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ICLE White Paper 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. . . .
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.
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.
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.
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.
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:
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.
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.
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.
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.
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.
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.
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.
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.
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]
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.
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.
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]
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.
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.
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.
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.
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]
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.
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%.
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]
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]
While the above papers use administrative data, other papers on labor-market concentration use online job vacancies (postings) to measure concentration.
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]
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 75th percentile market has an HHI of 0.2143 and the 95th 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 50th percentile worker works in a market with an HHI of 0.0137; the 75th percentile worker in a market with an HHI of 0.0404; and the 95th 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]
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
TOTM In my research and newsletters, I’ve written about how to interpret markups—mostly on the theory side. I haven’t devoted much space explaining the empirics. How . . .
In my research and newsletters, I’ve written about how to interpret markups—mostly on the theory side. I haven’t devoted much space explaining the empirics. How high are markups in the United States? Are they rising? If so, by how much?
This post seeks to answer those questions. I’m writing it after reading a new paper by Nathan Miller on “Industrial Organization and The Rise of Market Power,” which is the most recent literature review. Miller focuses primarily on the markup literature from an industrial-organization (IO) perspective. I’ll have more to say about that later. The paper helped me gather my thoughts, but the interpretations and arguments below are all mine. So read this post, and then read Miller.
Read the full piece here.
TOTM 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 . . .
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.
Amicus Brief Introduction and Summary of Argument The Sherman Act is the “Magna Carta of free enterprise.” Verizon Commcn’s Inc. v. Law Offs. of Curtis V. Trinko, . . .
The Sherman Act is the “Magna Carta of free enterprise.” Verizon Commcn’s Inc. v. Law Offs. of Curtis V. Trinko, LLP, 540 U.S. 398, 415 (2004) (citation omitted). It directs itself “not against conduct which is competitive, even severely so, but against conduct which unfairly tends to destroy competition itself.” Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 458 (1993). And it does so not to protect corporate or private interests, but from concern for consumer welfare and the public interest. Id. The goal of antitrust law thus “is not to redress losers of legitimate competition; [i]t is to proscribe actions with anticompetitive effect.” Apartments Nationwide, Inc. v. Harmon Publ’g Co., 78 F.3d 584 (6th Cir. 1996) (table); Omega Env’t, Inc. v. Gilbarco, Inc., 127 F.3d 1157, 1163 (9th Cir. 1997) (“[T]he antitrust laws were not designed to equip [a] competitor with [its rival’s] legitimate competitive advantage.”).
For almost four decades, CoStar Group, Inc. and CoStar Realty Information, Inc. (“CoStar”) have provided commercial real estate (“CRE”) services, including CRE listings and auction services. Commercial Real Estate Exchange Inc. (“CREXi”), launched almost a decade ago, is attempting to build its own CRE platform. CoStar filed suit against CREXi in September 2020, alleging that CREXi “harvests content, including broker directories, from CoStar’s subscription database without authorization by using passwords issued to other companies.” See Dist. Ct. Dkt. 1. In response, CREXi filed eight antitrust counterclaims for violations of the Sherman Act (seven claims) and the Cartwright Act (one claim). Dist. Ct. Dkt. 146. The district court dismissed them all.
In asking this Court to reverse the district court’s decision, CREXi and its amicus make three critical errors. First, CREXi and the FTC try to recast the court’s analysis as incorrectly applying a “refusal-to-deal framework.” Doc. 24 (“FTC Br.”) 10; Doc. 21 (“CREXi Br.”) 32. But the district court did not apply any such framework. Nor did it borrow any of the elements this Court has found must be pleaded in refusal to deal cases. See FTC v. Qualcomm Inc., 969 F.3d 974, 994–95 (9th Cir. 2020). Instead, the court did what courts do when considering antitrust claims—analyze contractual language and market realities in light of the bedrock antitrust principle that “a business generally has the right to refuse to deal with its competitors.” Dist. Ct. Dkt. 340 (“Op.”) 3. There is nothing improper about analyzing antitrust claims against the backdrop of this (and other) “traditional antitrust principles.” Trinko, 540 U.S. at 411.
Second, CREXi and the FTC argue that CoStar’s contractual provisions with brokers are “de facto” exclusivity provisions that violate the Sherman Act. CREXi Br. 62–64; FTC Br. 17–19. Yet both fail to acknowledge that this Court has never “explicitly recognized a ‘de facto’ exclusive dealing theory.” Aerotec Int’l, Inc. v. Honeywell Int’l, Inc., 836 F.3d 1171, 1182 (9th Cir. 2016). A careful examination of this theory reveals that it lacks a doctrinal foundation, and that this Court’s cases, historical context, and administrability concerns all counsel strongly against recognizing this theory. In any event, even if this were a viable theory, it is unavailable to CREXi here because CoStar’s express contractual terms plainly do not “substantially foreclose[]” brokers from dealing with CREXi. Id.
Third, CREXi and the FTC both urge this Court to hold that allegations of supracompetitive prices alone are enough to adequately allege direct evidence of market power, and thus that the test applied in Rebel Oil Co., Inc. v. Atl. Richfield Co., 51 F.3d 1421, 1433 (9th Cir. 1995), is “wrong as a matter of law.” CREXi Br. 38. Not so. Direct evidence of market power is “only rarely available.” United States v. Microsoft Corp., 253 F.3d 34, 51 (D.C. Cir. 2001) (en banc) (per curiam). And as the Supreme Court has made clear, market power is “the ability to raise prices profitably by restricting output. Ohio v. Am. Express Co., 138 S. Ct. 2274, 2288 (2018) (quoting Areeda & Hovenkamp § 5.01) (emphasis in original). “[H]igh price alone” thus is not enough to infer market power. Coal. for ICANN Transparency, Inc. v. VeriSign, Inc., 611 F.3d 495, 503 (9th Cir. 2010); see Blue Cross & Blue Shield United of Wis. v. Marshfield Clinic, 65 F.3d 1406, 1412 (7th Cir. 1995) (Posner, J.). A plaintiff seeking to present direct evidence of market power needs to show more than prices above a competitive level. It must show “evidence of restricted output and supracompetitive prices.” Rebel Oil, 51 F.3d at 1434 (emphasis added); Forsyth v. Humana, Inc., 114 F.3d 1467, 1476 (9th Cir. 1997) (“With no accompanying showing of restricted output,” “hig[h] prices” and “high profits … fail[ ] to present direct evidence of market power.”), overruled on other grounds by Lacey v. Maricopa Cnty, 693 F.3d 896 (9th Cir. 2012).
The arguments pushed by CREXi and the FTC, if accepted, would open the floodgates to baseless antitrust suits. Recognizing claims based on the de facto exclusive dealing theory would allow a competitor to transform its rival’s plainly nonexclusive contractual language into exclusive dealing provisions and drag its rival into expensive, protracted discovery based on speculative allegations about third-party conduct. Indeed, there is no end to what a struggling competitor could do with such an amorphous doctrine. So too, permitting a party to establish direct evidence of market power through allegations of supracompetitive prices alone would contravene binding authority and bedrock antitrust principles.
In rejecting these arguments below, the district court properly concluded that CREXi failed to meet its pleading burden for its antitrust counterclaims. This Court should affirm.
Read the full brief here.
ICLE White Paper Abstract Sherlocking refers to an online platform’s use of nonpublic third-party business data to improve its own business decisions—for instance, by mimicking the successful products . . .
Sherlocking refers to an online platform’s use of nonpublic third-party business data to improve its own business decisions—for instance, by mimicking the successful products and services of edge providers. Such a strategy emerges as a form of self-preferencing and, as with other theories about preferential access to data, it has been targeted by some policymakers and competition authorities due to the perceived competitive risks originating from the dual role played by hybrid platforms (acting as both referees governing their platforms, and players competing with the business they host). This paper investigates the competitive implications of sherlocking, maintaining that an outright ban is unjustified. First, the paper shows that, by aiming to ensure platform neutrality, such a prohibition would cover scenarios (i.e., the use of nonpublic third-party business data to calibrate business decisions in general, rather than to adopt a pure copycat strategy) that should be analyzed separately. Indeed, in these scenarios, sherlocking may affect different forms of competition (inter-platform v. intra-platform competition). Second, the paper argues that, in either case, the practice’s anticompetitive effects are questionable and that the ban is fundamentally driven by a bias against hybrid and vertically integrated players.
The dual role some large digital platforms play (as both intermediary and trader) has gained prominence among the economic arguments used to justify the recent wave of regulation hitting digital markets around the world. Many policymakers have expressed concern about potential conflicts of interest among companies that have adopted this hybrid model and that also control important gateways for business users. In other words, the argument goes, some online firms act not only as regulators who set their platforms’ rules and as referees who enforce those rules, but also as market players who compete with their business users. This raises the fear that large platforms could reserve preferential treatment for their own services and products, to the detriment of downstream rivals and consumers. That, in turn, has led to calls for platform-neutrality rules.
Toward this aim, essentially all of the legislative initiatives undertaken around the world in recent years to enhance competition in digital markets have included anti-discrimination provisions that target various forms of self-preferencing. Self-preferencing, it has been said, serves as the symbol of the current competition-policy zeitgeist in digital markets.[1] Indeed, this conduct is considered functional to leveraging strategies that would grant gatekeepers the chance to entrench their power in core markets and extend it into associated markets.[2]
Against this background, so-called “sherlocking” has emerged as one form of self-preferencing. The term was coined roughly 20 years ago, after Apple updated its own app Sherlock (a search tool on its desktop-operating system) to mimic a third-party application called Watson, which was created by Karelia Software to complement the Apple tool’s earlier version.[3] According to critics of self-preferencing generally and sherlocking in particular, biased intermediation and related conflicts of interest allow gatekeepers to exploit their preferential access to business users’ data to compete against them by replicating successful products and services. The implied assumption is that this strategy is relevant to competition policy, even where no potential intellectual-property rights (IPRs) are infringed and no slavish imitation sanctionable under unfair-competition laws is detected. Indeed, under such theories, sherlocking would already be prevented by the enforcement of these rules.
To tackle perceived misuse of gatekeepers’ market position, the European Union’s Digital Markets Act (DMA) introduced a ban on sherlocking.[4] Similar concerns have also motivated requests for intervention in the United States,[5] Australia,[6] and Japan.[7] In seeking to address at least two different theories of gatekeepers’ alleged conflicts of interest, these proposed bans on exploiting access to business users’ data are not necessarily limited to the risk of product imitation, but may include any business decision whatsoever that a platform may make while relying on that data.
In parallel with the regulatory initiatives, the conduct at-issue has also been investigated in some antitrust proceedings, which appear to seek the very same twofold goal. In particular, in November 2020, the European Commission sent a statement of objections to Amazon that argued the company had infringed antitrust rules through the systematic use of nonpublic business data from independent retailers who sell on the Amazon online marketplace in order to benefit Amazon’s own retail business, which directly competes with those retailers.[8] A similar investigation was opened by the UK Competition and Markets Authority (CMA) in July 2022.[9]
Further, as part of the investigation opened into Apple’s App Store rule requiring developers to use Apple’s in-app purchase mechanism to distribute paid apps and/or paid digital content, the European Commission also showed interest in evaluating whether Apple’s conduct might disintermediate competing developers from relevant customer data, while Apple obtained valuable data about those activities and its competitors’ offers.[10] The European Commission and UK CMA likewise launched an investigation into Facebook Marketplace, with accusations that Meta used data gathered from advertisers in order to compete with them in markets where the company is active, such as classified ads.[11]
There are two primary reasons these antitrust proceedings are relevant. First, many of the prohibitions envisaged in regulatory interventions (e.g., DMA) clearly took inspiration from the antitrust investigations, thus making it important to explore the insights that competition authorities may provide to support an outright ban. Second, given that regulatory intervention will be implemented alongside competition rules (especially in Europe) rather than displace them,[12] sherlocking can be assessed at both the EU and national level against dominant players that are not eligible for “gatekeeper” designation under the DMA. For those non-gatekeeper firms, the practice may still be investigated by antitrust authorities and assessed before courts, aside from the DMA’s per se prohibition. And, of course, investigations and assessments of sherlocking could also be made even in those jurisdictions where there isn’t an outright ban.
The former sis well-illustrated by the German legislature’s decision to empower its national competition authority with a new tool to tackle abusive practices that are similar and functionally equivalent to the DMA.[13] Indeed, as of January 2021, the Bundeskartellamt may identify positions of particular market relevance (undertakings of “paramount significance for competition across markets”) and assess their possible anticompetitive effects on competition in those areas of digital ecosystems in which individual companies may have a gatekeeper function. Both the initiative’s aims and its list of practices are similar to the DMA. They are distinguished primarily by the fact that the German list is exhaustive, and the practices at-issue are not prohibited per se, but are subject to a reversal of the burden of proof, allowing firms to provide objective justifications. For the sake of this analysis, within the German list, one provision prohibits designated undertakings from “demanding terms and conditions that permit … processing data relevant for competition received from other undertakings for purposes other than those necessary for the provision of its own services to these undertakings without giving these undertakings sufficient choice as to whether, how and for what purpose such data are processed.”[14]
Unfortunately, none of the above-mentioned EU antitrust proceedings have concluded with a final decision that addresses the merits of sherlocking. This precludes evaluating whether the practice would have survived before the courts. Regarding the Apple investigation, the European Commission dropped the case over App Store rules and issued a new statement of objections that no longer mentions sherlocking.[15] Further, the European Commission and the UK CMA accepted the commitments offered by Amazon to close those investigations.[16] The CMA likewise accepted the commitments offered by Meta.[17]
Those outcomes can be explained by the DMA’s recent entry into force. Indeed, because of the need to comply with the new regulation, players designated as gatekeepers likely have lost interest in challenging antitrust investigations that target the very same conduct prohibited by the DMA.[18] After all, given that the DMA does not allow any efficiency defense against the listed prohibitions, even a successful appeal against an antitrust decision would be a pyrrhic victory. From the opposite perspective, the same applies to the European Commission, which may decide to save time, costs, and risks by dropping an ongoing case against a company designated as a gatekeeper under the DMA, knowing that the conduct under investigation will be prohibited in any case.
Nonetheless, despite the lack of any final decision on sherlocking, these antitrust assessments remain relevant. As already mentioned, the DMA does not displace competition law and, in any case, dominant platforms not designated as gatekeepers under the DMA still may face antitrust investigations over sherlocking. This applies even more for jurisdictions, such as the United States, that are evaluating DMA-like legislative initiatives (e.g., the American Innovation and Choice Online Act, or “AICOA”).
Against this background, drawing on recent EU cases, this paper questions the alleged anticompetitive implications of sherlocking, as well as claims that the practice fails to comply with existing antitrust rules.
First, the paper illustrates that prohibitions on the use of nonpublic third-party business data would cover two different theories that should be analyzed separately. Whereas a broader case involves all the business decisions adopted by a dominant platform because of such preferential access (e.g., the launch of new products or services, the development or cessation of existing products or services, the calibration of pricing and management systems), a more specific case deals solely with the adoption of a copycat strategy. By conflating these theories in support of a blanket ban that condemns any use of nonpublic third-party business data, EU antitrust authorities are fundamentally motivated by the same policy goal pursued by the DMA—i.e., to impose a neutrality regime on large online platforms. The competitive implications differ significantly, however, as adopting copycat strategies may only affect intra-brand competition, while using said data to improve other business decisions could also affect inter-platform competition.
Second, the paper shows that, in both of these scenarios, the welfare effects of sherlocking are unclear. Notably, exploiting certain data to better understand the market could help a platform to develop new products and services, to improve existing products and services, or more generally to be more competitive with respect to both business users and other platforms. As such outcomes would benefit consumers in terms of price and quality, any competitive advantage achieved by the hybrid platform could be considered unlawful only if it is not achieved on the merits. In a similar vein, if sherlocking is used by a hybrid platform to deliver replicas of its business users’ products and services, that would likely provide short-term procompetitive effects benefitting consumers with more choice and lower prices. In this case, the only competitive harm that would justify an antitrust intervention resides in (uncertain) negative long-term effects on innovation.
As a result, in any case, an outright ban of sherlocking, such as is enshrined in the DMA, is economically unsound since it would clearly harm consumers.
The paper is structured as follows. Section II describes the recent antitrust investigations of sherlocking, illustrating the various scenarios that might include the use of third-party business data. Section III investigates whether sherlocking may be considered outside the scope of competition on the merits for bringing competitive advantages to platforms solely because of their hybrid business model. Section IV analyzes sherlocking as a copycat strategy by investigating the ambiguous welfare effects of copying in digital markets and providing an antitrust assessment of the practice at issue. Section V concludes.
Policymakers’ interest in sherlocking is part of a larger debate over potentially unfair strategies that large online platforms may deploy because of their dual role as an unavoidable trading partner for business users and a rival in complementary markets.
In this scenario, as summarized in Table 1, the DMA outlaws sherlocking, establishing that to “prevent gatekeepers from unfairly benefitting from their dual role,”[19] they are restrained from using, in competition with business users, “any data that is not publicly available that is generated or provided by those business users in the context of their use of the relevant core platform services or of the services provided together with, or in support of, the relevant core platform services, including data generated or provided by the customers of those business users.”[20] Recital 46 further clarifies that the “obligation should apply to the gatekeeper as a whole, including but not limited to its business unit that competes with the business users of a core platform service.”
A similar provision was included in the American Innovation and Choice Online Act (AICOA), which was considered, but not ultimately adopted, in the 117th U.S. Congress. AICOA, however, would limit the scope of the ban to the offer of products or services that would compete with those offered by business users.[21] Concerns about copycat strategies were also reported in the U.S. House of Representatives’ investigation of the state of competition in digital markets as supporting the request for structural-separation remedies and line-of-business restrictions to eliminate conflicts of interest where a dominant intermediary enters markets that place it in competition with dependent businesses.[22] Interestingly, however, in the recent complaint filed by the U.S. Federal Trade Commission (FTC) and 17 state attorneys general against Amazon that accuses the company of having deployed an interconnected strategy to block off every major avenue of competition (including price, product selection, quality, and innovation), there is no mention of sherlocking among the numerous unfair practices under investigation.[23]
Evaluating regulatory-reform proposals for digital markets, the Australian Competition and Consumer Commission (ACCC) also highlighted the risk of sherlocking, arguing that it could have an adverse effect on competition, notably on rivals’ ability to compete, when digital platforms exercise their strong market position to utilize nonpublic data to free ride on the innovation efforts of their rivals.[24] Therefore, the ACCC suggested adopting service-specific codes to address self-preferencing by, for instance, imposing data-separation requirements to restrain dominant app-store providers from using commercially sensitive data collected from the app-review process to develop their own apps.[25]
Finally, on a comparative note, it is also useful to mention the proposals advanced by the Japanese Fair Trade Commission (JFTC) in its recent market-study report on mobile ecosystems.[26] In order to ensure equal footing among competitors, the JFTC specified that its suggestion to prevent Google and Apple from using nonpublic data generated by other developers’ apps aims at pursuing two purposes. Such a ban would, indeed, concern not only use of the data for the purpose of developing competing apps, products, and services, but also its use for developing their own apps, products, and services.
As previously anticipated, sherlocking recently emerged as an antitrust offense in three investigations launched by the European Commission and the UK CMA.
