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Scholarship Abstract The Global Antitrust Institute (“GAI”) provided comments to the U.S. Federal Trade Commission (“FTC”) in response to the FTC’s proposal to make significant amendments . . .
The Global Antitrust Institute (“GAI”) provided comments to the U.S. Federal Trade Commission (“FTC”) in response to the FTC’s proposal to make significant amendments to the rules governing premerger notification under the Hart-Scott-Rodino Antitrust Improvements Act. The proposal will, if implemented, substantially increase burdens on all merging parties, regardless of whether the transaction reported poses an anticompetitive risk. In Section I we review the market for corporate control and the benefits it can have for effective firm management, allocative efficiency of economic resources, and consumer welfare. In Section II we explain how, contrary to the FTC’s view, the proposed changes will significantly increase the burden imposed on filing parties. This will impede the market for corporate control and consequently reduce productivity and inhibit innovation in other markets. In Section III we highlight potential conflicts between the proposed rule amendments and the Administrative Procedures Act.
Scholarship Summary The Digital Markets, Competition and Consumers Bill (DMCC or ‘the Bill’) endows the UK’s Competition and Markets Authority (CMA) with extensive new powers to . . .
The Digital Markets, Competition and Consumers Bill (DMCC), introduced into parliament in April 2023, is the UK government’s response to alleged anticompetitive practices in digital markets.[1] But in its current form, the Bill threatens to do more harm than good.
In this paper we address Part 1 of the Bill, which concerns its provisions on digital markets.[2] In this area, the government’s underlying concern is that network effects, economies of scale and the accumulation of user data have led to the creation of monolithic technology giants that can exercise market power in ways that lead to higher prices and poor outcomes for consumers, and furthermore, that their power is entrenched, in the sense that their market position is very hard for new entrants to challenge. Advocates of the legislation believe that new regulatory powers are necessary to address these competition issues. The particular point that digital companies are heavily entrenched has been questioned elsewhere, for example by Baye and Prince (2020: 1287). They argue that technology markets are highly dynamic and that, while it may be tempting for policymakers to intervene in an attempt to remedy an immediate concern, history suggests that competition often permits new and superior technologies to supplant entrenched ones. This paper, however, is more narrowly focused on the DMCC, the powers it gives to regulators, the lack of procedural protections, and the issues this raises for the UK economy.
Part 1 of the DMCC will:
In practice, it endows the CMA, acting through the newly created Digital Markets Unit (DMU), with extensive new powers to categorically prohibit certain types of conduct at an incipient stage and impose far-reaching remedies with limited consideration of countervailing consumer benefits.
The CMA will also be able to take crucial decisions at every step of the process—e.g., in designating relevant activities, imposing conduct requirements and pro-competition interventions, investigating breaches, adjudicating wrongdoing and imposing significant fines—without full merits review. It will only be possible to challenge the decision-making on process grounds under the judicial review standard. In simple terms, courts will not assess whether the CMA was ‘right’, but whether the correct procedures were followed.
In addition, the procedural safeguards contemplated by the Bill may enable overenforcement in ways that hurt consumers. In practical terms, this could mean new products will not be developed in the UK and that new features could be delayed or not introduced for British users, as firms seek to minimise the risk of falling afoul of the new regime and incurring hefty fines and stringent remedies. This could, in turn, deter post-Brexit investment in the British economy and damage job creation in high-tech industries.
Granting extreme executive powers without sufficient oversight marks a departure in British governance from the rule of law in favour of expansive regulatory discretion, which is ill-advised on both principled—i.e., respect for the rule of law as a guiding democratic principle—and practical grounds.
To avoid turning the UK into a ‘tech turn-off’, it is vital that the DMCC be revised to narrow the CMA’s discretion and that meaningful procedural guardrails are incorporated to counterbalance its far-reaching powers. Absent this, the damage caused to the British economy may be hard to reverse.
[1] These issues were outlined in the government’s Digital Competition Expert Panel, also known as the Furman (2019) report, and the consultation on a new pro-competition regime for digital markets (DCMS and BEIS 2022).
