Spotlight

October 2023

HIGHLIGHTS

Rethinking Prop 103’s Approach to Insurance Regulation

Executive Summary California voters passed Proposition 103 in 1988. Since that time, California’s insurance market has struggled to keep pace with national trends and product . . .

Executive Summary

California voters passed Proposition 103 in 1988. Since that time, California’s insurance market has struggled to keep pace with national trends and product innovations. The problems with the regulatory regime Prop 103 created most recently came to a head with the Sept. 21 announcement by Gov. Gavin Newsom that he had issued an emergency executive order to stabilize the state’s rapidly deteriorating market for property insurance.

As other states consider the adoption of reforms inspired by Prop 103, it is necessary to revisit the law’s genesis and recent history, as well as to examine the problems that it has fostered.

This paper outlines how the Prop 103 rating system is slow, imprecise, and inflexible relative to other jurisdictions; examines the ways in which the ratemaking system has been rendered unpredictable; and details the form, function, and questionable value proposition of the rate-intervenor system. In so doing, the paper demonstrates that Prop 103 has created an insurance market that struggles to work efficiently even in the best of times and is virtually impossible to sustain in periods of acute stress.

Despite the current problems in California’s insurance market, industry critics argue that other states would be better off with regulations similar to those contained in Prop 103. A clear view of the results from California demonstrate that these arguments are false and misleading. Contrary to claims that Prop 103 saved Californians as much as $154 billion in auto insurance premiums from 1989 to 2015, we find that Californians would have saved nearly $25 billion if they had not passed Prop 103.

The paper concludes with a series of policy recommendations designed to inform both the ongoing implementation of Prop 103 by the California Department of Insurance, as well as other jurisdictions considering elements of a Prop 103 approach.

I.       Introduction

The 1980s were a period of chaotic dislocation in the California automobile-insurance market.[1] The California Supreme Court’s 1979 decision in Royal Globe Insurance created precedent that third parties could bring action against a tortfeasor’s insurer, even if they were not party to the insurance contract in question.[2] What followed was an explosion in insurance-related litigation, as the number of auto-liability claim filings in California Superior Court rose by 82% between 1980 and 1987, and the severity of claims rose by a factor of four.[3] As would be expected, the state’s auto-insurance premiums likewise followed suit, rising 69.8% from $4.3 billion in 1984 to $7.3 billion in 1987.[4]

This crisis in auto-insurance affordability came to a head in 1988, when among the 29 ballot initiatives California voters were presented in that November’s election were five separate questions dealing specifically with insurance issues.[5] Two of these were broadly supported by the insurance industry: Proposition 104,[6] which would establish a no-fault system for auto insurance and limit damage awards against insurers, and Proposition 106, which would set percentage-based caps on attorneys’ contingency fees.[7] Proposition 100, backed by the California Trial Lawyers Association, was proposed as a counter to Props 104 and 106; if it received more votes that those initiatives, it would have canceled the limits on both damage awards and contingency fees, as well as the proposed no-fault system.[8] Proposition 101 would cap insureds’ ability to recover bodily injury damages, paired with a promised 50% reduction in the bodily injury portion of insurance premiums.[9]

In the end, however, only one of the insurance measures was approved in the Nov. 8 election: Proposition 103, also known as the “Insurance Rate Reduction and Reform Act.” Authored by Harvey Rosenfield of the Santa Monica-based Foundation for Taxpayer and Consumer Rights (now known as Consumer Watchdog) and sponsored by Rosenfield’s organization Voter Revolt, Prop 103  carried narrowly with 51.1% yes votes to 48.9% against.[10]

Prop 103’s stated purpose was “to protect consumers from arbitrary insurance rates and practices, to encourage a competitive insurance marketplace.”[11] Proponents of the measure claim they have achieved that, touting $154 billion of consumer savings over the first 30 years it was in effect.[12]

Among the specific changes mandated by the law were:

  • California’s insurance commissioner, previously appointed by the governor, was made an elected position, chosen in the same cycle with the other state officers for a term of four years.
  • Beginning in November 1988, all automobile and other property & casualty insurance rates were to be rolled back to 80% of their levels as of Nov. 8, 1987, and were to be held at such levels until November 1989.
  • Rate increases and decreases were now subject to prior approval of the elected insurance commissioner, replacing the “open competition” system that had previously prevailed for 40 years under the McBride-Grunsky Insurance Regulatory Act of 1947, which required only that insurers submit rate manuals to the California Department of Insurance (CDI).[13] Public hearings were mandatory for personal lines increases of more than 7% and commercial lines increases of more than 15%, while others were at CDI’s discretion.
  • The law created a role at these hearings for “public intervenors,” who are empowered to file objections on behalf of consumers, with fees to be paid by the applicant insurance company.
  • Prop 103 also established a rate-setting formula for auto insurance that mandated rates be based on an insured’s driving record, number of miles driven, and years of driving experience. While other factors could be considered, the burden would be on insurers to demonstrate they are statistically correlated with risk.
  • Drivers with at least three years of driving experience, no more than one violation point during the previous three years, and no fault in an accident involving death or damage great than $500 must be offered a “good driver discount” that is at least 20% below the rate the driver would otherwise have been charged for coverage.
  • The business of insurance was deemed subject to California antitrust, unfair business practices, and civil-rights law.

Because the law was subject to immediate and ongoing litigation, some provisions were only fully implemented years after the proposition’s passage. But notable among the law’s other provisions was Section 8(b), which rendered Prop 103’s text extraordinarily difficult to amend:

The provisions of this act shall not be amended by the Legislature except to further its purposes by a statute passed in each house by roll call vote entered in the journal, two-thirds of the membership concurring, or by a statute that becomes effective only when approved by the electorate.[14]

Much has changed in the world, and in California’s insurance industry, since the passage of Prop 103, but the lion’s share of the law remains as it was in 1988.

II.     The Recent History of California’s Insurance Market

The recent story of California’s property & casualty insurance market has been one of uncertainty and induced dysfunction.

Prior to the COVID-19 pandemic, California’s market was saddled by availability issues stemming from a series of historically costly wildfires. California homeowners insurers posted a combined underwriting loss of $20 billion for the massive wildfire years of 2017 and 2018 alone, more than double the total combined underwriting profit of $10 billion that the state’s homeowners insurers had generated from 1991 to 2016.[15] Partly in response to those losses, as well as the inability to adjust rates expeditiously, the number of nonrenewals of California residential-property policies grew by 36% in 2019, and new policies written by the state’s residual-market FAIR Plan surged 225% that same year.[16]

To stanch the bleeding of admitted market policies into the FAIR Plan and the surplus-lines market, CDI in December 2019 invoked recently enacted statutory authority to issue moratoria barring insurers from nonrenewing roughly 800,000 policies in ZIP codes adjacent to specified major wildfires.[17] As of November 2022, nearly 2.4 million policies statewide were in ZIP codes under nonrenewal moratoria, many of them added following additional catastrophic wildfires in 2020.[18]

During the COVID-19 pandemic, CDI instituted a rate freeze in auto insurance and accused the industry of profiteering. In June 2020, California Insurance Commissioner Ricardo Lara took credit for ordering $1.03 billion of premium refunds, dividends, or credits for auto-insurance policyholders, as well as “an additional $180 million in future rate increases that insurance companies reduced in response to the Commissioner’s orders.”[19]

In fact, most of the early rebates were voluntary, in line with similar voluntary rebates that insurers issued across the country.[20] CDI would not publish its methodology for mandatory rebates until March 2021, at which point it declared that, rather than the 9% of premium that California auto insurers returned to policyholders from March through September 2020, they should have returned 17%.[21] In October 2021, the California Court of Appeal ruled in State Farm General Insurance Co. v. Lara that Prop 103 did not actually give the commissioner authority to order the retroactive rate refunds.[22]

CDI was also slow to lift its rate freeze, even as the COVID-19 pandemic abated, and many employers ended work-from-home policies. From May 2020 until October 2022, CDI did not approve a single auto-insurance rate filing, even though more than 75% of the state’s auto insurers filed for an increase during that period.[23] In the meantime, the “motor vehicle repair” component of the Consumer Price Index (CPI) jumped by 19.2% between July 2022 and July 2023, far outstripping the 3.2% hike in overall CPI.[24]

With limited options on the pricing front, insurers have been forced to limit exposure in other ways. While California is a “guaranteed issue” state for private-passenger auto insurance, auto insurers are attempting to limit the policies they take on by, for example, limiting advertising. Insurance rating agency A.M. Best Co. reported that auto insurers cut their advertising budgets nearly 18% in the first half of 2022, compared with the same period in 2021.[25] In other cases, insurers have taken to asking for more premium upfront, instead of allowing consumers to pay via monthly or other periodic installment plans.[26]

Meanwhile, as detailed more extensively in the sections below, the wildfire-driven homeowners-insurance crisis that began before the COVID-19 pandemic has itself grown to epidemic levels, highlighted by State Farm General’s 2023 decision to cease writing new business in the California market. That led the environmental news service ClimateWire to observe:

Experts say State Farm’s decision highlights a flaw in California policies that effectively blocks insurers from considering climate change in setting premiums and discourages them from seeking rate increases sufficient to cover the state’s growing wildfire risk. In addition, the policies have created insurance premiums that are far too low and are forcing insurers to pull back their coverage in California to remain profitable.[27]

California’s political leaders have also acknowledged the crisis. On Sept. 21, Gov. Gavin Newsom issued an executive order noting that insurance carriers representing 63% of the state’s homeowners insurance market had in recent months announced plans to either cease or limit writing new policies.[28] He further announced that he was authorizing Insurance Commissioner Ricardo Lara to:

take prompt regulatory action to strengthen and stabilize California’s marketplace for homeowners insurance and commercial property insurance, and to consider whether the recent sudden deterioration of the private insurance market presents facts that support emergency regulatory action.[29]

For his part, Lara announced an emergency response plan that included:

[T]ransition[ing] homeowners and businesses from the FAIR Plan back into the normal insurance market with commitments from insurance companies to cover all parts of California by writing no less than 85% of their statewide market share in high wildfire risk communities. … ;

Giving FAIR Plan policyholders who comply with the new Safer from Wildfires regulation first priority for transition to the normal market, thus enhancing the state’s overall wildfire safety efforts;

Expediting the Department’s introduction of new rules for the review of climate catastrophe models that recognize the benefits of wildfire safety and mitigation actions at the state, local, and parcel levels; …

Holding public meetings exploring incorporating California-only reinsurance costs into rate filings;

Improving rate filing procedures and timelines by enforcing the requirement for insurance companies to submit a complete rate filing, hiring additional Department staff to review rate applications and inform regulatory changes, and enacting intervenor reform to increase transparency and public participation in the process …[30]

A.      Problems With Rate Regulation Under Prop 103

Prop 103 charges California’s insurance commissioner with applying requirements articulated in the California Insurance Code and the California Code of Regulations to determine whether an insurer’s requested rate change is “excessive, inadequate or unfairly discriminatory.”[31] If the commissioner determines that a request is not “most actuarially sound,” he or she can require a rate reduction or reject a rate filing completely.[32] Here, it should be noted that the “most actuarially sound” standard is unique to California, and is not applied by other states that employ prior-approval regulatory systems for rate review.

The most obvious problem with rate regulation is that it restricts the availability of insurance. As the German economist Karl Henrik Borch put it in a landmark article on capital markets in insurance:

If premiums are low, the profitability of the insurance company will also be low, and investors may not be inclined to risk their capital as reserves for an insurance company. If the government imposes too low premiums, the whole system may break down, and high standard insurance may become impossible in a free economy.[33]

Insurers naturally respond to rate regulation by tightening their underwriting criteria, forcing some consumers to have to turn to the higher-priced residual market for coverage. In extreme cases, rate suppression can lead some insurers to exit the market altogether.

The empirical evidence of this effect is manifest. After California ordered mandatory 20% rate rollbacks following the passage of Prop 103 in 1988 (the effects of which were initially somewhat blunted by the courts), the number of insurers writing auto coverage in the state fell from 265 in 1988 to 208 in 1993.[34]

[35]

More recently, Prop 103’s deleterious effects on the availability of coverage have manifested most obviously in decisions by major homeowners insurers to exit the market. In 2019, following the deadliest wildfire season in California history, the state’s homeowners insurers responded by nonrenewing 235,520 policies, a 31% increase from the prior year.[36] In May 2023, California’s largest writer of homeowners insurance, State Farm General, announced it would halt the sale of new homeowners policies in the state.[37] Six months earlier, in December 2022, California’s fourth-largest personal lines writer—Allstate—had likewise announced it would cease writing new policies,[38] while Farmers, the second-largest writer, subsequently said it would limit it, too, would writing of new policies.[39]

While Prop 103 calls for property & casualty insurers to earn a “fair profit” rate of return of 10%, the industry has long reported that it finds it difficult to meet the California Department of Insurance’s requirements to justify rate increases, even when such increases would allow premiums to better reflect true risk.[40] In fact, even after the state’s extreme wildfires in 2017 and 2018, and despite trailing only Hawaii in median home prices,[41] Californians in 2020 paid an annual average of $1,285 in homeowners insurance premiums across all policy types—less than the national average of $1,319.[42]

As noted above, the homeowners-insurance availability crisis has become particularly acute in the wake of those devastating 2017 and 2018 wildfires. Under Prop 103, an insurer must justify its requested statewide premium for future wildfire losses based upon its average annual wildfire losses over the last 20 years.[43] But as demonstrated in Figure I, a look at the data from California’s homeowners-insurance market illustrates why such long-run averages are wholly inadequate to project future losses.

[44]

B. Catastrophe Models and Reinsurance

Insurers have access to tools like advanced wildfire catastrophe models that would allow them to project future wildfire losses in ways that consider both changing climactic factors and a given property’s proximity to fuel load.[45] Such considerations are not currently permitted under California’s Prop 103 system, but nor are they explicitly barred, as such models largely did not yet exist in 1988. Indeed, the California Earthquake Authority uses catastrophe models to develop rates and mitigation discounts; determine the amount of claims-paying capacity the authority needs; and to estimate CEA losses after an event.[46] Moreover, California has begun to take steps in the direction of permitting their use in certain limited contexts, including recent regulations requiring insurers to disclose to consumers their “wildfire risk score.”[47] In July 2023, Insurance Commissioner Ricardo Lara hosted a workshop on catastrophe modeling and insurance, noting in a public invitation that:

For the past 30 years, the use of actual historical catastrophe losses has been the method used for estimating catastrophe adjustments in the California rate-approval process. However, historical losses do not fully account for the growing risk caused by climate change or risk mitigation measures taken by communities or regionally, as a result of local, state, and federal investments. Catastrophe estimates based on historical losses only reflect losses after they occur. As a result of climate-intensified wildfire risk and continued development in the wildland urban interface areas, and recent increased efforts to mitigate wildfire risks, past experience may no longer reflect the current wildfire exposure for property owners and insurance companies.[48]

Prop 103 also probits insurers from using the cost of reinsurance as justification for rate filings.[49] After a long period of “soft” pricing from 2006 to 2016, reinsurance rates for North American property-catastrophe risks more than doubled from 2017 to 2023, including a 35% year-over-year hike in 2023, according to reinsurance broker Guy Carpenter.[50] When combined with prohibitions on the use of catastrophe models, this has essentially meant that California—a state that has long prided itself as being on the leading edge when it comes to its response to climate change—is effectively telling insurers to ignore the science.[51]

Thus, unsurprisingly, denied the ability to charge rates that reflect the future risk of wildfire, admitted-market insurers have pulled back from the most at-risk areas. Ironically, this has meant a migration of policies to surplus lines insurers and to the California Fair Access to Insurance Requirements (FAIR) Plan, both of which are allowed to use catastrophe models in setting their premiums.

From 2015 to 2021, the number of FAIR Plan policies grew by 89.7%, in the process rising from 1.7% of the California homeowners insurance market to 3.0%.[52] With just $1.4 billion in aggregate loss retention and facing the prospect of claims-paying shortfalls in the event of another major wildfire, the FAIR Plan recently filed a request for an average 48.8% increase in its dwelling fire rates.[53]

C. An Inflexible System

Prop 103 is also remarkably inflexible, particularly given provisions that make it exceedingly difficult to amend by legislative enactment. Any changes must not only pass by a two-thirds vote in both chambers of the California Legislature, but they must also be found to “further the purposes” of the proposition. As the 2nd District Court of Appeal wrote in the 1998 decision Proposition 103 Enforcement v. Quackenbush:

Any doubts should be resolved in favor of the initiative and referendum power, and amendments which may conflict with the subject matter of initiative measures must be accomplished by popular vote, as opposed to legislatively enacted ordinances, where the original initiative does not provide otherwise.[54]

But with the bar to amendment set that high, it has proven to be effectively impossible for the law to respond to the enormous political, technological, and business practice changes that the insurance industry has undergone over the past 35 years.

In addition to the emergence of catastrophe models, discussed above, another significant tool that insurers have taken increasing advantage of in the years since 1988 is the use of credit-based insurance scores, particularly in auto insurance underwriting and ratemaking. Today, according to the Fair Isaac Corp. (FICO), 95% of auto insurers and 85% of homeowners insurers use credit-based insurance scores in states where it is legally allowed as an underwriting or risk-classification factor.[55]

But California is one of four states (along with Massachusetts, Hawaii, and Michigan) that does not permit their use,[56] because CDI has not adopted regulations acknowledging credit history as a rating factor with “a substantial relationship to the risk of loss.” This is despite the Federal Trade Commission’s (FTC) finding that, in the context of auto insurance, credit-based insurance scores “are predictive of the number of claims consumers file and the total cost of those claims.”[57]

A similar disjunction between the inflexibility of Prop 103 and the emergence of new technologies can be seen in the development of “telematic” technologies that allow insurers to measure a range of factors directly relevant to auto-insurance risk, including not only the number of miles driven (a required rating factor under Prop 103) but also how frequently the driver engages in sudden stops or rapid acceleration, as well as how often he or she drives after dark or in high-congestion situations.[58]

In July 2009, CDI adopted an amendment to the state insurance code that permitted the use of telematics devices to verify mileage for the purpose of advertise “pay per-mile” rates.[59] But other regulations in the California code limit the ability to use telematics to offer “pay-how-you-drive” products that have become popular in other jurisdictions. For example, insurers are currently prohibited from collecting vehicle-location information, which rules out rating on the basis of driving in congested areas.[60] Moreover, because the regulations do permit rating on the basis of the severity and frequency of accidents in the ZIP code where a vehicle is garaged,[61] identical drivers who spend equivalent time driving in congested areas may be charged different rates, with a suburban commuter earning a discount relative to an urban commuter.

Research by Jason E. Bordoff & Pascal J. Noel finds the status quo is that low-mileage drivers cross-subsidize high-mileage drivers,[62] and that about 64% of Californians would save money if they switched to a per-mile plan.[63] The president of the California Black Chamber of Commerce has also argued that telematics offers a potential solution to problems of bias in underwriting, given evidence that drivers from predominantly African-American communities are quoted premiums that are 70% higher than similarly situated drivers in predominantly white communities.[64]

By voluntarily downloading an app to their smartphone, a driver agrees to allow an insurer to measure data about (and only about) their driving habits. This includes behaviors like hard braking and distracted driving. Based on that data an insurance company can assess how much of a risk the driver poses and offer fair insurance, free of bias and inflation, that the driver may choose to purchase.[65]

III.   Prop 103 Rate Review in Practice

Dynamic aspects of insurance loss events and claim costs impose expenses on insurers if they cannot respond nimbly in matching rate to risk. Prop 103 and similar approaches to price regulation restrain insurers’ ability to adjust to new information, thereby causing an increase in price, a decrease in availability, or both. Rate suppression occurs when regulators deny rate filings that request adequate and non-excessive rates. Examples of extreme rate suppression have rarely lasted very long. Insurers exit suppressed markets, leaving consumers with fewer choices and higher prices.

While the last section examined some of the high-level issues created by the Prop 103 system, in this section, we draw from empirical data and recent legal precedent to demonstrate how the Prop 103 process, as applied by the CDI, has in practice amplified these dislocations in ways that have proven extraordinarily counterproductive.

A. Ratemaking as Market-Conduct Examination

Filing for rates under Prop 103 is a complex and costly enterprise. The discretion that CDI maintains and the ever-present risk of intervention by a third parties means that swift and predictable resolution is the exception, not the rule.

Further complicating ratemaking in California is the intrinsically political nature of the relationship between the insurance commissioner and regulated entities. California’s commissioner is one of 11 state insurance regulators in the United States to face direct election.[66] Thus, particularly in times of market strain or when policyholders are confronted with availability challenges or rate increases, the commissioner faces political incentives to pressure insurers to acquiesce to popular—if not market-based—demands. As a result, the ratemaking process can be misused as a proxy venue for larger ongoing disputes between the commissioner and insurers. Two recent cases highlight this phenomenon.

1.         Rulemaking by ratemaking proceeding

State Farm General (SFG)—a California entity separate from the larger State Farm Mutual, which was established to cover non-automobile lines—sought a rate increase of 6.4% in 2015. Consumer Watchdog intervened, CDI rejected the proposed increase, and the matter went to a hearing before a CDI administrative-law judge. The department’s hearing officer subsequently issued a far-reaching opinion, which was adopted by the commissioner, ordering SFG to retroactively reduce its rates and issue refunds, based on a novel reading of Prop 103 that erased the difference between the balance sheets of a particular insurer and the larger group of which it is a part for purposes of ratemaking.

Faced with a foundational reinterpretation of insurance law created in the process of seeking a rate, SFG appealed to California courts,  where it ultimately prevailed, after a years-long protracted lawsuit and subsequent CDI appeal.[67]

While resolving open questions about a state’s ratemaking process is appropriate fodder for any department to undertake, the broader context in which then-Insurance Commissioner Dave Jones—who launched what would ultimately be a failed bid to be elected California’s attorney general in 2018[68]—pursued the action against SFG speaks to a different motivation. Indeed, SFG had just one year prior sought and received a rate increase using the same formula subsequently rejected by CDI. To wit, the basis of CDI’s resistance was not the degree of the rate increase in question, but was instead premised upon a broader question of law.

CDI has broad rulemaking authority and, when necessary, can seek legislative amendment to ensure that the laws governing ratemaking protect California consumers. But the department also retains substantial leverage to secure acquiescence from insurers when it pursues novel ratemaking interpretations in the context of a particular rate application. This approach may be effective, but it frustrates well-established norms for creating rules of general applicability and deprives the industry as a whole of due process. Worse still, when it engages in facial abuses of its already broad discretion, the CDI undermines the Prop 103 ratemaking system’s ability to prevent dislocation between price and risk.

2.        Corporate governance by ratemaking proceeding

The ratemaking process under Prop 103 is likewise susceptible to being used to direct the behavior of firms beyond the scope of ratemaking itself. Predictably, delays in the ratemaking proceeding on account of nonprice factors trigger the same market-skewing dynamics and due-process issues discussed above. Intervenors like Consumer Watchdog have sought, e.g., to prevent Allstate from receiving a mere 4% rate increase in its homeowners book on the basis of the firm’s decision to limit its exposure to the California market more broadly.[69] In that case, the long-time intervenor alleged that ceasing to sell insurance—an underwriting determination—has an impact on rates and that as a result, the decision to cease offering coverage is itself a ratemaking action demanding review by California Department of Insurance.

To its credit, the department maintained that inactivity by a business does not constitute the use of an unapproved rate. But Consumer Watchdog’s broad reading of the acceptable scope of matters judicable in a ratemaking proceeding is no doubt borne directly of previous experiences in which insurers were made to acquiesce to demands related to business practices more broadly.

B. Prop 103’s Dead Letter Deemer

Rate-approval delays have become a hallmark of the Prop 103 system, as well as the resulting asymmetry between rate and risk. But as originally presented to California voters, the law envisioned that rates would be deemed accepted if no action were taken by the CDI for 60 or 180 days.[70] Indeed, Prop 103 included this “deemer” provision because a reasonable speed-to-market for insurance products also protects consumers.

The law’s deemer provision has been effectively rendered moot in practice because, as a matter of course, the CDI requests that firms waive the deemer. If the deemer is not waived, the CDI has two options: approve the rate or issue a formal notice of hearing on the rate proposal. Because the CDI is unable to complete timely review of filings within the deemer period, it always elects to move to a rate hearing. In effect, CDI turns every rate filing without a deemer waiver into an “extraordinary circumstance.”[71]

In practice, it has proven exceedingly challenging for petitioners to navigate the manner in which rate hearings—the nominal guarantors of due process—are conducted. The administrative law judges (ALJs) that oversee these proceedings are housed within the CDI. The hearings themselves take a broad view of relevance that drive up the cost of participation. Upon ALJ resolution, the commissioner can accept, reject, or modify the ALJ’s finding. There is little practical upside for an insurer to move to a hearing against the CDI.

Wawanesa General Insurance Co. offers a case study in the differences between how Prop 103 was drafted and the way it is currently enforced. After initially waiving the law’s deemer, Wawanesa reactivated the deemer in a 2021 private-passenger auto filing.[72] In so doing, Wawanesa elected to move to a hearing by the CDI. Ultimately, from start to finish, its December 2021 rate filing was not approved until March 2023—15 months after it was brought forward. Ultimately, unable to get the rate it needed in a timely manner, Wawanesa’s U.S. subsidiary was acquired by the Automobile Club of Southern California.[73]

Thus, in practice, insurers are faced with a starkly practical choice. One option is to waive their right to timely review of rates, and hope that they gain approval in, on average, six months. The alternative is to move to a formal hearing and reconcile themselves with the fact that approval, if forthcoming, will take at least a year. The system of due process originally contemplated by Prop 103 simply bears no relationship with the system as it operates today.

Figure II shows the average number of days between submission and resolution of rate filings in each state (including the District of Columbia as a state, for these purposes). With a five-year average filing delay of 236 days for homeowners insurance and 226 days for auto insurance, California ranks 50th in each category, responding more slowly than all states except Colorado. Although the average delay is affected somewhat by extreme-outlier observations, California’s rank is unchanged if we instead use the median delay.[74]

Another troubling aspect of California’s sluggish regulatory system is that it appears to be getting slower over time. Obviously, California has been relatively slow to resolve rate filings since Prop 103 took effect. In recent years, however, the average delay has increased, as wildfire losses and market conditions (e.g., inflation and the cost of capital) have increased the cost of providing insurance. Figure III shows the annual average number of days between filing and resolution of rate changes for homeowners insurance in California. The average delay from 2013 to 2019 was 157 days. For the last three years, the average delay has increased to 293 days.

C. The Intervenor Process

CDI’s ability to review rate filings in a timely manner is further constrained by Prop 103’s intervenor process. Intervenors are granted petitions to intervene, as a matter of right, on any rate filing. Personal-lines filings that request a rate increase of 6.9% or more (or 14.9% or more in commercial-lines filings) are subject to mandatory hearings, if requested, while the decision to grant hearings for those filings below 6.9% (or 14.9% for commercial lines) are at the commissioner’s discretion. Naturally, many personal lines insurers opt to file below that threshold, even if they actually require rate increases substantially in excess of 6.9%, simply to avoid dealing with intervenors (although many rate filings at or below 6.9% do also have intervenors).

The intervenor process has proven both costly and time-consuming. According to CDI data, since 2003, intervenors have been paid $23,267,698.72, or just over $1 million annually, for successfully challenging 177 filings.[75] While the process results in CDI receiving more filings to review than it otherwise would, the total number of filings it must review is significantly less than other jurisdictions (see Figure IV).

Intuitively, we can assume that states cannot change rates as frequently when rate filings take longer to resolve. Figure IV confirms this assumption, demonstrating the average number of rate filings made per-company in each state for homeowners and automobile insurance from 2018 to 2022. Over the last five years, California ranks 49th in the number of homeowners-insurance rates filed, and 50th in the number of auto-insurance rates filed.

D. Rate Suppression Under Prop 103

While a slow regulatory system limits the efficiency of insurance markets, a system that suppresses rates will also inhibit deployment of capital, ultimately reducing the number of insurers who choose to participate.

For example, if an insurer’s rate analysis indicates that a 40% increase is required for rates to be adequate, and the regulator instead approves only a 15% increase, the effect of rate suppression is (40%–15%=) 25%. In this category, California again ranks 50th, approving rates that are, on average, 29% (homeowners) and 14% (auto) less than the actuarially indicated rate supported by the analysis in the filing.[76]

Figure V, which measures the difference between the actuarially indicated rate and the rate approved by regulators, demonstrates that California’s regulatory system under Prop 103 is suppressive. Although it is common for insurers to request rate changes below the indicated rates for strategic reasons, the measure would not differ consistently across states in the absence of suppressive rate regulation.

Similar to the growing chasm of filing delays observed in Figure III, Figure 7 shows that rate suppression in California homeowners insurance has risen in response to the unprecedented wildfire losses incurred in 2017 and 2018. Although the level of rate suppression moderated somewhat in 2022, the average level of regulatory rate suppression for 2013 through 2018 was 18%, while the average for 2019 through 2022 is 30%. Moreover, at 14.5% in 2022, California is more than one standard deviation (3.6%) above the mean (9.8%) and ranks 45th among the 50 jurisdictions reporting data.

In summary, the rate-filing data clearly show that California’s regulatory system under Prop 103 is expensive and slow, and that it is currently causing unsustainable rate suppression, especially in the homeowners line.

IV.   The Impact of Prop 103 on Other States

Some of Prop 103’s effects have arguably spilled over to other jurisdictions, either directly—via states adopting similar regulatory regimes—or indirectly. Recent research by Sangmin S. Oh, Ishita Sen, & Ana-Maria Tenekedjieva suggests that there is a significant indirect effect in the form of rate suppression in California and other “high-friction” states leading to cross-subsidies among policyholders of multi-state insurers and, ultimately, “distortions in risk sharing across states.”[77]

First, rates have not adequately adjusted in response to the growth in losses in states we classify as “high friction”, i.e. states where regulation is most restrictive. Second, in low friction states rates increase both in response to local losses as well as to losses from high friction states. Importantly, these spillovers are asymmetric: they occur only from high to low friction states, consistent with insurers cross-subsidizing in response to rate regulation. Our results point to distortions in risk sharing across states, i.e. households in low friction states are in-part bearing the risks of households in high friction states.[78]

In other cases, the impact of Prop 103 has largely taken the form of political influence. As demonstrated in the previous section, states like Colorado, Maryland, and Hawaii have followed California’s model of extended rate-review processes that significantly slow product approvals.

Among the first states to respond to Prop 103 with its own similar regulatory system was New Jersey, which in 1990 passed the Fair Automobile Insurance Reform Act. Under terms of the law, effective April 1992, every admitted writer of automobile insurance in the state would be required to offer coverage for all eligible persons, with only a select group of motorists—including those convicted of driving under the influence or other automobile-related crimes, those whose licenses had been suspended, those convicted of insurance fraud, and those whose coverage had been canceled for nonpayment of premium—deemed ineligible.[79]

While the law nominally permitted insurers to earn an “adequate return on capital” of 13%, several companies would sue the state on grounds that the New Jersey Department of Banking and Insurance did not approve rate requests sufficient to meet that threshold.[80] In addition, the state assessed surcharged on insurers to close a $1.3 billion funding gap for the state’s Joint Underwriting Authority.[81]

As in California, New Jersey saw the exit of 20 insurers the state’s auto-insurance market in the decade after the Fair Automobile Insurance Reform Act’s passage. When the state later liberalized its regulatory system with passage of the Auto Insurance Reform Act in June 2003, the number of auto writers more than doubled from 17 to 39 and thousands of previously uninsured drivers entered the system.[82]

A similar effect was seen in South Carolina, where a restrictive rating system in the 1990s had forced 43% of drivers into residual market policies undergirded by a state-run reinsurance facility.[83] After adopting a liberalized flex-band rating law in 1999, as in New Jersey, the number of insurers offering coverage in South Carolina doubled,[84] the residual market shrank (it is, today, only 0.007% of the market),[85] and overall rates actually fell.

Even in Massachusetts, which retains a fairly restrictive rate-approval process, reforms passed in April 2008 to allow insurers to submit competitive rates (they were previously set by the commissioner for all carriers) had a notable impact. Within two years of the reforms, rates had fallen by 12.7% and a dozen new carriers began offering coverage in the state.[86] Because it is still a very regulated state, Massachusetts still has a relatively large residual market. According to data from the Automobile Insurance Plan Service Office (AIPSO), in 2022, 3.38% of Massachusetts auto-insurance customers had to resort to the residual market, the second-highest rate in the nation.[87] But before 2008, Massachusetts’ residual-market share was routinely in the double digits.

While those states that have opted to copy the California model have largely lived to regret it, others continue to explore the imposition of Prop 103-like regimes. Oregon lawmakers, for example, have repeatedly put forward legislation that would place the insurance industry under the state’s Unlawful Trade Practices Act, granting customers the right to sue for damages beyond even the face value of their policies, and third parties to bring private rights of action against insurers with whom they have no contractual relationship.[88]

But perhaps the most notable recent proposal to shift to a Prop 103-like system is Illinois’ H.B. 2203,[89] which would effectively transform the state from the most open and competitive insurance market in the country to one of the most restrictive. If approved, the legislation would require every insurer seeking to offer private passenger motor-vehicle liability insurance in the state to file a complete rate application with the Department of Insurance, which once again would be empowered to approve or disapprove rates on a prior-approval basis. The bill also would prohibit insurers from setting rates based on any “nondriving” factors, including credit history, occupation, education, and gender.

As in California, the measure would also create a new system for public intervenors in the ratemaking process, stipulating that “any person may initiate or intervene in any proceeding permitted or established under the provisions and challenge any action of the Director under the provisions.”[90]

Illinois is currently somewhat of an outlier in effectively having no formal rate-approval process at all. In 1971, the Illinois General Assembly neglected to extend legislation enacted a year earlier to create “file-and-use” system, and the state has continued on without any insurance rating law for more than half a century.[91]

V. Estimating the Cost of Prop 103 in California and Other States

For the last two decades, proponents of Prop 103 have asserted that the ballot measure saved Californians as much as $154 billion in auto-insurance premiums from 1989 to 2015. Further, they claim that other states could have saved nearly $60 billion per-year over the same period by adopting insurance regulations similar to Prop 103.[92] As David Appel has noted, the analysis supporting these claims is flawed.[93] In the 20 years since industry critics began making this claim, however, no one has performed the correct analysis. Here, we perform an object analysis and draw dramatically different conclusions.

The analyses performed and cited by Prop 103’s proponents assume that insurance premiums are a function of the prior year’s premiums.[94] This approach is invalid, because insurance premiums are instead a function of expected losses. For example, if a policy covering a $200,000 house has a lower premium than a policy covering a $500,000 house, that alone would not tell us whether the first policy is a better deal than the second. Equivalently, we cannot tout the value of automobile insurance without comparing premiums to losses.

Figure VII shows that premiums in California and in other states (USX) largely follow losses. Moreover, when insurance companies make rate filings asking state insurance departments to approve new rates, regulators evaluate them based on their similarity to past losses and loss trends. Therefore, a more appropriate method of creating a counterfactual comparing the results obtained under one state’s regulatory approach to the insurance premiums that would be generated in other states is to apply the ratio of premiums to losses from one state to the losses of the other states, as in Equation 1:

Where USX PremiumCA is the estimate of USX premiums if we impose the effects of California’s price controls on the rest of the country.

Figure VIII shows the results from solving Equation 1. In stark contrast to claims made by proponents of Prop 103, we find that if the rest of the country (USX) had passed Prop 103 in 1989, consumers would have paid more than $218 billion in additional auto insurance premiums. Likewise, results from solving Equation 2:

Where CA PremiumUSX is the estimate of California premiums if we remove the effects of Prop 103 on California, indicate that Californians would have saved nearly $25 billion if they had not passed Prop 103. In light of these findings, regulators should be appropriately skeptical of claims that price controls reduce insurance premiums.

VI.   Recommended Reforms

It is difficult, but not impossible, to amend Prop 103. Indeed, many reforms may be enacted by updating administrative interpretation alone. What follows is, first, a list of reforms that CDI could champion (some of which are included, in varying forms, in Commissioner Lara’s emergency plan) to improve speed-to-market, procedural predictability, and rate accuracy. Second is a list of structural reforms that would require legislative approval.

A. Interpretive Reforms

1.       Fast-track noncontroversial filings

As discussed above, Prop 103 grants CDI discretion on whether to convene public hearings on rate changes of less than 7% for personal lines or 15% for commercial lines. When the commissioner grants such hearings, it adds expense, administrative burden, and delays to very modest changes in product offerings. Not only is this problematic as a matter of substance, we have shown that the data on delays in rate-filing approvals demonstrate that CDI is routinely violating the explicit text of Prop 103, which requires that “a rate change application shall be deemed approved 180 days after the rate application is received by the commissioner” unless the commissioner either rejects the filing or there are “extraordinary circumstances.”[95] CDI not only can, but must act to uphold this provision of the law.

To do so, the CDI should entertain adopting a rate-approval “fastlane” premised on firms submitting filings that use actuarial judgments that embrace consumer-friendly assumptions. That is, if a filing is made on the basis of the least-inflationary or least-aggressive loss-development assumptions, CDI should undertake a light-touch review focused on rate sufficiency to expedite the approval process. This approach has the benefit of increasing both the predictability and speed of the ratemaking process.

2.       Refocus rate proceedings

If CDI were to adopt a narrower reading of the universe of rate-related issues appropriate for adjudication in a ratemaking proceeding, it would have the important benefit of limiting the universe of issues susceptible to controversy. In so doing, insurers and the department will better be able to focus on the resolution of rate applications in a timely manner that allows price to reflect risk. Relatedly, the department should continue to constrain intervenors from conflating rate-related and non-rate-related issues in the service of broader policy objectives.

3.       Transparency

There is no single cause for California’s substantial delay in approving  rates, but it is clear that the state’s unique intervenor system shapes both insurer and CDI behavior in ways that were not immediately cognizable when the law was adopted. One way to ensure that speed-to-market improves over the long term is to better understand the value that intervenors offer, and to ensure that intervenor engagement is both efficient and effective.

At the moment, CDI publishes quantitative data concerning intervenor compensation and rate differentiation in intervenor proceedings.[96] But while this is helpful in conveying the scope of intervenor efforts, the data fail to capture the value actually provided by intervenors in the ratemaking process. The qualitative contribution made by intervenors is obscured by the fact that none of their filings appear publicly on SERFF. Not only is this an aberration relative to other proceedings before the CDI, but there could be significant value in getting greater transparency from the intervenor process, given the delays and direct costs related to intervention.

For one, allowing the Legislature and the public to assess the substantive value of intervenor contributions would ensure not only substantial due-process protections for filing entities, but would also ensure that consumers are afforded a high level of representation in proceedings. For instance, such transparency would function as a guarantor that intervenor filings are not otherwise duplicative of CDI efforts. It would therefore allow the public to assess whether intervenors are diligent in their efforts on their behalf.

Therefore, CDI should consider requiring intervenors to have their filings reflected on SERFF. Doing so would cost virtually nothing and would redound to the benefit of all parties. And it should be noted that, as this paper was going to press, CDI had started to post intervenor filings (Petitions to Intervene and Petitions for Hearing) for public access.

And beyond simply making intervenor contributions more transparent, CDI should exercise its discretion to reduce and sometimes reject fee submissions due to the lack of significant or substantial contribution. The department has long rubber-stamped fee requests, thereby creating incentives for unnecessary and costly delays in reviews and in actuarially justified rate increases.

4.       Embracing catastrophe models

Another reform that may be possible to enact via regulatory action is allowing the use of wildfire catastrophe models to rate and underwrite risk on a prospective basis. As mentioned above, there is precedent for such interpretation, as the FAIR Plan and the California Earthquake Authority already use catastrophe models for similar purposes. The Legislature could contribute to this process by appropriating funds for a commission to formally review the output of wildfire models, much as the Florida Commission on Hurricane Loss Projection Methodology (FCHLPM) does for hurricane models.[97] A formal review process could also provide insurers with the certainty they would need to justify investing in refined pricing strategies without fear that regulators will later reject the underlying methodology.

B. Legislative Reforms

The following proposals would require one of the exceptional legislative processes outlined above. Under the most common, a bill would have to clear both chambers of the Legislature by a two-thirds majority, and courts would ultimately be called on to rule in any challenges (and there will be challenges) whether the measure “furthers the purpose” of Prop 103.

But there is another option. The Legislature could also, by simple majority vote, opt to pass a statute that becomes effective only when approved by the electorate. This path has largely been eschewed by past would-be reformers, who have considered the odds long that the voting public would choose to make changes to Prop 103.

That may once have been obviously true, but as the California market continues to struggle, and as banks and property owners find it impossible to secure coverage at any price, it is difficult to say with certainty what voters would do. Prop 103 itself passed narrowly, against the backdrop of an insurance market crisis. As we find ourselves in yet another such crisis, anything may be possible.

1.       Insurance Market Action Plan

One option to address availability concerns and shrink the bloated FAIR Plan would be for the Legislature to revive the Insurance Market Action Plan (IMAP) proposal that the Assembly passed by a 61-3 margin in June 2020.[98]

Similar to the “takeout” program used successfully to depopulate Florida’s Citizens Property Insurance Corp., under IMAP, insurers that committed to write a significant number of properties in counties with large proportions of FAIR Plan policies would be allowed to submit rate requests that considered the output of catastrophe models and the market cost of reinsurance. In addition, FAIR Plan assessments should be applied as a direct surcharge, not subject to CDI approval, to ensure that there is no unfair subsidization of the highest risks, as well as to guard against the burden of assessments contributing to the insolvency of private insurers.

IMAP filings would also receive expedited review by the insurance commissioner, which could alleviate the speed-to-market issues highlighted in Section III.

2.       Telematics

There has also been some legislative interest in broadening the availability of telematics. In 2020, Assemblymember Evan Low (D-Campbell) and then- Assemblymember Autumn Burke (D-Marina Del Rey) co-authored an op-ed in which they called telematics “a sensible and fair approach” and encouraged CDI to continue to explore the issue with stakeholders.[99]

Prop. 103 was passed in an age before cell phones, GPS Navigation and many other technological advancements. Its interpretation does not allow companies to rate customers on their driving behavior. Prop. 103 relies heavily on demographic factors, rather than basing your rate on how you drive.

VI.   Conclusion

As demonstrated in this paper, claims about Prop 103’s savings to consumers[100] must be taken with an enormous grain of salt. Prop 103’s suppression of property-insurance rates in the private market has contributed to an availability crisis and the shunting of policyholders into the surplus-lines market and the California FAIR Plan, both of which will inevitably have to raise rates accordingly to be able to meet their obligations. This displacement into what are intended to be mechanisms of last resort also deprives consumers of the protections ordinarily offered in the admitted market.

[1] W. Kip Viscusi & Patricia Born, The Performance of the 1980s California Insurance and Liability Reforms, 2 Risk Manag. Insur. Rev. 14-33 (1999), available at https://law.vanderbilt.edu/files/archive/201_The-Performance-of-the-1980s-California-Insurance-and-Liability-Reforms.pdf.

[2] Royal Globe Ins. Co. v. Superior Court, 23 Cal. 3d 880 (Cal. 1979), 153 Cal. Rptr. 842, 592 P.2d 329.

[3] David Appel, Revisiting the Lingering Myths about Proposition 103: A Follow Up Report, Milliman (Sep. 2004), available at https://www.namic.org/pdf/040921appelfinalrpt.pdf.

[4] Viscusi & Born, supra note 1, at 18.

[5] Jerry Gillam & Leo C. Wolinsky, State’s Voters Face Longest List of Issues in 66 Years; Nov. 8 Ballot to Carry Maze of 29 Propositions, Los Angeles Times (Jul. 7, 1988), https://www.latimes.com/archives/la-xpm-1988-07-07-mn-8306-story.html.

[6] PROPOSITION 104 No-Fault Insurance, Los Angeles Times (Oct. 10, 1988), https://www.latimes.com/archives/la-xpm-1988-10-10-mn-2779-story.html.

[7] Gillam & Wolinsky, supra note 5.

[8] Kenneth Reich, Prop. 100 Evokes Unrestrained Claims From Insurers, Lawyers, Los Angeles Times (Sep. 14, 1988), https://www.latimes.com/archives/la-xpm-1988-09-14-mn-1907-story.html.

[9] Kenneth Reich, Prop. 101: It’s ‘Not Perfect,’ Measure’s Sponsors Concede, Los Angeles Times (Sep. 21, 1988), https://www.latimes.com/archives/la-xpm-1988-09-21-mn-2241-story.html.

[10] Steve Geissinger, Californians Approve Auto Insurance Cuts, Insurer Files Lawsuit, Associated Press (Nov. 9, 1988).

[11] Text of Proposition 103, Consumer Watchdog (Jan. 1, 2008), https://consumerwatchdog.org/insurance/text-proposition-103.

[12] Press Release, 30 Years and $154 Billion of Savings: California’s Proposition 103 Insurance Reforms Still Saving Drivers Money, Consumer Federation of America (Oct. 17, 2018), https://consumerfed.org/press_release/30-years-and-154-billion-of-savings-californias-proposition-103-insurance-reforms-still-saving-drivers-money.

[13] Cal. Ins. Code §1850-1860.3.

[14] Stats. 1988, p. A-290.

[15] Eric J. Xu, Cody Webb, & David D. Evans, Wildfire Catastrophe Models Could Spark the Change California Needs, Milliman (Oct. 2019), available at https://fr.milliman.com/-/media/milliman/importedfiles/uploadedfiles/wildfire_catastrophe_models_could_spark_the_changes_california_needs.ashx.

[16] Data on Insurance Non-Renewals, FAIR Plan and Surplus Lines (2015-2019), California Department of Insurance (Oct. 19, 2020), available at https://www.insurance.ca.gov/0400-news/0100-press-releases/2020/upload/nr104Charts-NewRenewedNon-RenewedData-2015-2019-101920.pdf.

[17] Matthew Nuttle, California Blocks Insurance Companies From Dropping Residents in Fire-Prone Areas, ABC 10 Sacramento (Dec. 5, 2019), https://www.abc10.com/article/news/politics/insurance-non-renewal-moratorium/103-40050393-6915-41c4-a6f0-0e525990cce7.

[18] John Egan & Amy Danise, Many California ZIP Codes Get Protection From Home Insurance Non-Renewals, Forbes Advisor (Nov. 22, 2022), https://www.forbes.com/advisor/homeowners-insurance/california-policy-non-renewals.

[19] Press Release, Commissioner Lara’s Actions Lead to More Than $1.2 Billion in Premium Savings for California Drivers Due to COVID-19 Pandemic, California Department of Insurance (Jun. 25, 2020), https://www.insurance.ca.gov/0400-news/0100-press-releases/2020/release056-2020.cfm.

[20] Ron Lieber, Some Insurers Offer a Break for Drivers Stuck at Home, The New York Times (Apr. 6, 2020), https://www.nytimes.com/2020/04/06/business/coronavirus-car-insurance.html.

[21] Ricardo Lara, Bulletin 2021-03, California Department of Insurance (Mar. 11, 2021), available at https://www.insurance.ca.gov/0250-insurers/0300-insurers/0200-bulletins/bulletin-notices-commiss-opinion/upload/Bulletin-2021-03-Premium-Refunds-Credits-and-Reductions-in-Response-to-COVID-19-Pandemic.pdf.

[22] State Farm General Insurance Company v. Lara et al. (2021) 286 Cal. Rptr. 3d 124.

[23] June Sham, California Rate Filing Freeze Starts to Thaw, Bankrate (Dec. 1, 2022), https://www.bankrate.com/insurance/car/california-rate-filing-freeze-causes-unrest.

[24] Consumer Price Index for All Urban Consumers (CPI-U): U.S. City Average by Detailed Expenditure Category, U.S. Bureau of Labor Statistics (Aug. 10, 2023), https://www.bls.gov/news.release/cpi.t02.htm.

[25] Anthony Bellano, Where’d the Gecko Go? Auto Insurance Advertising Sees Dip, Best’s Review (Oct. 2022), available at https://bestsreview.ambest.com/edition/2022/october/index.html#page=82.

[26] Ricardo Lara, Bulletin 2022-10, California Department of Insurance (Aug. 8, 2022), available at https://www.insurance.ca.gov/0250-insurers/0300-insurers/0200-bulletins/bulletin-notices-commiss-opinion/upload/Insurance-Commissioner-Ricardo-Lara-Bulletin-2022-10-Changes-to-Premium-Options-Without-the-Prior-Approval-of-the-Department-of-Insurance.pdf.

[27] Thomas Frank, Calif. Scared Off Its Biggest Insurer. More Could Follow, ClimateWire (May 31, 2023), https://www.eenews.net/articles/calif-scared-off-its-biggest-insurer-more-could-follow.

[28] Gov. Gavin Newsom, Executive Order N-13-23, Executive Department, State of California (Sep. 21, 2023), available at https://www.gov.ca.gov/wp-content/uploads/2023/09/9.21.23-Homeowners-Insurance-EO.pdf.

[29] Id.

[30] Press Release, Commissioner Lara Announces Sustainable Insurance Strategy to Improve State’s Market Conditions for Consumers, California Department of Insurance (Sep. 21, 2023), https://www.insurance.ca.gov/0400-news/0100-press-releases/2023/release051-2023.cfm.

[31] Cal. Ins. Code §1861.137(b)

[32] Prior Approval Rate Filing Instructions, California Department of Insurance (Jun. 5, 2023), available at https://www.insurance.ca.gov/0250-insurers/0800-rate-filings/0200-prior-approval-factors/upload/PriorAppRateFilingInstr_Ed06-05-2023.pdf.

[33] Karl Borch, Capital Markets and the Supervision of Insurance Companies, 31 Journal of Risk and Insurance 397 (Sep. 1974).

[34] Dwight M. Jaffee & Thomas Russell, The Regulation of Automobile Insurance in California, in J.D. Cummins (ed.), Deregulating Property-Liability Insurance: Restoring Competition and Increasing Market Efficiency, American Enterprise Institute-Brookings Institution Joint Center for Regulatory Studies (2001).

[35] Id.

[36] Katherine Chiglinsky & Elaine Chen, Many Californians Being Left Without Homeowners Insurance Due to Wildfire Risk, Insurance Journal (Dec. 4, 2020), https://www.insurancejournal.com/news/west/2020/12/04/592788.htm.

[37] Leslie Scism, State Farm Halts Home-Insurance Sales in California, Wall Street Journal (May 26, 2023), https://www.wsj.com/articles/state-farm-halts-home-insurance-sales-in-california-5748c771.

[38] Ryan Mac, Allstate Is No Longer Offering New Policies in California, The New York Times (Jun. 4, 2023), https://www.nytimes.com/2023/06/04/business/allstate-insurance-california.html.

[39] Sam Dean, Farmers, California’s Second-Largest Insurer, Limits New Home Insurance Policies, Los Angeles Times (Jul. 11, 2023), https://www.latimes.com/business/story/2023-07-11/farmers-californias-second-largest-insurer-limits-new-home-insurance-policies.

[40] Rex Frazier, California’s Ban on Climate-Informed Models for Wildfire Insurance Premiums, Ecology Law Quarterly (Oct. 19, 2021), https://www.ecologylawquarterly.org/currents/californias-ban-on-climate-informed-models-for-wildfire-insurance-premiums.

[41] Median Home Price by State, World Population Review, https://worldpopulationreview.com/state-rankings/median-home-price-by-state (last updated May 2022).

[42] Dwelling Fire, Homeowners Owner-Occupied, and Homeowners Tenant and Condominium/Cooperative Unit Owner’s Insurance Report: Data for 2020, National Association of Insurance Commissioners (2022), available at https://content.naic.org/sites/default/files/publication-hmr-zu-homeowners-report.pdf.

[43] Cal. Code Regs. Tit. 10, § 2644.5.

[44] Xu et al., supra note 15.

[45] Robert Zolla & Melanie McFaul, Wildfire Catastrophe Models and Their Use in California for Ratemaking, Milliman (Jul. 21, 2023),

[46] Glenn Pomeroy, Use of Catastrophe Models by California Earthquake Authority, California Earthquake Authority (Dec. 17, 2017), available at https://ains.assembly.ca.gov/sites/ains.assembly.ca.gov/files/CEA%20Use%20of%20Catastrophe%20Models%20-%20GP%20Statement.pdf.

[47] Press Release, Commissioner Lara Announces New Regulations to Improve Wildfire Safety and Drive Down Cost of Insurance, California Department of Insurance (Feb. 25, 2022), https://www.insurance.ca.gov/0400-news/0100-press-releases/2022/release019-2022.cfm.

[48] Invitation to Workshop Examining Catastrophe Modeling and Insurance, California Department of Insurance (Jun. 7, 2023), available at https://www.insurance.ca.gov/0250-insurers/0500-legal-info/0300-workshop-insurers/upload/California-Department-of-Insurance-Invitation-to-Workshop-Examining-Catastrophe-Modeling-and-Insurance.pdf.

[49] Cal. Ins. Code §623.

[50] Guy Carpenter U.S. Property Catastrophe Rate-On-Line Index, Artemis, https://www.artemis.bm/us-property-cat-rate-on-line-index (last accessed Aug. 8, 2023).

[51] R.J. Lehmann, Even California Leaders Fail to Grasp Climate Change, San Francisco Chronicle (Jan. 10, 2018), https://medium.com/@sfchronicle/even-california-leaders-fail-to-grasp-climate-change-b960d7038fc7.

[52] FACT SHEET: Insurance Policy Count Data 2015-2021, California Department of Insurance (Dec. 2022), available at https://www.insurance.ca.gov/01-consumers/200-wrr/upload/CDI-Fact-Sheet-Residential-Insurance-Market-Policy-Count-Data-December-2022.pdf.

[53] Jeff Lazerson, FAIR Plan Seeks Nearly 50% Premium Hike from California Department of Insurance, Orange County Register (May 19, 2023), https://www.ocregister.com/2023/05/19/fair-plan-seeks-nearly-50-premium-hike-from-california-department-of-insurance.