In the first case, Amazon’s alleged reliance on marketplace sellers’ nonpublic business data has been claimed to distort fair competition on its platform and prevent effective competition. In its preliminary findings, the Commission argued that Amazon takes advantage of its hybrid business model, leveraging its access to nonpublic third-party sellers’ data (e.g., the number of ordered and shipped units of products; sellers’ revenues on the marketplace; the number of visits to sellers’ offers; data relating to shipping, to sellers’ past performance, and to other consumer claims on products, including the activated guarantees) to adjust its retail offers and strategic business decisions to the detriment of third-party sellers, which are direct competitors on the marketplace.[27] In particular, the Commission was concerned that Amazon uses such data for its decision to start and end sales of a product, for its pricing system, for its inventory-planning and management system, and to identify third-party sellers that Amazon’s vendor-recruitment teams should approach to invite them to become direct suppliers to Amazon Retail. To address the data-use concern, Amazon committed not to use nonpublic data relating to, or derived from, independent sellers’ activities on its marketplace for its retail business and not to use such data for the purposes of selling branded goods, as well as its private-label products.[28]
A parallel investigation ended with similar commitments in the UK.[29] According to the UK CMA, Amazon’s access to and use of nonpublic seller data could result in a competitive advantage for Amazon Retail arising from its operation of the marketplace, rather than from competition on the merits, and may lead to relevant adverse effects on competition. Notably, it was alleged this could result in a reduction in the scale and competitiveness of third-party sellers on the Amazon Marketplace; a reduction in the number and range of product offers from third-party sellers on the Amazon Marketplace; and/or less choice for consumers, due to them being offered lower quality goods and/or paying higher prices than would otherwise be the case.
It is also worth mentioning that, by determining that Amazon is an undertaking of paramount significance for competition across markets, the Bundeskartellamt emphasized the competitive advantage deriving from Amazon’s access to nonpublic data, such as Glance Views, sales figures, sale quantities, cost components of products, and reorder status.[30] Among other things, with particular regard to Amazon’s hybrid role, the Bundeskartellamt noted that the preferential access to competitively sensitive data “opens up the possibility for Amazon to optimize its own-brand assortment.”[31]
A second investigation involved Apple and its App Store rule.[32] According to the European Commission, the mandatory use of Apple’s own proprietary in-app purchase system (IAP) would, among other things, grant Apple full control over the relationship its competitors have with customers, thus disintermediating those competitors from customer data and allowing Apple to obtain valuable data about the activities and offers of its competitors.
Finally, Meta faced antitrust proceedings in both the EU and the UK.[33] The focus was on Facebook Marketplace—i.e., an online classified-ads service that allows users to advertise goods for sale. According to the European Commission and the CMA, Meta unilaterally imposes unfair trading conditions on competing online-classified ads services that advertise on Facebook or Instagram. These terms and conditions, which authorize Meta to use ads-related data derived from competitors for the benefit of Facebook Marketplace, are considered unjustified, as they impose an unnecessary burden on competitors and only benefit Facebook Marketplace. The suspicion is that Meta has used advertising data from Facebook Marketplace competitors for the strategic planning, product development, and launch of Facebook Marketplace, as well as for Marketplace’s operation and improvement.
Overall, these investigations share many features. The concerns about third-party business-data use, as well as about other forms of self-preferencing, revolve around the competitive advantages that accrue to a dominant platform because of its dual role. Such advantages are considered unfair, as they are not the result of the merits of a player, but derived purely and simply from its role as an important gateway to reach end users. Moreover, this access to valuable business data is not reciprocal. The feared risk is the marginalization of business users competing with gatekeepers on the gatekeepers’ platforms and, hence, the alleged harm to competition is the foreclosure of rivals in complementary markets (horizontal foreclosure).
The focus of these investigations was well-illustrated by the European Commission’s decision on Amazon’s practice.[34] The Commission’s concern was about the “data delta” that Amazon may exploit, namely the additional data related to third-party sellers’ listings and transactions that are not available to, and cannot be replicated by, the third-party sellers themselves, but are available to and used by Amazon Retail for its own retail operations.[35] Contrary to Amazon Retail—which, according to Commission’s allegations, would have full access to and would use such individual, real-time data of all its third-party sellers to calibrate its own retail decisions—sellers would have access only to their own individual listings and sales data. As a result, the Commission came to the (preliminary) conclusion that real-time access to and use of such volume, variety, and granularity of non-publicly available data from its retail competitors generates a significant competitive advantage for Amazon Retail in each of the different decisional processes that drive its retail operations.[36]
On a closer look, however, while antitrust authorities seem to target the use of nonpublic third-party business data as a single theory of harm, their allegations cover two different scenarios along the lines of what has already been examined with reference to the international legislative initiatives and proposals. Indeed, the Facebook Marketplace case does not involve an allegation of copying, as Meta is accused of gathering data from its business users to launch and improve its ads service, instead of reselling goods and services.
As illustrated above in Figure 1, while the claim in the latter scenario is that the preferential data use would help dominant players calibrate business decisions in general, the former scenario instead involves the use of such data for a pure copycat strategy of an entire product or service, or some of its specific features.
In both scenarios the aim of the investigations is to ensure platform neutrality. Accordingly, as shown by the accepted commitments, the envisaged solution for antitrust authorities is to impose data-separation requirements to restrain dominant platforms from using third-party commercially sensitive data. Putting aside that these investigations concluded with commitments from the firms, however, their chances of success before a court differ significantly depending on whether they challenge a product-imitation strategy, or any business decision adopted because of the “data delta.”
Before analyzing how existing competition-law rules could be applied to the various scenarios involving the use of third-party business data, it is worth providing a brief overview of the framework in which the assessment of sherlocking is conducted. As competition in the digital economy is increasingly a competition among ecosystems,[37] a lively debate has emerged on the capacity of traditional antitrust analysis to adequately capture the peculiar features of digital markets. Indeed, the combination of strong economies of scale and scope; indirect network effects; data advantages and synergies across markets; and portfolio effects all facilitate ecosystem development all contribute to making digital markets highly concentrated, prone to tipping, and not easily contestable.[38] As a consequence, it’s been suggested that addressing these distinctive features of digital markets requires an overhaul of the antitrust regime.
Such discussions require the antitrust toolkit and theories of harm to illustrate whether and how a particular practice, agreement, or merger is anticompetitive. Notably, at issue is whether traditional antitrust theories of harm are fit for purpose or whether novel theories of harm should be developed in response to the emerging digital ecosystems. The latter requires looking at the competitive impact of expanding, protecting, or strengthening an ecosystem’s position, and particularly whether such expansion serves to exploit a network of capabilities and to control access to key inputs and components.[39]
A significant portion of recent discussions around developing novel theories of harm to better address the characteristics of digital-business models and markets has been devoted to the topic of merger control—in part a result of the impressive number of acquisitions observed in recent years.[40] In particular, the focus has been on analyzing conglomerate mergers that involve acquiring a complementary or unrelated asset, which have traditionally been assumed to raise less-significant competition concerns.
In this regard, an ecosystem-based theory seems to have guided the Bundeskartellamt in its assessment of Meta’s acquisition of Kustomer[41] and by the CMA in Microsoft/Activision.[42] A more recent example is the European Commission’s decision to prohibit the proposed Booking/eTraveli merger, where the Commission explicitly noted that the transaction would have allowed Booking to expand its travel-services ecosystem.[43] The Commission’s concerns were related primarily to the so-called “envelopment” strategy, in which a prominent platform within a specific market broadens its range of services into other markets where there is a significant overlap of customer groups already served by the platform.[44]
Against this background, putative self-preferencing harms represent one of the European Commission’s primary (albeit contentious)[45] attempts to develop new theories of harm built on conglomerate platforms’ ability to bundle services or use data from one market segment to inform product development in another.[46] Originally formulated in the Google Shopping decision,[47] the theory of harm of (leveraging through) self-preferencing has subsequently inspired the DMA, which targets different forms of preferential treatment, including sherlocking.
In particular, it is asserting that platform may use self-preferencing to adopt a leveraging strategy with a twofold anticompetitive effect—that is, excluding or impeding rivals from competing with the platform (defensive leveraging) and extending the platform’s market power into associated markets (offensive leveraging). These goals can be pursued because of the unique role that some large digital platforms play. That is, they not only enjoy strategic market status by controlling ecosystems of integrated complementary products and services, which are crucial gateways for business users to reach end users, but they also perform a dual role as both a critical intermediary and a player active in complementors’ markets. Therefore, conflicts of interests may provide incentives for large vertically integrated platforms to favor their own products and services over those of their competitors.[48]
The Google Shopping theory of harm, while not yet validated by the Court of Justice of the European Union (CJEU),[49] has also found its way into merger analysis, as demonstrated by the European Commission’s recent assessment of iRobot/Amazon.[50] In its statement of objections, the Commission argued that the proposed acquisition of iRobot may give Amazon the ability and incentive to foreclose iRobot’s rivals by engaging in several foreclosing strategies to prevent them from selling robot vacuum cleaners (RVCs) on Amazon’s online marketplace and/or at degrading such rivals’ access to that marketplace. In particular, the Commission found that Amazon could deploy such self-preferencing strategies as delisting rival RVCs; reducing rival RVCs’ visibility in both organic and paid results displayed in Amazon’s marketplace; limiting access to certain widgets or commercially attractive labels; and/or raising the costs of iRobot’s rivals to advertise and sell their RVCs on Amazon’s marketplace.[51]
Sherlocking belongs to this framework of analysis and can be considered a form of self-preferencing, specifically because of the lack of reciprocity in accessing sensitive data.[52] Indeed, while gatekeeper platforms have access to relevant nonpublic third-party business data as a result of their role as unavoidable trading partners, they leverage this information exclusively, without sharing it with third-party sellers, thus further exacerbating an already uneven playing field.[53]
Insofar as prohibitions of sherlocking center on the competitive advantages that platforms enjoy because of their dual role—thereby allowing some players to better calibrate their business decisions due to their preferential access to business users’ data—it should be noted that competition law does not impose a general duty to ensure a level playing field.[54] Further, a competitive advantage does not, in itself, amount to anticompetitive foreclosure under antitrust rules. Rather, foreclosure must not only be proved (in terms of actual or potential effects) but also assessed against potential benefits for consumers in terms of price, quality, and choice of new goods and services.[55]
Indeed, not every exclusionary effect is necessarily detrimental to competition.[56] Competition on the merits may, by definition, lead to the departure from the market or the marginalization of competitors that are less efficient and therefore less attractive to consumers from the point of view of, among other things, price, choice, quality or innovation.[57] Automatically classifying any conduct with exclusionary effects were as anticompetitive could well become a means to protect less-capable, less-efficient undertakings and would in no way protect more meritorious undertakings—thereby potentially hindering a market’s competitiveness.[58]
As recently clarified by the CJEU regarding the meaning of “competition on the merits,” any practice that, in its implementation, holds no economic interest for a dominant undertaking except that of eliminating competitors must be regarded as outside the scope of competition on the merits.[59] Referring to the cases of margin squeezes and essential facilities, the CJEU added that the same applies to practices that a hypothetical equally efficient competitor is unable to adopt because that practice relies on using resources or means inherent to the holding of such a dominant position.[60]
Therefore, while antitrust cases on sherlocking set out to ensure a level playing field and platform neutrality, and therefore center on the competitive advantages that a platform enjoys because of its dual role, mere implementing a hybrid business model does not automatically put such practices outside the scope of competition on the merits. The only exception, according to the interpretation provided in Bronner, is the presence of an essential facility—i.e., an input whose access should be considered indispensable, as there are no technical, legal, or economic obstacles capable of making it impossible, or even unreasonably difficult, to duplicate it.[61]
As a result, unless it is proved that the hybrid platform is an essential facility, sherlocking and other forms of self-preferencing cannot be considered prima facie outside the scope of competition on the merits, or otherwise unlawful. Rather, any assessment of sherlocking demands the demonstration of anticompetitive effects, which in turn requires finding an impact on efficient firms’ ability and incentive to compete. In the scenario at-issue, for instance, the access to certain data may allow a platform to deliver new products or services; to improve existing products or services; or more generally to compete more efficiently not only with respect to the platform’s business users, but also against other platforms. Such an increase in both intra-platform and inter-platform competition would benefit consumers in terms of lower prices, better quality, and a wider choice of new or improved goods and services—i.e., competition on the merits.[62]
In Facebook Marketplace, the European Commission and UK CMA challenged the terms and conditions governing the provision of display-advertising and business-tool services to which Meta required its business customers to sign up.[63] In their view, Meta abused its dominant position by imposing unfair trading conditions on its advertising customers, which authorized Meta to use ads-related data derived from the latter in a way that could afford Meta a competitive advantage on Facebook Marketplace that would not have arisen from competition on the merits. Notably, antitrust authorities argued that Meta’s terms and conditions were unjustified, disproportionate, and unnecessary to provide online display-advertising services on Meta’s platforms.
Therefore, rather than directly questioning the platform’s dual role or hybrid business model, the European Commission and UK CMA decided to rely on traditional case law which considers unfair those clauses that are unjustifiably unrelated to the purpose of the contract, unnecessarily limit the parties’ freedom, are disproportionate, or are unilaterally imposed or seriously opaque.[64] This demonstrates that, outside the harm theory of the unfairness of terms and conditions, a hybrid platform’s use of nonpublic third-party business data to improve its own business decisions is generally consistent with antitrust provisions. Hence, an outright ban would be unjustified.
The second, and more intriguing, sherlocking scenario is illustrated by the Amazon Marketplace investigations and regards the original meaning of sherlocking—i.e., where a data advantage is used by a hybrid platform to mimic its business users’ products or services.
Where sherlocking charges assert that the practice allows some platforms to use business users’ data to compete against them by replicating their products or services, it should not be overlooked that the welfare effects of such a copying strategy are ambiguous. While the practice could benefit consumers in the short term by lowering prices and increasing choice, it may discourage innovation over the longer term if third parties anticipate being copied whenever they deliver successful products or services. Therefore, the success of an antitrust investigation essentially relies on demonstrating a harm to innovation that would induce business users to leave the market or stop developing their products and services. In other words, antitrust authorities should be able to demonstrate that, by allowing dominant platforms to free ride on their business guests’ innovation efforts, sherlocking would negatively affect rivals’ ability to compete.
The tradeoff between the short- and long-term welfare effects of copying has traditionally been analyzed in the context of the benefits and costs generated by intellectual-property protection.[65] In particular, the economic literature investigating the optimal life of patents[66] and copyrights[67] focuses on the efficient balance between dynamic benefits associated with innovation and the static costs of monopoly power granted by IPRs.
More recently, product imitation has instead been investigated in the different scenario of digital markets, where dominant platforms adopting a hybrid business model may use third-party sellers’ market data to design and promote their own products over their rivals’ offerings. Indeed, some studies report that large online platforms may attempt to protect their market position by creating “kill zones” around themselves—i.e., by acquiring, copying, or eliminating their rivals.[68] In such a novel setting, the welfare effects of copying are assessed regardless of the presence and the potential enforcement of IPRs, but within a strategy aimed at excluding rivals by exploiting the dual role of both umpire and player to get preferential access to sensitive data and free ride on their innovative efforts.[69]
Even in this context, however, a challenging tradeoff should be considered. Indeed, while in the short term, consumers may benefit from the platform’s imitation strategy in terms of lower prices and higher quality, they may be harmed in the longer term if third parties are discouraged from delivering new products and services. As a result, while there is empirical evidence on hybrid platforms successfully entering into third parties’ adjacent market segments, [70] the extant academic literature finds the welfare implications of such moves to be ambiguous.
A first strand of literature attempts to estimate the welfare impact of the hybrid business model. Notably, Andre Hagiu, Tat-How Teh, and Julian Wright elaborated a model to address the potential implications of an outright ban on platforms’ dual mode, finding that such a structural remedy may harm consumer surplus and welfare even where the platform would otherwise engage in product imitation and self-preferencing.[71] According to the authors, banning the dual mode does not restore the third-party seller’s innovation incentives or the effective price competition between products, which are the putative harms caused by imitation and self-preferencing. Therefore, the authors’ evaluation was that interventions specifically targeting product imitation and self-preferencing were preferable.
Germa?n Gutie?rrez suggested that banning the dual model would generate hardly any benefits for consumers, showing that, in the Amazon case, interventions that eliminate either the Prime program or product variety are likely to decrease welfare.[72]
Further, analyzing Amazon’s business model, Federico Etro found that the platform and consumers’ incentives are correctly aligned, and that Amazon’s business model of hosting sellers and charging commissions prevents the company from gaining through systematic self?preferencing for its private-label and first-party products.[73] In the same vein, on looking at its business model and monetization strategy, Patrick Andreoli-Versbach and Joshua Gans argued that Amazon does not have an obvious incentive to self-preference.[74] Indeed, Amazon’s profitability data show that, on average, the company’s operating margin is higher on third-party sales than on first-party retail sales.
Looking at how modeling details may yield different results with regard to the benefits and harms of the hybrid business model, Simon Anderson and O?zlem Bedre-Defoile maintain that the platform’s choice to sell its own products benefits consumers by lowering prices when a monopoly platform hosts competitive fringe sellers, regardless of the platform’s position as a gatekeeper, whether sellers have an alternate channel to reach consumers, or whether alternate channels are perfect or imperfect substitutes for the platform channel.[75] On the other hand, the authors argued that platform product entry might harm consumers when a big seller with market power sells on its own channel and also on the platform. Indeed, in that case, the platform setting a seller fee before the big seller prices its differentiated products introduces double markups on the big seller’s platform-channel price and leaves some revenue to the big seller.
Studying whether Amazon engages in self-preferencing on its marketplace by favoring its own brands in search results, Chiara Farronato, Andrey Fradkin, and Alexander MacKay demonstrate empirically that Amazon brands remain about 30% cheaper and have 68% more reviews than other similar products.[76] The authors acknowledge, however, that their findings do not imply that consumers are hurt by Amazon brands’ position in search results.
Another strand of literature specifically tackles the welfare effects of sherlocking. In particular, Erik Madsen and Nikhil Vellodi developed a theoretical framework to demonstrate that a ban on insider imitation can either stifle or stimulate innovation, depending on the nature of innovation.[77] Specifically, the ban could stimulate innovation for experimental product categories, while reducing innovation in incremental product markets, since the former feature products with a large chance of superstar demand and the latter generate mostly products with middling demand.
Federico Etro maintains that the tradeoffs at-issue are too complex to be solved with simple interventions, such as bans on dual mode, self-preferencing, or copycatting.[78] Indeed, it is difficult to conclude that Amazon entry is biased to expropriate third-party sellers or that bans on dual mode, self-preferencing, or copycatting would benefit consumers, because they either degrade services and product variety or induce higher prices or commissions.
Similar results are provided by Jay Pil Choi, Kyungmin Kim, and Arijit Mukherjee, who developed a tractable model of a platform-run marketplace where the platform charges a referral fee to the sellers for access to the marketplace, and may also subsequently launch its own private-label product by copying a seller.[79] The authors found that a policy to either ban hybrid mode or only prohibit information use for the launch of private-label products may produce negative welfare implications.
Further, Radostina Shopova argues that, when introducing a private label, the marketplace operator does not have incentive to distort competition and foreclose the outside seller, but does have an incentive to lower fees charged to the outside seller and to vertically differentiate its own product in order to protect the seller’s channel.[80] Even when the intermediary is able to perfectly mimic the quality of the outside seller and monopolize its product space, the intermediary prefers to differentiate its offer and chooses a lower quality for the private-label product. Accordingly, as the purpose of private labels is to offer a lower-quality version of products aimed at consumers with a lower willingness to pay, a marketplace operator does not have an incentive to distort competition in favor of its own product and foreclose the seller of the original higher-quality product.
In addition, according to Jean-Pierre Dubé, curbing development of private-label programs would harm consumers and Amazon’s practices amount to textbook retailing, as they follow an off-the-shelf approach to managing private-label products that is standard for many retail chains in the West.[81] As a result, singling out Amazon’s practices would set a double standard.
