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Julian Morris on Earth Day

Presentations & Interviews ICLE Senior Scholar Julian Morris joined an Earth Day-themed edition of the Pacific Research Institute Podcast to discuss the Biden Administration’s “green infrastructure” proposals, California . . .

ICLE Senior Scholar Julian Morris joined an Earth Day-themed edition of the Pacific Research Institute Podcast to discuss the Biden Administration’s “green infrastructure” proposals, California energy policy, fuel-emission standards, and how California’s housing crisis. The full episode is embedded below.

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Open Letter by Public Interest Organizations in Favor of Direct EV Sales and Service

Written Testimonies & Filings The signatories of this letter represent a broad range of public interest organizations who urge that any state laws still prohibiting car companies from selling their cars directly to consumers, or opening service centers for those vehicles, be amended to permit direct sales and service of EVs

We, the signatories of this letter, represent a broad range of public interest organizations. Our individual interests include such diverse matters as environmental protection, fair competition, consumer protection, economic growth and workforce development, and technology and innovation. Some of us frequently find ourselves on different sides of public policy debates. However, today we find common ground on an issue of considerable public importance concerning sales of electric vehicles (“EVs”). Specifically, we urge that any state laws still prohibiting car companies from selling their cars directly to consumers, or opening service centers for those vehicles, be amended to permit direct sales and service of EVs

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Innovation & the New Economy

Open Letter by Academics in Favor of Direct EV Sales and Service

Written Testimonies & Filings The signatories of this letter, active or emeritus professors employed at public or private universities in the United States, come from across the political spectrum, and have a wide variety of views on regulation, environmental and consumer protection, and free enterprise as a general matter, but find common ground on the important issue of automotive direct sales.

We, the signatories of this letter, are active or emeritus professors employed at public or private universities in the United States. We specialize in economics, competition policy, market regulation, industrial organization, or other disciplines bearing on the questions presented in this letter. We come from across the political spectrum, and have a wide variety of views on regulation, environmental and consumer protection, and free enterprise as a general matter, but find common ground on the important issue of automotive direct sales.

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Innovation & the New Economy

Consumer Welfare Standard

TL;DR Returning to a pre-Consumer Welfare Standard state of the law would lead antitrust enforcement to become confused, contradictory, and ineffective at promoting competition. The CWS makes antitrust economically coherent and democratically accountable.

Background…

In antitrust law, the Consumer Welfare Standard (CWS) directs courts to focus on the effects that challenged business practices have on consumers, rather than on alleged harms to specific competitors. Critics of the standard claim this focus on consumer welfare fails to capture a wide variety of harmful conduct. In addition to believing that harm to competitors is itself a valid concern, critics of the CWS believe it leads to harmful concentrations of political and economic power by biasing antitrust enforcement against intervention. Under this view, the CWS contributes to such harms as environmental degradation, income inequality, and bargaining disparities for labor. 

But…

Returning to a pre-CWS state of the law would lead antitrust enforcement to become confused, contradictory, and ineffective at promoting competition. The CWS makes antitrust economically coherent and democratically accountable.

However…

The CWS is agnostic about how much antitrust enforcement is necessary. Indeed, many advocates of more vigorous antitrust enforcement are also defenders of the CWS. The standard uses objective economic analysis to identify actual harms and to recommend remedies when those harms are not outweighed by countervailing benefits to consumers. While the issues the CWS critics care about may be important, antitrust law is a bad way to address them.

Read the full explainer here.

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Antitrust & Consumer Protection

Pandemic Risk Insurance Act Hearing

Written Testimonies & Filings "It is profoundly more important that Congress do its job to get assistance to the businesses, workers and communities who need that help right now that it is to pretend to have the answers in 2020 to a crisis of unknown and unknowable dimensions that may befall us in 2025 or 2050 or 2100."

Chairman Clay, Ranking Member Stivers and members of the subcommittee,

My name is R.J. Lehmann, and I am editor-in-chief and senior fellow with the International Center for Law & Economics. ICLE is a nonprofit, nonpartisan research center that works with a roster of more than 50 academic affiliates and research centers from around the globe to develop and disseminate academic output and build the intellectual foundation for rigorous, economically grounded public policy.

