seven Critical Commentaries 137, 140-41 (1995).

[13] See Nathan Miller, et al., supra note 12.

[14] Steven Berry, Martin Gaynor & Fiona Scott Morton, Do Increasing Markups Matter? Lessons from Empirical Industrial Organization, 33 J. Econ. Persp. 44, 48 (2019) (emphasis added). See also Jonathan Baker & Timothy F. Bresnahan, Economic Evidence in Antitrust: Defining Markets and Measuring Market Power, John M. Olin Program in L. & Econ., Stanford Law Sch. Working Paper 24 (Sep. 2006) (“The Chicago identification argument has carried the day, and structure-conduct-performance empirical methods have largely been discarded in economics.”).

[15] Gregory J. Werden & Luke M. Froeb, Don’t Panic: A Guide to Claims of Increasing Concentration, 33 Antitrust 74, 74 (2018).

[16] Christopher Garmon, The Accuracy of Hospital Screening Methods, 48 Rand J. Econ. 1068, 1070 (2017) (reviewing post-merger price changes for 28 hospital mergers, initially published as a BE Working Paper).

[17] Sharat Ganapati, Growing Oligopolies, Prices, Output, and Productivity, Working Paper (Oct. 6, 2018) at 13 (forthcoming in Am. Econ. J.: Microeconomics), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3030966.

[18] Id. at 1.

[19] Sam Peltzman, Productivity and Prices in Manufacturing During an Era of Rising Concentration, Working Paper (May 10, 2018, rev. Feb. 3, 2021), https://ssrn.com/abstract=3168877.

[20] Regarding geographic market area for hospitals, see, e.g., Joseph Farrell, et al., Economics at the FTC: Hospital Mergers, Authorized Generic Drugs, and Consumer Credit Markets, 39 Rev. Indus. Org. 271 (2011) (initially published as BE Working Paper): Garmon, The Accuracy of Hospital Screening Methods, supra note 17.

[21] W. Kip Viscusi, Joseph E. Harrington, Jr. & David E. M. Sappington, Economics of Regulation and Antitrust (2005) at 214-15.

[22] Mary Amiti & Sebastian Heise, U.S. Market Concentration and Import Competition, Federal Reserve Bank of New York, Working Paper No. 968 (May 2021), available at https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr968.pdf.

[23] Esteban Rossi-Hansberg, Pierre-Daniel Sarte & Nicholas Trachter, Diverging Trends in National and Local Concentration, in NBER Macroeconomics Annual 2020, Vol. 35 (Martin Eichenbaum & Erik Hurst eds., 2020).

[24] Rossi-Hansberg, et al., Presentation: Diverging Trends in National and Local Concentration, slide 3, available at https://conference.nber.org/conf_papers/f132587/f132587.slides.pdf.

[25] Rossi-Hansberg, et al, supra note 26, at 9.

[26] Id. at 14 (emphasis added).

[27] Ryan Decker, Discussion of “Diverging Trends in National and Local Concentration,” available at https://rdeckernet.github.io/website/2020ASSA_discussion_RST.pdf.

[28] See Rinz, supra note 11. See also David Berger, Kyle Herkenhoff & Simon Mongey, Labor Market Power, 112 AM. ECON. REV. 1147 (2022).

[29] C. Lanier Benkard, Ali Yurukoglu & Anthony Lee Zhang, Concentration in Product Markets, NBER, Working Paper No. 28745 (Apr. 2021), available at https://www.nber.org/papers/w28745.

[30] Id. at 4.

[31] Autor, et al. supra note 8. See David Autor, Christina Patterson & John Van Reenen, Local and National Concentration Trends in Jobs and Sales: The Role of Structural Transformation, NBER, Working Paper No. 31130 (Apr. 2023), available at https://www.nber.org/papers/w31130.

[32] Robert Kulick & Andrew Kard, A Tale of Two Samples: Unpacking Recent Trends in Industrial Concentration, AEI Economic policy Working Paper, available at https://www.aei.org/wp-content/uploads/2023/06/Kulick-Tale-of-Two-Samples-WP.pdf?x91208.

[33] Rossi-Hansberg, supra note 26 at 27 (emphasis added).

[34] Chang-Tai Hsieh & Esteban Rossi-Hansberg, The Industrial Revolution in Services, Working Paper (May 12, 2021), available at https://www.princeton.edu/~erossi/IRS.pdf.

[35] Id. at 4 (“[T]he increase in national industry concentration documented by Autor et al. (2017) and others, is driven by the expansion in markets per firms by top ?rms.”).

[36] Id. at 6.

[37] Id. at 41-42.

[38] Berger, et al., supra note 31.

[39] Id. at 1148.

[40] See Autor, et al., supra note 8.

[41] Robert E. Hall, New Evidence on the Markup of Prices Over Marginal Costs and the Role of Mega-Firms in the US Economy, Working Paper 16 (Apr. 27, 2018) (emphasis added), https://web.stanford.edu/~rehall/Evidence%20on%20markup%202018.

[42] Richard Schmalensee, Inter-Industry Studies of Structure and Performance, in 2 Handbook of Industrial Organization 951, 1000 (Richard Schmalensee & Robert Willig eds., 1989). See also Timothy F. Bresnahan, Empirical Studies of Industries with Market Power, in 2 Handbook of Industrial Organization 1011, 1053-54 (Richard Schmalensee & Robert Willig eds., 1989) (“[A]lthough the [most advanced empirical literature] has had a great deal to say about measuring market power, it has had very little, as yet, to say about the causes of market power.”); Frank H. Easterbrook, Workable Antitrust Policy, 84 Mich. L. Rev. 1696, 1698 (1986) (“Today it is hard to find an economist who believes the old structure-conduct-performance paradigm.”).

[43] Baker & Bresnahan, supra note 14, at 26.

[44] Chad Syverson, Macroeconomics and Market Power: Context, Implications, and Open Questions 33 J. Econ. Persp. 23, (2019) at 26.

[45] See Rinz, supra note 11

[46] Id. at S259.

[47] Berger et al., supra note 31 at 1148.

[48] Elizabeth Weber Handwerker & Matthew Dey, Some Facts About Concentrated Labor Markets in the United States. Industrial Relations: A Journal of Economy and Society, (2023), early view at https://onlinelibrary.wiley.com/doi/abs/10.1111/irel.12341.

[49] Draft Guidelines at 12.

[50] See J.A. Schumpeter, Capitalism, Socialism and Democracy 72 (1976).

[51] See Kenneth Arrow, Economic Welfare and the Allocation of Resources for Invention, in The Rate and Direction of Inventive Activity: Economic and Social Factors 620 (Richard R. Nelson ed.,1962).

[52] See, e.g., Philippe Aghion, Nick Bloom, Richard Blundell, Rachel Griffith & Peter Howitt, Competition and Innovation: An Inverted-U Relationship, 120 Q. J. Econ. 702 (2005).

[54] See, e.g., Michael L. Katz & Howard A. Shelanski, Mergers and Innovation, 74 Antitrust L.J. 1, 22 (2007) (“The literature addressing how market structure affects innovation (and vice versa) in the end reveals an ambiguous relationship in which factors unrelated to competition play an important role.”).

[55] Dirk Auer, Structuralist Innovation: A Shaky Legal Presumption in Need of an Overhaul, CPI Antitrust Chronicle (Dec. 1, 2018).