Interestingly, such findings about predictors and effects of Amazon’s entry in competition with third-party merchants on its own marketplace are confirmed by the only empirical study developed so far. In particular, analyzing the Home & Kitchen department of Germany’s version of Amazon Marketplace between 2016 and 2021, Gregory S. Crawford, Matteo Courthoud, Regina Seibel, and Simon Zuzek’s results suggest that Amazon’s entry strategy was more consistent with making Marketplace more attractive to consumers than expropriating third-party merchants.[82] Notably, the study showed that, comparing Amazon’s entry decisions with those of the largest third-party merchants, Amazon tends to enter low-growth and low-quality products, which is consistent with a strategy that seeks to make Marketplace more attractive by expanding variety, lessening third-party market power, and/or enhancing product availability. The authors therefore found that Amazon’s entry on Amazon Marketplace demonstrated no systematic adverse effects and caused a mild market expansion.
Massimo Motta and Sandro Shelegia explored interactions between copying and acquisitions, finding that the former (or the threat of copying) can modify the outcome of an acquisition negotiation.[83] According to their model, there could be both static and dynamic incentives for an incumbent to introduce a copycat version of a complementary product. The static rationale consists of lowering the price of the complementary product in order to capture more rents from it, while the dynamic incentive consists of harming a potential rival’s prospects of developing a substitute. The latter may, in turn, affect the direction the entrant takes toward innovation. Anticipating the incumbent’s copying strategy, the entrant may shift resources from improvements to compete with the incumbent’s primary product to developing complementary products.
Jingcun Cao, Avery Haviv, and Nan Li analyzed the opposite scenario—i.e., copycats that seek to mimic the design and user experience of incumbents’ successful products.[84] The authors find empirically that, on average, copycat apps do not have a significant effect on the demand for incumbent apps and that, as with traditional counterfeit products, they may generate a positive demand spillover toward authentic apps.
Massimo Motta also investigated the potential foreclosure effects of platforms adopting a copycat strategy committed to non-discriminatory terms of access for third parties (e.g., Apple App Store, Google Play, and Amazon Marketplace).[85] Notably, according to Motta, when a third-party seller is particularly successful and the platform is unable to raise fees and commissions paid by that seller, the platform may prefer to copy its product or service to extract more profits from users, rather than rely solely on third-party sales. The author acknowledged, however, that even though this practice may create an incentive for self-preferencing, it does not necessarily have anticompetitive effects. Indeed, the welfare effects of the copying strategy are a priori ambiguous.[86] While, on the one hand, the platform’s copying of a third-party product benefits consumers by increasing variety and competition among products, on the other hand, copying might be wasteful for society, in that it entails a fixed cost and may discourage innovation if rivals anticipate that they will be systematically copied whenever they have a successful product.[87] Therefore, introducing a copycat version of a product offered by a firm in an adjacent market might be procompetitive.
The economic literature has demonstrated that the rationale and welfare effects of sherlocking by hybrid platforms are definitively ambiguous. Against concerns about rivals’ foreclosure, some studies provide a different narrative, illustrating that such a strategy is more consistent with making the platform more attractive to consumers (by differentiating the quality and pricing of the offer) than expropriating business users.[88] Furthermore, copies, imitations, and replicas undoubtedly benefit consumers with more choice and lower prices.
Therefore, the only way to consider sherlocking anticompetitive is by demonstrating long-term deterrent effects on innovation (i.e., reducing rivals’ incentives to invest in new products and services) outweigh consumers’ short-term advantages.[89] Moreover, deterrent effects must not be merely hypothetical, as a finding of abuse cannot be based on a mere possibility of harm.[90] In any case, such complex tradeoffs are at odds with a blanket ban.[91]
Moreover, assessments of the potential impact of sherlocking on innovation cannot disregard the role of IPRs—which are, by definition, the main primary to promote innovation. From this perspective, intellectual-property protection is best characterized as another form of tradeoff. Indeed, the economic rationale of IPRs (in particular, of patents and copyrights) involves, among other things, a tradeoff between access and incentives—i.e., between short-term competitive restrictions and long-term innovative benefits.[92]
According to the traditional incentive-based theory of intellectual property, free riding would represent a dangerous threat that justifies the exclusive rights granted by intellectual-property protection. As a consequence, so long as copycat expropriation does not infringe IPRs, it should be presumed legitimate and procompetitive. Indeed, such free riding is more of an intellectual-property issue than a competitive concern.
In addition, to strike a fair balance between restricting competition and providing incentives to innovation, the exclusive rights granted by IPRs are not unlimited in terms of duration, nor in terms of lawful (although not authorized) uses of the protected subject matter. Under the doctrine of fair use, for instance, reverse engineering represents a legitimate way to obtain information about a firm’s product, even if the intended result is to produce a directly competing product that may steer customers away from the initial product and the patented invention.
Outside of reverse engineering, copying is legitimately exercised once IPRs expire, when copycat competitors can reproduce previously protected elements. As a result of the competitive pressure exerted by new rivals, holders of expired IPRs may react by seeking solutions designed to block or at least limit the circulation of rival products. They could, for example, request other IPRs to cover aspects or functionalities different from those previously protected. They could also bring (sometimes specious) legal action for infringement of the new IPR or for unfair competition by slavish imitation. For these reasons, there have been occasions where copycat competitors have received protection from antitrust authorities against sham litigation brought by IPR holders concerned about losing margins due to pricing pressure from copycats.[93]
Finally, within the longstanding debate on the intersection of intellectual-property protection and competition, EU antitrust authorities have traditionally been unsympathetic toward restrictions imposed by IPRs. The success of the essential-facility doctrine (EFD) is the most telling example of this attitude, as its application in the EU has been extended to IPRs. As a matter of fact, the EFD represents the main antitrust tool for overseeing intellectual property in the EU.[94]
After Microsoft, EU courts have substantially dismantled one of the “exceptional circumstances” previously elaborated in Magill and specifically introduced for cases involving IPRs, with the aim of safeguarding a balance between restrictions to access and incentives to innovate. Whereas the CJEU established in Magill that refusal to grant an IP license should be considered anticompetitive if it prevents the emergence of a new product for which there is potential consumer demand, in Microsoft, the General Court considered such a requirement met even when access to an IPR is necessary for rivals to merely develop improved products with added value.
Given this background, recent competition-policy concerns about sherlocking are surprising. To briefly recap, the practice at-issue increases competition in the short term, but may affect incentives to innovate in the long-term. With regard to the latter, however, the practice neither involves products protected by IPRs nor constitutes a slavish imitation that may be caught under unfair-competition laws.
The case of Amazon, which has received considerable media coverage, is illustrative of the relevance of IP protection. Amazon has been accused of cloning batteries, power strips, wool runner shoes, everyday sling bags, camera tripods, and furniture.[95] One may wonder what kind of innovation should be safeguarded in these cases against potential copies. Admittedly, such examples appear consistent with the findings of the already-illustrated empirical study conducted by Crawford et al. indicating that Amazon tends to enter low-quality products in order to expand variety on the Marketplace and to make it more attractive to consumers.
Nonetheless, if an IPR is involved, right holders are provided with proper means to protect their products against infringement. Indeed, one of the alleged targeted companies (Williams-Sonoma) did file a complaint for design and trademark infringement, claiming that Amazon had copied a chair (Orb Dining Chair) sold by its West Elm brand. According to Williams-Sonoma, the Upholstered Orb Office Chair—which Amazon began selling under its Rivet brand in 2018—was so similar that the ordinary observer would be confused by the imitation.[96] If, instead, the copycat strategy does not infringe any IPR, the potential impact on innovation might not be considered particularly worrisome—at least at first glance.
Further, neither the degree to which third-party business data is unavailable nor the degree to which they are relevant in facilitating copying are clear cut. For instance, in the case of Amazon, public product reviews supply a great deal of information[97] and, regardless of the fact that a third party is selling a product on the Marketplace, anyone can obtain an item for the purposes of reverse engineering.[98]
In addition, antitrust authorities are used to intervening against opportunistic behavior by IPR holders. European competition authorities, in particular, have never before seemed particularly responsive to the motives of inventors and creators versus the need to encourage maximum market openness.
It should also be noted that cloning is a common strategy in traditional markets (e.g., food products)[99] and has been the subject of longstanding controversies between high-end fashion brands and fast-fashion brands (e.g., Zara, H&M).[100] Furthermore, brick-and-mortar retailers also introduce private labels and use other brands’ sales records in deciding what to produce.[101]
So, what makes sherlocking so different and dangerous when deployed in digital markets as to push competition authorities to contradict themselves?[102]
The double standard against sherlocking reflects the same concern and pursues the same goal of the various other attempts to forbid any form of self-preferencing in digital markets. Namely, antitrust investigations of sherlocking are fundamentally driven by the bias against hybrid and vertically integrated players. The investigations rely on the assumption that conflicts of interest have anticompetitive implications and that, therefore, platform neutrality should be promoted to ensure the neutrality of the competitive process.[103] Accordingly, hostility toward sherlocking may involve both of the illustrated scenarios—i.e., the use of nonpublic third-party business data either in adopting any business decision, or just copycat strategies, in particular.
As a result, however, competition authorities end up challenging a specific business model, rather than the specific practice at-issue, which brings undisputed competitive benefits in terms of lower prices and wider consumer choice, and which should therefore be balanced against potential exclusionary risks. As the CJEU has pointed out, the concept of competition on the merits:
…covers, in principle, a competitive situation in which consumers benefit from lower prices, better quality and a wider choice of new or improved goods and services. Thus, … conduct which has the effect of broadening consumer choice by putting new goods on the market or by increasing the quantity or quality of the goods already on offer must, inter alia, be considered to come within the scope of competition on the merits.[104]
Further, in light of the “as-efficient competitor” principle, competition on the merits may lead to “the departure from the market, or the marginalization of, competitors that are less efficient and so less attractive to consumers from the point of view of, among other things, price, choice, quality or innovation.”[105]
It has been correctly noted that the “as-efficient competitor” principle is a reminder of what competition law is about and how it differs from regulation.[106] Competition law aims to protect a process, rather than engineering market structures to fulfill a particular vision of how an industry is to operate.[107] In other words, competition law does not target firms on the basis of size or status and does not infer harm from (market or bargaining) power or business model. Therefore, neither the dual role played by some large online platforms nor their preferential access to sensitive business data or their vertical integration, by themselves, create a competition problem. Competitive advantages deriving from size, status, power, or business model cannot be considered per se outside the scope of competition on the merits.
Some policymakers have sought to resolve these tensions in how competition law regards sherlocking by introducing or envisaging an outright ban. These initiatives and proposals have clearly been inspired by antitrust investigations, but they did so for the wrong reasons. Instead of taking stock of the challenging tradeoffs between short-term benefits and long-term risks that an antitrust assessment of sherlocking requires, they blamed competition law for not providing effective tools to achieve the policy goal of platform neutrality.[108] Therefore, the regulatory solution is merely functional to bypass the traditional burden of proof of antitrust analysis and achieve what competition-law enforcement cannot provide.
The bias against self-preferencing strikes again. Concerns about hybrid platforms’ potential conflicts of interest have led policymakers to seek prohibitions to curb different forms of self-preferencing, making the latter the symbol of the competition-policy zeitgeist in digital markets. Sherlocking shares this fate. Indeed, the DMA outlaws any use of business users’ nonpublic data and similar proposals have been advanced in the United States, Australia, and Japan. Further, like other forms of self-preferencing, such regulatory initiatives against sherlocking have been inspired by previous antitrust proceedings.
Drawing on these antitrust investigations, the present research shows the extent to which an outright ban on sherlocking is unjustified. Notably, the practice at-issue includes two different scenarios: the broad case in which a gatekeeper exploits its preferential access to business users’ data to better calibrate all of its business decisions and the narrow case in which such data is used to adopt a copycat strategy. In either scenario, the welfare effects and competitive implications of sherlocking are unclear.
Indeed, the use of certain data by a hybrid platform to improve business decisions generally should be classified as competition on the merits, and may yield an increase in both intra-platform (with respect to business users) and inter-platform (with respect to other platforms) competition. This would benefit consumers in terms of lower prices, better quality, and a wider choice of new or improved goods and services. In a similar vein, if sherlocking is used to deliver replicas of business users’ products or services, the anti-competitiveness of such a strategy may only result from a cumbersome tradeoff between short-term benefits (i.e., lower prices and wider choice) and negative long-term effects on innovation.
An implicit confirmation of the difficulties encountered in demonstrating the anti-competitiveness of sherlocking comes from the recent complaint issued by the FTC against Amazon.[109] Current FTC Chairwoman Lina Khan devoted a significant portion of her previous academic career to questioning Amazon’s practices (including the decision to introduce its own private labels inspired by third-party products)[110] and to supporting the adoption of structural-separation remedies to tackle platforms’ conflicts of interest that induce them to exploit their “systemic informational advantage (gleaned from competitors)” to thwart rivals and strengthen their own position by introducing replica products.[111] Despite these premises and although the FTC’s complaint targets numerous practices belonging to what has been described as an interconnected strategy to block off every major avenue of competition, however, sherlocking is surprisingly off the radar.
Regulatory initiatives to ban sherlocking in order to ensure platform neutrality with respect to business users and a level playing field among rivals would sacrifice undisputed procompetitive benefits on the altar of policy goals that competition rules are not meant to pursue. Sherlocking therefore appears to be a perfect case study of the side effects of unwarranted interventions in digital markets.
[1] Giuseppe Colangelo, Antitrust Unchained: The EU’s Case Against Self-Preferencing, 72 GRUR International 538 (2023).
[2] Jacques Cre?mer, Yves-Alexandre de Montjoye, & Heike Schweitzer, Competition Policy for the Digital Era (2019), 7, https://op.europa.eu/en/publication-detail/-/publication/21dc175c-7b76-11e9-9f05-01aa75ed71a1/language-en (all links last accessed 3 Jan. 2024); UK Digital Competition Expert Panel, Unlocking Digital Competition, (2019) 58, available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/785547/unlocking_digital_competition_furman_review_web.pdf.
[3] You’ve Been Sherlocked, The Economist (2012), https://www.economist.com/babbage/2012/07/13/youve-been-sherlocked.
[4] Regulation (EU) 2022/1925 on contestable and fair markets in the digital sector and amending Directives (EU) 2019/1937 and (EU) 2020/1828 (Digital Markets Act) (2022), OJ L 265/1, Article 6(2).
[5] U.S. S. 2992, American Innovation and Choice Online Act (AICOA) (2022), Section 3(a)(6), available at https://www.klobuchar.senate.gov/public/_cache/files/b/9/b90b9806-cecf-4796-89fb-561e5322531c/B1F51354E81BEFF3EB96956A7A5E1D6A.sil22713.pdf. See also U.S. House of Representatives, Subcommittee on Antitrust, Commercial, and Administrative Law, Investigation of Competition in Digital Markets, Majority Staff Reports and Recommendations (2020), 164, 362-364, 378, available at https://democrats-judiciary.house.gov/uploadedfiles/competition_in_digital_markets.pdf.
[6] Australian Competition and Consumer Commission, Digital Platform Services Inquiry Report on Regulatory Reform (2022), 125, https://www.accc.gov.au/about-us/publications/serial-publications/digital-platform-services-inquiry-2020-2025/digital-platform-services-inquiry-september-2022-interim-report-regulatory-reform.
[7] Japan Fair Trade Commission, Market Study Report on Mobile OS and Mobile App Distribution (2023), https://www.jftc.go.jp/en/pressreleases/yearly-2023/February/230209.html.
[8] European Commission, 10 Nov. 2020, Case AT.40462, Amazon Marketplace; see Press Release, Commission Sends Statement of Objections to Amazon for the Use of Non-Public Independent Seller Data and Opens Second Investigation into Its E-Commerce Business Practices, European Commission (2020), https://ec.europa.eu/commission/presscorner/detail/en/ip_20_2077.
[9] Press Release, CMA Investigates Amazon Over Suspected Anti-Competitive Practices, UK Competition and Markets Authority (2022), https://www.gov.uk/government/news/cma-investigates-amazon-over-suspected-anti-competitive-practices.
[10] European Commission, 16 Jun. 2020, Case AT.40716, Apple – App Store Practices.
[11] Press Release, Commission Sends Statement of Objections to Meta over Abusive Practices Benefiting Facebook Marketplace, European Commission (2022), https://ec.europa.eu/commission/presscorner/detail/en/ip_22_7728; Press Release, CMA Investigates Facebook’s Use of Ad Data, UK Competition and Markets Authority (2021), https://www.gov.uk/government/news/cma-investigates-facebook-s-use-of-ad-data.
[12] DMA, supra note 4, Recital 10 and Article 1(6).
[13] GWB Digitalization Act, 18 Jan. 2021, Section 19a. On risks of overlaps between the DMA and the competition law enforcement, see Giuseppe Colangelo, The European Digital Markets Act and Antitrust Enforcement: A Liaison Dangereuse, 47 European Law Review 597.
[14] GWB, supra note 13, Section 19a (2)(4)(b).
[15] Press Release, Commission Sends Statement of Objections to Apple Clarifying Concerns over App Store Rules for Music Streaming Providers, European Commission (2023), https://ec.europa.eu/commission/presscorner/detail/en/ip_23_1217.
[16] European Commission, 20 Dec. 2022, Case AT.40462; Press Release, Commission Accepts Commitments by Amazon Barring It from Using Marketplace Seller Data, and Ensuring Equal Access to Buy Box and Prime, European Commission (2022), https://ec.europa.eu/commission/presscorner/detail/en/ip_22_7777; UK Competition and Markets Authority, 3 Nov. 2023, Case No. 51184, https://www.gov.uk/cma-cases/investigation-into-amazons-marketplace.
[17] UK Competition and Markets Authority, 3 Nov. 2023, Case AT.51013, https://www.gov.uk/cma-cases/investigation-into-facebooks-use-of-data.
[18] See, e.g., Gil Tono & Lewis Crofts (2022), Amazon Data Commitments Match DMA Obligations, EU’s Vestager Say, mLex (2022), https://mlexmarketinsight.com/news/insight/amazon-data-commitments-match-dma-obligation-eu-s-vestager-says (reporting that Commissioner Vestager stated that Amazon’s data commitments definitively appear to match what would be asked within the DMA).
[19] DMA, supra note 4, Recital 46.
[20] Id., Article 6(2) (also stating that, for the purposes of the prohibition, non-publicly available data shall include any aggregated and non-aggregated data generated by business users that can be inferred from, or collected through, the commercial activities of business users or their customers, including click, search, view, and voice data, on the relevant core platform services or on services provided together with, or in support of, the relevant core platform services of the gatekeeper).
[21] AICOA, supra note 5.
[22] U.S. House of Representatives, supra note 5; see also Lina M. Khan, The Separation of Platforms and Commerce, 119 Columbia Law Review 973 (2019).
[23] U.S. Federal Trade Commission, et al. v. Amazon.com, Inc., Case No. 2:23-cv-01495 (W.D. Wash., 2023).
[24] Australian Competition and Consumer Commission, supra note 6, 125.
[25] Id., 124.
[26] Japan Fair Trade Commission, supra note 7, 144.
[27] European Commission, supra note 8. But see also Amazon, Supporting Sellers with Tools, Insights, and Data (2021), https://www.aboutamazon.eu/news/policy/supporting-sellers-with-tools-insights-and-data (claiming that the company is just using aggregate (rather than individual) data: “Just like our third-party sellers and other retailers across the world, Amazon also uses data to run our business. We use aggregated data about customers’ experience across the store to continuously improve it for everyone, such as by ensuring that the store has popular items in stock, customers are finding the products they want to purchase, or connecting customers to great new products through automated merchandising.”)
[28] European Commission, supra note 16.
[29] UK Competition and Markets Authority, supra notes 9 and 16.
[30] Bundeskartellamt, 5 Jul. 2022, Case B2-55/21, paras. 493, 504, and 518.
[31] Id., para. 536.
[32] European Commission, supra note 10.
[33] European Commission, supra note 11; UK Competition and Markets Authority, supra note 11.