I am a recent addition to the ICLE staff. My own background is that I have spent the past 17 years as a journalist and public-policy analyst specializing in the business of insurance. That includes running the insurance policy program at the R Street Institute, which I co-founded in 2012.

The COVID-19 outbreak has triggered unprecedented interruption in the operations of businesses across the country and around the world. While roughly 37 percent of U.S. businesses maintain insurance policies to cover the loss of business income due to direct physical damage to a business property, such policies are not designed to insure revenue loss resulting from a pandemic, even where closure is required by a civil authority order. Indeed, many policies contain explicit endorsements clarifying that viruses and bacteria are excluded as causes for business interruption and loss-of-use coverages.

Earlier this year, Congress sought to address the disruption caused by COVID-19 through the Paycheck Protection Program and there have been various efforts to extend further relief to affected employers and employees. But it is understandable that many seek a more permanent solution and look to insurance markets as offering the framework to provide it.

I agree entirely with the analysis that the pandemic has highlighted a massive protection gap in commercial insurance products. I also agree that it is a problem that almost certainly calls for a governmental solution. I would, however, raise the threshold question of whether insurance is actually the best means to accomplish the public policy goals in question.

Insurance is a system of risk transfer, not a system of economic relief. Even if private insurers could provide this coverage—on their own or with government support—it is not clear their incentives would align with public health goals or with the aims members of Congress likely have in mind.

I would urge the subcommittee and Congress generally to proceed deliberatively before erecting structures that may not prove to be well-suited to the crisis we are currently experiencing, much less unforeseen future crises whose nature and scope we cannot know. In sum, do not legislate for the next pandemic when we are still in the midst of dealing with the current one.

I.      Are Pandemics Insurable?

In the business of insurance, there are certain general characteristics that determine whether it is possible, in theory, to insure a given risk. These include having a large number of similarly exposed individuals and having losses that are reasonably predictable. A textbook example of an uninsurable risk would be intentional acts, such as arson. You could not transfer to an insurer the risk that you will burn down your own home, because that risk is fully within your control.

Business interruption caused by a pandemic is not uninsurable in the same sense that intentional arson is uninsurable. There were insurance products available to cover loss of business income due to viral contagion before COVID-19 hit our shores, although clients’ interest in those products was reportedly fairly limited. There are still products that offer such coverage now, although the price of coverage has gone up significantly. On the micro level, for any given insurer and any given insured, viral business interruption is an insurable risk.

The problem is at the macro level. There is only a limited amount of capital that insurers would be willing to devote to a risk like pandemics. Some insurers will write some coverage. They might, for instance, cover a restaurant’s risk of food spoilage resulting from an extended shutdown. But they will not and should not gamble their entire balance sheets. And the capacity that the global insurance and reinsurance industry would ever be willing to devote to this risk cannot possibly match its unique scale.

In this macro sense, for a risk to be insurable, it must be possible to manage it through careful underwriting and diversification. Global pandemics make that impossible. They hit every business sector and every geographical region simultaneously. They even degrade the invested assets insurers use to back up their promises. In a scenario where half the global economy shuts down overnight, there is no world in which the insurance industry can single-handedly carry the other half on its back.

The only entity with the financial resilience, the balance sheet and the risk tolerance to offer such assistance is the federal government itself.

II.      Moral Hazard and Government Insurance

When I have appeared before this committee in the past, it has been to warn about the dangers of moral hazard that frequently accompany government intervention in insurance markets. The 50-year-old National Flood Insurance Program is a prime example of this danger. By providing insurance coverage to all comers at rates insufficient to match the level of risk, the NFIP encourages development in disaster-prone and environmentally sensitive regions.

While I remain disposed to skepticism about government insurance programs, I do not believe any of the proposals discussed here today—such as Rep. Maloney’s Pandemic Risk Insurance Act (PRIA) or the joint-trades’ Business Continuity Protection Plan (BCPP)—pose much, if any, risk of moral hazard. With or without insurance and with or without government support, there is likely nothing at all a business owner could do to avoid the impact of a pandemic. Indeed, the greater threat is a business that would go out of its way to keep its doors open, despite the dangers that could result.