[56] Amended complaint, Fed. Trade Comm’n v. Facebook, Inc., No. 1:20-cv-03590 (D.C. Cir. filed Aug. 19, 2021), available at https://www.ftc.gov/system/files/documents/cases/ecf_75-1_ftc_v_facebook_public_redacted_fac.pdf, at 73.

[57] This is not to say that some economists do not believe that more competitive market structures generally lead to more innovation. But rather that these writings have (i) not garnered a wide consensus among the economics profession, and (ii) often rest on narrow assumptions that reduce their application to specific settings. See, e.g., Carl Shapiro, Competition and Innovation: Did Arrow Hit the Bull’s Eye?, in The Rate and Direction of Inventive Activity Revisited 400 (Josh Lerner & Scott Stern eds., 2011). See also Ilya Segal & Michael D. Whinston, Antitrust in Innovative Industries, 97 Am. Econ. Rev. 1712 (2007). For instance, both above papers conclude that exclusivity, though it may increase innovator’s ex-post profits, is unlikely to increase incentives to innovate because it prevents entry by more innovative rivals. To reach this conclusion, the authors notably assume that consumers that are bound by exclusivity contracts never find it profitable to purchase the innovation of a second firm (they assume that the innovation costs more to produce than the value to consumers of its incremental improvement). There is no reason to believe that this is, or is not, a good reflection of reality.

[58] Richard J. Gilbert, Innovation Matters: Competition Policy for the High-Technology Economy, 116 (2020)

[59] Ronald L. Goettler & Brett R. Gordon, Does AMD Spur Intel to Innovate More?, 119 J. Pol. Econ. 1141, 1141 (2011)

[60] Mitsuru Igami, Estimating the Innovator’s Dilemma: Structural Analysis of Creative Destruction in the Hard Disk Drive Industry, 1981–1998, 125 J. Pol. Econ. 798, 798 (2017)

[61] Elena Patel & Nathan Seegert, Does Market Power Encourage or Discourage Investment? Evidence From the Hospital Market, 63 J.L. Econ. 667, 667 (2020).

[62] See Aghion, et al., supra note 52, 701-28 (2005). The theoretical aspects of this paper are a refinement of previous seminal research by some of these authors, which found that increased product market competition had a negative effect on innovation. See P. Aghion & P. Howitt, A Model of Growth Through Creative Destruction, 60 Econometrica 323 (1992).

[63]  Id. at 707.

[64] See, e.g., Federico Etro, Competition, Innovation, and Antitrust: A Theory of Market Leaders and Its Policy Implications (2007) at 163-64.

[65] See Aghion, et al., supra note 52, at 714.

[66] Id. at 706.

[67] Id. at 702.

[68] Id.

[69] Eric Fruits, Justin (Gus) Hurwitz, Geoffrey A. Manne, Julian Morris & Alec Stapp, Static and Dynamic Effects of Mergers: A Review of the Empirical Evidence in the Wireless Telecommunications Industry, OECD Directorate for Financial and Enterprise Affairs Competition Committee, Global Forum on Competition. DAF/COMP/GF(2019)13 (Sep. 4, 2020), available at https://one.oecd.org/document/DAF/COMP/GF(2019)13/en/pdf.

[70] See, generally, Nicolai J. Foss & Peter G. Klein, Organizing Entrepreneurial Judgment (2012).

[71] See, e.g., J. Gregory Sidak & David J. Teece, Dynamic Competition in Antitrust Law, 5 J. Competition L. & Econ. 581 (2009).

[72] Asker, et al., supra note 3, at 34.

[73] Cristina Caffarra, Gregory S. Crawford & Tommaso Valletti, “How Tech Rolls”: Potential Competition and “Reverse” Killer Acquisitions, Antitrust Chronicle (May, 26, 2020) (“Large digital platforms in particular have exceptional abilities to pursue organic expansion but also opportunities to ‘roll up’ (willing) startups to ‘get there faster’, ‘buying’ instead of expending effort in rival innovation. Foregoing such effort is never good for consumers and society as a whole: while innovative effort is costly, it will often yield multiple providers and differentiated services, with socially desirable properties.”).

[74] See, e.g., Steven C. Salop, Potential Competition and Antitrust Analysis: Monopoly Profits Exceed Duopoly Profits, Working Paper (Apr. 28, 2021), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3839631. See also C. Scott Hemphill & Tim Wu, Nascent Competitors, 168 U. Pa. L. Rev. 1879 (2019).

[75] See, e.g., Salop, id. See also Giulio Federico, Gregor Langus & Tommaso Valletti, Horizontal Mergers and Product Innovation, 59 Int’l J. Indus. Org. 1 (2018).

[76] CMA, Completed Acquisition by Facebook, Inc (now Meta Platforms, Inc.) of Giphy, Inc., Final Report (Nov. 30, 2021) at 223 (“We consider this evidence supports the view that GIPHY was an important player in a potentially growing segment of the display advertising market, and as such (taking account of the economic context, in particular the expected closeness of competition between Facebook and GIPHY) an important part of a dynamic competitive process with Facebook and others.”).

[77] See Caffarra, et al., supra note 74. (“What seems to be more frequent are cases where the acquisition may effectively extinguish the standalone effort of the buyer to expand in a particular space because the target immediately provides it with those capabilities.  This covers a broader set of possibilities as platforms continue to expand into adjacent fields by buying functionalities, capabilities, even whole businesses (see the recent example of Google/Fitbit).”).

[78] FTC v. Meta Platforms Inc., U.S. Dist. LEXIS 29832 (2023); Complaint, Fed. Trade Comm’n v. Facebook, Inc., No. 1:20-cv-03590 (D.C. Cir. filed Jan. 13, 2021).

[79] Case No COMP/M.7217—Facebook / WhatsApp (Oct. 3, 2014), at 61.

[80] Jessica L Recih, Letter Reminding Both Firms That WhatsApp Must Continue To Honor Its Promises To Consumers With Respect to the Limited Nature of the Data It Collects, Maintains, and Shares With Third Parties (Apr. 10, 2014), available at https://www.ftc.gov/system/files/documents/public_statements/297701/140410facebookwhatappltr.pdf.

[81] CMA Case ME/5525/12—Anticipated acquisition by Facebook Inc of Instagram Inc (Aug. 22, 2012).

[82] Amended complaint, Fed. Trade Comm’n v. Facebook, Inc., No. 1:20-cv-03590 (D.C. Cir. filed Aug. 19, 2021), available at https://www.ftc.gov/system/files/documents/cases/ecf_75-1_ftc_v_facebook_public_redacted_fac.pdf, at 26-41.

[83] Steven C. Salop, A Suggested Revision of the 2020 Vertical Merger Guidelines, Georgetown Law Faculty Publications and Other Works No. 2381 (Dec. 2021), https://scholarship.law.georgetown.edu/facpub/2381.

[84] D. Bruce Hoffman, Acting Dir., Bureau of Competition, Fed. Trade Comm’n, Remarks at the Credit Suisse 2018 Washington Perspectives Conference: Vertical Merger Enforcement at the FTC 4 (Jan. 10, 2018), available at https://www.ftc.gov/system/files/documents/public_statements/1304213/hoffman_vertical_merger_speech_final.pdf.