[34] European Commission, supra note 16. In a similar vein, see also UK Competition and Markets Authority, supra note 16, paras. 4.2-4.7.
[35] European Commission, supra note 16, para. 111.
[36] Id., para. 123.
[37] Cre?mer, de Montjoye, & Schweitzer, supra note 2, 33-34.
[38] See, e.g., Marc Bourreau, Some Economics of Digital Ecosystems, OECD Hearing on Competition Economics of Digital Ecosystems (2020), https://www.oecd.org/daf/competition/competition-economics-of-digital-ecosystems.htm; Amelia Fletcher, Digital Competition Policy: Are Ecosystems Different?, OECD Hearing on Competition Economics of Digital Ecosystems (2020).
[39] See, e.g., Cristina Caffarra, Matthew Elliott, & Andrea Galeotti, ‘Ecosystem’ Theories of Harm in Digital Mergers: New Insights from Network Economics, VoxEU (2023), https://cepr.org/voxeu/columns/ecosystem-theories-harm-digital-mergers-new-insights-network-economics-part-1 (arguing that, in merger control, the implementation of an ecosystem theory of harm would require assessing how a conglomerate acquisition can change the network of capabilities (e.g., proprietary software, brand, customer-base, data) in order to evaluate how easily competitors can obtain alternative assets to those being acquired); for a different view, see Geoffrey A. Manne & Dirk Auer, Antitrust Dystopia and Antitrust Nostalgia: Alarmist Theories of Harm in Digital Markets and Their Origins, 28 George Mason Law Review 1281(2021).
[40] See, e.g., Viktoria H.S.E. Robertson, Digital merger control: adapting theories of harm, (forthcoming) European Competition Journal; Caffarra, Elliott, & Galeotti, supra note 39; OECD, Theories of Harm for Digital Mergers (2023), available at www.oecd.org/daf/competition/theories-of-harm-for-digital-mergers-2023.pdf; Bundeskartellamt, Merger Control in the Digital Age – Challenges and Development Perspectives (2022), available at https://www.bundeskartellamt.de/SharedDocs/Publikation/EN/Diskussions_Hintergrundpapiere/2022/Working_Group_on_Competition_Law_2022.pdf?__blob=publicationFile&v=2; Elena Argentesi, Paolo Buccirossi, Emilio Calvano, Tomaso Duso, Alessia Marrazzo, & Salvatore Nava, Merger Policy in Digital Markets: An Ex Post Assessment, 17 Journal of Competition Law & Economics 95 (2021); Marc Bourreau & Alexandre de Streel, Digital Conglomerates and EU Competition Policy (2019), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3350512.
[41] Bundeskartellamt, 11 Feb. 2022, Case B6-21/22, https://www.bundeskartellamt.de/SharedDocs/Entscheidung/EN/Fallberichte/Fusionskontrolle/2022/B6-21-22.html;jsessionid=C0837BD430A8C9C8E04D133B0441EB95.1_cid362?nn=4136442.
[42] UK Competition and Markets Authority, Microsoft / Activision Blizzard Merger Inquiry (2023), https://www.gov.uk/cma-cases/microsoft-slash-activision-blizzard-merger-inquiry.
[43] See European Commission, Commission Prohibits Proposed Acquisition of eTraveli by Booking (2023), https://ec.europa.eu/commission/presscorner/detail/en/ip_23_4573 (finding that a flight product is a crucial growth avenue in Booking’s ecosystem, which revolves around its hotel online-travel-agency (OTA) business, as it would generate significant additional traffic to the platform, thus allowing Booking to benefit from existing customer inertia and making it more difficult for competitors to contest Booking’s position in the hotel OTA market).
[44] Thomas Eisenmann, Geoffrey Parker, & Marshall Van Alstyne, Platform Envelopment, 32 Strategic Management Journal 1270 (2011).
[45] See, e.g., Colangelo, supra note 1, and Pablo Iba?n?ez Colomo, Self-Preferencing: Yet Another Epithet in Need of Limiting Principles, 43 World Competition 417 (2020) (investigating whether and to what extent self-preferencing could be considered a new standalone offense in EU competition law); see also European Commission, Digital Markets Act – Impact Assessment Support Study (2020), 294, https://op.europa.eu/en/publication-detail/-/publication/0a9a636a-3e83-11eb-b27b-01aa75ed71a1/language-en (raising doubts about the novelty of this new theory of harm, which seems similar to the well-established leveraging theories of harm of tying and bundling, and margin squeeze).
[46] European Commission, supra note 45, 16.
[47] European Commission, 27 Jun. 2017, Case AT.39740, Google Search (Shopping).
[48] See General Court, 10 Nov. 2021, Case T-612/17, Google LLC and Alphabet Inc. v. European Commission, ECLI:EU:T:2021:763, para. 155 (stating that the general principle of equal treatment obligates vertically integrated platforms to refrain from favoring their own services as opposed to rival ones; nonetheless, the ruling framed self-preferencing as discriminatory abuse).
[49] In the meantime, however, see Opinion of the Advocate General Kokott, 11 Jan. 2024, Case C-48/22 P, Google v. European Commission, ECLI:EU:C:2024:14, paras. 90 and 95 (arguing that the self-preferencing of which Google is accused constitutes an independent form of abuse, albeit one that exhibits some proximity to cases involving margin squeezing).
[50] European Commission, Commission Sends Amazon Statement of Objections over Proposed Acquisition of iRobot (2023), https://ec.europa.eu/commission/presscorner/detail/en/IP_23_5990.
[51] The same concerns and approach have been shared by the CMA, although it reached a different conclusion, finding that the new merged entity would not have incentive to self-preference its own branded RVCs: see UK Competition and Markets Authority, Amazon / iRobot Merger Inquiry – Clearance Decision (2023), paras. 160, 188, and 231, https://www.gov.uk/cma-cases/amazon-slash-irobot-merger-inquiry.
[52] See European Commission, supra note 45, 304.
[53] Id., 313-314 (envisaging, among potential remedies, the imposition of a duty to make all data used by the platform for strategic decisions available to third parties); see also Désirée Klinger, Jonathan Bokemeyer, Benjamin Della Rocca, & Rafael Bezerra Nunes, Amazon’s Theory of Harm, Yale University Thurman Arnold Project (2020), 19, available at https://som.yale.edu/sites/default/files/2022-01/DTH-Amazon.pdf.
[54] Colangelo, supra note 1; see also Oscar Borgogno & Giuseppe Colangelo, Platform and Device Neutrality Regime: The New Competition Rulebook for App Stores?, 67 Antitrust Bulletin 451 (2022).
[55] See Court of Justice of the European Union (CJEU), 12 May 2022, Case C-377/20, Servizio Elettrico Nazionale SpA v. Autorità Garante della Concorrenza e del Mercato, ECLI:EU:C:2022:379; 19 Apr. 2018, Case C-525/16, MEO v. Autoridade da Concorrência, ECLI:EU:C:2018:270; 6 Sep. 2017, Case C-413/14 P, Intel v. Commission, ECLI:EU:C:2017:632; 6 Oct. 2015, Case C-23/14, Post Danmark A/S v. Konkurrencerådet (Post Danmark II), ECLI:EU:C:2015:651; 27 Mar. 2012, Case C-209/10, Post Danmark A/S v Konkurrencera?det (Post Danmark I), ECLI: EU:C:2012:172; for a recent overview of the EU case law, see also Pablo Iba?n?ez Colomo, The (Second) Modernisation of Article 102 TFEU: Reconciling Effective Enforcement, Legal Certainty and Meaningful Judicial Review, SSRN (2023), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4598161.
[56] CJEU, Intel, supra note 55, paras. 133-134.
[57] CJEU, Servizio Elettrico Nazionale, supra note 55, para. 73.
[58] Opinion of Advocate General Rantos, 9 Dec. 2021, Case C?377/20, Servizio Elettrico Nazionale SpA v. Autorità Garante della Concorrenza e del Mercato, ECLI:EU:C:2021:998, para. 45.
[59] CJEU, Servizio Elettrico Nazionale, supra note 55, para. 77.
[60] Id., paras. 77, 80, and 83.
[61] CJEU, 26 Nov.1998, Case C-7/97, Oscar Bronner GmbH & Co. KG v. Mediaprint Zeitungs- und Zeitschriftenverlag GmbH & Co. KG, Mediaprint Zeitungsvertriebsgesellschaft mbH & Co. KG and Mediaprint Anzeigengesellschaft mbH & Co. KG, ECLI:EU:C:1998:569.
[62] CJEU, Servizio Elettrico Nazionale, supra note 55, para. 85.
[63] European Commission, supra note 11; UK Competition and Markets Authority, supra note 17, paras. 2.6, 4.3, and 4.7.
[64] See, e.g., European Commission, Case COMP D3/34493, DSD, para. 112 (2001) OJ L166/1; affirmed in GC, 24 May 2007, Case T-151/01, DerGru?nePunkt – Duales System DeutschlandGmbH v. European Commission, ECLI:EU:T:2007:154 and CJEU, 16 Jul. 2009, Case C-385/07 P, ECLI:EU:C:2009:456; European Commission, Case IV/31.043, Tetra Pak II, paras. 105–08, (1992) OJ L72/1; European Commission, Case IV/29.971, GEMA III, (1982) OJ L94/12; CJUE, 27 Mar. 1974, Case 127/73, Belgische Radio en Televisie e socie?te? belge des auteurs, compositeurs et e?diteurs v. SV SABAM and NV Fonior, ECLI:EU:C:1974:25, para. 15; European Commission, Case IV/26.760, GEMA II, (1972) OJ L166/22; European Commission, Case IV/26.760, GEMA I, (1971) OJ L134/15.
[65] See, e.g., Richard A. Posner, Intellectual Property: The Law and Economics Approach, 19 The Journal of Economic Perspectives 57 (2005).
[66] See, e.g., Richard Gilbert & Carl Shapiro, Optimal Patent Length and Breadth, 21 The RAND Journal of Economics 106 (1990); Pankaj Tandon, Optimal Patents with Compulsory Licensing, 90 Journal of Political Economy 470 (1982); Frederic M. Scherer, Nordhaus’ Theory of Optimal Patent Life: A Geometric Reinterpretation, 62 American Economic Review 422 (1972); William D. Nordhaus, Invention, Growth, and Welfare: A Theoretical Treatment of Technological Change, Cambridge, MIT Press (1969).
[67] See, e.g., Hal R. Varian, Copying and Copyright, 19 The Journal of Economic Perspectives 121 (2005); William R. Johnson, The Economics of Copying, 93 Journal of Political Economy 158 (1985); Stephen Breyer, The Uneasy Case for Copyright: A Study of Copyright in Books, Photocopies, and Computer Programs, 84 Harvard Law Review 281 (1970).
[68] Sai Krishna Kamepalli, Raghuram Rajan, & Luigi Zingales, Kill Zone, NBER Working Paper No. 27146 (2022), http://www.nber.org/papers/w27146; Massimo Motta & Sandro Shelegia, The “Kill Zone”: Copying, Acquisition and Start-Ups’ Direction of Innovation, Barcelona GSE Working Paper Series Working Paper No. 1253 (2021), https://bse.eu/research/working-papers/kill-zone-copying-acquisition-and-start-ups-direction-innovation; U.S. House of Representatives, Subcommittee on Antitrust, Commercial, and Administrative Law, supra note 8, 164; Stigler Committee for the Study of Digital Platforms, Market Structure and Antitrust Subcommittee (2019) 54, https://research.chicagobooth.edu/stigler/events/single-events/antitrust-competition-conference/digital-platforms-committee; contra, see Geoffrey A. Manne, Samuel Bowman, & Dirk Auer, Technology Mergers and the Market for Corporate Control, 86 Missouri Law Review 1047 (2022).
[69] See also Howard A. Shelanski, Information, Innovation, and Competition Policy for the Internet, 161 University of Pennsylvania Law Review 1663 (2013), 1999 (describing as “forced free riding” the situation occurring when a platform appropriates innovation by other firms that depend on the platform for access to consumers).
[70] See Feng Zhu & Qihong Liu, Competing with Complementors: An Empirical Look at Amazon.com, 39 Strategic Management Journal 2618 (2018).
[71] Andrei Hagiu, Tat-How Teh, and Julian Wright, Should Platforms Be Allowed to Sell on Their Own Marketplaces?, 53 RAND Journal of Economics 297 (2022), (the model assumes that there is a platform that can function as a seller and/or a marketplace, a fringe of small third-party sellers that all sell an identical product, and an innovative seller that has a better product in the same category as the fringe sellers and can invest more in making its product even better; further, the model allows the different channels (on-platform or direct) and the different sellers to offer different values to consumers; therefore, third-party sellers (including the innovative seller) can choose whether to participate on the platform’s marketplace, and whenever they do, can price discriminate between consumers that come to it through the marketplace and consumers that come to it through the direct channel).
[72] See Germa?n Gutie?rrez, The Welfare Consequences of Regulating Amazon (2022), available at http://germangutierrezg.com/Gutierrez2021_AMZ_welfare.pdf (building an equilibrium model where consumers choose products on the Amazon platform, while third-party sellers and Amazon endogenously set prices of products and platform fees).
[73] See Federico Etro, Product Selection in Online Marketplaces, 30 Journal of Economics & Management Strategy 614 (2021), (relying on a model where a marketplace such as Amazon provides a variety of products and can decide, for each product, whether to monetize sales by third-party sellers through a commission or become a seller on its platform, either by commercializing a private label version or by purchasing from a vendor and resell as a first party retailer; as acknowledged by the author, a limitation of the model is that it assumes that the marketplace can set the profit?maximizing commission on each product; if this is not the case, third-party sales would be imperfectly monetized, which would increase the relative profitability of entry).
[74] Patrick Andreoli-Versbach & Joshua Gans, Interplay Between Amazon Store and Logistics, SSRN (2023) https://ssrn.com/abstract=4568024.
[75] Simon Anderson & O?zlem Bedre-Defolie, Online Trade Platforms: Hosting, Selling, or Both?, 84 International Journal of Industrial Organization 102861 (2022).
[76] Chiara Farronato, Andrey Fradkin, & Alexander MacKay, Self-Preferencing at Amazon: Evidence From Search Rankings, NBER Working Paper No. 30894 (2023), http://www.nber.org/papers/w30894.
[77] See Erik Madsen & Nikhil Vellodi, Insider Imitation, SSRN (2023) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3832712 (introducing a two-stage model where the platform publicly commits to an imitation policy and the entrepreneur observes this policy and chooses whether to innovate: if she chooses not to, the game ends and both players earn profits normalized to zero; otherwise, the entrepreneur pays a fixed innovation cost to develop the product, which she then sells on a marketplace owned by the platform).
[78] Federico Etro, The Economics of Amazon, SSRN (2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4307213.
[79] Jay Pil Choi, Kyungmin Kim, & Arijit Mukherjee, “Sherlocking” and Information Design by Hybrid Platforms, SSRN (2023), https://ssrn.com/abstract=4332558 (the model assumes that the platform chooses its referral fee at the beginning of the game and that the cost of entry is the same for both the seller and the platform).
[80] Radostina Shopova, Private Labels in Marketplaces, 89 International Journal of Industrial Organization 102949 (2023), (the model assumes that the market structure is given exogenously and that the quality of the seller’s product is also exogenous; therefore, the paper does not investigate how entry by a platform affects the innovation incentives of third-party sellers).
[81] Jean-Pierre Dube?, Amazon Private Brands: Self-Preferencing vs Traditional Retailing, SSRN (2022) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4205988.
[82] Gregory S. Crawford, Matteo Courthoud, Regina Seibel, & Simon Zuzek, Amazon Entry on Amazon Marketplace, CEPR Discussion Paper No. 17531 (2022), https://cepr.org/publications/dp17531.
[83] Motta & Shelegia, supra note 68.
[84] Jingcun Cao, Avery Haviv, & Nan Li, The Spillover Effects of Copycat Apps and App Platform Governance, SSRN (2023), https://ssrn.com/abstract=4250292.
[85] Massimo Motta, Self-Preferencing and Foreclosure in Digital Markets: Theories of Harm for Abuse Cases, 90 International Journal of Industrial Organization 102974 (2023).
[86] Id.
[87] Id.
[88] See, e.g., Crawford, Courthoud, Seibel, & Zuzek, supra note 82; Etro, supra note 78; Shopova, supra note 80.
[89] Motta, supra note 85.
[90] Servizio Elettrico Nazionale, supra note 55, paras. 53-54; Post Danmark II, supra note 55, para. 65.
[91] Etro, supra note 78; see also Herbert Hovenkamp, The Looming Crisis in Antitrust Economics, 101 Boston University Law Review 489 (2021), 543, (arguing that: “Amazon’s practice of selling both its own products and those of rivals in close juxtaposition almost certainly benefits consumers by permitting close price comparisons. When Amazon introduces a product such as AmazonBasics AAA batteries in competition with Duracell, prices will go down. There is no evidence to suggest that the practice is so prone to abuse or so likely to harm consumers in other ways that it should be categorically condemned. Rather, it is an act of partial vertical integration similar to other practices that the antitrust laws have confronted and allowed in the past.”)
[92] On the more complex economic rationale of intellectual property, see, e.g., William M. Landes & Richard A. Posner, The Economic Structure of Intellectual Property Law, Cambridge, Harvard University Press (2003).
[93] See, e.g., Italian Competition Authority, 18 Jul. 2023 No. 30737, Case A538 – Sistemi di sigillatura multidiametro per cavi e tubi, (2023) Bulletin No. 31.
[94] See CJEU, 6 Apr. 1995, Joined Cases C-241/91 P and 242/91 P, RTE and ITP v. Commission, ECLI:EU:C:1995:98; 29 Apr. 2004, Case C-418/01, IMS Health GmbH & Co. OHG v. NDC Health GmbH & Co. GH, ECLI:EU:C:2004:257; General Court, 17 Sep. 2007, Case T-201/04, Microsoft v. Commission, ECLI:EU:T:2007:289; CJEU, 16 Jul. 2015, Case C-170/13, Huawei Technologies Co. Ltd v. ZTE Corp., ECLI:EU:C:2015:477.
[95] See, e.g., Dana Mattioli, How Amazon Wins: By Steamrolling Rivals and Partners, Wall Street Journal (2022), https://www.wsj.com/articles/amazon-competition-shopify-wayfair-allbirds-antitrust-11608235127; Aditya Kalra & Steve Stecklow, Amazon Copied Products and Rigged Search Results to Promote Its Own Brands, Documents Show, Reuters (2021), https://www.reuters.com/investigates/special-report/amazon-india-rigging.
[96] Williams-Sonoma, Inc. v. Amazon.Com, Inc., Case No. 18-cv-07548 (N.D. Cal., 2018). The suit was eventually dismissed, as the parties entered into a settlement agreement: Williams-Sonoma, Inc. v. Amazon.Com, Inc., Case No. 18-cv-07548-AGT (N.D. Cal., 2020).
[97] Amazon Best Sellers, https://www.amazon.com/Best-Sellers/zgbs.
[98] Hovenkamp, supra note 91, 2015-2016.
[99] Nicolas Petit, Big Tech and the Digital Economy, Oxford, Oxford University Press (2020), 224-225.
[100] For a recent analysis, see Zijun (June) Shi, Xiao Liu, Dokyun Lee, & Kannan Srinivasan, How Do Fast-Fashion Copycats Affect the Popularity of Premium Brands? Evidence from Social Media, 60 Journal of Marketing Research 1027 (2023).
[101] Lina M. Khan, Amazon’s Antitrust Paradox, 126 Yale Law Journal 710 (2017), 782.