Which is not to say moral hazard is irrelevant to the pandemic or to how insurance responds to it. Business interruption is far from the only insurance coverage implicated by viral contagion. Most obviously, employers in nearly every state must provide, on a no-fault basis, workers’ compensation coverage for illnesses contracted on the worksite or in the usual course of job duties. Businesses also obtain various commercial liability coverages that could be triggered if they breach a duty of care or otherwise recklessly cause foreseeable harm by exposing a customer or other third party to the virus.

Where a business is a potential nexus of contagion, we should want them to internalize that cost and to adjust their operations in the interest of better protecting public health. That could mean investments in mitigation, adaptation and prevention. It could mean making sure a worksite is well-stocked with personal protective equipment or that the spatial orientation is changed to reduce the risk of infection.

These casualty and liability lines of business exemplify how risk-based insurance rates can serve a regulatory function, providing price signals that encourage businesses to adopt those practices that best protect their employees and others. If Congress is to move forward with creating a federal insurance or reinsurance program to manage pandemic risk, I would strongly urge to focus tightly on the unique challenges of business interruption and not extend it to casualty and liability lines of coverage. It would be extremely unwise to extend public subsidies that could serve to encourage recklessness.

III.      A Murky Role for Business Interruption Insurance

The approach proposed by PRIA is to graft coverage for pandemic risks onto the existing structure of business interruption coverage by providing a $750 billion federal backstop for insurers who choose to participate, with the industry retaining only about 5 percent of the total risk. But only a minority of businesses—a little over a third—currently maintain business interruption coverage. Given that the program would be voluntary for insurers to offer and voluntary for insureds to purchase, it is reasonable to assume less than a third would ultimately elect to carry it.

Even for those who do, there are real questions about whether the sorts of claims we can reasonably anticipate policyholders to make would actually be paid. PRIA is a good faith attempt to extend coverage and avoid the sorts of claims disputes that have prompted hundreds of businesses to sue their insurance companies. The program may well extend coverage but there are some predictable areas of conflict that will almost certainly land policyholders back in court.

Business interruption and contingent business coverages are components of commercial property insurance policies. PRIA would ask participating insurers to vitiate standard contract language that excludes claims for viral pandemics. But that would not change a more fundamental presumption of any property insurance policy: that there must be demonstrable physical damage to the insured property.

To be sure, there are legal theories—some of them currently being tested in the courts—that business closures are necessitated by viral contamination of surfaces within the covered property. But whether that is applicable in any given case is going to depend both on the nature of the virus and the nature of the property. If contamination can be easily cured by wiping down surfaces, that is going to be an extremely limited claim. The reality is, creative legal theories aside, most business closures in this pandemic have had nothing to do with potentially contaminated surfaces. They have instead sought to avoid transmission between people. That is not a risk covered by property insurance.

There is also the question of what triggers coverage. Both PRIA and the BCPP proposal tie coverage to public health emergency orders, such as mandated shutdowns. But the experience we have had in this pandemic shows why that is almost certainly insufficient. The initial wave of business closures did not come as a result of mandated shutdowns; they were in response to customers choosing to stay home. A number of states and localities never formally “shut down” businesses at all and yet still suffered precipitous drops in economic activity. As of October, after nearly all states lifted shutdown orders, airport traffic remained down 60 percent from before the pandemic and OpenTable restaurant reservations were down nearly 40 percent.

There is no “business is bad” insurance. Without some sort of external trigger, there is no cause to make a business interruption claim for a business that has merely been depressed, not interrupted.

Again, insurance is risk transfer, not economic assistance. It should give lawmakers pause that PRIA would represent a $750 billion investment of taxpayer dollars in a program that two-thirds or more of businesses will not access, where many claims will still be denied and where the kind of loss that will be most commonly experienced by businesses does not and cannot constitute a claim.

IV.      Why Risk-Based Coverage May Be Bad

A central argument for a public-private partnership to support business interruption insurance for pandemics is that, while the federal government can bring its balance sheet to bear, it does not have the insurance industry’s expertise in modeling, managing and mitigating risk. I find myself in the uncomfortable position of critiquing that argument, given that it is one that I myself have made for the entirety of my career in public policy, whether the subject was flood insurance or crop insurance or terrorism insurance.

But it is important to ask: modeling, managing and mitigating the risk of what, specifically? In the case of business interruption insurance, it is not the risk of viral transmission. It is not even the risk of a pandemic, not quite. It is the risk of business closure as a result of a pandemic.