[2] Shalchi and Mirza-Davies (2023) describe Part 2, and Conway, Fairbairn, and Pyper (2023) describe Parts 3-6.
Scholarship Abstract Compensation claims for competition infringements are a form of private enforcement of prohibitions against anti-competitive conduct. The proper understanding of this kind of enforcement . . .
Compensation claims for competition infringements are a form of private enforcement of prohibitions against anti-competitive conduct. The proper understanding of this kind of enforcement requires taking into consideration the particularities of these offences, which influence the right of the injured parties to obtain compensation for the harm suffered and other possible remedies provided for in the law. Although the right of injured parties to claim damages is built on the typical foundations of non-contractual liability (tort), a dozen judgments of the EU Court of Justice have altered the rules and principles according to which victims are entitled to seek damages compensation. Directive EU/2014/104 codifies this jurisprudential acquis and introduces other novelties, which are currently being tested in the incipient follow-on litigation in Spain following several decisions of the national and European competition authorities. The new rules and the forceful projection of the principle of effectiveness of EU law have limited the autonomy of Member States and lead to an actualised approach to the rules on standing (active and passive), causation, statute of limitations and harm proof/quantification. Surprisingly, the progress made on the above issues contrasts with the lack of adequate mechanisms for class actions, which -given the dispersion and fragmentation of the damage in many of these cases- severely limits the effectiveness of the rights of injured parties and the efficiency of these proceedings.
(Paper is in Spanish.)
Scholarship Abstract The Federal Trade Commission and the U.S. Department of Justice published a draft update of their merger guidelines in July 2023. This paper reviews . . .
The Federal Trade Commission and the U.S. Department of Justice published a draft update of their merger guidelines in July 2023. This paper reviews the Draft Merger Guidelines from a dynamic competition perspective. We base our findings and recommendations on recent economic literature dealing with innovation.
Scholarship Abstract The economic theory of the firm teaches that vertical (and complementary goods) mergers differ fundamentally from horizontal mergers. Given incomplete contracting at arm’s length, . . .
The economic theory of the firm teaches that vertical (and complementary goods) mergers differ fundamentally from horizontal mergers. Given incomplete contracting at arm’s length, improved coordination post-merger tends to increase competition and improve market outcomes in the case of vertical merger but tends to lessen competition and degrade market outcomes in the case of horizontal merger. Countervailing effects can of course reverse these tendencies, but rational merger analysis should take the fundamental differences of merger types into account.
The economic analysis of Section II.5 of the Draft Merger Guidelines (DMGs) conveys a rational—though incomplete—antitrust treatment of vertical mergers based on sound economic analysis. The one glaring omission in Section II.5 is the absence of any discussion of the elimination of double marginalization (EDM)—a feature typically inherent to vertical mergers and thus a procompetitive effect rather than an exogenous efficiency requiring separate evidence and analysis. EDM arises from improved coordination between the merging parties, with the salutary effect of increasing competition in the relevant market. EDM can manifest as improvements in the merged firm’s product price or non-price features. We urge the Agencies to add a discussion of EDM to Section II.5 of the DMGs.
Section II.6 of the DMGs, however, stands in stark contradiction to the economic analysis in Section II.5. The market-share threshold for a presumption of harm in Section II.6 has no support in either economics or legal precedent, and the “plus factors” when the presumption threshold is not triggered offer no reliable indication of competitive harm. We urge the Agencies to entirely eliminate Guideline 6 and the material in Section II.6 from the DMGs.
Scholarship Abstract The Federal Trade Commission recently proposed a rule banning nearly all employee noncompete agreement (“NCAs”) as unfair methods of competition under Section 5 of . . .