[102] See Massimo Motta &Martin Peitz, Intervention Triggers and Underlying Theories of Harm, in Market Investigations. A New Competition Tool for Europe? (M. Motta, M. Peitz, & H. Schweitzer, eds.), Cambridge, Cambridge University Press (2022), 16, 59 (arguing that, while it is unclear to what extent products or ideas are worth protecting and/or can be protected from sherlocking and whether such cloning is really harmful to consumers, this is clearly an area where an antitrust investigation for abuse of dominant position would not help).
[103] Khan, supra note 101, 780 and 783 (arguing that Amazon’s conflicts of interest tarnish the neutrality of the competitive process and that the competitive implications are clear, as Amazon is exploiting the fact that some of its customers are also its rivals).
[104] Servizio Elettrico Nazionale, supra note 55, para. 85.
[105] Post Danmark I, supra note 55, para. 22.
[106] Iba?n?ez Colomo, supra note 55, 21-22.
[107] Id.
[108] See, e.g., DMA, supra note 4, Recital 5 (complaining that the scope of antitrust provisions is “limited to certain instances of market power, for example dominance on specific markets and of anti-competitive behaviour, and enforcement occurs ex post and requires an extensive investigation of often very complex facts on a case by case basis.”).
[109] U.S. Federal Trade Commission, et al. v. Amazon.com, Inc., supra note 23.
[110] Khan, supra note 101.
[111] Khan, supra note 22, 1003, referring to Amazon, Google, and Meta.
TOTM Go big or go home, they say. It’s not really an either-or choice: one can go big, and then go home. Not infrequently, an attempt . . .
Go big or go home, they say. It’s not really an either-or choice: one can go big, and then go home. Not infrequently, an attempt to go big is what gets one sent home.
The Federal Trade Commission (FTC) swung for the fences in April 23’s open meeting. On purely partisan lines, the commission voted 3-2 to adopt a competition regulation that bans the use of noncompete agreements (NCAs) across much of the U.S. economy. With a few small wrinkles, it’s just what the FTC had proposed to do—also by a purely partisan vote—in its January 2023 notice of proposed rulemaking (NPRM).
Regulatory Comments Resumen Ejecutivo Agradecemos la oportunidad de presentar nuestros comentarios al Informe Preliminar (en adelante, el Informe[1]) publicado por la Autoridad Investigadora (AI) de la Comisión . . .
Agradecemos la oportunidad de presentar nuestros comentarios al Informe Preliminar (en adelante, el Informe[1]) publicado por la Autoridad Investigadora (AI) de la Comisión Federal de Competencia Económica (COFECE), luego de culminada su investigación sobre la competencia en el mercado de comercio electrónico. El International Center for Law and Economics (“ICLE”) es un think-tank global de políticas públicas e investigación, no partidista y sin fines de lucro, fundado con el objetivo de construir las bases intelectuales para políticas sensatas y económicamente fundamentadas. ICLE promueve el uso de las metodologías del Análisis Económico del Derecho para informar los debates de política pública, y tiene una larga experiencia en la evaluación de leyes y políticas de competencia. El interés de ICLE es garantizar que la aplicaciones de las leyes de competencia y el impacto de la regulación sobre la competencia se base en reglas claras, precedentes establecidos, evidencia y un análisis económico sólido.
El Informe ha sido emitido en el marco de un procedimiento contemplado en la Ley de Competencia de México, conocido como “Investigaciones para Determinar Facilidades Esenciales o Barreras a la Competencia”, en virtud del cual COFECE iniciará una investigación “cuando existan elementos que sugieran que no existen condiciones efectivas de competencia en un mercado”. La AI es responsable de emitir un informe de investigación preliminar y proponer medidas correctivas. El Pleno de la COFECE podrá posteriormente adoptar o rechazar la propuesta.
Nuestros comentarios sugieren respetuosamente a los Comisionados de la COFECE no seguir las recomendaciones de la AI en lo que se refiere a la competencia en el mercado de comercio electrónico. Si bien el Informe es un esfuerzo loable por comprender el mercado de marketplaces y proteger la competencia en él —competencia que ha sido beneficiosa para los consumidores mexicanos—sus conclusiones y recomendaciones no siguen la evidencia ni los métodos y principios generalmente aceptados del Derecho de la Libre Competencia.
En primer lugar, de acuerdo con la Ley de Competencia mexicana, cualquier investigación debe apuntar a eliminar “restricciones al funcionamiento eficiente de los mercados”. Sin embargo, según información disponible públicamente, Amazon y Mercado Libre (MeLi), las dos empresas identificadas como “dominantes” en el informe, debe su éxito al hecho de que gozan de la preferencia de los consumidores, y cuentan la confianza de éstos, antes que a la existencia de “barreras a la competencia”. El informe también parece ignorar los beneficios para el consumidor que ofrecen los modelos de negocio de Amazon y MeLi (es decir, productos y servicios más baratos, entrega rápida, acceso más fácil a la información para comparar productos, etc.).
En segundo lugar, el Informe define un mercado relevante irrazonablemente “estrecho”, que incluye sólo “mercados en línea en múltiples categorías de productos y que operan a nivel nacional”. Esta definición de mercado ignora a otros minoristas en línea (como Shein o Temu) porque venden una selección menos amplia de productos, agregadores de comercio electrónico (como Google Shopping) porque son “meros intermediarios” que conectan compradores y vendedores, sitios propios de vendedores (como Apple o Adidas) porque no operan en diversas categorías, así como tiendas físicas. Esta definición, artificialmente estrecha, distorsiona drásticamente la participación de mercado de Amazon y MeLi, haciéndola parecer mucho mayor de lo que realmente es.
En tercer lugar, esta distorsionada definición del mercado relevante conduce hacia la errada conclusión de que Amazon y MeLi ostentan una posición dominante, un requisito previo para la adopción de medidas aplicables a dichas empresas. Esta conclusión es errada porque el Informe utiliza un concepto de “barreras a la entrada” que parece considerar cualquier costo que enfrenten los nuevos participantes como una barrera a la entrada que protege a Amazon y MeLi de la competencia. Como explicamos más adelante, estos costos son costos comerciales regulares, no barreras específicas del mercado que impiden la entrada de nuevos actores. En efecto, la evidencia muestra que, efectivamente, han estado entrando regularmente nuevas empresas en el mercado.
Finalmente, el informe sugiere remedios que perjudicarían a los consumidores en lugar de beneficiarlos. El Informe sugiere obligar a Amazon y MeLi a separar sus servicios de streaming (como Amazon Prime) de sus programas de fidelización. Esto perjudicaría a los consumidores que actualmente disfrutan de beneficios combinados a un precio más bajo. Además, exigir que las plataformas sean interoperables conlas otros proveedores de logística sofocaría la innovación y la inversión, ya que estas plataformas no aprovecharían los beneficios de su infraestructura digital. Esta interoperabilidad obligatoria también podría perjudicar a los consumidores, quienes pueden atribuir fallas relacionadas con la entrega a los marketplaces, en lugar de a los proveedores de logística responsables de ellas, creando así un típico problema de “free-riding”.
El Informe ha sido emitido en el marco de un procedimiento contemplado en el artículo 94 de la Ley de Competencia de México, conocido como “Investigaciones para Determinar Facilidades Esenciales o Barreras a la Competencia”. Según esta disposición, la COFECE iniciará una investigación “cuando existan elementos que sugieran que no existen condiciones de competencia efectiva en un mercado”. La investigación debería apuntar a determinar la existencia de “barreras a la competencia y al libre acceso a los mercados” o de “facilidades esenciales”.
La AI es responsable de emitir un informe de investigación preliminar y proponer medidas correctivas. El Informe deberá identificar el mercado objeto de la investigación con el fin de que cualquier persona interesada aporte elementos durante la investigación. Una vez finalizada la investigación, la AI emitirá un Informe, incluyendo las medidas correctivas que se consideren necesarias para eliminar las restricciones al funcionamiento eficiente del mercado. Los agentes económicos potencialmente afectados por las medidas correctivas propuestas tienen la oportunidad de comentar y aportar evidencia. El Pleno de la COFECE puede posteriormente adoptar o rechazar las propuestas.
Entendemos y elogiamos las preocupaciones de la COFECE sobre la competencia en los mercados, pero cualquier investigación debe apuntar a eliminar “las restricciones al funcionamiento eficiente de los mercados”, el propósito de la Ley de Competencia de México, según su Artículo 2. Las conclusiones y recomendaciones del Informe no parecen considerar las eficiencias generadas por los marketplaces líderes, lo que puede explicar por qué gozan de la preferencia de los consumidores.
De hecho, según información públicamente disponible, Amazon y MeLi, las dos empresas identificadas como “dominantes” en el informe, son debe su éxito a la preferencia y confianza de los consumidores. Según una fuente[2], por ejemplo:
La popularidad del marketplace de Amazon en México se basa en gran medida en la satisfacción del cliente. Amazon es la segunda plataforma de comercio electrónico más apreciada en México, según una encuesta de Kantar, con un índice de satisfacción de 8.5 sobre 10. El feedback de los consumidores también es esencial para el éxito del mercado de Amazon, ya que permite a los compradores realizar compras exitosas. . Las reseñas de los consumidores también son esenciales para el éxito del marketplace de Amazon, ya que permiten a los compradores realizar compras informadas. Las buenas críticas destacan la velocidad y confiabilidad de Amazon (el énfasis es nuestro).
Según un estudio publicado por el Instituto Federal de Telecomunicaciones (IFT) sobre el uso de plataformas digitales durante la pandemia de Covid-19, el 75.8% de los usuarios afirma estar satisfecho o muy satisfecho con las aplicaciones y páginas web que utiliza para comprar en línea. Precisamente MeLi y Amazon fueron las plataformas más mencionadas con un 67,3% y un 30,3% de menciones, respectivamente.[3]
El informe también parece ignorar los beneficios para el consumidor que ofrecen los modelos de negocio de Amazon MeLi (es decir, productos y servicios más baratos, entrega rápida, acceso más fácil a la información para comparar productos, etc.).
El Informe encuentra evidencia preliminar de que “no existen condiciones de competencia efectiva en el Mercado Relevante de Vendedores y en el Mercado Relevante de Compradores”, así como la existencia de tres “Barreras a la Competencia” que generan restricciones al funcionamiento eficiente de dichos mercados.
Las supuestas barreras consisten en:
Para eliminar estas supuestas barreras, el Informe propone tres remedios que se aplicarían a Amazon y MeLi:
No estamos de acuerdo con las conclusiones y recomendaciones del Informe por las razones que se exponen a continuación:
Antes que un procedimiento de “abuso de posición dominante”, la investigación de mercado que condujo a la emisión del Informe fue el “procedimiento cuasi-regulatorio” descrito líneas arriba. Pero la redacción del artículo 94 de la Ley Federal de Competencia Económica de México (bajo la cual se autorizó la investigación) sugiere contundentemente que la COFECE tiene que establecer (no simplemente afirmar que existe) una “ausencia de competencia efectiva”. Esto implicaría que existe una “falla del mercado” que impide la competencia, o que existe un agente económico con una posición dominante. El informe intenta mostrar esto último, pero lo hace de manera poco convincente.
Para determinar si una determinada empresa tiene una “posición dominante” (poder monopólico), las agencias de competencia deben primero definir un “mercado relevante” en el que la conducta o modelo de negocio cuestionado tenga un efecto. Aunque es común que las autoridades antimonopolio definan de manera restrictiva los mercados relevantes (a menudo, cuanto más pequeño es el mercado, más fácil es descubrir que el hipotético monopolista es, de hecho, un monopolista), creemos que el Informe va demasiado lejos en el caso que nos ocupa.
El Informe parece seguir el (mal) ejemplo de su homólogo estadounidense, la Comisión Federal de Comercio (FTC). Como explica Geoffrey Manne en un informe sobre la reciente denuncia[5] por monopolización de la FTC contra Amazon:
La denuncia de la FTC contra Amazon describe dos mercados relevantes en los que supuestamente se han producido daños anticompetitivos: (1) el “mercado de los grandes supermercados en línea” y (2) el “mercado de servicios de marketplaces en línea”. … la demanda de la FTC limita el mercado de los supermercados en línea únicamente a las tiendas en línea, y lo limita aún más a las tiendas que tienen una “gran amplitud y profundidad” de productos. Esto último significa tiendas en línea que venden prácticamente todas las categorías de productos (“como artículos deportivos, artículos de cocina, indumentaria y electrónica de consumo”) y que también tienen una amplia variedad de marcas dentro de cada categoría (como Nike, Under Armour, Adidas , etc.). En la práctica, esta definición excluye los canales privados de marcas líderes (como la tienda en línea de Nike), así como las tiendas en línea que se centran en una categoría particular de productos (como el enfoque de Wayfair en muebles). También excluye las tiendas físicas que todavía representan la gran mayoría de las transacciones minoristas. Las empresas con importantes ventas en línea y físicas podrían contar, pero sólo sus ventas en línea se considerarían parte del mercado.[6]
La denuncia de la FTC contra Amazon describe dos mercados relevantes en los que supuestamente se han producido daños anticompetitivos: (1) el “mercado de los grandes supermercados en línea” y (2) el “mercado de servicios de marketplaces en línea”.
… la demanda de la FTC limita el mercado de los supermercados en línea únicamente a las tiendas en línea, y lo limita aún más a las tiendas que tienen una “gran amplitud y profundidad” de productos. Esto último significa tiendas en línea que venden prácticamente todas las categorías de productos (“como artículos deportivos, artículos de cocina, indumentaria y electrónica de consumo”) y que también tienen una amplia variedad de marcas dentro de cada categoría (como Nike, Under Armour, Adidas , etc.). En la práctica, esta definición excluye los canales privados de marcas líderes (como la tienda en línea de Nike), así como las tiendas en línea que se centran en una categoría particular de productos (como el enfoque de Wayfair en muebles). También excluye las tiendas físicas que todavía representan la gran mayoría de las transacciones minoristas. Las empresas con importantes ventas en línea y físicas podrían contar, pero sólo sus ventas en línea se considerarían parte del mercado.[6]
El Informe hace algo similar. Define dos mercados relevantes;
Ambos mercados, sin embargo, están definidos de forma irrazonablemente restrictiva. Al alegar que los grandes mercados en línea “se han posicionado como una importante opción”, la agencia ignora la competencia de otros minoristas, tanto on-line como off-line. El Informe ignora otras plataformas de comercio electrónico, como Shein[7] y Temu[8] de China, que han ganado tanto popularidad como participación en el mercado publicitario. El Informe tampoco menciona los agregadores de comercio electrónico como Google Shopping, que permiten a los consumidores buscar casi cualquier producto, compararlos y encontrar ofertas competitivas; así como la competencia de sitios web de comercio electrónico propiedad de los propios vendedores, como Apple o Adidas.
Esta exclusión es, por decir lo menos, discutible. Para competir con una “super-tienda online”, las tiendas online no tienen que contar necesariamente con la misma gama de productos que tienen Amazon o MeLi, porque “los consumidores compran productos, no tipos de tiendas”[9]:
De hecho, parte de la supuesta ventaja de las compras en línea (cuando es una ventaja) es que los consumidores no tienen que agrupar las compras para minimizar los costos de transacción de visitar físicamente a un minorista tradicional. Mientras tanto, otra parte de la ventaja de las compras en línea es la facilidad de comparar precios: los consumidores ni siquiera tienen que cerrar una ventana de Amazon en sus computadoras para verificar alternativas, precios y disponibilidad en otros lugares. Todo esto socava la afirmación de que el “one-stop shopping” es una característica definitoria del supuesto mercado relevante.[10]
El Informe también parece ignorar la competencia que representan por los minoristas tradicionales, que disciplinarían cualquier intento de Amazon o Meli de explotar su poder de mercado. Por supuesto, cuántos consumidores podrían cambiar de proveedor y en qué medida eso afectaría a los marketplaces en cuestión son cuestiones empíricas. Pero no hay duda de que al menos algunos consumidores podrían cambiarse. Sobre el particular, es importante recordar que la competencia se produce en los márgenes. En consecuencia, no es necesario que todos los consumidores cambien para afectar las ventas y las ganancias de una empresa.
El informe hace mención a las ventas a través de las redes sociales, pero no las incluye en el mercado relevante. Desde nuestro punto de vista las redes sociales como canal de ventas deben considerarse como un sustituto razonable de Amazon y Meli, considerando que el 85% de las pequeñas y medianas empresas recurrieron a Facebook, Instagram y WhatsApp durante la pandemia de Covid-19 para publicitar y vender sus productos.[11] La Guía Comercial publicada por la Administración de Comercio Internacional del Departamento de Comercio de Estados Unidos para México informa que “los compradores mexicanos están muy influenciados por las redes sociales a la hora de realizar compras. El cuarenta y tres por ciento de los compradores de comercio electrónico han comprado a través de comercio conversacional o comercio electrónico (ventas a través de Facebook o WhatsApp) y el 29 por ciento a través de “lives” o transmisiones en vivo”.[12]
También hay evidencia empírica de que Amazon no sólo compite, sino que compite intensamente con otros canales de distribución, y tiene un efecto neto positivo en el bienestar de los consumidores mexicanos. Un artículo[13] de 2022 encontró que:
El mismo documento concluye que la entrada al mercado de productos vendidos y entregados por Amazon dio lugar a reducciones de precios de hasta un 28%.[14] A la luz de esta evidencia, creemos que es un error suponer que mercados como Amazon y MeLi no compiten con otros minoristas. Por tanto, estos últimos deberían incluirse en el mercado relevante.
Por si esta estrecha definición del mercado relevante no fuera suficiente, el informe combina las cuotas de mercado de Amazon y MeLi, para concluir que, ambas empresas ostentan más del 85% de las ventas y transacciones en el Mercado Relevante de Vendedores durante el periodo analizado, y el Índice Herfindahl-Hirschman (HHI) supera los dos mil puntos (por tanto, el mercado sería “altamente concentrado”). Asimismo, en el “Mercado Relevante de Compradores” el HHI se estimó, para 2022, en 1614 unidades, y los tres principales participantes concentran el 61% (sesenta y uno por ciento) del mercado. En ambos mercados, los demás participantes tienen una participación significativamente menor.
Pero ¿por qué combinar la cuota de mercado de Amazon y MeLi, como si actuaran como una sola empresa? Dada la definición de mercado de la AI, Amazon y MeLi (por lo menos) estarían compitiendo entre sí. El continuo crecimiento del mercado y la evolución de las respectivas cuotas de mercado de las empresas indican que así es. Un artículo de 2020, por ejemplo, informa que:
Cadenas de autoservicios, departamentales y nativas digitales tienen un objetivo en común: ser quien acapare más mercado en el comercio electrónico en México. En esta batalla, Amazon y Mercado Libre se ponen a la cabeza, pues son las dos firmas que concentran casi un cuarto del total de mercado de este rubro. Al cierre de 2019, Amazon contaba con un cuota de mercado del 13.4%, que lo colocaba al frente de los demás competidores. Ese mismo año, con 11.4% se encontraba Mercado Libre”.[15]
Cadenas de autoservicios, departamentales y nativas digitales tienen un objetivo en común: ser quien acapare más mercado en el comercio electrónico en México. En esta batalla, Amazon y Mercado Libre se ponen a la cabeza, pues son las dos firmas que concentran casi un cuarto del total de mercado de este rubro.
Al cierre de 2019, Amazon contaba con un cuota de mercado del 13.4%, que lo colocaba al frente de los demás competidores. Ese mismo año, con 11.4% se encontraba Mercado Libre”.[15]
También es inconsistente con la hipótesis de un mercado con “barreras a la competencia” el hecho de que el mercado de comercio electrónico está creciendo continuamente en México, que ahora es el segundo mercado de comercio electrónico más grande de América Latina.[16]
Es sólo sobre la base de una descripción distorsionada del mercado relevante que puede arribarse a la conclusión de que Amazon y MeLi tienen “el poder de fijar precios” (otra forma de decir “poder de monopolio”). Teniendo en cuenta lo explicado líneas arriba, esa conclusión debe rechazarse.