I mentioned earlier that I do not believe there is anything a business owner could do to avoid the impact of a pandemic. What they could do—what risk-based insurance might encourage them to do—is to avoid making a claim by refusing to shut their doors and by pressuring local leaders not to issue mandatory shutdown orders. From a public health perspective, that is the opposite of what we want to happen. And yet, we see it has happened. It is one reason we see the incoherent outcome that, in some cities, schools are closed while bars and restaurants are allowed to remain open.

Like any efficient insurance market, a risk-based insurance market for pandemic business interruption insurance would seek to align the incentives of the insured and the insurer. Among the ways this is generally accomplished is through deductibles, which discourage policyholders from making claims for shallow losses. More broadly, it is accomplished by matching premiums to the level of risk. For example, businesses that could continue operating remotely even in the midst of a pandemic are low-risk and would be offered the most affordable coverage.

On the other hand, risk-based insurance premiums for restaurants, gyms, theatres, barbers, manicurists—any environment where you have close personal contact with strangers or indoor mass congregations of people—would be punishingly expensive. Actuarial science is notoriously complex, but the basics of risk-based premiums are fairly simple: frequency times severity. The severity of a pandemic contagion, even if it happened just once a century, is so extreme that a risk-based premium could not be affordable for the overwhelming majority of small businesses—or even churches and social groups—that rely on in-person human interaction. If they were forced to buy this coverage, many could simply no longer exist. That is not a socially desirable outcome.

The saving grace—the reason we would not likely see that outcome—is itself discouraging. Because the coverage would be voluntary, these sorts of businesses almost certainly would not take it up. Thus, the very businesses who have been hardest hit by this pandemic and would likely be hardest hit in any future one would remain the most exposed.

V.      Learning from the Current Pandemic

Proposals like PRIA and the BCPP initially were put forward in the early days of the pandemic. The folly of imagining that lawmakers could have the foresight to craft structures that anticipate future pandemics is just how much has changed in the few months since those proposals were debuted.

I consulted with the insurance trades on the earliest drafts of what became the BCPP. I believe it was my idea to cap the maximum coverage the program would offer at three months of business income. Back in April, that seemed like a generous benefit. Seven months later, with caseloads breaking new records every day and a vaccine at least months away from broad distribution, it seems much less so.

PRIA was originally a $500 billion proposal. It is now a $750 billion proposal. But it is also clear that that amount, while a lot of money for a federal program, is not nearly enough for the scope of the problem. Moreover, PRIA is structured as a single pot of money. Were it in place during COVID-19, it may well have been completely depleted by the earliest phases of the pandemic, when the virus was contained largely to New York and New Jersey. By the time the second wave spread across the Sunbelt in June and July, there may have been nothing left, to say nothing of the third wave we are now encountering.

Any program that Congress does establish should follow some broad principles gleaned from our experience thus far with COVID-19. But we also should be humble about how much we still do not know even about the current pandemic, much less the next one.

The program should endeavor for broad participation, with a bias toward encouraging small businesses, nonprofits and community organizations to take part. Larger enterprises already have available to them a number of insurance options that small businesses do not, from the ability to create captive insurance companies to relatively easy access to bespoke products in the excess and surplus lines market. Indeed, our experience with the Terrorism Risk Insurance Act suggests we should be particularly skeptical of how large companies might use captives to game a structure like PRIA, including for tax-avoidance purposes, with the overwhelming majority of risk passed on to taxpayers.

If there is to be a premium or a participation fee for the program, it should be flat, not risk-based. One common concern of insurance markets is the problem of adverse selection. Because an insured has more information about their own risk than an insurer does, the riskiest businesses are also the most likely to buy coverage. While that is a problem for writing insurance profitably, the public health goals of pandemic response turn that issue on its head. The businesses most at risk of shutting down are the ones to whom we most need to extend a safety net. We want them to cooperate with shutdowns, not push back.

In the spirit of broad participation, the insurance industry should not be the sole marketing force for any federal pandemic risk program. PPP was administered primarily by banks and credit unions and that appears, on balance, to have worked pretty well. There is no reason that lending institutions, payroll processing companies or credit card issuers could not help to sign up participants.