[54] Proposition 103 Enforcement Project v. Charles Quackenbush, 64 Cal. App.4th 1473 (Cal. Ct. App. 1998), 76 Cal. Rptr. 2d 342.

[55] Clint Proctor, Do Insurance Companies Use Credit Data?, MyFICO (Oct. 21, 2020), https://www.myfico.com/credit-education/blog/insurance-and-credit-scores.

[56] Deanna Dewberry, Got a Bad Credit Score? You Pay Much More for Car Insurance in New York, News10 NBC (Apr. 27, 2023), https://www.whec.com/top-news/consumer-alert-got-a-bad-credit-score-you-pay-much-more-for-car-insurance-in-new-york.

[57] Credit-Based Insurance Scores: Impacts on Consumers of Automobile Insurance, Federal Trade Commission (Jul. 2007), available at https://www.ftc.gov/sites/default/files/documents/reports/credit-based-insurance-scores-impacts-consumers-automobile-insurance-report-congress-federal-trade/p044804facta_report_credit-based_insurance_scores.pdf.

[58] Daniel Robinson, What Is Telematics Insurance?, MarketWatch (Aug. 4, 2023), https://www.marketwatch.com/guides/insurance-services/telematics-insurance.

[59] 10 CCR § 2632.5.

[60] 10 CCR § 2632.5(c)(2).F.5.B.

[61] 10 CCR § 2632.5(d)(15-16)

[62] Jason E. Bordoff & Pascal J. Noel, Pay-As-You Drive Auto Insurance; A Simple Way to Reduce Driving-Related Harms and Increase Equity, Brookings Institution (Jul. 25, 2008), https://www.brookings.edu/articles/pay-as-you-drive-auto-insurance-a-simple-way-to-reduce-driving-related-harms-and-increase-equity.

[63] Jason E. Bordoff & Pascal J. Noel, The Impact of Pay-As-You-Drive Auto Insurance in California, Brookings Institution (Jul. 31, 2008), https://www.brookings.edu/articles/the-impact-of-pay-as-you-drive-auto-insurance-in-california.

[64] Edwin Lombard III, Telematics: A Tool to Curb Auto Insurance Discrimination, Capitol Weekly (Feb. 18, 2020), https://capitolweekly.net/telematics-a-tool-to-curb-auto-insurance-discrimination.

[65] Id.

[66] Insurance Commissioner (State Executive Office), Ballotpedia, https://ballotpedia.org/Insurance_Commissioner_(state_executive_office) (last accessed Aug. 16, 2023).

[67] State Farm General Insurance Company v. Lara et al. (2021) 286 Cal. Rptr. 3d 124.

[68] Jeff Daniels, Becerra, Incumbent California Attorney General and Legal Thorn to Trump, to Face GOP Challenger Bailey in Fall General Election, CNBC (Jun. 6, 2018), https://www.cnbc.com/2018/06/06/becerra-california-attorney-general-to-face-gop-rival-bailey-in-fall.html.

[69] Harvey Rosenfield, Allstate’s $16M Homeowners Rate Hike Approved Despite Company Secretly Ending Sales of New Home Insurance in California, Consumer Watchdog (Jun. 13, 2023), https://consumerwatchdog.org/insurance/allstates-16m-homeowners-rate-hike-approved-despite-company-secretly-ending-sales-of-new-home-insurance-in-california.

[70] CIC Section 1861.05.

[71] CIC 1861.065(d).

[72] SERFF WAWA-133081408.

[73] Press Release, Auto Club to Acquire rhe U.S. Subsidiary of Wawanesa Mutual, Wawanesa Mutual (Aug. 1, 2023), https://www.wawanesa.com/canada/news/auto-club-acquires-wawanesa-general.

[74] The median delay for homeowners rate filings in California is 198 days. For auto insurance rate filings, it is 185.5 days.

[75] Data are drawn from Informational Report on the CDI Intervenor Program, California Department of Insurance, available at  https://www.insurance.ca.gov/01-consumers/150-other-prog/01-intervenor/report-on-intervenor-program.cfm (last accessed Aug. 15, 2023).

[76] Data from Florida are not available for this measure; therefore, California ranks 50th out of 50 jurisdictions.

[77] Sangmin S. Oh, Ishita Sen, & Ana-Maria Tenekedjieva, Pricing of Climate Risk Insurance: Regulation and Cross-Subsidies, SSRN (Dec. 22, 2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3762235.

[78] Id. at 1.

[79] N.J. Admin. Code § 11:3 app A, available at https://casetext.com/regulation/new-jersey-administrative-code/title-11-insurance/chapter-3-automobile-insurance/subchapter-33-appeals-from-denial-of-automobile-insurance/appendix-a.

[80] High Court Upholds N.J. Surcharges on Insurers, A.M. Best Co. (Mar. 19, 1996).

[81] Anthony Gnoffo Jr., NJ, Insurers Near Deal to Close State Fund Gap, The Journal of Commerce (1994).

[82] Sharon L. Tennyson, Efficiency Consequences of Rate Regulation in Insurance Markets, Networks Financial Institute, Policy Brief No. 2007-PB-03 (March 2007), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=985578.

[83] Martin F. Grace, Robert W. Klein, & Richard W. Phillips, Auto Insurance Reform: The South Carolina Story, Georgia State University Center for Risk Management and Insurance Research (Jan. 15, 2001), available at https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&doi=bae61c3c10a95b535a11c83094abea0be16fa05a.

[84] Tennyson, supra note 10.

[85] Residual Market Size Relative to Total Market, Automobile Insurance Plan Service Office (2022), available at https://www.aipso.com/Portals/0/IndustryData/Residual%20Market%20Size%20Relative%20To%20Total%20Market_BD040_2021.xlsx?ver=2022-08-11-133511-543.

[86]  Jim Kinney, Massachusetts Auto Insurance Deregulation Brought Variety, Lower Prices, National Association of Insurance Commissioners Says, The Republican (Jan. 18, 2012), https://www.masslive.com/business-news/2012/01/massachusetts_auto_insurance_deregulatio.html.

[87] AIPSO, supra note 13.

[88] Nigel Jaquiss, Oregon Lawmakers Will Try Again to Bring Insurers Under the State’s Unlawful Trade Practices Act, Willamette Week (Mar. 1, 2023), https://www.wweek.com/news/2023/03/01/oregon-lawmakers-will-try-again-to-bring-insurers-under-the-states-unlawful-trade-practices-act.

[89] Motor Vehicle Insurance Fairness Act, H.B. 2203, Illinois 103rd General Assembly.

[90] Id.

[91] Jon S. Hanson, The Interplay of the Regimes of Antitrust, Competition, and State Insurance Regulation on the Business of Insurance, 4 Drake LR 767 (1978-1979), available at https://lawreviewdrake.files.wordpress.com/2016/09/hanson1.pdf.

[92] J. Robert Hunter & Douglass Heller, Auto Insurance Regulation What Works 2019: How States Could Save Consumers $60 Billion a Year, Consumer Federation of America (Feb. 11, 2019), available at https://consumerfed.org/wp-content/uploads/2019/02/auto-insurance-regulation-what-works-2019.pdf

[93] David Appel, Revisiting the Lingering Myths About Proposition 103: A Follow-Up Report, Milliman Inc. (Sep. 2004), available at https://www.namic.org/pdf/040921appelfinalrpt.pdf; David Appel, Analysis of the Consumer Federation of America Report ‘Why Not the Best’, Milliman Inc. (Dec. 2001), available at https://www.namic.org/pdf/01PolPaperAppelCFA.pdf; David Appel, Comment on Chapter 5 in Deregulating Property Liability Insurance, J. David Cummins (ed.), Brookings Institution Press (Oct. 2011), available at https://www.aei.org/wp?content/uploads/2011/10/deregulating property liability insurance.pdf.

[94] Dwight M. Jaffee & Thomas Russell, Regulation of Automobile Insurance in California in Deregulating Property Liability Insurance, J. David Cummins (ed.), Brookings Institution Press (Oct. 2011), available at https://www.aei.org/wp?content/uploads/2011/10/deregulating_property_liability_insurance.pdf;

  1. Robert Hunter, Tom Feltner, & Douglas Heller, What Works: A Review of Auto Insurance Rate Regulation in America and How Best Practices Save Billions of Dollars Consumer Federation of America (Nov. 2013), available at http://consumerfed.org/wp-content/uploads/2010/08/whatworks-report_nov2013_hunter-feltner-heller.pdf; see also Hunter & Heller, supra note 92.

[95] Consumer Watchdog, supra note 11.

[96] Informational Report on the CDI Intervenor Program, California Department of Insurance, https://www.insurance.ca.gov/01-consumers/150-other-prog/01-intervenor/report-on-intervenor-program.cfm (last accessed Aug. 16, 2023)

[97] About the FCHLPM, Florida Commission on Hurricane Loss Projection Methodology, https://fchlpm.sbafla.com/about-the-fchlpm (last accessed Aug. 9, 2023).

[98] A.B. 2167, California Legislature 2019-2020 Regular Session.

[99] Evan Low & Autumn Burke, Modernize the Way We Price Auto Insurance – Telematics Is a Sensible Approach, CalMatters (Aug. 19, 2020), https://calmatters.org/commentary/2020/08/modernize-the-way-we-price-auto-insurance-telematics-is-a-sensible-approach.

[100] Consumer Federation of America, supra note 12.

FTC Chair Lina Khan’s Mission to Destroy Amazon Will Harm Millions of Consumers

The Federal Trade Commission and 17 states have filed a high-profile antitrust lawsuit against Amazon that could force major changes to the popular Amazon Prime . . .

The Federal Trade Commission and 17 states have filed a high-profile antitrust lawsuit against Amazon that could force major changes to the popular Amazon Prime service — which would be bad news for its 167 million American members.

Read the full piece here.

Comments of the International Center for Law and Economics on the FTC & DOJ Draft Merger Guidelines

Executive Summary We appreciate the opportunity to comment on the Draft Merger Guidelines (Draft Guidelines) released by the U.S. Department of Justice (DOJ or Division) . . .

Executive Summary

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

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

Our main recommendations are as follows:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A.      Should Concentration Thresholds Be Lowered?

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

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

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

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

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

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

B.      Empirical Trends in Concentration

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

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

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

1.        National versus local competition

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

These results turn the commonly accepted narrative on its head:

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

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

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

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

3.        It is not clear that industry concentration harms consumers

Economists have been studying the relationship between concentration and various potential indicia of anticompetitive effects—price, markup, profits, rate of return, etc.—for decades. There are, in fact, hundreds of empirical studies addressing this topic. Contrary to some common claims, however, when taken as a whole, this literature is singularly unhelpful in resolving our fundamental ignorance about the functional relationship between structure and performance: “Inter-industry research has taught us much about how markets look… even if it has not shown us exactly how markets work.”[42]

Though some studies have plausibly shown that an increase in concentration in a particular case led to higher prices (although this is true in only a minority share of the relevant literature), assuming the same result from an increase in concentration in other industries or other contexts is simply not justified: “The most plausible competitive or efficiency theory of any particular industry’s structure and business practices is as likely to be idiosyncratic to that industry as the most plausible strategic theory with market power.”[43]

As Chad Syverson recently summarized:

Perhaps the deepest conceptual problem with concentration as a measure of market power is that it is an outcome, not an immutable core determinant of how competitive an industry or market is… ??As a result, concentration is worse than just a noisy barometer of market power. Instead, we cannot even generally know which way the barometer is oriented.[44]

This does not mean that concentration measures have no use in merger enforcement. Instead, it demonstrates that market concentration is often unrelated to antitrust enforcement because it is driven by factors that are endogenous to each industry. Enforcers should be careful to not rely too heavily on structural presumptions based around concentration measures, as these may be poor indicators of the instances in which antitrust enforcement is most beneficial to consumers. The Draft Guidelines move in the opposite direction.

4.        Labor market concentration is falling; Should we decrease antitrust attention?

One way to see potential problems with structural presumptions is to consider labor markets. The best data aggregating labor-market concentration finds either low and/or falling concentration over recent decades at the local level. Studies that use administrative data from the Longitudinal Business Database find that local labor-market concentration has been declining, while national concentration has been increasing, across various definitions of “local.”[45]

Source: Rinz (2022)[46]

This fall in concentration has happened even as firms’ labor-market power appears to be rising—which, again, illustrates the disconnect between concentration and market power. According to one recent study in the American Economic Review, while the average labor-market power of firms appears to have increased nationally, “despite the backdrop of stable national concentration, we… find that [local concentration] has declined over the last 35 years.”[47]

Another study uses microdata from the Occupational Employment and Wage Statistics, mapped to the Quarterly Census of Employment and Wages, which records quarterly employment levels for each establishment in the United States that reports to state-level unemployment insurance departments.[48] They define markets using 6-digit SOC by metropolitan area. They find an average HHI that is relatively stable and low: the employment-weighted level of the employment HHI measure in the private sector is 0.0331.

In short, just as we should not use the low (or falling) average concentration as a reason to decrease HHI thresholds, we should not use high (or rising) average concentration to increase thresholds.

5.        Market structure and innovation.

The problem with the focus on market concentration can be seen clearly when looking at innovation. The draft guidelines rightly put increased innovation as a pro-competitive effect on par with increased output or investment, higher wages or improved working conditions, higher quality, and lower prices.[49]

However, this emphasis on innovation is in tension with the guidelines’ excessive focus on market concentration. How does a market’s structure affect innovation? This crucial question has occupied the world’s brightest economists for almost a century, from Schumpeter (who found that monopoly was optimal)[50] through Arrow (who concluded that competitive market structures were key),[51] to the endogenous-growth scholars (who empirically derived an inverted-U relationship between market concentration and innovation).[52] Despite these pioneering contributions to our understanding of competition and innovation, there is a growing consensus that no specific market structure is strictly superior at generating innovation. Just as the SCP paradigm ultimately faltered—because structural presumptions were a weak predictor of market outcomes[53]—so too have dreams of divining the optimal market structure for innovation.[54] Instead, in any given case, innovation depends on a plethora of sector- and firm-specific characteristics that range from the size and riskiness of innovation-related investments to regulatory compliance costs, the appropriability mechanisms used by firms, and the rate of technological change, among many others.

Despite this complex economic evidence, several antitrust agencies, including the FTC and the European Commission, believe they have cracked the innovation-market-structure conundrum. Throughout several recent decisions and complaints, these and other authorities have concluded that more firms in any given market will produce greater choice and more innovation for consumers. This could be referred to as the “Structuralist Innovation Presumption.”[55] This presumption notably plays an important role in the FTC’s recent case against Facebook, where the agency argues that:

Competition benefits users in some or all of the following ways: additional innovation (such as the development and introduction of new features, functionalities, and business models to attract and retain users); quality improvements (such as improved features, functionalities, integrity measures, and user experiences to attract and retain users); and consumer choice…[56]

Unfortunately, the Structuralist Innovation Presumption is a misguided heuristic that antitrust authorities around the globe would do well to avoid, as it is at odds with the mainstream economics of innovation.[57]

There is a vast empirical literature examining the relationship between market structure and innovation. While a comprehensive survey of the literature is beyond the scope of our comments, the top-level findings clearly suggest that  the relationship between market structure and innovation is not monotonic, and that it depends on several other parameters. For instance, surveying the econometric literature concerning the effect of industry structure on innovation, Richard Gilbert concludes that it is indeterminate:

Table 6.1 summarizes the conclusions from these interindustry studies for the effects of competition and industry structure on innovation. Unfortunately, these studies do not reach a consensus, other than to note that innovation effects can differ dramatically for firms that are at different levels of technological sophistication. Although some studies find a positive relationship between measures of innovation and competition (alternatively, a negative relationship between innovation and industry concentration), others find that the relationship exhibits an inverted-U, with the largest effects at moderate levels of industry concentration or competition, and at least one study reports a negative relationship between competition (measured by Chinese import penetration) and innovation (measured by citation-weighted patents and R&D investment. One consistent finding is that an increase in competition has less of a beneficial effect, and may have a negative effect, on innovation incentives for firms that are far behind the industry technological frontier.[58]

Along similar lines, high-profile studies reach opposite conclusions. For instance, looking at the semiconductor industry, Ronald Goettler and Brett Gordon find that concentrated market structures lead to higher innovation:

The rate of innovation in product quality would be 4.2 percent higher without AMD present, though higher prices would reduce consumer surplus by $12 billion per year. Comparative statics illustrate the role of product durability and provide implications of the model for other industries.[59]

Mitsuru Igami reaches the opposite conclusion while studying the hard-disk-drive industry:

The results suggest that despite strong preemptive motives and a substantial cost advantage over entrants, cannibalization makes incumbents reluctant to innovate, which can explain at least 57 percent of the incumbent-entrant innovation gap.[60]

Looking at the hospital industry, Elena Patel & Nathan Seegert find a negative relationship between competition and investment:

In particular, hospitals in concentrated markets increased investment by 5.1 percent ($2.5 million) more than firms in competitive markets in response to tax incentives. Further, firms’ investment responses monotonically increased with market concentration.[61]

Finally, some of the most universally recognized articles in this field stem from the empirical research of Aghion and coauthors.[62] Their work famously found that the relationship between product-market competition and innovation had an inverted-U shape. Stated differently, increased product-market competition is associated with higher innovative output, up to a point of diminishing returns.[63] According to some, this strand of research warrants a policy of greater antitrust enforcement, relying upon patents to generate ex post profits for innovators.[64]

This conclusion appears somewhat misguided, as Aghion et al.’s seminal paper paints a far more nuanced picture. The authors’ main finding is that product-market concentration has an ambiguous effect on innovation—on average.[65] This last qualification is often omitted in policy discussions. As a result, what is true for the economy as a whole does not necessarily hold on a case-by-case basis. Some comparatively concentrated industries may score highly in terms of innovation, while some moderately concentrated ones do not.[66] In other words, there are several endogenous factors that affect how increased product-market competition will influence innovation in a given case. For example, the authors show that greater product-market competition is more likely to have a positive effect on innovation in industries where firms are technologically “neck and neck” before an innovation takes places (as opposed to those industries where “laggard” firms can innovate to overtake incumbents).[67] In the first case, more competition mostly decreases pre-innovation rents, while in the second case it has a larger effect on post-innovation rents (this is because increased competition would have little to no effect on laggard firms’ pre-innovation rents, which are likely to be small). [68]

The upshot is that empirical economics do not paint a clear or consistent picture of the relationship between market structure and innovation. Antitrust authorities and courts should thus avoid the presumption that more concentrated-market structures hinder innovation to the detriment of consumers.

6.        Market structure and investment: lessons from telecom

As the previous section explained, mergers may lead to diverging price and innovation effect—as increased concentration might sometimes (though certainly not always) increase both market power and innovation output. This is not the only area where price and “non-price” effects may cut in opposite directions. Price competition and investments can also be inversely correlated.

Mergers among mobile-wireless providers provide a rich source of information to evaluate these effects. In a recent paper, ICLE scholars reviewed the sizable empirical literature on this topic, with much of the research focused on so-called “4-to-3” mergers that reduce the number of large, national carriers from four firms to three (though some have also persuasively argued that such a characterization may not be accurate).[69]

Of the 18 studies ICLE reviewed, eight analyzed changes in market concentration across multiple jurisdictions between 2000 and 2015, while 10 analyzed specific mergers. ICLE’s paper also reviewed a more recent study that considered the effects of U.S. market concentration in spectrum ownership on measures of quality.

Of the 10 studies that looked at specific mergers, about half found that short-term prices decreased following a merger, whereas half found that short-term prices increased. Even different studies of the same merger found wildly different effects on short-term prices, ranging from significant price decreases to significant price increases. Thus, looking at these price effects alone, the studies are, collectively, inconclusive.

The ICLE paper identified several reasons for these apparently divergent results, including:

  1. a lack of common measures of prices and price effects across studies;
  2. differences in the time period chosen; and
  3. difficulties accounting for variations in geography, demography, and regulatory regimes among jurisdictions (the latter also creates a potential for endogeneity bias).

Of those studies that considered the effect on long-term investment of such mergers, all found that capital expenditures—a proxy for investment and, presumably, long-term dynamic welfare—increased post-merger.

Indeed, several recent studies that looked more broadly at the effects of market concentration in the mobile-telecommunications industry suggest that increased concentration is correlated with increased investment and may therefore be correlated with greater dynamic benefits. These studies indicate that the highest levels of long-term country-wide investment occurred in markets with three facilities-based operators (though total investment was not significantly lower in markets with four facilities-based operators). In addition, a recent analysis found that U.S. markets with higher concentration of spectrum ownership had faster, more reliable cellular service (reflecting an increase in dynamic welfare effects).

Studies of investment also found that markets with three facilities-based operators had significantly higher levels of investment by individual firms. The implication is that, in such markets, individual firms have stronger incentives to make capital investments that enable long-term competition through expanded infrastructure and technological innovation, which affect the range, quality, and quantity of services provided to consumers. Studies also suggest this effect may be strengthened when the merger results in a more symmetrical market structure (i.e., the various facilities-based providers become more equal in market share). It is argued that increases in the number of competitors in asymmetric markets leads to disproportionately lower levels of investment by smaller firms. Thus, a merger between two smaller firms that results in greater market symmetry could result in higher levels of investment by the merged firms relative to the unmerged entities.

The results of ICLE’s review indicate that a merger that involves products or firms that compete along a variety of dimensions, in addition to price, must evaluate the effects of the merger across these dimensions, as well. In addition, relying on past empirical research to evaluate a current merger may overlook economic, technological, or regulatory changes that diminish the reliability of past experience to inform current events. This review of mobile-wireless-provider mergers reveals a number of factors that should be considered when seeking to understand the likely welfare effects of a given merger. These include:

  1. Whether the effects to be evaluated are limited to static price effects or also include qualitative measures, such as capital expenditures and other investment in quality of service, suggesting dynamic innovation effects;
  2. The timeframe over which the effects are evaluated;
  3. The effects on different tiers of service, especially those measured by hypothetical consumption profiles (known as “baskets” in mobile-wireless-provider mergers);
  4. The extent to which the effects of previous mergers may confound projected effects of the merger at hand; and
  5. Whether a transaction occurs during, or even as part of, a transition between different generations of technology (e.g., during an upgrade from 3G to 4G networks).

Further, it is well-known that process and product innovation does not arise solely from new entry; incumbent firms frequently are important sources of innovation, as well as of increased market competitiveness.[70] Dynamic analysis takes entry seriously, but it is much more sensitive to potential entry as a constraint on incumbents than a structuralist view would permit. Thus, for example, an incumbent mobile-wireless provider that offers wide coverage of 4G service must consider the potential capabilities of an existing competitor that currently has only sparse 4G coverage; it must incorporate potential threats from that competitor in its decision matrix when evaluating whether to upgrade its network to 5G in order to retain its customer base. An incumbent’s dominant position can quickly erode thanks to imperfect in-market substitutes, as well as from out-of-market firms that may decide to enter in the future.[71]

When evaluating the merits of a merger, authorities are charged with identifying the effects on the welfare of consumers. Crucially, this analysis must consider not only short-term price effects, but also long-term and dynamic effects, particularly in markets (like mobile telecommunications) in which competition occurs over both price and innovation. Based on the studies that we reviewed, 4-to-3 mergers appear to generate net long-term benefits to consumer welfare in the form of increased investment (presumably—although not conclusively, based on these studies—resulting in increased innovation), while the short-term effects on price are resolutely inconclusive.

II.      Guideline 2: Mergers Should Not Eliminate Substantial Competition Between Firms

While it is reasonable to consolidate the horizontal and vertical merger guidelines into one document, the draft essentially writes away the distinction between them. Footnote 30 suggests that Guideline 2 is about horizontal unilateral effects. If so, the application of the guideline to horizontal mergers specifically should be made explicit. Otherwise, readers are left with the impression that the Draft Guidelines intentionally avoid specificity, perhaps hoping to enhance the agencies’ prosecutorial discretion. That would be problematic, notwithstanding the possibility of line-blurring cases. In brief, a significant body of economic literature and judicial precedent recognizes the competitive importance of the distinction, and requires that the agencies treat horizontal and vertical mergers differently.

As Aviv Nevo and colleagues summarized, the distinction is especially important when thinking about efficiencies and other potential merger benefits:

Applying the same sort of skepticism about efficiencies in a vertical merger as in a horizontal merger can amount to assuming away a portion of the economics that is at the heart of the vertical investigation.

One clear example of this dual nature of vertical theories is the model of linear pricing, which generates a raising rivals’ cost incentive and also generates a potential procompetitive incentive in the form of elimination of double marginalization (“EDM”). Not every merger will present facts that fit this particular model. But, if that model is the basis of an investigation, its full range of implications should be considered.[72]

By rejecting—or implying a rejection of—a general distinction between horizontal and vertical mergers, the Draft Guidelines effectively enact a “horizontalization” of merger enforcement. The following subsection explains the importance of explicitly delineating horizontal and vertical mergers at certain points in the Draft Guidelines.

A.      Horizontal Mergers Are Different Than Vertical Mergers

Antitrust merger enforcement has long relied on a fundamental distinction between horizontal and vertical mergers (or horizontal and vertical theories of harm, to be more precise). Policymakers widely assume the former are more likely to cause problems for consumers than the latter. However, this distinction increasingly has been challenged by some antitrust scholars and enforcers. In recent years, antitrust authorities on both sides of the Atlantic—and several high-profile scholars—have put forward theories of harm that obscure the traditional distinctions among horizontal, vertical, and conglomerate mergers. This is epitomized by an alarmist 2020 article by Cristina Caffarra and co-authors that portrays nearly all tech mergers as horizontal, based on the supposition that, but for the acquisition, one of the merging firms likely would launch its own competing vertical product..[73] But the claim seems manifestly implausible, and the paper offers no evidence on its behalf. Of course, in a given case, under specific facts and circumstances, a large, diversified tech firm might consider or achieve entry into a vertical market. But a possibility under some facts and circumstances is a far cry from a general likelihood. The implication of this (and other) research is that mergers between firms that are either vertically related or active in unrelated markets routinely or typically have significant horizontal effects.[74] This can be the case, either when merging firms are potential competitors or when they compete in innovation markets (i.e., they have overlapping R&D pipelines, or may have them in the future).[75]

These concerns are compounded in the digital economy, where ostensibly non-competing firms may become competitors on one side of their platforms. For instance, it has been argued that Giphy, which offers a library of gif files, may ultimately compete with Facebook in ad markets.[76] Similarly, it has been claimed that Google’s acquisition of Fitbit—a producer of wearable health-monitoring devices—raises horizontal theories of harm, because Google would otherwise have developed its own wearable devices.[77] Such hypotheticals are sometimes deemed to be “reverse killer acquisitions,” on grounds that acquiring a rival enables the incumbent to not produce a good itself. Endorsing this approach to merger review wholeheartedly would have profound policy ramifications. Indeed, should authorities assume the counterfactual to a merger is that the acquirer will compete with the target directly, then every merger effectively becomes a horizontal one.

The influence of this research can be seen in the FTC’s loss in blocking Meta’s acquisition of Within Unlimited and the ongoing case against Meta, which centers on the company’s acquisitions of WhatsApp and Instagram.[78] For the Within case, the FTC wanted to turn a vertical merger (software and hardware) into a horizontal merger between potential competitors. The court was unwilling to accept the claim that, if the Within deal were blocked, Meta would likely develop its own VR fitness app to compete against Supernatural. Meta had no such product poised to enter the market, or even in late-stage development. The contingent probability of timely, competitively significant entry—inherent in a potential competition case—was simply too small or speculative to conclude that Meta was a potential competitor, and was further undermined by internal emails suggesting that they should partner with Peloton—an idea that got so little traction that they never even ran it past Peloton.

At the time of the WhatsApp and Instagram acquisitions, competition authorities around the world tended to analyze them (and the potential theories of harm they might give rise to) primarily as vertical. For instance, looking at Facebook’s purchase of WhatsApp, the European Commission concluded that “while consumer communications apps like Facebook Messenger and WhatsApp offer certain elements which are typical of a social networking service, in particular sharing of messages and photos, there are important differences between WhatsApp and social network services.” This suggested the merging firms were likely active in separate markets.[79] The FTC’s clearance of that deal suggests that the agency largely adhered to the view that the merging entities were not close competitors.[80] Similarly, when the UK CMA reviewed Facebook’s acquisition of Instagram, it concluded that the two firms exercised only weak competitive constraints on each other:

To conclude, there are several relatively strong competitors to Instagram in the supply of camera and photo editing apps, and those competitors appear at present to be a stronger constraint on Instagram than Facebook’s new app.[81]

Reevaluating these deals almost a decade later, the FTC reached a diametrically opposite conclusion. In its Facebook complaint, the agency concluded that:

Failing to compete on business talent, Facebook developed a plan to maintain its dominant position by acquiring companies that could emerge as or aid competitive threats. By buying up these companies, Facebook eliminated the possibility that rivals might harness the power of the mobile internet to challenge Facebook’s dominance….

…As Instagram soared, Facebook’s leaders began to focus on the prospect of acquiring Instagram rather than competing with it….

…In sum, Facebook’s acquisition and control of WhatsApp represents the neutralization of a significant threat to Facebook Blue’s personal social networking monopoly, and the unlawful maintenance of that monopoly by means other than competition on the merits.[82]

While this change of heart could be characterized as the agency updating its position in light of new evidence concerning the nature of competition between the merging firms, there is also a clear sense that times have changed. Indeed, both antitrust agencies and scholars appear more willing to assume (i) that firms could become competitors absent a merger, and (ii) that mergers between them are likely to reflect efforts by the acquirer to anticompetitively maintain its market position. We address both these claims in the subsequent sections.

The most important difference between a horizontal merger and a vertical merger is the merging parties’ relationships with each other. A horizontal merger is between firms that compete in the same product and geographic market. A vertical merger is between firms with an upstream-downstream (e.g., seller-buyer) relationship. These distinctions are well-known and widely accepted. There has been no economic trend that would justify a redefinition of these distinctions.

Drawing on an example provided by Steve Salop, consider a hypothetical orange-juice market with firms that manufacture and engage in the wholesale distribution of orange juice, as well as firms that own the orchards that supply the oranges to be juiced.[83] A merger between manufacturer/wholesalers would be a horizontal merger; a manufacturer/wholesaler’s purchase of a firm owning orchards would be a vertical merger.

A horizontal merger removes a competing firm from the market and thereby eliminates substitute products or firms that produce the products.[84],[85] By definition, horizontal mergers reduce competition, but the attendant harm to consumers may be large, small, or infra-marginal, depending on the facts and circumstances of a given merger; and any consumer harms may be offset by benefits, such as economies of scale and other efficiencies.[86]

In contrast, in most cases, a vertical merger does not eliminate a competing firm from the market and does not involve substitutes.[87] In fact, vertical mergers typically involve complements, such as a product plus distribution or a critical input to a complex device.[88] In Salop’s orange-juice hypothetical, the manufacturer juices oranges, cans the juice, and operates a wholesaling operation to sell the canned juice to retailers. In this example, the wholesaling operations is a complement to the manufacturing process.

Although not necessarily “by definition,” in most cases, vertical mergers are undertaken to achieve efficiencies and reduce costs. For example, through the elimination of double marginalization and the resulting downward pressure on prices, vertical mergers present a stronger likelihood of improving competition than horizontal mergers.[89]

In a statement during the 2018 FTC hearings, FTC Commissioner Christine Wilson concluded that “we know that competitive harm is less likely to occur in a vertical merger than in a horizontal one,” and echoed some of Hoffman’s points:[90]

[I]n contrast to horizontal guidelines, the economics in vertical mergers indicate efficiencies are much more likely. Professor Shapiro went so far as to call them “inherently” likely at our hearing. Given this dynamic, it may be appropriate to presume that certain vertical efficiencies are verifiable and substantial in the absence of strong evidence to the contrary, even if we would not do so in a horizontal merger case.[91]

The economics of horizontal mergers comprises a long, well-established literature of theoretical models and empirical research. In contrast, there are fewer quantitative theoretical models that can be used to predict outcomes in vertical mergers. Moreover, those models that do exist have a far shorter track record than those used to assess horizontal mergers.[92]

Naturally, the real world is much more complicated. For example, Salop points out that some mergers involve firms that are already vertically integrated prior to the merger.[93] In these cases, the merger would involve both vertical and horizontal elements. Such mergers may lead to horizontal and vertical efficiencies that reinforce each other. They also may lead to horizontal and vertical harms that reinforce each other. Or they may lead to mix of horizontal and vertical efficiencies and harms that counteract each other. That may explain why empirical research on vertical mergers, discussed below, can yield sometimes wildly different results—even when using seemingly similar sets of data.

To be sure, there are no economic trends that would lead one to revisit the distinction between horizontal and vertical mergers. Nevertheless, there have been advances in economic theory that have led some to conclude that vertical mergers may not be as beneficial as once thought or that they may lead to anticompetitive consumer harm.

Some critics of the current state of vertical-merger enforcement assert a vertical merger can effectively become a horizontal merger—or have horizontal effects. If that is the case, then it is argued that vertical mergers should be evaluated in the same way as horizontal mergers. According to Salop, “[f]or the type of markets that are normally analyzed in antitrust, the competitive harms from vertical mergers are just as intrinsic as are harms from horizontal mergers.”[94] Thus, a vertically integrated firm faces an “intrinsic incentive[95] to foreclose downstream competition “by raising the input price it charges to the rivals of its downstream merger partner” in the same way that horizontal firms face “inherent upward pricing pressure from horizontal mergers in differentiated products markets, even without coordination.”[96]

In an implicit acknowledgement of the distinction between horizontal and vertical mergers, Salop describes the competition between an upstream firm and a downstream partner as indirect: “the upstream merging firm that supplies a downstream firm is inherently an ‘indirect competitor’ of the future downstream merging firm. That indirect competition is eliminated by merger. This unilateral effect is exactly parallel to the unilateral effect from a horizontal merger.”[97]

But the two are not “exactly parallel,” of course, because indirect competition is different from direct competition—Salop himself make the distinction. Even in Salop’s telling, the mechanism by which his vertical-leads-to-horizontal theory operates requires that (1) the upstream firm has market power and (2) post-merger, the merged firm forecloses supply or raises costs to the downstream firm’s horizontal rivals. While this is possible, it is not a necessary consequence of the transaction; and the risk of competitive harm, at the very least, must be a function of both the likelihood and degree of foreclosure. The presence of downstream horizontal competitors operates as an immediate and present constraint on the vertically integrated merged firm.

It may be helpful to explain using Salop’s orange-juice hypothetical:

Company A is a manufacturer and wholesale supplier of orange juice to retailers. It seeks to acquire Company B, an owner of orange orchards.… The merged firm may find it profitable to raise the price or cease supplying oranges to one or more rival orange juice suppliers.… This input foreclosure may lessen competition in the wholesale orange juice market, for example, by raising the price or reducing the quality of some or all types of orange juice.[98]

This is an excellent example because it highlights how complex even a straightforward hypothetical of raising rivals’ costs can get. Under the standard formulation, the vertically integrated firm would produce oranges at the orchard’s marginal cost—in theory, the price it pays for oranges would be the same both pre- and post-merger. Under this theory, if the vertically integrated orchard does not sell its oranges to the non-integrated manufacturer/wholesalers, then the other non-vertically integrated orchards will be able to charge a price greater than their marginal cost of production and greater than the pre-merger market price for oranges. The higher price of oranges used by non-integrated manufacturer/wholesalers will then be reflected in higher prices for orange juice sold by the manufacturer/wholesalers.

The merged firm’s juice prices will be higher post-merger because its unintegrated rivals’ juice prices will be higher, thus increasing the merged firm’s profits. The merged firm and unintegrated orchards would be the “winners;” unintegrated manufacturer/wholesalers and consumers would be the “losers.” Under a consumer welfare standard, the result could be deemed anticompetitive. Under a total welfare standard, anything goes.

But this classic example of raising rivals’ costs is based on some strong assumptions. It assumes that, pre-merger, all upstream firms price at marginal cost, which means there is no double marginalization. It assumes all the upstream firm’s products are perfectly identical. It assumes unintegrated firms do not respond by integrating themselves. If one or more of these assumptions is not correct, more complex models—with additional (potentially unprovable) assumptions—must be employed. What begins as a seemingly straightforward theoretical example is now a model-selection problem: which economic models best fit the facts and best predict the likely outcome.

In Salop’s example, it is assumed the merged firm would raise the price or refuse to sell oranges to rival downstream wholesalers. However, if rival orchards charge a sufficiently high price, the merged firm would profit from undercutting its rivals’ orange prices, while still charging a price greater than its own marginal cost. Thus, it is not obvious that the merged firm has an incentive to cut off supply to downstream competitors or charge a higher price. The extent of the pricing pressure on the merged firm to cheat on itself is an empirical matter that depends on how upstream and downstream firms will or might react. Depending on how other manufacturer/wholesalers and orchard firms react, the merged firm’s attempt at foreclosure may have no effect and there would be no harm to competition.

The hypothetical also assumes that commercial juicing is the only use for oranges and that juice oranges are the only thing that can be produced by citrus groves. It is possible that, rather than raising prices or foreclosing competitors, the merged firm would divert some or all of its juice oranges to a “secondary” market, such as the retail market for those who juice at home. They also could convert groves used to grow juice oranges to the production of strains of oranges and other citrus fruits that are sold as fresh produce. Indeed, fresh citrus fruits currently account for 10% of Florida’s crop and 75% of California’s.[99] This diversion would lead to a decline in the supply of juice oranges and the price of this key input would rise.

This strategy would raise the merged firm’s costs along with its rivals. Moreover, rival orchards can respond to this strategy by diverting their own groves from the production of fresh produce citrus to the juice market, in which case there may be no significant effect on the price of juice oranges. What begins as a seemingly straightforward theoretical example is now a complicated empirical matter and raises the antitrust question of whether selling into a “secondary” market constitutes anticompetitive conduct.

Moreover, the merged firm may have legitimate business reasons for the merger and legitimate business reasons for reducing the supply of oranges to juice wholesalers. For example, “citrus greening,” an incurable bacterial disease, has caused severe damage to Florida’s citrus industry, significantly reducing crop yields.[100] A vertical merger could be one way to reduce supply risks. On the demand side, an increase in the demand for fresh oranges would guide firms to shift from juice and processed markets to the fresh market. What some would see as anticompetitive conduct, others would see as a natural and expected response to price signals.

Furthermore, it is not actually the case that the incentive to foreclose downstream rivals is “intrinsic,” nor is it the case that the effect is necessarily deleterious. In fact, as we discuss below, even when foreclosure can be shown, empirical evidence indicates that the consumer benefits from efficiencies tend to be greater than the harms from foreclosure.

A key difference between horizontal and vertical mergers is that any efficiency gains from a horizontal merger are not automatic and must be established. On the other hand, the realization of certain vertical-merger efficiencies, at least from the elimination of double marginalization, is automatic.[101] And, of course, additional merger benefits may be established for any given vertical merger.

The logic is simple: Potentially welfare-reducing vertical mergers are those that involve an upstream firm with market power. Thus, pre-merger, all downstream firms bear presumptively higher input costs. To realize their own profits, they must increase final-product prices to consumers by even more.[102] But after the merger, the merged downstream entity no longer pays the markup. As a result, it “enjoys lower input costs and thus increases its output, thereby increasing welfare.”[103] At the same time, of course, non-merged downstream firms bear a higher input price, and it is an empirical question whether the net consumer welfare effect will be positive or negative. But it is never a question that the two effects operate simultaneously, and that the reduction of double marginalization necessarily occurs. Indeed, it is most likely to arise and to lead to net consumer-welfare benefits precisely where there is the greatest potential for anticompetitive price increases to downstream rivals.[104]

All else being equal, the effect of removing a horizontal competitor by merger is automatic: less competition. That isn’t necessarily bad. It may be offset, and it may also enable innovation, more competition, or other results that benefit consumers. But in the first instance, former head-to-head competitors that merge are no longer competing. With vertical mergers, however, the effect is not to automatically reduce competition (indirect, potential, or otherwise). A vertically integrated firm might (or might not) choose to hurt unaffiliated downstream competitors by more than it benefits its integrated downstream firm—that might (or might not) be feasible and advantageous–but nothing is automatic. Assessing the competitive effect of such a merger necessarily means incorporating an added layer of uncertainty, complexity, and distance between cause and effect. In the absence of a few particular, tenuous, and stylized circumstances, “[i]n this model, vertical integration is unambiguously good for consumers.”[105]

In response, proponents of invigorated vertical-merger enforcement argue, in part, that:

[T]he claim that vertical mergers are inherently unlikely to raise horizontal concerns fails to recognize that all theories of harm from vertical mergers posit a horizontal interaction that is the ultimate source of harm. Vertical mergers create an inherent exclusionary incentive as well as the potential for coordinated effects similar to those that occur in horizontal mergers.[106]

But this fails to resolve anything. Moreover, the “analogy with horizontal mergers is misleading.”[107] It is uncontroversial (and far from “[un]recognized”) that “all theories of harm from vertical mergers posit a horizontal interaction that is the ultimate source of harm.”[108] All this says is that there could be harm of the sort that horizontal mergers might cause. But it does not acknowledge that the likelihood and extent of that harm are different in the vertical and horizontal contexts. Moreover, it does not note that the mechanism by which harm might arise is different and more complex in the vertical case. All in all, the probability of that outcome is lower in the case of a vertical merger, where it is dependent on an additional step that may or may not arrive and that may or may not cause harm.

III.    Guideline 4: Mergers Should Not Eliminate a Potential Entrant in a Concentrated Market

The wording of the guideline should be changed to reflect the fact that we are dealing with probabilities, as the body of the guideline makes clear. “Mergers should not eliminate a potential entrant with probable future entry in a concentrated market” would more closely match the body of the guideline.

The distinction between 4.A and 4.B should be eliminated. The only way for a potential entrant to exert competitive pressure is if the current competitors perceive the potential entrant to be a threat. Are the agencies claiming otherwise? Are there firms that no current competitors think about yet somehow still exert competitive pressure on the market? If the agencies mean as much, it should be explicit.

One difficulty with treating all potential competitors like actual competitors is that it assumes that all vertically related (or even non-related) firms could eventually threaten the acquiring incumbent. In other words, potential competition from a particular firm is probabilistic, with the likelihood varying according to the facts and circumstances of the individual case. This forces agencies to make complex assessments regarding the potential future evolution of competition. Beyond the scale that “for mergers involving one or more potential entrants, the higher the market concentration, the lower the probability of entry that gives rise to concern,” the guidelines do not offer guidance about how the relevant probabilities will be assessed.

A.      Potential Competition Is Inherently Probabilistic

The uncertainty involved in any merger involving a potential competitor has important ramifications for policymaking. Anticompetitive mergers are, by definition, possible (under the above theories) only when the acquired rival could effectively challenge the incumbent.[109] But these are, of course, only potential challengers; there is no guarantee that any one of them could or would mount a viable competitive threat.[110]

A first important consequence is that, while potential competitors are important constraints on existing markets, they do not generally offer the same degree of constraint as actual competitors.[111] As such, any analysis of a merger involving a potential competitor would have to assess and incorporate the probability of competition.[112] High-quality analysis of the effects of potential competition are few and far between but, according to at least one literature review, a potential competitor may have between one-eighth to one-third the effect on competition as an actual competitor. [113] Likelihoods may vary by industry, product category, and the specific facts and circumstances of the product market and firms at issue. The strength of this competitive constraint also depends on the firms’ perceptions: If both the incumbent and the rival heavily discount the probability of entry, then potential competition is unlikely to affect their behavior.[114]

This leads to a second important issue. Because the loss of a potential competitor will, in expectation, lead to less harm than that of an actual competitor, it is crucial that agencies tailor their responses accordingly. While the traditional remedies for anticompetitive horizontal mergers include divestments or outright prohibition, these remedies may no longer be appropriate in the face of potential competition theories of harm (although such remedies might sometimes remain necessary to fully remove potential anticompetitive harm). Decisionmakers should look at mergers from a cost/benefit standpoint, which, in turn, counsels weighing anticompetitive harms against procompetitive benefits. Because one would expect anticompetitive harms in potential-competition cases to be only a fraction of those in actual-competition cases, there is—all else being equal—a higher likelihood in the former that efficiencies will outweigh harms.

It is not clear how this can be addressed in terms of remedies: neither divestures nor prohibitions can realistically be made probabilistic or conditioned on future market outcomes, as firms could easily game this. At the very least, this probably means judges should set a high evidentiary bar for claims that a merger will reduce potential competition, and agencies should, at the margin, focus more heavily on traditional theories that involve more tangible risks of consumer harm.

This restrained approach to enforcement is—perhaps surprisingly, given the agency’s generally interventionist track record in digital markets—encapsulated by the European Commission’s stance in the Google /Fitbit merger, which many sought to frame as a potential competition case. Instead, the commission found that:

As regards Fitbit’s ability to compete in innovation with regard to smartwatches, the Commission notes that [Fitbit’s product strategy], there are also no competitive relationships that would lead to the Transaction reducing Google’s incentives to innovate in the future. Based on the Notifying Party’s submission, the Commission considers that there is no possible market assessed in this Decision where Fitbit is the only or main source of pressure on Google to innovate. For these reasons, the Commission considers that the Transaction would not unduly restrict competition in… innovation as regards the supply of smartwatches. This issue will, therefore, not be further discussed in this Decision.[115]

Review of mergers that involve potential competitors require agencies to make speculative assessments as to how competition will likely play out in a given market. Absent the ability to condition remedies on these future evolutions, error-cost considerations will often dictate that authorities clear mergers, despite a limited risk of future competitive harm.[116] Failing this, agencies and courts should, at the very least, set a high evidentiary bar for plaintiffs to bring forward such claims, or else numerous mergers will wrongly be prohibited as anticompetitive, to the detriment of consumers.

B.      Buying Up Every Potential Competitor Is Unlikely to Be a Successful Business Strategy

One cannot simply assume that mergers involving potential competitors are harmful. It is becoming a common theory of harm regarding non-horizontal acquisitions that they are, in fact, horizontal acquisitions in disguise. This is a form of the “horizontalization” discussed above. The acquired party may not be a direct competitor today but may become one in the future. Therefore, the theory goes, to reduce the competitive pressure they would otherwise face in the future, the incumbent will acquire a company that does not appear to be a competitor.

This argument to strengthen enforcement against mergers involving potential competitors is intuitive but it involves restrictive assumptions that weaken its applicability. The argument is laid out most completely by Steven Salop in his paper, Potential Competition and Antitrust Analysis: Monopoly Profits Exceed Duopoly Profits.[117] In it, he argues that:

Acquisitions of potential or nascent competitors by a dominant firm raise inherent anticompetitive concerns. By eliminating the procompetitive impact of the entry, an acquisition can allow the dominant firm to continue to exercise monopoly power and earn monopoly profits. The dominant firm also can neutralize the potential innovation competition that the entrant would provide.

Under the model that Salop puts forward, there should, in fact, be a presumption against any acquisition, since any firm is a potential competitor with a sufficiently small probability.[118] Given that a model like Salop’s animates lots of skepticism toward mergers with potential entrants, it is important to examine the model’s assumptions, including that, because monopoly profits exceed duopoly profits, incumbents have an incentive to eliminate potential competition for anticompetitive reasons.

The notion that monopoly profits exceed joint duopoly profits rests upon two restrictive assumptions that hinder the simple application of Salop’s model to antitrust in general and to the merger guidelines, in particular.

First, even in a simple model, it is not always true that monopolists have both the ability and incentive to eliminate any potential entrant simply because monopoly profits exceed duopoly profits. For the simplest complication, suppose there are two possible entrants, rather than the common assumption of just one entrant at a time. The monopolist must now pay each of the entrants enough to prevent entry. But how much? If the incumbent has already paid one potential entrant not to enter, the second could then enter the market as a duopolist, rather than as one of three oligopolists. Therefore, the incumbent must pay the second entrant an amount sufficient to compensate a duopolist, not their share of a three-firm oligopoly profit. The same is true for buying the first entrant. To remain a monopolist, the incumbent would have to pay each possible competitor duopoly profits.

Because monopoly profits exceed duopoly profits, it is profitable to pay a single entrant half of the duopoly profit to prevent entry. It is not, however, necessarily profitable for the incumbent to pay both potential entrants half of the duopoly profit to avoid entry by either.[119] With enough potential entrants, the monopolist in any market will not want to buy any of them out. In that case, the outcome involves no acquisitions.

If we observe an acquisition in a market with many potential entrants, which any given market may or may not have, there must be another reason for that deal besides monopoly maintenance. The presence of multiple potential entrants overturns the antitrust implications of the truism that monopoly profits exceed duopoly profits. The question turns instead to empirical analysis of the merger and market in question as to whether it would be profitable to acquire all potential entrants.

The second simplifying assumption that restricts applicability of Salop’s baseline model is that the incumbent has the lowest cost of production. He rules out the possibility of lower-cost entrants in Footnote 2: “Monopoly profits are not always higher. The entrant may have much lower costs or a better or highly differentiated product. But higher monopoly profits are more usually the case.” If one allows the possibility that an entrant may have lower costs (even if those lower costs won’t be achieved until the future, when the entrant gets to scale), it does not follow that monopoly profits (under the current higher-cost monopolist) necessarily exceed duopoly profits (with a lower-cost producer involved).

One cannot simply assume that all firms have the same costs or that the incumbent is always the lowest-cost producer. This is not just a modeling choice but has implications for how we think about mergers. As Manne, Bowman, & Auer argue:

Although it is convenient in theoretical modeling to assume that similarly situated firms have equivalent capacities to realize profits, in reality firms vary greatly in their capabilities, and their investment and other business decisions are dependent on the firm’s managers’ expectations about their idiosyncratic abilities to recognize profit opportunities and take advantage of them—in short, they rest on the firm managers’ ability to be entrepreneurial.[120]

Given the assumptions that all firms have identical costs and there is only one potential entrant, Salop’s framework would find that all possible mergers are anticompetitive and that there are no possible efficiency gains from any merger. Since the acquired firm cannot, by assumption, have lower costs of production, it cannot improve the incumbent’s costs of production. But, in fact, whether a merger is efficiency-reducing and bad for competition and consumers needs to be proven, not assumed.

If we take Salop’s acquisition model literally, every industry would have just one firm. Every incumbent would acquire every possible competitor, no matter how small—after all, monopoly profits are higher than duopoly profits, and so the incumbent both wants to and can preserve its monopoly profits. The model gives us no way to disentangle when mergers would stop. The merger, again by assumption, does not affect the production side of the economy but exists only to gain market power to manipulate the price. Since the model offers no downside to the incumbent of acquiring a competitor, it would acquire every last potential competitor, no matter how small, unless prevented by law.

Once we allow for the possibility that firms differ in productivity, however, it is no longer true that monopoly profits are greater than industry duopoly profits. We can see this most clearly in situations where there is “competition for the market” and the market is winner-take-all. If the entrant to such a market has lower costs, the profit under entry (when one firms wins the whole market) can be greater than the original monopoly profits. In such cases, monopoly maintenance alone cannot explain an entrant’s decision to sell. An acquisition could therefore be procompetitive and increase consumer welfare. For example, the acquisition could allow the lower-cost entrant to get to scale quicker. The acquisition of Instagram by Facebook, for example, brought the photo-editing technology that Instagram had developed to a much larger market of Facebook users and provided it with a powerful monetization mechanism that was otherwise unavailable to Instagram.

In short, the notion that incumbents can systematically and profitably maintain their market position by acquiring potential competitors rests on assumptions that, in practice, will regularly and consistently fail to materialize. It is thus improper to assume that most of these acquisitions reflect efforts by an incumbent to anticompetitively maintain its market position.

IV.    Guideline 5: Mergers Should Not Substantially Lessen Competition by Creating a Firm That Controls Products or Services That Its Rivals May Use to Compete

The word “may” in this context is much too open, appearing to include products that no firm would imagine using to compete—but may use—and products that have close substitutes that constrain competition. A better wording would be “likely use to compete” or, at least, “plausibly use to compete.” Alternatively, the guideline could use the language from the body of the guideline “have the ability and incentive,” since the incentive to restrict products and services that competitors use is what matters for predicting whether the merged party will restrict products and services.

The guideline should not use the phrase “make it harder for rivals to compete,” since that will include many pro-competitive mergers. If the merged firm is more productive and can outbid competitors for inputs, that merger makes it harder for rivals to compete. Would the agencies challenge such a merger? A better phrase would be that the “merged firm would have the ability and incentive to restrict access and thereby harm competition” or “merged firm would have the ability and incentive to weaken or exclude rivals and thereby harm competition.”

A.      Vertical Mergers Often Create Efficiencies That Make It Harder for Rivals to Compete

The language of “make it harder for rivals to compete” is especially problematic in vertical mergers, which guideline 5 is about, without saying as much. The reason is that vertical mergers often have pro-competitive effects that make it harder for rivals to compete. Most of the time, vertical mergers are benign or beneficial, often leading to cost reductions, synergies, new or improved products, and lower prices for consumers.[121] Again, as Aviv Nevo and colleagues summarized:

Applying the same sort of skepticism about efficiencies in a vertical merger as in a horizontal merger can amount to assuming away a portion of the economics that is at the heart of the vertical investigation.[122]

Critics of the “Chicago school orthodoxy” on vertical mergers pay special attention to “oligopoly” markets,[123] contending that “[a] stronger overarching procompetitive presumption for vertical mergers does not make sense in oligopoly markets where vertical merger enforcement would be focused.”[124] But the critics are simply wrong that the empirical evidence supports greater condemnation of vertical mergers, even in oligopoly markets. At best, the evidence from oligopoly markets is mixed. Rather than a rush to condemnation, there is a need for further research before adopting any new policies based on such ambivalent (at best) evidence.