The Federal Trade Commission recently proposed a rule banning nearly all employee noncompete agreement (“NCAs”) as unfair methods of competition under Section 5 of the Federal Trade Commission Act. The proposed rule reflects two complementary pillars of an aggressive new enforcement agenda championed by Commission Chair Lina Khan, a leading voice in the NeoBrandeisian antitrust movement. First, such a rule depends on the assumption, rejected by most prior Commissions, that the Act empowers the Commission to issue legislative rules. Proceeding by rulemaking is essential, the Commission has said, to fight a “hyperconcentrated economy” that injures employees and consumers alike. Second, the content of the rule reflects the Commission’s repudiation of consumer welfare and the Sherman Act’s Rule of Reason as guides to implementing Section 5.
Affected parties will no doubt challenge the Commission’s assertion of authority to issue legislative rules. This article assumes for the sake of argument that the Commission possesses the authority to issue such rules enforcing Section 5. Still, prudence can counsel that an agency refrain from issuing rules before it has fully educated itself about the nature of the economic phenomena it hopes to regulate. Such prudence seems particularly appropriate when the Commission has very recently adopted an entirely new substantive standard governing such conduct. Deferring a rulemaking does not mean inaction. The Commission could develop competition policy regarding NCAs the old-fashioned way, investigating and challenging such agreements on a case-by-case basis.
The Commission rejected these prudential concerns and proceeded to ban nearly all NCAs, assuring the public that it had educated itself sufficiently about the origin and impact of NCAs to conduct a global assessment of such agreements. The Notice of Proposed Rulemaking (“NPRM”) offered three rationales for the proposed rule, drawn from a late 2022 Statement of Section 5 Enforcement Policy. First, the Commission opined that NCAs are “restrictive” because they prevent employees from selling their labor to other employers or starting their own business in competition with their employer. Second, NCAs result from procedural coercion, because employers use a “particularly acute bargaining advantage” to impose such agreements. Third, NCAs are substantively coercive, because they burden the employee’s right to quit and pursue a more lucrative opportunity.
The first rationale applied to all NCAs. The second and third applied to all NCAs except those binding senior executives. Such executives, the Commission said, bargain for such agreements with the assistance of counsel and presumably receive higher salary and/or more generous severance in return for entering such NCAs. Because NCAs also have a “negative impact on competitive conditions,” the NPRM also concluded that they are presumptively unfair methods of competition.
The Commission conceded that NCAs can create cognizable benefits. Nonetheless, the Commission concluded that such benefits do not justify NCAs, for two reasons. First, less restrictive means can “reasonably achieve” such benefits. Second, such benefits do not exceed the harms that NCAs produce.
The Commission also rejected the alternative remedy of mandatory precontractual disclosure of NCAs for two interrelated reasons. First, such disclosure would not prevent employers from using overwhelming bargaining power to impose such restraints. Second, disclosure would not alter the number or scope of NCAs and thus would not reduce their aggregate negative economic impact.
The procedural coercion rationale played an outsized role in the Commission’s Section 5 analysis, informing the findings that NCAs are also “restrictive” and substantively coercive. Moreover, the outsized emphasis on procedural coercion dovetailed nicely with the NeoBrandeisian claim that ordinary Americans are routinely helpless before large concentrations of private economic power. Indeed, when the Commission released the NPRM, Chair Khan separately tweeted that NCAs reduced core economic liberties.
Still, the Commission offered no definition of “coercion” or explanation of how to determine whether employers have used coercion to impose NCAs on employees. Instead, the Commission articulated several subsidiary determinations regarding the characteristics of employers and employees that, taken together, established that employers always possess and use an acutely overwhelming bargaining advantage to impose nonexecutive NCAs. Thus, the Commission emphasized that labor market power is widespread, due in part to labor market concentration, most employees are unaware of NCAs before they enter such agreements, NCAs generally appear in standard form contracts, employees rarely bargain over such agreements, most employees live paycheck-to-paycheck and thus have no choice but to accept NCAs, and individuals negotiating over terms of employment discount or ignore the possibility that they will depart from the job they are about to accept and thus downplay the potential impact of an NCA on their future employment autonomy.