[85] Although in some cases, such as a failing firm, the competing firm may have exited the market even if the merger did not occur.

[86] Hoffman, supra note 86.

[87] Id.

[88] Id.

[89]Id.

[90] Christine S. Wilson, Comm’r, Fed. Trade Comm’n, Keynote Address at the GCR Live 8th Annual Antitrust Law Leaders Forum: Vertical Merger Policy: What Do We Know and Where Do We Go? (Feb. 1, 2019) at 4 & 9, available at https://www.ftc.gov/system/files/documents/public_statements/1455670/wilson_-_vertical_merger_speech_at_gcr_2-1-19.pdf.

[91] Id.

[92] Hoffman, supra note 86.

[93] Salop, supra note 89.

[94] Competition and Consumer Protection in the 21^st Century; FTC Hearing #5: Vertical Merger Analysis and the Role of the Consumer Welfare Standard in U.S. Antitrust Law; Before the FTC, Presentation Slides at 15 (Nov. 1, 2018), available at https://www.ftc.gov/system/files/documents/public_events/1415284/ftc_hearings_5_georgetown_slides.pdf [hereinafter “Salop, Vertical Merger Slides”] (emphasis added). See also Serge Moresi & Steven C. Salop, When Vertical is Horizontal: How Vertical Mergers Lead to Increases in “Effective Concentration,” 59 R. Ind. Org. 177 (2021) (“there in an inherent loss of an indirect competitor that supported the non-merging competitors in the pre-merger world, which leads to reduced competition when there is an input foreclosure concern”).

[95] Id. (emphasis added).

[96] Id. (emphasis added).

[97] Id. (emphasis added).

[98] Salop, supra note 89.

[99] USDA, Citrus Fruits 2021 Summary (Sep. 2021), available at https://downloads.usda.library.cornell.edu/usda-esmis/files/j9602060k/kp78hg05n/1544cn77s/cfrt0921.pdf.

[100] Chad Miles, After Troubling New Forecast, Florida Citrus Advocate Says Industry Is “At A Crossroads,” WFTS (Jan. 24, 2022), https://www.abcactionnews.com/news/region-polk/after-troubling-new-forecast-florida-citrus-advocate-says-industry-is-at-a-crossroads.

[101] David Reiffen & Michael Vita, Comment: Is There New Thinking on Vertical Mergers? 63 Antitrust L. J. 917, 920 (1995) (“Some horizontal mergers do not create efficiencies; they are profitable only because of the post-merger anticompetitive conduct made possible by the transaction. By contrast, the primary lesson of both the older literature on vertical integration, as well as the newer ‘post-Chicago’ literature, is that this trade-off invariably exists for all vertical transactions that threaten to reduce consumer welfare.”). See also Joseph J. Spengler, Vertical Integration and Antitrust Policy, 58 J. Pol. Econ. 347 (1950); Robert H. Bork, The Antitrust Paradox: A Policy At War With Itself 219 (1978); Richard A. Posner, Antitrust Law 228 (1976).

[102] See, e.g., Michael A. Salinger, Vertical Mergers and Market Foreclosure, 103 Q.J. Econ. 345 (1988).

[103] Reiffen & Vita, supra note 107, at 921.

[104] Id. (“High price-cost margins increase the size of gain to the integrated firm as well as the potential for anticompetitive input price increases.… [And] the post-Chicago literature suggests that vertical mergers that occur in the presence of high premerger concentration are likely to result in lower prices to consumers.”).

[105] Cooper, et al., supra note 108, at 645.

[106] Jonathan B. Baker, Nancy L. Rose, Steven C. Salop, & Fiona Scott Morton, Five Principles for Vertical Merger Enforcement Policy, Georgetown Law Faculty Pub. and Other Works, Working Paper No. 2148 (2019), at 8 https://scholarship.law.georgetown.edu/facpub/2148 (emphasis added).

[107] Reiffen & Vita, supra note 107, at 920.

[108] See, e.g., Cooper, et al., supra note 108, at 642-45 (assessing the vast majority of post-Chicago theories of vertical harm under the heading “softening horizontal competition”).

[109] See, generally, Salop, supra note 79.

[110] Id.

[111] Id.

[112] See Dissenting Statement of Commissioner Joshua D. Wright, In the Matter of Nielsen Holdings N.V. and Arbitron Inc., FTC File No. 131-0058 (Sep. 20, 2013), at note 3 (“Nevertheless, competitive effects in actual potential competition cases still are more difficult, on balance, to assess than typical merger cases because the agency must predict whether a party is likely to enter the relevant market absent the merger. It is because of this uncertainty and the potential for conjecture that the courts and agencies have cabined the actual potential competition doctrine by, for instance, applying a heightened standard of proof for showing a firm likely would enter the market absent the merger.”) (citing B.A.T. Indus., 104 F.T.C. 852, 926-28 (1984) (applying a “clear proof” standard)).

[113] See Mergers That Eliminate Potential Competition, RESEARCH HANDBOOK ON THE ECONOMICS OF ANTITRUST LAWS 111 (Einer Elhauge, ed. 2012) (“All twelve studies [of airline markets] find that potential competition results in lower prices by incumbent carriers, in ten cases by statistically significant amounts. Except as noted below, the amounts range between one quarter of one percent to about two percent, and in all cases are less than the amount of the price decline from one additional actual competitor, specifically, from one eighth to one third as large.”).

[114] Id.

[115] Case No M.9660—Google/Fitbit, C (2020) 9105 final (Dec. 12, 2020), at 398.

[116] Geoffrey A. Manne, Sam Bowman & Dirk Auer, Technology Mergers and the Market for Corporate Control, 86 Mo. L. Rev. 1047 (2021). This is because the availability of mergers as an exit strategy have been shown to increase investments by firms. Regarding the effect of mergers on investment, see, e.g., Gordon M. Phillips & Alexei Zhdanov, Venture Capital Investments and Merger and Acquisition Activity Around the World, NBER, Working Paper No. 24082 (Nov. 2017), https://ssrn.com/abstract=3082265 (“We examine the relation between venture capital (VC) investments and mergers and acquisitions (M&A) activity around the world. We find evidence of a strong positive association between VC investments and lagged M&A activity, consistent with the hypothesis that an active M&A market provides viable exit opportunities for VC companies and therefore incentivizes them to engage in more deals.”). And increased M&A activity in the pharmaceutical sector has not led to decreases in product approvals; rather, quite the opposite has happened. See, e.g., Barak Richman, et al., Pharmaceutical M&A Activity: Effects on Prices, Innovation, and Competition, 48 Loyola U. Chi. L. J. 787, 799 (2017) (“Our review of data measuring pharmaceutical innovation, however, tells a different story. First, even as merger activity in the United States increased over the past ten years, there has been a steady upward trend of FDA approvals of new molecular entities (“NMEs”) and new biological products (“BLAs”). Hence, the industry has been highly successful in bringing new products to the market.”).

[117] See Salop, supra note 79.

[118] In this section, we focus on Salop’s comments because they represent a common perspective. As Salop himself points out “I do not think that any of the analysis in the article is new. I expect that all the points have been made elsewhere by others and myself.”