The same applies when it comes to distributing benefits. The insurance industry’s claims-adjustment force is already pushed to capacity to keep up with disasters like hurricanes and wildfires. Adjusting business interruption claims requires special training. Moreover, adjusting claims is a slow and laborious process, which conflicts with the goal of getting money out the door as quickly as possible. A parametric trigger, such as the one in the BCPP, would better accomplish that goal.

The BCPP balances the parametric structure by enumerating specific purposes for which benefits can be used, like rent and payroll. Any disbursed benefits not used for those purposes could later be clawed back. While this is how PPP worked and how the BCPP would work, it is not how business interruption insurance works. A policyholder that makes a claim for business interruption might use the money to continue paying staff, but there would be nothing requiring them to do so. Even with PRIA in place, a business owner could make a claim for interruption while simultaneously placing all his or her employees on furlough. Lawmakers should understand that.

Another question is whether it is wise to create a federal program at all. Given that public health orders are overwhelmingly the jurisdiction of state and local governments, one option would be to allow the states to create their own programs, with the U.S. Treasury partially reimbursing the cost. This would require Congress to establish some minimum guidelines for qualifying programs. But so long as the reimbursement formula was relatively transparent and applied equitably, it would permit innovation and local customization in program design, while also limiting the “run on the bank” danger that a single pot of federal money like PRIA might face.

But above all, my recommendation to lawmakers is to take your time. Perhaps more private solutions, from the insurance industry or some other source, will emerge to meet these challenges before the next pandemic. Perhaps Congress would again have to provide ad hoc assistance. It is profoundly more important that Congress do its job to get assistance to the businesses, workers and communities who need that help right now that it is to pretend to have the answers in 2020 to a crisis of unknown and unknowable dimensions that may befall us in 2025 or 2050 or 2100.

Thank you, and I would be happy to answer any questions.

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Financial Regulation & Corporate Governance

Ag-biotech merger symposium wrap-up

TOTM On Thursday, March 30, Friday March 31, and Monday April 3, Truth on the Market and the International Center for Law and Economics presented a blog symposium . . .

On Thursday, March 30, Friday March 31, and Monday April 3, Truth on the Market and the International Center for Law and Economics presented a blog symposium — Agricultural and Biotech Mergers: Implications for Antitrust Law and Economics in Innovative Industries — discussing three proposed agricultural/biotech industry mergers awaiting judgment by antitrust authorities around the globe. These proposed mergers — Bayer/Monsanto, Dow/DuPont and ChemChina/Syngenta — present a host of fascinating issues, many of which go to the core of merger enforcement in innovative industries — and antitrust law and economics more broadly.

Read the full piece here.

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Antitrust & Consumer Protection

Finding your way in the seeds/agro-chem mergers labyrinth

TOTM The recently notified mergers in the seed and agro-chem industry raise difficult questions that competition authorities around the world would need to tackle in the . . .

The recently notified mergers in the seed and agro-chem industry raise difficult questions that competition authorities around the world would need to tackle in the following months. Because of the importance of their markets’ size, the decision reached by US and EU competition authorities would be particularly significant for the merging parties, but the perspective of a number of other competition authorities in emerging and developing economies, in particular the BRICS, will also play an important role if the transactions are to move forward.

Read the full piece here.

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Antitrust & Consumer Protection

Antitrust review of ag-biotech mergers: Appropriability versus cannibalization

TOTM This symposium offers a good opportunity to look again into the complex relation between concentration and innovation in antitrust policy. Whilst the details of the . . .

This symposium offers a good opportunity to look again into the complex relation between concentration and innovation in antitrust policy. Whilst the details of the EC decision in Dow/Dupont remain unknown, the press release suggests that the issue of “incentives to innovate” was central to the review. Contrary to what had leaked in the antitrust press, the decision has apparently backed off from the introduction of a new “model”, and instead followed a more cautious approach. After a quick reminder of the conventional “appropriability v cannibalizationframework that drives merger analysis in innovation markets (1), I make two sets of hopefully innovative remarks on appropriability and IP rights (2) and on cannibalization in the ag-biotech sector (3).

Read the full piece here.

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Antitrust & Consumer Protection

The Essential Facility of Obama’s Competition Policy

Popular Media It appears that White House’s zeal for progressive-era legal theory has … progressed (or regressed?) further. Late last week President Obama signed an Executive Order . . .