Incluso si se acepta la definición de mercado del Informe y, por lo tanto, se considera que Amazon y MeLi tienen una participación de mercado significativa, ambas empresas aún podrían enfrentar la competencia de nuevos participantes, atraídos al mercado por los precios más altos (u otras condiciones “explotativas”) que cobrarían a los consumidores. Según el Informe, sin embargo, existen varias barreras que obstaculizan “la entrada y la expansión” en ambos mercados relevantes. Entre ellos, el Informe menciona, por ejemplo:
Sin embargo, y contrariamente a lo que afirma el Informe, estos son costos de hacer negocios, no “barreras de entrada”. Como explicó convincentemente Richard Posner, el término “barrera de entrada” se utiliza comúnmente para describir cualquier obstáculo o costo que enfrentan los entrantes al mercado[17]. Pero según esta definición (aparentemente adoptada por el Informe), cualquier costo es una barrera de entrada. Basándose en la definición más precisa de George Stigler, Posner sugirió definir una barrera de entrada como “una condición que impone a un nuevo entrante costos de producción a largo plazo más altos que los que soportan las empresas que ya están en el mercado”.[18] En otras palabras, bien entendida, una barrera a la entrada es un costo asumido por los nuevos participantes, que no fue asumido por los ya actores establecidos.
La definición de “barreras de entrada” de la AI también contradice la definición dada por la sección IV del artículo 3 de la Ley de Competencia de México, según la cual una barrera a la competencia es:
Cualquier característica estructural del mercado, acto o hecho realizado por Agentes Económicos con el propósito o efecto de impedir el acceso a competidores o limitar su capacidad para competir en los mercados; que impida o distorsione el proceso de competencia y libre acceso a los mercados, así como cualquier disposición legal emitida por cualquier nivel de gobierno que impida o distorsione indebidamente el proceso de competencia y libre acceso a los mercados.
Por supuesto, Amazon y MeLi tienen algunas ventajas sobre otras empresas en términos de infraestructura, conocimientos, escala y goodwill. Pero esas ventajas no cayeron del cielo. Amazon y MeLi los construyeron con el tiempo, invirtiendo (y continuando invirtiendo) a menudo enormes cantidades para lograrlo. Incluso los “efectos de red”, a menudo considerados como una fuente inevitable de monopolio, no son un obstáculo definitivo para la competencia. Como han señalado Evans y Schmalensee:
la investigación sistemática sobre plataformas en línea realizada por varios autores, incluido uno de nosotros, muestra una considerable rotación en el liderazgo de las plataformas en línea en períodos inferiores a una década. luego está la colección de plataformas muertas o marchitas que salpican este sector, incluidas blackberry y windows en los sistemas operativos de teléfonos inteligentes, aol en mensajería, orkut en redes sociales y yahoo en medios masivos en línea.[19]
La idea de que Amazon y MeLi están protegidas por barreras de entrada también se contradice con la entrada de nuevos rivales, como Shein y Temu.
Como se explicó anteriormente, el Informe también combina erróneamente las participaciones de mercado de Mercado Libre y Amazon, para alcanzar una participación de mercado combinada del 85% (ochenta y cinco por ciento) de las ventas y transacciones en el Mercado Relevante de Vendedores; y luego combina la participación de mercado de los tres principales participantes del mercado en el Mercado Relevante para Compradores para alcanzar una participación de mercado del 61% (sesenta y uno por ciento) del mercado. Esto es muy problemático, ya que esas empresas no son una sola entidad económica y, por lo tanto, presumiblemente (a falta de evidencia de colusión) debe asumirse que compiten entre sí.
En todo caso, las cuotas de mercado producidas por el Informe sólo conducen a un IHH alto, lo que a su vez muestra que el mercado está “altamente concentrado” (si se acepta la estrecha definición de mercado del Informe). Pero la concentración es un pobre indicador del poder de mercado. Los economistas han estudiado la relación entre la concentración y diversos indicios potenciales de efectos anticompetitivos (precio, margen, ganancias, tasa de rendimiento, etc.) durante décadas, y la evidencia empírica es más que suficiente para decir que la concentración podría conducir a problemas de competencia.[20] No es per se una prueba de falta de competencia, y mucho menos de una posición dominante.
Como resumió recientemente Chad Syverson:
Quizás el problema conceptual más profundo de la concentración como medida del poder de mercado es que es un resultado, no un determinante central inmutable de cuán competitivo es una industria o un mercado… Como resultado, la concentración es peor que un simple barómetro poco preciso del poder de mercado. En realidad, ni siquiera podemos saber en general en qué dirección está orientado el barómetro.[21]
Incluso si aceptáramos la definición de mercado relevante sugerida por el Informe y su determinación de la existencia de una posición dominante, los remedios propuestos —que podrían resumirse en la separación obligatoria de los servicios de streaming de Amazon y MeLi de sus programas de fidelización (como Prime de Amazon) y hacer que (al menos parte de) sus plataformas sean “interoperables” con otros servicios logísticos—perjudicaría a los consumidores, en lugar de beneficiarlos.
Amazon Prime, por ejemplo, ofrece a los consumidores muchos beneficios atractivos: acceso a streaming de vídeo y música; ofertas y descuentos especiales; y, por último, pero no menos importante, envío gratuito en dos días. Según el Informe, estos “son una estrategia artificial que atrae y retiene a los compradores, a la vez que reduce que los compradores y vendedores usen marketplaces alternativos.”
No está del todo claro qué significa el término “artificial” en este contexto, pero parece implicar algo fuera de los límites de la competencia “natural”. Sin embargo, la estrategia de negocio que describe el Informe es la definición misma de competencia. Las empresas que compiten en un mercado siempre eligen un “paquete” de atributos que combinan en un solo producto. En cierta medida “apuestan” por un conjunto de características (funcionalidad, materiales, términos y condiciones) que implican asumir determinado costos, que luego ofrecen a un precio determinado, que puede ser asumido por clientes dispuestos (o no). Incluso con información imperfecta, los mercados (es decir, los vendedores y los consumidores) son los agentes mejor calificados para “decidir” el nivel apropiado de “agrupación” de un producto, no las agencias de competencia o los tribunales.
Un mandato para desagregar los servicios de streaming en realidad degradaría la experiencia de los consumidores online, quienes tendrían que contratar y pagar esos servicios por separado[22]. La prestación independiente de dichos servicios no se beneficiaría de las economías de escala y alcance de Amazon o MeLi y, por tanto, sería más cara. Ofrecer más beneficios a los consumidores a un precio determinado es lo precisamente lo que queremos que hagan los competidores. Tratar el beneficio para el consumidor como un daño es un contrasentido para el Derecho y las políticas de competencia (y, de hecho, para la noción misma de competencia).
Por otro lado, el informe también propone ordenar la apertura del Buy Box y modificar sus reglas, a fin de que sea neutral para todos los proveedores de logística. Exigir que se permita a dichos proveedores ofrecer sus servicios en Amazon o Mercado Libre equivale a considerar estas plataformas como “operadores comunes”, tal como los legisladores y reguladores hicieron con las antiguas redes de telefonía del siglo XX. Sin embargo, esta clasificación y las reglas que de ella se derivan (neutralidad y regulación de precios, entre otras) fueron diseñadas para mercados con monopolios naturales, donde la competencia no es posible, o incluso indeseable.[23] Pero no hay evidencia de que este sea el caso de los marketplaces de comercio electrónico. Por el contrario, las plataformas digitales son mucho más competitivas. En este contexto, el aplicara éstas las normas del tipo “common carrier” sólo crearía “free-riding” e incentivos negativos para la inversión y la innovación (tanto por parte de los actuales participantes del mercado como de los nuevos entrantes). Los vendedores y proveedores de logística tienen muchas otras opciones para acceder a los consumidores. No existe ninguna justificación económica o legal para ordenar su acceso mandatorio a las plataformas de Amazon o MeLi.
En resumen, las conclusiones erróneas del Informe conducen a soluciones aún peores. Tales soluciones no promoverían la competencia en México ni beneficiarían a los consumidores.
[1] El texto completo de el Informe (en su versión pública) está disponible en el siguiente enlace: https://www.cofece.mx/wp-content/uploads/2024/02/Dictamen_Preliminar_Version_Publica.pdf.
[2] La Patria, ¿Qué tan popular es el marketplace de Amazon en México? (23 Apr. 2023), https://www.lapatria.com/publirreportaje/que-tan-popular-es-el-marketplace-de-amazon-en-mexico.
[3] Instituto Federal de Telecomunicaciones, Adopción, Uso y satisfacción de las aplicaciones y herramientas digitales para compras y banca en línea, videollamadas, redes sociales, salud y trámites gubernamentales en tiempos de Covid-19 (Jan 19, 2022), https://www.ift.org.mx/sites/default/files/contenidogeneral/usuarios-y-audiencias/aplicacionesyherramientasdigitalesentiemposdecovid19.pdf.
[4] El “Buy Box” o, traduciendo literalmente el “Recuadro de compra” es un cuadro que normalmente se encuentra en el lado derecho de la página web del marketplace cuando los clientes buscan un producto. Estar en esta casilla es una ventaja para el vendedor porque no solo resalta su producto, sino que también facilita el proceso de pago. Por supuesto, esto también es una ventaja para los consumidores, que pueden encontrar y comprar productos más rápido.
[5] Ver: https://www.ftc.gov/legal-library/browse/cases-proceedings/1910129-1910130-amazoncom-inc-amazon-ecommerce.
[6] Geoffrey A. Manne, Gerrymandered Market Definitions in FTC v. Amazon (Jan. 26, 2024), https://laweconcenter.org/resources/gerrymandered-market-definitions-in-ftc-v-amazon.
[7] Ver, por ejemplo: Krystal Hu y Arriana McLymore, Exclusive: Fast-fashion giant Shein plans Mexico factory, Reuters (Mayo 24, 2023), https://www.reuters.com/business/retail-consumer/fast-fashion-giant-shein-plans-mexico-factory-sources-2023-05-24.
[8] Ver, por ejemplo: Rising E-commerce Star: The Emergence of Temu in Mexico, BNN (Sep. 25, 2023), https://bnnbreaking.com/finance-nav/rising-e-commerce-star-the-emergence-of-temu-in-mexico.
[9] Geoffrey A. Manne, Ibid.
[10] Ibid.
[11] Expansión, El 85% de las Pymes usa redes sociales para vender en línea (28 Jul. 2021), https://expansion.mx/tecnologia/2021/07/28/el-85-de-las-pymes-usa-redes-sociales-para-vender-en-linea.
[12] International Trade Organization, Mexico – Country Commercial Guide, (Nov. 5, 2023), https://www.trade.gov/country-commercial-guides/mexico-ecommerce.
[13] Raymundo Campos Vázquez et al., Amazon’s Effect on Prices: The Case of Mexico, Centro de Estudios Económicos, Documentos de Trabajo, Nro. II (2022), https://cee.colmex.mx/dts/2022/DT-2022-2.pdf.
[14] Ibid, p. 23.
[15] El CEO, Amazon y Mercado Libre se disputan la corona del comercio electrónico en México (Mar 17, 2020), https://elceo.com/negocios/amazon-y-mercado-libre-se-discuten-la-corona-del-comercio-electronico-en-mexico.
[16] “Over the last few years, online buying and selling have gained considerable ground in Mexico, so much so that the country has positioned itself as the second largest e-commerce market in Latin America. With a rapidly increasing online buying population, it was forecast that nearly 70 million Mexicans would be shopping on the internet in 2023, a figure that would grow by over 26 percent by 2027.”). Stephanie Chevalier, E-commerce market share in Latin American and the Caribbean 2023, by country, Statista, March 25, 2024, https://www.statista.com/statistics/434042/mexico-most-visited-retail-websites.
[17] Richard Posner, Antitrust Law (2nd. Ed. 2001), pp.73-74.
[18] Ibid., p. 74.
[19] David S.Evans and Richard Schmalensee, Debunking the “network effects” bogeyman, Regulation (Winter 2017-2018), at 39, https://www.cato.org/sites/cato.org/files/serials/files/regulation/2017/12/regulation-v40n4-1.pdf.
[20] Sólo para citar alguos de los ejemplos más relevante de una amplia literatura, ver: Steven Berry, Martin Gaynor, & Fiona Scott Morton, Do Increasing Markups Matter? Lessons from Empirical Industrial Organization, 33J. Econ. Perspectives 44 (2019); 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).
[21] Chad Syverson, Macroeconomics and Market Power: Context, Implications, and Open Questions 33 J. Econ. Persp. 23, (2019) at 26.
[22] Ver, sobre el particular: Alden Abbott, FTC’s Amazon Complaint: Perhaps the Greatest Affront to Consumer and Producer Welfare in Antitrust History, Truth on the Market (September 27, 2023), https://truthonthemarket.com/2023/09/27/ftcs-amazon-complaint-perhaps-the-greatest-affront-to-consumer-and-producer-welfare-in-antitrust-history.
[23] Ver, por ejemplo: Giuseppe Colangelo y Oscar Borgogno, App Stores as Public Utilities?, Truth on the Market (January 19, 2022), https://truthonthemarket.com/2022/01/19/app-stores-as-public-utilities.
Regulatory Comments Executive Summary We are thankful for the opportunity to submit our comments to the Preliminary Report (hereinafter, the Report)[1] published by the Investigative Authority (IA) . . .
We are thankful for the opportunity to submit our comments to the Preliminary Report (hereinafter, the Report)[1] published by the Investigative Authority (IA) of the Federal Economic Competition Commission (COFECE, after its Spanish acronym) following its investigation of competition in the retail electronic-commerce market. The International Center for Law & Economics (“ICLE”) is a nonprofit, nonpartisan global research and policy center 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 precedent, a record of evidence, and sound economic analysis.
The Report stems from a procedure included in the Mexican Competition Act, known as “Investigations to Determine Essential Facilities or Barriers to Competition”. COFECE can initiate such investigations “when there are elements suggesting there are no effective competition conditions in a market.” The IA is responsible for issuing a preliminary investigative report and proposing corrective measures. COFECE’s Board of Commissioners can later adopt or reject the proposal.
Our comments respectfully suggest to COFECE Commissioners not to follow the recommendations of the IA concerning competition in the retail electronic-commerce market. While the Report is a laudable effort to understand the market and to protect the competition upon it—competition that has been beneficial to Mexican consumers—its conclusions and recommendations do not follow the evidence and the generally accepted methods and principles of Antitrust laws and best practices.
In first place, under the Mexican Competition Act, investigations should aim to eliminate only “restrictions to the efficient operation of markets”, the purpose of According to publicly available information, however, Amazon and Mercado Libre (MeLi), the two companies identified as “dominant” in the report, owe their success to consumer preferences and trust, rather than “barriers to competition”. Indeed, if these were present, they would lead to consumer dissatisfaction that is simply not the case here. The report also ignores the consumer benefits provided by Amazon and MeLi’s business models (i.e., cheaper products and services, fast delivery, easier access to information to compare products, etc.).
Second, the Report defines an unreasonably narrow relevant market that includes only “online marketplaces in multiple product categories and operating at the national level”. This market definition ignores other online retailers (like Shein or Temu) because they sell a narrower selection of goods?, e-commerce aggregators (like Google Shopping) because they are merely intermediaries that connect buyers and sellers, seller-owned websites (like Apple or Adidas) because they do not sell as many distinct product categories, as well as brick-and-mortar stores. By artificially narrowing the market in this way, the report drastically overstates Amazon and MeLi’s market shares.
Third, this gerrymandered relevant market leads to an artificial finding that Amazon and MeLi are “dominant” marketplaces—a key requirement for subsequent enforcement. This finding is problematic because the Report considers any costs faced by new entrants as “barriers to entry” that insulate the two marketplaces from competition. As we argue below, however, these “barriers” are merely regular business costs that do not prevent new players from entering. To wit, the record shows that new firms regularly enter the market.
Finally, the proposed remedies would harm rather than benefit consumers. The Report suggests forcing Amazon and MeLi to separate their streaming services (like Amazon Prime) from their loyalty programs. This would hurt consumers who currently enjoy bundled benefits at a lower price. Additionally, requiring the platforms to interoperate with other logistics providers would stifle innovation and investment as these platforms wouldn’t reap the benefits of their digital infrastructure. This mandated interoperability could also harm consumers who may attribute delivery-related failings to the marketplaces rather than logistics providers responsible for them, thereby creating a standard free-rider problem.
The Report has been issued in the context of a procedure contemplated in Article 94 of the Mexican Competition Act, known as “Investigations to Determine Essential Facilities or Barriers to Competition”. According to this provision, COFECE shall initiate an investigation “when there are elements suggesting there are no effective competition conditions in a market”. The investigation should aim to determine the existence of “barriers to competition and free market access” or of “essential facilities”.
An IA is responsible for issuing a preliminary investigative report and to propose corrective measures. The Report must identify the market subject to the investigation with the purpose of allowing any person to provide elements during the investigation. Once the investigation is finished, the IA shall issue a Report, including corrective measures deemed necessary to eliminate the restrictions to the efficient operation of the market. Economic agents potentially affected by corrective measures proposed have the opportunity to comment and provide evidence. COFECE’s Board of Commissioners can later adopt or reject the proposals.
We understand and commend COFECE’s concerns for competition in the marketplaces market, but any investigation should aim to eliminate “restrictions to the efficient operation of markets”, the purpose of the Mexican Competition Act, according to its Article 2[2]. The conclusions and recommendations of the Report do not appear to consider the efficiency of the leading marketplaces, which may explain why consumers routinely choose them over rivals.
Indeed, according to publicly available information, Amazon and MeLi, the two companies identified as “dominant” in the report, owe their success to consumer preferences and trust. According to one source[3], for instance:
The popularity of the Amazon marketplace in Mexico is largely based on customer satisfaction. Amazon is the second most appreciated e-commerce platform in Mexico, according to a Kantar survey, with a satisfaction index of 8.5 out of 10. Consumer feedback is also essential to the success of the Amazon marketplace, as it allows buyers to make successful purchases. Consumer reviews are also essential to the success of the Amazon marketplace, allowing buyers to make informed purchases. Good reviews highlight Amazon’s speed and reliability [emphasis added].
According to a study published by the Federal Institute of Telecommunications (IFT, after its Spanish acronym) about the use of digital platforms during the Covid-19 pandemic, 75.8% of users claim to be satisfied or very satisfied with the applications and webpages they use to buy online. Moreover, MeLi and Amazon were the most mentioned platforms with 67.3% and 30.3% of mentions, respectively.[4]
The report also appears to ignore the consumer benefits provided by Amazon MeLi’s business models (i.e., cheaper products and services, fast delivery, easier access to information to compare products, etc.).
The Report finds preliminary evidence to support the notion that “there are no conditions of effective competition in the Relevant Market of Sellers and in the Relevant Market of Buyers,” as well as the existence of “three Barriers to Competition” that generate restrictions on the efficient functioning of said markets.
The alleged barriers consist of:
To eliminate these alleged barriers, the Report proposes three remedies, to be applied to Amazon and MeLi:
We disagree with the findings and recommendations of the Report for the reasons stated below:
Rather than an “abuse of dominance” procedure, the market investigation that led to the report was a “quasi-regulatory procedure.” But the wording of Article 94 of the Mexican Federal Economic Competition Act (under which the investigation was authorized) strongly suggests that COFECE has to establish (not simply assert) an “absence of effective competition.” This would entail either that there is a “market failure” that impedes competition, or that there is an economic agent with a dominant position. The report unconvincingly tries to show the latter.