[119] For a simple example, consider a Cournot oligopoly model with an industry inverse demand curve of P(Q)=1-Q and constant marginal costs that are normalized to zero. In a market with N symmetric sellers, each seller earns in profits. A monopolist makes a profit of 1/4. A duopolist can expect to earn a profit of 1/9. If there are 3 potential entrants plus the incumbent, the monopolist must pay each the duopoly profit 3*1/9=1/3, which exceeds the monopoly profits of 1/4. In the Nash/Cournot equilibrium, the incumbent will not acquire any of the competitors since it is too costly to keep them all out.

[120] Manne, Bowman, & Auer, supra note 132, at 1080.

[121] For vertical mergers the welfare-enhancing effects are well-established. See, e.g., Francine Lafontaine & Margaret Slade, Vertical Integration and Firm Boundaries: The Evidence, 45 J. ECON. LIT. 629, 677 (2007) (“In spite of the lack of unified theory, over all a fairly clear empirical picture emerges. The data appear to be telling us that efficiency considerations overwhelm anticompetitive motives in most contexts. Furthermore, even when we limit attention to natural monopolies or tight oligopolies, the evidence of anticompetitive harm is not strong.”). See also, Global Antitrust Institute, Comment Letter on Federal Trade Commission’s Hearings on Competition and Consumer Protection in the 21st Century, Vertical Merger, Geo. Mason Law & Econ. Research Paper No. 18-27, 8–9 (2018), https://ssrn.com/abstract=3245940 (“In sum, these papers from 2009-2018 continue to support the conclusions from Lafontaine & Slade (2007) and Cooper et al. (2005) that consumers mostly benefit from vertical integration. While vertical integration can certainly foreclose rivals in theory, there is only limited empirical evidence supporting that finding in real markets. The results continue to suggest that the modern antitrust approach to vertical mergers 9 should reflect the empirical reality that vertical relationships are generally procompetitive.”). Along similar lines, empirical research casts doubt on the notion that antitrust merger enforcement (in marginal cases) raises consumer welfare. The effects of horizontal mergers are, empirically, less well documented. See, e.g., Robert W. Crandall & Clifford Winston, Does Antitrust Policy Improve Consumer Welfare? Assessing the Evidence, 17 J. ECON. PERSP. 3, 20 (2003) (“We can only conclude that efforts by antitrust authorities to block particular mergers or affect a merger’s outcome by allowing it only if certain conditions are met under a consent decree have not been found to increase consumer welfare in any systematic way, and in some instances the intervention may even have reduced consumer welfare.”). While there is some evidence that horizontal mergers can reduce consumer welfare, at least in the short run, see, e.g., Gregory J. Werden, et al., The Effects of Mergers on Price and Output: Two Case Studies from the Airline Industry, 12 MGMT. DECIS. ECON. 341 (1991), the long-run effects appear to be strongly positive. See, e.g., Dario Focarelli & Fabio Panetta, Are Mergers Beneficial to Consumers? Evidence from the Market for Bank Deposits, 93 AM. ECON. REV. 1152, 1152 (2003) (“We find strong evidence that, although consolidation does generate adverse price changes, these are temporary. In the long run, efficiency gains dominate over the market power effect, leading to more favorable prices for consumers.”). See, generally, Michael C. Jensen, Takeovers: Their Causes and Consequences, 2 J. ECON. PERSP. 21 (1988). Some related literature similarly finds that horizontal merger enforcement has harmed consumers. See B. Espen Eckbo & Peggy Wier, Antimerger Policy Under the Hart-Scott-Rodino Act: A Reexamination of the Market Power Hypothesis, 28 J.L. & ECON. 119, 121 (1985) (“In sum, our results do not support the contention that enforcement of Section 7 has served the public interest. While it is possible that the government’s merger policy has deterred some anticompetitive mergers, the results indicate that it has also protected rival producers from facing increased competition due to efficient mergers.”); B. Espen Eckbo, Mergers and the Value of Antitrust Deterrence, 47 J. FINANCE 1005, 1027–28 (1992) (rejecting “the market concentration doctrine on samples of both U.S. and Canadian mergers. By implication, the results also reject the effective deterrence hypothesis. The evidence is, however, consistent with the alternative hypothesis that the horizontal mergers in either of the two countries were expected to generate productive efficiencies”).

[122] Asker, et al., supra note 3, at 34.

[123] See Baker, et al., supra note 106, at 13 (“[Treating vertical mergers more permissively than horizontal mergers, even in concentrated markets] would be tantamount to presuming that vertical mergers benefit competition regardless of market structure. However, such a presumption is not warranted for vertical mergers in the oligopoly markets that typically prompt enforcement agency review.”); Competition and Consumer Protection in the 21^st Century: FTC Hearing #5: Vertical Merger Analysis and the Role of the Consumer Welfare Standard in U.S. Antitrust Law; FTC Transcript 164 (Nov. 1, 2018) [hereinafter “FTC Hearing #5”] at 14-15 (statement of Steven Salop, Professor, Georgetown University Law Center). See also Cooper, et al., supra note 108, at 643-48 (discussing such “post-Chicago” scholarship).

[124] Salop, Vertical Merger Slides, supra note 96, at 14.

[125] See Lafontaine & Slade, supra note 138. See also Cooper, et al., supra note 108; Daniel O’Brien, The Antitrust Treatment of Vertical Restraint: Beyond the Beyond the Possibility Theorems, in Report: The Pros and Cons of Vertical Restraints 22, 36 (2008) (“[Table 1 in this paper] indicates that voluntarily adopted restraints are associated with lower costs, greater consumption, higher stock returns, and better chances of survival.”).

[126] See, e.g., Salop, Vertical Merger Slides, supra note 96, at 17 (dismissing Lafontaine & Slade and attempting to adduce a few newer studies as contradictory and dispositive).

[127] It is fair to point out that, indeed, many of the studies look at the effects of vertical restraints rather than vertical mergers, per se. But such studies remain instructive, given that the theories of harm arising from vertical mergers arise from precisely the sorts of conduct at issue in these studies. If perfect alignment of facts were required, no economic theory or evidence would ever be relevant.

[128] Lafontaine & Slade, supra note 138, at 663.

[129] FTC Hearing #5 (statement of Francine Lafontaine, Professor, Michigan-Ross), supra note 140, at 93.

[130] Margaret E. Slade, Vertical Integration and Mergers: Empirical Evidence and Evaluation Methods, OECD (Jun. 7, 2019), https://one.oecd.org/document/DAF/COMP/WD(2019)68/en/pdf.

[131] Id. at 10-12.

[132] Baker, et al., supra note 106, at 11.

[133] Global Antitrust Institute, Comment at the Fed. Trade Comm’n Hearings on Competition and Consumer Protection in the 21st Century, The Consumer Welfare Standard in Antitrust Law (Sep. 7, 2018).

[134] Salop, Vertical Merger Slides, supra note 96, at 25. For a more comprehensive assessment of the recent empirical scholarship (finding the same overall results that we do), see id.

[135] Fernando Luco & Guillermo Marshall, Vertical Integration With Multiproduct Firms: When Eliminating Double Marginalization May Hurt Consumers (Jan. 15, 2018), https://ssrn.com/abstract=3110038.

[136] Id. at 22.

[137] FTC Hearing #5 (statement of Francine Lafontaine, Professor, Michigan-Ross), supra note 140, at 88.

[138] Justine S. Hastings & Richard J. Gilbert, Market Power, Vertical Integration, and the Wholesale Price of Gasoline, 33 J. Indus. Econ. 469 (2005).