It appears that White House’s zeal for progressive-era legal theory has … progressed (or regressed?) further. Late last week President Obama signed an Executive Order that nominally claims to direct executive agencies (and “strongly encourages” independent agencies) to adopt “pro-competitive” policies. It’s called Steps to Increase Competition and Better Inform Consumers and Workers to Support Continued Growth of the American Economy, and was produced alongside an issue brief from the Council of Economic Advisors titled Benefits of Competition and Indicators of Market Power.

TL;DR version: the Order and its brief do not appear so much aimed at protecting consumers or competition, as they are at providing justification for favored regulatory adventures.

In truth, it’s not exactly clear what problem the President is trying to solve. And there is language in both the Order and the brief that could be interpreted in a positive light, and, likewise, language that could be more of a shot across the bow of “unruly” corporate citizens who have not gotten in line with the President’s agenda. Most of the Order and the corresponding CEA brief read as a rote recital of basic antitrust principles: price fixing bad, collusion bad, competition good. That said, there were two items in the Order that particularly stood out.

The (Maybe) Good

Section 2 of the Order states that

Executive departments … with authorities that could be used to enhance competition (agencies) shall … use those authorities to promote competition, arm consumers and workers with the information they need to make informed choices, and eliminate regulations that restrict competition without corresponding benefits to the American public. (emphasis added)

Obviously this is music to the ears of anyone who has thought that agencies should be required to do a basic economic analysis before undertaking brave voyages of regulatory adventure. And this is what the Supreme Court was getting at in Michigan v. EPA when it examined the meaning of the phrase “appropriate” in connection with environmental regulations:

One would not say that it is even rational, never mind “appropriate,” to impose billions of dollars in economic costs in return for a few dollars in health or environmental benefits.

Thus, if this Order follows the direction of Michigan v. EPA, and it becomes the standard for agencies to conduct cost-benefit analyses before issuing regulation (and to review old regulations through such an analysis), then wonderful! Moreover, this mandate to agencies to reduce regulations that restrict competition could lead to an unexpected reformation of a variety of regulations – even outside of the agencies themselves. For instance, the FTC is laudable in its ongoing efforts both to correct anticompetitive state licensing laws as well as to resist state-protected incumbents, such as taxi-cab companies.

Still, I have trouble believing that the President — and this goes for any president, really, regardless of party — would truly intend for agencies under his control to actually cede regulatory ground when a little thing like economic reality points in a different direction than official policy. After all, there was ample information available that the Title II requirements on broadband providers would be both costly and result in reduced capital expenditures, and the White House nonetheless encouraged the FCC to go ahead with reclassification.

And this isn’t the first time that the President has directed agencies to perform retrospective review of regulation (see the Identifying and Reducing Regulatory Burdens Order of 2012). To date, however, there appears to be little evidence that the burdens of the regulatory state have lessened. Last year set a record for the page count of the Federal Register (80k+ pages), and the data suggest that the cost of the regulatory state is only increasing. Thus, despite the pleasant noises the Order makes with regard to imposing economic discipline on agencies – and despite the good example Canada has set for us in this regard – I am not optimistic of the actual result.

And the (maybe) good builds an important bridge to the (probably) bad of the Order. It is well and good to direct agencies to engage in economic calculation when they write and administer regulations, but such calculation must be in earnest, and must be directed by the learning that was hard earned over the course of the development of antitrust jurisprudence in the US. As Geoffrey Manne and Josh Wright have noted:

Without a serious methodological commitment to economic science, the incorporation of economics into antitrust is merely a façade, allowing regulators and judges to select whichever economic model fits their earlier beliefs or policy preferences rather than the model that best fits the real?world data. Still, economic theory remains essential to antitrust law. Economic analysis constrains and harnesses antitrust law so that it protects consumers rather than competitors.

Unfortunately, the brief does not indicate that it is interested in more than a façade of economic rigor. For instance, it relies on the outmoded 50 firm revenue concentration numbers gathered by the Census Bureau to support the proposition that the industries themselves are highly concentrated and, therefore, are anticompetitive. But, it’s been fairly well understood since the 1970s that concentration says nothing directly about monopoly power and its exercise. In fact, concentration can often be seen as an indicator of superior efficiency that results in better outcomes for consumers (depending on the industry).