Emerging criticisms of the so-called “orthodoxy” must either ignore or dismiss the hundreds of econometric studies famously reviewed by Lafontaine and Slade.[125] Indeed, this longstanding work is criticized by some as irrelevant or insufficient.[126] But the reality is that these studies constitute the overwhelming majority of the evidence we have; many, if not most, of the studies are well-done, even by modern standards.[127] The upshot of these studies, as Lafontaine & Slade put it, is that:

[C]onsistent with the large set of efficiency motives for vertical mergers that we have described so far, the evidence on the consequences of vertical mergers suggests that consumers mostly benefit from mergers that firms undertake voluntarily.[128]

Francine Lafontaine, while acknowledging the limitations of some of the evidence used for these studies, recently reiterated the relevance of the studies to vertical mergers, and restated the overall conclusions of the literature:

We were clear that some of the early empirical evidence is less than ideal, in terms of data and methods.

But we summarized by saying that the empirical literature reveals consistent evidence of efficiencies associated with the use of vertical restraints (when chosen by market participants) and, similarly, with vertical integration decisions.[129]

Margaret Slade reiterated this same conclusion in June 2019 at the OECD, where she noted that, even in light of further studies, “[t]he empirical evidence leads one to conclude that most vertical mergers are efficient.”[130] Moreover, as Slade noted, forecasting likely effects from vertical mergers using more modern tools—such as assessment of vertical upward pricing pressure—is a fraught and unreliable endeavor.[131]

Nonetheless, critics forward the claim that many newer studies demonstrate harm from vertical mergers. The implication is that the balance of evidence taken from these studies tips the scales against a presumption of benefits from vertical mergers:

Surveys of earlier economic studies, relied upon by commenters who propose a procompetitive presumption, reference studies of vertical mergers in which the researchers sometimes identified competitive harm and sometimes did not. However, recent empirical work using the most advanced empirical toolkit often finds evidence of anticompetitive effects.[132]

The implication is that the balance of evidence taken from these studies tips the scales against a presumption of benefits from vertical mergers. Yet the newer literature is no different than the old in finding widely procompetitive results overall, intermixed with relatively few seemingly harmful results. As scholars at the Global Antitrust Institute at George Mason Law School have noted in a thorough canvassing of the more-recent literature:

In sum, these papers from 2009-2018 continue to support the conclusions from Lafontaine & Slade (2007) and Cooper et al. (2005) that consumers mostly benefit from vertical integration. While vertical integration can certainly foreclose rivals in theory, there is only limited empirical evidence supporting that finding in real markets.[133]

Below, we briefly review the actual results of several of these recent studies—including, in particular, studies that were referenced at the recent 2018 FTC hearings to support claims that the “econometric evidence does not support a stronger procompetitive presumption.”[134]

Fernando Luco and Guillermo Marshall examined Coca-Cola and PepsiCo’s acquisitions of some of their downstream bottlers.[135] At the time, Dr Pepper Snapple Group remained independent in selling inputs to bottlers. Bottlers, even those that are vertically integrated with one of their upstream suppliers, purchased inputs from competing upstream suppliers. Based on their statistical analysis, the authors conclude that vertical integration in the carbonated-beverage industry was associated with price increases for Dr Pepper Snapple Group products and price decreases for both Coca-Cola and PepsiCo products bottled by vertically integrated bottlers. However, the market share of the products associated with higher prices was no more than 2%. Thus, the authors conclude: “vertical integration did not have a significant effect on quantity-weighted prices when considering the full set of products.”[136] Overall, the effect on consumers was either an efficiency gain or no change. As Francine Lafontaine notes, “in total, consumers were better off given who was consuming how much of what.”[137]

Justine Hastings and Richard Gilbert conclude that vertical integration is associated with statistically significant higher wholesale gasoline prices.[138] Using data from 1996-1998, their study examined the wholesale prices charged by a vertically integrated refiner/retailer and found the firm charged higher wholesale prices in cities where its retail outlets competed more with independent gas stations. Hastings and Gilbert conclude that their observations are consistent with a theory of raising rivals’ costs.[139]

In subsequent research, Christopher Taylor, Nicolas Kreisle, and Paul Zimmerman examine retail gasoline prices following the 1997 acquisition of an independent gasoline retailer by a vertically integrated refiner/retailer.[140] They estimate the merger was associated with a price increase of 0.4 to 1.0 cents per-gallon—about 1% or less—and was economically insignificant.[141] These results were at odds with Hastings’ earlier review of the same merger, which concluded that the replacement of independent retailers with branded vertically integrated retailers would result in higher prices.[142]

To explain the conflicting results between Hastings and Taylor et al., Hastings[143] highlights the challenges of evaluating vertical mergers with incomplete data or using different sets of data—even seemingly similar data can yield wildly different results. Because of the wide range of reported results and their sensitivity to the data used, caution should be exercised before inferring any general conclusions from this line of research.

Other commonly cited studies for the proposition that the more recent evidence on vertical mergers shows a greater likelihood of harm fare no better.

Gregory Crawford, Robin Lee, Michael Whinston, & Ali Yurukoglu examine vertical mergers between cable-programming distributors (MVPDs) and regional sports networks (RSNs).[144] Margaret Slade characterizes the findings of the paper as “mixed,” in that integration can be associated with both beneficial and harmful effects.[145] In a purely semantic sense, that is an accurate characterization. But the overall results in Crawford et al. overwhelmingly find procompetitive consumer-welfare effects:

In counterfactual simulations that enforce program access rules, we find that vertical integration leads to signi?cant gains in both consumer and aggregate welfare… Averaging results across channels, we find that integration of a single RSN with effective program access rules in place would reduce average cable prices by 1.2% ($0.67) per subscriber per month in markets served by the RSN, and increase overall carriage of the RSN by 9.4%. Combined, these effects would yield, on average, a $0.43 increase in total welfare per household from all television services, representing approximately 17% of the average consumer willingness to pay for a single RSN. We also predict that consumer welfare would increase….

On net, we find that the overall effect of vertical integration in the absence of effective program access rules—allowing for both efficiency and foreclosure incentives—is to increase consumer and total welfare on average, resulting in (statistically significant) gains of approximately $0.38–0.39 per household per month, representing 15–16% of the average consumer willingness to pay for an RSN….[146]

The implications of this well-designed and carefully executed study are clear. Indeed, Harvard economist Robin Lee, one of the study’s authors, concluded that the findings demonstrate that the consumer benefits of efficiency gains outweighed any harms from foreclosure.[147]

Ayako Suzuki reviewed the vertical merger between Time Warner and Turner Broadcasting in programming and distribution in the cable-television market.[148] The paper examined the merger’s effects on foreclosure, per-channel prices, basic-bundle product mix, and basic-bundle penetration.

The author found foreclosure following the merger in Time Warner markets for those rival channels that were not integrated with any cable distributors. After the merger, two independent channels, the Disney Channel and the Fox News Channel, were foreclosed from Time Warner markets. The paper notes that prior to the merger, two Turner channels (TBS and TCM) were foreclosed by Time Warner, but the foreclosure was ended after the merger: “Turner suffered from the low market shares of TBS and TCM in Time Warner markets, therefore it integrated itself with Time Warner in order to recover their market shares.”[149]

Suzuki concludes that per-channel prices decreased more in Time Warner markets than they would have in the absence of the merger.[150] The paper suggests transaction-cost efficiencies lowered the implicit cost to the channels’ distributor, causing input prices to shift downward, and in turn resulted in reduced cable prices to consumers.[151]

V.      Guideline 6: Vertical Mergers Should Not Create Market Structures That Foreclose Competition

Guideline 6 appears to add additional structural presumptions that are not justified by the law or the economics. On the law, the guideline says “If the foreclosure share is above 50 percent, that factor alone is a sufficient basis to conclude that the effect of the merger may be to substantially lessen competition, subject to any rebuttal evidence…” However, the section of Brown Shoe immediately following the one cited states:

Between these extremes, in cases such as the one before us, in which the foreclosure is neither of monopoly nor de minimis proportions, the percentage of the market foreclosed by the vertical arrangement cannot itself be decisive.[152]

On the economics, guideline 6 shares all the issues of the structural presumptions discussed around guideline 1 and more. The “foreclosure share” is the amount the merged firm could foreclose. It does not require an incentive to foreclose. If guideline 6 remains, foreclosure share needs to include an incentive to foreclose. Otherwise, the agencies could challenge a merger of a firm with 51 percent of an upstream market and a firm with 0.001 percent of a downstream market since “the foreclosure share is above 50 percent, [and] that factor alone is a sufficient basis to conclude that the effect of the merger may be to substantially lessen competition.”

The courts have recently rejected such arguments, so it is surprising to see them in the Draft Guidelines. In the recent Microsoft-Activision merger, the Draft Guidelines would certainly flag it to be blocked since Microsoft could pull Call of Duty from the Sony PlayStation consoles. But the courts concluded that Microsoft would not have an incentive to pull Call of Duty, since Sony has the biggest market share.[153]

VI.    Guideline 8: Mergers Should Not Further a Trend Toward Concentration

The agencies are well-justified to think about the dynamics of the market, not just the static snapshot. Unfortunately, guideline 8 maintains all the flaws of guideline 1 and adds a few more.

It is important to reiterate: concentration need not be harmful to consumers. In fact, the trade and industrial-organization literature that explicitly studies changes (or trends) in competition finds that increased competition increases concentration. As Chad Syverson summarizes:

Many empirical studies in varied settings have found that greater substitutability/competition—resulting from, say, reductions in trade, transport, or search costs—shifts activity away from smaller, higher-cost producers and toward larger, lower-cost producers.. [We] demonstrate that search cost reductions reallocate market share toward lower-cost and larger sellers, increasing market concentration even as margins fall. It is not an exaggeration to say that there are scores, perhaps hundreds, of such studies.[154]

This literature does not imply that every increase in concentration is pro-competitive. Instead, it simply means that a previous trend toward concentration need not be anticompetitive in any way. If there is an industry that has become more concentrated through more competition, will the agencies block a merger that increases concentration but does not increase prices?

Guideline 8 is especially problematic when paired with the statement “efficiencies are not cognizable if they will accelerate a trend toward concentration.”[155] Such a statement effectively negates any efficiency defense available to all but the very smallest firms. Efficiencies will almost always increase concentration—especially if those efficiencies come from economies of scale. If a merger creates efficiencies, the merged firm can lower costs, cut prices, and attract more customers. Attracting more customers with better products and prices will likely increase competition. The economic evidence is quite strong that efficiency increases concentration.

VII.  Guideline 11: When a Merger Involves Competing Buyers, the Agencies Examine Whether It May Substantially Lessen Competition for Workers or Other Sellers

Guideline 11 should be commended for mentioning lower wages as an anticompetitive harm. The other guidelines would benefit from focusing more on effects on prices, quality, and innovation, instead of structural presumptions.

Guideline 11 should, however, be restricted to the first two paragraphs: the first stating that merger analysis applies to buyer markets and the second (if there was any confusion) that labor markets are buyer markets. The rest of the guideline is a digression on the nature of labor markets that cites neither law nor economics. For example, the guidelines say, “labor markets are often relatively narrow.”[156] What is the justification for this claim in the merger guidelines, of all documents?

If the agencies have demonstrated a loss of competition in the labor market, the guidelines make clear that the Clayton Act does not allow for the consideration of offsetting effects in output markets. In the standard monopsony models in economics, there is no offsetting effect, so the point is irrelevant. Harm to sellers of inputs (workers) hurts consumers as well. This was the case in the recent successful action to  block Penguin-Random House from merging with Simon & Schuster.[157] The parties agreed that, if there was harm to the authors, there would be fewer books, harming consumers.[158] There was no need to think about offset harms.

The hard part is when the agencies have yet to prove loss of competition in the labor market, but that putative loss is being adjudicated. Thorny issues arise that make competition among buyers different from competition among sellers, but the guidelines do not offer any guidance here. For example, will the agencies consider a reduction in wages to be evidence of harm in labor markets? A merger that increases efficiency but does not decrease competition could still end up reducing workers’ wages if the efficiency gains require fewer workers. Perhaps the merger does not require fewer workers overall, but it does reduce employment of a subset of workers. Will the agencies regard that as a labor-market harm? The guidelines may not be the right place for these clarifications, but providing guidance on such tough issues would be more beneficial than making blanket statements about the nature of labor markets.

A.        Monopsony Is More Than the Mirror Image of Monopoly

The application of antitrust to monopsony is significantly more complicated than it might seem. On the surface, it may appear that monopsony is simply the “mirror image” of monopoly.”[159] There are, however, several important differences between monopoly and monopsony, and several complications raised by monopsony analysis that significantly distinguish the analysis required for each. Most fundamental among these, monopsony and monopoly markets do not sit at the same place in the supply chain.[160] This matters because all supply chains end with final consumers. Accordingly, from a policy standpoint, it is essential to decide whether antitrust ultimately seeks to maximize output and welfare at that (final) level of the distribution chain (albeit indirectly); whether intermediate levels of the distribution chain (e.g., an input market) should be analyzed in isolation; or whether effects in both must be somehow aggregated.

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

The upshot is that, while monopsony concerns are becoming more prevalent in academic and policy discussions, the agencies should be extremely hesitant as they move forward. Some have argued that “[m]mergers affecting the labor market require some rethinking of merger policy, although not any altering of its fundamentals.”[161] As we discuss below, however, while the economic “fundamentals” undergirding merger policy may not change for labor-market mergers, the “rethinking” required to properly assess such mergers does entail fundamental changes that have not yet been adequately studied or addressed. As many have pointed out, there is only a scant history of merger enforcement in input markets in general, and even less in labor markets.[162] It is premature to offer guidelines purporting to synthesize past practice and the state of knowledge when neither is well established.

1.        Theoretical differences between monopoly and monopsony

Before getting to the practical differences of a monopoly case versus a monopsony case, consider the theoretical differences between identifying monopsony power versus monopoly power.[163] Suppose, for now, that a merger either generates efficiency gains or market power but not both. In a monopoly case, if there are efficiency gains from a merger, the quantity sold in the output market will increase. With sufficient data, the agencies will be able to see (or estimate) the efficiencies directly in the output market. Efficiency gains result in either greater output at lower unit cost or else product-quality improvements that increase consumer demand. In contrast, if the merger simply enhances monopoly power without efficiency gains, the quantity sold will decrease, either because the merging parties raise prices or quality declines. The empirical implication of the merger is seen directly in the market in question.

The monopsony case is more complicated, however. Ultimately, we can be certain of the effects of monopsony only by looking at the output market, not the input market where the monopsony power is claimed. To see this, consider again a merger that generates either efficiency gains or market (now monopsony) power. A merger that creates monopsony power will necessarily reduce the prices and quantity purchased of inputs like labor and materials. But this same effect (reduced prices and quantities for inputs) could be observed if the merger is efficiency-enhancing, as well. If there are efficiency gains, the merged parties may purchase fewer of one or more inputs. For example, if the efficiency gain arises from the elimination of redundancies in a hospital merger, the hospital will buy fewer inputs, hire fewer technicians, or purchase fewer medical supplies. This may even reduce the wages of technicians or the price of medical supplies, even if the newly merged hospitals are not exercising any market power to suppress wages.[164]

Decisionmakers cannot simply look at the quantity of inputs purchased in the monopsony case as the flip side of the quantity sold in the monopoly case, because the efficiency-enhancing merger can look like the monopsony merger in terms of the level of inputs purchased. The court can differentiate a merger that generates monopsony power from a merger that increases productive efficiencies only by looking to the output market. Once we look at the output market, as in a monopoly case, if the merger is efficiency-enhancing, there will be an increase in the output-market quantity. If the merger increases monopsony power, the firm perceives its marginal cost as higher than before the merger and will reduce output.[165]

In short, the assumption that monopsony analysis is simply the mirror image of monopoly analysis does not hold.[166] In both types of mergers—those that possibly generate monopoly or monopsony—the agencies and courts cannot look to the input market to differentiate them from efficiency-enhancing mergers; they must look at the output market. Therefore, it is impossible to discuss monopsony power coherently without considering the output market.

2.        Monopsony and merger efficiencies

In real world cases, mergers will not necessarily be either just efficiency-enhancing or just monopsony-generating, but a blend of the two. Any rigorous consideration of merger effects must account for both and make some tradeoff between them. The question of how guidelines should address monopsony power is inextricably tied to the consideration of merger efficiencies—particularly given the point above that identifying and evaluating monopsony power will often depend on its effects in downstream markets.

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

Admitting the existence of efficiencies gives rise to a subsequent set of difficult questions central to which is “what counts as an efficiency?.” A good example of why the economics of this is difficult is considering the case in which a horizontal merger leads to increased bargaining power with upstream suppliers. The merger may lead to the merging parties being able to extract necessary inputs at a lower price than they otherwise would be able to. If so, does this merger enhance competition in a possible upstream market? Perhaps not. However, to the extent that the ability to obtain inputs at a lower price leads to an increase in the total output of the industry, then downstream consumers may in fact bene?t. Whether the possible increase in the total surplus created by such a scenario should be regarded as off-setting any perceived loss in competition in a more narrowly de?ned upstream market is a question that warrants more attention than it has attracted to date.[167]

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

As we have explained above, this analysis becomes more complicated when a merger raises monopsony concerns. In a simple model of monopsony, the merger would increase market power in the input market (e.g., labor), leading to a lower price paid for the input and a smaller quantity used of the input relative to pre-merger levels. Assuming no change in market power in the final product market, these cost savings would result in lower prices paid by consumers. Should such efficiency effects “count” in evaluating mergers alleged to lessen competition in input markets? It is surely too facile a response to assert that such efficiency effects would be “out of market” and thus irrelevant. Indeed, if antitrust enforcement truly seeks to promote consumer welfare, any evaluation of a “monopsony” merger must weigh these effects against the effects in the input market.

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

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

A further complication arises when dynamic effects are considered, which may convert apparent harms even on only the seller side of an input market into benefits:

[T]he presence of larger buyers can make it more profitable for a supplier to reduce marginal cost (or, likewise, to increase quality). This result stands in stark contrast to an often expressed view whereby the exercise of buyer power would stifle suppliers’ investment incentives. In a model with bilateral negotiations, a supplier can extract more of the profits from an investment if it faces more powerful buyers, though the supplier’s total profits decline. Furthermore, the presence of more powerful buyers creates additional incentives to lower marginal cost as this reduces the value of buyers’ alternative supply options.[168]

None of this is to say the creation of monopsony power should categorically be excluded from the scope of antitrust enforcement, of course. But it is quite apparent that this sort of enforcement raises extremely complicated tradeoffs that are elided over or underappreciated in the current discourse and under-explored in the law. It would be deeply problematic to attempt to enshrine a particular view of these tradeoffs into guidelines given the current state of knowledge and practice in this area. Perhaps worse, it would almost surely undermine the efficacy and authority of guidelines in general, as courts are unlikely to find such guidelines to be the helpful distillation of economic and legal principles that they are today.

3.        Determining the relevant market for labor

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

When Whole Foods attempted to acquire Wild Oats, the FTC defined the relevant market as “premium natural and organic supermarkets” as a way to exclude larger firms, such as Walmart and Kroger, from the relevant product market.[169] Yet even if one were to accept the FTC’s product market definition, it is unlikely that anyone would consider employment at a “premium natural and organic supermarket” as a distinct input market. This is because the skill set needed to work at Whole Foods overlaps with the skill set demanded by myriad retailers and other employers—and certainly overlaps with the skillset needed to work at Kroger.

Moreover, policies such as occupational licensing have the effect of arbitrarily defining the work that can be performed or the services provided by a wide range of workers. This raises the question whether firms should be scrutinized for exercising monopsony power when regulations may be limiting the scope of the relevant market and contributing to the monopsony conditions. A “whole-of-government” approach to competition,[170] in other words, would certainly work to reduce these artificial barriers to market scope before thwarting possibly efficiency enhancing mergers that appear monopsonistic only because of such government constraints.

Contrary to what some have claimed, applying the SSNIP test to input markets—in the form of a “small and significant but non-transitory reduction in wages” or “SSNRW”—would also raise significant difficulties.[171] For a start the necessary datapoints required to conduct a SSNRW test are much harder to obtain than is the case for the SSNIP. The SSNIP test asks whether a hypothetical monopolist could profitably raise prices 5-10% above the competitive baseline, whereas the SSNRW test questions whether a hypothetical monopsonist could profitably decrease wages by 5-10%. The former question is far more tractable than the latter. Indeed, under the SSNIP, profitability hinges on the quantity sold, as well as the difference between prices and costs—both of which are relatively amendable to measurement. This is less true of the SSNRW, which depends on the difference between prices paid for inputs and their “marginal revenue product.” The second of these two factors would prove extremely challenging, perhaps impossible, to measure. This makes the SSNRW significantly harder to apply than the SSNIP. At the same time, “wages” in many labor contexts consist of a complicated mix of factors, including some (e.g., “work environment”) that defy easy quantification. While there are, of course, issues with measuring quality changes in product markets, the problems are significantly magnified in labor markets, and laborers’ preferences are invariably more heterogenous across many more dimensions of the elements of labor’s “price.” Furthermore, the marginal revenue product of an input hinges on competitive conditions in the output market. This reinforces the sense that monopsony analysis inherently raises cross-market effects that are less prevalent in the monopoly case.

4.        Monopsony and the consumer welfare standard

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

Marinescu & Hovenkamp assert that:

Properly defined, the consumer welfare standard applies in exactly the same way to monopsony. Its goal is high output, which comes from the elimination of monopoly power in the purchasing market.… [W]hen consumer welfare is properly defined as targeting monopolistic restrictions on output, it is well suited to address anticompetitive consequences on both the selling and the buying side of markets, and those that affect labor as well as the ones that affect products. In cases where output does not decrease, the anticompetitive harm to trading partners can also be invoked.”[172]

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

For a start, the assertion that harm to input providers that does not result in reduced product output is actionable is based on a tenuous assertion that a mere pecuniary transfer is sufficient to establish anticompetitive harm.[173] This is problematic because such harms may actually benefit consumers. In the extreme example, all of the benefits of a better negotiating position are passed on to consumers.[174] The main justification for ignoring these cross-market effects (as with all market-definition exercises) is primarily a pragmatic one (though it is rather weakened in light of modern analytical methods).[175] Particularly in the context of inputs into a specific output market, these cross-market effects are inextricably linked and hardly beyond calculation. And as the enforcement agencies have previously recognized, “[i]nextricably linked out-of-market efficiencies, however, can cause the Agencies, in their discretion, not to challenge mergers that would be challenged absent the efficiencies.”[176]

The assertion that pecuniary transfers are actionable is also inconsistent with the fundamental basis for antitrust enforcement, which seeks to mitigate deadweight loss, but not mere pecuniary transfers that do not result in anticompetitive effects.[177]

Second, it is unclear whether the consumer welfare standard applies to input markets. At its heart, the consumer welfare standard focuses on the effects that a(n) (incipient) monopolist’s behavior may have on consumers. And courts have, arguably, extended this welfare calculation to all direct purchasers affected by anticompetitive behavior. Much less clear is whether courts have extended (or would extend) this notion of anticompetitive harm to input markets. This goes to the very heart of the consumer welfare standard.

As we explain above, lower wages could be consistent with both efficiency and monopsony.[178] Somewhat more problematically, these lower wages may also be accompanied by lower prices passed through to consumers (or at least the monopsonist’s direct purchasers, downstream).

Larger buyers may also be able to reduce their purchasing costs at the expense of suppliers…. The concept of buyer power as an efficiency defence rests squarely on such a presumption. What is more, the argument also posits that the exercise of buyer power will not only have distributional consequences, but also increase welfare and consumer surplus by reducing deadweight loss. As we spell out in detail below, welfare gains may arise both at the upstream level, i.e., in the transactions between the more powerful merged firm and its suppliers, as well as at the downstream level, where the creation of buyer power may translate into increased rivalry and lower prices. The extent to which final consumers ultimately benefit is of particular importance if antitrust authorities rely more on a consumer standard when assessing mergers. If total welfare is the standard, however, distributional issues are not directly relevant and any pass-on to consumers is thus only relevant in as much as it contributes to total welfare.[179]

This raises an obvious question: can the consumer welfare standard (and thus antitrust authorities and courts) reach a finding of anticompetitive harm if consumers (at least in the narrow market under investigation) are ultimately being charged lower prices? As the FTC summarized in closing the investigation of a merger between two pharmacy benefit managers, “[a]s a general matter, transactions that allow firms to reduce the costs of input products have a high likelihood of benefitting consumers, since lower costs create incentives to lower prices.”[180]

Consider Judge Breyer’s Kartell opinion. As Steve Salop explains:[181]

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

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

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

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

Indeed, extended to more current potential cases, this mode of analysis raises a distinct problem for the agencies. Consider, for example, a hypothetical case against Kroger surrounding practices that exploit its buyer power.[182] Should such a challenge fail regardless of the effect on input providers because Kroger can be considered “an agent for the customers it [sells to]”? There is, as Salop seems to suggest,[183] some merit in such an approach, but it is certainly not how similar cases have been evaluated in the past.

There is no easy answer to the difficulty of assessing harm in upstream markets when downstream markets benefit. At first blush, excluding deadweight losses that stem from monopsony power (or at least forcing plaintiffs to show that downstream purchasers are also harmed) seems like legalistic reasoning that is largely incompatible with the welfarist ancestry of the consumer welfare standard.[184] Indeed, the consumer welfare standard is largely premised on the assumption that increased output is desirable, and deadweight losses are harmful to society, regardless of their second-order effects. It seems odd to depart from this reasoning just because a supplier, rather than a consumer, is being harmed. Not to mention that, from a welfare standpoint, inefficient switching, caused by a deadweight loss, is no less harmful in the monopsony context than the monopoly one.

But at least when it comes to law and antitrust practice, things are more complicated than that. Faced with what may potentially be intractable economic questions, antitrust courts have often decided to limit antitrust analysis to what economics generally refer to as partial equilibrium analysis. This likely explains why only direct purchasers can claim antitrust damages,[185] and why the Amex court chose to overlook potential harm to cash purchasers (as they were deemed to lie outside of the relevant market).[186] The upshot is that, with some notable exceptions (such as the case of two-sided markets in Amex), antitrust courts have been reluctant to analyze competitive effects in adjacent markets.

What might seem like an arbitrary decision appears more reasonable when one considers the sheer complexity of the task at hand. Economic behavior will often have second-order effects that run in an opposite direction to its first-order or “partial equilibrium” ones. A charcoal monopoly may cause buyers to opt for cleaner energy sources; a conservation cartel may maximize the long-term value of scarce resources.[187]

The question is whether antitrust law has a comparative advantage in dealing with these more “systemic” issues, or whether other legal frameworks are better adapted. Put differently, antitrust law’s main strength might be that it is mostly a consumer-oriented body of law that focuses on a single tractable problem: the prices consumers and other direct purchasers pay for goods. If that is true, then maybe other bodies of law (such as, e.g., labor and environmental laws) may be better suited to deal with broader harms. Indeed, in the case of each of these fields there exists a massive regulatory apparatus specifically designed to implement government standards. And, under the law as it stands, where antitrust law and a regulatory regime conflict, antitrust must give way.[188]

We do not purport to have a satisfactory answer to this complicated question. In fact, it is probably fair to say one does not exist. Antitrust law can either depart from its welfarist underpinnings—a large loss for its economic consistency—or it can follow those principles towards potentially intractable problems that may ultimately undermine its administrability and thus its usefulness as a policy tool. At this juncture, it is not clear there is a compromise that might enable enforcers to thread the needle to solve this complex conundrum. And if such a solution exists, it has yet to be articulated in a convincing manner that may lead to actionable insights for enforcers or courts.

Given all of this, the FTC and DOJ’s desire to adopt merger guidelines that address monopsony harms, while clearly important, seems premature compared to the state of the economic literature, and potentially unactionable under the consumer welfare standard. This is not to say the antitrust policy world should suddenly ignore monopsony harms, but rather that more research, discussion, and case law is needed before definitive guidelines can be written. And, ultimately, it may well be that legislative change is needed before any such guidelines will be enforceable before the courts.

VIII.     Market Definition

The difficulties discussed above should serve as a good reminder that market definition is but a means to an end. As William Landes, Richard Posner, and Louis Kaplow have all observed, market definition is merely a proxy for market power, which in turn enables policymakers to infer whether consumer harm (the underlying question to be answered) is likely in a given case.[189]

Given the difficulties inherent in properly defining markets, policymakers should redouble their efforts to precisely measure both potential barriers to entry (the obstacles that may lead to market power) or anticompetitive effects (the potentially undesirable effect of market power), under a case-by-case analysis that looks at both sides of a platform.

Unfortunately, this is not how the FTC has proceeded in recent cases or the current Draft Guidelines. The FTC’s Facebook complaint, to cite but one example, merely assumes the existence of network effects (a potential barrier to entry) with no effort to quantify their magnitude.[190] Likewise, the agency’s assessment of consumer harm is just two pages long and includes superficial conclusions that appear plucked from thin air:

The benefits to users of additional competition include some or all of the following: additional innovation…; quality improvements…; and/or consumer choice…. In addition, by monopolizing the U.S. market for personal social networking, Facebook also harmed, and continues to harm, competition for the sale of advertising in the United States.[191]

Not one of these assertions is based on anything that could remotely be construed as empirical or even anecdotal evidence. Instead, the FTC’s claims are presented as self-evident. Given the difficulties surrounding market definition in digital markets, this superficial analysis of anticompetitive harm is simply untenable.

In short, discussions around attention markets emphasize the important role of case-by-case analysis underpinned by the consumer welfare standard. Indeed, the fact that some of antitrust enforcement’s usual benchmarks are unreliable in digital markets reinforces the conclusion that an empirically grounded analysis of barriers to entry and actual anticompetitive effects must remain the cornerstones of sound antitrust policy. Or, put differently, uncertainty surrounding certain aspects of a case is no excuse for arbitrary speculation. Instead, authorities must meet such uncertainty with an even more vigilant commitment to thoroughness.

IX.   Rebuttal Evidence Showing That No Substantial Lessening of Competition Is Threatened by the Merger

Starting at page 39, we discussed how vertical mergers often are pro-competitive and introduce efficiencies. Even in the case of horizontal mergers, however, the best recent empirical work finds that efficiencies in many mergers.[192] While procompetitive efficiencies could be oversold by the merging parties, they cannot be assumed away, and the Draft Guidelines raise the burden on any efficiency defense beyond what is justified by the law or the economics. For example, the Draft Guidelines require that cognizable efficiencies “could not be achieved without the merger under review.”[193] First, “could not” is too high of a burden. Second, what if there were many similar mergers available that offered efficiencies, all of which were pro-competitive? The wording of draft guideline would not recognize those efficiencies, since they were not unique to the merger being considered. The wording of the 2010 HMGs is better: “The Agencies credit only those efficiencies likely to be accomplished with the proposed merger and unlikely to be accomplished in the absence of either the proposed merger or another means having comparable anticompetitive effects” (emphasis added).[194]

The most extreme version of “raising the burden of proof” is the statement: “efficiencies are not cognizable if they will accelerate a trend toward concentration (see Guideline 8) or vertical integration (see Guideline 6).”[195] Until that is removed, there effectively is no rebuttal, since most efficiencies will accelerate a trend toward concentration or involve vertical integration. As such, the above statement should be removed.

X.     Avoiding Damage to the Credibility of the Merger Guidelines

Conceptually, the role of guidelines is to codify the accepted knowledge in a particular area of antitrust for the sake of legal certainty, and not to drive the law toward a particular unsettled frontier of the discipline. It is highly doubtful, however, whether some of the issues raised in the Draft Guidelines enjoy anywhere near the level of consensus needed to justify being codified into guidelines. The problem with pretending that they do is that it risks turning “guidelines” into an opportunity for agencies to advocate for new antitrust law and set new antitrust policy, rather than offer a useful, albeit comparatively modest, tool for legal interpretation.

Relatedly, it is somewhat puzzling that the agencies feel compelled and empowered to issue new merger guidelines now. Typically, guidelines are issued in the face of new learnings or new jurisprudence with the potential to overhaul an area of antitrust law. Adoption of the 1982 guidelines, for instance, was preceded by a series of Supreme Court opinions that indicated a marked embrace of economic analysis in the Court’s antitrust analysis.[196] Nothing of this sort has, to our knowledge, preceded the agencies’ current proposals. If new economic or legal learning is not guiding the new guidelines, then what is? It is not cited in the Draft Guidelines. The most plausible explanation is that it is politics. This idea is further reinforced by the limited public debate surrounding the current process for adopting new guidelines, and the pervasiveness of certain contentious assumptions which indicate a clear political bias and preordained political intent.

Not that there isn’t precedent for this sort of approach. But the last time merger guidelines were (arguably) employed to advance a contentious political objective was more than 40 years ago.[197] By virtually any measure, subsequent updates to the guidelines have been aimed at attempting to incorporate relatively new-but-well-established learning and to synthesize updates to longstanding agency practice aimed at “getting it right,” particularly with respect to basic and ever-evolving procedural issues, like the use of thresholds. There has been, in other words, an overarching humility to the process, which has lent it a crucial authority in both courts and among practitioners and economic actors.

The 2010 [HMGs] are noteworthy because, although the agencies’ views are not binding on the judiciary, courts adjudicating merger challenges routinely cite them as persuasive. The Guidelines derive their persuasive value from laying out a consensus view on the framework that the FTC and DOJ have developed, over decades of experience, to analyze the effects of mergers. Reflecting precedent from courts and the agencies, and based on accepted economic principles, they garnered support at adoption and in case after case, serving as the touchstone for merging parties, enforcers, and judges alike.[198]

Indeed, where previous guidelines have strayed perhaps a bit too far into novelty, their influence on the courts has been minimal. Perhaps the best example of this has been the reception by courts of the 2010 Horizontal Merger Guidelines (“2010 HMGs”), particularly the intended diminishment of the role of technical analysis of market definition and the heightened reliance on relatively novel methods of direct evidence of competitive effects.[199] Although the 2010 HMGs have generally proved to be significantly influential,[200] courts’ have been decidedly reluctant to replace consideration of market definition with measures like the gross upward pricing pressure index (“GUPPI”) to assess unilateral effects.[201] Indeed, reliance on market shares to determine case outcomes has arguably increased.[202]

By contrast, the FTC’s recent rejection of the 2020 Vertical Merger Guidelines (“2020 VMGs”) was grounded in an obvious distaste for the specific outcomes it might have engendered.[203] Although nominally justified by a claimed lack of scholarly support,[204] that rhetoric was transparently faulty, particularly given the process by which the withdrawal was accomplished.[205] Indeed, as Carl Shapiro and Herbert Hovenkamp put it: “The Federal Trade Commission’s recent withdrawal of its 2020 vertical merger guidelines is flatly incorrect as a matter of microeconomic theory and is contrary to an extensive economic literature about vertical integration.”[206] To be sure, there was (and always will be) disagreement at the margins over best practices in merger analysis and enforcement. But nothing in the 2020 VMGs was unsupported by longstanding scholarship and practice (except, ironically, to the extent they may have gone too far at times toward repudiating the FTC majority’s preferences).[207]

And the same preference for simply stronger—not necessarily better—enforcement seems to be animating the agencies’ “very tendentious” (in the words of Doug Melamed) effort to produce new merger guidelines now.[208]  Indeed, in the press release announcing the guidelines-revision process, FTC Chair Khan and AAG Kanter declare at the outset that they have “launched a joint public inquiry aimed at strengthening enforcement against illegal mergers.”[209]

The Draft Guidelines are overwhelmingly concerned with the presumed dangers of underenforcement, but inexplicably pays almost no heed to the possibility, let alone the cost, of overenforcement. Leaving aside the fact that—in merger enforcement, as in antitrust law more generally—a sound error-cost framework takes a holistic view of the likelihood and cost of errors, underpinning the agencies’ slanted view are two popular, albeit unjustified, narratives that dissolve upon closer examination.

Ultimately, both these narratives appear designed to bolster the case for the type of politically motivated overhaul of the merger guidelines that the agencies have pre-committed themselves to, rather than to fulfill what is—and should remain—the primary purpose of merger guidelines: i.e., to codify state-of-the-art knowledge and practice in one area of antitrust law as a means to increase legal certainty.

Before the FTC and DOJ consider what recommendations should be incorporated into a new set of merger guidelines, it would be appropriate to briefly consider what the current review process should aim to achieve. This raises two critical questions: What is the ultimate aim of merger guidelines, and what should the process leading up to them look like?

A.      The Role of Merger Guidelines

Merger guidelines attempt to provide an authoritative and practical guide for enforcement and adjudication by explicating two important inputs into those processes. First, guidelines attempt to coalesce established agency thinking and practice to inform potential merging parties—effectively seeking to improve legal certainty by prefiguring how agencies are likely to respond to given situations. They also describe the “accepted wisdom” of merger analysis (especially that which stems from jurisprudence). “To be as effective and persuasive as possible, the Guidelines should reflect our best thinking about the competitive effects of mergers and appropriate merger enforcement policy.”[210] Updating merger guidelines may thus be necessary when the consensus—the economic and legal “best thinking” or the underlying jurisprudence—surrounding certain practices has evolved. “Indeed, many commentators regard the guidelines’ credibility arising from this collected institutional wisdom as a foundational principle of any further revisions to the Guidelines. This caution doubtlessly preserves consumer welfare by reducing the costs associated with uncertain antitrust enforcement.”[211]

As the Antitrust Modernization Commission (“AMC”) described them:

There is general consensus that the Merger Guidelines have acted as the “blueprint for the architecture” of merger analysis and, overall, provide a guide that “functions well.” The Guidelines have had a significant influence on judicial development of merger law, which is reflected in their widespread acceptance by the courts as the relevant framework for analyzing merger cases.… The Guidelines have also provided useful guidance and transparency to the business community and antitrust bar. Finally, the Guidelines have helped to influence the development of merger policy by jurisdictions outside the United States.[212]

Given these twin goals—providing legal certainty and “codifying” the accepted knowledge concerning certain antitrust situations—guidelines are not the place to set out a novel, activist agenda or push the boundaries of knowledge and practice.

This is no small detail. There is a vast difference between what may fairly be described as new learning (i.e., a new consensus gleaned from extensive scholarship and rigorous debate), on the one hand, and new interrogations (i.e., unresolved questions that pique the interest of some scholars), on the other. As the rest of our comment suggests, many of the questions currently contemplated by the agencies fall squarely within the latter category. Accordingly, while they arguably constitute an interesting research agenda for scholars, there is virtually no sense in which they justify drafting guidelines that seek to settle these unresolved issues and that, in doing so, lead to a significant departure from existing practice.

Our assertion here is further supported by the fact that guidelines do not have binding authority, either on enforcers or courts. Courts are under no obligation to adhere to antitrust guidelines, and they will be far less likely to look to them even for guidance if they espouse politicized, un-rigorous concepts. Accordingly, by importing novel and unresolved enforcement concepts (as well as approaches to merger enforcement) into their guidelines, the agencies may render them of little use both to the public and to the courts. As Tim Muris & Bilal Sayyed put it, “the Merger Guidelines have succeeded in significant part because they do not try to do too much.”[213] In short, there is a risk that the resulting updated guidelines will not describe the “state of the art” of the economic and legal understanding. As a result, they would no longer shed light on either agency practice or likely litigation outcomes. The guidelines would thus be devoid of any tangible purpose.

This would be a real loss for consumers, as non-specialist courts currently do often look to guidelines in order to appropriately resolve complex merger issues. “The Guidelines accrued substantial institutional credibility and capital with courts due to their economic sophistication and consistency in application.”[214] As Christine Varney, assistant attorney general of the DOJ Antitrust Division in the Obama administration and a member of the Federal Trade Commission in the Clinton administration, put it: “many courts indicate that they consider the Guidelines in assessing mergers under the antitrust laws, some finding them more useful than others.”[215] Numerous scholars and practitioners echo this view and applaud the role of the HMGs in bringing focus and consensus to merger enforcement.[216] Given the speculative and politicized nature of the draft guidelines, there is good reason to doubt that many courts will find the resulting guidelines to fall on the “more useful” end of the scale.

B.      How Guidelines Are Adopted

The process the DOJ and FTC are following to produce their updated guidelines is also problematic. Indeed, if guidelines are released without real opportunity for input and without clear indication that that input has been considered in their formulation, they will be of little use.

It is not inherently problematic to revisit and revise the guidelines, of course; the agencies have done so on a somewhat regular basis since the first guidelines were issued in 1968. In all previous instances (and in the case of the agencies’ other guidelines), revisions were preceded by significant public input, debate, and consideration, leading to identification of an overarching consensus. To take one example, the FTC and DOJ ran an extensive series of workshops and consultations when they updated the HMGs in 2009-2010.[217] In a joint press release announcing the workshops, the agencies explained the goal of this process: “The goal of the workshops will be to determine whether the Horizontal Merger Guidelines accurately reflect the current practice of merger review at the Department and the FTC as well as to take into account legal and economic developments that have occurred since the last significant Guidelines revision in 1992.”[218] And as Christine Varney later elaborated on the agencies’ process and what they expected to glean from it:

In addition to inviting comments, [five] workshops have been held over the past two months.… Our nearly 100 panelists have included leading practitioners, economists, consumer advocates, industry executives, and academics. We have been fortunate to have both former and current government enforcers from the United States and around the world share their perspectives with us.… We’ve learned a lot from the workshops and the comments received so far, and this morning I would like to offer some views about what we’ve heard during this process and where I believe areas of consensus are emerging.”[219]

This is quite different from the perfunctory process seemingly contemplated, at least thus far, by those same agencies today.

One response may be that the substantial process used to develop the 2010 HMGs was itself unnecessary. Rather, the agencies are approaching the current revisions using the notice-and-comment procedures required by the Administrative Procedure Act (“APA”).[220] The problem with this view is that the APA only applies agency rulemaking authorized by Congress—and, even then, it sets the procedural floor. Congress has not authorized the antitrust agencies to develop legally binding merger guidelines. This does not mean that it is impermissible for them to develop such guidelines as informal policy statement. It does mean, however, that such guidelines carry no force of law beyond their ability to persuade courts of their approach. On this account, adopting a minimal notice-and-comment approach offers minimal support for the proposed changes when compared to past guidelines—especially when normalized relative to the extent of the proposed changes. Modest changes might be supported by more modest procedure; substantial changes should be supported by more robust procedure.

To make matters worse, it is difficult to escape the sense that, whatever nominal process is employed by the agencies, the current guidelines-reform effort is intended to effect a predetermined, political outcome, irrespective of any actual consensus (or lack thereof) that emerges. We cannot know precisely how this process will unfold, of course, but there is considerable basis for concern. In particular, the FTC majority’s seriousness about engaging in apolitical, rigorous analysis must be called into question based on the inescapable pattern that has emerged from its recent conduct. In brief, the current FTC majority has undertaken a series of actions and adopted a series of governance policies that reveal an agency focused myopically on advancing a radical revision of antitrust law, as far as possible from the strictures of judicial review and without consultation from the antitrust community.[221]

This sense that politics, rather than evidence, is driving the current review process is further reinforced by the contents of the Draft Guidelines. Many of the claims therein demonstrate substantial bias and heavy reliance on contentious and unsupported assumptions. Indeed, the Draft Guidelines operate from the apparent assumptions (among others) that more enforcement is inherently better, that merger efficiencies are inconsistent with Section 7, and that distributional concerns should factor into merger review. The Draft Guidelines are overwhelmingly concerned with how the status quo may lead to false acquittals; the notions that authorities may err in the other direction, and that excessive enforcement may chill beneficial business activity, are conspicuously absent. Further, the inquiries of those questions often rely on cases that are woefully outdated and not reflective of a massive amount of subsequent economic learning and case law. Citations to cases throughout the draft guidelines are often one-sided and omit or ignore contrary authority.[222] This is notably the case of the guidelines’ repeated citations to Brown Shoe[223] (15 citations), Philadelphia National Bank[224] (eight citations), and Procter and Gamble[225] (six citations)—three mid-20th century cases that are widely decried as being out of tune with modern economics and social science.[226] In short, in their pursuit of strong merger enforcement, the agencies are seemingly looking to reverse time and return to an old set of learnings from which courts, enforcers, and mainstream antitrust scholars have all steered away.

The net effect of these problems is to undermine confidence in the agency. That effect that will carry over to the courts as they are confronted with the resulting guidelines, all the more so if the sanitizing effect of legitimate process is not applied going forward. Such undermining of confidence is a serious problem for effective guidelines, so much so that the FTC’s unremitting willingness to maneuver outside the bounds of established antitrust law and economics reveals perhaps a fundamental disdain for the opinion of the courts.

 

[1] U.S. Dep’t of Justice & F.T.C., Draft Merger Guidelines for Public Comment (Jul. 18, 2023), https://www.regulations.gov/comment/FTC-2023-0043-0001 [hereinafter “Draft Merger Guidelines” or “Draft Guidelines”].

[2] Draft Merger Guidelines, supra note 1, at 31 (“The Agencies may assess whether a merger may substantially lessen competition or tend to create a monopoly based on a fact-specific analysis under any one or more of the Guidelines discussed above.”)

[3] John Asker et al, Comments on the January 2022 DOJ and FTC RFI on Merger Enforcement, available at https://www.regulations.gov/comment/FTC-2022-0003-1847 at 15-6.

[4] Gregory J. Werden & Luke M. Froeb, Don’t Panic: A Guide to Claims of Increasing Concentration, 33 Antitrust 74, 74 (2018).

[5] Executive Office of the President, Council of Economic Advisers, Economic Report of the President 215 (Feb. 2020).

[6] See, e.g., Germán Gutiérrez and Thomas Philippon, Declining Competition and Investment in the U.S., NBER Working Paper No. 23583 (2017), https://www.nber.org/papers/w23583; Simcha Barkai, Declining Labor and Capital Shares, 75 J. Fin. 2021 (2020).

[7] See Jan De Loecker, Jan Eeckhout & Gabriel Unger, The Rise of Market Power and the Macroeconomic Implications, 135 Q. J. Econ. 561 (2020).

[8] See David Autor, et al., The Fall of the Labor Share and the Rise of Superstar Firms, 135 Q. J. Econ. 635 (2020).

[9] Ryan A. Decker, John Haltiwanger, Ron S. Jarmin & Javier Miranda, Where Has All the Skewness Gone? The Decline in High-Growth (Young) Firms in the U.S, 86 Eur. Econ. Rev. 4, 5 (2016).

[10] Several papers simply do not find that the accepted story—built in significant part around the famous De Loecker and Eeckhout study, see De Loecker, et al., supra note 2 —regarding the vast size of markups and market power is accurate. Among other things, the claimed markups due to increased concentration are likely not nearly as substantial as commonly assumed. See, e.g., James Traina, Is Aggregate Market Power Increasing? Production Trends Using Financial Statements, Stigler Center Working Paper (Feb. 2018), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3120849; see also World Economic Outlook, April 2019 Growth Slowdown, Precarious Recovery, International Monetary Fund (Apr. 2019), https://www.imf.org/en/Publications/WEO/Issues/2019/03/28/world-economic-outlook-april-2019. Another study finds that profits have increased but are still within their historical range. See Loukas Karabarbounis & Brent Neiman, Accounting for Factorless Income, 33 NBER Macroeconomics Annual 167 (2018). And still another shows decreased wages in concentrated markets but also that local concentration has been decreasing over the relevant time period. See Kevin Rinz, Labor Market Concentration, Earnings, and Inequality, 57 J. Human Resources S251 (2022), available at http://jhr.uwpress.org/content/57/S/S251.full.pdf+html

[11] See Harold Demsetz, Industry Structure, Market Rivalry, and Public Policy, 16 J. L. & Econ. 1 (1973). See also, e.g., Richard Schmalensee, Inter-Industry Studies of Structure and Performance, in 2 Handbook of Industrial Organization 951-1009 (Richard Schmalensee & Robert Willig, eds., 1989); William N. Evans, Luke M. Froeb & Gregory J. Werden, Endogeneity in the Concentration-Price Relationship: Causes, Consequences, and Cures, 41 J. Indus. Econ. 431 (1993); Steven Berry, Market Structure and Competition, Redux, FTC Micro Conference (Nov. 2017), available at https://www.ftc.gov/system/files/documents/public_events/1208143/22_-_steven_berry_keynote.pdf; Nathan Miller, et al., On the Misuse of Regressions of Price on the HHI in Merger Review, 10 J. Antitrust Enforcement 248 (2022).

[12] Harold Demsetz, The Intensity and Dimensionality of Competition, in Harold Demsetz, The Economics of the Business Firm: Seven Critical Commentaries 137, 140-41 (1995).

[13] See Nathan Miller, et al., supra note 12.

[14] Steven Berry, Martin Gaynor & Fiona Scott Morton, Do Increasing Markups Matter? Lessons from Empirical Industrial Organization, 33 J. Econ. Persp. 44, 48 (2019) (emphasis added). See also Jonathan Baker & Timothy F. Bresnahan, Economic Evidence in Antitrust: Defining Markets and Measuring Market Power, John M. Olin Program in L. & Econ., Stanford Law Sch. Working Paper 24 (Sep. 2006) (“The Chicago identification argument has carried the day, and structure-conduct-performance empirical methods have largely been discarded in economics.”).

[15] Gregory J. Werden & Luke M. Froeb, Don’t Panic: A Guide to Claims of Increasing Concentration, 33 Antitrust 74, 74 (2018).

[16] Christopher Garmon, The Accuracy of Hospital Screening Methods, 48 Rand J. Econ. 1068, 1070 (2017) (reviewing post-merger price changes for 28 hospital mergers, initially published as a BE Working Paper).

[17] Sharat Ganapati, Growing Oligopolies, Prices, Output, and Productivity, Working Paper (Oct. 6, 2018) at 13 (forthcoming in Am. Econ. J.: Microeconomics), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3030966.

[18] Id. at 1.

[19] Sam Peltzman, Productivity and Prices in Manufacturing During an Era of Rising Concentration, Working Paper (May 10, 2018, rev. Feb. 3, 2021), https://ssrn.com/abstract=3168877.

[20] Regarding geographic market area for hospitals, see, e.g., Joseph Farrell, et al., Economics at the FTC: Hospital Mergers, Authorized Generic Drugs, and Consumer Credit Markets, 39 Rev. Indus. Org. 271 (2011) (initially published as BE Working Paper): Garmon, The Accuracy of Hospital Screening Methods, supra note 17.

[21] W. Kip Viscusi, Joseph E. Harrington, Jr. & David E. M. Sappington, Economics of Regulation and Antitrust (2005) at 214-15.

[22] Mary Amiti & Sebastian Heise, U.S. Market Concentration and Import Competition, Federal Reserve Bank of New York, Working Paper No. 968 (May 2021), available at https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr968.pdf.

[23] Esteban Rossi-Hansberg, Pierre-Daniel Sarte & Nicholas Trachter, Diverging Trends in National and Local Concentration, in NBER Macroeconomics Annual 2020, Vol. 35 (Martin Eichenbaum & Erik Hurst eds., 2020).

[24] Rossi-Hansberg, et al., Presentation: Diverging Trends in National and Local Concentration, slide 3, available at https://conference.nber.org/conf_papers/f132587/f132587.slides.pdf.

[25] Rossi-Hansberg, et al, supra note 26, at 9.

[26] Id. at 14 (emphasis added).

[27] Ryan Decker, Discussion of “Diverging Trends in National and Local Concentration,” available at https://rdeckernet.github.io/website/2020ASSA_discussion_RST.pdf.

[28] See Rinz, supra note 11. See also David Berger, Kyle Herkenhoff & Simon Mongey, Labor Market Power, 112 AM. ECON. REV. 1147 (2022).

[29] C. Lanier Benkard, Ali Yurukoglu & Anthony Lee Zhang, Concentration in Product Markets, NBER, Working Paper No. 28745 (Apr. 2021), available at https://www.nber.org/papers/w28745.

[30] Id. at 4.

[31] Autor, et al. supra note 8. See David Autor, Christina Patterson & John Van Reenen, Local and National Concentration Trends in Jobs and Sales: The Role of Structural Transformation, NBER, Working Paper No. 31130 (Apr. 2023), available at https://www.nber.org/papers/w31130.

[32] Robert Kulick & Andrew Kard, A Tale of Two Samples: Unpacking Recent Trends in Industrial Concentration, AEI Economic policy Working Paper, available at https://www.aei.org/wp-content/uploads/2023/06/Kulick-Tale-of-Two-Samples-WP.pdf?x91208.

[33] Rossi-Hansberg, supra note 26 at 27 (emphasis added).

[34] Chang-Tai Hsieh & Esteban Rossi-Hansberg, The Industrial Revolution in Services, Working Paper (May 12, 2021), available at https://www.princeton.edu/~erossi/IRS.pdf.

[35] Id. at 4 (“[T]he increase in national industry concentration documented by Autor et al. (2017) and others, is driven by the expansion in markets per firms by top ?rms.”).

[36] Id. at 6.

[37] Id. at 41-42.

[38] Berger, et al., supra note 31.

[39] Id. at 1148.

[40] See Autor, et al., supra note 8.

[41] Robert E. Hall, New Evidence on the Markup of Prices Over Marginal Costs and the Role of Mega-Firms in the US Economy, Working Paper 16 (Apr. 27, 2018) (emphasis added), https://web.stanford.edu/~rehall/Evidence%20on%20markup%202018.

[42] Richard Schmalensee, Inter-Industry Studies of Structure and Performance, in 2 Handbook of Industrial Organization 951, 1000 (Richard Schmalensee & Robert Willig eds., 1989). See also Timothy F. Bresnahan, Empirical Studies of Industries with Market Power, in 2 Handbook of Industrial Organization 1011, 1053-54 (Richard Schmalensee & Robert Willig eds., 1989) (“[A]lthough the [most advanced empirical literature] has had a great deal to say about measuring market power, it has had very little, as yet, to say about the causes of market power.”); Frank H. Easterbrook, Workable Antitrust Policy, 84 Mich. L. Rev. 1696, 1698 (1986) (“Today it is hard to find an economist who believes the old structure-conduct-performance paradigm.”).

[43] Baker & Bresnahan, supra note 14, at 26.

[44] Chad Syverson, Macroeconomics and Market Power: Context, Implications, and Open Questions 33 J. Econ. Persp. 23, (2019) at 26.

[45] See Rinz, supra note 11

[46] Id. at S259.

[47] Berger et al., supra note 31 at 1148.