This article contends that the Commission’s procedural coercion rationale for condemning nonexecutive NCAs does not withstand analysis. In particular, the Commission’s various subsidiary determinations that support the procedural coercion rationale have no basis in the evidence before the Commission, contradict such evidence and/or disregard modern economic theory regarding contract formation. For instance, a recent study by two Department of Labor economists finds that the average Herfindahl-Hirschman Index in American labor markets is 333, the equivalent of 30 equally-sized firms, each with a 3.33 percent market share, competing for labor in the same market. A previous version of the study was published on the Department of Labor’s website several months before the Commission issued the proposed rule. The NPRM offers no contrary evidence regarding the proportion of labor markets that are concentrated. “Hyperconcentration of labor markets” is apparently a myth.
Moreover, the NPRM ignores record evidence that 61 percent of employees know of NCAs before they accept the offer of employment. The NPRM’s failure to address these data is particularly strange, insofar as the NPRM cites the very same page of the academic article where these data appear three different times for other propositions. The Commission also erred when it assumed that employers with labor market power will use such power coercively to impose even beneficial NCAs. This assumption would have made perfect sense in 1965. However, since the 1980s, scholars practicing Transaction Cost Economics have explained how firms with market power, including labor market power, will not use that power to impose beneficial nonstandard agreements, including NCAs. The Commission was apparently unaware of this literature.
Nor does the lack of individualized bargaining and reliance on form contracts suggest that employers use power coercively to impose NCAs. Form contracts often arise in competitive markets and reduce transaction costs. Background rules governing contract formation, robust state court review of NCAs and exit by potential employees can constrain employers’ ability to obtain unreasonable provisions and induce employers to pay premium wages to compensate employees for agreeing to NCAs. These considerations may explain why a majority of employees who had advanced knowledge of NCAs considered the agreements reasonable, a finding the NPRM ignores.
Nor does it matter that most employees work paycheck-to-paycheck. The Commission ignored the possibility that such individuals may be employed when seeking a new job, bargain from a position of relative security and can thus “walk away” from onerous NCAs. The Commission also ignored economic literature establishing that the presence of some such individuals in a labor market can ensure that employers offer reasonable terms to all potential employees, including unemployed job seekers.
Refutation of the procedural coercion rationale for banning nonexecutive NCAs requires reconsideration of the other two rationales as well. For instance, nonexecutive NCAs are the result of voluntary integration and thus not procedurally coercive or substantively coercive, either. Moreover, because some nonexecutive NCAs are voluntary, the Commission must abandon its erroneous assumption that the beneficial impacts of NCAs necessarily coexist with coercive harms. Proper assessment of business justifications requires the Commission to ascertain the proportion of NCAs that constitute voluntary integration, revise downward its estimate of coercive harms and reassess NCAs’ relative harms and benefits. This revision could result in a determination that NCAs’ benefits in fact exceed their harms. Finally, recognition that beneficial NCAs are the result of voluntary integration requires the Commission to reconsider the mandatory disclosure remedy, which the Commission rejected based on the erroneous belief that employers use bargaining power to impose even fully-disclosed and beneficial NCAs. Such reconsideration could of course lead to revising the scope of the proposed ban or rejection of any ban.
The Commission may well be entirely capable of assessing the global impact of NCAs on economic variables such as price, output, and wages. However, the Commission rejected such a rule of reason approach in favor of a standard that turns in part on the process of contract formation. Thus, the Commission necessarily took on the task of gathering information regarding the process of forming NCAs and of assessing that data in light of applicable economic theory. The Commission’s demonstrably poor execution of this task reveals that it lacks the capacity to conduct a generalized assessment of NCAs under a governing standard that treats procedural coercion as legally significant.
Because it lacks the capacity to assess the process of forming nonexecutive NCAs, the Commission should withdraw the NPRM and start over. There are two alternative paths the Commission may take to develop well-considered competition policy governing NCAs. First, the Commission could revert to the rule of reason approach it rejected in 2021. The Commission could draw upon its considerable study of the impact of NCAs on wages, prices and employee training and promulgate a rule that bans those agreements the Commission believes produce net harm, after reconsidering regulatory alternatives such as mandatory disclosure.