The (Probably) Bad

Apart from general concerns (such as having a host of federal agencies with no antitrust expertise now engaging in competition turf wars) there is one specific area that could have a dramatically bad result for long term policy, and that moreover reflects either ignorance or willful blindness of antitrust jurisprudence. Specifically, the Order directs agencies to

identify specific actions that they can take in their areas of responsibility to build upon efforts to detect abuses such as price fixing, anticompetitive behavior in labor and other input markets, exclusionary conduct, and blocking access to critical resources that are needed for competitive entry. (emphasis added).

It then goes on to say that

agencies shall submit … an initial list of … any specific practices, such as blocking access to critical resources, that potentially restrict meaningful consumer or worker choice or unduly stifle new market entrants (emphasis added)

The generally uncontroversial language regarding price fixing and exclusionary conduct are bromides – after all, as the Order notes, we already have the FTC and DOJ very actively policing this sort of conduct. What’s novel here, however, is that the highlighted language above seems to amount to a mandate to executive agencies (and a strong suggestion to independent agencies) that they begin to seek out “essential facilities” within their regulated industries.

But “critical resources … needed for competitive entry” could mean nearly anything, depending on how you define competition and relevant markets. And asking non-antitrust agencies to integrate one of the more esoteric (and controversial) parts of antitrust law into their mission is going to be a recipe for disaster.

In fact, this may be one of the reasons why the Supreme Court declined to recognize the essential facilities doctrine as a distinct rule in Trinko, where it instead characterized the exclusionary conduct in Aspen Skiing as ‘at or near the outer boundary’ of Sherman Act § 2 liability.

In short, the essential facilities doctrine is widely criticized, by pretty much everyone. In their respected treatise, Antitrust Law, Herbert Hovenkamp and Philip Areeda have said that “the essential facility doctrine is both harmful and unnecessary and should be abandoned”; Michael Boudin has noted that the doctrine is full of “embarrassing weaknesses”; and Gregory Werden has opined that “Courts should reject the doctrine.” One important reason for the broad criticism is because

At bottom, a plaintiff … is saying that the defendant has a valuable facility that it would be difficult to reproduce … But … the fact that the defendant has a highly valued facility is a reason to reject sharing, not to require it, since forced sharing “may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities.” (quoting Trinko)

Further, it’s really hard to say when one business is so critical to a particular market that its own internal functions need to be exposed for competitors’ advantage. For instance, is Big Data – which the CEA brief specifically notes as a potential “critical resource” — an essential facility when one company serves so many consumers that it has effectively developed an entire market that it dominates? ( In case you are wondering, it’s actually not). When exactly does a firm so outcompete its rivals that access to its business infrastructure can be seen by regulators as “essential” to competition? And is this just a set-up for punishing success — which hardly promotes competition, innovation or consumer welfare?

And, let’s be honest here, when the CEA is considering Big Data as an essential facility they are at least partially focused on Google and its various search properties. Google is frequently the target for “essentialist” critics who argue, among other things, that Google’s prioritization of its own properties in its own search results violates antitrust rules. The story goes that Google search is so valuable that when Google publishes its own shopping results ahead of its various competitors, it is engaging in anticompetitive conduct. But this is a terribly myopic view of what the choices are for search services because, as Geoffrey Manne has so ably noted before, “competitors denied access to the top few search results at Google’s site are still able to advertise their existence and attract users through a wide range of other advertising outlets[.]”

Moreover, as more and more users migrate to specialized apps on their mobile devices for a variety of content, Google’s desktop search becomes just one choice among many for finding information. All of this leaves to one side, of course, the fact that for some categories, Google has incredibly stiff competition.

Thus it is that

to the extent that inclusion in Google search results is about “Stiglerian” search-cost reduction for websites (and it can hardly be anything else), the range of alternate facilities for this function is nearly limitless.

The troubling thing here is that, given the breezy analysis of the Order and the CEA brief, I don’t think the White House is really considering the long-term legal and economic implications of its command; the Order appears to be much more about political support for favored agency actions already under way.