[48] Elizabeth Weber Handwerker & Matthew Dey, Some Facts About Concentrated Labor Markets in the United States. Industrial Relations: A Journal of Economy and Society, (2023), early view at https://onlinelibrary.wiley.com/doi/abs/10.1111/irel.12341.

[49] Draft Guidelines at 12.

[50] See J.A. Schumpeter, Capitalism, Socialism and Democracy 72 (1976).

[51] See Kenneth Arrow, Economic Welfare and the Allocation of Resources for Invention, in The Rate and Direction of Inventive Activity: Economic and Social Factors 620 (Richard R. Nelson ed.,1962).

[52] See, e.g., Philippe Aghion, Nick Bloom, Richard Blundell, Rachel Griffith & Peter Howitt, Competition and Innovation: An Inverted-U Relationship, 120 Q. J. Econ. 702 (2005).

[54] See, e.g., Michael L. Katz & Howard A. Shelanski, Mergers and Innovation, 74 Antitrust L.J. 1, 22 (2007) (“The literature addressing how market structure affects innovation (and vice versa) in the end reveals an ambiguous relationship in which factors unrelated to competition play an important role.”).

[55] Dirk Auer, Structuralist Innovation: A Shaky Legal Presumption in Need of an Overhaul, CPI Antitrust Chronicle (Dec. 1, 2018).

[56] Amended complaint, Fed. Trade Comm’n v. Facebook, Inc., No. 1:20-cv-03590 (D.C. Cir. filed Aug. 19, 2021), available at https://www.ftc.gov/system/files/documents/cases/ecf_75-1_ftc_v_facebook_public_redacted_fac.pdf, at 73.

[57] This is not to say that some economists do not believe that more competitive market structures generally lead to more innovation. But rather that these writings have (i) not garnered a wide consensus among the economics profession, and (ii) often rest on narrow assumptions that reduce their application to specific settings. See, e.g., Carl Shapiro, Competition and Innovation: Did Arrow Hit the Bull’s Eye?, in The Rate and Direction of Inventive Activity Revisited 400 (Josh Lerner & Scott Stern eds., 2011). See also Ilya Segal & Michael D. Whinston, Antitrust in Innovative Industries, 97 Am. Econ. Rev. 1712 (2007). For instance, both above papers conclude that exclusivity, though it may increase innovator’s ex-post profits, is unlikely to increase incentives to innovate because it prevents entry by more innovative rivals. To reach this conclusion, the authors notably assume that consumers that are bound by exclusivity contracts never find it profitable to purchase the innovation of a second firm (they assume that the innovation costs more to produce than the value to consumers of its incremental improvement). There is no reason to believe that this is, or is not, a good reflection of reality.

[58] Richard J. Gilbert, Innovation Matters: Competition Policy for the High-Technology Economy, 116 (2020)

[59] Ronald L. Goettler & Brett R. Gordon, Does AMD Spur Intel to Innovate More?, 119 J. Pol. Econ. 1141, 1141 (2011)

[60] Mitsuru Igami, Estimating the Innovator’s Dilemma: Structural Analysis of Creative Destruction in the Hard Disk Drive Industry, 1981–1998, 125 J. Pol. Econ. 798, 798 (2017)

[61] Elena Patel & Nathan Seegert, Does Market Power Encourage or Discourage Investment? Evidence From the Hospital Market, 63 J.L. Econ. 667, 667 (2020).

[62] See Aghion, et al., supra note 52, 701-28 (2005). The theoretical aspects of this paper are a refinement of previous seminal research by some of these authors, which found that increased product market competition had a negative effect on innovation. See P. Aghion & P. Howitt, A Model of Growth Through Creative Destruction, 60 Econometrica 323 (1992).

[63]  Id. at 707.

[64] See, e.g., Federico Etro, Competition, Innovation, and Antitrust: A Theory of Market Leaders and Its Policy Implications (2007) at 163-64.

[65] See Aghion, et al., supra note 52, at 714.

[66] Id. at 706.

[67] Id. at 702.

[68] Id.

[69] Eric Fruits, Justin (Gus) Hurwitz, Geoffrey A. Manne, Julian Morris & Alec Stapp, Static and Dynamic Effects of Mergers: A Review of the Empirical Evidence in the Wireless Telecommunications Industry, OECD Directorate for Financial and Enterprise Affairs Competition Committee, Global Forum on Competition. DAF/COMP/GF(2019)13 (Sep. 4, 2020), available at https://one.oecd.org/document/DAF/COMP/GF(2019)13/en/pdf.

[70] See, generally, Nicolai J. Foss & Peter G. Klein, Organizing Entrepreneurial Judgment (2012).

[71] See, e.g., J. Gregory Sidak & David J. Teece, Dynamic Competition in Antitrust Law, 5 J. Competition L. & Econ. 581 (2009).

[72] Asker, et al., supra note 3, at 34.

[73] Cristina Caffarra, Gregory S. Crawford & Tommaso Valletti, “How Tech Rolls”: Potential Competition and “Reverse” Killer Acquisitions, Antitrust Chronicle (May, 26, 2020) (“Large digital platforms in particular have exceptional abilities to pursue organic expansion but also opportunities to ‘roll up’ (willing) startups to ‘get there faster’, ‘buying’ instead of expending effort in rival innovation. Foregoing such effort is never good for consumers and society as a whole: while innovative effort is costly, it will often yield multiple providers and differentiated services, with socially desirable properties.”).

[74] See, e.g., Steven C. Salop, Potential Competition and Antitrust Analysis: Monopoly Profits Exceed Duopoly Profits, Working Paper (Apr. 28, 2021), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3839631. See also C. Scott Hemphill & Tim Wu, Nascent Competitors, 168 U. Pa. L. Rev. 1879 (2019).

[75] See, e.g., Salop, id. See also Giulio Federico, Gregor Langus & Tommaso Valletti, Horizontal Mergers and Product Innovation, 59 Int’l J. Indus. Org. 1 (2018).

[76] CMA, Completed Acquisition by Facebook, Inc (now Meta Platforms, Inc.) of Giphy, Inc., Final Report (Nov. 30, 2021) at 223 (“We consider this evidence supports the view that GIPHY was an important player in a potentially growing segment of the display advertising market, and as such (taking account of the economic context, in particular the expected closeness of competition between Facebook and GIPHY) an important part of a dynamic competitive process with Facebook and others.”).

[77] See Caffarra, et al., supra note 74. (“What seems to be more frequent are cases where the acquisition may effectively extinguish the standalone effort of the buyer to expand in a particular space because the target immediately provides it with those capabilities.  This covers a broader set of possibilities as platforms continue to expand into adjacent fields by buying functionalities, capabilities, even whole businesses (see the recent example of Google/Fitbit).”).

[78] FTC v. Meta Platforms Inc., U.S. Dist. LEXIS 29832 (2023); Complaint, Fed. Trade Comm’n v. Facebook, Inc., No. 1:20-cv-03590 (D.C. Cir. filed Jan. 13, 2021).

[79] Case No COMP/M.7217—Facebook / WhatsApp (Oct. 3, 2014), at 61.

[80] Jessica L Recih, Letter Reminding Both Firms That WhatsApp Must Continue To Honor Its Promises To Consumers With Respect to the Limited Nature of the Data It Collects, Maintains, and Shares With Third Parties (Apr. 10, 2014), available at https://www.ftc.gov/system/files/documents/public_statements/297701/140410facebookwhatappltr.pdf.

[81] CMA Case ME/5525/12—Anticipated acquisition by Facebook Inc of Instagram Inc (Aug. 22, 2012).

[82] Amended complaint, Fed. Trade Comm’n v. Facebook, Inc., No. 1:20-cv-03590 (D.C. Cir. filed Aug. 19, 2021), available at https://www.ftc.gov/system/files/documents/cases/ecf_75-1_ftc_v_facebook_public_redacted_fac.pdf, at 26-41.

[83] Steven C. Salop, A Suggested Revision of the 2020 Vertical Merger Guidelines, Georgetown Law Faculty Publications and Other Works No. 2381 (Dec. 2021), https://scholarship.law.georgetown.edu/facpub/2381.

[84] D. Bruce Hoffman, Acting Dir., Bureau of Competition, Fed. Trade Comm’n, Remarks at the Credit Suisse 2018 Washington Perspectives Conference: Vertical Merger Enforcement at the FTC 4 (Jan. 10, 2018), available at https://www.ftc.gov/system/files/documents/public_statements/1304213/hoffman_vertical_merger_speech_final.pdf.

[85] Although in some cases, such as a failing firm, the competing firm may have exited the market even if the merger did not occur.

[86] Hoffman, supra note 86.

[87] Id.

[88] Id.

[89]Id.

[90] Christine S. Wilson, Comm’r, Fed. Trade Comm’n, Keynote Address at the GCR Live 8th Annual Antitrust Law Leaders Forum: Vertical Merger Policy: What Do We Know and Where Do We Go? (Feb. 1, 2019) at 4 & 9, available at https://www.ftc.gov/system/files/documents/public_statements/1455670/wilson_-_vertical_merger_speech_at_gcr_2-1-19.pdf.

[91] Id.

[92] Hoffman, supra note 86.

[93] Salop, supra note 89.

[94] Competition and Consumer Protection in the 21st Century; FTC Hearing #5: Vertical Merger Analysis and the Role of the Consumer Welfare Standard in U.S. Antitrust Law; Before the FTC, Presentation Slides at 15 (Nov. 1, 2018), available at https://www.ftc.gov/system/files/documents/public_events/1415284/ftc_hearings_5_georgetown_slides.pdf [hereinafter “Salop, Vertical Merger Slides”] (emphasis added). See also Serge Moresi & Steven C. Salop, When Vertical is Horizontal: How Vertical Mergers Lead to Increases in “Effective Concentration,” 59 R. Ind. Org. 177 (2021) (“there in an inherent loss of an indirect competitor that supported the non-merging competitors in the pre-merger world, which leads to reduced competition when there is an input foreclosure concern”).

[95] Id. (emphasis added).

[96] Id. (emphasis added).

[97] Id. (emphasis added).

[98] Salop, supra note 89.

[99] USDA, Citrus Fruits 2021 Summary (Sep. 2021), available at https://downloads.usda.library.cornell.edu/usda-esmis/files/j9602060k/kp78hg05n/1544cn77s/cfrt0921.pdf.

[100] Chad Miles, After Troubling New Forecast, Florida Citrus Advocate Says Industry Is “At A Crossroads,” WFTS (Jan. 24, 2022), https://www.abcactionnews.com/news/region-polk/after-troubling-new-forecast-florida-citrus-advocate-says-industry-is-at-a-crossroads.

[101] David Reiffen & Michael Vita, Comment: Is There New Thinking on Vertical Mergers? 63 Antitrust L. J. 917, 920 (1995) (“Some horizontal mergers do not create efficiencies; they are profitable only because of the post-merger anticompetitive conduct made possible by the transaction. By contrast, the primary lesson of both the older literature on vertical integration, as well as the newer ‘post-Chicago’ literature, is that this trade-off invariably exists for all vertical transactions that threaten to reduce consumer welfare.”). See also Joseph J. Spengler, Vertical Integration and Antitrust Policy, 58 J. Pol. Econ. 347 (1950); Robert H. Bork, The Antitrust Paradox: A Policy At War With Itself 219 (1978); Richard A. Posner, Antitrust Law 228 (1976).

[102] See, e.g., Michael A. Salinger, Vertical Mergers and Market Foreclosure, 103 Q.J. Econ. 345 (1988).

[103] Reiffen & Vita, supra note 107, at 921.

[104] Id. (“High price-cost margins increase the size of gain to the integrated firm as well as the potential for anticompetitive input price increases.… [And] the post-Chicago literature suggests that vertical mergers that occur in the presence of high premerger concentration are likely to result in lower prices to consumers.”).

[105] Cooper, et al., supra note 108, at 645.

[106] Jonathan B. Baker, Nancy L. Rose, Steven C. Salop, & Fiona Scott Morton, Five Principles for Vertical Merger Enforcement Policy, Georgetown Law Faculty Pub. and Other Works, Working Paper No. 2148 (2019), at 8 https://scholarship.law.georgetown.edu/facpub/2148 (emphasis added).

[107] Reiffen & Vita, supra note 107, at 920.

[108] See, e.g., Cooper, et al., supra note 108, at 642-45 (assessing the vast majority of post-Chicago theories of vertical harm under the heading “softening horizontal competition”).

[109] See, generally, Salop, supra note 79.

[110] Id.

[111] Id.

[112] See Dissenting Statement of Commissioner Joshua D. Wright, In the Matter of Nielsen Holdings N.V. and Arbitron Inc., FTC File No. 131-0058 (Sep. 20, 2013), at note 3 (“Nevertheless, competitive effects in actual potential competition cases still are more difficult, on balance, to assess than typical merger cases because the agency must predict whether a party is likely to enter the relevant market absent the merger. It is because of this uncertainty and the potential for conjecture that the courts and agencies have cabined the actual potential competition doctrine by, for instance, applying a heightened standard of proof for showing a firm likely would enter the market absent the merger.”) (citing B.A.T. Indus., 104 F.T.C. 852, 926-28 (1984) (applying a “clear proof” standard)).

[113] See Mergers That Eliminate Potential Competition, RESEARCH HANDBOOK ON THE ECONOMICS OF ANTITRUST LAWS 111 (Einer Elhauge, ed. 2012) (“All twelve studies [of airline markets] find that potential competition results in lower prices by incumbent carriers, in ten cases by statistically significant amounts. Except as noted below, the amounts range between one quarter of one percent to about two percent, and in all cases are less than the amount of the price decline from one additional actual competitor, specifically, from one eighth to one third as large.”).

[114] Id.

[115] Case No M.9660—Google/Fitbit, C (2020) 9105 final (Dec. 12, 2020), at 398.

[116] Geoffrey A. Manne, Sam Bowman & Dirk Auer, Technology Mergers and the Market for Corporate Control, 86 Mo. L. Rev. 1047 (2021). This is because the availability of mergers as an exit strategy have been shown to increase investments by firms. Regarding the effect of mergers on investment, see, e.g., Gordon M. Phillips & Alexei Zhdanov, Venture Capital Investments and Merger and Acquisition Activity Around the World, NBER, Working Paper No. 24082 (Nov. 2017), https://ssrn.com/abstract=3082265 (“We examine the relation between venture capital (VC) investments and mergers and acquisitions (M&A) activity around the world. We find evidence of a strong positive association between VC investments and lagged M&A activity, consistent with the hypothesis that an active M&A market provides viable exit opportunities for VC companies and therefore incentivizes them to engage in more deals.”). And increased M&A activity in the pharmaceutical sector has not led to decreases in product approvals; rather, quite the opposite has happened. See, e.g., Barak Richman, et al., Pharmaceutical M&A Activity: Effects on Prices, Innovation, and Competition, 48 Loyola U. Chi. L. J. 787, 799 (2017) (“Our review of data measuring pharmaceutical innovation, however, tells a different story. First, even as merger activity in the United States increased over the past ten years, there has been a steady upward trend of FDA approvals of new molecular entities (“NMEs”) and new biological products (“BLAs”). Hence, the industry has been highly successful in bringing new products to the market.”).

[117] See Salop, supra note 79.

[118] In this section, we focus on Salop’s comments because they represent a common perspective. As Salop himself points out “I do not think that any of the analysis in the article is new. I expect that all the points have been made elsewhere by others and myself.”

[119] For a simple example, consider a Cournot oligopoly model with an industry inverse demand curve of P(Q)=1-Q and constant marginal costs that are normalized to zero. In a market with N symmetric sellers, each seller earns in profits. A monopolist makes a profit of 1/4. A duopolist can expect to earn a profit of 1/9. If there are 3 potential entrants plus the incumbent, the monopolist must pay each the duopoly profit 3*1/9=1/3, which exceeds the monopoly profits of 1/4. In the Nash/Cournot equilibrium, the incumbent will not acquire any of the competitors since it is too costly to keep them all out.

[120] Manne, Bowman, & Auer, supra note 132, at 1080.

[121] For vertical mergers the welfare-enhancing effects are well-established. See, e.g., Francine Lafontaine & Margaret Slade, Vertical Integration and Firm Boundaries: The Evidence, 45 J. ECON. LIT. 629, 677 (2007) (“In spite of the lack of unified theory, over all a fairly clear empirical picture emerges. The data appear to be telling us that efficiency considerations overwhelm anticompetitive motives in most contexts. Furthermore, even when we limit attention to natural monopolies or tight oligopolies, the evidence of anticompetitive harm is not strong.”). See also, Global Antitrust Institute, Comment Letter on Federal Trade Commission’s Hearings on Competition and Consumer Protection in the 21st Century, Vertical Merger, Geo. Mason Law & Econ. Research Paper No. 18-27, 8–9 (2018), https://ssrn.com/abstract=3245940 (“In sum, these papers from 2009-2018 continue to support the conclusions from Lafontaine & Slade (2007) and Cooper et al. (2005) that consumers mostly benefit from vertical integration. While vertical integration can certainly foreclose rivals in theory, there is only limited empirical evidence supporting that finding in real markets. The results continue to suggest that the modern antitrust approach to vertical mergers 9 should reflect the empirical reality that vertical relationships are generally procompetitive.”). Along similar lines, empirical research casts doubt on the notion that antitrust merger enforcement (in marginal cases) raises consumer welfare. The effects of horizontal mergers are, empirically, less well documented. See, e.g., Robert W. Crandall & Clifford Winston, Does Antitrust Policy Improve Consumer Welfare? Assessing the Evidence, 17 J. ECON. PERSP. 3, 20 (2003) (“We can only conclude that efforts by antitrust authorities to block particular mergers or affect a merger’s outcome by allowing it only if certain conditions are met under a consent decree have not been found to increase consumer welfare in any systematic way, and in some instances the intervention may even have reduced consumer welfare.”). While there is some evidence that horizontal mergers can reduce consumer welfare, at least in the short run, see, e.g., Gregory J. Werden, et al., The Effects of Mergers on Price and Output: Two Case Studies from the Airline Industry, 12 MGMT. DECIS. ECON. 341 (1991), the long-run effects appear to be strongly positive. See, e.g., Dario Focarelli & Fabio Panetta, Are Mergers Beneficial to Consumers? Evidence from the Market for Bank Deposits, 93 AM. ECON. REV. 1152, 1152 (2003) (“We find strong evidence that, although consolidation does generate adverse price changes, these are temporary. In the long run, efficiency gains dominate over the market power effect, leading to more favorable prices for consumers.”). See, generally, Michael C. Jensen, Takeovers: Their Causes and Consequences, 2 J. ECON. PERSP. 21 (1988). Some related literature similarly finds that horizontal merger enforcement has harmed consumers. See B. Espen Eckbo & Peggy Wier, Antimerger Policy Under the Hart-Scott-Rodino Act: A Reexamination of the Market Power Hypothesis, 28 J.L. & ECON. 119, 121 (1985) (“In sum, our results do not support the contention that enforcement of Section 7 has served the public interest. While it is possible that the government’s merger policy has deterred some anticompetitive mergers, the results indicate that it has also protected rival producers from facing increased competition due to efficient mergers.”); B. Espen Eckbo, Mergers and the Value of Antitrust Deterrence, 47 J. FINANCE 1005, 1027–28 (1992) (rejecting “the market concentration doctrine on samples of both U.S. and Canadian mergers. By implication, the results also reject the effective deterrence hypothesis. The evidence is, however, consistent with the alternative hypothesis that the horizontal mergers in either of the two countries were expected to generate productive efficiencies”).

[122] Asker, et al., supra note 3, at 34.

[123] See Baker, et al., supra note 106, at 13 (“[Treating vertical mergers more permissively than horizontal mergers, even in concentrated markets] would be tantamount to presuming that vertical mergers benefit competition regardless of market structure. However, such a presumption is not warranted for vertical mergers in the oligopoly markets that typically prompt enforcement agency review.”); Competition and Consumer Protection in the 21st Century: FTC Hearing #5: Vertical Merger Analysis and the Role of the Consumer Welfare Standard in U.S. Antitrust Law; FTC Transcript 164 (Nov. 1, 2018) [hereinafter “FTC Hearing #5”] at 14-15 (statement of Steven Salop, Professor, Georgetown University Law Center). See also Cooper, et al., supra note 108, at 643-48 (discussing such “post-Chicago” scholarship).

[124] Salop, Vertical Merger Slides, supra note 96, at 14.

[125] See Lafontaine & Slade, supra note 138. See also Cooper, et al., supra note 108; Daniel O’Brien, The Antitrust Treatment of Vertical Restraint: Beyond the Beyond the Possibility Theorems, in Report: The Pros and Cons of Vertical Restraints 22, 36 (2008) (“[Table 1 in this paper] indicates that voluntarily adopted restraints are associated with lower costs, greater consumption, higher stock returns, and better chances of survival.”).

[126] See, e.g., Salop, Vertical Merger Slides, supra note 96, at 17 (dismissing Lafontaine & Slade and attempting to adduce a few newer studies as contradictory and dispositive).

[127] It is fair to point out that, indeed, many of the studies look at the effects of vertical restraints rather than vertical mergers, per se. But such studies remain instructive, given that the theories of harm arising from vertical mergers arise from precisely the sorts of conduct at issue in these studies. If perfect alignment of facts were required, no economic theory or evidence would ever be relevant.

[128] Lafontaine & Slade, supra note 138, at 663.

[129] FTC Hearing #5 (statement of Francine Lafontaine, Professor, Michigan-Ross), supra note 140, at 93.

[130] Margaret E. Slade, Vertical Integration and Mergers: Empirical Evidence and Evaluation Methods, OECD (Jun. 7, 2019), https://one.oecd.org/document/DAF/COMP/WD(2019)68/en/pdf.

[131] Id. at 10-12.

[132] Baker, et al., supra note 106, at 11.

[133] Global Antitrust Institute, Comment at the Fed. Trade Comm’n Hearings on Competition and Consumer Protection in the 21st Century, The Consumer Welfare Standard in Antitrust Law (Sep. 7, 2018).

[134] Salop, Vertical Merger Slides, supra note 96, at 25. For a more comprehensive assessment of the recent empirical scholarship (finding the same overall results that we do), see id.

[135] Fernando Luco & Guillermo Marshall, Vertical Integration With Multiproduct Firms: When Eliminating Double Marginalization May Hurt Consumers (Jan. 15, 2018), https://ssrn.com/abstract=3110038.

[136] Id. at 22.

[137] FTC Hearing #5 (statement of Francine Lafontaine, Professor, Michigan-Ross), supra note 140, at 88.

[138] Justine S. Hastings & Richard J. Gilbert, Market Power, Vertical Integration, and the Wholesale Price of Gasoline, 33 J. Indus. Econ. 469 (2005).

[139] Id. at 471.

[140] Christopher T. Taylor, Nicolas M. Kreisle, & Paul R. Zimmerman, Vertical Relationships and Competition in Retail Gasoline Markets: Empirical Evidence from Contract Changes in Southern California: Comment, 100 Am. Econ. Rev. 1269 (2010).

[141] Id. at 1272-76.

[142] Justine Hastings, Vertical Relationships and Competition in Retail Gasoline Markets: Empirical Evidence from Contract Changes in Southern California, 94 Am. Econ. Rev. 317 (2004).

[143] Justine Hastings, Vertical Relationships and Competition in Retail Gasoline Markets: Empirical Evidence from Contract Changes in Southern California: Reply, 100 Am. Econ. Rev. 1227 (2010).

[144] Gregory S. Crawford, Robin S. Lee, Michael D. Whinston, & Ali Yurukoglu, The Welfare Effects of Vertical Integration in Multichannel Television Markets, 86 Econometrica 891 (2018).

[145] Slade, supra, note 147, at 6.

[146] Crawford, et al, supra note 160, at 893-94 (emphasis added).

[147] Competition and Consumer Protection in the 21st Century: FTC Hearing #3: Multi-sided Platforms, Labor Markets, and Potential Competition; FTC Transcript 101 (Oct. 17, 2018) (statement of Robin Lee, Professor, Harvard University), available at https://www.ftc.gov/system/files/documents/public_events/1413712/ftc_hearings_session_3_transcript_day_3_10-17-18_0.pdf  (“[O]ur key findings are that, on average, across channels and simulations, there is a net consumer welfare gain from integration. Don’t get me wrong, there are significant foreclosure effects, and rival distributors are harmed, but these negative effects are oftentimes offset by sizeable efficiency gains. Of course, this is an average. It masks considerable heterogeneity. When complete exclusion occurs, which happens both in our simulations and in the data some of the times, consumer welfare is actually harmed.”).

[148] Ayako Suzuki, Market Foreclosure and Vertical Merger: A Case Study of the Vertical Merger Between Turner Broadcasting and Time Warner, 27 Int’l J. of Indus. Org. 532 (2009).

[149] Id. at 542.

[150] Id.

[151] Id.

[152] Brown Shoe, 370 U.S. at 329 ((emphasis added)

[153] FTC v. Microsoft Corporation et al., No. 23-cv-02880-JSC (N.D. Cal. Jul. 10, 2023), available at https://s3.documentcloud.org/documents/23870711/ftc-v-microsoft-preliminary-injunction-opinion.pdf.

[154] Syverson, supra note 48, at 27.

[155] Draft Merger Guidelines, at 34.

[156] Id. at 26.

[157] United States v. Bertelsmann SE & Co. KGaA, No. CV 21-2886-FYP, 2022 WL 16949715 (D.D.C. Nov. 15, 2022)

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

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

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

[161] Ioana Marinescu & Herbert J. Hovenkamp, Anticompetitive Mergers in Labor Markets, 94 Indiana L.J. 1031, 1034 (2019) (“While the use of section 7 to pursue mergers among buyers is well established, there is relatively little case law.”)

[162] Id. at 1034.

[163] For purposes of this discussion, “monopoly” refers to any merger that would increase market power by a seller in a product market and “monopsony” refers to any merger that would increase market by the buyer in an input market.

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

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

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

[167] John Asker & Volker Nocke, Collusion, Mergers, and Related Antitrust Issues, NBER Working Paper 29175 (Aug. 2021), at 42, https://www.nber.org/papers/w29175.

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

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

[170] Executive Order 14036 on Promoting Competition in the American Economy, § 2(g) (Jul. 9, 2021) https://www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition-in-the-american-economy (“This order recognizes that a whole-of-government approach is necessary to address overconcentration, monopolization, and unfair competition in the American economy.”

[171] Ioana Marinescu & Herbert J. Hovenkamp, Anticompetitive Mergers in Labor Markets, 94 Indiana L.J. 1031, 1050 (2019). (“The analogous question for considering monopsony in the labor market would be to identify the smallest labor market for which a hypothetical monopsonist in that market would find profitable to implement a “small and significant but non-transitory reduction in wages” (SSNRW)”).

[172] Id. 1062-63.

[173] As Marinescu & Hovenkamp note (attributing the point to Hemphill & Rose), “[i]n this case, there is merely a transfer away from workers and towards the merging firms. Yet. . . such a transfer is a harm for antitrust law as it results from a reduction in competition.” Id. at 1062 (citing Hemphill & Rose, supra note 211, at 2104-05).

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

[175] See Jan M. Rybnicek & Joshua D. Wright, Outside In or Inside Out?: Counting Merger Efficiencies Inside and Out of the Relevant Market, in William E. Kovacic: An Antitrust Tribute Vol. II (2014) at *10, SSRN version available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2411270) (“Despite the incorporation of efficiencies analysis into modern merger evaluation, and the advances in economics that allow efficiencies to be identified and calculated more accurately than at the time of Philadelphia National Bank, antitrust doctrine in the United States still supports a regime that fails to take into account efficiencies arising outside of the relevant market.”).

[176] U.S. Dep’t of Justice & Fed. Trade Comm’n, Commentary on the Horizontal Merger Guidelines (2006), available at http://www.justice.gov/atr/public/guidelines/215247.htm. See also U.S. Dep’t of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines (1992, rev. 1997) § 4 at n.36 (“In some cases, merger efficiencies are “not strictly in the relevant market, but so inextricably linked with it that a partial divestiture or other remedy could not feasibly eliminate the anticompetitive effect in the relevant market without sacrificing the efficiencies in the other market(s).”).

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

[178] Hemphill & Rose distinguish monopsony power from increased buyer leverage, which does not result in a deadweight loss but is simply a redistribution from sellers to buyers. Leverage will be partially passed through to consumers as lower prices. Standard monopsony increases in bargaining power will not generate lower prices, since “[a]n increase in monopsony power increases the firm’s perceived marginal cost and reduces output. Far from lowering output prices, the increased monopsony power raises price in output markets (if the firm faces downward sloping demand for its output) or else leaves it unchanged.” Hemphill & Rose, supra note 211, at 2106.

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

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

[181] Salop, supra note 218, at 342 (“Efficiency benefits count under the true consumer welfare standard, but only if there is evidence that enough of the efficiency benefits pass through to consumers so that consumers (i.e., the buyers) would directly benefit on balance from the conduct.”)

[182] The same analysis can be applied to a hypothetical merger between, say, Kroger and Trader Joe’s in which we assume for the sake of argument there is no increase in seller power, but there is an increase in buyer power.

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

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

[185] See, Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977); Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481 (1968).

[186] Ohio v. Am. Express Co., 138 S. Ct. 2274 (2018).

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

[188] See, Credit Suisse Securities (USA) LLC v. Billing, 551 U.S. 264, *19-*20, *1-*2 (2007) (holding that where “(1) an area of conduct [is] squarely within the heartland of… regulations; (2) [there is] clear and adequate… authority to regulate; (3) [there is] active and ongoing agency regulation; and (4) [there is] a serious conflict between the antitrust and regulatory regimes. . . , [such] laws are ‘clearly incompatible’ with the application of the antitrust laws…[,]” thus “implicitly precluding the application of the antitrust laws to the conduct alleged”). See also U.S. v. Philadelphia Nat. Bank, 374 U.S. 321, 398-74 (1963) (Harlan, J. dissenting) (“Sweeping aside the ‘design fashioned in the Bank Merger Act’ as ‘predicated upon uncertainty as to the scope of § 7 of the Clayton Act’ (ante, p. 349), the Court today holds § 7 to be applicable to bank mergers and concludes that it has been violated in this case. I respectfully submit that this holding, which sanctions a remedy regarded by Congress as inimical to the best interests of the banking industry and the public, and which will in large measure serve to frustrate the objectives of the Bank Merger Act, finds no justification in either the terms of the 1950 amendment of the Clayton Act or the history of the statute.”).

[189] See William M Landes & Richard A Posner, Market Power in Antitrust Cases, 94 HARV. L. REV. 937 (1981) at 938 (“The standard method of proving market power in antitrust cases involves first defining a relevant market in which to compute the defendant’s market share, next computing that share, and then deciding whether it is large enough to support an inference of the required degree of market power.”); Louis Kaplow, Why (ever) Define Markets?, 124 Harv. L. Rev. 437, 515 (2010) (“The market definition / market share paradigm plays a prominent role in competition law regimes. Its central justification is that it offers a useful means of making inferences about market power, indeed one that is easier or more reliable than other means of market power determination. Upon analysis, however, it appears that this widely accepted view is always false….”).

[190] Complaint, Fed. Trade Comm’n v. Facebook, Inc., No. 1:20-cv-03590 (D.C. Cir. filed Jan. 13, 2021), at 19. Consider the following passage from the FTC’s complaint: “Direct network effects are a significant barrier to entry into personal social networking. Specifically, because a core purpose of personal social networking is to connect and engage with personal connections, it is very difficult for a new entrant to displace an established personal social network in which users’ friends and family already participate. A potential entrant in personal social networking services also would have to overcome users’ reluctance to incur high switching costs.” This analysis fails to examine whether users can and do coordinate among themselves to join rival networks. For a detailed discussion of these considerations, see, e.g., Daniel F Spulber, Consumer Coordination in the Small and in the Large: Implications for Antitrust in Markets With Network Effects, 4 J. Competition L. & Econ. 207 (2008). See also, Dirk Auer, What Zoom Can Tell Us About Network Effects and Competition Policy in Digital Markets, Truth on the Market (Apr. 14, 2019), https://truthonthemarket.com/2019/04/24/what-zoom-can-tell-us-about-network-effects-and-competition-policy-in-digital-markets.

[191] Complaint, Fed. Trade Comm’n v. Facebook, Inc., id. at 48.

[192] Vivek Bhattacharya, Gaston Illanes & David Stillerman, Merger Effects and Antitrust Enforcement: Evidence from U.S. Retail, NBER, Working Paper 31123 (2023), available at https://www.nber.org/papers/w31123; Mert Demirer & Omer Karaduman, Do Mergers and Acquisitions Improve Efficiency: Evidence from Power Plants, available at https://gsb-faculty.stanford.edu/omer-karaduman/files/2022/12/Draft.pdf; Celine Bonnet & Jan Philip Schain, An Empirical Analysis of Mergers: Efficiency Gains and Impact on Consumer Prices, 16 J. Comp. Law & Econ 1 (2020).

[193] Draft Guidelines, at 33.

[194] 2010 HMGs, at 30.

[195] Draft Guidelines, at 34.

[196] See, e.g., Reiter v. Sonotone Corp., 442 U.S. 330 (1979); Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977); United States v. General Dynamics, 415 U.S. 486 (1974).

[197] See, e.g., Matt Stoller, The Secret Plot to Unleash Corporate Power, Big (Apr. 8, 2022), https://mattstoller.substack.com/p/the-secret-plot-to-unleash-corporate?s=r.

[198] Noah Joshua Phillips & Christine S. Wilson, Comm’rs, Fed. Trade Comm’n, Statement Regarding the Request for Information on Merger Enforcement (Jan. 18, 2022) at 1-2, available at http://www.ftc.gov/system/files/documents/public_statements/1599775/phillips_wilson_rfi_statement_final_1-18-22.pdf.

[199] See U.S. Dep’t of Justice & F.T.C., Horizontal Merger Guidelines (2010), available at https://www.justice.gov/sites/default/files/atr/legacy/2010/08/19/hmg-2010.pdf [hereinafter “2010 HMGs”].

[200] Carl Shapiro & Howard Shelanski, Judicial Response to the 2010 Horizontal Merger Guidelines, 58 Rev. Indus. Org. 51 (2021).

[201] Jan M. Rybnicek & Laura C. Onken, A Hedgehog in Fox’s Clothing: The Misapplication of GUPPI Analysis, 23 Geo. Mason L. Rev. 1187, 1190 (2016). (“This paper argues that the GUPPI regularly fails to live up to its promise for two principal reasons: (1) the GUPPI all too often is based on inaccurate or incomplete data and (2) there is insufficient guidance to allow the business community and the antitrust bar to draw reliable conclusions about how the GUPPI will be incorporated into the agencies’ enforcement decisions.”).

[202] Adam Di Vincenzo, Brian Ryoo, & Joshua Wade, Refining, Not Redefining, Market Definition: A Decade Under the 2010 Horizontal Merger Guidelines, Antitrust Source (Aug. 2020) at 11, available at https://www.americanbar.org/content/dam/aba/publishing/antitrust-magazine-online/2020/august-2020/aug20_divincenzo_8_18f.pdf (“Market definition has retained a central and often outcome-determinative role in courts’ merger analysis beyond the presumption of anticompetitive effects; in this respect, market definition is as important today as it was prior to the 2010 Guidelines.”).

[203] Fed. Trade Comm’n, Federal Trade Commission Withdraws Vertical Merger Guidelines and Commentary (Sep. 15, 2021), https://www.ftc.gov/news-events/news/press-releases/2021/09/federal-trade-commission-withdraws-vertical-merger-guidelines-commentary.

[204] Id. (“The guidance documents… include unsound economic theories that are unsupported by the law or market realities.”).

[205] As the dissent from the withdrawal of the 2020 VMGs by Commissioners Philips and Wilson notes, “the FTC leadership continues the disturbing trend of pulling the rug out under from honest businesses and the lawyers who advise them, with no explanation and no sound basis of which we are aware .., with the minimum notice required by law, virtually no public input, and no analysis or guidance.” Noah Joshua Phillips & Christine S. Wilson, Comm’rs, Fed. Trade Comm’n, Dissenting Statement Regarding the Commission’s Rescission of the 2020 FTC/DOJ Vertical Merger Guidelines and the Commentary on Vertical Merger Enforcement (Sep. 15, 2021) at 1, https://www.ftc.gov/legal-library/browse/cases-proceedings/public-statements/dissenting-statement-commissioners-noah-joshua-phillips-christine-s-wilson-regarding-commissions. See also, id. at 6 (“The majority could have waited to rescind the 2020 Guidelines until they had something with which to replace it. It appears they prefer sowing uncertainly in the market and arrogating unbridled authority to condemn mergers without reference to law, agency practice, economics, or market realities.”).

[206] Carl Shapiro & Herbert Hovenkamp, How Will the FTC Evaluate Vertical Mergers?, ProMarket (Sep. 23, 2021), https://www.promarket.org/2021/09/23/ftc-vertical-mergers-antitrust-shapiro-hovenkamp. Other choice words used by Shapiro & Hovenkamp in their extremely short essay to describe the FTC majority’s asserted basis for withdrawing the 2020 Guidelines include: “baffling,” “reli[ant] on specious economic arguments,” “demonstrably false,” “ignor[ing] relevant expertise,” “contrary to a broad consensus among economists going back at least to. . . 1968,” “flatly inconsistent with the Horizontal Merger Guidelines,” and “likely to cause real harm.” Id.

[207] See, generally, Geoffrey A. Manne, Kristian Stout & Eric Fruits, The Fatal Economic Flaws of the Contemporary Campaign Against Vertical Integration, 68 Kansas L. Rev. 923 (2020).

[208] Doug Melamed, in Antitrust Policy and Its Different Perspectives: Where Do the Antitrust Professionals Agree and Disagree? (interview by Alden Abbott with Doug Melamed and Joshua Wright), The Bridge Podcast (Apr. 19, 2022), transcript available at https://www.mercatus.org/bridge/podcasts/04192022/antitrust-policy-and-its-different-perspectives (“I will say I think the request for information that the agencies put out is a little worrisome because I think it’s very tendentious. At the outset, they say, ‘We’re interested in information that will help us strengthen merger enforcement.’ I would have thought the appropriate question would be information that would help us improve merger enforcement. They ask for information about false negatives, they don’t ask for information about false positives.”).

[209] Press Release, Federal Trade Commission and Justice Department Seek to Strengthen Enforcement Against Illegal Mergers (Jan. 18, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/01/federal-trade-commission-justice-department-seek-strengthen-enforcement-against-illegal-mergers (emphasis added).

[210] Christine A. Varney, Assistant Att’y Gen., Antitrust Div., U.S. Dept. of Justice, An Update on the Review of the Horizontal Merger Guidelines (Jan. 26, 2010) at 4, available at http://www.justice.gov/atr/public/speeches/254577.pdf.

[211] Judd E. Stone & Joshua D. Wright, The Sound of One Hand Clapping: The 2010 Merger Guidelines and the Challenge of Judicial Adoption, 39 Rev. Indus. Org. 145, 152 (2011).

[212] Report and Recommendations of the Antitrust Modernization Commission (Apr. 2007) at 54-55.

[213] Timothy J. Muris & Bilal Sayyed, Three Key Principles for Revising the Horizontal Merger Guidelines, Antitrust Source (Apr. 2010) at 3.

[214] Stone & Wright, supra note 366, at 157.

[215] Christine Varney, Assistant Att’y Gen., Antitrust Div., U.S. Dept. of Justice, Merger Guidelines Workshops (Sep. 22, 2009) at 4-5, available at http://www.justice.gov/atr/public/speeches/250238.pdf.

[216] See, e.g., Dennis Carlton, Revising the Horizontal Merger Guidelines, 6 J. Comp. L. & Econ. 1, 2 (2010) (“The Guidelines have proven to be a valuable and durable guide to antitrust practitioners and the courts”); William E. Kovacic, The Modern Evolution of Competition Policy Enforcement Norms, 71 Antitrust L.J. 377, 435 (“The Guidelines not only changed the way the U.S. courts and enforcement agencies examine mergers, but they also supplied an influential focal point for foreign competition authorities in the formulation of their own merger control regimes.”); Carl Shapiro, The 2010 Horizontal Merger Guidelines: From Hedgehog to Fox in Forty Years, 77 Antitrust L.J. 701, 703 (2010) (“One cannot help but marvel at how far merger enforcement has moved over the past forty years, with no change in the substantive provisions of the Clayton Act and very little new guidance on horizontal mergers from the Supreme Court”).

[217] Press Release, Department of Justice and Federal Trade Commission to Hold Workshops Concerning Horizontal Merger Guidelines (Sep. 22, 2009), https://www.justice.gov/opa/pr/department-justice-and-federal-trade-commission-hold-workshops-concerning-horizontal-merger.

[218] Id.

[219] Christine A. Varney, Assistant Att’y Gen., Antitrust Div., U.S. Dept. of Justice, An Update on the Review of the Horizontal Merger Guidelines (Jan. 26, 2010) at 3, available at http://www.justice.gov/atr/public/speeches/254577.pdf (emphasis added).

[220] 5 U.S.C. 553.

[221] We need not recount the entire series of actions here, but they include, inter alia: withdrawing the 2020 VMGs; rescinding the 2015 UMC Policy Statement; eviscerating HSR process by, among other things, suspending HSR early terminations and lowering merger-challenge thresholds; reinstating and expanding the use of prior-approval provisions; conducting business using “zombie votes”; and moving forward with competition rulemakings.

[222] There are myriad examples throughout the guidelines. To consider only a couple of examples, see, e.g., Draft Merger Guidelines fn 41 (citing Marine Bancorp for the proposition that “If the merging firm had a reasonable probability of entering the concentrated relevant market, the Agencies will usually presume that the resulting deconcentration and other benefits that would have resulted from its entry would be competitively significant” – Marine Bancorp speaks to the opposite circumstance, rejecting consideration of potential entry where state law prohibits such entry to occur at a meaningful scale); fn 53 (citing Brown Shoe at 328 for the proposition that, in the context of vertical mergers, “If the foreclosure share is above 50 percent, that factor alone is a sufficient basis to conclude that the effect of the merger may be to substantially lessen competition, subject to any rebuttal evidence.” – Brown Shoe at 329 further clarifies that “in which the foreclosure is neither of monopoly nor de minimis proportions, the percentage of the market foreclosed by the vertical arrangement cannot itself be decisive.”). Additionally, as other commentors note, the guidelines simply ignore decades of circuit and district court caselaw. In instances where they do cite to recent circuit court opinions, they do so improperly. See, e.g., Draft Merger Guidelines at fn 13 (citing United States v. AT&T, 916 F.3d 1029 (D.C. Cir. 2019) for the proposition that “Mergers Should not Substantially Lessen Competition by Creating a Firm that Controls Products or Services That Its Rivals May Use to Compete” – this was the government’s theory of harm in the case, not the court’s holding); fn 48 (citing FTC v. H.J. Heinz Co., 246 F.3d 708 (D.C. Cir. 2001) for the proposition that “the Agencies are unlikely to credit claims of commitments to protect or otherwise avoid harming their rivals that do not align with the firm’s incentives” – in the cited case the court was concern with “mere speculation and promises” that would protect rivals not “claims or commitments.”)..

[223] Brown Shoe Co. v. United States, 370 U.S. 294 (1962).

[224] United States v. Phila. Nat’l Bank, 374 U.S. 321 (1963).

[225] FTC v. Procter & Gamble Co., 386 U.S. 568 (1967).

[226] See, e.g., Douglas H Ginsburg & Joshua D Wright, Philadelphia National Bank: Bad Economics, Bad Law, Good Riddance, 80 Antitrust L.J. 377 (2015).

 

IN THE MEDIA

ICLE on the Durbin Amendment

Corpus Christi Caller Times – An ICLE white paper about the Durbin amendment UK’s Digital Markets was cited in an op-ed that appeared in the Corpus . . .

Corpus Christi Caller Times – An ICLE white paper about the Durbin amendment UK’s Digital Markets was cited in an op-ed that appeared in the Corpus Christi Caller Times. You can read full piece here.

Again, we know from experience what happened after the Durbin Amendment of 2010. Research for the International Center for Law and Economics found that “although the Durbin Amendment had generated benefits for large-box retailers, it had harmed many other merchants, especially those specializing in small-ticket items, and imposed substantial net costs on the majority of consumers, especially those from lower-income households.”

Geoff Manne and Keith Hylton on the Amazon Case

Bloomberg Law – ICLE President Geoffrey Manne and Academic Affiliate Keith Hylton were both quoted by Bloomberg Law in a story about the FTC’s antitrust case . . .

Bloomberg Law – ICLE President Geoffrey Manne and Academic Affiliate Keith Hylton were both quoted by Bloomberg Law in a story about the FTC’s antitrust case against Amazon. You can read full piece here.

Although the complaint doesn’t characterize them as two sides of the same market, they appear to function as one, said Keith Hylton, a professor at Boston University School of Law. But the link between them may not be as strong as in American Express, he cautioned.

…Amazon’s offerings to sellers go beyond American Express’ interactions with merchants. So it isn’t just facilitating the transaction like American Express is, making that case likely irrelevant, said Geoffrey Manne, president of the International Center for Law and Economics..

By choosing to define two connected markets rather than a single, two-sided one, the FTC may be trying to dodge the Supreme Court’s test, Manne said.

Mikołaj Barczentewicz on ‘Schrems III’

Euractiv – ICLE Senior Scholar Miko?aj Barczentewicz was cited by Euractiv in a newsletter item about his recent ICLE issue brief on “Schrems III.” You can . . .

Euractiv – ICLE Senior Scholar Miko?aj Barczentewicz was cited by Euractiv in a newsletter item about his recent ICLE issue brief on “Schrems III.” You can read full piece here.

Schrems III. The International Center for Law & Economics’s Senior Scholar Miko?aj Barczentewicz published a new issue brief about Schrems III on Monday. The paper discusses such issues as an “adequate level of protection” for personal data, the issue of proportionality of “bulk” data collection and of effective redress, as well as of access to information about American intelligence agencies’ data processes.

Lazar Radic & Dirk Auer on the UK’s DMCC

The New Statesman – A recent ICLE white paper co-published with the Institute for Economic Affairs about the UK’s Digital Markets, Competition and Consumers Bill was . . .

The New Statesman – A recent ICLE white paper co-published with the Institute for Economic Affairs about the UK’s Digital Markets, Competition and Consumers Bill was the subject of an article in The New Statesman. You can read full piece here.

What are we talking about this week? We’re talking about a new paper, Digital Overload: How the Digital Markets, Competition and Consumers Bill’s sweeping new powers threaten Britain’s economyIt’s from the Institute for Economic Affairs (IEA), written by one of their staffers plus two experts in competition law – Dirk Auer and Lazar Radic. They’re based at a co-publishing organisation called the International Centre for Law and Economics, a “”non-partisan research centre” that looks to “promote the use of law and economics methodologies to inform public policy debates”, according to its website.

Dirk Auer and Geoff Manne on the Amazon Case

Yahoo News – ICLE Director of Competition Policy Dirk Auer and President Geoffrey Manne were quoted by Yahoo News in a story about the FTC’s antitrust . . .

Yahoo News – ICLE Director of Competition Policy Dirk Auer and President Geoffrey Manne were quoted by Yahoo News in a story about the FTC’s antitrust case brought against Amazon that cited their recent New York Post op-ed. You can read full piece here.

“Unfortunately, the case is reminiscent of Captain Ahab’s doomed pursuit of Moby Dick — it is guided more by desire and ideology than a reasonable assessment of the costs and benefits. The result will be a wasteful battle all but guaranteed to founder in court.” — Geoffrey A. Manne and Dirk Auer, New York Post

Brian Albrecht on the FTC’s Amazon Suit

FEE Stories – ICLE Chief Economist Brian Albrecht was cited in a blog post at FEE Stories about the Federal Trade Commission’s major antitrust case against . . .

FEE Stories – ICLE Chief Economist Brian Albrecht was cited in a blog post at FEE Stories about the Federal Trade Commission’s major antitrust case against Amazon. You can read full piece here.

To sum up, the new FTC case against Amazon is rooted in familiar problems with antitrust cases—ambiguity and an inappropriate benchmark for competition remain at the heart of these complaints. I can only cover so much ground here, but if you’re interested in learning more about some of the issues with the case, I recommend following the International Center for Law and Economics’s own Brian Albrecht. Brian has analyzed this case with more technical detail and dedicates many Twitter threads and Substack posts to antitrust issues in theory and practice.

Eric Fruits on Net Neutrality

Law360 – ICLE Senior Scholar Eric Fruits was quoted by Law360 in a story about the Federal Communications Commission’s efforts to reinstate net neutrality. You can . . .

Law360 – ICLE Senior Scholar Eric Fruits was quoted by Law360 in a story about the Federal Communications Commission’s efforts to reinstate net neutrality. You can read full piece here.

Eric Fruits, a senior scholar at the International Center for Law and Economics, told Law360 on Wednesday the FCC has multiple avenues to use common-carrier regulation to affect broadband rates. “One of the big concerns that people have about the Title II reclassification is that it does open the door for rate regulation,” he said. “In some sense, one of the main purposes of Title II, at least with respect to telecoms, is rate regulation.”

Fruits, who recently co-authored a report with Geoffrey Manne on “de facto rate regulation” in the telecom sector, noted that with the 2015 net neutrality order, the FCC made clear it was not tackling that issue. Rosenworcel this week was “pretty adamant that they’re not doing it,” he said, but even so “there are some other issues that I think raise questions.”

For example, the chair mentioned banning paid prioritization several times, which the 2015 Open Internet Order did, “and it’s really hard to say [that] is not a form of rate regulation,” he said.

Another issue that will probably come up is zero-rating, which is an industry practice that involves not applying data caps to certain services. Fruits said that issue was never fully resolved from the 2015 order. “I think that is an issue that could come up again,” he said. “If you get rid of zero-rating, that again, is a form of rate regulation.”

Fruits said other concerns could arise from a Title II classification such as rates for attaching broadband equipment to utility poles.

 

Kristian Stout on Revived Net Neutrality

Communications Daily – ICLE Director of Innovation Policy Kristian Stout was quoted by Communications Daily in a story about the Federal Communications Commission’s plan to reinstate . . .

Communications Daily – ICLE Director of Innovation Policy Kristian Stout was quoted by Communications Daily in a story about the Federal Communications Commission’s plan to reinstate net-neutrality rules. You can read full piece here.

“Despite dire predictions, the internet has thrived in the absence of utility-style net-neutrality regulations,” said Kristian Stout, International Center for Law & Economics director-innovation policy. Stout also questioned whether the FCC has the authority to impose Title II regulation on broadband: “As the U.S. Supreme Court has made clear through its ‘major questions’ doctrine, federal agencies cannot make major regulatory moves without explicit authorization from Congress.”

ICLE on California’s Prop 103

Insurance News Net – A recent ICLE white paper on the failure of the insurance regulatory system created by California’s Proposition 103 was cited in a . . .

Insurance News Net – A recent ICLE white paper on the failure of the insurance regulatory system created by California’s Proposition 103 was cited in a story in Insurance News Net. You can read full piece here.

A new white paper by International Center for Law & Economics said 1988’s Prop 103 rating system, which was intended to protect consumers from arbitrary insurance rates and encourage a competitive marketplace, was “slow, imprecise, inflexible, unpredictable,” and was of questionable value to the state’s unique rate-intervenor system.

“Prop 103’s suppression of property-insurance rates in the private market has contributed to an availability crisis and the shunting of policyholders into the surplus-lines market and the California FAIR Plan, both of which will inevitably have to raise rates accordingly to be able to meet their obligations,” the ICLE authors wrote. “Prop 103 has created an insurance market that struggles to work efficiently even in the best of times and is virtually impossible to sustain in periods of acute stress.”

Brian Albrecht on the Amazon Case

Axios – ICLE Chief Economist Brian Albrecht was quoted by Axios in a story about the Federal Trade Commission filing a major antitrust case against Amazon. . . .

Axios – ICLE Chief Economist Brian Albrecht was quoted by Axios in a story about the Federal Trade Commission filing a major antitrust case against Amazon. You can read full piece here.

An argument could be made that penalizing Amazon or, at the most extreme, breaking up Prime could actually harm the consumer, says Brian Albrecht, chief economist at the International Center for Law & Economics

…Be smart: Because of anticipated difficulties in court, critics will argue antitrust law is outdated and is not equipped to regulate modern tech conglomerates, Albrecht says.

Gus Hurwitz and Geoff Manne on the Amazon Case

The Messenger – ICLE Director of Law & Economics Programs Gus Hurwitz and President Geoffrey Manne were quoted by The Messenger in a story about the . . .

The Messenger – ICLE Director of Law & Economics Programs Gus Hurwitz and President Geoffrey Manne were quoted by The Messenger in a story about the antitrust case brought by the Federal Trade Commission and 17 state attorney generals against Amazon. You can read full piece here.

“It’s really about proving harm to sellers, not harm to consumers,” said Justin Hurwitz, Director of Law and Economics Programs at the nonprofit institute, International Center for Law & Economics.

…Nonprofit legal organization International Center for Law & Economics President and Founder Geoffrey A. Manne said that while the suit wasn’t unexpected, but the scope of it is more surprising.

“If successful, the FTC’s suit could profoundly undermine central features of the Amazon retail platform,” Manne said in an email.

Geoff Manne on the Amazon Suit

CBS News – ICLE President Geoffrey Manne quoted by CBS News in a story about the antitrust case brought by the Federal Trade Commission and 17 . . .

CBS News – ICLE President Geoffrey Manne quoted by CBS News in a story about the antitrust case brought by the Federal Trade Commission and 17 state attorney generals against Amazon. You can read full piece here.

“T]he case could greatly harm consumers, all in an attempt to shift the course of U.S. antitrust policy against the will of Congress and the courts, Geoffrey A. Manne, president and founder of the International Center for Law & Economics, a nonprofit public policy research group, said in an email.

Geoff Manne on the Amazon Case

Broadband Breakfast – ICLE President Geoffrey Manne quoted by Broadband Breakfast in a story about the Federal Trade Commission filing a major antitrust case against Amazon. . . .