[139] Id. at 471.

[140] Christopher T. Taylor, Nicolas M. Kreisle, & Paul R. Zimmerman, Vertical Relationships and Competition in Retail Gasoline Markets: Empirical Evidence from Contract Changes in Southern California: Comment, 100 Am. Econ. Rev. 1269 (2010).

[141] Id. at 1272-76.

[142] Justine Hastings, Vertical Relationships and Competition in Retail Gasoline Markets: Empirical Evidence from Contract Changes in Southern California, 94 Am. Econ. Rev. 317 (2004).

[143] Justine Hastings, Vertical Relationships and Competition in Retail Gasoline Markets: Empirical Evidence from Contract Changes in Southern California: Reply, 100 Am. Econ. Rev. 1227 (2010).

[144] Gregory S. Crawford, Robin S. Lee, Michael D. Whinston, & Ali Yurukoglu, The Welfare Effects of Vertical Integration in Multichannel Television Markets, 86 Econometrica 891 (2018).

[145] Slade, supra, note 147, at 6.

[146] Crawford, et al, supra note 160, at 893-94 (emphasis added).

[147] Competition and Consumer Protection in the 21^st Century: FTC Hearing #3: Multi-sided Platforms, Labor Markets, and Potential Competition; FTC Transcript 101 (Oct. 17, 2018) (statement of Robin Lee, Professor, Harvard University), available at https://www.ftc.gov/system/files/documents/public_events/1413712/ftc_hearings_session_3_transcript_day_3_10-17-18_0.pdf  (“[O]ur key findings are that, on average, across channels and simulations, there is a net consumer welfare gain from integration. Don’t get me wrong, there are significant foreclosure effects, and rival distributors are harmed, but these negative effects are oftentimes offset by sizeable efficiency gains. Of course, this is an average. It masks considerable heterogeneity. When complete exclusion occurs, which happens both in our simulations and in the data some of the times, consumer welfare is actually harmed.”).

[148] Ayako Suzuki, Market Foreclosure and Vertical Merger: A Case Study of the Vertical Merger Between Turner Broadcasting and Time Warner, 27 Int’l J. of Indus. Org. 532 (2009).

[149] Id. at 542.

[150] Id.

[151] Id.

[152] Brown Shoe, 370 U.S. at 329 ((emphasis added)

[153] FTC v. Microsoft Corporation et al., No. 23-cv-02880-JSC (N.D. Cal. Jul. 10, 2023), available at https://s3.documentcloud.org/documents/23870711/ftc-v-microsoft-preliminary-injunction-opinion.pdf.

[154] Syverson, supra note 48, at 27.

[155] Draft Merger Guidelines, at 34.

[156] Id. at 26.

[157] United States v. Bertelsmann SE & Co. KGaA, No. CV 21-2886-FYP, 2022 WL 16949715 (D.D.C. Nov. 15, 2022)

[158] Id. (“The defendants do not dispute that if advances are significantly decreased, some authors will not be able to write, resulting in fewer books being published, less variety in the marketplace of ideas, and an inevitable loss of intellectual and creative output.”)

[159] See, e.g., Roger G. Noll, Buyer Power and Economic Policy, 72 Antitrust L.J. 589, 589 (2005) (“[B]uyer power arises from monopsony (one buyer) or oligopsony (a few buyers), and is the mirror image of monopoly or oligopoly.”); Id. at 591 (“Asymmetric treatment of monopoly and monopsony has no basis in economic analysis.”).

[160] Of course, monopoly markets in intermediate products (i.e., products sold not to end users but to manufacturers who use them as inputs for products that are, in turn, sold to end users) may indeed sit in the same place in the supply chain as the typical monopsony market. Some, but not all, of the complications associated with monopsony analysis are relevant to these monopoly situations, as well.

[161] Ioana Marinescu & Herbert J. Hovenkamp, Anticompetitive Mergers in Labor Markets, 94 Indiana L.J. 1031, 1034 (2019) (“While the use of section 7 to pursue mergers among buyers is well established, there is relatively little case law.”)

[162] Id. at 1034.

[163] For purposes of this discussion, “monopoly” refers to any merger that would increase market power by a seller in a product market and “monopsony” refers to any merger that would increase market by the buyer in an input market.

[164] Some efficiency-enhancing mergers will be identifiable, of course. For example, if the merger raises quantities and prices for all inputs, that must be efficiency enhancing. The problem, as always, is with the hard cases.

[165] See C. Scott Hemphill & Nancy L. Rose, Mergers that Harm Sellers, 127 Yale L.J. 2078 (2018).

[166] In theory, one could force a monopsony model to be identical to monopoly. The key difference is about the standard economic form of these models that economists use. The standard monopoly model looks at one output good at a time, while the standard factor demand model uses two inputs, which introduces a trade-off between, say, capital and labor. See Sonia Jaffe, Robert Minton, Casey B. Mulligan, and Kevin M. Murphy, Chicago Price Theory (2019) at Ch. 10. One could generate harm from an efficiency for monopoly (as we show for monopsony) by assuming the merging parties each produce two different outputs, apples and bananas. An efficiency gain could favor apple production and hurt banana consumers. While this sort of substitution among outputs is often realistic, it is not the standard economic way of modeling an output market.

[167] John Asker & Volker Nocke, Collusion, Mergers, and Related Antitrust Issues, NBER Working Paper 29175 (Aug. 2021), at 42, https://www.nber.org/papers/w29175.

[168] Roman Inderst & Christian Wey, Countervailing Power and Dynamic Efficiency, 9 J. Eur. Econ. Ass’n 702, 715 (2011).

[169] FTC v. Whole Foods Mkt., Inc., 548 F.3d 1028, 1063 (D.C. Cir. 2008). See also Geoffrey Manne, Premium, Natural, and Organic Bullsh**t, Truth on the Market (Jun. 6, 2007), https://truthonthemarket.com/2007/06/06/premium-natural-and-organic-bullst (“In other words, there is a serious risk of conflating a ‘market’ for business purposes with an actual antitrust-relevant market.”).

[170] Executive Order 14036 on Promoting Competition in the American Economy, § 2(g) (Jul. 9, 2021) https://www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition-in-the-american-economy (“This order recognizes that a whole-of-government approach is necessary to address overconcentration, monopolization, and unfair competition in the American economy.”

[171] Ioana Marinescu & Herbert J. Hovenkamp, Anticompetitive Mergers in Labor Markets, 94 Indiana L.J. 1031, 1050 (2019). (“The analogous question for considering monopsony in the labor market would be to identify the smallest labor market for which a hypothetical monopsonist in that market would find profitable to implement a “small and significant but non-transitory reduction in wages” (SSNRW)”).

[172] Id. 1062-63.

[173] As Marinescu & Hovenkamp note (attributing the point to Hemphill & Rose), “[i]n this case, there is merely a transfer away from workers and towards the merging firms. Yet. . . such a transfer is a harm for antitrust law as it results from a reduction in competition.” Id. at 1062 (citing Hemphill & Rose, supra note 211, at 2104-05).