Second, the Commission could continue to embrace its new Section 5 standard but take an “adjudication only” approach to implementation. The Commission could simultaneously take other steps through various forms of public engagement to educate itself about contract formation in general and the formation of NCAs in particular. The Commission could build on data it has to this point ignored regarding various attributes of employers, employees and labor markets more generally. Adjudication and self-education could be mutually reinforcing. Self-education could inform the Commission’s determination of which NCAs to challenge, while information generated in adjudication could improve the Commission’s knowledge base about NCAs. Ultimately this two-track approach could generate sufficient information to justify a well-considered rule governing NCAs.
Scholarship Abstract Major competition regulators, and substantial portions of the scholarly community, have rapidly adopted the view that “killer acquisitions” and “kill zones” constitute significant sources . . .
Major competition regulators, and substantial portions of the scholarly community, have rapidly adopted the view that “killer acquisitions” and “kill zones” constitute significant sources of competitive risk arising from incumbent acquisitions of emerging firms in digital markets. Based on this view, policymakers in the United States, European Union, and other jurisdictions have advocated, and in some cases have taken, substantial changes to merger review policies that would erect significant obstacles to incumbent/startup acquisitions. A review of the relevant body of evidence finds that these widely-held views concerning incumbent/startup acquisitions rest on meager support, confined to ambiguous evidence drawn from a small portion of the total universe of acquisitions in the pharmaceutical market and theoretical models of acquisition transactions in information technology markets. Moreover, the emergent regulatory and scholarly consensus fails to take into account the rich body of evidence showing the critical function played by incumbent/startup acquisitions in supplying a monetization mechanism that induces venture-capital investment and promotes startup entry in technology markets. The prospect of an acquisition transaction in the case of technical and commercial success generally promotes innovation and competition by providing a transactional device that expands startups’ access to the capital inputs required to undertake R&D and the commercialization services required to convert R&D outputs into commercially viable products. At the same time, these acquisitions enable incumbents to access the specialized innovation capacities of smaller firms. Proposed changes to merger review standards would disrupt these efficient transactional mechanisms and are likely to have counterproductive effects on competitive conditions in innovation markets.
Scholarship Abstract Evidence of rising market power in the U.S. economy has received widespread attention in macroeconomics literature. Recent research has linked trends in measured market . . .
Evidence of rising market power in the U.S. economy has received widespread attention in macroeconomics literature. Recent research has linked trends in measured market power to other secular trends in the U.S., including multi-decade trends of declining rates of job reallocation and business entry (or “business dynamism”). Intuitively, firms with more market power are less responsive to shocks, and industries characterized by market power may have (or create) significant barriers to entry. Both forces predict a negative correlation between market power and business dynamism. However, industry-level data shows zero, or often a positive, correlation between markups and business dynamism; industries that experienced larger increases in markups had smaller decreases in dynamism on average. Those few industries that saw both large declines in markups and large declines in dynamism do not account for a significant share of the aggregate trends in markups and dynamism. Our results suggest that market power does not explain the decline in dynamism.
Scholarship Abstract Previous iterations of the DOJ/FTC Merger Guidelines have articulated a clear, rigorous, and transparent methodology for balancing the pro-competitive benefits of mergers against their . . .
Previous iterations of the DOJ/FTC Merger Guidelines have articulated a clear, rigorous, and transparent methodology for balancing the pro-competitive benefits of mergers against their anticompetitive costs. By describing agency practice, guidelines facilitate compliance, ensure consistent and reasonable enforcement, increase public understanding and confidence, and promote international cooperation.
But the 2023 Draft Merger Guidelines do not. They go to great lengths to articulate the potential anticompetitive costs of mergers but with no way to gauge “substantiality.” Most significantly, they ignore potential benefits, which eliminates the need for balancing. In other words, the Draft Guidelines provide very little guidance about current practice which adds risk, which deters mergers, which seems to be the point. We offer specific recommendations for Horizontal, Vertical, and Tech Mergers that do a better job differentiating procompetitive mergers from anticompetitive ones.