Broadband Breakfast – ICLE President Geoffrey Manne quoted by Broadband Breakfast in a story about the Federal Trade Commission filing a major antitrust case against Amazon. You can read full piece here.

In a public statement responding to the lawsuit, Center for Law & Economics President and Founder Geoffrey A. Manne stated that it was “expected” but also argued that the “extreme demands greatly undermine the chances that the agency will prevail in court.”

“The case could greatly harm consumers, all in an attempt to shift the course of U.S. antitrust policy against the will of Congress and the courts,” said Manne.

Kristian Stout on 2.5 GHz License Grants

Communications Daily – ICLE Director of Innovation Policy Kristian Stout was quoted by Communications Daily in a story about legislative efforts to include granting the Federal . . .

Communications Daily – ICLE Director of Innovation Policy Kristian Stout was quoted by Communications Daily in a story about legislative efforts to include granting the Federal Communications Commission authority to grant 2.5 GHz licenses to the congressional funding resolution. You can read full piece here.

“Right now it looks like, given the state of Congress, this could be a solution that helps get those licenses into use,” said Kristian Stout, International Center for Law and Economics innovation policy director.

ICLE on Rewards Cards

Americans for Tax Reform – ICLE research on payment cards’ “rewards” programs was cited by Americans for Tax Reform in a recent “key vote” announcement regarding . . .

Americans for Tax Reform – ICLE research on payment cards’ “rewards” programs was cited by Americans for Tax Reform in a recent “key vote” announcement regarding the Credit Card Competition Act. You can read full piece here.

The mandates in the bill are so costly that more than $75 billion in rewards that consumers receive every year would largely disappear. According to the International Center for Law & Economics, “86% of credit cardholders have active rewards cards, including 77% of cardholders with a household income of less than $50,000.” The disappearance of rewards would likely harm minority communities and small businesses.

Dirk Auer & Lazar Radic on the DMCC Bill

City A.M. – A recent ICLE white paper co-published with the Institute for Economic Affairs about the UK’s Digital Markets, Competition and Consumers Bill was the . . .

City A.M. – A recent ICLE white paper co-published with the Institute for Economic Affairs about the UK’s Digital Markets, Competition and Consumers Bill was the subject of an article in City A.M. You can read full piece here.

Authors of the paper also include Dirk Auer and Lazar Radic from the International Center for Law and Economics (ICLE).

ICLE on Kristen Osenga

University of Richmond School of Law – Professor Kristen Osenga’s appointment as an ICLE academic affiliate was noted in a recent bulletin from the University of . . .

University of Richmond School of Law – Professor Kristen Osenga’s appointment as an ICLE academic affiliate was noted in a recent bulletin from the University of Richmond School of Law. You can read full piece here.

Professor Kristen Osenga received the 2023 Law Distinguished Scholarship Award. A member of the law faculty for seventeen years, Professor Osenga currently holds the title of Austin E. Owen Research Scholar, and in 2022 became the law school’s Associate Dean of Academic Affairs. An expert in intellectual property law and information law, her work has appeared in some of the nation’s top legal and specialty journals, including the American University Law ReviewGeorge Mason Law Review, and George Washington Law Review. Most recently, Professor Osenga was named both an Academic Affiliate at the International Center for Law & Economics and a Senior Fellow for Innovation Policy at the Center for Intellectual Property & Innovation Policy (C-IP2) at George Mason Law

 

ICLE on the UK’s DMCC Bill

UK Tech News – A recent ICLE white paper about the UK’s Digital Markets, Competition and Consumers Bill, co-published with the Institute for Economic Affairs, was . . .

UK Tech News – A recent ICLE white paper about the UK’s Digital Markets, Competition and Consumers Bill, co-published with the Institute for Economic Affairs, was cited in an article about the paper published by UK Tech News. You can read full piece here.

But giving the Competition and Markets Authority (CMA) the additional powers laid out in the proposed bill will harm growth, the Institute of Economic Affairs (IEA) along with the International Center for Law and Economics (ICLE) have warned.

According to the paper, which has drawn support from several MPs, the proposed law undermines the UK government’s “science and tech superpower” goals.

Brian Albrecht on Inflation

Econlib – ICLE Chief Economist Brian Albrecht was cited in a blog post at Econlib about a recent post of his on theories of inflation. You . . .

Econlib – ICLE Chief Economist Brian Albrecht was cited in a blog post at Econlib about a recent post of his on theories of inflation. You can read full piece here.

Brian Albrecht has a very good post criticizing ad hoc theories of inflation, such as those that point to a mysterious rise in “collusion”.  He favors the traditional supply and demand approach to prices

 

 

ICLE on the Durbin Amendment

The Points Guy  – An ICLE report on the effects of the Durbin amendment on debit-card networks was cited in a post by The Points . . .

The Points Guy  – An ICLE report on the effects of the Durbin amendment on debit-card networks was cited in a post by The Points Guy op-ed about proposals to extend its rules to credit-card networks. You can read full piece here.

Another study by the International Center for Law & Economics estimates that the cap on interchange fees for debit transactions hit large banks’ annual revenues to the tune of $6.6-$8 billion. The loss in revenue directly contributed to reducing free checking accounts and rewards programs.

Dirk Auer on the DMA and Ad Tech

Exchange Wire – ICLE Director of Competition Policy Dirk Auer was quoted by Exchange Wire in a story about the impact the European Union’s Digital Markets . . .

Exchange Wire – ICLE Director of Competition Policy Dirk Auer was quoted by Exchange Wire in a story about the impact the European Union’s Digital Markets Act could have on ad tech. You can read full piece here.

Even if tech giants do adhere to this aspect of the DMA, it is also worth considering how competitors respond to it. Dirk Auer, president of the International Centre for Law and Economics, warns that compulsory compatibility with third-party apps could be detrimental to innovation within Europe. “If the goal is to nurture European tech firms—as some have claimed—the DMA will likely be underwhelming,” Auer states. “The DMA mostly enables rival firms to interoperate with large platforms at a lower cost. This will incentivise European startups and other firms to piggyback on existing platforms rather than create their own. As a result, the DMA is unlikely to meaningfully alter competition at the platform level.”

ICLE on Doomsday Mergers

Townhall – A recent ICLE white paper on so-called “doomsday mergers” was cited in an opinion piece published by Townhall. You can read full piece here. . . .

Townhall – A recent ICLE white paper on so-called “doomsday mergers” was cited in an opinion piece published by Townhall. You can read full piece here.

The Amazon-Whole Foods deal is an example of what International Center for Law & Economics scholars call “doomsday mergers.” In their recent, the authors document how progressive antitrust advocates have made alarming predictions about mergers across sectors—from beverages to pharmaceuticals to tech. These forecasts proved to be “completely untethered from prevailing market realities, as well as far removed from the outcomes that emerged after the mergers.”

John Lopatka on the Google Antitrust Case

Agence France Presse – ICLE Academic Affiliate John Lopatka was quoted by Agence France Presse in a story about the U.S. Justice Department’s pending antitrust case . . .

Agence France Presse – ICLE Academic Affiliate John Lopatka was quoted by Agence France Presse in a story about the U.S. Justice Department’s pending antitrust case against Google. You can read full piece here.

“Technology has progressed a lot in 20 years so what results from this case will have a strong bearing on how tech platforms operate in the future,” said John Lopatka, from Penn State’s School of Law.

 

Brian Albrecht on Kroger’s Divestiture Plan

Axios – ICLE Chief Economist Brian Albrecht was quoted in a story in Axios about Kroger and Albertsons agreement to divest select stores to C&S Wholesale . . .

Axios – ICLE Chief Economist Brian Albrecht was quoted in a story in Axios about Kroger and Albertsons agreement to divest select stores to C&S Wholesale in an effort to gain Federal Trade Commission approval of their proposed merger. You can read full piece here.

What they’re saying: “This is exactly the type of divestiture we expected,” Brian Albrecht, chief economist at the International Center for Law & Economics, tells Axios.
  • “A midsized company like C&S should be able to avoid the financing problems that happened to Haggen,” he adds, referencing a failed divestiture from the 2014 Albertson’s-Safeway merger.

Geoff Manne on the Google Search Antitrust Case

Law360 – ICLE President Geoffrey Manne quoted in a Law360 story about the U.S. Justice Department’s pending antitrust case targeting Google’s search operations. You can read . . .

Law360 – ICLE President Geoffrey Manne quoted in a Law360 story about the U.S. Justice Department’s pending antitrust case targeting Google’s search operations. You can read full piece here.

Google is not without its backers, including the International Center for Law and Economics, or ICLE, a right-leaning think tank that has railed against DOJ and Federal Trade Commission efforts to fundamentally reshape antitrust enforcement including through pushing back against the power of Big Tech.

ICLE President and founder Geoffrey A. Manne told Law360 that Judge Mehta “showed a lot of skepticism” during the April arguments over summary judgment. “They have a bit of an uphill battle,” he said of the enforcers.

…”The Microsoft case certainly looms large,” said Manne of the ICLE. “It’s going to be the main precedent.”

 

 

Brian Albrecht on Kroger and Albertsons’ Divestitures

Anchorage Daily News – ICLE Chief Economist Brian Albrecht was quoted in a story in the Anchorage Daily News about Kroger and Albertsons’ proposal to divest . . .

Anchorage Daily News – ICLE Chief Economist Brian Albrecht was quoted in a story in the Anchorage Daily News about Kroger and Albertsons’ proposal to divest stores in order to complete their planned merger. You can read full piece here.

Brian Albrecht, an economist with the International Center for Law and Economics, a think tank in Portland, Oregon, said the stores that are likely to be part of the divestiture are those in larger cities, such as where Fred Meyer and Carrs Safeway compete within close distance of each other. That’s because the divestiture is likely designed to reduce anti-competitive concerns among federal regulators, he said.

One such situation is the Fred Meyer and Carrs Safeway stores in Midtown Anchorage that are a hop across the Seward Highway from each other.

Albrecht said Alaska is on deck to see a large proportion of stores sold for its small population, compared to other states.

He said the choice of C&S appears to be a good move by Kroger and Albertsons, Albrecht said.

C&S has enough money to operate stores that can compete with a newly merged company. But they’re not so big that their proposed acquisition of more than 400 stores would create its own antitrust issues, he said.

“I think the FTC would be in a really hard spot if they don’t take this very seriously as a solution, he said.

 

Geoff Manne, Gus Hurwitz, Todd Zywicki & Richard Epstein on Chevron

City Journal – An amicus brief signed by ICLE President Geoffrey Manne, Director of Law & Economics Programs Gus Hurwitz, Nonresident Scholar Todd Zywicki, and Academic . . .

City Journal – An amicus brief signed by ICLE President Geoffrey Manne, Director of Law & Economics Programs Gus Hurwitz, Nonresident Scholar Todd Zywicki, and Academic Advisor Richard Epstein was cited in a story in City Journal about challenges to the U.S. Supreme Court’s Chevron decision. You can read full piece here.

The Manhattan Institute filed an amicus brief in this blockbuster case, joined by professors Richard Epstein, Todd Zywicki, Gus Hurwitz, and Geoffrey Manne. We argue that the Court should take this opportunity to overhaul the Chevron-deference regime because this experiment in rebalancing the relationship between presidential administration and judicial review has failed. It has led to agency overreach, haphazard practical results, and the diminution of Congress. Though intended to empower Congress by limiting the role of courts, Chevron has instead empowered agencies to aggrandize their own powers to the greatest extent plausible under their operative statutes, and often beyond.

Geoff Manne on the Amgen Settlement

Law360 – ICLE President Geoffrey Manne quoted in a Law360 story about Amgen’s settlement with the Federal Trade Commission regarding their planned purchase of Horizon Therapeutics. . . .

Law360 – ICLE President Geoffrey Manne quoted in a Law360 story about Amgen’s settlement with the Federal Trade Commission regarding their planned purchase of Horizon Therapeutics. You can read full piece here.

But for all the fixes that come with the deal, one major critic of Khan’s FTC argues that it’s actually fairly limited. Geoffrey A. Manne, president and founder of the International Center for Law & Economics, which filed an amicus brief backing the companies, argued that unlike other deals where the FTC has negotiated a fairly broad prior approval provision covering a wide array of future mergers or even all future transactions for a 10-year period, the deal here only covers transactions scooping up potential treatments for the two diseases at issue.

“That’s a face-saving thing for the FTC,” Manne told Law360. “It’s a strong indication the FTC knew it had no bargaining power here, other than the cost of litigation.”

Brian Albrecht on the Merger of Kroger and Albertsons

Anchorage Daily News – ICLE Chief Economist Brian Albrecht was quoted in a story in the Anchorage Daily News about unions’ opposition to Kroger and Albertsons’ . . .

Anchorage Daily News – ICLE Chief Economist Brian Albrecht was quoted in a story in the Anchorage Daily News about unions’ opposition to Kroger and Albertsons’ proposal to merge. You can read full piece here.

Brian Albrecht, an economist with the International Center for Law and Economics, a think tank in Portland, Oregon, said the two chains face anti-competition concerns primarily in some areas of the western U.S., but not across most of the U.S. where their brands’ operations do not overlap.

He said regulators will be looking closely at individual markets such as the one in Alaska and can make sure the deal addresses antitrust issues, worker concerns and the state’s unique logistical challenges.

PRESENTATIONS & INTERVIEWS

Gus Hurwitz on the Google and Amazon Cases

ICLE Director of Law & Economics Programs Gus Hurwitz was a guest on The Cyberlaw Podcast, where he discussed the U.S. Justice Department’s recently initiated . . .

ICLE Director of Law & Economics Programs Gus Hurwitz was a guest on The Cyberlaw Podcast, where he discussed the U.S. Justice Department’s recently initiated trial against Google and a pair of cases brought by the Federal Trade Commission against Amazon. Audio of the full episode is embedded below.

Lazar Radic on the UK’s Digital Markets Bill

ICLE Senior Scholar Lazar Radic joined Institute of Economic Affairs (IEA) Director of Public Policy and Communications Matthew Lesh on the IEA Podcast to discuss . . .

ICLE Senior Scholar Lazar Radic joined Institute of Economic Affairs (IEA) Director of Public Policy and Communications Matthew Lesh on the IEA Podcast to discuss the new joint ICLE-IEA paper “Digital Overload: How the Digital Markets, Competition and Consumers Bill’s Sweeping New Powers Threaten Britain’s Economy.” Video of the full podcast is embedded below.

The Future of Article 102: Evolution or Revolution?

In March 2023, the European Commission announced new guidelines on exclusionary abuses and amended its 2008 guidance on enforcement priorities concerning exclusionary abuses. According to . . .

In March 2023, the European Commission announced new guidelines on exclusionary abuses and amended its 2008 guidance on enforcement priorities concerning exclusionary abuses.

According to the Commission, the initiative aims at reflecting the EU courts’ case law, as well as the extensive experience gained in the enforcement of Article 102 of the Treaty on the Functioning of the European Union (Art. 102 TFEU).

The International Center for Law & Economics (ICLE) hosted a Sept. 18, 2023 panel in Brussels to discuss the changes made to the guidance paper, the most pressing challenges that the new guidelines need to address, and the interplay between Art. 102 TFEU and the Digital Markets Act. Video of the full event is embedded below.

Keith Hylton on the Google Antitrust Case

ICLE Academic Affiliate Keith Hylton of Boston University School of Law joined Yahoo Finance Live to discuss the U.S. Justice Department’s recently launched Section 2 . . .

ICLE Academic Affiliate Keith Hylton of Boston University School of Law joined Yahoo Finance Live to discuss the U.S. Justice Department’s recently launched Section 2 antitrust case against Google and how it compares to the case brought against Microsoft in 1998. The full video is embedded below.

John Lopatka on the Google Search Case

ICLE Academic Affiliate John Lopatka appeared as a guest on KCBS Radio in San Francisco to discuss the U.S. Justice Department’s antitrust case against Google. . . .

ICLE Academic Affiliate John Lopatka appeared as a guest on KCBS Radio in San Francisco to discuss the U.S. Justice Department’s antitrust case against Google. The full audio clip is embedded below.

Geoff Manne on the Google Search Trial

ICLE President Geoffrey Manne joined Tech Policy Podcast host Corbin Barthold to discuss the start of the U.S. Justice Department’s Google search antitrust trial. The . . .

ICLE President Geoffrey Manne joined Tech Policy Podcast host Corbin Barthold to discuss the start of the U.S. Justice Department’s Google search antitrust trial. The full episode is embedded below.

;

Ben Sperry on Internet Age-Verification Rules

ICLE Senior Scholar took part in an online panel hosted by the Federalist Society’s Regulatory Transparency Project regarding recent regulatory and legislative proposals to enact . . .

ICLE Senior Scholar took part in an online panel hosted by the Federalist Society’s Regulatory Transparency Project regarding recent regulatory and legislative proposals to enact age-verification requirements for access to social media and adult websites. Video of the full panel is embedded below.

SHORT FORM WRITTEN OUTPUT

What Does NetChoice v. Bonta Mean for KOSA and Other Attempts to Protect Children Online?

With yet another win for NetChoice in the U.S. District Court for the Northern District of California—this time a preliminary injunction granted against California’s Age Appropriate Design Code (AADC)—it is . . .

With yet another win for NetChoice in the U.S. District Court for the Northern District of California—this time a preliminary injunction granted against California’s Age Appropriate Design Code (AADC)—it is worth asking what this means for the federally proposed Kids Online Safety Act (KOSA) and other laws of similar import that have been considered in a few states. I also thought it was worthwhile to contrast them with the duty-of-care proposal we at the International Center for Law & Economics have put forward, in terms of how best to protect children from harms associated with social media and other online platforms.

In this post, I will first consider the Bonta case, its analysis, and what it means going forward for KOSA. Next, I will explain how our duty-of-care proposal differs from KOSA and the AADC, and why it would, in select circumstances, open online platforms to intermediary liability where they are best placed to monitor and control harms to minors, by making it possible to bring products-liability suits. I will also outline a framework for considering how the First Amendment and the threat of collateral censorship interacts with such suits.

Read the full piece here.

FTC v Amazon: Significant Burdens to Prove Relevant Markets and Net Consumer Harm

tl;dr Background: The Federal Trade Commission (FTC) and 17 states this month filed a major antitrust complaint against Amazon. The much-anticipated suit comes more than . . .

tl;dr

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

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

KEY TAKEAWAYS

SEEMINGLY TRADITIONAL THEORIES OF HARM

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

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

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

NARROW RELEVANT MARKETS

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

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

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

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

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

OVERLOOKING THE BENEFITS OF AMAZON’S CONDUCT

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

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

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

RESTORING ‘FAIR COMPETITION’

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

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

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

 

Net Neutrality II: Electric Boogaloo—Rate Regulation Hiding in Plain Sight

Federal Communications Commission (FCC) Chair Jessica Rosenworcel on Tuesday announced the agency’s proposal to regulate internet services under Title II of the Communications Act. Commonly referred . . .

Federal Communications Commission (FCC) Chair Jessica Rosenworcel on Tuesday announced the agency’s proposal to regulate internet services under Title II of the Communications Act. Commonly referred to as “net neutrality,” the chair plans to release proposed rules today, with a vote scheduled for Oct. 19 to begin the rulemaking process.

Read the full piece here.

Maybe Google Is Popular Because It’s Good?

In July 2001, a dozen Google techies pondered their mission mantra. In essence, they aimed “to organize the world’s information and make it universally accessible and . . .

In July 2001, a dozen Google techies pondered their mission mantra. In essence, they aimed “to organize the world’s information and make it universally accessible and useful.” However, their ambition was celestial. They grasped for a moniker.

The network of networks was expanding exponentially in every direction, with websites stacking up data everywhere. The informational jumble was messier than a teenager’s bedroom floor.

Read the full piece here.

FTC’s Amazon Complaint: Perhaps the Greatest Affront to Consumer and Producer Welfare in Antitrust History

The FTC—joined (unfortunately) by 17 state attorneys general—on Sept. 26 filed its much-anticipated antitrust complaint against Amazon in the U.S. District Court for the Western . . .

The FTC—joined (unfortunately) by 17 state attorneys general—on Sept. 26 filed its much-anticipated antitrust complaint against Amazon in the U.S. District Court for the Western District of Washington. Lacking all sense of irony, Deputy Director Newman, quoted above, bragged about the case’s potential to do greater good than almost all previous antitrust lawsuits.

Read the full piece here.

FTC Chair Lina Khan’s Mission to Destroy Amazon Will Harm Millions of Consumers

The Federal Trade Commission and 17 states have filed a high-profile antitrust lawsuit against Amazon that could force major changes to the popular Amazon Prime . . .

The Federal Trade Commission and 17 states have filed a high-profile antitrust lawsuit against Amazon that could force major changes to the popular Amazon Prime service — which would be bad news for its 167 million American members.

Read the full piece here.

As Shutdown Fight Looms, Congress Should Remember Broadband Program

With Congress facing a Sept. 30 deadline to pass both its appropriations and farm bills, and the threat of a government shutdown looming, the options . . .

With Congress facing a Sept. 30 deadline to pass both its appropriations and farm bills, and the threat of a government shutdown looming, the options to find a moving vehicle to which Congress could attach an extension of the $14 Affordable Connectivity Program (ACP) are running short.

Read the full piece here.

An FTC Complaint Against Amazon Gets Personal

There is much in the Federal Trade Commission’s (FTC) record over the past two years that could be categorized as abnormal. There is, for instance, . . .

There is much in the Federal Trade Commission’s (FTC) record over the past two years that could be categorized as abnormal. There is, for instance, nothing “normal” about using the threat of excessive force to cower businesses into submission. Introducing sky high costs for the filing of mergers isn’t normal, as it will scare away merging parties. These are attempts at regulation by intimidation.

Read the full piece here.

More FTC Overreach in Labor Markets

The Federal Trade Commission (FTC) and U.S. Labor Department (DOL) signed a memorandum of understanding (MOU) this past week “to strengthen the Agencies’ partnership through greater cooperation . . .

The Federal Trade Commission (FTC) and U.S. Labor Department (DOL) signed a memorandum of understanding (MOU) this past week “to strengthen the Agencies’ partnership through greater cooperation and coordination in information sharing, investigations and enforcement activity, training, education, research, and outreach.” The accompanying Sept. 21 announcement is another example of FTC overreach, as it highlights matters that simply are not part of the agency’s mission.

Read the full piece here.

The Marketplace of Ideas: Government Failure Is Worse Than Market Failure When It Comes to Social-Media Misinformation

Today marks the release of a white paper I have been working on for a long time, titled “Knowledge and Decisions in the Information Age: . . .

Today marks the release of a white paper I have been working on for a long time, titled “Knowledge and Decisions in the Information Age: The Law & Economics of Regulating Misinformation on Social-Media Platforms.” In it, I attempt to outline an Austrian law & economics theory of state action under the First Amendment, and then explain why it is important to the problem of misinformation on social-media platforms.

Read the full piece here.

Abandoning Antitrust Common Sense: The FTC’s New Normal?

This symposium wonders what exactly is “The FTC’s New Normal”? The short answer: scary. The current Federal Trade Commission (FTC) leadership is clear that old . . .

This symposium wonders what exactly is “The FTC’s New Normal”? The short answer: scary.

The current Federal Trade Commission (FTC) leadership is clear that old U.S. Supreme Court opinions, rather than more recent jurisprudence, are their lodestones for antitrust analysis. This is dramatically illustrated by the draft merger guidelines recently proposed by the FTC and U.S. Justice Department’s (DOJ) Antitrust Division; as Geoff Manne has noted, of the 48 antitrust decisions cited, only 10 are from this century, and on a weighted-average basis, the cases cited are almost a half-century old!

Read the full piece here.

The Digital Competition and Consumers Bill Threatens to Wrap UK Tech in Red Tape

The UK has long prided itself as an attractive destination for investors and a hub for innovation. This is no small part due to the . . .

The UK has long prided itself as an attractive destination for investors and a hub for innovation. This is no small part due to the country’s sensible and proportionate, evidence-based approach to regulation, which focuses on correcting market failures. But a new bill currently in Parliament risks undermining Britain’s status as a regulatory role model, as well as Rishi Sunak’s ambition to turn the UK into a “science and technology superpower.” The Digital Competition and Consumers Bill (DMCC) takes its inspiration from the EU’s Digital Markets Act. The DMCC would give the Competition and Market Authority’s (CMA) expansive new powers to prohibit or compel conduct in digital markets, with potentially far-reaching implications for consumers, investment, innovation, and the country’s overall competitiveness.

Read the full piece here.

ICLE on the ACP, BEAD in the Spotlight, Small Steps Toward Ending the Spectrum Impasse

School’s back in session and the Telecom Hootenanny is heating up. We’ve got a hot-off-the-presses issue brief on the ACP, more BEAD agonistes, and the latest on . . .

School’s back in session and the Telecom Hootenanny is heating up. We’ve got a hot-off-the-presses issue brief on the ACP, more BEAD agonistes, and the latest on spectrum auctions.

Read the full piece here.

Regulatory Humility or Regulatory Hubris at the Federal Trade Commission?

Competition policy at the Federal Trade Commission (FTC) will naturally ebb and flow, depending on its leadership. Over the years, some commissions have taken a . . .

Competition policy at the Federal Trade Commission (FTC) will naturally ebb and flow, depending on its leadership. Over the years, some commissions have taken a more aggressive approach, while others have granted greater credibility to market forces. Still, regardless of the party in power, the agency was generally able to maintain a solid reputation as an antitrust-enforcement agency that adhered to the law and took a dispassionate approach when evaluating the cases before it.

Not anymore.

Read the full piece here.

Three Key Questions in the Google Antitrust Case

Last Tuesday, the Department of Justice (DOJ) kicked off its first major monopolization trial since the Microsoft case of the late 1990s. The target this . . .

Last Tuesday, the Department of Justice (DOJ) kicked off its first major monopolization trial since the Microsoft case of the late 1990s. The target this time is a Microsoft rival: Google. Google’s ubiquitous search engine competes with Microsoft’s Bing, which powers search engines Yahoo and DuckDuckGo.

Filed in the waning days of the Trump administration, the government’s lawsuit alleges that Google has cemented its monopoly power in general internet search and related search advertising by paying to be the default search engine on various “search access points.” Specifically, Google secures default status by agreeing to share search advertising revenue with web browsers like Mozilla’s Firefox, producers of Android phones and the carriers who service them, and iPhone maker Apple. In the government’s telling, these deals prevent Google’s search rivals from achieving the scale they need to become formidable competitors.

Read the full piece here.

Recent Antitrust and Regulatory Changes Both Unravel the Consensus

Presidential administrations over the last 50 years have pursued widely varying policy goals, but they have agreed—at least, in principle—that policies should be efficient and . . .

Presidential administrations over the last 50 years have pursued widely varying policy goals, but they have agreed—at least, in principle—that policies should be efficient and improve social welfare. Now, the Biden administration is taking steps to unravel that bipartisan consensus. We focus on different policy areas (Dudley on regulation and Sullivan on antitrust) and are struck by the similarities among the radical changes being proposed.

Read the full piece here.

The Biden Administration’s Contradictory Disdain for ‘Junk Fees’

The White House has declared war on so-called “junk fees,” i.e. add-on fees to transactions that increase complexity and decrease price transparency as opposed to rolling all . . .

The White House has declared war on so-called “junk fees,” i.e. add-on fees to transactions that increase complexity and decrease price transparency as opposed to rolling all relevant costs into one “all-in” price. Regulators such as the Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission have followed with their own rules implementing that command.

Read the full piece here.

The Effect of VAT Withholding Requirements in Latin America

Innovations in payment systems are rapidly transforming the world economy. While Bitcoin, Ethereum, and other decentralized blockchain-based systems tend to garner much of the press . . .

Innovations in payment systems are rapidly transforming the world economy. While Bitcoin, Ethereum, and other decentralized blockchain-based systems tend to garner much of the press (good and bad), centralized peer-to-peer (P2P) payment systems are far more common. (Note that I use the term P2P here in its original sense to mean all peer-to-peer transactions, which includes transactions between any combination of individuals, businesses, and other entities, such as governments and unincorporated associations.) 

Read the full piece here.

Antitrust at the Agencies Roundup: Take My Default … Please! Edition

I can hardly believe it, but I’ve read that a famous old bit by Henny Youngman has been purged from Florida textbooks, apparently because it was . . .

I can hardly believe it, but I’ve read that a famous old bit by Henny Youngman has been purged from Florida textbooks, apparently because it was deemed offensive to those who wrote, told, and laughed at the joke. I won’t tell it here, but you can look it up. And if you’re a reader of a certain age, you’ll know it as soon as I note that it’s at the heart of the U.S. Justice Department’s (DOJ) antitrust case against Google.

Read the full piece here.

The FTC, DOJ, and International Competition Law: Convergence Away From the Consumer Welfare Standard?

In less than two and a half years, the Federal Trade Commission (FTC) and U.S. Justice Department (DOJ) have undone more than two decades of . . .

In less than two and a half years, the Federal Trade Commission (FTC) and U.S. Justice Department (DOJ) have undone more than two decades of work aimed at moving global competition law toward an economics-friendly consumer welfare standard. In tandem with foreign competition authorities, the U.S. antitrust agencies are now cooperating in an effort to lead competition law in a consumer welfare-inimical direction, characterized by the promotion of debunked structuralist antitrust principles and a disdain for economic efficiency.

To better appreciate the dramatic turnabout represented by recent policy, an overview of U.S. efforts to promote global convergence toward best practices in competition law—an effort in which DOJ and FTC played leading roles—is warranted. In particular, I will focus on the role played over two decades by the International Competition Network (ICN) in fostering support for an economics-based, consumer welfare-centric approach to competition policy. Unfortunately, the Biden administration’s antitrust policies have short-circuited these efforts, at least temporarily.

Read the full piece here.

The FTC Tacks Into the Gale, Battening No Hatches: Part 2

Emergence of the ‘Neo-Brandeisians’ Thus, matters unfolded until the curtain began to descend on the second Obama term in 2016. In the midst of presidential . . .

Emergence of the ‘Neo-Brandeisians’

Thus, matters unfolded until the curtain began to descend on the second Obama term in 2016. In the midst of presidential primary season, a targeted political challenge to the prevailing economic approach to antitrust first came to light. No one has yet clearly identified who was doing the targeting, but the March 26, 2016 edition of The Economist magazine included an article that suggested U.S. firms were earning excessive profits because new entry was blocked by monopoly abuses and by “lobbying” to obstruct competition. The Economist suggested scrutiny of U.S. antitrust policy as one item on a broad list of suggested remedies.

Read the full piece here.

The FTC Tacks Into the Gale, Battening No Hatches: Part 1

The Evolution of FTC Antitrust Enforcement – Highlights of Its Origins and Major Trends 1910-1914 – Creation and Launch The election of 1912, which led . . .

The Evolution of FTC Antitrust Enforcement – Highlights of Its Origins and Major Trends

1910-1914 – Creation and Launch

The election of 1912, which led to the creation of the Federal Trade Commission (FTC), occurred at the apex of the Progressive Era. Since antebellum times, Grover Cleveland had been the only Democrat elected as president. But a Democratic landslide in the 1910 midterms during the Taft administration substantially reduced the Republicans’ Senate majority and gave the Democrats a huge majority in the House, signaling a major political shift. Spurred by progressive concern that Standard Oil—decided in 1911—signaled judicial leniency toward trusts and monopolies, government control of big business became the leading issue of the 1912 campaign. Both the progressive Democrats and the so-called Republican “insurgents” favored stronger antitrust laws, reduced hours and an antitrust exemption for workers, and closer federal regulation of banking and currency, among other items. Progressive agendas led both Woodrow Wilson’s “New Freedom” platform and the “New Nationalism” of former Republican President Theodore Roosevelt and his Bull Moose Party.

Read the full piece here.

The FTC Lacks Authority for Competition Rulemaking

Before becoming chair of the Federal Trade Commission (FTC), Lina Khan advocated the use of rulemakings to implement the prohibition on unfair methods of competition (UMC) . . .

Before becoming chair of the Federal Trade Commission (FTC), Lina Khan advocated the use of rulemakings to implement the prohibition on unfair methods of competition (UMC) in Section 5 of the FTC Act. As chair, she proposed a rule, which likely will be finalized in the spring, to ban noncompete clauses in employment contracts. But I expect a court to quash this bold assertion of quasi-legislative power.

Read the full piece here.

Right to Anonymous Speech, Part 3: Anonymous Speech and Age-Verification Laws

An issue that came up during a terrific panel that I participated in last Thursday—organized by the Federalist Society’s Regulatory Transparency Project—was whether age-verification laws for social-media use . . .

An issue that came up during a terrific panel that I participated in last Thursday—organized by the Federalist Society’s Regulatory Transparency Project—was whether age-verification laws for social-media use infringed on a First Amendment right of either adults or minors to receive speech anonymously.

My co-panelist Clare Morell of the Ethics and Public Policy Center put together an excellent tweet thread summarizing some of her thoughts, including on the anonymous-speech angle. Another co-panelist—Shoshana Weissmann of the R Street Institute—also has a terrific series of blog posts on this particular issue.

Continuing this ongoing Truth on the Market series on anonymous speech, I wanted to respond to some of these ideas, and to argue that the primary First Amendment and public-policy concerns with age-verification laws really aren’t about anonymous speech. Instead, they are about whether such laws place the burden of avoiding harms on the least-cost avoider. Or, in the language of First Amendment jurisprudence, whether they are the least restrictive means to achieve a particular policy end.

Read the full piece here.

Will the EU-U.S. Data Privacy Bridge Hold?

With the European Commission’s recent announcement that it had deemed the revamped data-protection framework from the United States to be “adequate” under the European Union’s . . .

With the European Commission’s recent announcement that it had deemed the revamped data-protection framework from the United States to be “adequate” under the European Union’s stringent General Data Protection Regulation (GDPR), the stage is set for what promises to be a legal rollercoaster in the European Court of Justice (CJEU). The Commission’s decision is certain to be challenged, and the CJEU’s ultimate decision in that case has the potential to shape transatlantic relations and global data governance for years to come.

Read the full piece here.

A Bad Merger of Process and Substance: Changing the Merger Guidelines and Premerger Review Form

On June 27, 2023, the Federal Trade Commission (“FTC”) announced proposed changes to Hart-Scott-Rodino Act (“HSR Act”) premerger notification form. Less than a month later, . . .

On June 27, 2023, the Federal Trade Commission (“FTC”) announced proposed changes to Hart-Scott-Rodino Act (“HSR Act”) premerger notification form. Less than a month later, on July 19, the FTC and Department of Justice (“DOJ”) announced proposed changes to the agencies’ joint merger guidelines. These proceedings are closely related, both part of the Biden administration’s ongoing efforts to approach U.S. merger law more aggressively. But despite being part of the same substantive agenda, these two sets of changes are governed by distinct procedural rules and, ultimately, are likely to have very different effects on how merger law is enforced in the United States.

Read the full piece here.

The Federal Affordable Connectivity Program’s Funding Must Continue to Benefit NJ

Nearly 93% of American households have at-home internet access. Most have subscriptions through an internet service provider and some have access without having to pay . . .

Nearly 93% of American households have at-home internet access. Most have subscriptions through an internet service provider and some have access without having to pay for a subscription. Even so, more than nine million U.S. household remain unconnected to the internet at home.

To close this gap, the federal government created the Affordable Connectivity Program in 2021 to help many of these households get connected and stay connected throughout the COVID-19 pandemic. Congress appropriated more than $14 billion to fund the program, which provides eligible low-income families with a $30 monthly discount on internet service and a one-time $100 subsidy to purchase equipment necessary for an internet connection.

Read the full piece here.

Minor Matters in Cyberspace: Examining Internet Age-Verification Regulations

I participated yesterday in a webinar panel hosted by the Federalist Society’s Regulatory Transparency Project. The video was livestreamed at YouTube. Below, I offer my . . .

I participated yesterday in a webinar panel hosted by the Federalist Society’s Regulatory Transparency Project. The video was livestreamed at YouTube. Below, I offer my opening remarks, with some links.

Thank you for having me. As mentioned, I’m a senior scholar in innovation policy at the International Center for Law & Economics (ICLE). This means I have the institutional responsibility to talk to you today about Ronald Coase and transaction costs. Don’t worry, I’ll define my terms and explain why these things are important. In fact, I think it could help to frame our discussion, before offering my own preliminary thoughts on the debates over a duty of care to protect minors online and online age-verification and parental-consent laws.

Read the full piece here.

Gomez Confirmed to FCC: Here Comes Net Neutrality, But First…

The U.S. Senate moved yesterday in a 55-43 vote to confirm Anna Gomez to the Federal Communications Commission. Her confirmation breaks a partisan deadlock at . . .

The U.S. Senate moved yesterday in a 55-43 vote to confirm Anna Gomez to the Federal Communications Commission. Her confirmation breaks a partisan deadlock at the agency that has been in place since the beginning of the Biden administration, when Commissioner Jessica Rosenworcel vacated her seat to become FCC chair.

The commission now has a 3-2 Democratic majority. With the new majority, many speculate that the FCC will push to bring back net neutrality, which President Joe Biden supports. The president’s July 9, 2021 executive order specifically “encouraged” the FCC to “[r]estore Net Neutrality rules undone by the prior administration.” Deadline reminds us that Gomez served as counselor to Obama-era FCC Chairman Tom Wheeler, when the commission voted to reclassify broadband service under the banner of net neutrality.

Read the full piece here.

Goodbye Margrethe, Hello Didier: What Next for European Competition Law?

European Commissioner for Competition Margrethe Vestager announced Sept. 5 that she was leaving her position after nearly a decade in charge, which for the last . . .

European Commissioner for Competition Margrethe Vestager announced Sept. 5 that she was leaving her position after nearly a decade in charge, which for the last four years has also included holding the title of “executive vice president of the European Commission for a Europe fit for the Digital Age.” Her departure caps off an uncharacteristically tumultuous couple of months for the EU’s competition watchdog, amid a backdrop of looming elections and political infighting. Where the agency goes from here is anyone’s guess.

Read the full piece here.

Right to Anonymous Speech, Part 2: A Law & Economics Approach

We at the International Center for Law & Economics (ICLE) have written extensively on the intersection of the First Amendment, the regulation of online platforms, and the immunity from . . .

We at the International Center for Law & Economics (ICLE) have written extensively on the intersection of the First Amendment, the regulation of online platforms, and the immunity from liability for user-generated content granted to platforms under Section 230 of the Communications Decency Act of 1996.

One of the proposals we put forward was that Section 230 immunity should be conditioned on platforms making reasonable efforts to help potential plaintiffs be able to track down users for illegal conduct. This post is the second in a series on the right to anonymity. In this edition, I will explore the degree to which the First Amendment protects the right to anonymous speech, and whether it forecloses the application of such a statutory duty of care.

Read the full piece here.

LEOs Need Love Too and Nobody Wants to Pay for Subsidies

Coming out of Labor Day weekend, there’s not a lot of earth-shaking happenings at the Telecom Hootenanny. But like a visit to the state fair, . . .

Coming out of Labor Day weekend, there’s not a lot of earth-shaking happenings at the Telecom Hootenanny. But like a visit to the state fair, there’s always something to see.

Read the full piece here.

Sloshing Around with the ‘Waterbed Effect’

If you spend a lot of time in the world of competition policy—or any time at all on the announced Kroger/Albertsons merger—you will eventually stumble . . .

If you spend a lot of time in the world of competition policy—or any time at all on the announced Kroger/Albertsons merger—you will eventually stumble on the unfortunately named and greatly misunderstood “waterbed effect.” In a congressional hearing regarding the merger, this purported effect was mentioned at least a half-dozen times.

Read the full piece here.

Right to Anonymous Speech, Part 1: An Introduction from First Principles

What is anonymity? Do we have a right to it? And against what other values should this right be balanced when it comes to government . . .

What is anonymity? Do we have a right to it? And against what other values should this right be balanced when it comes to government regulation? This blog post will be the first in a series that looks at what anonymity is, why it is important, and what tradeoffs should be considered when applying a right to anonymity in specific contexts.

Read the full piece here.

Are Markups Really SO Bad?

Concentration is a terrible measure of [insert basically anything people actually care about]. Have I said that before? Concentration tells us nothing about market power, efficiency, or whether . . .

Concentration is a terrible measure of [insert basically anything people actually care about]. Have I said that before? Concentration tells us nothing about market power, efficiency, or whether policy changes can do anything to increase welfare. Economists know that, especially industrial organization (IO) economists.

If we want to measure market power for a seller, a better measure is the markup, defined as the ratio of price over marginal cost. If we want to measure market power for a buyer, we can look at the markdown. Either one is a better measure of market power (possibly bad) and often the very definition of market power.

Read the full piece here.

We Need New Types of Unions to Represent New Types of Workers

This Labor Day, America’s labor movement is at the brink of a pivotal moment. Conservatives are now joining liberals in embracing the vital role of . . .

This Labor Day, America’s labor movement is at the brink of a pivotal moment. Conservatives are now joining liberals in embracing the vital role of labor unions for advancing a worker-centric society—albeit with some crucial reforms in mind.

This comes at a time when workers are feeling apprehensive about their future labor market prospects, especially with recent developments in the field of artificial intelligence. Concurrently, the independent economy—comprised of freelancers, gig workers, and conventional contractors—is revolutionizing how we work and challenging the relevance of traditional, employee-centric labor unions.

Read the full piece here.

Antitrust at the Agencies Roundup: Back to the Past Edition

Labor Day approaches with most of us looking forward to a long weekend off, but there’s much in competition world looming on the horizon. As . . .

Labor Day approaches with most of us looking forward to a long weekend off, but there’s much in competition world looming on the horizon. As I am looking forward to a couple of days off, I’ll offer more of an annotated bibliography than analysis. But also a bit of discussion, because I am what I am.

Earlier this week, the Federal Trade Commission (FTC) and U.S. Justice Department’s (DOJ) Antitrust Division announced a series of workshops “aimed at promoting a dynamic discussion about the draft [merger] guidelines to complement the comments currently being submitted to the agencies by the public.” The first of these workshops is slated for Sept. 5, the day after Labor Day. Workshops two and three have yet to be announced. The timing is tight, given that the deadline for submitting public comments on the guidelines is Sept. 18. There might indeed be a dynamic discussion, even if the agenda for the first workshop doesn’t promise a balanced one.

Read the full piece here.

ISSUE BRIEFS

Schrems III: Gauging the Validity of the GDPR Adequacy Decision for the United States

Executive Summary The EU Court of Justice’s (CJEU)  July 2020 Schrems II decision generated significant uncertainty, as well as enforcement actions in various EU countries, . . .

Executive Summary

The EU Court of Justice’s (CJEU)  July 2020 Schrems II decision generated significant uncertainty, as well as enforcement actions in various EU countries, as it questioned the lawfulness of transferring data to the United States under the General Data Protection Regulation (GDPR)[1] while relying on “standard contractual clauses.”

President Joe Biden signed an executive order in October 2022 establishing a new data-protection framework to address this uncertainty. The European Commission responded in July 2023 by adopting an “Adequacy Decision” under Article 45(3) of the GDPR, formally deeming U.S. data-protection commitments to be adequate.

A member of the French Parliament has already filed the first legal challenge to the Adequacy Decision and another from Austrian privacy activist Max Schrems is expected soon.

This paper discusses key legal issues likely to be litigated:

  1. The legal standard of an “adequate level of protection” for personal data. Although we know that the “adequate level” and “essential equivalence” of protection do not necessarily mean identical protection, the precise degree of flexibility remains an open question that the EU Court may need to clarify to a much greater extent.
  2. The issue of proportionality of “bulk” data collection by the U.S. government. It examines whether the objectives pursued can be considered legitimate under EU law and, if so, whether the existing CJEU precedents preclude such collection from being considered proportionate under the GDPR.
  3. The problem of effective redress—a cornerstone of the Schrems II decision. This paper explores debates around Article 47 of the EU Charter of Fundamental Rights, whether the new U.S. framework offers redress through an impartial tribunal, and whether EU persons can effectively access the redress procedure.
  4. The issue of access to information about U.S. intelligence agencies’ data-processing activities.

I.        Introduction

Since the EU Court of Justice’s (CJEU) Schrems II decision,[2] it has been precarious whether transfers of personal data from the EU to the United States are lawful. It’s true that U.S. intelligence-collection rules and practices have changed since 2016, when the European Commission issued its assessment in the “Privacy Shield Decision” and to which facts the CJEU limited its reasoning. There has, however, also been a vocal movement among NGOs, European politicians, and—recently—national data-protection authorities to treat Schrems II as if it conclusively decided that exports of personal data to the United States could not be justified through standard contractual clauses (“SCC”) in most contexts (i.e., when data can be accessed in the United States). This interpretation has now led to a series of enforcement actions by national authorities in Austria, France, and likely in several other member states (notably in the “Google Analytics” cases, as well as the French “Doctolib/Amazon Web Services” case).[3]

Aiming to address this precarious situation, the White House adopted a new data-protection framework for intelligence-collection activities. On Oct. 7, 2022, President Joe Biden signed an executive order codifying that framework,[4] which had been awaited since U.S. and EU officials reached an agreement in principle on a new data-privacy framework in March 2022.[5] The European Commission responded by preparing a draft “Adequacy Decision” for the United States under Article 45(3) of the General Data Protection Regulation (GDPR), which was released in December 2022.[6] In July 2023, the European Commission formally adopted the Adequacy Decision.[7]

The first legal challenge to the decision has already been filed by Philippe Latombe, a member of the French Parliament and a commissioner of the French Data Protection Authority (CNIL).[8] Latombe is acting in his personal capacity, not as a French MP or a member of CNIL. He chose a direct action for annulment under Article 263 of the Treaty on the Functioning of the European Union (TFEU), which means that his case faces strict admissibility conditions. Based on precedent, it would not be surprising if the EU courts refuse to consider its merits.[9] Regarding the substance of Latombe’s action, he described it in very general terms in his press release (working translation from French):

The text resulting from these negotiations violates the Charter of Fundamental Rights of the Union, due to the insufficient guarantees of respect for private and family life with regard to the bulk collection of personal data, and the General Data Protection Regulation (GDPR), due to the absence of guarantees of a right to an effective remedy and access to an impartial tribunal, the absence of a framework for automated decisions or lack of guarantees relating to the security of the data processed: all violations of our law which I develop in the 33-page brief (+ 283 pages of annexes) filed with the TJUE yesterday.[10]

Latombe also complained about the Adequacy Decision being published only in English.[11] Irrespective of the legal merits of that complaint, however, it is already moot because the Adequacy Decision was subsequently published in the Official Journal of the European Union in all official EU languages.[12]

Reportedly, Max Schrems also plans to bring a legal challenge against the Adequacy Decision,[13] as he has successfully done with the two predecessors of the current EU-US framework.[14] This time, however, Schrems plans to begin the suit in the Austrian courts, hoping for a speedy preliminary reference to the EU Court of Justice (“CJEU”).[15]

This paper aims to present and discuss the key legal issues surrounding the European Commission’s Adequacy Decision, which are likely to be the subject of litigation. In Section II, I begin by problematizing the applicable legal standard of an “adequate level of protection” of personal data in a third country, noting that this issue remains open for the CJEU to address. This makes it more challenging to assess the Adequacy Decision’s chances before the Court and suggests that the conclusive tone adopted by some commentators is premature.

I then turn, in Section III, to the question of proportionality of bulk data collection by the U.S. government. I consider whether the objectives for which U.S. intelligence agencies collect personal data may constitute “legitimate objectives” under EU law. Secondly, I discuss whether bulk collection of personal data may be done in a way that does not jeopardize adequacy under the GDPR.

The second part of Section III is devoted to the problem of effective redress, which was the critical issue on which the CJEU relied in making its Schrems II decision. I note some confusion among the commentators about the precise role of Article 47 of the EU Charter of Fundamental Rights for a third-country adequacy assessment under the GDPR. I then outline the disagreement between the Commission and some commentators on whether the new U.S. data-protection framework provides redress through an independent and impartial tribunal with binding powers.

Finally, I discuss the issue of access to information about U.S. intelligence agencies’ data-processing activities.

II.      The Applicable Legal Standard: What Does ‘Adequacy’ Mean?

The overarching legal question that the CJEU will likely need to answer is whether the United States “ensures an adequate level of protection for personal data essentially equivalent to that guaranteed in the European Union by the GDPR, read in the light of Articles 7 and 8 of the [EU Charter of Fundamental Rights].”[16]

The words “essentially equivalent” are not to be found in the GDPR’s provision on adequacy decisions—i.e., in its Article 45, which merely refers to an “adequate level of protection” of personal data in a third country. Instead, we find them in the GDPR’s recital 104: “[t]he third country should offer guarantees ensuring an adequate level of protection essentially equivalent to that ensured within the Union (…).” This phrasing goes back to the CJEU’s Schrems I decision,[17] where the Court interpreted the old Data Protection Directive (Directive 95/46).[18] In Schrems I, the Court stated:

The word ‘adequate’ in Article 25(6) of Directive 95/46 admittedly signifies that a third country cannot be required to ensure a level of protection identical to that guaranteed in the EU legal order. However, as the Advocate General has observed in point 141 of his Opinion, the term ‘adequate level of protection’ must be understood as requiring the third country in fact to ensure, by reason of its domestic law or its international commitments, a level of protection of fundamental rights and freedoms that is essentially equivalent to that guaranteed within the European Union by virtue of Directive 95/46 read in the light of the Charter.[19]

As Christakis, Propp, & have Swire noted,[20] the critical point that “a third country cannot be required to ensure a level of protection identical to that guaranteed in the EU legal order” was also accepted by the Advocate General Øe in Schrems II.[21]

In 2020, the European Data Protection Board (EDPB) issued recommendations “on the European Essential Guarantees for surveillance measures.”[22] The recommendations aim to “form part of the assessment to conduct in order to determine whether a third country provides a level of protection essentially equivalent to that guaranteed within the EU.”[23] The EDPB’s document is, of course, not a source of law binding the Court of Justice, but it attempts to interpret the law in light of the CJEU’s jurisprudence. The Court is free not to follow the EDPB’s legal interpretation, and thus the importance of the recommendations should not be overstated, either in favor or against the Adequacy Decision.

While we know that the “adequate level” and “essential equivalence” of protection do not necessarily mean identical protection, the precise degree of flexibility remains an open question—and one that the EU Court may need to clarify to a much greater extent.

III.    Arguments Likely to Be Made Against the Adequacy Decision

A.     Proportionality and Bulk Data Collection

Under Article 52(1) of the EU Charter of Fundamental Rights, restrictions on the right to privacy and the protection of personal data must meet several conditions. They must be “provided for by law” and “respect the essence” of the right. Moreover, “subject to the principle of proportionality, limitations may be made only if they are necessary” and meet one of the objectives recognized by EU law or “the need to protect the rights and freedoms of others.”

The October 2022 executive order supplemented the phrasing “as tailored as possible” present in 2014’s Presidential Policy Directive on Signals Intelligence Activities (PPD-28) with language explicitly drawn from EU law: mentions of the “necessity” and “proportionality” of signals-intelligence activities related to “validated intelligence priorities.”[24]

Doubts have been raised, however, as to whether this is sufficient. I consider two potential issues. First, whether the objectives for which U.S. intelligence agencies collect personal data may constitute “legitimate objectives” under EU law. Second, whether the bulk collection of personal data may be done in a way that does not jeopardize adequacy under the GDPR.

1.        Legitimate objectives

In his analysis of the adequacy under EU law of the new U.S. data-protection framework, Douwe Korff argues that:

The purposes for which the Presidential Executive Order allows the use of signal intelligence and bulk data collection capabilities are clearly not limited to what the EU Court of Justice regards as legitimate national security purposes.[25]

Korff’s concern is that the legitimate objectives listed in the executive order are too broad and could be interpreted to include, e.g., criminal or economic threats, which do not rise to the level of “national security” as defined by the CJEU.[26] Korff referred to the EDPB Recommendations, which reference CJEU decisions in La Quadrature du Net and Privacy International. Unlike Korff, however, the EDPB stresses that those CJEU decisions were “in relation to the law of a Member State and not to a third country law.”[27]

In contrast, in Schrems II, the Court did not consider legitimate objectives when assessing whether a third country provides adequate protection. In its recommendations, the EDPB discussed the legal material that was available, i.e., the CJEU decisions on intra-EU matters. Still, this approach can be taken too far without sufficient care. Just because some guidance is available (on intra-EU issues), it does not follow that it applies to data transfers outside the EU. It is instructive to consider, in this context, what Advocate General Øe said in Schrems II:

It also follows from that judgment [Schrems I – MB], in my view, that the law of the third State of destination may reflect its own scale of values according to which the respective weight of the various interests involved may diverge from that attributed to them in the EU legal order. Moreover, the protection of personal data that prevails within the European Union meets a particularly high standard by comparison with the level of protection in force in the rest of the world. The ‘essential equivalence’ test should therefore in my view be applied in such a way as to preserve a certain flexibility in order to take the various legal and cultural traditions into account. That test implies, however, if it is not to be deprived of its substance, that certain minimum safeguards and general requirements for the protection of fundamental rights that follow from the Charter and the ECHR have an equivalent in the legal order of the third country of destination.[28]

Hence, exclusive focus on what the EU law requires within the EU—however convenient this method may be—may be misleading in assessing the adequacy of a third country under Article 45.

Aside from the lack of direct guidance on the question of legitimate objectives under Article 45 GDPR, there is a second reason not to be too quick to conclude that the U.S. framework fails on this point. As the Commission noted in the Adequacy Decision:

(…) the legitimate objectives laid down in EO 14086 cannot by themselves be relied upon by intelligence agencies to justify signals intelligence collection but must be further substantiated, for operational purposes, into more concrete priorities for which signals intelligence may be collected. In other words, actual collection can only take place to advance a more specific priority. Such priorities are established through a dedicated process aimed at ensuring compliance with the applicable legal requirements, including those relating to privacy and civil liberties.[29]

It may be a formalistic mistake to consider the list of “legitimate objectives” in isolation from such additional requirements and process. The assessment of third-country adequacy cannot be constrained by the mere choice of words, even if they seem to correspond to an established concept in EU law. (Note that this also applies to “necessity” and “proportionality” as used in the executive order.)