[174] See, e.g., Kartell v. Blue Shield of Mass., Inc., 749 F.2d 922 (1st Cir. 1984). See also Steven C. Salop, Question: What Is the Real and Proper Antitrust Welfare Standard? Answer: The True Consumer Welfare Standard, 22 Loy. Consumer L. Rev. 336, 342 (2010) (“However, Judge Breyer treated Blue Cross essentially as an agent for the customers it insured, rather than as an intermediary firm that purchased inputs and sold outputs as a monopolistic reseller. The court apparently assumed (perhaps wrongfully) that Blue Cross would pass on its lower input costs to its customers in the form of lower insurance premiums.”).

[175] See Jan M. Rybnicek & Joshua D. Wright, Outside In or Inside Out?: Counting Merger Efficiencies Inside and Out of the Relevant Market, in William E. Kovacic: An Antitrust Tribute Vol. II (2014) at *10, SSRN version available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2411270) (“Despite the incorporation of efficiencies analysis into modern merger evaluation, and the advances in economics that allow efficiencies to be identified and calculated more accurately than at the time of Philadelphia National Bank, antitrust doctrine in the United States still supports a regime that fails to take into account efficiencies arising outside of the relevant market.”).

[176] U.S. Dep’t of Justice & Fed. Trade Comm’n, Commentary on the Horizontal Merger Guidelines (2006), available at http://www.justice.gov/atr/public/guidelines/215247.htm. See also U.S. Dep’t of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines (1992, rev. 1997) § 4 at n.36 (“In some cases, merger efficiencies are “not strictly in the relevant market, but so inextricably linked with it that a partial divestiture or other remedy could not feasibly eliminate the anticompetitive effect in the relevant market without sacrificing the efficiencies in the other market(s).”).

[177] See, e.g., Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 487 (1977) (“Every merger of two existing entities into one, whether lawful or unlawful, has the potential for producing economic readjustments that adversely affect some persons. But Congress has not condemned mergers on that account; it has condemned them only when they may produce anticompetitive effects.”). See also Robert H. Bork, The Antitrust Paradox: A Policy at War with Itself (2021) at 110 (“Those who continue to buy after a monopoly is formed pay more for the same output, and that shifts income from them to the monopoly and its owners, who are also consumers. This is not dead-weight loss due to restriction of output but merely a shift in income between two classes of consumers. The consumer welfare model, which views consumers collectively, does not take this income effect into account.”).

[178] Hemphill & Rose distinguish monopsony power from increased buyer leverage, which does not result in a deadweight loss but is simply a redistribution from sellers to buyers. Leverage will be partially passed through to consumers as lower prices. Standard monopsony increases in bargaining power will not generate lower prices, since “[a]n increase in monopsony power increases the firm’s perceived marginal cost and reduces output. Far from lowering output prices, the increased monopsony power raises price in output markets (if the firm faces downward sloping demand for its output) or else leaves it unchanged.” Hemphill & Rose, supra note 211, at 2106.

[179] Roman Inderst & Greg Shaffer, Buyer Power in Merger Control, in ABA Antitrust Section Handbook, Issues in Competition Law and Policy (Wayne Dale Collins, ed. 2008) at 1611, 1612-13 (emphasis added).

[180] Statement of the Federal Trade Commission Concerning the Proposed Acquisition of Medco Health Solutions by Express Scripts, Inc., FTC File No. 111-0210, at 7 (Apr. 2, 2012), available at https://www.ftc.gov/sites/default/files/documents/closing_letters/proposed-acquisition-medco-health-solutions-inc.express-scripts-inc./120402expressmedcostatement.pdf.

[181] Salop, supra note 218, at 342 (“Efficiency benefits count under the true consumer welfare standard, but only if there is evidence that enough of the efficiency benefits pass through to consumers so that consumers (i.e., the buyers) would directly benefit on balance from the conduct.”)

[182] The same analysis can be applied to a hypothetical merger between, say, Kroger and Trader Joe’s in which we assume for the sake of argument there is no increase in seller power, but there is an increase in buyer power.

[183] It is worth noting that, although the analogy between Blue Cross and Kroger here seems quite apt and powerful, there can be little doubt that Salop would not condone this mode of analysis in a such a case against Kroger. Whether (if correct) that is a function of one person’s idiosyncratic preferences or an expression of the complication inherent in assessing consumer welfare in monopsony cases is uncertain.

[184] See, e.g., Gregory J. Werden, Monopsony and the Sherman Act: Consumer Welfare in a New Light, 74 Antitrust L.J. 707, 735 (2007). (“Predatory pricing that excludes competitors and results in monopsony is condemned by the Sherman Act, just as the Act condemns predatory pricing that excludes competitors and obtains a monopoly.… Protecting consumer welfare is the principal goal of the Sherman Act, but it is only a goal: The Sherman Act protects the people by protecting the competitive process. The competitive process could not be under mined any more clearly than it is when competing buyers conspire to eliminate the competition among themselves, and it matters not one whit under the Sherman Act whether the conspiracy threatens the welfare of conspirators’ customers or the welfare of end users. It is enough that the conspiracy threatens the welfare of the trading partners exploited by the conspiracy. Harm to them implies harm to people protected by the Sherman Act.”).

[185] See, Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977); Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481 (1968).

[186] Ohio v. Am. Express Co., 138 S. Ct. 2274 (2018).

[187] See Jonathan H. Adler, Conservation Through Collusion: Antitrust as an Obstacle to Marine Resource Conservation, 61 Wash. & Lee L. Rev 3 (2004) (“The purported aim of antitrust law is to improve consumer welfare by proscribing actions and arrangements that reduce output and increase prices. Conservation aims to improve human welfare by maximizing the long-term productive use of natural resources, an aim that often requires limiting consumption to sustainable levels. While such conservation measures might increase prices in the short-run, when successful they enhance consumer welfare by increasing long-term production and ensuring the availability of valued resources over time.”).

[188] See, Credit Suisse Securities (USA) LLC v. Billing, 551 U.S. 264, *19-*20, *1-*2 (2007) (holding that where “(1) an area of conduct [is] squarely within the heartland of… regulations; (2) [there is] clear and adequate… authority to regulate; (3) [there is] active and ongoing agency regulation; and (4) [there is] a serious conflict between the antitrust and regulatory regimes. . . , [such] laws are ‘clearly incompatible’ with the application of the antitrust laws…[,]” thus “implicitly precluding the application of the antitrust laws to the conduct alleged”). See also U.S. v. Philadelphia Nat. Bank, 374 U.S. 321, 398-74 (1963) (Harlan, J. dissenting) (“Sweeping aside the ‘design fashioned in the Bank Merger Act’ as ‘predicated upon uncertainty as to the scope of § 7 of the Clayton Act’ (ante, p. 349), the Court today holds § 7 to be applicable to bank mergers and concludes that it has been violated in this case. I respectfully submit that this holding, which sanctions a remedy regarded by Congress as inimical to the best interests of the banking industry and the public, and which will in large measure serve to frustrate the objectives of the Bank Merger Act, finds no justification in either the terms of the 1950 amendment of the Clayton Act or the history of the statute.”).

[189] See William M Landes & Richard A Posner, Market Power in Antitrust Cases, 94 HARV. L. REV. 937 (1981) at 938 (“The standard method of proving market power in antitrust cases involves first defining a relevant market in which to compute the defendant’s market share, next computing that share, and then deciding whether it is large enough to support an inference of the required degree of market power.”); Louis Kaplow, Why (ever) Define Markets?, 124 Harv. L. Rev. 437, 515 (2010) (“The market definition / market share paradigm plays a prominent role in competition law regimes. Its central justification is that it offers a useful means of making inferences about market power, indeed one that is easier or more reliable than other means of market power determination. Upon analysis, however, it appears that this widely accepted view is always false….”).