Indeed, despite the length of the CEA brief and the variety of antitrust principles recited in the Order itself, an accompanying release points to what is really going on (at least in part). The White House, along with the FCC, seems to think that the embedded streams in a cable or satellite broadcast should be considered a form of essential facility that is an indispensable component of video consumers’ choice (which is laughable given the magnitude of choice in video consumption options that consumers enjoy today).

And, to the extent that courts might apply the (controversial) essential facilities doctrine, an “indispensable requirement … is the unavailability of access to the ‘essential facilities’[.]” This is clearly not the case with much of what the CEA brief points to as examples of ostensibly laudable pro-competitive regulation.

The doctrine wouldn’t apply, for instance, to the FCC’s Open Internet Order since edge providers have access to customers over networks, even where network providers want to zero-rate, employ usage-based billing or otherwise negotiate connection fees and prioritization. And it also doesn’t apply to the set-top box kerfuffle; while third-parties aren’t able to access the video streams that make-up a cable broadcast, the market for consuming those streams is a single part of the entire video ecosystem. What really matters there is access to viewers, and the ability to provide services to consumers and compete for their business.

Yet, according to the White House, “the set-top box is the mascot” for the administration’s competition Order, because, apparently, cable boxes represent “what happens when you don’t have the choice to go elsewhere.” ( “Elsewhere” to the White House, I assume, cannot include Roku, Apple TV, Hulu, Netflix, and a myriad of other video options  that consumers can currently choose among.)

The set-top box is, according to the White House, a prime example of the problem that

[a]cross our economy, too many consumers are dealing with inferior or overpriced products, too many workers aren’t getting the wage increases they deserve, too many entrepreneurs and small businesses are getting squeezed out unfairly by their bigger competitors, and overall we are not seeing the level of innovative growth we would like to see.

This is, of course, nonsense. Consumers enjoy an incredible amount of low-cost, high quality goods (including video options) – far more than at any point in history.  After all:

From cable to Netflix to Roku boxes to Apple TV to Amazon FireStick, we have more ways to find and watch TV than ever — and we can do so in our living rooms, on our phones and tablets, and on seat-back screens at 30,000 feet. Oddly enough, FCC Chairman Tom Wheeler … agrees: “American consumers enjoy unprecedented choice in how they view entertainment, news and sports programming. You can pretty much watch what you want, where you want, when you want.”

Thus, I suspect that the White House has its eye on a broader regulatory agenda.

For instance, the Department of Labor recently announced that it would be extending its reach in the financial services industry by changing the standard for when financial advice might give rise to a fiduciary relationship under ERISA. It seems obvious that the SEC or FINRA could have taken up the slack for any financial services regulatory issues – it’s certainly within their respective wheelhouses. But that’s not the direction the administration took, possibly because SEC and FINRA are independent agencies. Thus, the DOL – an agency with substantially less financial and consumer protection experience than either the SEC or FINRA — has expansive new authority.

And that’s where more of the language in the Order comes into focus. It directs agencies to “ensur[e] that consumers and workers have access to the information needed to make informed choices[.]” The text of the DOL rule develops for itself a basis in competition law as well:

The current proposal’s defined boundaries between fiduciary advice, education, and sales activity directed at large plans, may bring greater clarity to the IRA and plan services markets. Innovation in new advice business models, including technology-driven models, may be accelerated, and nudged away from conflicts and toward transparency, thereby promoting healthy competition in the fiduciary advice market.

Thus, it’s hard to see what the White House is doing in the Order, other than laying the groundwork for expansive authority of non-independent executive agencies under the thin guise of promoting competition. Perhaps the President believes that couching this expansion in free market terms ( i.e. that its “pro-competition”) will somehow help the initiatives go through with minimal friction. But there is nothing in the Order or the CEA brief to provide any confidence that competition will, in fact, be promoted. And in the end I have trouble seeing how this sort of regulatory adventurism does not run afoul of separation of powers issues, as well as assorted other legal challenges.

Finally, conjuring up a regulatory version of the essential facilities doctrine as a support for this expansion is simply a terrible idea — one that smacks much more of industrial policy than of sound regulatory reform or consumer protection.

Filed under: antitrust, consumer protection, cost-benefit analysis, economics, essential facilities, exclusionary conduct, fiduciary duties, monopolization, regulation, regulatory reform, truth on the market Tagged: antitrust, consumer protection, regulation, regulatory overreach

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Antitrust & Consumer Protection