To determine if any given company has a “dominant position” (monopoly power), competition agencies must first define a “relevant market” in which the challenged conduct or business model has an effect. Although it is common for antitrust enforcers to define relevant markets narrowly (often, the smaller the market, the easier it is to find that the hypothetical monopolist is, in fact, a monopolist), we think the Report goes too far in the case at hand.
The Report appears to follow the bad example of its American counterpart, the Federal Trade Commission (FTC). As Geoffrey Manne explains in an Issue Brief about the FTC’s recent monopolization complaint[6] against Amazon the agency:
The FTC’s complaint against Amazon describes two relevant markets in which anticompetitive harm has allegedly occurred: (1) the “online superstore market” and (2) the “online marketplace services market.” … the FTC’s complaint limits the online-superstore market to online stores only, and further limits it to stores that have an “extensive breadth and depth” of products. The latter means online stores that carry virtually all categories of products (“such as sporting goods, kitchen goods, apparel, and consumer electronics”) and that also have an extensive variety of brands within each category (such as Nike, Under Armor, Adidas, etc.). In practice, this definition excludes leading brands’ private channels (such as Nike’s online store), as well as online stores that focus on a particular category of goods (such as Wayfair’s focus on furniture). It also excludes the brick-and-mortar stores that still account for the vast majority of retail transactions. Firms with significant online and brick-and-mortar sales might count, but only their online sales would be considered part of the market. [7]
The FTC’s complaint against Amazon describes two relevant markets in which anticompetitive harm has allegedly occurred: (1) the “online superstore market” and (2) the “online marketplace services market.”
… the FTC’s complaint limits the online-superstore market to online stores only, and further limits it to stores that have an “extensive breadth and depth” of products. The latter means online stores that carry virtually all categories of products (“such as sporting goods, kitchen goods, apparel, and consumer electronics”) and that also have an extensive variety of brands within each category (such as Nike, Under Armor, Adidas, etc.). In practice, this definition excludes leading brands’ private channels (such as Nike’s online store), as well as online stores that focus on a particular category of goods (such as Wayfair’s focus on furniture). It also excludes the brick-and-mortar stores that still account for the vast majority of retail transactions. Firms with significant online and brick-and-mortar sales might count, but only their online sales would be considered part of the market. [7]
The Report does something similar. It defines two relevant markets;
Both markets, however, are defined in an unreasonably narrow way. By alleging that large online marketplaces “have positioned themselves as an important choice,” the agency ignores competition from other online and offline retailers. The Report ignores other e-commerce platforms—like China’s Shein[8] and Temu[9]—that have gained both popularity and advertising-market share. The report also neglects to mention e-commerce aggregators like Google Shopping, which allow consumers to search for almost any product, compare them, and find competitive offers; as well as competition from e-commerce websites owned by sellers, such as Apple or Adidas.
This exclusion seems wrong. To compete with and “online superstores”, online stores do not need the scope of products that Amazon or MeLi have, because “consumers buy products, not store types”[10]:
Indeed, part of the purported advantage of online shopping—when it’s an advantage—is that consumers don’t have to bundle purchases together to minimize the transaction costs of physically visiting a brick-and-mortar retailer. Meanwhile, another part of the advantage of online shopping is the ease of comparison shopping: consumers don’t even have to close an Amazon window on their computers to check alternatives, prices, and availability elsewhere. All of this undermines the claim that one-stop shopping is a defining characteristic of the alleged market.[11]
The Report also appears to ignore the competitive constraints imposed by brick-and-mortar retailers, especially if Amazon or MeLi tried to exploit their market power. Of course, how many consumers might switch, and the extent to which that would affect the marketplaces, are empirical questions. But there is no question that some consumers might switch. In that respect, it is important to remember that competition takes place on the margins. Accordingly, it is not necessary for all consumers to switch to affect a company’s sales and profits.
The report does mention selling through social media but does not include such sales in the relevant market. We think that social media should as a sales channel should be considered as reasonable substitute for Amazon and MeLi, considering the fact that 85% of small and medium enterprises turned to Facebook, Instagram, and WhatsApp during the Covid-19 pandemic to advertise and sell their products.[12] The Commercial Guide for Mexico published by the U.S. Department of Commerce’s International Trade Administration reports that “Mexican buyers are highly influenced by social networks when making purchases. Forty-three percent of eCommerce buyers have bought via Conversational Commerce or C-commerce (selling via Facebook or WhatsApp), and 29 percent through “lives” or livestreams”.[13]
There is also empirical evidence that Amazon not only competes, but competes intensively with other distribution channels, and has a net-positive welfare effect on Mexican consumers. A 2022 paper[14] found that:
The paper finds the market entry of products sold and delivered by Amazon gave rise to price reductions of up to 28%.[15] In light of this evidence, we think that is wrong to assume that marketplaces like Amazon and MeLi do not compete with other retailers. The latter should thus be included in the relevant market.
As if this narrow definition were not enough, the report conflates Amazon and MeLi’s market shares, to conclude that, together, both hold more than 85% of the sales and transactions in the Relevant Seller Market during the period analyzed and the Herfindahl-Hirschman Index (HHI) exceeds two thousand points (therefore, the market is highly concentrated). Likewise, in the “Relevant Buyers Market,” the HHI was estimated, for 2022, at 1,614 units and the main three participants concentrate 61% (sixty-one percent) of the market. In both markets, the other participants have a significantly smaller share.
But why combine the market share of Amazon and MeLi, as if they were acting as a single firm? Given the IO’s market definition, it must at least be the case that Amazon and MeLi at least competing with each other. The market’s continuous growth and the evolution of the companies’ respective market shares indicate that they do. A news article from 2020, for instance, reports that:
Supermarkets, department stores and digital-native chains have a common goal: to be the one that captures the most market in electronic commerce in Mexico. In this battle, Amazon and Mercado Libre take the lead, as they are the two firms that concentrate almost a quarter of the total market in this area. At the end of 2019, Amazon had a market share of 13.4%, which placed it ahead of other competitors. That same year, Mercado Libre was with 11.4%.[16]
Supermarkets, department stores and digital-native chains have a common goal: to be the one that captures the most market in electronic commerce in Mexico. In this battle, Amazon and Mercado Libre take the lead, as they are the two firms that concentrate almost a quarter of the total market in this area.
At the end of 2019, Amazon had a market share of 13.4%, which placed it ahead of other competitors. That same year, Mercado Libre was with 11.4%.[16]
Also inconsistent with the hypothesis of a market with “barriers to competition” is the fact that the e-commerce market is continuously growing (and adding market players) in Mexico, which is now the second-largest e-commerce market in Latin America.[17]
It is only on the basis of this distorted depiction of the market that the Report reaches the conclusion that Amazon and MeLi have “the power to fix prices” (another form of saying “monopoly power”). Given what precedes, that conclusion should be rejected.
Even if one accepts the Report’s market definition, and Amazon and MeLi thus have a significant market share, both firms could still face competition from new entrants, attracted to the market by the higher prices (or other “exploitative” conditions) charged to consumers. According to the Report, alas, there are various barriers to hinder “the entry and expansion” in both relevant markets. Among them, the Report mentions, for instance:
Contrary to what the report claims, however, these are costs, not “barriers to entry.” As Richard Posner convincingly explained, the term “barrier to entry” is commonly used to describe any obstacle or cost faced by entrants. [18] But by this definition (embraced by the Report, apparently), any cost is a barrier to entry. Relying on George Stigler’s more precise definition, Posner suggested defining a barrier to entry as “a condition that imposes higher long-run costs of production on a new entrant than are borne by the firms already in the market.”[19] In other words, properly understood, a barrier to entry is a cost borne by new entrants that was not borne by incumbents.
The authority’s definition of barriers to entry is also at odds with the definition given by the Section IV of Article 3 of the Mexican Competition Act, according to which a barrier to competition is:
Any structural market characteristic, act or deed performed by Economic Agents with the purpose or effect of impeding access to competitors or limit their ability to compete in the markets; which impedes or distorts the process of competition and free market access, as well as any legal provision issued by any level of government that unduly impedes or distorts the process of competition and free market access.
Of course, Amazon and MeLi have some advantages over other firms in terms of their infrastructure, know-how, scale, and goodwill. But those advantages didn’t fall from the sky. Amazon and MeLi built them over time, investing (and continuing to invest) often enormous amounts to do so. Even “network effects” often considered as an inevitable source of monopoly, are not a definite obstacle to competition. As Evans and Schmalensee, have pointed out:
Systematic research on online platforms by several authors, including one of us, shows considerable churn in leadership for online platforms over periods shorter than a decade. Then there is the collection of dead or withered platforms that dot this sector, including Blackberry and Windows in smartphone operating systems, AOL in messaging, Orkut in social networking, and Yahoo in mass online media.[20]
The notion that Amazon and MeLi are shielded by barriers to entry is also contradicted by the entry of new rivals, such as Shein and Temu.
As explained above, the Report also erroneously conflates the market shares of Mercado Libre and Amazon, to reach a combined market share of 85% (eighty-five percent) of sales and transactions in the Sellers Relevant Market; and then combines the market share of the main three market participants in the Buyers Relevant Market to reach a market share of 61% (sixty-one percent) of the market. This is highly problematic as those firms are not a single economic entity, they thus presumably compete against each other.
If anything, the market shares produced by the Report only lead to a high HHI, which in turn shows that the market is “highly concentrated” (if one accepts the Report’s narrow market definition). But concentration is a poor proxy for market power. Economists have been studying the relationship between concentration and various potential indicia of anticompetitive effects—price, markup, profits, rate of return, etc.—for decades, and the empirical evidence is more than enough to say that concentration could lead to competition problems. [21] It is not per se evidence of a lack of competition, let alone a dominant position.
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.[22]
Even if one accepts the Report’s suggested market definition and its assessment of market power, the report’s proposed remedies—which could be summarized as the mandated unbundling of Amazon’s and MeLi’s streaming services from their loyalty programs (like Amazon’s Prime) and to make (at least part of) their platforms “interoperable” with other logistic services—would harm consumers, rather than benefit them.
Amazon Prime, for instance, provides consumers with many attractive benefits: access to video and music streaming; special deals and discounts; and last, but not least, two-day free shipping. According to the Report, “this is an artificial strategy that attracts and retains buyers and, at the same time, hinders buyers and sellers from using alternative marketplaces.”
It’s not entirely clear what “artificial” means in this context, but it appears to imply something outside of the bounds of “normal” competition. Yet what the Report describes is the very definition of competition. Firms competing in a market always choose to combine a “bundle” of features into a single product. They to some extent “bet” on a bundle of features (functionality, materials, terms and conditions) that imply assuming some costs, that they later offer at a given price, that may be met by willing customers (or not). Even with imperfect information, markets (that is, sellers and customers) are the best qualified agents to “decide” the appropriate level of “bundling” on a product, not competition agencies or courts.
A mandate to unbundle streaming services would degrade the online experience of consumers, who would instead have to contract and pay for those services separately.[23] The independent provision of such services would not benefit from Amazon’s or MeLi’s economies of scale and scope and would, therefore, be more expensive. And providing more benefits for consumers at a given price is what we want competitors to do. Treating consumer benefit as a harm turns competition enforcement—and, indeed, the very notion of competition itself—on its head.
The report also proposes to open the Buy Box and modifying its rules so as to be neutral to all logistics providers. This effectively amounts to treating Amazon and MeLi as “common carriers,” like regulators did with telephone networks from the 20th century onwards. Unfortunately, this classification and the rules that follow from it (neutrality and price regulation, among others) was designed for markets with natural monopolies—where competition is not possible or even undesirable[24]—but there is no evidence to suggest this is the case in the case at hand. Instead, Digital platform markets are far more competitive. Given this, common-carrier rules would only foster free riding and dampen incentives to invest and innovate (for both incumbents and new entrants). Sellers and logistics providers have many other options to access consumers. There is no economic or legal justification to mandate their access to Amazon or MeLi’s platforms.
In sum, the Report’s flawed findings lead to even worse remedies. Such remedies would neither promote competition in Mexico nor benefit consumers.
[1] The full text of the report (public version), available at https://www.cofece.mx/wp-content/uploads/2024/02/Dictamen_Preliminar_Version_Publica.pdf.
[2] Mexican Competition Act. Article 2. “The purpose of this Law is to promote, protect and guarantee free market access and economic competition, as well as to prevent, investigate, combat, prosecute effectively, severely punish and eliminate monopolies, monopolistic practices, unlawful concentrations, barriers to entry and to economic competition, as well as other restrictions to the efficient operation of markets.”
[3] ¿Qué Tan Popular es el Marketplace de Amazon en México?, La Patria (Apr. 23, 2023), https://www.lapatria.com/publirreportaje/que-tan-popular-es-el-marketplace-de-amazon-en-mexico. Free translation of the following text in Spanish: “La popularidad del mercado de Amazon en México se basa en gran medida en la satisfacción de los clientes. Amazon es la segunda plataforma de comercio electrónico más apreciada en México, según una encuesta de Kantar, con un índice de satisfacción de 8,5 sobre 10. Los comentarios de los consumidores también son esenciales para el éxito del mercado de Amazon, ya que permiten a los compradores realizar compras acertadas. Las opiniones de los consumidores también son esenciales para el éxito del mercado de Amazon, ya que permiten a los compradores realizar compras acertadas. Las buenas opiniones ponen de relieve la rapidez y fiabilidad de Amazon.”
[4] Instituto Federal de Telecomunicaciones, Uso y Satisfacción de las Aplicaciones y Herramientas Digitales para Compras y Banca en Línea, Videollamadas, Redes Sociales, Salud y Trámites Gubernamentales en Tiempos de Covid-19, Adopción (Jan 19, 2022), available at https://www.ift.org.mx/sites/default/files/contenidogeneral/usuarios-y-audiencias/aplicacionesyherramientasdigitalesentiemposdecovid19.pdf.
[5] The “Buy Box” is a box, normally found on the right side of a marketplace product page after the clients search for a product. Being in this box is an advantage for the seller because it not only highlights its product, but also makes the payment process easier. This is, of course, also an advantage for consumers, who can find and buy products faster.
[6] See https://www.ftc.gov/legal-library/browse/cases-proceedings/1910129-1910130-amazoncom-inc-amazon-ecommerce.
[7] Geoffrey A. Manne, Gerrymandered Market Definitions in FTC v. Amazon, (Jan. 26, 2024), https://laweconcenter.org/resources/gerrymandered-market-definitions-in-ftc-v-amazon.
[8] See, e.g., Krystal Hu & Arriana McLymore, Exclusive: Fast-Fashion Giant Shein Plans Mexico Factory, Reuters (May 24, 2023), https://www.reuters.com/business/retail-consumer/fast-fashion-giant-shein-plans-mexico-factory-sources-2023-05-24.
[9] See, e.g., Rising E-commerce Star: The Emergence of Temu in Mexico, BNN (Sep. 25, 2023), https://bnnbreaking.com/finance-nav/rising-e-commerce-star-the-emergence-of-temu-in-mexico.
[10] Manne, supra note 7.
[11] Id.
[12] El 85% de las Pymes USA Redes Sociales para Vender en Línea, Expansión (Jul. 28, 2021), https://expansion.mx/tecnologia/2021/07/28/el-85-de-las-pymes-usa-redes-sociales-para-vender-en-linea.
[13] Mexico – Country Commercial Guide, International Trade Organization (Nov. 5, 2023), https://www.trade.gov/country-commercial-guides/mexico-ecommerce.
[14] Raymundo Campos Vázquez et al., Amazon’s Effect on Prices: The Case of Mexico, Centro de Estudios Económicos, Documentos de Trabajo, Nro. II (2022), available at https://cee.colmex.mx/dts/2022/DT-2022-2.pdf.
[15] Id., at 23.
[16] Amazon y Mercado Libre se Disputan la Corona del Comercio Electrónico en México, El CEO (Mar 17, 2020), https://elceo.com/negocios/amazon-y-mercado-libre-se-discuten-la-corona-del-comercio-electronico-en-mexico. Free translation of the following text, in Spanish: “Cadenas de autoservicios, departamentales y nativas digitales tienen un objetivo en común: ser quien acapare más mercado en el comercio electrónico en México. En esta batalla, Amazon y Mercado Libre se ponen a la cabeza, pues son las dos firmas que concentran casi un cuarto del total de mercado de este rubro. Al cierre de 2019, Amazon contaba con un cuota de mercado del 13.4%, que lo colocaba al frente de los demás competidores. Ese mismo año, con 11.4% se encontraba Mercado Libre.”
[17] Stephanie Chevalier, E-commerce Market Share in Latin American and the Caribbean 2023, By Country, Statista (Mar. 25, 2024), https://www.statista.com/statistics/434042/mexico-most-visited-retail-websites (“Over the last few years, online buying and selling have gained considerable ground in Mexico, so much so that the country has positioned itself as the second largest e-commerce market in Latin America. With a rapidly increasing online buying population, it was forecast that nearly 70 million Mexicans would be shopping on the internet in 2023, a figure that would grow by over 26 percent by 2027.”).
[18] Richard Posner, Antitrust Law (2nd. Ed. 2001), at 73-74.
[19] Id., at 74.
[20] David S. Evans & Richard Schmalensee, Debunking the “Network Effects” Bogeyman, Regulation (Winter 2017-2018), at 39, available at https://www.cato.org/sites/cato.org/files/serials/files/regulation/2017/12/regulation-v40n4-1.pdf.
[21] For a few examples from a very large body of literature, see, e.g., Steven Berry, Martin Gaynor, & Fiona Scott Morton, Do Increasing Markups Matter? Lessons from Empirical Industrial Organization, 33J. Econ. Perspectives 44 (2019); 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).
[22] Chad Syverson, Macroeconomics and Market Power: Context, Implications, and Open Questions 33 J. Econ. Persp. 23 (2019), at 26.
[23] See, relatedly, Alden Abbott, FTC’s Amazon Complaint: Perhaps the Greatest Affront to Consumer and Producer Welfare in Antitrust History, Truth on the Market (Sep. 27, 2023), https://truthonthemarket.com/2023/09/27/ftcs-amazon-complaint-perhaps-the-greatest-affront-to-consumer-and-producer-welfare-in-antitrust-history.
[24] See, e.g., Giuseppe Colangelo & Oscar Borgogno, App Stores as Public Utilities?, Truth on the Market (Jan. 19, 2022), https://truthonthemarket.com/2022/01/19/app-stores-as-public-utilities.
Regulatory Comments A year after it was created by the Government of India’s Ministry of Corporate Affairs to examine the need for a separate law on competition . . .
A year after it was created by the Government of India’s Ministry of Corporate Affairs to examine the need for a separate law on competition in digital markets, India’s Committee on Digital Competition Law (CDCL) in February both published its report[1] recommending adoption of such rules and submitted the draft Digital Competition Act (DCA), which is virtually identical to the European Union’s Digital Markets Act (DMA).[2]
The EU has touted its new regulation as essential to ensure “fairness and contestability” in digital markets. And since it entered into force early last month,[3] the DMA has imposed strict pre-emptive rules on so-called digital “gatekeepers,”[4] a cohort of mostly American tech giants like Google, Amazon, Apple, Meta, and Microsoft.
But despite the impressive public-relations campaign[5] that the DMA’s proponents have been able to mount internationally, India should be wary of reflexively importing these ready-made and putatively infallible solutions that promise to “fix” the world’s most successful digital platforms at little or no cost.
The first question India should ask itself is why?[6] Echoing the European Commission, the CDCL argues that strict ex-ante rules are needed because competition-law investigations in digital markets are too time-consuming. But this could be a feature, not a bug, of competition law. Digital markets often involve novel business models and zero or low-price products, meaning that there is nearly always a plausible pro-competitive explanation for the impugned conduct.