2.        Can bulk collection be ‘adequate’?

As Max Schrems’ organization NOYB stated in response to the executive order’s publication:

(…) there is no indication that US mass surveillance will change in practice. So-called “bulk surveillance” will continue under the new Executive Order (see Section 2 (c)(ii)) and any data sent to US providers will still end up in programs like PRISM or Upstream, despite of the CJEU declaring US surveillance laws and practices as not “proportionate” (under the European understanding of the word) twice.[30]

Korff echoed this view, noting, e.g.:

(…) – the EO [Executive Order – MB] does not stand in the way of the indiscriminate bulk collection of e-communications content data that the EU Court held does not respect the “essence” of data protection and privacy and that therefore, under EU law, must always be prohibited, even in relation to national security issues (as narrowly defined);

– the EO allows for indiscriminate bulk collection of e-communications metadata outside of the extreme scenarios in which the EU Court only, exceptionally, allows it in Europe; and

– the EO allows for indiscriminate bulk collection of those and other data for broadly defined not national security-related purposes in relation to which such collection is regarded as clearly not “necessary” or “proportionate” under EU law.[31]

The Schrems II Court indeed held that U.S. law and practices do not “[correlate] to the minimum safeguards resulting, under EU law, from the principle of proportionality.”[32] As, however, the EDPB noted in its opinion on a draft of the Adequacy Decision:

… the CJEU did not exclude, by principle, bulk collection, but considered in its Schrems II decision that for such bulk collection to take place lawfully, sufficiently clear and precise limits must be in place to delimit the scope of such bulk collection. (…)

The EDPB also recognizes that while replacing the PPD-28, the EO 14086 provides for new safeguards and limits to the collection and use of data collected outside the U.S., as the limitations of FISA or other more specific U.S. laws do not apply.[33]

As Korff observed, the CJEU has considered the question of bulk collection of electronic communication data, in an intra-EU context, in cases like Digital Rights Ireland[34] and La Quadrature du Net.[35] In Schrems I, the Court referenced Digital Rights Ireland, while stating:

(…) legislation permitting the public authorities to have access on a generalised basis to the content of electronic communications must be regarded as compromising the essence of the fundamental right to respect for private life, as guaranteed by Article 7 of the Charter (…)[36]

This is potentially important, because the Court concluded the discussion included in this paragraph by saying that “a level of protection of fundamental rights essentially equivalent to that guaranteed in the EU legal order” is “apparent in particular from the preceding paragraphs.”[37] This could suggest that, as under the Data Protection Directive in Schrems I, the Court may see the issue of bulk collection of the contents of electronic communications as a serious problem for adequacy under Article 45 GDPR.

The Commission addressed this in the Adequacy Decision as follows:

(…) collection of data within the United States, which is the most relevant for the present adequacy finding as it concerns data that has been transferred to organisations in the U.S., must always be targeted (…) ‘Bulk collection’ may only be carried out outside the United States, on the basis of EO 12333.[38]

The Commission relies on a distinction between data collection that the U.S. government does within the United States and outside of the United States. This likely refers to an argument—discussed by, e.g., Christakis[39] —that adequacy assessment should only concern the processing of personal data that takes place due to a data transfer to the country in question. In other words, it should only concern domestic surveillance, not international surveillance (if personal data transferred from the EU would fall under domestic surveillance in that third country).

The Commission also made a second relevant point:

(…) bulk collection under EO 12333 takes place only when necessary to advance specific validated intelligence priorities and is subject to a number of limitations and safeguards designed to ensure that data is not accessed on an indiscriminate basis. Bulk collection is therefore to be contrasted to collection taking place on a generalised and indiscriminate basis (‘mass surveillance’) without limitations and safeguards.[40]

In the Commission’s view, there is a categorical distinction between “bulk collection” as practiced by the United States and the “generalized and indiscriminate” mass surveillance that the CJEU scrutinized in Digital Rights Ireland and other cases. This may seem like an unnatural reading of “generalized and indiscriminate,” given that it is meant not to apply to “the collection of large quantities of signals intelligence that, due to technical or operational considerations, is acquired without the use of discriminants (for example, without the use of specific identifiers or selection terms).”[41] There may, however, be analogies in EU law that could lead the Court to agree with the Commission on this point.

Consider the Court’s interpretation of the prohibition on “general monitoring” obligations from Article 15(1) of the eCommerce Directive.[42] In Glawischnig-Piesczek, the Court interpreted this rule as not precluding member states from requiring hosting providers to monitor all the content they host in order to identify content identical to “the content of information which was previously declared to be unlawful.”[43] In other words, “general monitoring” was interpreted as not covering indiscriminate processing of all data stored by a hosting provider in order to find content identical to some other content.[44] The Court adopted an analogous approach with respect to Article 17 of the Copyright Directive.[45] This suggests that, in somewhat similar contexts, the Court is willing to see activities that may technically appear to be “general” as “not general,” if some procedural or substantive limitations are present.

B.     Effective Redress

The lack of effective redress available to EU citizens against potential restrictions of their right to privacy from U.S. intelligence activities was central to the Schrems II decision. Among the Court’s key findings were that “PPD-28 does not grant data subjects actionable rights before the courts against the US authorities”[46] and that, under Executive Order 12333, “access to data in transit to the United States [is possible] without that access being subject to any judicial review.”[47]

The new executive order introduced redress mechanisms that include creating a civil-liberties-protection officer in the Office of the Director of National Intelligence (DNI), as well as a new Data Protection Review Court (DPRC). The DPRC is proposed as an independent review body that will make decisions binding on U.S. intelligence agencies. The old framework had sparked concerns about the independence of the DNI’s ombudsperson, and what was seen as insufficient safeguards against external pressures, including the threat of removal. Under the new framework, the independence and binding powers of the DPRC are grounded in regulations issued by the U.S. attorney general.

In a recent public debate, Max Schrems argued that the CJEU would have a difficult time finding that this judicial procedure satisfies Article 47 of the EU Charter, while at the same time holding that some courts in Poland and Hungary do not satisfy it.[48]

1.        Article 47 of the Charter ‘contributes’ to the benchmark level of protection

Schrems’ comment raises two distinct issues. First, Schrems seems to suggest that an adequacy decision can only be granted if the available redress mechanism satisfies the requirements of Article 47 of the Charter of Fundamental Rights.[49] But this is a hasty conclusion. The CJEU’s phrasing in Schrems II is more cautious:

…Article 47 of the Charter, which also contributes to the required level of protection in the European Union, compliance with which must be determined by the Commission before it adopts an adequacy decision pursuant to Article 45(1) of the GDPR.[50]

In arguing that Article 47 “also contributes to the required level of protection,” the Court is not saying that it determines the required level of protection. This is potentially significant, given that the standard of adequacy is “essential equivalence,” not that it be procedurally and substantively identical. Moreover, the Court did not say that the Commission must determine compliance with Article 47 itself, but with the “required level of protection” (which, again, must be “essentially equivalent”). Hence, it is far from clear how the CJEU’s jurisprudence interpreting Article 47 of the Charter is to be applied in the context of an adequacy assessment under Article 45 GDPR.

2.        Is there an independent and impartial tribunal with binding powers?

Second, there is the related but distinct question of whether the redress mechanism is effective under the applicable standard of “required level of protection.” Christakis, Propp, & Swire offer helpful analysis suggesting that it is, considering the proposed DPRC’s independence, effective investigative powers, and authority to issue binding determinations.[51] Gorski & Korff argue that this is not the case, because the DPRC is not “wholly autonomous” and “free from hierarchical constraint.”[52]

The Commission stated in the Adequacy Decision that the available avenues of redress “allow individuals to have access to their personal data, to have the lawfulness of government access to their data reviewed and, if a violation is found, to have such violation remedied, including through the rectification or erasure of their personal data.”[53] Moreover:

(…) the executive branch (the Attorney General and intelligence agencies) are barred from interfering with or improperly influencing the DPRC’s review. The DPRC itself is required to impartially adjudicate cases and operates according to its own rules of procedure (adopted by majority vote) (…)[54]

Likely the most serious objection to this assessment (raised by Gorski) is that:

(…) the court’s decisions can be overruled by the President. Indeed, the President could presumably overrule these decisions in secret, since the court’s opinions are not issued publicly.[55]

Given that Christakis, Propp, & Swire appear to disagree,[56] this question of U.S. law may require further scrutiny. Even if the scenario sketched by Gorski is theoretically possible, however, the CJEU may take the view that it would not be appropriate to rule based on the assumption that the U.S. government would act to mislead the EU. And without that assumption, then the possibility of future changes to U.S. law appear to be adequately addressed by the adequacy-monitoring process (Article 45(4) GDPR).

3.        Do EU persons have effective access to the redress mechanism?

In the already-cited public debate, Max Schrems argued that it may be practically impossible for EU persons to benefit from the new redress mechanism, due to the requirements imposed on “qualifying complaints” under the executive order.[57] Presumably, Schrems implicitly refers to the requirements that a complaint:

(i) “alleges a covered violation has occurred that pertains to personal information of or about the complainant, a natural person, reasonably believed to have been transferred to the United States from a qualifying state after” the official designation of that country by the Attorney General;

(ii) includes “information that forms the basis for alleging that a covered violation has occurred, which need not demonstrate that the complainant’s data has in fact been subject to United States signals intelligence activities; the nature of the relief sought; the specific means by which personal information of or about the complainant was believed to have been transmitted to the United States; the identities of the United States Government entities believed to be involved in the alleged violation (if known); and any other measures the complainant pursued to obtain the relief requested and the response received through those other measures;”

(iii) “is not frivolous, vexatious, or made in bad faith”[58]

Given the qualifications that a complaint need only to “allege” a violation and “need not demonstrate that the complainant’s data has in fact been subject to United States signals intelligence activities,” it is unclear what Schrems’ basis for suggesting that it will not be possible for EU persons to benefit from this redress mechanism is.

C.     Access to Information About Data Processing

Finally, Schrems’ NOYB raised a concern that “judgment by ‘Court’ [is] already spelled out in Executive Order.”[59] This concern seems to be based on the view that a decision of the DPRC (“the judgment”) and what the DPRC communicates to the complainant are the same thing. In other words, the legal effects of a DPRC decision are exhausted by providing the individual with the neither-confirm-nor-deny statement set out in Section 3 of the executive order. This is clearly incorrect. The DPRC has the power to issue binding directions to intelligence agencies. The actual binding determinations of the DPRC are not predetermined by the executive order; only the information to be provided to the complainant is.

Relatedly, Korff argues that:

(…) the meaningless “boilerplate” responses that are spelled out in the rules also violate the principle, enshrined in the ECHR and therefore also applicable under the Charter, that any judgment of a court must be “pronounced publicly”. The “boilerplate” responses, in my opinion, do not constitute the “judgment” reached (…)[60]

Here, as before, Korff appears to elide the question of the legal standard of “adequacy,” directly applying to a third country what he argues is required under the European Convention of Human Rights and thus under the EU Charter.

The issues of access to information and data may, however, call for closer consideration. For example, in La Quadrature du Net, the CJEU looked at the difficult problem of notifying persons whose data has been subject to state surveillance, requiring individual notification “only to the extent that and as soon as it is no longer liable to jeopardise” the law-enforcement tasks in question.[61] Nevertheless, given the “essential equivalence” standard applicable to third-country adequacy assessments, it does not automatically follow that individual notification is at all required in that context.

Moreover, it also does not necessarily follow that adequacy requires that EU citizens have a right to access the data processed by foreign government agencies. The fact that there are significant restrictions on rights to information and access in some EU member states,[62] though not definitive (after all, those countries may be violating EU law), may be instructive for the purposes of assessing the adequacy of data protection in a third country, where EU law requires only “essential equivalence.”

The Commission’s Adequacy Decision accepted that individuals would have access to their personal data processed by U.S. public authorities, but clarifies that this access may be legitimately limited—e.g., by national-security considerations.[63] The Commission did not take the simplistic view that access to personal data must be guaranteed by the same procedure that provides binding redress, including through the Data Protection Review Court. Instead, the Commission accepts that other avenues, such as requests under the Freedom of Information Act, may perform that function.

IV.    Conclusion

With the Adequacy Decision, the European Commission announced that it has favorably assessed the October 2022 executive order’s changes to the U.S. data-protection framework, which apply to foreigners from friendly jurisdictions (presumed to include the EU). The Adequacy Decision is certain to be challenged before the CJEU by privacy advocates. As discussed above, the key legal concerns will likely be the proportionality of data collection and the availability of effective redress.

Opponents of granting an adequacy decision tend to rely on the assumption that a finding of adequacy requires virtually identical substantive and procedural privacy safeguards as required within the EU. As noted by the European Commission in its decision, this position is not well-supported by CJEU case law, which clearly recognizes that only “adequate level” and “essential equivalence” of protection are required from third-party countries under the GDPR. To date, the CJEU has not had to specify in greater detail precisely what, in their view, these provisions mean. Instead, the Court has been able to point to certain features of U.S. law and practice that were significantly below the GDPR standard (e.g., that the official responsible for providing individual redress was not guaranteed to be independent of political pressure). Future legal challenges to a new Adequacy Decision will most likely require the CJEU to provide more guidance on what “adequate” and “essentially equivalent” mean.

In the Adequacy Decision, the Commission carefully considered the features of U.S. law and practice that the Court previously found inadequate under the GDPR. Nearly half of the explanatory part of the decision is devoted to “access and use of personal data transferred from the [EU] by public authorities in the” United States, with the analysis grounded in CJEU’s Schrems II decision.

Overall, the Commission presents a sophisticated, yet uncynical, picture of U.S. law and practice. The lack of cynicism about, e.g., the independence of the DPRC adjudicative process, will undoubtedly be seen by some as naïve and unrealistic, even if the “realism” in this case is based on speculations of what might happen (e.g., secret changes to U.S. policy), rather than evidence. Litigants will likely invite the CJEU to assume that the U.S. government cannot be trusted and that it will attempt to mislead the European Commission and thus undermine the adequacy-monitoring process (Article 45(3) GDPR). It is not clear, however, that the Court will be willing to go that way—not least due to respect for comity in international law.

[1] Regulation (EU) 2016/679 (General Data Protection Regulation).

[2] Case C-311/18, Data Protection Comm’r v. Facebook Ireland Ltd. & Maximillian Schrems, ECLI:EU:C:2019:1145 (CJ, Jul. 16, 2020), available at http://curia.europa.eu/juris/liste.jsf?num=C-311/18 [hereinafter “Schrems II”].

[3] See, e.g., Ariane Mole, Willy Mikalef, & Juliette Terrioux, Why This French Court Decision Has Far-Reaching Consequences for Many Businesses, IAPP.org (Mar. 15, 2021), https://iapp.org/news/a/why-this-french-court-decision-has-far-reaching-consequences-for-many-businesses; Gabriela Zanfir-Fortuna, Understanding Why the First Pieces Fell in the Transatlantic Transfers Domino, The Future of Privacy Forum (2022), https://fpf.org/blog/understanding-why-the-first-pieces-fell-in-the-transatlantic-transfers-domino; Caitlin Fennessy, The Austrian Google Analytics decision: The Race Is On, IAPP Privacy Perspectives (Feb. 7, 2022) https://iapp.org/news/a/the-austrian-google-analytics-decision-the-race-is-on; Italian SA Bans Use of Google Analytics: No Adequate Safeguards for Data Transfers to the USA (Jun. 23, 2022), https://www.gpdp.it/web/guest/home/docweb/-/docweb-display/docweb/9782874.

[4] Executive Order on Enhancing Safeguards for United States Signals Intelligence Activities, The White House (2022), https://www.whitehouse.gov/briefing-room/presidential-actions/2022/10/07/executive-order-on-enhancing-safeguards-for-united-states-signals-intelligence-activities.

[5] European Commission and United States Joint Statement on Trans-Atlantic Data Privacy Framework, European Commission (Mar. 25, 2022), https://ec.europa.eu/commission/presscorner/detail/en/IP_22_2087.

[6] Draft Commission Implementing Decision Pursuant to Regulation (EU) 2016/679 of the European Parliament and of the Council on the Adequate Level of Protection of Personal Data Under the EU-US Data Privacy Framework, European Commission (2022), available at https://commission.europa.eu/system/files/2022-12/Draft%20adequacy%20decision%20on%20EU-US%20Data%20Privacy%20Framework_0.pdf.

[7]  Commission Implementing Decision EU 2023/1795 of 10 July 2023 pursuant to Regulation (EU) 2016/679 of the European Parliament and of the Council on the adequate level of protection of personal data under the EU-US Data Privacy Framework, OJ L 231, 20.9.2023, European Commission (2023), https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32023D1795 (hereinafter “Adequacy Decision”).

[8] See Patrice Navarro & Julie Schwartz, Member of French Parliament Lodges First Request for Annulment of EU-US Data Privacy Framework, Hogan Lovells Engage (Sep. 8, 2023), https://www.engage.hoganlovells.com/knowledgeservices/news/member-of-french-parliament-lodges-first-request-for-annulment-of-eu-us-data-privacy-framework; Philippe Latombe, Communiqué de Presse (Sep. 7, 2023), available at https://www.politico.eu/wp-content/uploads/2023/09/07/4_6039685923346583457.pdf.

[9] See, e.g., Joe Jones, EU-US Data Adequacy Litigation Negins, IAPP.org (Sep. 8, 2023), https://iapp.org/news/a/eu-u-s-data-adequacy-litigation-begins.

[10] Latombe, supra note 9.

[11] Id.

[12] See supra note 8.

[13] Mark Scott, We Don’t Talk About Fixing Social Media, Digital Bridge from Politico (Aug. 3, 2023), https://www.politico.eu/newsletter/digital-bridge/we-dont-talk-about-fixing-social-media. See also New Trans-Atlantic Data Privacy Framework Largely a Copy of “Privacy Shield”. NOYB Will Challenge the Decision, noyb.eu (2023), https://noyb.eu/en/european-commission-gives-eu-us-data-transfers-third-round-cjeu.

[14] Case C-362/14, Maximillian Schrems v Data Protection Commissioner, ECLI:EU:C:2015:650, available at https://curia.europa.eu/juris/liste.jsf?num=C-362/14 [hereinafter “Schrems I”].

[15] Scott, supra note 13.

[16] Schrems II [178].

[17] Case C?362/14, Maximillian Schrems v Data Protection Commissioner, EU:C:2015:650 (CJEU judgment of 6 October 2015) [hereinafter: “Schrems I”].

[18] Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the Protection of Individuals With Regard to the Processing of Personal Data and on the Free Movement of Such Data (“Data Protection Directive”).

[19] Schrems I [73].

[20] Theodore Christakis, Kenneth Propp, & Peter Swire, EU/US Adequacy Negotiations and the Redress Challenge: Whether a New U.S. Statute is Necessary to Produce an “Essentially Equivalent” Solution, European Law Blog (2022), https://europeanlawblog.eu/2022/01/31/eu-us-adequacy-negotiations-and-the-redress-challenge-whether-a-new-u-s-statute-is-necessary-to-produce-an-essentially-equivalent-solution.

[21] Opinion of Advocate General Saugmandsgaard Øe delivered on 19 December 2019, Data Protection Commissioner v Facebook Ireland Limited and Maximillian Schrems, ECLI:EU:C:2019:1145 [248].

[22] European Data Protection Board, Recommendations 02/2020 on the European Essential Guarantees for surveillance measures, available at https://edpb.europa.eu/sites/default/files/files/file1/edpb_recommendations_202002_europeanessentialguaranteessurveillance_en.pdf (hereinafter: “EDPB Recommendations on surveillance measures”).

[23] EDPB Recommendations on surveillance measures [8].

[24] Executive Order, supra note 5, Sec. 2(a)(ii)(B).

[25] Douwe Korff, The Inadequacy of the October 2022 New US Presidential Executive Order on Enhancing Safeguards For United States Signals Intelligence Activities, 13 (2022), https://www.ianbrown.tech/2022/11/11/the-inadequacy-of-the-us-executive-order-on-enhancing-safeguards-for-us-signals-intelligence-activities.

[26] Id. at 10–13.

[27] EDPB Recommendations on surveillance measures [34].

[28] Opinion of Advocate General Saugmandsgaard Øe in Schrems II [249].

[29] European Commission, supra note 8, Recital 135.

[30] New US Executive Order Unlikely to Satisfy EU Law, NOYB (Oct. 7, 2022), https://noyb.eu/en/new-us-executive-order-unlikely-satisfy-eu-law.

[31] Korff, supra note 25 at 19.

[32] Schrems II [184].

[33] European Data Protection Supervisor, Opinion 5/2023 on the European Commission Draft Implementing Decision on the Adequate Protection of Personal Data Under the EU-US Data Privacy Framework, [134]-[135] (2023), https://edpb.europa.eu/our-work-tools/our-documents/opinion-art-70/opinion-52023-european-commission-draft-implementing_en. See also Alex Joel, Necessity, Proportionality, and Executive Order 14086, Joint PIJIP/TLS Research Paper Series (2023), https://digitalcommons.wcl.american.edu/research/99.

[34] Digital Rights Ireland and Others, Cases C?293/12 and C?594/12, EU:C:2014:238.

[35] La Quadrature du Net and Others v Premier Ministre and Others, Case C-511/18, ECLI:EU:C:2020:791.

[36] Schrems I [94].

[37] Schrems I [96].

[38] European Commission, supra note 8, Recitals 140-141 (footnotes omitted).

[39] Theodore Christakis, Squaring the Circle? International Surveillance, Underwater Cables and EU-US Adequacy Negotiations (Part 1), European Law Blog (2021), https://europeanlawblog.eu/2021/04/12/squaring-the-circle-international-surveillance-underwater-cables-and-eu-us-adequacy-negotiations-part1; Theodore Christakis, Squaring the Circle? International Surveillance, Underwater Cables and EU-US Adequacy Negotiations (Part 2), European Law Blog (2021), https://europeanlawblog.eu/2021/04/13/squaring-the-circle-international-surveillance-underwater-cables-and-eu-us-adequacy-negotiations-part2.

[40] European Commission, supra note 8, Recital 141, footnote 250 (emphasis added).

[41] Id., Recital 141, footnote 250.

[42] Directive (EU) 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on Certain Legal Aspects of Information Society Services, in Particular Electronic Commerce, in the Internal Market (‘Directive on Electronic Commerce’) [2000] OJ L178/1.

[43] Case C-18/18, Eva Glawischnig-Piesczek v Facebook [2019] ECLI:EU:C:2019:821. See also Daphne Keller, Facebook Filters, Fundamental Rights, and the CJEU’s Glawischnig-Piesczek Ruling, 69 GRUR International 616 (2020).

[44] As Keller puts it: “Instead of defining prohibited ‘general’ monitoring as monitoring that affects every user, the Court effectively defines it as monitoring for content that was not specified in advance by a court.” Id. at 620.

[45] Case C?401/19, Poland v Parliament and Council [2022] ECLI:EU:C:2022:297; Directive (EU) 2019/790 of the European Parliament and of the Council of 17 April 2019 on Copyright and Related Rights in the Digital Single Market and Amending Directives 96/9/EC and 2001/29/EC (OJ 2019 L 130, p. 92). For background, see Christophe Geiger & Bernd Justin Jütte, Platform Liability Under Art. 17 of the Copyright in the Digital Single Market Directive, Automated Filtering and Fundamental Rights: An Impossible Match, 70 GRUR International 517 (2021).

[46] Schrems II [181].

[47] Schrems II [183].

[48] @MBarczentewicz, Twitter (Aug. 24, 2023, 9:43 AM), https://twitter.com/MBarczentewicz/status/1694707035659813023. See also Max Schrems, Open Letter on the Future of EU-US Data Transfers (May 23, 2022), https://noyb.eu/en/open-letter-future-eu-us-data-transfers.

[49] Similar phrasing can be found in Ashley Gorski, The Biden Administration’s SIGINT Executive Order, Part II: Redress for Unlawful Surveillance, Just Security (2022), https://www.justsecurity.org/83927/the-biden-administrations-sigint-executive-order-part-ii. Gorski’s text shows well how easy it is to elide, even unintentionally, the distinction between the Article 47 being a standard that must be satisfied by a third country, and it merely contributing to the level of protection that constitutes a benchmark for an adequacy assessment. At one point she notes that “the CJEU held that U.S. law failed to provide an avenue of redress ‘essentially equivalent’ to that required by Article 47.” In other places, however, she adopts the phrasing of “satisfying” Article 47.

[50] Schrems II [186].

[51] Theodore Christakis, Kenneth Propp & Peter Swire, The Redress Mechanism in the Privacy Shield Successor: On the Independence and Effective Powers of the DPRC, IAPP.org (2022), https://iapp.org/news/a/the-redress-mechanism-in-the-privacy-shield-successor-on-the-independence-and-effective-powers-of-the-dprc.

[52] Gorski, supra note 49; Korff, supra note 25 at 21.

[53] European Commission, supra note 8, Recital 175.

[54] Id., Recital 187 (footnotes omitted).

[55] Gorski, supra note 49.

[56] According to them: “(…) key U.S. Supreme Court decisions have affirmed the binding force of a DOJ regulation and the legal conclusion that all of the executive branch, including the president and the attorney general, are bound by it.” Christakis, Propp, & Swire, supra note 51.

[57] @MBarczentewicz, Twitter (Aug. 24, 2023, 9:43 AM), https://twitter.com/MBarczentewicz/status/1694707035659813023.

[58] Executive Order, section 5(k)(i)-(iv).

[59] NOYB, New US Executive Order Unlikely to Satisfy EU Law (Oct. 7, 2022), https://noyb.eu/en/new-us-executive-order-unlikely-satisfy-eu-law. See also NOYB, supra note 13.

[60] Korff, supra note 25 at 25.

[61] Joined cases C-511/18, C-512/18 and C-520/18, La Quadrature du Net and others, ECLI:EU:C:2020:791 [191].

[62] European Union Agency for Fundamental Rights, Surveillance by Intelligence Services: Fundamental Rights Safeguards and Remedies in the EU – Volume II: Field Perspectives and Legal Update (2017) https://fra.europa.eu/en/publication/2017/surveillance-intelligence-services-fundamental-rights-safeguards-and-remedies-eu.

[63] European Commission, supra note 8, Recitals 199-200.

Finding Marginal Improvements for the ‘Good Enough’ Affordable Connectivity Program

Introduction The Affordable Connectivity Program (ACP) is a federal program that provides eligible low-income households with discounts of up to $30 per-month for broadband-internet service . . .

Introduction

The Affordable Connectivity Program (ACP) is a federal program that provides eligible low-income households with discounts of up to $30 per-month for broadband-internet service and up to $100 for a laptop, desktop computer, or tablet from a participating provider. It was created by Congress as part of the COVID-19 relief package and is administered by the Federal Communications Commission (FCC). The ACP is funded by a $14 billion appropriation that is expected to be exhausted within the next year.[1]

In anticipation of legislation to continue ACP funding, some have called for the program to be expanded,[2] while other have urged that it be scaled back or otherwise expressed skepticism of how it is currently administered.[3] Despite its flaws, we argue in this issue brief that the ACP is a “good enough” solution that should be continued with some straightforward adjustments.

Currently, about 95% of households with access to the internet use it at home, and most obtain that access through a subscription with an internet service provider (ISP). Due to what appears to be inelastic demand, ACP has faced difficulties in stimulating sufficient interest among some segments of the 5% of unconnected households that could access the internet, but fail to take up service. These households may not be aware of the program or may lack digital literacy, may be able to access the internet without a subscription, or may have no interest in subscribing to an internet service at any price.

On the other hand, the ACP’s subsidies appear to have successfully enabled already-subscribed households to maintain at-home internet service through the COVID-19 pandemic, thereby proving effective at allowing economically vulnerable inframarginal consumers to remain connected. This becomes a critical fact in light of the interest expressed by some policymakers and advocates in solutions such as municipal broadband and rate regulation in order to guarantee low-income consumers’ continued access to broadband. Moreover, the ability of programs like the ACP to stimulate demand could be deployed to stand up competitive markets in some areas that currently lack them.

This issue brief addresses some of the ACP’s early successes and remaining challenges, while sketching a roadmap for reform. Section I examines the digital divide and the factors that explain why it has proven so difficult to connect the remaining 5% of households that lack an at-home internet connection. Section II summarizes and evaluates the ACP and its predecessors. Section III examines how the ACP compares to an ideal subsidy program and the degree to which it has shown itself to be “good enough.” Section IV identifies some principles for broadband-adoption policy and a roadmap to reform the ACP. Section V offers concluding comments.

Despite the ACP’s shortcomings, the program is a much better policy than many alternatives, such as direct rate regulation or municipal broadband provision. While it is easy to qualify for the ACP, consumers nonetheless report difficulties with the enrollment process. We suggest focusing eligibility criteria on those low-income households that currently lack at-home internet service or that, due to being particularly economically vulnerable, are most likely to drop service. In tandem with tightened eligibility, however, the program’s enrollment process should be streamlined and the burden to enroll reduced. In addition, the program should expand its outreach to eligible households by leveraging data about enrollees in Medicaid, the Supplemental Nutrition Assistance Program (SNAP), and the Section 8 Housing Choice Voucher Program. The FCC should also extend funding to local organizations—such as libraries, schools, community centers, and nonprofits—to inform eligible households about the ACP and to assist them with the application process.

These reforms would improve the ACP’s efficiency and efficacy. They would also likely reduce the program’s costs, thereby allowing a greater proportion of allocated funds to reach the households the program was intended to help.

I.        Broadband Access, Adoption, and Use: Is There a Digital Divide?

According to the Information Technology and Innovation Foundation (ITIF), 97.6% of the U.S. population has access to a fixed connection of at least 25/3 through ADSL, cable, fiber, or fixed wireless.[4] Pew Research reports that 93% of its survey respondents indicated they have a broadband connection at home.[5] Figure 1 summarizes Pew survey results since 2000, which shows at-home broadband use has increased from 1% in 2000 to 77% in 2021.

 Pew’s results are in-line with U.S. Census estimates from the American Community Survey. Table 1 summarizes information from 2021.[6] The table shows that 90.3% of households have a broadband subscription and another 2.3% of households claim they have access to at-home internet “without paying a cell phone company or Internet service provider.” Assuming ITIF’s estimates of broadband availability are accurate, then among households without a broadband subscription, approximately two-thirds, or 6.4 million households, nonetheless have access to broadband.

Evidence about the impact of price on broadband uptake is mixed. In one study, George Zuo of the University of Maryland found that employment increased among low-income populations in areas where Comcast’s subsidized low-cost “Internet Essentials” plans were offered:[7]

The results indicate that … availability of Internet Essentials led to a 0.9 percentage point increase (1.6 percent) in the probability that an eligible low-income individual was employed. … The findings also suggest that Internet Essentials was responsible for narrowing the income-broadband gap by as much as 40 percent. A back-of-the-envelope cost-benefit calculation suggests that the value to consumers (in terms of increased earnings) is four times that of the typical cost to provide the service.

Of course, this is not a direct measure of changes in willingness-to-pay. Employment changes, however, serve as an interesting proxy. Zuo’s work exploits the difference between those eligible and ineligible for Internet Essentials, and found that, after becoming eligible for the plans, the employment gap between the two groups climbs from 3.1% to 5.6%.[8] One very strong possibility, therefore, is that the presence of a low-cost internet option spurred individuals to adopt and use that connection as part of a job search and employment.

Evidence from large surveys suggests that price is not a dominant factor driving adoption for the currently unconnected. For example, among the 7% of households who do not use the internet at home, more than half of Current Population Survey (CPS) respondents indicated that they “don’t need it or [are] not interested.”[9] About one-third of respondents indicated that price is a factor, with responses such as “can’t afford it” or “not worth the cost.”

Smaller surveys and focus groups that allow more opportunities for follow-up questions, however, suggest that price may be more important than suggested by Census Bureau surveys. For example, one study in Detroit, Michigan used surveys and focus groups to examine internet adoption and use in three low-income urban neighborhoods.[10] Participants who reported lacking at-home internet mentioned lack of interest and high costs at roughly equal rates.

Of course, cost and interest are not mutually exclusive factors.[11] A common response to CPS surveys among those who do not subscribe to internet service is that it’s “not worth the cost.” This is an unhelpful response to guide policymakers because it doesn’t answer whether the cost is “too high,” the value is “too low,” or a combination of both. Another common response is “not interested.” This, too, is unhelpful, as it does not identify the price at which a potential consumer might become interested, if such a price exists. For example, as discussed below, studies suggest that some nonadopters may become interested in subscribing to internet services or find it worth the cost at a price of zero.

A.      How Responsive Are Households to Broadband Pricing?

One way of evaluating the importance of cost is through empirical estimates of demand elasticity. The price elasticity of demand is the percent change in the quantity demanded for a good, divided by the percent change in price. A demand curve with an elasticity between 0 and –1 is said to be inelastic, meaning that the change in the quantity demanded is relatively less responsive to changes in price. An elasticity of less than –1 is said to be elastic, meaning the change in the quantity demanded is relatively more responsive to changes in price.

Michael Williams & Wei Zao’s survey of the research on the price elasticity of demand for internet services concludes that “demand for Internet services was price-inelastic and has become increasingly so over time.”[12] In 2015, Octavian Carare, et al. estimated an elasticity of –0.62.[13] George Ford’s 2021 study estimates an elasticity ranging from –0.58 to –0.33.[14] Williams & Zao’s 2020 report concluded with elasticity ranges from –0.08 to –0.05. [15] These results indicate a subsidy program that reduced the price of internet services by 10% would increase adoption by anywhere from 0.5% to 6.2%.

While these recent studies indicate an inelastic demand for internet services, the wide range of estimates makes it difficult to guide subsidy policies. If the elasticity is –0.62, then a subsidy program may be effective in meaningfully moving adoption closer to 100% of households with access. If the elasticity is closer to –0.05, however, then even a generous subsidy program would do very little to increase access.

The larger lesson is that policymakers need to be careful in determining how subsidies are used. As in Zuo’s findings about improvements in employment outcomes, much could be gained from targeted subsidies in some contexts. In situations where demand is less elastic, however, subsidies will be less effective.

One reason that demand for internet services may be so inelastic is the nature of demand curves. Generally speaking, as quantity demanded increases (i.e., moving downward along the demand curve), the demand curve becomes less elastic, as shown in Figure 2.[16] With adoption currently at more than 90% of households, a significant portion of the remaining nonadopters are much less likely to adopt at any price.

This is demonstrated by a National Telecommunications and Information Administration (NTIA) survey of internet use that reported the average monthly price that offline households wanted to pay for internet access was approximately $10 per month; roughly 75% of households gave $0 or “none” as their answer.[17] In addition, as shown in Table 1, about a quarter of households without a broadband or smartphone subscription claim that they can access the internet at home without paying for a subscription. Thus, one potential reason for the substantial share of nonadopters who would not adopt internet service even if it were free may be because, in effect, some are already able to use it without paying for it. It is also likely, of course, that the status of those who are able to access broadband without paying for it could change quickly.

B.      Does Digital Literacy Matter?

Despite near-ubiquitous internet access and use across society, there is a widespread belief that digital literacy presents a significant barrier to broadband adoption. Digital literacy can be divided into two broad categories: (1) familiarity with computers and the internet, and (2) an understanding of the potential value of a fixed broadband connection. J. A. Hauge & J. E. Prieger report that 22% of nonadopters cited digital illiteracy as a factor for nonadoption.[18] Erezi Ogbo, et al. conclude from the literature that low-income households are unlikely to adopt broadband without understanding how being connected can save them time and money.[19] Jacob Manlove & Brian Whitacre note that one of the goals of the Connected Nation Broadband Adoption Program is to improve digital literacy and educate users about the relevance of broadband.[20]

Lack of access to—or a lack of understanding of how to use—a computer, tablet, or other internet-connected device certainly presents some barrier to broadband adoption. But as reported by Scott Wallsten, the evidence indicates little consumer interest in—if not outright antipathy toward—digital-literacy training classes:[21]

Finally, subscribers generally expressed a preference to avoid digital literacy training classes. In one project, many participants were willing to forego an additional $10 per month savings or a free computer in order to avoid taking those classes.

Perhaps, rather than a lack of digital literacy, some nonadopters may have a surfeit of literacy, and conclude that smartphone internet service provides a superior “bang for the buck” relative to fixed broadband. Jamie Greig & Hannah Nelson note that low-income households are more likely to use smartphones than computers for internet access.[22] According to Pew Research, 19% of adults who do not lack at-home broadband report that their smartphone does everything they need to do online.[23] Colin Rhinesmith, et al. recount the response of a Detroit focus group participant:[24]

As one male, African-American job seeker in one of the focus groups mentioned, he was not interested in having home access, as he was able to do almost anything he wanted to on his smartphone: “I have my four wheels, why would I pay for eight?” He explained—and this sentiment was echoed by many others across the three groups—that if he had to choose between home access and mobile access, the latter is more desirable as it allows him to be reachable and flexible for job interviews and the like. However, later in the conversation, he changed his mind when the possibility of cheap home access was mentioned by another participant, explaining he would sign up for home access, if he could afford to do so in addition to his data plan. This is another indication that low-income communities appreciate and understand the value of fixed access, but if financially forced to choose between home access and mobile access, it is not the first choice.

So, again, the findings on digital literacy are mixed. There is, however, another potential hurdle for adoption. As discussed in Section III, simple unawareness of programs such as the ACP could be the steepest hurdle. Increasing awareness of an existing program is a much lower-cost endeavor to implement than embarking on a nationwide digital-literacy effort.

II.      The Affordable Connectivity Program and Its Predecessors: Successes and Failures

Since the Great Financial Crisis of 2008 and the ensuing recession, Congress and federal agencies have enacted several programs to increase broadband adoption among low-income households. These include the Broadband Technology Opportunities Program, the FCC’s Lifeline Broadband Program, the COVID-19 pandemic-era Emergency Broadband Benefit Program, and the current Affordable Connectivity Program. While the first program had little demonstrated success, both Congress and the FCC appear to have built on the lessons of earlier programs to develop today’s relatively straightforward ACP.

A.      Broadband Technology Opportunities Program

The Broadband Technology Opportunities Program (BTOP) was a federal grant program that aimed to expand broadband access and adoption across the United States. It was funded by the American Recovery and Reinvestment Act of 2009, and administered by the NTIA. BTOP awarded about $4 billion to 233 projects across the country, covering three categories: infrastructure, public computer centers, and adoption.[25] BTOP funded 44 grants totaling $251 million on projects to sustain adoption of broadband service.[26] Unlike other program discussed in this section, however, BTOP did not include direct subsidies to consumers.[27] The program formally ended in 2015, but some projects continued to operate beyond that date.

NTIA reported that, based on the evaluation study sample of BTOP communities, more than 4.3 million people across the United States gained broadband availability from June 30, 2011 through June 30, 2013.[28] Jacob Manlove & Brian Whitacre note, however, that “the program’s effect on increasing adoption were not rigorously studied” in the evaluation.[29] A later empirical study concluded that BTOP had no measurable effect on broadband adoption:[30]

We did not find clear evidence supporting the position that BTOP led to beneficial out-comes of increased adoption. In fact, with such a high degree of uncertainty in the results, no sweeping claims can be made for the success of BTOP as regards the goal of sustainable adoption. In fact, in at least some ranges of spending, additional BTOP spending is associated with lower levels of adoption.

More recent research concludes: “no effect of the BTOP programs on home broadband adoption, a result consistent with prior empirical analysis on BTOP programs.”[31]

B.      Lifeline Broadband

The FCC’s 2012 Lifeline Order specified three goals for the Lifeline program: (1) ensure the availability of voice service for low-income Americans; (2) ensure the availability of broadband for low-income Americans; and (3) minimize the Universal Service Fund contribution burden on consumers and businesses.[32] The order established a broadband pilot program to gather data about how Lifeline could be used to support broadband adoption.[33] The pilot program aimed to test how the Lifeline program could be best structured to provide support for broadband services. In December 2012, the FCC announced the broadband pilot program and authorized approximately $13.8 million for 14 projects, spanning 21 states and Puerto Rico.[34] The selected projects would study the effects of varying subsidy amounts, end-user charges, access to digital-literacy training, data-usage limits, choices for broadband speed, access to equipment, and other variables affecting broadband adoption. The pilot program ran from February 2013 to November 2014.

From the pilot program, FCC staff concluded that consumers were willing to pay for speeds in the mid-range of options and preferred “more modest and affordable” speeds and data allowances.[35] Similarly, consumers had “little interest” in paying for the highest-speed tiers.[36] In addition, consumers had “little interest” in receiving digital-literacy training.[37] Based on these findings, the FCC’s 2016 Lifeline Order included broadband as a supported service in the Lifeline program, with the following provisions:

  • Allow Lifeline subscribers to apply the $9.25 monthly Lifeline discount to broadband and broadband voice-bundled service;
  • Set minimum service standards for Lifeline-supported service;[38]
  • Establish the National Verifier as a neutral third party to make program-eligibility decisions; and
  • Phase out support for voice-only service over time.[39]

A 2017 Government Accountability Office report notes:[40]

[W]hile some academic studies have raised questions whether Lifeline is a costly and inefficient means of achieving universal service, FCC has not evaluated the program to determine whether it is efficiently and effectively meeting its goals …

The 2016 Lifeline Order mandated that the Universal Service Administrative Company (USAC) obtain an independent program evaluation of the Lifeline program’s design, function, and administration. In response, USAC contracted Grant Thornton Public Sector LLC to conduct an independent program evaluation. Grant Thornton’s 2020 report concluded that “the Lifeline program has been successful in providing a free/low-cost option for voice and broadband service for consumers,” but that “[t]here is no evidence to support whether or not the Lifeline program has improved access to voice and broadband services for low-income consumers.”[41] In addition, the report notes “administrative costs relative to program enrollment and the number of eligible low-income households have been steadily increasing since 2011 and should be monitored.”[42]

The Lifeline broadband program has faced allegations of waste, fraud, or abuse, such as the Assurance Wireless scandal.[43] Assurance was a Sprint brand that, as of 2019, had more than three million Lifeline customers in 41 states and the District of Columbia. That year, the FCC investigated allegations that the company may have enrolled ineligible or duplicate subscribers in three states. As part of the investigation, Sprint disclosed that more than one million Lifeline subscribers were not using their Lifeline services. In other words, approximately one-third of Sprint’s Lifeline subscribers—and one in eight of all Lifeline subscribers—were not using the Lifeline services in which they were enrolled.

C.      Emergency Broadband Benefit and the Affordable Connectivity Program

Congress enacted the Consolidated Appropriations Act of 2021 in response to the COVID-19 pandemic. One provision of the act created a temporary $3.2 billion Emergency Broadband Benefit (EBB) within the Lifeline program. The EBB program provides eligible households with a $50 monthly discount on qualifying broadband service or bundled voice-broadband packages purchased from participating providers, as well as a one-time discount of up to $100 for the purchase of a device (computer or tablet). The EBB program was originally set to expire when the funds were depleted or six months after the U.S. Department of Health and Human Services (HHS) declared an end to the pandemic.

With passage of the Infrastructure Investment and Jobs Act (IIJA) in November 2021, the EBB’s temporary subsidy was extended indefinitely and renamed the Affordable Connectivity Program (ACP). The IIJA allocated an additional $14 billion to provide subsidies of $30 a month to eligible households. Without additional appropriations, the ACP is expected to run out of funding by early 2024.[44]

III.    Lessons Learned From ACP and Its Predecessors

The mixed results found in various studies of subsidized broadband access warrant caution and context. Caution is needed, insofar as, without some fiscal guardrails, merely throwing money at the problem—particularly at the tail of nonadopters—is unlikely to help very much. Context is needed because, in fact, subsidization can help along a number of dimensions, but the programs need to meet consumers where they are, rather than seeking to effect some ideal situation.

As noted above, some portion of current nonadopters have fairly inelastic demand and are unlikely to adopt at any price. That may not be the case, however, for many or most households that have not yet adopted broadband. Myopic focus on the hardest-to-connect group may distort the optimal design of a broader subsidy program. Apart from the significant portion of nonadopters who would adopt at the “right” price, there is some large share of users who have already adopted, but would unadopt if they faced economic hardship.

In the face of recession, job loss, or other economic volatility, many low-income households would likely unadopt from broadband access. When economic hardship strikes, families are often faced with tough choices about how to allocate their limited resources. Essential needs such as food, shelter, and utilities naturally take precedence over other expenses. Broadband access, despite its crucial role in modern society, would likely be one of the first things to be eliminated from the budget for many households.

The Broadband Equity, Access, and Deployment (BEAD) program, initiated by Congress this past year, underlines a recognition of this issue and reflects a commitment to ensuring and maintaining digital inclusivity. The BEAD program is structured to regard internet access as more than just as a luxury, but as a vital tool for education, employment, communication, and countless other facets of daily life.  Thus, it is highly improbable that the FCC and Congress would merely look on as large numbers of people disconnect from the internet due to financial hardships. Instead, they will likely face recurring cycles of efforts to reconnect the disconnected, leading to substantial economic waste as programs are cyclically decommissioned and then reinstated.

This inefficiency can be likened to the function of a household thermostat. Keeping a home’s temperature constant is more energy- and cost-efficient than constantly turning off and restarting the heating or cooling systems as external temperatures fluctuate. The same concept applies to broadband adoption. It is likely to be much more economically efficient, and less disruptive to households, to maintain a constant state of connection, rather than navigating the start-stop cycle of disconnection and reconnection.

In light of this reality, broadband-policy design needs to evolve to sustain continuous connectivity, even in the face of economic hardship. Thus, policymakers should look at subsidy design as getting a “good enough” result in the face of the various difficulties these programs face, and to forego aiming for the perfect.

More narrowly, even on its own terms, there is more to be done to make ACP a broader success. Approximately 40% of U.S. households are eligible for the ACP program.[45] At least two-thirds of eligible households, however, do not participate in the ACP. The GAO reports the program has an uptake rate of about one-third of eligible households,[46] while the Annenberg Research Network on International Communication estimates a 28% uptake rate.[47] Moreover, despite repeated requests from the GAO to collect the data needed to evaluate the programs, the FCC has not undertaken any serious efforts to do so. Thus, more needs to be done to explore why eligible households are not taking advantage of ACP.

Unawareness of the ACP is a significant factor driving the low uptake rate. A survey of ACP-eligible households reports that 53% of respondents had either never heard of the program or had heard of it, but didn’t know anything about it.[48] This suggests that increasing awareness of the program may be one of the most cost-effective ways to increase enrollment among unconnected households.

Even so, cost likely remains a key factor, too. The same survey reports that 42% of households pay $50 or more a month after receiving the ACP discount.[49] In addition, 7% of nonadopters indicate the cost of a computer as a reason for not having broadband at home.[50] The ACP’s equipment subsidy may be one way to address this factor.

On the flip side of the concern that Lifeline and ACP are ineffective at fostering broadband adoption is the concern that the programs provide subsidies to those who do not need them (at least, for adoption purposes). In congressional testimony, GAO Director Andrew Von Ah reported:[51]

One of the things we noted in a report we recently did on that [Affordable Connectivity] Program was that we’re not sure—based the way that they measure their performance of that program—whether they’re serving people who are new subscribers or they’re serving people who already have a subscription but now they’re getting a subsidy for that subscription.

George Ford estimates that less than 10% of EBB participants were not connected prior to enrolling in EBB.[52] This suggests that more than 90% of participants did not need a subsidy to subscribe to internet service. On the one hand, Daniel Lyons notes that Lifeline and ACP “risk squandering large amounts of subsidy dollars on households that would have bought internet access even without the subsidy.”[53] On the other hand, regarding the EBB, Hernan Galperin argues:

[T]he primary impact of the EBB program was to alleviate the cost burden for households that were already connected pre-pandemic, with only modest impact in bringing new households online. Alleviating the cost burden of broadband for vulnerable households is an important policy goal, as evidence from other studies suggests that low-income households often cut on essentials expenses (such as food and clothing) to pay for Internet service.[54]

It is necessary here to walk the line walking carefully. We do not want all of the households that would otherwise connect to receive the benefit, but we want enough of the lower-income households to stay online until the point that competition is sufficiently healthy enough in their market to support organic low-cost options. Thus, creating a bright-line rule that cuts off ACP for anyone who was not connected prior to the program probably does not make sense.

In addition to concerns about subsidizing infra-marginal households, there are also concerns about potential waste, fraud, and abuse in the program as it is currently structured. Based on experiences with the Lifeline Broadband program, the GAO identified two overarching areas of potential concern with the ACP:[55]

  • Non-use of broadband service. Instances in which providers receive ACP reimbursement for subscribers who do not use their broadband service; and
  • False reimbursement claims, such as the submission of incorrect information regarding subscriber eligibility for ACP, failure to de-enroll ineligible subscribers or de-enroll them in a timely manner, or submission of incorrect imbursement amounts.

For example, in September 2022, the FCC inspector general reported that potentially thousands of households were fraudulently enrolled in the ACP.[56] Typically, households are eligible for ACP support based on the subscriber’s own participation in a qualifying federal program, like SNAP or Medicaid. Many other households, however, are eligible due to the presence of a “benefit-qualifying person” (BQP). A BQP is a household member—such as a child or dependent—who meets one of the ACP eligibility requirements. For example, if a child is enrolled in Medicaid or qualifies for free or reduced lunch at school, then the household would be eligible for ACP.[57] The inspector general found 12 BQPs who were used by service providers and their agents to enroll an average of 504 ACP households each. One BQP, a four-year old child who receives Medicaid benefits, was used to enroll 1,042 households.

One avenue for this sort of fraud is that the ACP subsidies go to ISPs, rather than directly to consumers. This creates an incentive for providers to enroll as many subscribers as possible in order to capture the revenues from the subsidies. The incentives appear to be sufficient to encourage some degree of chicanery (or at least negligence) to obtain the additional revenues. In January 2023, for example, the FCC proposed a $62 million penalty for wireless provider Q Link Wireless, which was accused of seeking and receiving EBB reimbursements for internet-connected tablets in excess of the market value of the devices.[58]

D.     Defining ACP Success in a Competitive Market

In a perfect world, direct subsidies would have a linear (or better) relationship with adoption and use of broadband. As noted above, this is an idealistic aim, but our goal for a subsidy program should be more rooted in the reality that individuals face. The goal of ACP (and any other similar program) should be focused on adoption where possible, and also on making sure that the economically vulnerable do not unadopt. This is, of course, a fine line to walk. We could over-index in the direction of preventing unadoption, and effectively subsidize the middle class, an endeavor that would be self-obviously economically inefficient.

In light of the interest shown by the FCC and Congress in keeping households online, subsidy programs like the ACP should be designed to minimize market disruption. That is, we know that Congress and the FCC are comfortable intervening in the market, and we want to make sure that intervention is done in the least-destructive manner possible that also yields the greatest possible benefits.

As we have previously noted, the existence of even potential competition across speed tiers has a substantial disciplining effect on broadband prices.[59] Thus, where a subsidy program is used to bring and keep people online, its success can be measured in terms of how many providers are now able to enter a new area. Once two or more providers have established themselves in an area, for example, households in that area can be weaned off of the subsidy program and market regulation can take over. As a competitive marketplace matures for hard-to-connect households, the need for the subsidy shrinks over time.

This is also where digital literacy and similar programs can have some positive effect. For those in the tail of the willingness-to-pay, learning how to use the internet for activities such as job searches, education, and health care will serve to stimulate some demand. Combined with the invigorated competition that flows from vulnerable inframarginal individuals becoming stable customers, such subsidies can provide the needed demand stimulus to grow a functional, self-supporting market.

IV.    A Roadmap for Reform

As Congress considers additional funding for ACP, lawmakers should consider the following reforms to make the program more effective in helping consumers and reducing the cost to taxpayers. The reforms should have three goals: (1) expand internet adoption among unconnected households and retain connections for vulnerable infra-marginal households; (2) reduce wasteful spending on erroneous or fraudulent enrollments, and (3) empower consumers to choose the devices and services that best fit their demands.

Some of these goals can operate at cross purposes. For example, efforts to increase enrollment in ACP increase the risk of false reimbursement claims. Similarly, efforts to reduce fraudulent claims will likely increase the burden on eligible consumers seeking to successfully enroll in the program, thereby stifling enrollment and adoption. With an eye toward reducing these cross purposes, we propose the following reforms to the ACP.

Design eligibility criteria to target low-income nonadopters and vulnerable infra-marginal households. The current eligibility criteria may be overly broad and include households that are neither unconnected nor economically vulnerable. For example, households that live in a school district that offers free and reduced-price school lunch through the U.S. Department of Agriculture’s Community Eligibility Provision are eligible for ACP, regardless of their own income or broadband status. Some of this spending is likely wasteful and diminishes the program’s effectiveness. Instead, the eligibility criteria should be based on income and broadband adoption, such as households that have no broadband service or only use mobile data plans, or are within a certain percentage of the federal poverty level.

Provide targeted outreach to increase awareness among eligible households. Many eligible households are unaware of the ACP or how to apply for it. According to a survey by Pew Research Center, only about half of low-income adults have heard of the ACP or a similar program. This limits the program’s reach and effectiveness. The FCC should partner with local organizations—such as libraries, schools, community centers, and nonprofits—to inform and assist eligible households with applying for the ACP. The FCC should also leverage its existing Lifeline program—which provides discounts on phone service for low-income households—to promote the ACP and enroll eligible customers.

Reduce enrollment complexities. The ACP’s current enrollment process is cumbersome and confusing for both consumers and providers. Consumers have to apply for the program through a website or a mail-in application, verify their eligibility through various documents or databases, and contact a participating provider to select a service plan. Some providers may have an alternative application that they will ask consumers to complete. Providers have to verify customers’ eligibility through a national verifier system, report data on their enrollments and reimbursements, and comply with various rules and requirements. These complexities create barriers and inefficiencies for both parties.

The FCC should streamline the enrollment process by creating a user-friendly online portal that allows consumers to apply for and manage their ACP benefits, verify their eligibility through a single source of data, and compare and choose among different broadband options. The FCC should also simplify the reporting and reimbursement process for providers by creating a standardized system that minimizes paperwork and delays.