[190] Complaint, Fed. Trade Comm’n v. Facebook, Inc., No. 1:20-cv-03590 (D.C. Cir. filed Jan. 13, 2021), at 19. Consider the following passage from the FTC’s complaint: “Direct network effects are a significant barrier to entry into personal social networking. Specifically, because a core purpose of personal social networking is to connect and engage with personal connections, it is very difficult for a new entrant to displace an established personal social network in which users’ friends and family already participate. A potential entrant in personal social networking services also would have to overcome users’ reluctance to incur high switching costs.” This analysis fails to examine whether users can and do coordinate among themselves to join rival networks. For a detailed discussion of these considerations, see, e.g., Daniel F Spulber, Consumer Coordination in the Small and in the Large: Implications for Antitrust in Markets With Network Effects, 4 J. Competition L. & Econ. 207 (2008). See also, Dirk Auer, What Zoom Can Tell Us About Network Effects and Competition Policy in Digital Markets, Truth on the Market (Apr. 14, 2019), https://truthonthemarket.com/2019/04/24/what-zoom-can-tell-us-about-network-effects-and-competition-policy-in-digital-markets.

[191] Complaint, Fed. Trade Comm’n v. Facebook, Inc., id. at 48.

[192] Vivek Bhattacharya, Gaston Illanes & David Stillerman, Merger Effects and Antitrust Enforcement: Evidence from U.S. Retail, NBER, Working Paper 31123 (2023), available at https://www.nber.org/papers/w31123; Mert Demirer & Omer Karaduman, Do Mergers and Acquisitions Improve Efficiency: Evidence from Power Plants, available at https://gsb-faculty.stanford.edu/omer-karaduman/files/2022/12/Draft.pdf; Celine Bonnet & Jan Philip Schain, An Empirical Analysis of Mergers: Efficiency Gains and Impact on Consumer Prices, 16 J. Comp. Law & Econ 1 (2020).

[193] Draft Guidelines, at 33.

[194] 2010 HMGs, at 30.

[195] Draft Guidelines, at 34.

[196] See, e.g., Reiter v. Sonotone Corp., 442 U.S. 330 (1979); Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977); United States v. General Dynamics, 415 U.S. 486 (1974).

[197] See, e.g., Matt Stoller, The Secret Plot to Unleash Corporate Power, Big (Apr. 8, 2022), https://mattstoller.substack.com/p/the-secret-plot-to-unleash-corporate?s=r.

[198] Noah Joshua Phillips & Christine S. Wilson, Comm’rs, Fed. Trade Comm’n, Statement Regarding the Request for Information on Merger Enforcement (Jan. 18, 2022) at 1-2, available at http://www.ftc.gov/system/files/documents/public_statements/1599775/phillips_wilson_rfi_statement_final_1-18-22.pdf.

[199] See U.S. Dep’t of Justice & F.T.C., Horizontal Merger Guidelines (2010), available at https://www.justice.gov/sites/default/files/atr/legacy/2010/08/19/hmg-2010.pdf [hereinafter “2010 HMGs”].

[200] Carl Shapiro & Howard Shelanski, Judicial Response to the 2010 Horizontal Merger Guidelines, 58 Rev. Indus. Org. 51 (2021).

[201] Jan M. Rybnicek & Laura C. Onken, A Hedgehog in Fox’s Clothing: The Misapplication of GUPPI Analysis, 23 Geo. Mason L. Rev. 1187, 1190 (2016). (“This paper argues that the GUPPI regularly fails to live up to its promise for two principal reasons: (1) the GUPPI all too often is based on inaccurate or incomplete data and (2) there is insufficient guidance to allow the business community and the antitrust bar to draw reliable conclusions about how the GUPPI will be incorporated into the agencies’ enforcement decisions.”).

[202] Adam Di Vincenzo, Brian Ryoo, & Joshua Wade, Refining, Not Redefining, Market Definition: A Decade Under the 2010 Horizontal Merger Guidelines, Antitrust Source (Aug. 2020) at 11, available at https://www.americanbar.org/content/dam/aba/publishing/antitrust-magazine-online/2020/august-2020/aug20_divincenzo_8_18f.pdf (“Market definition has retained a central and often outcome-determinative role in courts’ merger analysis beyond the presumption of anticompetitive effects; in this respect, market definition is as important today as it was prior to the 2010 Guidelines.”).

[203] Fed. Trade Comm’n, Federal Trade Commission Withdraws Vertical Merger Guidelines and Commentary (Sep. 15, 2021), https://www.ftc.gov/news-events/news/press-releases/2021/09/federal-trade-commission-withdraws-vertical-merger-guidelines-commentary.

[204] Id. (“The guidance documents… include unsound economic theories that are unsupported by the law or market realities.”).

[205] As the dissent from the withdrawal of the 2020 VMGs by Commissioners Philips and Wilson notes, “the FTC leadership continues the disturbing trend of pulling the rug out under from honest businesses and the lawyers who advise them, with no explanation and no sound basis of which we are aware .., with the minimum notice required by law, virtually no public input, and no analysis or guidance.” Noah Joshua Phillips & Christine S. Wilson, Comm’rs, Fed. Trade Comm’n, Dissenting Statement Regarding the Commission’s Rescission of the 2020 FTC/DOJ Vertical Merger Guidelines and the Commentary on Vertical Merger Enforcement (Sep. 15, 2021) at 1, https://www.ftc.gov/legal-library/browse/cases-proceedings/public-statements/dissenting-statement-commissioners-noah-joshua-phillips-christine-s-wilson-regarding-commissions. See also, id. at 6 (“The majority could have waited to rescind the 2020 Guidelines until they had something with which to replace it. It appears they prefer sowing uncertainly in the market and arrogating unbridled authority to condemn mergers without reference to law, agency practice, economics, or market realities.”).

[206] Carl Shapiro & Herbert Hovenkamp, How Will the FTC Evaluate Vertical Mergers?, ProMarket (Sep. 23, 2021), https://www.promarket.org/2021/09/23/ftc-vertical-mergers-antitrust-shapiro-hovenkamp. Other choice words used by Shapiro & Hovenkamp in their extremely short essay to describe the FTC majority’s asserted basis for withdrawing the 2020 Guidelines include: “baffling,” “reli[ant] on specious economic arguments,” “demonstrably false,” “ignor[ing] relevant expertise,” “contrary to a broad consensus among economists going back at least to. . . 1968,” “flatly inconsistent with the Horizontal Merger Guidelines,” and “likely to cause real harm.” Id.

[207] See, generally, Geoffrey A. Manne, Kristian Stout & Eric Fruits, The Fatal Economic Flaws of the Contemporary Campaign Against Vertical Integration, 68 Kansas L. Rev. 923 (2020).

[208] Doug Melamed, in Antitrust Policy and Its Different Perspectives: Where Do the Antitrust Professionals Agree and Disagree? (interview by Alden Abbott with Doug Melamed and Joshua Wright), The Bridge Podcast (Apr. 19, 2022), transcript available at https://www.mercatus.org/bridge/podcasts/04192022/antitrust-policy-and-its-different-perspectives (“I will say I think the request for information that the agencies put out is a little worrisome because I think it’s very tendentious. At the outset, they say, ‘We’re interested in information that will help us strengthen merger enforcement.’ I would have thought the appropriate question would be information that would help us improve merger enforcement. They ask for information about false negatives, they don’t ask for information about false positives.”).