When designing rules and presumptions in a world of imperfect information, the general theme is that, as confidence in public harm goes up, the evidentiary burden must go down. This is why antitrust law tilts the field in the enforcer’s favor in cases involving practices that are known to always, or almost always, be harmful. But none of the conduct covered by the DCA falls into this category. Unlike with, say, price-fixing cartels or territorial divisions, there is currently no consensus that the practices the DMA would prohibit are generally harmful or anticompetitive. To the contrary, when assessing a self-preferencing case against Google in 2018, the Competition Commission of India (CCI) found important consumer benefits[7] that outweighed any inconveniences they may impose on competitors.
By imposing per se rules with no scope for consumer-welfare or efficiency exemptions, the DCA could capture swaths of procompetitive conduct. This is a steep—and possibly irrational—price to pay for administrative expediency. Rather than adopt a “speed-at-all-costs” approach, India should design its rules to minimize error costs and ensure the system’s overall efficiency.
But this cannot be done, or it cannot be done rationally, unless India is crystal clear about what the costs and benefits of digital-competition regulation are. As things stand, it is unclear whether this question has been given sufficient thought.
For one, the DCA’s goals do not seem to align well with competition law. While competition law protects competition for the ultimate benefit of consumers, the DCA—like the DMA—is concerned with aiding rivals, rather than benefiting consumers. Unmooring digital competition regulation from consumer welfare is ill-advised. It opens the enforcer to aggressive rent seeking by private parties with a vested interest in never being satisfied,[8] who may demand far-reaching product-design changes that don’t jibe with what consumers—i.e., the public at-large—actually want.
Indeed, when the system’s lodestar shifts from benefiting consumers to facilitating competitors, there is a risk that the only tangible measure of the law’s success will be the extent to which rivals are satisfied[9] with gatekeepers’ product-design changes, and their relative market-share fluctuations. Sure enough, the European Commission recently cited stakeholders’ dissatisfaction[10] as one of the primary reasons to launch five DMA noncompliance investigations, mere weeks after the law’s entry into force. In the DCA’s case, the Central Government’s ability to control CCI decisions further exacerbates the risk of capture and political decision making.
While digital-competition regulation’s expected benefits remain unclear and difficult to measure, there are at least three concrete types of costs that India can, and should, consider.
First, there is the cost of harming consumers and diminishing innovation. Mounting evidence from the EU demonstrates this to be a very real risk. For example, Meta’s Threads was delayed[11] in the EU block due to uncertainties about compliance with the DMA. The same happened with Gemini, Google’s AI program.[12] Some product functionalities have also been degraded. For instance, in order to comply with the DMA’s strict self-preferencing prohibitions, maps that appear in Google’s search results no longer link to Google Maps, much to the chagrin of European users.[13]
Google has also been forced to remove[14] features like hotel bookings and reviews from its search results. Until it can accommodate competitors who offer similar services (assuming that is even possible), these specialized search results will remain buried several clicks away from users’ general searches. Not only is this inconvenient for consumers, but it has important ramifications for business users.
Early estimates suggest that clicks from Google ads to hotel websites decreased by 17.6%[15]as a result of the DMA. Meanwhile, on iOS, rivals like Meta[16] and Epic Games[17] are finding it harder than they expected to offer competing app stores or payment services. At least some of this is due to the reality that offering safe online services is a costly endeavour. Apple reviews millions of apps every year[18] to weed out bad actors, and replicating this business is easier said than done. In other words, the DMA is falling short even on its own terms.
In other cases, consumers are likely to be saddled with a litany of pointless choices, as well as changes in product design that undermine user experience. For example, the European Commission appears to believe that the best way to ensure that Apple doesn’t favor its own browser on iOS is by requiring consumers to sift through 12 browser offerings[19] presented on a choice screen.[20] But consumers haven’t asked for this “choice.” The simple explanation for the policy’s failure is that, despite the DMA’s insistence to the contrary, users were always free to choose their preferred browser.
Supporters of digital-competition regulation will no doubt retort that India should also consider the costs of inaction. This is certainly true. But it should do so against the background of the existing legal framework, not a hypothetical legal and regulatory vacuum. Digital platforms are already subject to general (and fully functional) competition law, as well as to a range of other sector-specific regulations.
For instance, Amazon and Flipkart are precluded by India’s foreign-direct-investment (FDI) policy from offering first-party sales[21] to end-users on their e-commerce platforms. In addition, the CCI has launched several investigations of digital-platform conduct that would presumably be caught by the DCA, including by Google,[22] Amazon,[23] Meta,[24] Apple,[25] and Flipkart.[26]
The facile dichotomy made between digital-competition regulation and “the digital wild west”[27] is essentially a red herring. Nobody is saying that digital platforms should be above the law. Rather, the question is whether a special competition law is necessary and justified considering the costs such a law would engender, as well as the availability of other legal and regulatory instruments to tackle the same conduct.
This is particularly the case when these legal and regulatory instruments incorporate time-honed analytical tools, heuristics, and procedural safeguards. In 2019, India’s Competition Law Review Committee[28] concluded that a special law was unnecessary. In a report titled “Competition Policy for the Digital Era,”[29] a panel of experts retained by the European Commission reached the same conclusion.
Complicating the question further still is that the DCA would mark a paradigm shift for Indian competition policy. In 2000, the Raghavan Committee Report was crucial in aligning Indian competition law with international best practices, including by moving analysis away from blunt structural presumptions and toward the careful observance of economic effects. As such, it paved the way for the 2002 Competition Act—a milestone of Indian law.
The DCA, by contrast, would overturn these advancements to target companies based on size, obviating any effects analysis. This would amount to taking Indian competition law back to the era of the Monopolies and Restrictive Trade Practices Act of 1969 (MRTP). Again, is the hodgepodge of products and services known collectively as “digital markets” sufficiently unique to warrant such a drastic deviation from well-established antitrust doctrine?
The third group of costs that the government must consider are the DCA’s enforcement costs. The five DMA noncompliance investigations launched recently by the European Commission have served to dispel the once-common belief that the law would be “self-executing”[30] and that its enforcement would be collaborative, rather than adversarial. With just 80 dedicated staff,[31] many believe the Commission is understaffed[32] to enforce the DMA (initially, the most optimistic officials asked for 220 full-time employees).[33] If the EU—a sprawling regulatory superstate[34]—struggles to find the capacity to deploy digital-competition rules, can India expect to fare any better?
Enforcing the DCA would require expertise in a range of fields, including competition law, data privacy and security, telecommunications, and consumer protection, among others. Either India can produce these new experts, or it will have to siphon them from somewhere else. This raises the question of opportunity costs. Assuming that India even can build a team to enforce the DCA, the government would also need to be reasonably certain that, given the significant overlaps in expertise, these resources wouldn’t yield better returns if allocated elsewhere—such as, for example, in the fight against cartels or other more obviously nefarious conduct.
In short, if the government cannot answer the question of how much the Indian public stands to gain for every Rupee of public money invested into enforcing the DCA, it should go back to the drawing board and either redesign or drop the DCA altogether.
When deciding whether to adopt digital-competition rules, India should consider its own interests and play to its strengths. These need not be the same as Europe’s and, indeed, it would be surprising if they were. Despite the European Commission’s insistence to the contrary, the DMA is not a law that enshrines general or universal economic truths. It is, and always has been, an industrial policy tool,[35] designed to align with the EU’s strengths, weaknesses, and strategic priorities. One cannot just assume that these idiosyncrasies translate into the Indian context.
As International Center for Law & Economics President Geoffrey Manne has written,[36] promotion of investment in the infrastructure required to facilitate economic growth and provision of a secure environment for ongoing innovation are both crucial to the success of developing markets like India’s. Securing these conditions demands dynamic and flexible competition policymaking.
For young, rapidly growing industries like e-commerce and other digital markets, it is essential to attract consistent investment and industry know-how in order to ensure that such markets are able to innovate and evolve to meet consumer demand. India has already witnessed a few leading platforms help build the necessary infrastructure during the nascent stages of sectoral development; continued investment along these lines will be essential to ensure continued consumer benefits.
In the above context, emulating the EU’s DMA approach could be a catastrophic mistake. Indian digital platforms are still not as mature as the EU’s, and a copy and paste of the DMA may prove unfit for the particular attributes of India’s market. The DCA could potentially capture many Indian companies. Paytm, Zomato, Ola Cabs, Nykaa, AllTheRooms, Squeaky, FlipCarK, MakeMyTrip, and Meesho (among others) are some of the companies that could be stifled by this new regulatory straitjacket.
This would not only harm India’s competitiveness, but would also deny consumers important benefits. Despite India’s remarkable economic growth over the last decade, it remains underserved by the most powerful consumer and business technologies, relative to its peers in Europe and North America. The priority should be to continue to attract and nurture investment, not to impose regulations that may further slow the deployment of critical infrastructure.
Indeed, this also raises the question of whether the EU’s objectives with the DMA are even ones that India would want to emulate. While the DMA’s effects are likely to be varied, it is clear that one major impetus for the law is distributional: to ensure that platform users earn a “fair share” of the benefits they generate. Such an approach could backfire, however, as using competition policy to reduce profits may simply lead to less innovation and significantly reduced benefits for the very consumers it is supposed to help. This risk is significantly magnified in India, where the primary need is to ensure the introduction and maintenance of innovative technology, rather than fine tuning the precise distribution of its rewards.
A DMA-like approach could imperil the domestic innovation that has been the backbone of initiatives like Digital India[37] and Startup India.[38] Implementation of a DMA-like regime would discourage growing companies that may not be able to cope with the increased compliance burden. It would also impose enormous regulatory burdens on the government and great uncertainty for businesses, as a DMA-like regime would require the government to define and quantify competitive benchmarks for industries that have not yet even grown out of their nascent stages. At a crucial juncture when India is seen as an investment-friendly nation,[39] implementation of a DMA-like regime could create significant roadblocks to investment—all without any obligation on the part of the government to ensure that consumers benefit.
This is because ex-ante regimes impose preemptive constraints on digital platforms, with no consideration of possible efficiencies that benefit consumers. While competition enforcement in general may tend to promote innovation, jurisdictions that do not allow for efficiency defenses tend to produce relatively less innovation, as careful, case-by-case competition enforcement is replaced with preemptive prohibitions that impede experimentation.
Regulation of digital markets that have yet to reach full maturity is bound to create a more restrictive environment that will harm economic growth, technological advancement, and investment. For India, it is crucial that a nuanced approach is taken to ensure that digital markets can sustain their momentum, without being bogged down by various and unnecessary compliance requirements that are likely to do more harm than good.
In a multi-polar world, developing countries can no longer be expected to mechanically adopt the laws and regulations demanded of them by senior partners to trade agreements and international organizations. Nor should they blindly defer to foreign legislatures, who may (and likely do) have vastly different interests and priorities than their own.
Nobody is denying that the EU has provided many useful legal and regulatory blueprints in the past, many of which work just as well abroad as they do at home. But based on what we know so far, the DMA is not poised to become one of them. It is overly stringent, ignores efficiencies, is indifferent about effects on consumers, incorporates few procedural safeguards, is lukewarm on cost-benefit analysis, and risks subverting well-established competition-law principles. These notably include that the law should ultimately protect competition, not competitors.
Rather than instinctively playing catch up, India could ask the hard questions that the EU eschewed for the sake of a quick political victory against popular bogeymen. What is this law trying to achieve? What are the DCA’s supposed benefits? What are its potential costs? Do those benefits outweigh those costs? If the answer to these questions is ambivalent or negative, India’s digital future may well lay elsewhere.
[1] Report of the Committee on Digital Competition Law, Government of India Ministry of Corporate Affairs (Feb. 27, 2024), https://www.mca.gov.in/bin/dms/getdocument?mds=gzGtvSkE3zIVhAuBe2pbow%253D%253D&type=open.
[2] Regulation (EU) 2022/1925 of the European Parliament and of the Council, on contestable and fair markets in the digital sector and amending Directives (EU) 2019/1937 and (EU) 2020/1828 (Digital Markets Act) (Text with EEA relevance), Official Journal of the European Union, available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32022R1925.
[3] Press Release, Designated Gatekeepers Must Now Comply With All Obligations Under the Digital Markets Act, European Commission (Mar. 7, 2024), https://digital-markets-act.ec.europa.eu/designated-gatekeepers-must-now-comply-all-obligations-under-digital-markets-act-2024-03-07_en.
[4] Press Release, Digital Markets Act: Commission Designates Six Gatekeepers, European Commission (Sep. 6, 2023), https://ec.europa.eu/commission/presscorner/detail/en/ip_23_4328.
[5] Press Release, Cade and European Commission Discuss Collaboration on Digital Market Agenda Ministério da Justiça e Segurança Pública (Mar. 29, 2023), https://www.gov.br/cade/en/matters/news/cade-and-european-commission-discuss-collaboration-on-digital-market-agenda.
[6] Summary of Remarks by Jean Tirole, Analysis Group (Sep. 27, 2018), available at https://www.analysisgroup.com/globalassets/uploadedimages/content/insights/ag_features/summary-of-remarks-by-jean-tirole_english.pdf.
[7] Geoffrey A. Manne, Google’s India Case and a Return to Consumer-Focused Antitrust, Truth on the Market (Feb. 8, 2018), https://truthonthemarket.com/2018/02/08/return-to-consumer-focused-antitrust-in-india.
[8] Adam Kovacevich, The Digital Markets Act’s “Statler & Waldorf” Problem, Chamber of Progress, Medium (Mar. 7, 2024), https://medium.com/chamber-of-progress/the-digital-markets-acts-statler-waldorf-problem-2c9b6786bb55.
[9] Id.
[10] Remarks by Executive-Vice President Vestager and Commissioner Breton on the Opening of Non-Compliance Investigations Under the Digital Markets Act, European Commission (Mar. 25, 2024), https://ec.europa.eu/commission/presscorner/detail/en/speech_24_1702.
[11] Makena Kelly, Here’s Why Threads Is Delayed in Europe, The Verge (Jul. 10, 2023), https://www.theverge.com/23789754/threads-meta-twitter-eu-dma-digital-markets.
[12] Andrew Grush, Did You Know Google Gemini Isn’t Available in Europe Yet?, Android Authority (Dec. 7, 2023), https://www.androidauthority.com/did-you-know-google-gemini-isnt-available-in-europe-yet-3392451.
[13] Edith Hancock, ‘Severe Pain in the Butt’: EU’s Digital Competition Rules Make New Enemies on the Internet, Politico (Mar. 25, 2024), https://www.politico.eu/article/european-union-digital-markets-act-google-search-malicious-compliance.
[14] Oliver Bethell, An Update on Our Preparations for the DMA, Google Blog (Jan. 17, 2024), https://blog.google/around-the-globe/google-europe/an-update-on-our-preparations-for-the-dma.
[15] Mirai, Linkedin (Apr. 17, 2024), https://www.linkedin.com/feed/update/urn:li:activity:7161330551709138945.
[16] Alex Heath, Meta Says Apple Has Made It ‘Very Difficult’ To Build Rival App Stores in the EU, The Verge (Feb. 2, 2024), https://www.theverge.com/2024/2/1/24058572/zuckerberg-meta-apple-app-store-iphone-eu-sideloading.
[17] Id.
[18] 2022 App Store Transparency Report, Apple Inc. (2023), available at https://www.apple.com/legal/more-resources/docs/2022-App-Store-Transparency-Report.pdf.
[19] About the Browser Choice Screen in iOS 17, Apple Developer, (Feb. 2024), https://developer.apple.com/support/browser-choice-screen.
[20] Remarks by Executive-Vice President Vestager and Commissioner Breton on the Opening of Non-Compliance Investigations Under the Digital Markets Act, EUROPEAN COMMISSION, https://ec.europa.eu/commission/presscorner/detail/en/speech_24_1702.
[21] Saheli Roy Choudhury, If You Hold Amazon Shares, Here’s What You Need to Know About India’s E-Commerce Law, CNBC (Feb. 4, 2019), https://www.cnbc.com/2019/02/05/amazon-how-india-ecommerce-law-will-affect-the-retailer.html.
[22] Press Release, CCI Imposes a Monetary Penalty of Rs.1337.76 Crore on Google for Anti-Competitive Practices in Relation to Android Mobile Devices, Competition Commission of India (Oct. 20, 2022), https://www.cci.gov.in/antitrust/press-release/details/261/0; CCI Orders Probe Into Google’s Play Store Billing Policies, The Economic Times, (Sep. 7, 2023), https://economictimes.indiatimes.com/tech/startups/competition-watchdog-orders-probe-into-googles-play-store-billing-policies/articleshow/108528079.cms.
[23] Why Competition Commission of India Is Investigating Amazon, Outlook, (May. 1, 2022), https://business.outlookindia.com/news/explained-why-is-competition-commission-of-india-probing-amazon-news-194362.
[24] HC Dismisses Facebook India’s Plea Challenging CCI Probe Into Whatsapp’s 2021 Privacy Policy, The Economic Times (Sep. 7, 2023), https://economictimes.indiatimes.com/tech/technology/women-participation-in-tech-roles-in-non-tech-sectors-to-grow-by-24-3-by-2027-report/articleshow/109374509.cms.
[25] Case No. 24 of 2021, Competition Commission of India, (Dec. 31, 2021), https://www.cci.gov.in/antitrust/orders/details/32/0.
[26] Supra note 23.
[27] Anne C. Witt, The Digital Markets Act: Regulating the Wild West, 60(3) Common Market Law Review 625 (2023).
[28] Report of Competition Law Review Committee, Indian Economic Service (Jul. 2019), available at https://www.ies.gov.in/pdfs/Report-Competition-CLRC.pdf.
[29] Jacques Crémer, Yves-Alexandre de Montjoye, & Heike Schweitzer, Competition Policy for the Digital Era, European Commission Directorate-General for Competition (2019), https://data.europa.eu/doi/10.2763/407537.
[30] Strengthening the Digital Markets Act and Its Enforcement, Bundesministerium für Wirtschaft und Klimaschutz (Sep. 7, 2021), available at https://www.bmwk.de/Redaktion/DE/Downloads/XYZ/zweites-gemeinsames-positionspapier-der-friends-of-an-effective-digital-markets-act.pdf.
[31] Meghan McCarty Carino, A New EU Law Aims to Tame Tech Giants. But Enforcing It Could Turn out to Be Tricky Marketplace (Mar. 7, 2024), https://www.marketplace.org/2024/03/07/a-new-eu-law-aims-to-tame-tech-giants-but-enforcing-it-could-turn-out-to-be-tricky.
[32] Id.
[33] Luca Bertuzzi & Molly Killeen, Digital Brief: DSA Fourth Trilogue, DMA Diverging Views, France’s Fine for Google, EurActiv (Apr. 1, 2022), https://www.euractiv.com/section/digital/news/digital-brief-dsa-fourth-trilogue-dma-diverging-views-frances-fine-for-google.
[34] Anu Bradford, The Brussels Effect: The Rise of a Regulatory Superstate in Europe, Columbia Law School (Jan. 8, 2013), https://www.law.columbia.edu/news/archive/brussels-effect-rise-regulatory-superstate-europe.
[35] Lazar Radic, Gatekeeping, the DMA, and the Future of Competition Regulation, Truth on the Market (Nov. 8, 2023), https://truthonthemarket.com/2023/11/08/gatekeeping-the-dma-and-the-future-of-competition-regulation.
[36] Geoffrey A. Manne, European Union’s Digital Markets Act Not Suitable for Developing Economies, Including India, The Times of India (Feb. 14, 2023), https://timesofindia.indiatimes.com/blogs/voices/european-unions-digital-markets-act-not-suitable-for-developing-economies-including-india.
[37] Digital India, Common Services Centre (Apr. 18, 2024), https://csc.gov.in/digitalIndia.
[38] Startup India, Government of India (Apr. 16, 2024), https://www.startupindia.gov.in.
[39] Invest India, Government of India (Mar. 20, 2024), https://www.investindia.gov.in/why-india.