Indeed, there has long been criticism of the National Verifier program that the FCC uses to administer these programs.[60] The process is error prone and, according to Pew, more than two-thirds of Lifeline applicants using the process abandon their application.[61] In lieu of making their own process work better, the FCC should continue to allow private providers to engage in more efficient, alternative-verification processes.[62]

V.      Conclusion

The ACP is expected to run out of federal funding within the next year. In anticipation of legislation to continue funding, some have called for the program’s expansion, while others urge that the ACP be scaled back. Despite its flaws, the ACP is a “good enough” solution and should be continued with some straightforward adjustments.

Approximately 95% of households with access to the internet use it at home, and most obtain that access through a subscription with an ISP. In addition to the 5% of fully unconnected homes, we need to be practically and politically concerned with some portion of the economically vulnerable at the tail of the 95% of current adopters.

Among nonadopting households, some are not aware of the program, some lack digital literacy, some currently access the internet without a subscription, and some have no interest in subscribing to an internet service at any price. On the other hand, the ACP and its predecessors appear to have been successful in subsidizing low-income households that already subscribe to an internet service, allowing these households to maintain at-home internet service through the COVID-19 pandemic and afterward.

The ACP has provisions to prevent and detect waste and fraud, and the FCC has implemented many of them. These provisions include requiring verification of eligibility, identity, and address, and auditing providers’ compliance. Nevertheless, the program has experienced instances of fraud and abuse, such as providers enrolling ineligible customers or providers overcharging for equipment.

Even so, lawmakers and regulators must accept that any policies to make enrollment easier will necessarily increase the risk of erroneous or fraudulent subsidy payments. Similarly, any policies to reduce these risks will necessarily add additional burdens on providers and consumers and suppress enrollment.

Despite its shortcomings, the ACP is a much better policy than other alternatives, such as direct rate regulation or municipal broadband. Rate regulation would discourage investment and innovation in the broadband market.[63] Municipal broadband would create unfair competition and waste local taxpayer money.[64] Both of these are realistic policy alternatives that are frequently offered by advocates as ways to ease the burden of paying for broadband access by low-income households.

In contrast, the ACP likely fosters investment by encouraging household internet adoption and retention. Unlike municipal broadband, the ACP does not favor one provider over another and does not require any state or local funding.

The ACP is easy to qualify for, but difficult to enroll in. Eligibility criteria should be focused on low-income households that do not already use an internet service at home or are particularly economically vulnerable. Hand-in-hand with tightened eligibility, the ACP should streamline the process and reduce the burden to enroll. At the same time, the program should increase its outreach to eligible households through existing programs to support low-income households, such as SNAP, Medicaid, and Section 8. The FCC should provide funding to local organizations—such as libraries, schools, community centers, and nonprofits—to inform eligible households and assist them with applying for the ACP.

These reforms would make the ACP more efficient and effective. They would likely reduce the program’s costs, thereby allowing more of the appropriated funds to be directed toward the households the program is intended to help.

[1] Affordable Connectivity Program, Federal Communications Commission, https://www.fcc.gov/acp (last accessed Sep. 14, 2023).

[2] Nicole Ferraro, Rosenworcel Warns Congress That Not Funding ACP Will ‘Cut Families Off’, Light Reading (Jun. 21, 2023), https://www.lightreading.com/broadband/rosenworcel-warns-congress-that-not-funding-acp-will-cut-families-off/d/d-id/785380.

[3] Press Release, Thune, Cruz Statement on the FCC’s Mismanagement of a Taxpayer-Funded Broadband Subsidy Program, Sen. John Thune (Jan. 25, 2023), https://www.thune.senate.gov/public/index.cfm/2023/1/thune-cruz-statement-on-the-fcc-s-mismanagement-of-a-taxpayer-funded-broadband-subsidy-program.

[4] Jessica Dine & Joe Kane, The State of US Broadband in 2022: Reassessing the Whole Picture, Information Technology & Innovation Foundation (Dec. 5, 2022), https://itif.org/publications/2022/12/05/state-of-us-broadband-in-2022-reassessing-the-whole-picture.

[5] Internet/Broadband Fact Sheet, Pew Research Center (Apr. 7, 2021), https://www.pewresearch.org/internet/fact-sheet/internet-broadband.

[6] 2021 American Community Survey 1-Year Estimates, U.S. Census Bureau (2021), Table Id. S2801; ACS 1-Year Estimates Public Use Microdata Sample 2021, Access to the Internet (ACCESSINET), U.S. Census Bureau (2021).

[7] George W. Zuo, Wired and Hired: Employment Effects of Subsidized Broadband Internet for Low-Income Americans, 13 Am. Econ. J.: Econ. Pol’y 447 (2021).

[8] Id. at 463.

[9] George S. Ford, Confusing Relevance and Price: Interpreting and Improving Surveys on Internet Non-adoption, 45 Telecomm. Pol’y 102084 (2021).

[10] Colin Rhinesmith, Bianca Reisdorf, & Madison Bishop, The Ability to Pay For Broadband, 5 Comm. Res. Pract. 121 (2019).

[11] Ford, supra note 9.

[12] Michael A. Williams & Wei Zao, (Expert Report of Michael A. Williams and Wei Zhao, NTCA–The Rural Broadband Association (May 7, 2020), available at https://www.ntca.org/sites/default/files/documents/2020-05/2020-05-07%20-%20Williams-Zhao%20report%20Final.pdf.

[13] Octavian Carare, Chris McGovern, Raquel Noriega, & Jay Schwarz, The Willingness to Pay For Broadband of Non-Adopters in the U.S.: Estimates From a Multi-State Survey, 30 Inf. Econ. Pol’y. 19 (2015).

[14] George S. Ford, Assessing Broadband Policy Options: Empirical Evidence on Two Relationships of Primary Interest, Phoenix Ctr. For Advanced Legal & Econ. Pub. Pol’y Stud., Perspectives 21-04 (Jul. 28, 2021) available at https://www.phoenix-center.org/perspectives/Perspective21-04Final.pdf.

[15] Williams & Zao, supra note 12.

[16] See also, N. Gregory Mankiw, Principles of Economics (4th ed, Thomson South-Western 2007) (“At points with a low price and high quantity, the [linear] demand curve is inelastic. At points with a high price and low quantity, the [linear] demand curve is elastic.”)

[17] Michelle Cao & Rafi Goldberg, New Analysis Shows Offline Households Are Willing to Pay $10-a-Month on Average for Home Internet Service, Though Three in Four Say Any Cost is Too Much, National Telecommunications and Information Administration (Oct. 6, 2022), https://ntia.gov/blog/2022/new-analysis-shows-offline-households-are-willing-pay-10-month-average-home-internet.

[18] J. A. Hauge & J. E. Prieger, Evaluating the Impact of the American Recovery and Reinvestment Act’s BTOP on Broadband Adoption, 47 App. Econ. 6553 (2015).

[19] Erezi Ruth Ogbo, Heonuk Ha, Hernan Galperin, & François Bar, Measuring the Effectiveness of Digital Inclusion Approaches, iConference 2022 (Feb. 2, 2022) available at https://www.ideals.illinois.edu/items/123109.

[20] Jacob Manlove & Brian Whitacre, An Evaluation of the Connected Nation Broadband Adoption Program, 43 Telecomm. Pol’y 101809 (2019).

[21] Scott Wallsten, Learning from the FCC’s Lifeline Broadband Pilot Projects, TPRC 44: The 44th Research Conference on Communication, Information and Internet Policy 2016 (March 23, 2016), available at http://dx.doi.org/10.2139/ssrn.2757149.

[22] Jamie Greig & Hannah Nelson, Federal Funding Challenges Inhibit a Twenty-First Century “New Deal” for Rural Broadband, 37 Choices 1 (2022).

[23] Andrew Perrin, Mobile Technology and Home Broadband 2021, Pew Research Center (Jun. 3, 2021), https://www.pewresearch.org/internet/2021/06/03/mobile-technology-and-home-broadband-2021.

[24] Rhinesmith, et al., supra note 10.

[25] Broadband Technology Opportunities Program 46th Quarterly Report to Congress, National Telecommunications and Information Administration (Nov. 2020), available at https://ntia.gov/sites/default/files/publications/ntia_btop_46th_quarterly_congressional_report_0.pdf.

[26] Hauge & Prieger, supra note 18.

[27] T. Randolph Beard, George S. Ford, & Michael Stern, Bridging the Digital Divide: An Empirical Analysis of Public Programs to Increase Broadband Adoption, 67 Telematics & Informatics 10754 (2022).

[28] NTIA, BTOP/SBI Archived Grant Program (n.d.), https://www2.ntia.doc.gov/Broadband-Resources#evaluation. See also, Final Report: Social and Economic Impacts of the Broadband Technology Opportunities Program, ASR Analytics (Sep. 15, 2014), available at https://www2.ntia.doc.gov/files/asr_final_report.pdf.

[29] Manlove & Whitacre, supra note 20.

[30] Hauge & Prieger, supra note 18.

[31] Beard, et al., supra note 27.

[32] FCC Lifeline Reform Order, 47 CFR 54 (2012), available at https://docs.fcc.gov/public/attachments/FCC-12-11A1.pdf (“2012 Lifeline Order”).

[33] FCC Should Evaluate the Efficiency and Effectiveness of the Lifeline Program, U.S. Government Accountability Office (Mar. 2015), available at https://www.gao.gov/assets/gao-15-335.pdf.

[34] Id.

[35] Wireline Competition Bureau Low-Income Broadband Pilot Program Staff Report, 30 FCC Rcd 4960 (6) (May 22, 2015), available at https://docs.fcc.gov/public/attachments/DA-15-624A1.pdf.

[36] Id.

[37] Id.

[38] Initially, the minimum service standards for fixed broadband were 10/1 Mbps speeds and 150 GB per-month of usage. Currently, the standards are 25/3 Mbps speeds and 1,280 GB of usage. FCC Lifeline Reform Order, 81 FR 7999 (2016), available at https://docs.fcc.gov/public/attachments/FCC-16-38A1.pdf (“2016 Lifeline Order”). See also, Minimum Service Standards, Universal Service Administrative Company (n.d.), https://www.usac.org/lifeline/rules-and-requirements/minimum-service-standards.

[39] Under the 2016 Lifeline Order, support for voice-only Lifeline services would decline to $7.25 per-month beginning December 2019, and decline further to $5.25 per-month by December 2020. Voice-only service for Lifeline would be eliminated by December 2021. However, voice-only service would continue to be supported so long as it was offered with a broadband service meeting the minimum service standards, or if the subscribers’ Lifeline service was only available from one Lifeline provider within a U.S. Census block. See also, Additional Action Needed to Address Significant Risks in FCC’s Lifeline Program, U.S. Government Accountability Office (May 2015), available at https://www.gao.gov/assets/gao-17-538.pdf.

[40] Id.

[41] Universal Service Administrative Co. Lifeline Program 2020 Evaluation, Grant Thornton Public Sector LLC (Feb. 5, 2021), available at https://www.neca.org/docs/default-source/wwpdf/public/7121usac.pdf.

[42] Id.

[43] Daniel Lyons, Assessing Broadband Affordability Initiatives, Boston College Law Sch. Legal Stud. Res. Paper No. 593, (Jan. 16, 2023), available at https://ssrn.com/abstract=4363595.

[44] Jessica Dine, Allowing the Affordable Connectivity Program to Lapse Helps Nobody, Innovation Files (Mar. 29, 2023), https://itif.org/publications/2023/03/29/allowing-the-acp-to-lapse-helps-nobody.

[45] Hernan Galperin, Estimating Participation in the Affordable Connectivity Program (ACP), Annenberg Res. Network on Int’l Comm. (Oct. 2022) available at https://arnicusc.org/wp-content/uploads/2022/10/Policy-Brief-2-ACP-eligibility-final-1.pdf (“Expressed in terms of percentage of eligible households, the income-only criteria estimates that about 28% of U.S. households are eligible for ACP, when the true number is closer to 40%.”).

[46] FCC Could Improve Performance Goals and Measures, Consumer Outreach, and Fraud Risk Management, U.S. Government Accountability Office (Jan. 2023), available at https://www.gao.gov/assets/gao-23-105399.pdf.

[47] François Bar & Hernan Galperin, A Look at the Affordable Connectivity Program’s Inaugural Year through Interactive Dashboards, USC Annenberg Research Network on International Communication (Feb. 22, 2023), https://arnicusc.org/a-look-at-the-affordable-connectivity-programs-inaugural-year-through-interactive-dashboards.

[48] Half of ACP-Eligible Households Still Unaware of the Program, Benton Institute for Broadband & Society (Mar. 17, 2023), https://www.benton.org/blog/half-acp-eligible-households-still-unaware-program.

[49] Id.

[50] Lyons, supra note 43.

[51] Closing the Digital Divide: Overseeing Federal Funds for Broadband Deployment, Before House Oversight and Investigations Subcommittee, 118th Cong. (May 10, 2023) (statement of Andrew Von Ah, Director, Physical Infrastructure, Government Accountability Office), https://energycommerce.house.gov/events/oversight-and-investigations-subcommittee-hearing-closing-the-digital-divide-overseeing-federal-funds-for-broadband-deployment.

[52] George S. Ford, EBB, Lifeline, and ACP: Some Guidance, Phoenix Ctr. For Advanced Legal & Econ. Pub. Pol’y Stud. (Jan. 13, 2022) available at http://dx.doi.org/10.2139/ssrn.4159859.

[53] Lyons, supra note 43.

[54] Galperin, supra note 45.

[55] GAO, supra note 46.

[56] Advisory Regarding Provider Enrollments of Multiple ACP Households Based on the Same Child/Dependent, Federal Communications Commission (Sep. 8, 2022), available at https://docs.fcc.gov/public/attachments/DOC-387009A1.pdf.

[57] GAO, supra note 46.

[58] Diana Goovaerts, FCC Proposes to Fine Q Link Wireless $62M Related to ACP, Fierce Wireless (Jan. 18, 2023), https://www.fiercewireless.com/wireless/fcc-fines-q-link-wireless-62m-alleged-acp-fraud.

[59] Geoffrey A. Manne, Kristian Stout, & Ben Sperry, A Dynamic Analysis of Broadband Competition: What Concentration Numbers Fail to Capture, Int’l Ctr. for L. & Econ. (Jun. 3, 2021), https://laweconcenter.org/resources/a-dynamic-analysis-of-broadband-competition-what-concentration-numbers-fail-to-capture.

[60] Anna Read & Kelly Wert, Enrollment Hurdles Limit Uptake for FCC’s Affordable Connectivity Program, Pew Charitable Trusts (Feb. 28, 2023), https://www.pewtrusts.org/nb/research-and-analysis/articles/2023/02/28/enrollment-hurdles-limit-uptake-for-fccs-affordable-connectivity-program.

[61] Id.

[62] Unfortunately, the FCC has signaled some reluctance to allow providers to do so. See Masha Abarinova, FCC Urges Cox, Charter, Starry to Double Down on ACP Verification, Fierce Telecom (May 18, 2023), https://www.fiercetelecom.com/broadband/fcc-urges-charter-cox-starry-double-down-acp-verification.

[63] Eric Fruits & Geoffrey Manne, Quack Attack: De Facto Rate Regulation in Telecommunications, Int’l Ctr. for L. & Econ. (March 30, 2023), https://ssrn.com/abstract=4412076 or http://dx.doi.org/10.2139/ssrn.4412076.

[64] Manne, et al., supra note 59.

AMICUS BRIEFS

Amicus Brief of Economists and Antitrust Scholars in FTC v Microsoft

Interest of Amicus Curiae Amici curiae are economists and antitrust scholars who write to share their perspective with the Court.[1] The names of the signatories . . .

Interest of Amicus Curiae

Amici curiae are economists and antitrust scholars who write to share their perspective with the Court.[1] The names of the signatories appear in the attached Addendum.

We have an interest in ensuring the proper application of antitrust doctrine and that it reflects current economic principles.[2]

We think that the District Court followed the law and sound economic principles in reviewing the FTC’s challenge to the vertical merger between a platform provider (Microsoft) and a content creator (Activision).

Summary of the Argument

The FTC proceeded against the proposed Microsoft-Activision merger with a prospective theory based on the FTC’s predicted economic incentives of Microsoft to foreclose Activision’s first-person shooter video game, Call of Duty—a 20-year, multi-platform franchise—from all rivals in three proposed markets: high performance consoles, cloud streaming, and library subscription services. After the parties submitted extensive factual and expert evidence, the District Court concluded that the FTC had not shown a likelihood that it would prevail on its claim that this vertical merger may substantially lessen competition.

The District Court followed the proper framework for reviewing the merger given the FTC’s vertical theory of harm. First, a court must consider whether the combination has the ability and the incentive to foreclose the input from rivals. If the court determines both ability and incentive exist, the court must decide what effect, if any, such a foreclosure will have on competition.

Accepting the FTC’s narrow high-performance-console market for Rule 13(b) purposes, the District Court concluded that Microsoft lacked an economic incentive to foreclose Call of Duty from Sony, the dominant player in the FTC’s market. In so doing, the District Court rejected the FTC’s theory that Microsoft’s commitment to Sony to continue offering Call of Duty on PlayStation was a “proposed remedy” unworthy of consideration under Rule 13(b).

The District Court also concluded that the merger would expand access to Call of Duty to the benefit of gamers. With respect to the nascent cloud-streaming market, the District Court found that, pre-merger, Activision had not made Call of Duty available to any cloud-streaming providers and was unlikely to do so based on a long-held view that doing it was not in its interest. Microsoft’s plan to add Call of Duty to its streaming service represented an output-expanding product of the merger. Moreover, Microsoft had reached agreements with five (5) cloud-streaming providers to allow them to stream the game as well, which the District Court concluded would result in the merger creating more (not less) Call of Duty availability. And the District Court’s consideration of these agreements—including with sophisticated providers like Nvidia—countered the FTC’s central theory that Microsoft would limit the availability of Call of Duty to its own platform.

Regarding the proposed library subscription market, the District Court found that, pre-merger, Call of Duty was not currently available to gamers via subscriptions, and that Activision had no plans to offer it to gaming platforms. Moreover, based on current market conditions and Activision’s actions before the merger, the District Court found that, even accepting for preliminary injunction purposes that Microsoft would offer Call of Duty exclusively on its own subscription service, the merger would not represent input foreclosure because the alternative was no access to the game by subscription at all. The District Court rejected the FTC’s economic theory that more availability of an input, even if only via Xbox’s library subscription service, could result in less competition.

Finally, the critical element in the analysis of the effects of the merger is the impact that potential foreclosure would have on competition. The District Court did not reach this ultimate step, having found no incentive to withhold Call of Duty. But the fact that the FTC’s expert economist concluded that, at worst, the transaction would result in a 5.5% share shift from the dominant platform (Sony PlayStation) to the much smaller platform (Xbox), suggests that the transaction is unlikely to harm competition. And it belies the FTC’s other argument that the transaction would increase a trend toward concentration, which in any event is not a proxy for showing harm to competition.

[1] Under Rule 29(a)(4)(E) of the Federal Rules of Appellate Procedure, amici certify that (i) no party’s counsel authored the brief in-whole or in-part; (ii) no party or a party’s counsel contributed money that was intended to fund preparing or submitting the brief; and (iii) no person, other than amici or its counsel, contributed money that was intended to fund preparing or submitting the brief.

[2] All parties have consented to the filing of this brief.

COMMENTS & STATEMENTS

Letter to Chairs and Ranking Members of House Ways and Means and Senate HELP Committees on Prescription Drug Price Controls

Dear Chairman Sanders, Ranking Member Cassidy, Chairman Smith, and Ranking Member Neal: As former judges, former government officials, and scholars who are experts in patent . . .

Dear Chairman Sanders, Ranking Member Cassidy, Chairman Smith, and Ranking Member Neal:

As former judges, former government officials, and scholars who are experts in patent law, healthcare policy, or both, we write to express our concerns about lobbying efforts for the government to impose price controls on patented drugs. Some activists and academics have written to Congress and to agency officials arguing that existing laws are “tools” for the government to impose price controls on patented drugs to lower drug prices.[1] Their arguments mischaracterize these statutes by inaccurately claiming that Congress has endorsed the imposition of price controls on patented drugs. It has not.

Drug pricing presents a multi-dimensional policy issue because the U.S. healthcare system comprises a complex, intermingled system of federal and state laws and regulations, as well as a myriad of equally complex and intermingled set of public and private institutions. Yet, activists and others inaccurately reduce the causes of drug prices to a single issue: patents. They argue that the federal government can “lower drug prices by breaking patent barriers,”[2] and they claim that two statutes can be used to achieve this policy goal: the Bayh-Dole Act and 28 U.S.C. § 1498.

Neither the Bayh-Dole Act nor § 1498 are price-control statutes, and thus they do not authorize the federal government to impose price controls on patents. This is clear by their plain legal text, as well as by their consistent interpretation by courts and agencies. The Bayh-Dole Act promotes the commercialization of patented inventions that may result from government funding of research, and § 1498 secures patent-owners in obtaining compensation for unauthorized uses of their property rights by the government. Neither law says anything about drug prices. If the government used either law to impose price controls on patented drugs, this would conflict with the clear purpose of these statutes. It would also represent an unprecedented and fundamental change in U.S. patent law. From 1790 through the twentieth century, Congress rejected bills that would impose compulsory licensing on patents.[3] The calls to use the Bayh-Dole Act or § 1498 for similar purposes fundamentally are at odds with these statutes and threaten to undermine the U.S. patent system’s historic success as a driver of U.S. global leadership in biopharmaceutical innovation.

This letter explains why neither the Bayh-Dole Act nor § 1498 can be used to break patents to impose price controls on drugs. First, it sets forth the proven success of the patent system as a driver of innovation in healthcare, which is the framework to evaluate the argument to “lower drug prices by breaking patent barriers.”[4] This argument threatens to undermine the legal system that has saved lives and improved everyone’s quality of life. It then describes the Bayh-Dole Act and § 1498, explaining how neither authorizes price controls on patented drugs. The policy argument seeking to impose price controls on drugs contradicts the clear text and purpose of these statutes.

Read the full letter here.

[1] See Letter to Senator Elizabeth Warren from Amy Kapczynski, Aaron S. Kesselheim, et al., at 1 (Apr. 20, 2022), https://tinyurl.com/yt62wt4t. Professor Kapczynski and Professor Kesselheim are the co-authors of this letter, which is based on their articles, and thus this letter is identified as the “Kapczynski-Kesselheim Letter.”

[2] Id. at 8

[3] See, e.g., Bruce W. Bugbee, Genesis of American Patent and Copyright Law 143-44 (1967) (discussing the rejection of a Senate proposal for a compulsory licensing requirement in the bill that eventually became the Patent Act of 1790); Kali Murray, Constitutional Patent Law: Principles and Institutions, 93 Nebraska Law Review 901, 935-37 (2015) (discussing 1912 bill that imposed compulsory licensing on patent owners who are not manufacturing a patented invention, which received twenty-seven days of hearings, but was not enacted into law).

[4] Kapczynski-Kesselheim Letter, supra note 1, at 8.

Comments of the International Center for Law & Economics on Proposed Changes to the Premerger Notification Rules

I.        Introduction We appreciate the opportunity to comment on the proposed changes to the premerger notification rules recently published by the Federal Trade Commission (“FTC”), . . .

I.        Introduction

We appreciate the opportunity to comment on the proposed changes to the premerger notification rules recently published by the Federal Trade Commission (“FTC”), with the concurrence of the Assistant Attorney General of the Antitrust Division of the U.S. Department of Justice (“DOJ” or “Division”).[1]

Merger law in the United States has largely tracked developing economic theory.[2] This approach has tended to reject structural presumptions about a merger’s likely effects on competition and consumers (understanding, that is, that “big” is not necessarily “bad”). It encourages weighing the potential anticompetitive effects of a transaction against its potential procompetitive efficiencies.

That trend in enforcement and jurisprudence notwithstanding, current leadership at the agencies has signaled a more aggressive approach to enforcement, dismissing likely efficiencies and other merger benefits. For instance, the Chair of the FTC has argued that Section 7 of the Clayton Act:

is a broad mandate aimed at prohibiting mergers even when they do not constitute monopolization and even when their tendency to lessen competition is not certain. . . . [E]ven if a merger does create efficiencies, the statute provides no basis for permitting the merger if it nevertheless lessens competition.[3]

The substantive changes to both the merger guidelines and the premerger notification form relate to this goal of more aggressive merger enforcement. As we explain below, while certain changes are required by statutory amendments to the Clayton Act, many of the proposed amendments would be both unnecessary and inappropriately burdensome and costly. Collectively, they would exceed the agencies’ statutory authority, under Section 7A of the Clayton Act,[4] to require the production of “such documentary material and information relevant to a proposed acquisition as is necessary and appropriate … to determine whether such acquisition may, if consummated, violate the antitrust laws.”[5]

While further research, enforcement experience, and legal precedent might develop such that certain additional information would reasonably be required of all filers, the agencies have not presented the requisite developments in the NPRM or, to the best of our knowledge, elsewhere. Such developments should, at least, precede the imposition of substantial new filing requirements. The HSR regulations and form are not supposed to be a substitute for, e.g., the FTC’s study authority under Section 6(b) of the FTC Act.[6]

The scope of the NPRM and the diversity of additional information that filers would be required to produce should the proposals be adopted together raise a fundamental question: how will the new requirements materially improve merger screening?  Are the agencies often or systematically clearing anticompetitive mergers because of information not included in initial filings, and that staff cannot glean via, e.g., follow-up queries to the parties, voluntary requests, pull-and-refiles, and second requests? Would such mergers fail to clear under the proposed filing requirements?  Answers to these and other questions, which nowhere appear in the NPRM, are needed to maintain that these changes are necessary and appropriate, given the other means by which the agencies can obtain information to inform premerger screening (such as through second requests).

Section I offers some background concerning the purpose of the HSR form and filing requirements, and on the changes that have been proposed. Section IV provides a brief discussion of the proposed changes that are necessary or otherwise reasonable. Section V discusses the changes that are problematic. These would increase compliance costs for merging parties generally, with disproportionate impact on small and first-time filers; they would impose additional burdens on agency staff; yet it is unlikely that they would provide countervailing benefits to competition and consumers.

II.      Background: Merger Enforcement and the HSR Premerger Notification Form?

At the outset, we note that the proposed changes to the premerger notification rules (“NPRM”) were closely followed by the agencies’ publication of new draft merger guidelines.[7] That makes some sense, as the two are closely intertwined. Section 7 of the Clayton Act prohibits mergers where the effect “may be substantially to lessen competition, or to tend to create a monopoly.”[8] In 1976, Congress enacted the Hart–Scott–Rodino Antitrust Improvements Act (“HSR Act”) to facilitate enforcement of Section 7. Specifically, the HSR Act created a premerger notification mandate, under which transactions exceeding certain market share or value thresholds must be reported to the DOJ and FTC at least 30 days prior to closing.[9] The agencies use these 30 days to screen proposed large transactions and to determine whether further scrutiny is needed as to whether a transaction might violate the Clayton Act.[10]

The premerger notification process is a congressionally created mechanism that requires parties to relatively large transactions to provide the agencies with notice of, and opportunity to go to court to enjoin, those transactions before they close. Initial filings are a critical basis on which agency staff can screen proposed mergers effectively, although, of course, the production required by the HSR form itself is far from the only source of information available to staff screening mergers prior to closing.

Reviewing staff can—and routinely do—ask merger-specific follow-up questions during that initial 30-day period, in addition to consulting third parties and other sources of information. The agencies can then issue a request for additional information, called a second request, to the parties to get further details about a transaction and to decide whether to seek to enjoin the merger from proceeding.[11] With that second request, the reviewing agency may extend the screening period for an additional 30 days.[12] In the interim—often prompted by additional staff questions—parties may elect to “pull and refile,” which restarts the initial 30-day clock and permits additional information gathering by the staff in advance of a decision regarding whether to issue a second request.

The HSR premerger notification requirements address a basic problem of antitrust law: you can’t “unscramble an egg.”[13] Once a merger is finalized, businesses begin intermingling their operations, personnel, finances, business plans, trade secrets, and intellectual property in various ways. The larger the firms—or the more complex the integration or consolidation—the more difficult it becomes to undo (or “unwind”) a consummated merger. Premerger notification creates an opportunity for the antitrust agencies to identify and pause pending mergers, in order to allow for more thoroughgoing investigation of their potential competitive effects before any eggs have been scrambled.

When the HSR Act was adopted, it was expected that only 150 or so transactions each year would be large enough to trigger review.[14] In time, that estimate proved to be off by more than an order of magnitude; in recent years, more than that many transactions are notified each month.[15] The effect has largely been to transition merger law in the United States from an ex post enforcement-based regime to an ex ante regulatory regime.[16]

Despite this change, the premerger notification regime is generally viewed as successful. [17] This is because the program has been designed and managed with the understanding that it is meant only to identify mergers that are likely problematic; and, conversely, that it is meant not to impede the vast majority of mergers that are unlikely to be problematic (but likely procompetitive or benign). [18] Combined with the merger guidelines—which have (in the past) provided clear guidance on how the agencies will review materials submitted as part of the premerger notification process—the HSR Act’s premerger notification process has created a robust and relatively low-burden system. This system enables business and antitrust agencies alike to identify problematic transactions, while allowing most deals to proceed with minimal cost or delay. The balance is captured in a December 2020 advance notice of proposed rulemaking that contemplated other premerger-filing amendments: “[t]he Agencies have a strong interest in receiving HSR filings that contain enough information to conduct a preliminary assessment of whether the proposed transaction presents competition concerns, while at the same time not receiving filings related to acquisitions that are very unlikely to raise competition concerns.”[19]

A very large majority of reported mergers are consummated without challenge or allegation of likely anticompetitive effects. For example, the agencies reported challenging only 32 of the 3,520 transactions reported in fiscal year 2021; that is, 0.009%.[20] Across the 10-year period from fiscal years 2012-2021 (inclusive), in the vast majority of cases, neither agency even issued a second request. It is reported that DOJ issued second requests in frequencies ranging from 0.7% to a high of 2.1% in 2012, while FTC issued second requests in 1.4% to 1.9% of investigations.[21]

The agencies’ multiple opportunities to receive and request information prior to the consummation of a transaction, along with the relative infrequency with which additional information is requested, or with which transactions are challenged, are the context in which to ask whether it is “necessary and appropriate” to require the production of certain information with the initial HSR filing. As a simple example, if roughly 2% of noticed transactions receive a second request, the compliance burden of requesting information of all firms as part of the premerger notification process is roughly 50 times greater than it would be if the information were requested only with a second request.[22] And that burden is one imposed on both reviewing staff and filers.

III.    Direct Costs

From the outset, it is important to understand that the proposed amendments are anything but costless. Estimates suggest the new rules will lead to somewhere between $350 million and $2.23 billion in additional annual compliance costs. Not only will these additional costs deter firms, at the margin, from filing—and hence from merging—but they will also be passed on to consumers (at least in part) when firms do. The substantial costs that would be imposed by many of the proposed requirements raises the bar for deeming such amendments appropriate.

Even the FTC estimates a massive increase in compliance costs of approximately $350 million, to more than $470 million per year. But that estimate is likely a serious underestimate, as it is based on, among other things, an unscientific “estimate” of the time involved and a dated assumption about the average hourly costs imposed on filers’ senior executives and firms’ counsel.

The U.S. Chamber of Commerce conducted “a survey of 70 antitrust practitioners asking them questions about the proposed revisions to the HSR merger form and the new draft merger guides.”[23] Based on average answers from the survey respondents, the new rules would increase compliance costs by $1.66 billion, almost five times the FTC’s $350 million estimate. For the current rules, the average survey response puts the cost of compliance at $79,569.[24] Assuming there are 7,096 filings (as the FTC projects for FY 23), the total cost under the current rules would be $565 million. Under the new rules, the average survey response estimates the expected cost of compliance to be $313,828 per transaction, for a total cost of $2.23 billion.[25] The relevant total costs for all filing are summarized in Table 1. Table 2 presents the numbers on a per-filing basis.

Even if we assume the U.S. Chamber of Commerce’s survey was biased toward practitioners who work on more complex and costly transactions, it is dramatically higher than the FTC’s estimate. The FTC estimates that 45% of filings have overlaps.[26] For simplicity, assume survey respondents work only on overlaps and the remaining 55% of filings require no extra work.[27] Even with these extreme assumptions, the amendments would increase the cost of filing by nearly $750 million—more than double the FTC’s estimate.

On any reasonable estimate, the amendments are likely to impose substantial new costs on all filers and may have significant effects on firms’ incentives to merge—and important consequences for consumers when they do. They may also have an outsize impact on relatively small filers. The merits of these amendments should thus be carefully considered against their substantial and widespread costs.

IV.    Required and Reasonable Changes to the Reporting Requirements

The HSR form has been amended many times since 1976.[28] Some of the amendments have been minor or even ministerial, and many—not all—have been required by statutory amendments to the pertinent provisions of the Clayton Act.[29] For example, revised reporting thresholds were noticed in January 2023,[30] January 2022,[31] and February 2021,[32] and the commission published an advance notice of proposed rulemaking regarding various potential changes in December 2020.[33]

Consistent with past practice, some of the amendments proposed in the NPRM implement 2022 amendments to pertinent provisions of the Clayton Act, while others appear to streamline or clarify reporting requirements. That is, some of the proposed changes are necessary and others appear at least appropriate.

First, as noted in the NPRM, certain proposed amendments implement 2022 statutory amendments imposed by the Merger Filing Fee Modernization Act of 2022.[34] For example, the 2022 statutory amendments require the disclosure of subsidies from nations or entities that Congress has identified as “foreign entities of concern” and correspondingly requires that the agencies collect such information with premerger filings, and that they promulgate regulations to that effect.[35] The NPRM’s proposed changes to Part 801.1 of the HSR rules appears to be a reasonable implementation of 2022 congressional charge.

Second, the NPRM’s proposal to amend Part 803 to require electronic filing[36] will likely be salutary, especially with the successful implementation of an e-filing platform that, according to the NPRM, is under development.[37] As observed in the NPRM, the agencies have been accepting electronic HSR filings since March 2020.[38] Many filers have taken advantage of the electronic-filing option since then. Furthermore, premerger screening by staff can be carried out more efficiently with electronic documents. Given the increased digitization of pertinent documents across the economy, it is reasonable to assume that the formal routinization of electronic filing will streamline both premerger filing and the screening of filings by agency staff. The extent to which this will make premerger filing and screening more efficient depends on the successful implementation of an e-filing platform. If successful, the benefits should be substantial.

V.      Problematic Changes to the Filing Rules Are Not Justified by the NPRM or Otherwise

While several of the NPRM’s proposed changes appear to be reasonable attempts to implement new statutory mandates or, as in the case of electronic filing, pragmatic initiatives to update and streamline the filing and review processes, others appear cumbersome, costly, and unnecessary or, at best, substantially unjustified by the NPRM or other available evidence.

For example, Parts 4(c) and 4(d) of the current premerger notification form require merging parties to provide copies of “all studies, surveys, analyses and reports which were prepared . . . for the purpose of evaluating or analyzing the acquisition” and “all Confidential Information Memoranda . . . that specifically relate to the sale.”[39] The proposed changes would require an additional “narrative that would identify and explain each strategic rationale for the transaction.”[40] That narrative would not have been created in the ordinary course of business, and likely not even in the context of contemplating a transaction. Creating it would come at a real cost, in terms of billable hours and executives’ time. This might imply a requirement that the parties prepare a reply brief to a potential future antitrust challenge to the transaction, without the benefit of knowing the specific arguments that the agencies would make against it.

In brief, the changes proposed in the NPRM would force parties to submit far more information than the HSR rules now require. Much of this information appears to be of, at best, peripheral value to screening mergers under the Clayton Act. The result is that the NPRM would greatly increase the burden placed on all merging parties, while apparently offering little countervailing value to competition and consumers, or even to the staff charged with premerger screening. Some have even suggested this may be the purpose of the changes: “killing deals softly”[41] by making mergers more costly in an effort to deter at least some of them, including even some that ultimately would be cleared by agencies and courts.

A.          Non-Horizontal Information

The NPRM would require both filing entities to submit considerable additional material about supply and other non-horizontal relationships between the parties, including both formal agreements, such as supply, distribution, purchase, and franchise agreements,[42] and a “supply relationships narrative section that would require each filing person to provide information about existing or potential vertical, or supply, relationships between the filing persons.”[43] The latter type of information would not likely be documented in the ordinary course of business.

The NPRM acknowledges that “this will increase the burden on filers whose transaction involves existing supply relationships or who supply or purchase from companies that compete with the other filing party.”[44] The NPRM also acknowledges that 2001 amendments to the HSR rules removed some additional vertical information that had been required “because the type of information collected did not prove useful enough to the Agencies as a screen for potential non-horizontal relationships to justify the burden of providing it at that time.”[45] The extra burden is now supposed to be justified, however, as “it would allow them to quickly identify those transactions that raise concerns about non-horizontal competitive effects.”[46]

The basis of the commission’s claim about a newfound utility for such required production is unclear. There remains the basic question of how the new requirements will materially improve merger screening. The agencies do not offer any evidence to suggest they often or systematically clear anticompetitive mergers because of information that is not included in initial filings, that staff cannot obtain via follow-up queries to the parties, voluntary requests, pull-and-refiles, and second requests, etc. In other words, there is little to suggest that many mergers would be challenged, but for the supposed lacunae in the HSR requirements.

It is worth recalling, in that regard, that a “second request” extends the initial 30-day screening period by an additional 30 days, and that Section 7A of the Clayton Act affords the agencies considerable discretion in determining “ all the information and documentary material required to be submitted pursuant to such a request.”[47] That is, the agencies have ample opportunity to obtain necessary documents that are not included in the initial premerger notification.

When the draft merger guidelines were issued, an accompanying statement by FTC Commissioner Alvaro M. Bedoya, joined by Chair Lina Khan and Commissioner Rebecca Slaughter, also addressed the question of what is missing from the extant filing requirements—i.e., what missing information impedes merger screening, to the detriment of competition and consumers? Addressing “periods of high merger activity” generally, and mergers by large tech firms specifically, the statement argues that a:

lack of relevant information is especially problematic during periods of high merger activity . . . The Commission’s recent 6(b) inquiry into unreported acquisitions by Apple, Amazon, Facebook (now Meta), Google, and Microsoft during 2010-2019 also highlighted the importance of collecting more information on the firm’s history of acquisitions, including non-horizontal and small prior acquisitions. The study captured how these firms structured acquisitions, the sectors they had identified as strategically important for acquisitions, and how these acquisitions figured into the companies’ overall business strategies.[48]

Of course, small or non-horizontal mergers might be competitively significant under particular facts and circumstances. But the study in question does not find, or even suggest, that such transactions have been typically, frequently, or in any instance anticompetitive, much less that the NPRM’s proposed changes would have allowed the staff to spot such anticompetitive mergers before they were consummated. Indeed, the study does not appear to address at all the question of whether any mergers of interest were anticompetitive. And the report expressly states that it “does not make recommendations or conclusions regarding the HSR thresholds.”[49]

A recently published paper by Ginger Zhe Jin (former director of the FTC’s Bureau of Economics), Mario Leccese, and Liad Wagman (formerly a senior economic and technology advisor in the FTC’s Office of Policy Planning who, in that capacity, played a leading role in conducting the above 6(b) study) is at least somewhat in tension with the commissioner’s representation of the study.[50] The paper finds, among other things, that “GAFAM acquisitions are less concentrated across tech categories than other top acquirer groups,” and that “[o]verall, we find that technology acquisitions do not shield GAFAM from competition, at least not from other GAFAM members or other firms that acquire in the same categories.”[51]

To be sure, neither the FTC study nor the related—more thorough—investigation by Jin, Leccese, and Wagman, demonstrates that none of the mergers in question had anticompetitive consequences. They do, however, sharpen the question of the agencies’ basis—if any—for requiring considerable additional information. In brief, the NPRM presents no evidence to contradict or reverse the 2021 determination that the screening utility of such additional non-horizontal information did not justify the burden it imposed. And that is a burden on both filing parties and reviewing staff.

B.          Labor Information

The NPRM proposes to require the production of material for “a new Labor Markets section” comprising considerable information on employees of the merging parties—information not previously identified under the HSR regulations.[52] The likely utility of this information is unclear.

1.        Overlaps in quasi-labor markets

Both the acquiring party and the target would be required to gather information on their employees in each of five standard occupational classification (SOC) categories, with occupations defined by six-digit SOC codes.[53] For each of the five largest such groups of employees, both filers would be required to identify any SOC codes in which they both employ workers, as well as any overlap in employees’ commuting zones and the total number of employees within each commuting zone.[54]

The NPRM acknowledges that neither six-digit SOC codes (developed by the U.S. Bureau of Labor Statistics) nor commuting zones (as determined by the U.S. Agriculture Department’s Economic Research Service) were developed to facilitate competition analysis generally, or merger screening specifically. Thus, they do not determine the product/labor markets or geographic markets in which labor competition might be impeded. The NPRM nonetheless suggests that such information will serve as a useful “screen” or “initial proxy for labor issues while balancing the burden on filers by limiting the request to their five largest categories of workers.”[55]

Given the systematic misfit between the proposed “Labor Markets” section and any actual labor markets, given the agencies lack of experience in analyzing the local labor-market effects of proposed mergers, and given the hard questions of when or under what conditions such labor-market effects might be both material and unlikely to covary with product-market effects, we suggest that the screening utility of the new information remains unclear.

In addition, the NPRM seeks comment on the question of whether such information would be costly to collect. In that regard, it is worth noting that firms are highly unlikely to collect or maintain this employee information in the manner proposed in the ordinary course of business. Hence, the gathering of such information might represent a substantial new burden on HSR filers. Compiling such information is not what is ordinarily understood to be “production” in the discovery context, and it would be a burden with unclear benefits to competition and consumers.

Of course, certain labor-market information may be pertinent to the analysis of certain mergers. But if it is unclear what new labor information would be useful, reasonable, and necessary to merger screening, then further research—as well as further enforcement experience—is warranted to determine the scope of such information before the imposition of costly regulations. As noted in the introduction to these comments, the HSR rules and form are not supposed to be substitutes for enforcement experience or, e.g., the FTC’s study authority under Section 6(b) of the FTC Act.

2.        Worker and workplace-safety information

In addition, both filing firms would be required to identify various “worker and workplace safety information.”[56] Specifically, for the five years immediately preceding the filing:

…any penalties or findings issued against the filing person by the U.S. Department of Labor’s Wage and Hour Division (WHD), the National Labor Relations Board (NLRB), or the Occupational Safety and Health Administration (OSHA) in the last five years and/or any pending WHD, NLRB, or OSHA matters. For each identified penalty or finding, provide (1) the decision or issuance date, (2) the case number, (3) the JD number (for NLRB only), and (4) a description of the penalty and/or finding.[57]

The purported rationale for this requirement appears strained. The NPRM suggests that “[i]f a firm has a history of labor law violations, it may be indicative of a concentrated labor market where workers do not have the ability to easily find another job.”[58] That is not impossible, but it does not seem likely, and the agencies provide no basis on which to think that the signaling value of such information would be significant.

According to the Department of Labor’s Occupational Safety and Health Administration (“OSHA”), these types of violations occur most often in the construction and general-industry sectors. Of the 10 most frequently cited OSHA violations, five are in the construction sector—not commonly a highly concentrated one—and five are in “general industry.”[59] We are not aware of any literature showing a significant correlation between such violations and highly concentrated product markets (or even industries), or with highly concentrated labor markets, much less with anticompetitive mergers, and the NPRM does not cite any.

VI.    The Limits of Reasonable and Necessary Filing Requirements

As described briefly in the background section of these comments above, certain aspects of the premerger notification process are specified in the statute, while others are left to agency implementation and discretion. Section 7A(a) of the Clayton Act specifies the transactions for which notice must be given.[60] And Subsections (b)(1) and (e)(2) specify the duration of the initial waiting period, as well as that for second requests.[61] But other aspects of the premerger notification process are delegated to the agencies to develop by rule, requiring that:

The Federal Trade Commission, with the concurrence of the [DOJ] and by rule in accordance with section 553 of title 5, consistent with the purposes of this section—shall require that the notification required under subsection (a) be in such form and contain such documentary material and information relevant to a proposed acquisition as is necessary and appropriate to enable the Federal Trade Commission and the Assistant Attorney General to determine whether such acquisition may, if consummated, violate the antitrust laws[.][62]

Implementation of premerger notification is subject to the rulemaking process outlined in Section 553 of the APA.[63] This process requires, for instance, putting out a notice of proposed rulemaking, soliciting comments, and publishing final rules that explain their basis and respond to substantial comments.[64] Rules adopted through this process carry the force of law and are binding on parties and the courts. A challenge to such rules would need to show that the agency had been arbitrary or capricious in adopting them,[65] or that there were defects in the rulemaking process such as a failure to respond to significant comments or adoption of final rules that were not a “logical outgrowth” of those contained in the proposed changes to the rules.[66]

As described above, the proposed changes to the premerger notification requirements are significant. Indeed, the FTC’s own estimate of the costs of the proposal exceeds the entire 2023 antitrust budget for the FTC and DOJ combined.[67] More substantively, the proposed changes to the premerger notification form would impose significant costs on firms; and some would appear prejudicial.

A particular area of substantial change discussed above has to do with the production of considerable employee or labor-regulation information, such as the parties’ history of OSHA complaints.[68] This, again, would require compiling information firms are not likely to gather and maintain in the ordinary course of business. This concern is even more severe, because the agencies’ concern with the local labor-market implications of mergers—including mergers that may have national geographic markets from a product perspective—is of recent provenance.[69] As we discussed above, the antitrust relevance of information such as OSHA complaints is dubious or, at least, unclear. It may be that the agencies will, in time, develop sufficient experience with these aspects of merger cases to justify labor-related changes to the HSR rules. At present, however, the information proposed to be required seems better suited to a research proposal—perhaps under the FTC’s study authority under Section 6(b) of the FTC Act—than it does to a regulatory requirement.

The changes to the premerger notification requirements would be significant. Perhaps the simplest metric to capture the scope of these changes is the FTC’s own estimate of compliance costs. With the current HSR premerger notification form, the FTC estimates that aggregate annual HSR compliance costs are approximately $120 million. Under the new requirements, the FTC estimates this would increase by approximately $350 million, to more than $470 million per year.[70] This exceeds the entire 2023 antitrust budget for the FTC and DOJ combined.[71]

A.          The Premerger Notification Form Risks Challenge as Arbitrary and Capricious

As an initial matter, the proposed changes clearly run contrary to legislative intent. As Chair Khan has herself noted, Congress expected only the 150 largest mergers each year would require notification to the agencies,[72] but the agencies today review several thousand reported transactions annually.[73] Former U.S. Rep. Peter Rodino, one of the authors of the HSR Act, anticipated that premerger notification would not entail the creation of new information and that compliance should not routinely delay consummation of deals.[74] Similarly, a “need to avoid burdensome notification requirements or fruitless delays”[75] was noted in the Senate. At least arguably, many of the NPRM’s proposed changes fail on all of these fronts.

Changes to the premerger notification process would carry to the force of law. So long as they are not arbitrary or capricious—and, usually, a failure to abide by the legislative history would not, in and of itself, surmount this bar—such changes are binding on parties to a merger. The hallmarks of arbitrary or capricious agency action were explained by the Supreme Court in State Farm:

Normally, an agency rule would be arbitrary and capricious if the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.[76]

While the statute confers considerable discretion on the agencies’ implementation of the HSR Act’s amendments to the Clayton Act, that discretion is not unbounded. Indeed, there is good reason to believe that courts are likely to find many of the NPRM’s proposed changes to be arbitrary and capricious. The Act expressly limits the agencies to requiring production of information that is “relevant to a proposed acquisition as is necessary and appropriate . . . to determine whether such acquisition may, if consummated, violate the antitrust laws.”[77] And this text must be read in conjunction with the statutory authority to make second requests that “require the submission of additional information or documentary material relevant to the proposed acquisition.”[78] Moreover, any rules must be “consistent with the purposes of this section”—that is, to allow the antitrust agencies an opportunity to review significant mergers prior to their consummation to avoid the “unscrambling the egg” problem.

The statutory authority raises many textual questions. What constitutes “necessary” and “appropriate” information? And what does it mean for these words to be joined by the conjunction “and”? What is the extent of the limitation that information be “relevant to the proposed acquisition”? Is the “purpose of the section” limited to merger-related antitrust concerns, or more expansively related to the violation of any antitrust laws that might result from consummation of the transaction?[79] Each of these specify factors that Congress did or did not intend the agencies to consider or that may or may not be important aspects of the problem that Congress empowered the agencies to address.

Consider, for instance, what it means for materials to be “relevant to a proposed acquisition.” A natural reading would limit this to the materials that firms gathered in evaluating the transaction; and the submission of such extant materials would meet the ordinary meaning of “production” in a litigation context. The NPRM would expand the universe of relevant materials, including potentially anything that might inform a determination of the transaction’s legality. Courts are likely to say that the limit must be narrower than anything the agencies think potentially relevant to request.[80]

For example, the proposed rules would require disclosure of information about OSHA findings against the parties, on the theory that OSHA violations correlate with labor-market power. But as noted above, OSHA data suggest that the most common violations occur in industries that are minimally concentrated (e.g., construction). Similarly, the proposed rules would require parties to provide detailed information about the number of employees in broad categories working in overlapping commuting zones.[81] Such information might be useful in evaluating the competitive effects of a transaction,[82] but that utility is unclear. Furthermore, the information is not of a sort, or in a format, that parties to a merger are likely to compile in the ordinary course of business, or to aid themselves in deciding whether to pursue a merger. That is, from the parties’ perspective, this information would likely be irrelevant to a proposed acquisition, even if it might be relevant to the agencies’ evaluation of the effects of the proposed acquisition.

The point is underscored when considering the meaning of “necessary and appropriate.” As an initial matter—and echoing the concerns about information’s relevance to a proposed transaction— “appropriateness” could be determined with respect to purpose; that is, whether it is appropriate for the agencies to use the premerger notification process as a tool for developing novel theories of antitrust law or, in the alternative, whether it should be limited to screening for transactions that would violate established antitrust precedent under established methods.

“Necessary and appropriate” suggests an even more stringent constraint when read together. The availability of, and broad latitude afforded, second requests—among other tools, such as voluntary requests and “pull-and-refiles”—suggests that relatively little be required as part of the initial premerger notification. Indeed, without “and appropriate,” nothing would be required of a filing in the strict sense of “necessary,” as anything necessary might be gathered through a second request. Additional information is appropriate because it is both necessary to the process as a whole and appropriate to an initial filing by parties in general; that is, among other things, that it is not merger-specific information more efficiently gathered and screened with a proper subset of filers.

In addition, the burdens of required filing information (including those imposed by the HSR form) must be considered in light of the fact that the vast majority of mergers have not been deemed to raise competition concerns. Specifically, only 2% of all mergers subject to premerger notification receive second requests; and a second requests is not a complaint, much less a final decision that a proposed merger would be unlawful. That is, in considering the balance of what is reasonable and necessary, the agencies must be mindful of the fact that material required by HSR notification is a burden imposed on roughly 50 times the number of transactions as those deemed—in the agencies’ own judgment—to warrant a second request.

B.   Problematic Premerger Notification Rules Might Escape Challenge

Were issues like these to be raised in a challenge to the premerger notification process, the outcome may be hard to predict, but a court could well decide against the agencies. Still, there is reason to worry, independent of the question of such a challenge in the courts. The costs of the premerger notification process act as a tax on transactions. And as a tax, it is a regressive one, most likely felt by firms considering transactions on the margin of the HSR-reporting thresholds. These may disproportionately affect firms that, while large enough to be subject to notification, are relatively small or relatively infrequent filers.

That points to a question about the relative burdens and benefits of the proposed changes, but it also suggests a question regarding when, or even whether, overly burdensome regulations are likely to be challenged in court. Because the burdens of the tax are spread across the thousands of firms engaged in HSR-reportable transactions each year, no single firm—or pair of firms—would have an incentive even remotely close to the economic cost of the rules; or to put it another way, because the costs of the rule would be spread over thousands of transactions, the incentives for any given firm (or pair of firms) to challenge the requirements would be a very small fraction of the economic burdens of the requirement as a whole.

While that might seem an advantage to the agencies—at least insofar as the agencies might be concerned about litigation risk—it is not an advantage to efficient rulemaking or, specifically, to rules that provide for effective premerger screening without placing undue burdens on procompetitive or benign transactions.

In brief, the tax imposed by the new process would be imposed across a very large number of lawful mergers, including (and, very largely, comprising) mergers that would benefit both competition and consumers. As a regressive tax, it would also likely have an outsized effect on transactions at the margin of the HSR-reporting thresholds; and these may be those transactions least likely to raise competition concerns or lead to an agency challenge.

VII.   Conclusion

Certain proposed changes to the HSR-reporting rules and form may be necessary. For example, the NPRM’s proposed changes to Part 801.1 of the HSR rules appears to be a reasonable implementation of the 2022 statutory amendments to the Clayton Act that require the disclosure of subsidies from nations or entities that Congress has identified as “foreign entities of concern.”[83]

In addition, as we have also discussed, the NPRM’s proposal to amend Part 803 to require electronic filing[84] will likely be salutary, especially with the successful implementation of an e-filing platform that, according to the NPRM, is under development.[85] Electronic production and merger screening is in widespread use already, and more comprehensive adoption and standardization of electronic filing should help streamline premerger screening for both filers and the agency staff charged to review filings.

Many other proposals in the NPRM would greatly increase compliance costs for merging parties generally, with disproportionate impact on small and first-time filers. They would, not incidentally, also impose additional burdens on the agency staff who are charged to screen such mergers. Yet the screening value of much of the information is entirely unclear. For example, the NPRM proposes to require the production of considerable information about violations of labor regulations—such as OSHA regulations regarding worker safety—that have no evident connection (or even correlation) with highly concentrated product or labor markets, much less a demonstrated connection with harm to competition and consumers. Similarly, the utility of new information bundling industry “overlaps” based on six-digit occupational codes (not labor markets) and Department of Commerce “commuting zones” (not necessarily the geographic component of labor markets, either) is unclear.