[209] Press Release, Federal Trade Commission and Justice Department Seek to Strengthen Enforcement Against Illegal Mergers (Jan. 18, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/01/federal-trade-commission-justice-department-seek-strengthen-enforcement-against-illegal-mergers (emphasis added).

[210] Christine A. Varney, Assistant Att’y Gen., Antitrust Div., U.S. Dept. of Justice, An Update on the Review of the Horizontal Merger Guidelines (Jan. 26, 2010) at 4, available at http://www.justice.gov/atr/public/speeches/254577.pdf.

[211] Judd E. Stone & Joshua D. Wright, The Sound of One Hand Clapping: The 2010 Merger Guidelines and the Challenge of Judicial Adoption, 39 Rev. Indus. Org. 145, 152 (2011).

[212] Report and Recommendations of the Antitrust Modernization Commission (Apr. 2007) at 54-55.

[213] Timothy J. Muris & Bilal Sayyed, Three Key Principles for Revising the Horizontal Merger Guidelines, Antitrust Source (Apr. 2010) at 3.

[214] Stone & Wright, supra note 366, at 157.

[215] Christine Varney, Assistant Att’y Gen., Antitrust Div., U.S. Dept. of Justice, Merger Guidelines Workshops (Sep. 22, 2009) at 4-5, available at http://www.justice.gov/atr/public/speeches/250238.pdf.

[216] See, e.g., Dennis Carlton, Revising the Horizontal Merger Guidelines, 6 J. Comp. L. & Econ. 1, 2 (2010) (“The Guidelines have proven to be a valuable and durable guide to antitrust practitioners and the courts”); William E. Kovacic, The Modern Evolution of Competition Policy Enforcement Norms, 71 Antitrust L.J. 377, 435 (“The Guidelines not only changed the way the U.S. courts and enforcement agencies examine mergers, but they also supplied an influential focal point for foreign competition authorities in the formulation of their own merger control regimes.”); Carl Shapiro, The 2010 Horizontal Merger Guidelines: From Hedgehog to Fox in Forty Years, 77 Antitrust L.J. 701, 703 (2010) (“One cannot help but marvel at how far merger enforcement has moved over the past forty years, with no change in the substantive provisions of the Clayton Act and very little new guidance on horizontal mergers from the Supreme Court”).

[217] Press Release, Department of Justice and Federal Trade Commission to Hold Workshops Concerning Horizontal Merger Guidelines (Sep. 22, 2009), https://www.justice.gov/opa/pr/department-justice-and-federal-trade-commission-hold-workshops-concerning-horizontal-merger.

[218] Id.

[219] Christine A. Varney, Assistant Att’y Gen., Antitrust Div., U.S. Dept. of Justice, An Update on the Review of the Horizontal Merger Guidelines (Jan. 26, 2010) at 3, available at http://www.justice.gov/atr/public/speeches/254577.pdf (emphasis added).

[220] 5 U.S.C. 553.

[221] We need not recount the entire series of actions here, but they include, inter alia: withdrawing the 2020 VMGs; rescinding the 2015 UMC Policy Statement; eviscerating HSR process by, among other things, suspending HSR early terminations and lowering merger-challenge thresholds; reinstating and expanding the use of prior-approval provisions; conducting business using “zombie votes”; and moving forward with competition rulemakings.

[222] There are myriad examples throughout the guidelines. To consider only a couple of examples, see, e.g., Draft Merger Guidelines fn 41 (citing Marine Bancorp for the proposition that “If the merging firm had a reasonable probability of entering the concentrated relevant market, the Agencies will usually presume that the resulting deconcentration and other benefits that would have resulted from its entry would be competitively significant” – Marine Bancorp speaks to the opposite circumstance, rejecting consideration of potential entry where state law prohibits such entry to occur at a meaningful scale); fn 53 (citing Brown Shoe at 328 for the proposition that, in the context of vertical mergers, “If the foreclosure share is above 50 percent, that factor alone is a sufficient basis to conclude that the effect of the merger may be to substantially lessen competition, subject to any rebuttal evidence.” – Brown Shoe at 329 further clarifies that “in which the foreclosure is neither of monopoly nor de minimis proportions, the percentage of the market foreclosed by the vertical arrangement cannot itself be decisive.”). Additionally, as other commentors note, the guidelines simply ignore decades of circuit and district court caselaw. In instances where they do cite to recent circuit court opinions, they do so improperly. See, e.g., Draft Merger Guidelines at fn 13 (citing United States v. AT&T, 916 F.3d 1029 (D.C. Cir. 2019) for the proposition that “Mergers Should not Substantially Lessen Competition by Creating a Firm that Controls Products or Services That Its Rivals May Use to Compete” – this was the government’s theory of harm in the case, not the court’s holding); fn 48 (citing FTC v. H.J. Heinz Co., 246 F.3d 708 (D.C. Cir. 2001) for the proposition that “the Agencies are unlikely to credit claims of commitments to protect or otherwise avoid harming their rivals that do not align with the firm’s incentives” – in the cited case the court was concern with “mere speculation and promises” that would protect rivals not “claims or commitments.”)..

[223] Brown Shoe Co. v. United States, 370 U.S. 294 (1962).

[224] United States v. Phila. Nat’l Bank, 374 U.S. 321 (1963).

[225] FTC v. Procter & Gamble Co., 386 U.S. 568 (1967).

[226] See, e.g., Douglas H Ginsburg & Joshua D Wright, Philadelphia National Bank: Bad Economics, Bad Law, Good Riddance, 80 Antitrust L.J. 377 (2015).

 

Abstract

The economic theory of the firm teaches that vertical (and complementary goods) mergers differ fundamentally from horizontal mergers. Given incomplete contracting at arm’s length, improved coordination post-merger tends to increase competition and improve market outcomes in the case of vertical merger but tends to lessen competition and degrade market outcomes in the case of horizontal merger. Countervailing effects can of course reverse these tendencies, but rational merger analysis should take the fundamental differences of merger types into account.

The economic analysis of Section II.5 of the Draft Merger Guidelines (DMGs) conveys a rational—though incomplete—antitrust treatment of vertical mergers based on sound economic analysis. The one glaring omission in Section II.5 is the absence of any discussion of the elimination of double marginalization (EDM)—a feature typically inherent to vertical mergers and thus a procompetitive effect rather than an exogenous efficiency requiring separate evidence and analysis. EDM arises from improved coordination between the merging parties, with the salutary effect of increasing competition in the relevant market. EDM can manifest as improvements in the merged firm’s product price or non-price features. We urge the Agencies to add a discussion of EDM to Section II.5 of the DMGs.

Section II.6 of the DMGs, however, stands in stark contradiction to the economic analysis in Section II.5. The market-share threshold for a presumption of harm in Section II.6 has no support in either economics or legal precedent, and the “plus factors” when the presumption threshold is not triggered offer no reliable indication of competitive harm. We urge the Agencies to entirely eliminate Guideline 6 and the material in Section II.6 from the DMGs.