Further enforcement experience with labor-market competition matters, and further empirical investigation, could develop such that the inclusion of additional labor information in the filing requirements would be reasonable and necessary. But such developments should precede, not follow, the formulation and imposition of such requirements. In the absence of such developments, it seems highly unlikely that the costs of the new requirements would be offset by countervailing benefits to competition and consumers.

By the NPRM’s own estimate, those costs are substantial. And the NPRM’s estimate seems extremely low, given the considerable time that senior executives and firm counsel would need to devote to compliance. Moreover, the costs of the new rules would work as a regressive tax, tending to chill mergers by smaller and less frequently transacting firms. Most of the mergers chilled by such costs would likely be—like the vast majority of mergers—either procompetitive or benign. Impeding them would thus be to the detriment—not the protection—of competition and consumers.

Finally, such costs would be imposed on all firms required to file HSR notifications, notwithstanding other means of gathering screening information, and notwithstanding that fewer than 2% of reported transactions lead even to a “second request.” Given the high and skewed costs of the proposals, and given the statutory charge to collect only information that is necessary and reasonable, many of the proposed changes seem not only unnecessary, cumbersome, and costly, but in excess of the rulemaking authority conferred by the HSR Act’s amendments to the Clayton Act.

For these reasons, we urge the commission to consider seriously the evidentiary bases of its proposed changes to the HSR rules and to scale back its proposal accordingly.

 

[1] Premerger Notification Rules, 88 Fed. Reg. 42178 (RIN 3084-AB46), proposed Jun. 29, 2023) (to be codified at 16 C.F.R. Parts 801 and 803) [hereinafter “NPRM”].

[2] See generally, e.g., William E. Kovacic & Carl Shapiro, Antitrust Policy: A Century of Economic and Legal Thinking, 14 J. Econ. Persp. 43 (2000).

[3] Statement of Chair Lina M. Khan, Commissioner Rohit Chopra, and Commissioner Rebecca Kelly Slaughter on the Withdrawal of the Vertical Merger Guidelines, Fed. Trade Comm’n, Commission File No. P810034 (Sep. 15, 2021), available at https://www.ftc.gov/system/files/documents/public_statements/1596396/statement_of_chair_lina_m_khan_commissioner_rohit_chopra_and_commissioner_rebecca_kelly_slaughter_on.pdf (citing Open Markets Inst. et al., Comment Letter No. 31 on #798: Draft Vertical Merger Guidelines (“Draft VMGs”), Matter No. P810034 at 4 (Feb. 2020)).

[4] 15 U.S.C. § 18a(d)-(e).

[5] Id. at (d)(1).

[6] 15 U.S.C. § 46(b).

[7] Draft Merger Guidelines, U.S. Dep’t Justice & Fed. Trade Comm’n, Document No. FTC-2023-0043-0001 (Jul. 19, 2023), https://www.regulations.gov/document/FTC-2023-0043-0001. For comments on the draft merger guidelines see, e.g., Comment from International Center for Law & Economics, FTC-2023-0043-1555 (Sep. 18, 2023), https://www.regulations.gov/comment/FTC-2023-0043-1555; Comments of Economists and Lawyers on the Draft Merger Guidelines, FTC-2023-0043-1406 (Sep. 15, 2023), https://www.regulations.gov/comment/FTC-2023-0043-1406; Comment from Gregory J. Werden, FTC-2023-0043-0624 (Aug. 12, 2023), https://www.regulations.gov/comment/FTC-2023-0043-0624; Comment from Professor Carl Shapiro, FTC-2023-0043-1393 (Sep. 14, 2023), https://www.regulations.gov/comment/FTC-2023-0043-1393; Comment from Global Antitrust Institute, FTC-2023-0043-1397 (Sep. 14, 2023), https://www.regulations.gov/comment/FTC-2023-0043-1397; Comment from Compass Lexecon, FTC-2023-0043-1518 (Sep. 18, 2023), https://www.regulations.gov/comment/FTC-2023-0043-1518; Comment from Herbert Hovenkamp, FTC-2023-0043-1280 (Sep. 8, 2023), https://www.regulations.gov/comment/FTC-2023-0043-1280.

[8] Id.

[9] Or 15 days, in the case of tender offers. 15 U.S.C. § 18(b)(1)(B), (e)(1)(A).

[10] See, e.g., Lina Khan, Chair, FTC and Jonathan Kanter, Asst. Atty. Gen., Antitrust Div., Hart-Scott-Rodino Annual Report, Fiscal Year 2021, 4 (2023), available at https://www.ftc.gov/system/files/ftc_gov/pdf/p110014fy2021hsrannualreport.pdf.

[11] 15 USC § 18a(e)(1)(A); Cf., Hart-Scott-Rodino Annual Report, Fiscal Year 2021, Appendix A, U.S. Dep’t Justice & Fed. Trade Comm’n (2023), available at https://www.ftc.gov/system/files/ftc_gov/pdf/p110014fy2021hsrannualreport.pdf (summary of reported transactions by fiscal year, 2012-2021, showing, inter alia, percentage of filings leading to second requests).

[12] 15 USC § 18a(e)(2).

[13] See, e.g., Statement of Representative Rodino, Merger Oversight and H.R. 13131, Providing Premerger Notification and Stay Requirements, Subcomm. on Monopolies and Commercial Law of the Comm. on the Judiciary (Mar. 10, May 6 and 13, 1976) (“Both agencies can, and will, tell us what we have known for years—you can’t unscramble an egg.”).

[14] See Statement of Federal Trade Commission Chair Khan, Joined by Commissioner Rebecca Kelly Slaughter and Commissioner Alvaro M. Bedoya, Regarding Proposed Amendments to the Premerger Notification Form and the Hart-Scott-Rodino Rules, at 2 (Jun. 27, 2023), available at https://www.ftc.gov/system/files/ftc_gov/pdf/statement_of_chair_khan_joined_by_commrs_slaughter_and_bedoya_on_the_hsr_form_and_rules_-_final_130p_1.pdf.

[15] Id.; see also Annual Reports to Congress Pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, Fed. Trade Comm’n (2021), https://www.ftc.gov/policy/reports/annual-competition-reports.

[16] E.g., Joe Simms, The Effect of Twenty Years of Hart-Scott-Rodino on Merger Practice: A Case Study in the Law of Unintended Consequences Applied to Antitrust Legislation, 65 Antitrust L.J. 865 (1997).

[17] The FTC’s introductory guide to the premerger process, for instance, says of the process that: “The Program has been a success.” What is the Premerger Notification Program? An Overview, Fed. Trade Comm’n (Mar. 2009), available at https://www.ftc.gov/sites/default/files/attachments/premerger-introductory-guides/guide1.pdf. This is not to say that the program is without critics or criticism. The initial implementation, for instance, did not index reporting thresholds to inflation. By the year 2000, nearly 5,000 transactions were noticed each year. The HSR Act was subsequently amended to index thresholds to inflation. Today, roughly 2,000 transactions are noticed each year (allowing for some variation during the pandemic). See Fed. Trade Comm’n, supra note 22, available at https://www.ftc.gov/system/files/ftc_gov/pdf/p110014fy2021hsrannualreport.pdf. See also Report of the Antitrust Modernization Committee, 158 (“the existing pre-merger review system under the HSR Act is achieving its intended objectives of providing a more effective means for challenging mergers raising competitive concerns before their consummation and protecting consumers from anticompetitive effects.”), available at https://govinfo.library.unt.edu/amc/report_recommendation/amc_final_report.pdf.

[18] Andrew G. Howell, Why Premerger Review Needed Reform-and Still Does, 43 Wm. & Mary L. Rev. 1703, 1716 (2002) (“There are several key points to draw from this legislative history. First, the premerger title of the Act was meant only to make the procedural change of requiring notification—it was not meant to change substantive law. Second, the provision was intended to encompass only the very largest of mergers. Finally, there was concern in Congress about not allowing pursuit of merger enforcement goals to place too much of a burden on commerce.”)

[19] Premerger Notification; Reporting and Waiting Period Requirements, 85 Fed. Reg. 77042, 77055 (RIN 3084-AB46), proposed Dec. 1, 2020 (to be codified at 16 C.F.R. Parts 801, 802, and 803)

[20] Hart-Scott-Rodino Annual Report, Fiscal Year 2021, supra note at 1-2.

[21] Id. at Appendix (A summary of reported transactions by fiscal year, 2012-2021, showing, inter alia, percentage of filings leading to second requests).

[22] The difference may, of course, be greater still, given the nature of a second request. Based on the initial filing and follow-up information, the agencies have very broad discretion in seeking additional production via a second request; at the same time, we understand that staff tend not to request additional information by rote, but according to merger-specific concerns and queries.

[23] Antitrust Experts Reject FTC/DOJ Changes to Merger Process, U.S. Chamber of Commerce (Sep. 19, 2023), https://www.uschamber.com/finance/antitrust/antitrust-experts-reject-ftc-doj-changes-to-merger-process. The surveyed group was made up seasoned antitrust veterans from across a variety of backgrounds: 80% had been involved in more than 50 mergers and 59% in more than 100.

[24] Id. at 2.

[25] Id. at 3.

[26] NPRM at 42208.

[27] We note, however, that both the NPRM and the draft merger guidelines suggest a greatly expanded notion of “overlaps,” adding to the likely costs to filers and, not incidentally, burden to reviewing staff.

[28] See, e.g., HSR Statements of Basis and Purpose, FTC Legal Library, https://www.ftc.gov/legal-library/browse/hsr-statements-basis-purpose (last checked Sep. 23, 2023).

[29] For example, year 2000 amendments to the HSR Act required annual publication of adjustments to the Act’s jurisdictional and filing-fee thresholds in the Federal Register for each fiscal year, beginning Sept. 30, 2004, based on change in the gross national product, in accordance with Section 8(a)(5) of the Clayton Act.

[30] Revised Jurisdictional Thresholds, 88 Fed. Reg. 5004 (Jan. 26, 2023).

[31] Revised Jurisdictional Thresholds for Section 7A of the Clayton Act, 87 Fed. Reg. 3541 (Jan. 24, 2022).

[32] Revised Jurisdictional Thresholds for Section 7A of the Clayton Act, 86 Fed. Reg. 7870 (Feb. 2, 2021).

[33] Premerger Notification; Reporting and Waiting Period Requirements, 85 Fed. Reg. 77042 (RIN 3084-AB46), proposed Dec. 1, 2020 (to be codified at 16 C.F.R. Parts 801, 802, and 803).

[34] NPRM at 42180-81 (discussing provisions of the Merger Filing Fee Modernization Act of 2022, Pub. L. 117-328, 136 Stat. 4459 (2022), Div. GG.).

[35] Id.

[36] NPRM at 42181.

[37] Id. at 42180.

[38] Id. at 42181.

[39] Antitrust Improvements Act Notification and Report Form for Certain Mergers and Acquisitions: Instructions, available at https://www.ftc.gov/system/files/ftc_gov/pdf/HSRFormInstructions02.27.23.pdf.

[40] NPRM at 42191.

[41] David C. Kully, et al., Killing Deals Softly: FTC Proposes 107-Hour Increase in Hart-Scott-Rodino Burden, Holland & Knight Alert (Jun. 28, 2023), https://www.hklaw.com/en/insights/publications/2023/06/killing-deals-softly-ftc-proposes-107-hour-increase.

[42] NPRM at 42193

[43] Id. at 42196.

[44] Id. at 42197.

[45] Id. at 42196-42197.

[46] Id. at 42197.

[47] 15 U.S.C. § 18a(e)(1)-(2).

[48] Statement of Commissioner Alvaro M. Bedoya, Joined by Chair Lina M. Khan and Commissioner Rebecca Kelly Slaughter Regarding the Proposed Merger Guidelines, U.S. Dep’t Justice & Fed. Trade Comm’n (Jul. 19, 2023), available at https://www.ftc.gov/system/files/ftc_gov/pdf/p234000_merger_guidelines_statement_bedoya_final.pdf (internal citations omitted, but including a reference to FTC, Non-HSR Reported Acquisitions by Select Technology Platforms, 2010-2019 (Sept. 15, 2021), https://www.ftc.gov/reports/non-hsr-reported-acquisitions-select-technology-platforms-2010-2019-ftc-study.)

[49] Id. at 3.

[50] Ginger Zhe Jin, Mario Leccese, & Liad Wagman, How Do Top Acquirers Compare in Technology Mergers? New Evidence from an S&P Taxonomy, 89 J. Indus. Org. (2023), https://www.sciencedirect.com/science/article/abs/pii/ S0167718722000662.

[51] Id.

[52] NPRM at 42197.

[53] Id. at 42197-98.

[54] Id.

[55] Id. at 42198.

[56] NPRM at 42198, 42215.

[57] Id.

[58] Id.

[59]  Top 10 Most-cited Standards for Fiscal Year 2022, U.S. Dep’t Labor, Occupational Safety & Health Admin., https://www.osha.gov/top10citedstandards. The source page includes a link to a searchable database of Frequently Cited OSHA Standards by industry.

[60] 15 U.S.C. § 18a.

[61] Id.

[62] 15 U.S.V. § 18a(d).

[63] 5 U.S.C. § 553.

[64] Id.

[65] Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983).

[66] See A Guide to the Rulemaking Process, Office of the Federal Register (Jan. 2011), available at https://www.federalregister.gov/uploads/2011/01/the_rulemaking_process.pdf. In addition, regulations may be constitutionally infirm.

[67] The FTC’s 2023 budget request for antitrust enforcement (“Promoting Competition”) was $239,613,000. See Fiscal Year 2023 Congressional Budget Justification, Fed. Trade Comm’n (Mar. 28, 2022), available at https://www.ftc.gov/system/files/ftc_gov/pdf/P859900FY23CBJ.pdf. The Department of Justice’s similar request 2023 appropriation was $225,000,000. See Appropriation Figures for The Antitrust Division, Fiscal Years 1903-2023, Dep’t of Just., Antitrust Div (Feb. 2023), https://www.justice.gov/atr/appropriation-figures-antitrust-division.

[68] Id. at 42198.

[69] To demonstrate the need for information about labor market conditions in evaluating mergers, the NPRM identifies only two recent (2021 and 2022) decisions by the agencies to bring actions against firms that include labor-market concerns. Id. at 42197.

[70] NPRM at 42208 (“the total estimated additional hours burden is 759,272. . . . Applying the revised estimated hours, 759,272, to the previous assumed hourly wage of $460 for executive and attorney compensation, yields approximately $350,000,000 in labor costs.”).

[71] The FTC’s 2023 budget request for antitrust enforcement (“Promoting Competition”) was $239,613,000. See Fed. Trade Comm’n, Fiscal Year 2023 Congressional Budget Justification, https://www.ftc.gov/system/files/ftc_gov/pdf/P859900FY23CBJ.pdf. The Department of Justice’s similar request 2023 appropriation was $225,000,000. See Dep’t of Just., Antitrust Div., Appropriation Figures for The Antitrust Division, Fiscal Years 1903-2023 (Feb. 2023), https://www.justice.gov/atr/appropriation-figures-antitrust-division.

[72] See Statement of Federal Trade Commission Chair Khan, supra note 15, at 2.

[73] See Hart-Scott-Rodino Annual Report, Fiscal Year 2021, supra note 11, at 1 (noting 3,520 transactions for fiscal year 2021).

[74] Rep. Rodino himself indicated: “Government requests for additional information must be reasonable. [. . .] the Government will be requesting the very data that is already available to the merging parties, and has already been assembled and analyzed by them. If the merging parties are prepared to rely on it, all of it should be available to the Government. But lengthy delays and extended searches should consequently be rare.”

[75] S. Rep. No. 94-803, pt. 1, at 65, 67 (1976) (“A proper balance should exist between the needs of effective enforcement of the law and the need to avoid burdensome notification requirements or fruitless delays.”)

[76] 463 U.S. at 43.

[77] 15 U.S.C. § 18a(d).

[78] Id. at § 18a(e)(1).

[79] Strictly merger-related concerns would be limited to those that violate Section 7 of the Clayton Act (that is, consummation of transactions where the effect “may be substantially to lessen competition, or to tend to create a monopoly.”) Other concerns that might result from the transaction, such as an interlocking directorate prohibited by Section 8 of the Clayton Act, might therefore be excluded.

[80] See, e.g., AT&T Corp. v. Iowa Utils Bd, 525 U.S. 1133 (1999) (“the Act requires the FCC to apply some limiting standard, rationally related to the goals of the Act, which it has simply failed to do.”)

[81] NPRM at 42198.

[82] Given the coarseness of the data requested, it is doubtful whether it would be analytically useful for such purposes.

[83] NPRM at 42180-81.

[84] Id. at 42181.

[85] Id. at 42180.

ICLE White Paper Highlights Role of Prop 103 in California’s Collapsing Insurance Market

PORTLAND, Ore. (Sept. 27, 2023) – As California leaders move to take emergency action to stabilize its rapidly collapsing market for property insurance, a new . . .

PORTLAND, Ore. (Sept. 27, 2023) – As California leaders move to take emergency action to stabilize its rapidly collapsing market for property insurance, a new International Center for Law & Economics (ICLE) white paper examines the role that the state’s 35-year-old Proposition 103 has played in leaving the state unable to keep pace with national trends and product innovations.

Written by ICLE Academic Affiliate Lars Powell, Editor-in-Chief R.J. Lehmann, and Executive Director Ian Adams, “Rethinking Prop 103’s Approach to Insurance Regulation” outlines how the Prop 103 rating system is slow, imprecise, inflexible, and unpredictable, and details the questionable value provided by the state’s unique rate-intervenor system.

The authors argue that these factors have played a key role in the ongoing collapse of the property-insurance market, highlighted in recent months by decisions from insurers representing 63% of the state’s homeowners market to either cease or severely limit writing new policies in California.

“Prop 103’s suppression of property-insurance rates in the private market has contributed to an availability crisis and the shunting of policyholders into the surplus-lines market and the California FAIR Plan, both of which will inevitably have to raise rates accordingly to be able to meet their obligations,” the authors write. 

“Prop 103 has created an insurance market that struggles to work efficiently even in the best of times and is virtually impossible to sustain in periods of acute stress,” they add.

The paper concludes with administrative and legislative recommendations for reform, including allowing insurers to use catastrophe models and account for the cost of reinsurance in their rate filings; broadening the availability of telematics in auto insurance; fast-tracking noncontroversial filings; refocusing rate proceedings; and requiring intervenors to publicly account for their substantive contributions to the ratemaking process.

The full paper can be downloaded here. To schedule an interview with one of the authors, contact ICLE Media and Communications Manager Elizabeth Lincicome at [email protected] or (919) 744-8087.

FTC Alumni Comments on Proposed HSR Form

As alumni of the Federal Trade Commission, we are responding to the Agency’s proposed amendments to the premerger notification rules. We have devoted significant portions . . .

As alumni of the Federal Trade Commission, we are responding to the Agency’s proposed amendments to the premerger notification rules. We have devoted significant portions of our careers to protecting consumers and competition and we continue to care deeply about the Agency and its mission. Moreover, we agree that the notification rules are due for revisions given the passage of time and statutory changes, particularly the Merger Filing Fee Modernization Act of 2022, and that development of an e-filing system would streamline the process. We applaud the FTC for tackling these issues.

We write to suggest several ways in which the FTC might strengthen the evidentiary and legal foundations for the proposed amendments. Because the proposed reporting form requests vast amounts of new information as compared to the existing form, a stronger foundation would help to insulate the proposal from legal challenge and to build congressional support:

  • First, lay a stronger evidentiary basis for the proposed changes by initiating a comprehensive merger retrospective and economic concentration study. In the Notice of Proposed Rulemaking (NPRM), the FTC justifies the broad reporting form by suggesting that the antitrust agencies have systemically underenforced the law against problematic mergers. The NPRM, however, provides little support for this proposition, whereas in contrast, recent studies, court decisions, and retrospectives suggest no underenforcement problem.
  • Second, develop a stronger legal foundation for certain information requests. The proposed reporting form would request detailed information on a range of new topics, such as workplace safety The NPRM should explain, with case citations, why such topics have legal relevance for an initial merger review.
  • Third, ensure that Congress is prepared to fund more personnel, or to extend the statutory time frame in which the Agencies must complete their initial review. According to a recent survey, former enforcers overwhelmingly believe that, with the proposed form, the agencies could not complete their initial merger reviews at current staffing levels within the existing statutory time frame. As a result, prior congressional support becomes paramount.

Again, we applaud the Agency for revising the form. Nevertheless, given the NPRM’s legal and evidentiary shortcomings, we encourage the FTC to adopt only those changes that are required legally, and to table other changes until the Agency lays a stronger foundation.

Read the full letter here.

ICLE Statement on the FCC Reinstatement of Net Neutrality

PORTLAND, Ore. (Sept. 26, 2023) – The International Center for Law & Economics (ICLE) offers the following statement from ICLE Director of Innovation Policy Kristian . . .

PORTLAND, Ore. (Sept. 26, 2023) – The International Center for Law & Economics (ICLE) offers the following statement from ICLE Director of Innovation Policy Kristian Stout in response to today’s announcement by Federal Communications Commission (FCC) Chair Jessica Rosenworcel that the FCC plans to open the process for reimposing net neutrality:

Despite dire predictions, the internet has thrived in the absence of utility-style net-neutrality regulations. When the FCC repealed net neutrality in 2018, advocates claimed that without these rules, innovation would cease and access would suffer. But the opposite has occurred: more services are available at faster speeds than ever before. During the COVID-19 pandemic, our broadband networks proved remarkably robust, supporting a massive shift to remote work and school. U.S. networks also outperformed those in many countries with net-neutrality rules. These facts demonstrate that heavy-handed regulation is not needed to preserve a free and open internet.

Moreover, the FCC does not have clear authority from Congress to reclassify broadband as a common-carrier service or to impose utility-style regulations. As the U.S. Supreme Court has made clear through its “major questions” doctrine, federal agencies cannot make major regulatory moves without explicit authorization from Congress. Regulating net neutrality involves complex economic and political considerations that Congress has actively debated, without granting the FCC power to resolve them. Any attempt by the FCC to adopt net-neutrality rules through reclassification would likely be struck down by the Supreme Court as exceeding the agency’s authority. Rather than wasting time and resources pursuing legally dubious regulations, the FCC should allow Congress to legislate on this major policy issue.

To schedule an interview with Kristian about the FCC’s planned regulations, contact ICLE Media and Communications Manager Elizabeth Lincicome at [email protected] or (919) 744-8087.

ICLE Statement on the FTC’s Amazon Case

PORTLAND, Ore. (Sept. 26, 2023) – With the Federal Trade Commission (FTC) and 17 state attorneys general announcing today that they have filed a major . . .

PORTLAND, Ore. (Sept. 26, 2023) – With the Federal Trade Commission (FTC) and 17 state attorneys general announcing today that they have filed a major antitrust action in U.S. District Court in Seattle targeting Amazon, the following statement can be attributed to International Center for Law & Economics (ICLE) President and Founder Geoffrey A. Manne:

Lina Khan and her agency have been looking into Amazon for a long time, so today’s move was expected. What was less expected is the sheer breadth of the suit, and the far-reaching remedies that are being demanded. These extreme demands greatly undermine the chances that the agency will prevail in court.

If successful, the FTC’s suit could profoundly undermine central features of the Amazon retail platform. This is the case for Amazon’s Prime program and its logistics network, as well as Amazon’s house brands, all of which are all essential to maintaining low prices for consumers. 

In short, the case could greatly harm consumers, all in an attempt to shift the course of U.S. antitrust policy against the will of Congress and the courts.

To schedule an interview with Geoffrey or other ICLE scholars about the Amazon case, contact ICLE Media and Communications Manager Elizabeth Lincicome at [email protected] or (919) 744-8087.

Comment of the International Center of Law & Economics Concerning Merger Enforcement in India and the Competition Amendment Act of 2023

Introduction We appreciate the opportunity to comment on some of the changes made by the Competition (the Amendment) Act, 2023 (Amendment Act) to India’s Competition . . .

Introduction

We appreciate the opportunity to comment on some of the changes made by the Competition (the Amendment) Act, 2023 (Amendment Act) to India’s Competition Act of 2002 (the Act).

The International Center for Law & Economics (“ICLE”) is a nonprofit, nonpartisan, global research and policy center—based in Portland. Oregon, United States—founded to build the intellectual foundations for sensible, economically grounded policy. ICLE promotes the use of law & economics methodologies, and economic findings, to inform public policy. More specifically, ICLE and its affiliate scholars have written extensively about competition and merger policy and routinely engage with policymakers and academics across the globe on these issues.

The Amendment raises several important issues, but our comments focus on the new notification criteria for M&A deals. The Amendment adds a new notification threshold to Section 5 of the Act, which outlines when parties need to notify their merger to the Competition Commission of India. Under the new Section 5 (d), parties must notify a transaction when:

“(d) value of any transaction, in connection with acquisition of any control, shares, voting rights or assets of an enterprise, merger or amalgamation exceeds rupees two thousand crore:

Provided that the enterprise which is being acquired, taken control of, merged or amalgamated has such substantial business operations in India as may be specified by regulations.[1]

These new thresholds appear designed to catch certain startup acquisitions that would otherwise escape merger review because the target firm has little to no turnover or assets. In other words, the amendment adds a new threshold that aims to ensure potential “killer acquisitions” are reviewed by enforcers.

But while attempting to catch transactions that may harm consumers is commendable, it is important to understand the important tradeoffs that ensue. Policing mergers is anything but costless and any change in merger policy should consider both the benefits and the costs. Agencies will need to devote time and resources to assess mergers that previously were waved through without review. In turn, absent significantly more resources, this will reduce the review time devoted to the most problematic deals. Looking outside the agency, it will also increase the cost of mergers for parties, thereby chilling all deals, even procompetitive deals.

Our comment analyzes these tradeoffs in more detail, ultimately concluding that lower merger=filing thresholds may be inappropriate when viewed through the lens of the error-cost framework. Section I puts the Amendment in a global context, explaining the impetus for and weakness of attempts to bolster merger enforcement around the world. Section II outlines some of the implications of the error-cost framework for merger policy. Section III concludes by putting forward four questions that policymakers should ask themselves when they amend merger-enforcement law and policy.

I.        The Global Crackdown on Mergers

The antitrust policy world has fallen out of love with corporate mergers. After decades of relatively laissez-faire enforcement, spurred in part by the emergence of Chicago school of economics,[2] a growing number of policymakers and scholars are calling for tougher rules to curb corporate acquisitions. But these appeals are premature. There is currently little evidence to suggest that mergers systematically harm consumer welfare. More importantly, scholars fail to identify alternative institutional arrangements that could capture the anticompetitive mergers that evade prosecution without disproportionate false positives and administrative costs. Their proposals thus fail to meet the requirements of the error-cost framework.

Taking a step back, there are multiple reasons for the antitrust community’s about-face. These include concerns about rising market concentration,[3] labor-market monopsony power,[4] and of large corporations undermining the very fabric of democracy.[5] But of these numerous (mis)apprehensions, one has received the lion’s share of scholarly and political attention: a growing number of voices argue that existing merger rules fail to apprehend competitively significant mergers that either fall below existing merger-filing thresholds or affect innovation in ways that are, allegedly, ignored by current rules. For instance, Rohit Chopra, a former commissioner at the US Federal Trade Commission, asserted that too many transactions avoid antitrust scrutiny by falling through the cracks of HSR premerger notification thresholds. For instance, Rohit Chopra, a former commissioner at the U.S. Federal Trade Commission, asserted that too many transactions avoid antitrust scrutiny by falling through the cracks of the Hart-Scott-Rodino Act’s premerger-notification thresholds. As a result, Chopra claimed, “[t]he FTC ends up missing a large number of anticompetitive mergers every year.”[6]

These fears are particularly acute in the pharmaceutical and tech industries, where several high-profile academic articles and reports claim to have identified important gaps in current merger-enforcement rules, particularly with respect to acquisitions involving nascent and potential competitors.[7] Some of these gaps are purported to arise in situations that would normally appear to be procompetitive:

Established incumbents in spaces like tech, digital payments, internet, pharma and more have embarked on bids to acquire features, businesses and functionalities to shortcut the time and effort they would otherwise require for organic expansion. We have traditionally looked at these cases benignly, but it is now right to be much more cautious.[8]

As a result of these perceived deficiencies, scholars and enforcers have called for tougher rules, including the introduction of lower merger filing thresholds—similar to what is currently proposed with regard to India’s proposed reform of its merger rules—and substantive changes, such as the inversion of the burden of proof when authorities review mergers and acquisitions in the digital platform industry.[9] As a result of these perceived deficiencies, scholars and enforcers have called for tougher rules, including the introduction of lower merger-filing thresholds—similar to what has been put forward in India’s proposed reform of its merger rules—and substantive changes, such as the inversion of the burden of proof when authorities review mergers and acquisitions in the digital-platform industry.[10] Meanwhile, and seemingly in response to the increased political and advocacy pressures around the issue, U.S. antitrust enforcers have recently undertaken several enforcement actions directly targeting such acquisitions.[11] Meanwhile, and seemingly in response to the increased political and advocacy pressures around the issue, U.S. antitrust enforcers have recently undertaken several enforcement actions that directly target such acquisitions.[12]

These proposals, however, tend to overlook the important tradeoffs that would ensue from attempts to decrease the number of false positives under existing merger rules and thresholds. While merger enforcement ought to be mindful of these possible theories of harm, the theories and evidence are not nearly as robust as many proponents suggest. Most importantly, there is insufficient basis to conclude that the costs of permitting the behavior they identify is greater than the costs would be of increasing enforcement to prohibit it.[13]

In this regard, two key strands of economic literature are routinely overlooked (or summarily dismissed) by critics of the status quo.

For a start, as Judge Frank Easterbrook argued in his pioneering work on The Limits of Antitrust, antitrust enforcement is anything but costless.[14] In the case of merger enforcement, not only is it expensive for agencies to detect anticompetitive deals but, more importantly, overbearing rules may deter beneficial merger activity that creates value for consumers. Indeed, not only are most mergers welfare-enhancing, but barriers to merger activity have been shown to significantly, and negatively, affect early company investment.[15]

Second, critics are mistaking the nature of causality. Scholars routinely surmise that incumbents use mergers to shield themselves from competition. Acquisitions are thus seen as a means to eliminate competition. But this overlooks an important alternative. It is at least plausible that incumbents’ superior managerial or other capabilities (i.e., what made them successful in the first place) make them the ideal purchasers for entrepreneurs and startup investors who are looking to sell.

This dynamic is likely to be amplified where the acquirer and acquiree operate in overlapping lines of business. In other words, competitive advantage, and the ability to profitably acquire other firms, might be caused by business acumen rather than exemplifying anticompetitive behavior. And significant and high-profile M&A activity involving would-be competitors may thus be the procompetitive byproduct of a well-managed business, rather than anticompetitive efforts to stifle competition.

Critics systematically overlook this possibility. Indeed, Henry Manne’s seminal work on Mergers and Market for Corporate Control[16]—the first to argue that mergers are a means of applying superior management practices to new assets—is almost never cited by contemporary researchers in this space. Our comments attempt to set the record straight.

With this in mind, we believe that calls to reform merger enforcement rules and procedures should be analyzed under the error-cost framework. With this in mind, we believe that calls to reform merger-enforcement rules and procedures should be analyzed under the error-cost framework. Accordingly, the challenge for policymakers is not merely to minimize type II errors (i.e., false acquittals), which have been a key area of focus for recent scholarship, but also type I errors (i.e., false convictions) and enforcement costs. This is particularly important in the field of merger enforcement, where authorities need to analyze vast numbers of transactions in extremely short periods of time.

In other words, while scholars have raised valid concerns, they have not suggested alternative institutional arrangements to address them that would lead to better overall outcomes. In other words, while scholars have raised valid concerns, they have not suggested alternative institutional arrangements to address those concerns that would lead to better overall outcomes. All legal enforcement systems are imperfect, and it is not enough to justify changes to the system that some imperfections can be identified.[17] Indeed, it could be that antitrust doctrine currently condones practices that harm innovation, but that there is no cost-effective way to reliably identify and deter this harmful conduct.

For instance, as we discuss below, a recent paper estimates that between 5.3% and 7.4% of pharmaceutical mergers are “killer acquisitions.”[18] But even if that is accurate, it suggests no tractable basis on which those acquisitions can be differentiated ex ante from the 92.6% to 94.7% that are presumed to be competitively neutral or procompetitive. A reformed system that overly deters these acquisitions in order to capture more of the problematic ones—which is presumably the purpose of the merger-related amendments in the 2023 Competition Act— is not necessarily an improvement.

Further, while many of the arguments suggesting that the current system is imperfect are well-taken, these claims of systemic problems are not always as robust as proponents suggest. This further weakens the case for policy reform, because any potential gains from such reforms are likely far less certain than they are often claimed to be.

II.      Antitrust and the Error-Cost Framework

Firms spend trillions of dollars globally every year on corporate mergers, acquisitions, and R&D investments.[19] Most of the time, these investments are benign, often leading to cost reductions, synergies, new or improved products, and lower prices for consumers.[20] For smaller firms, the possibility of being acquired can be vital to making a product worth developing.

There are also instances, however, when M&A activity enables firms to increase their market power and reduce output. Therein lies the fundamental challenge for antitrust authorities: among these myriad transactions, investments, and business decisions, is it possible to effectively sort the wheat from the chaff in a way that leads to net improvements in efficiency and competition, and ultimately consumer welfare? In more concrete terms, the question is: are there reasonable rules and standards that enforcers can use to filter out anticompetitive practices while allowing beneficial ones to follow their course? And if so, can this be done in a timely and cost-effective manner?[21]

A.      The Use of Filters in Antitrust

What might appear to be a herculean task has, in fact, been considerably streamlined, and vastly improved, by the emergence of the error-cost framework, itself a byproduct of pioneering advances in microeconomics and industrial organization.[22] This is “the economists’ way out.”[23] The error-cost framework is designed to enable authorities to focus their limited resources on that conduct most likely to have anticompetitive effects. In practice, this is done by applying several successive filters that separate potentially anticompetitive practices from ones that are likely innocuous.[24] Depending on this initial classification, practices are then submitted to varying levels of scrutiny, which may range from per se prohibitions to presumptive legality.[25]

Of the thousands of M&A transactions each year, only a few must be notified to antitrust authorities, and fewer still are subject to in-depth reviews.[26] For instance, in both the United States and the European Union, only deals that meet certain transaction values and/or revenue thresholds require merger notifications.[27] Accordingly, U.S. antitrust authorities receive somewhere in the vicinity of 2,000 merger filings per year, while the European Commission usually receives a few hundred.[28] Typically, less than 5% of these mergers are ultimately subjected to in-depth reviews.[29] These cases are selected by applying yet another set of filters that include: looking at the relationship between the merging firms (horizontal, vertical, conglomerate); calculating market shares and concentration ratios; and checking whether transactions fall within several recognized theories of harm.[30]

Similar filtering mechanisms apply to other forms of conduct. Incumbent firms routinely decide to enter adjacent markets, for instance, or to adopt strategies that might incidentally reduce competition in markets where they are already present. As with mergers, authorities and courts apply a series of filters/presumptions to home in on those practices most likely to cause anticompetitive harm.[31] Firms with low market shares are deemed less likely to possess market power (and thus, less likely to harm competition); vertical agreements are widely seen as being less problematic than horizontal ones; and vertical integration is widely regarded as procompetitive, absent other accompanying factors.[32]

This system is certainly not perfect; filtering cases in this manner inevitably lets some anticompetitive practices fall through the cracks. Indeed, the error-cost framework is premised on the recognition of this eventuality. Nevertheless, the strengths of this paradigm arguably outweigh its weaknesses. “If presumptions let some socially undesirable practices escape, the cost is bearable. . . . One cannot have the savings of decision by rule without accepting the costs of mistakes.”[33]

In most jurisdictions around the world, today’s competition merger-control apparatus is administrable,[34] somewhat predictable,[35] and—in the case of merger enforcement—it ensures that deals are reviewed in a relatively timely manner.[36]

The contours of this system have profound ramifications for substantive antitrust policy. Potential reforms need to account for the tradeoffs inherent to this vision of antitrust enforcement: between false positives and false negatives, between timeliness and thoroughness, and so on. Accordingly, the relevant policy question is not whether existing provisions allow certain categories of potentially harmful conduct to go unchallenged. Instead, policymakers should ask whether there is a better set of filters and heuristics that would enable authorities and courts to prevent previously unchallenged anticompetitive conduct without overburdening the system or disproportionately increasing false positives. In short, antitrust enforcers must avoid the so-called “nirvana fallacy” of believing that all errors can be eliminated, and existing policies should thus always be weighed against alternative institutional arrangements (as opposed to merely identifying instances where they lead to false negatives).[37]

B.      Calls for a Reform of Merger-Enforcement Rules and Thresholds

Against this backdrop, a growing body of economic literature has identified potential inadequacies in both the U.S. and EU merger-control regimes, as well as the antitrust rules that govern the business practices of digital platforms (notably, vertical integration and tying).[38] These critiques focus on ways in which incumbents might prevent nascent or potential rivals from introducing innovative new products and services that could disrupt their existing businesses. In short, this recent economic literature purports to show how incumbents might use their dominant market positions to reduce innovation.

For instance, recent empirical research purports to show that mergers of pharmaceutical companies with overlapping R&D pipelines result in higher project-termination rates, thus reducing innovation and, ultimately, price competition. These are referred to as “killer acquisitions.”[39] Others have argued that killer acquisitions also occur in the tech sector, although the empirical evidence offered to support this second claim is much weaker. In large part, this is because it does not differentiate between legitimate, efficient discontinuations of acquired products (such as the product being unsuccessful on the market, or the acquisition being done to hire the staff of the acquired firm) and the elimination of potential competitors.[40] Acquisitions of nascent and potential competitors undertaken with the intention of reducing competition have also been described as “killer acquisitions,” even if they do not involve their products being discontinued.[41]

Along similar lines, it is sometimes argued that large tech firms create so-called “kill zones” around their core businesses.[42] Similarly, some scholars assert that incumbent digital platforms might seek to foreclose rivals in adjacent markets by “copying” their products, or by using proprietary datasets that tilt the scales in their favor.[43]

All of these practices are said to harm innovation by deterring the incentives of competitors to invest in innovations that compete with incumbents. And the overarching theme of the above research is that existing antitrust doctrine is ill-equipped to handle these practices—or, at the very least, that antitrust law should be enforced more vigorously in these settings.

But while the above research identifies important and potentially harmful conduct that cannot be dismissed out of hand, it is important to recognize its inherent limitations when it comes to informing normative policy decisions. Indeed, there is a vast difference between identifying categories of conduct that sometimes harm consumers, on the one hand, and being able to isolate individual instances of anticompetitive behavior, on the other (and even then, it is important to distinguish conduct that harms consumers overall from conduct that merely harms certain parameters of competition while improving others. In other words, antitrust law should prohibit conduct when the category it belongs to is generally harmful to consumers and/or when harmful occurrences of that conduct can readily be distinguished[44]).

The above is merely a restatement of the error-cost framework, which highlights that the existence of false negatives is not a sufficient condition for increased intervention. The fact—if it can be proved—that there were some false negatives does not imply that there has been underenforcement with respect to the optimal level of enforcement. In other words, in the digital space, the argument can be made that an optimal merger policy on average leads to ex-post “underenforcement.” Moreover, even if the level of enforcement has been lower than optimal, one must be careful not to swing too far in the opposite direction, especially in high-tech industries. The chilling effect on innovation could be significant.[45] Instead, any change to the standards of government intervention that seeks to prevent more of these false negatives, with all the accompany tradeoffs and risks inherent to this enterprise, must ultimately increases social welfare overall.

Take the example of Google. It has acquired at least 270 companies over the last two decades.[46] It has been argued that some of these—such as Google’s acquisitions of YouTube, Waze, or DoubleClick—may have been anticompetitive. The real test for regulators, however, is whether they could reliably identify which of Google’s 270 acquisitions are actually anticompetitive and do so under a decision rule that causes less harm to consumers from false positives caused by the current (alleged) false negatives. If the anticompetitive mergers are such a tiny percentage of total mergers, and if identifying them a priori is difficult, then a precautionary-principle strategy that results in many false positives would likely not merit the benefits from blocking one or two anticompetitive mergers.

Indeed, but for Google and Facebook’s investments in YouTube and Instagram (to cite but two examples), it is far from clear that a mere “video-hosting service” or “photo-sharing app” would have grown into the robust competitor that advocates assume. Apart from the potential synergies arising from the combination of these products with the acquiring companies’ other products (for example, YouTube’s search and recommendation engines being developed by Google, the world’s leading internet-search company, or Instagram’s ad platform being integrated with Facebook’s), corporate control by the acquiring company may lead to these firms being better managed. This concept of M&A as creating a “market for corporate control” adds an important new dimension to the understanding of the tradeoffs involved.[47]

These anticompetitive theories of harm can thus be separated into three broad categories: (1) large incumbents have become so dominant in their primary markets that venture capitalists decline to fund startups that compete head-on, reducing potential competition; (2) these incumbents acquire potential competitors or non-competitor startups so as to reduce the competition along several dimensions, and (3) that incumbents purchase competitors to shut down their overlapping innovation pipelines (i.e., killer acquisitions).

III.    Concluding Remarks

With this in mind, applying the error-cost framework should lead policymakers to carefully consider the following questions when evaluating the merits and policy implications of economic research in this space:

  1. Do the papers advancing these theories identify categories of conduct that, on average, harm consumer welfare?
  2. If not, do the papers identify additional factors that would enable authorities to infer the existence of anticompetitive effects in individual cases?
  3. If so, would it be feasible for authorities to add these factors to their analysis (in terms of time and resources)?
  4. Finally, would prohibiting these practices at an individual or category level prevent efficiencies that would otherwise outweigh these anticompetitive harms? And could these efficiencies be analyzed on a case-by-case basis?

In addition to these error-cost-related questions, it is also necessary to question whether the results of these studies are relevant outside of the specific markets that they examine, and whether they give sufficient weight to countervailing procompetitive justifications.

All of this has profound ramifications for amendments to India’s competition law. Lowering merger-filing thresholds may be counterproductive if it means fewer enforcement resources are devoted to other, more important cases. To make matters worse, heightened merger-control rules may deter firms from merging in the first place. This could have dramatic consequences for an economy like India’s, which depends on startup activity to remain on its current growth path. In short, we recommend that Indian policymakers carefully consider whether the possibility of catching an additional handful of anticompetitive mergers is worth the significant costs that would be incurred by the Indian economy.

 

 

[1] The Competition Act (2002), as modified by the 2023 Amendment, Section 5 (d).

[2] See, e.g., Jonathan B Baker, Recent Developments in Economics That Challenge Chicago School Views, 58 Antitrust L.J. 655 (1989) (“Over the past fifteen years, the courts and enforcement agencies have created Robert Bork’s antitrust paradise. Antitrust has adopted the Chicago School’s efficiency analysis and the Chicago School’s conclusions about the effects of business practices.”). Note that, in many ways, the Chicago and late-Harvard views are somewhat similar when it comes to mergers—both schools of thought might thus have influenced this loosening of merger policy. See, e.g., Richard A Posner, The Chicago School of Antitrust Analysis, U. Penn. L. Rev. 937 (1979) (“The change in thinking that has been brought about by the Chicago school is nowhere more evident than in the area of vertical integration. Kaysen and Turner, writing in 1959, advocated for- bidding any vertical merger in which the acquiring firm had twenty percent or more of its market. Areeda and Turner, writing in 1978, express very little concern with anticompetitive effects from vertical integration. In fact, as between a rule of per se illegality for vertical integration by monopolists and a rule of per se legality, their preference is for the latter.”).

[3] See, e.g., Germán Gutiérrez & Thomas Philippon, Declining Competition and Investment in the U.S., NBER Working Paper 1 (2017) (“The U.S. business sector has under-invested relative to Tobin’s Q since the early 2000’s. We argue that declining competition is partly responsible for this phenomenon.”). Contra, Esteban Rossi-Hansberg, Pierre-Daniel Sarte & Nicholas Trachter, Diverging trends in national and local concentration, 35 NBER Macroeconomics Annual 1 (2021) (“Using US NETS data, we present evidence that the positive trend observed in national product-market concentration between 1990 and 2014 becomes a negative trend when we focus on measures of local concentration. We document diverging trends for several geographic definitions of local markets. SIC 8 industries with diverging trends are pervasive across sectors. In these industries, top firms have contributed to the amplification of both trends. When a top firm opens a plant, local concentration declines and remains lower for at least 7 years. Our findings, therefore, reconcile the increasing national role of large firms with falling local concentration, and a likely more competitive local environment.”).

[4] See, e.g., José Azar, Ioana Marinescu, Marshall Steinbaum & Bledi Taska, Concentration in U.S. labor markets: Evidence From Online Vacancy Data, 66 Labour Economics 101886 (2020) (“These indicators suggest that employer concentration is a meaningful measure of employer power in labor markets, that there is a high degree of employer power in labor markets, and also that it varies widely across occupations and geography.”).

[5] See, e.g., Tim Wu, The Curse of Bigness: Antitrust in the New Gilded Age 9 (2018) (“We have managed to recreate both the economics and politics of a century ago—the first Gilded Age—and remain in grave danger of repeating more of the signature errors of the twentieth century. As that era has taught us, extreme economic concentration yields gross inequality and material suffering, feeding an appetite for nationalistic and extremist leadership. Yet, as if blind to the greatest lessons of the last century, we are going down the same path. If we learned one thing from the Gilded Age, it should have been this: The road to fascism and dictatorship is paved with failures of economic policy to serve the needs of the general public.”).

[6] Rohit Chopra, Statement of Commissioner Rohit Chopra, 85 Fed. Regis. 231, 77052 (2020) (“Adequate premerger reporting is a helpful tool used to halt anticompetitive transactions before too much damage is done. However, the usefulness of the HSR Act only goes so far. This is because many deals can quietly close without any notification and reporting, since only transactions above a certain size are reportable.”).

[7] See Collen Cunningham, Florian Ederer, & Song Ma, Killer Acquisitions, 129 J. Pol. Econ. 649 (2021); Sai Krishna Kamepalli, Raghuram Rajan & Luigi Zingales, Kill Zone, Nat’l Bureau of Econ. Research, Working Paper No. 27146 (2020); Digital Competition Expert Panel, Unlocking Digital Competition (2019), available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/785547/unlocking_digital_competition_furman_review_web.pdf; Stigler Center for the Study of the Economy and the State, Stigler Committee on Digital Platforms (2019), available at https://www.publicknowledge.org/wp-content/uploads/2019/09/Stigler-Committee-on-Digital-Platforms-Final-Report.pdf; Australian Competition & Consumer Commission, Digital Platforms Inquiry (2019), available at https://www.accc.gov.au/system/files/Digital%20platforms%20inquiry%20-%20final%20report.pdf. See also Jacques Cre?mer, Yves-Alexandre De Montjoye, Heike Schweitzer, Competition Policy For The Digital Era Final Report (2019), available at https://ec.europa.eu/competition/publications/reports/kd0419345enn.pdf [hereinafter “Crémer Report”].

[8] Cristina Caffarra, Gregory S. Crawford, & Tommaso Valletti, “How Tech Rolls”: Potential Competition and “Reverse” Killer Acquisitions, 2 Antitrust Chron. 1, 1 (2020).

[9] As far as jurisdictional thresholds are concerned, see, e.g., Crémer Report, supra note 7, at 10 (“Many of these acquisitions may escape the Commission’s jurisdiction because they take place when the start-ups do not yet generate sufficient turnover to meet the thresholds set out in the EUMR. This is because many digital startups attempt first to build a successful product and attract a large user base while sacrificing short-term profits; therefore, the competitive potential of such start-ups may not be reflected in their turnover. To fill this gap, some Member States have introduced alternative thresholds based on the value of the transaction, but their practical effects still have to be verified.”). As far as inverting the burden of proof is concerned, see, e.g., Crémer Report, supra note 7, at 11 (“The test proposed here would imply a heightened degree of control of acquisitions of small start-ups by dominant platforms and/or ecosystems, to be analysed as a possible strategy against partial user defection from the ecosystem. Where an acquisition is plausibly part of such a strategy, the notifying parties should bear the burden of showing that the adverse effects on competition are offset by merger-specific efficiencies.”).

[10] As far as jurisdictional thresholds are concerned, see, e.g., Crémer Report, supra note 7, at 10 (“Many of these acquisitions may escape the Commission’s jurisdiction because they take place when the start-ups do not yet generate sufficient turnover to meet the thresholds set out in the EUMR. This is because many digital startups attempt first to build a successful product and attract a large user base while sacrificing short-term profits; therefore, the competitive potential of such start-ups may not be reflected in their turnover. To fill this gap, some Member States have introduced alternative thresholds based on the value of the transaction, but their practical effects still have to be verified.”). As far as inverting the burden of proof is concerned, see, e.g., Crémer Report, supra note 7, at 11 (“The test proposed here would imply a heightened degree of control of acquisitions of small start-ups by dominant platforms and/or ecosystems, to be analysed as a possible strategy against partial user defection from the ecosystem. Where an acquisition is plausibly part of such a strategy, the notifying parties should bear the burden of showing that the adverse effects on competition are offset by merger-specific efficiencies.”).

[11] See FTC Press Release, FTC Sues to Block Procter & Gamble’s Acquisition of Billie, Inc. (Dec. 8, 2020), https://www.ftc.gov/news-events/press-releases/2020/12/ftc-sues-block-procter-gambles-acquisitionbillie-inc; DOJ Press Release, Justice Department Sues to Block Visa’s Proposed Acquisition of Plaid (Nov. 5, 2020), https://www.justice.gov/opa/pr/justice-department-sues-block-visas-proposedacquisition-plaid; FTC Press Release, FTC Files Suit to Block Edgewell Personal Care Company’s Acquisition of Harry’s, Inc. (Feb. 3, 2020), https://www.ftc.gov/news-events/press-releases/2020/02/ftcfiles-suit-block-edgewell-personal-care-companys-acquisition; FTC Press Release, FTC Challenges Illumina’s Proposed Acquisition of PacBio (Dec. 17, 2019), https://www.ftc.gov/newsevents/pressreleases/2019/12/ftc-challenges-illuminas-proposed-acquisition-pacbio; DOJ Press Release, Justice Department Sues to Block Sabre’s Acquisition of Farelogix (Aug. 20, 2019), https://www.justice.gov/opa/pr/justice-department-sues-block-sabres-acquisition-farelogix.

[12] See FTC Press Release, FTC Sues to Block Procter & Gamble’s Acquisition of Billie, Inc. (Dec. 8, 2020), https://www.ftc.gov/news-events/press-releases/2020/12/ftc-sues-block-procter-gambles-acquisitionbillie-inc; DOJ Press Release, Justice Department Sues to Block Visa’s Proposed Acquisition of Plaid (Nov. 5, 2020), https://www.justice.gov/opa/pr/justice-department-sues-block-visas-proposedacquisition-plaid; FTC Press Release, FTC Files Suit to Block Edgewell Personal Care Company’s Acquisition of Harry’s, Inc. (Feb. 3, 2020), https://www.ftc.gov/news-events/press-releases/2020/02/ftcfiles-suit-block-edgewell-personal-care-companys-acquisition; FTC Press Release, FTC Challenges Illumina’s Proposed Acquisition of PacBio (Dec. 17, 2019), https://www.ftc.gov/newsevents/pressreleases/2019/12/ftc-challenges-illuminas-proposed-acquisition-pacbio; DOJ Press Release, Justice Department Sues to Block Sabre’s Acquisition of Farelogix (Aug. 20, 2019), https://www.justice.gov/opa/pr/justice-department-sues-block-sabres-acquisition-farelogix.

[13] See, e.g., Prepared Remarks of Commissioner Noah Joshua Phillips, “Reasonably Capable? Applying Section 2 to Acquisitions of Nascent Competitors,” Antitrust in the Technology Sector: Policy Perspectives and Insights From the Enforcers Conference (Apr. 29, 2021), available at https://www.ftc.gov/system/files/documents/public_statements/1589524/reasonably_capable_-_acquisitions_of_nascent_competitors_4-29-2021_final_for_posting.pdf (“Some would-be reformers view M&A as fundamentally predatory and wish to “level the playing” field for smaller, less competitive, or more sympathetic businesses by throwing as much sand in the gears as possible. But their Harrison Bergeron vision of competition, handicapping successful businesses, will not so much level the field as tilt the scales dramatically in favor of the government, handing tremendous power to regulators, sapping American competitiveness, and hitting Americans in their pocketbooks.”).

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

[15] For vertical mergers, the welfare-enhancing effects are well-established. See, e.g., Francine Lafontaine & Margaret Slade, Vertical Integration and Firm Boundaries: The Evidence, 45 J. Econ. Lit. 677 (2007) (“In spite of the lack of unified theory, over all a fairly clear empirical picture emerges. The data appear to be telling us that efficiency considerations overwhelm anticompetitive motives in most contexts. Furthermore, even when we limit attention to natural monopolies or tight oligopolies, the evidence of anticompetitive harm is not strong.”). See also, Global Antitrust Institute, Comment Letter on Federal Trade Commission’s Hearings on Competition and Consumer Protection in the 21st Century, Vertical Mergers 8–9, Geo. Mason Law & Econ. Research Paper No. 18-27 (2018), https://ssrn.com/abstract=3245940 (“In sum, these papers from 2009-2018 continue to support the conclusions from Lafontaine & Slade (2007) and Cooper et al. (2005) that consumers mostly benefit from vertical integration. While vertical integration can certainly foreclose rivals in theory, there is only limited empirical evidence supporting that finding in real markets. The results continue to suggest that the modern antitrust approach to vertical mergers 9 should reflect the empirical reality that vertical relationships are generally procompetitive.”). Along similar lines, empirical research casts doubt on the notion that antitrust merger enforcement (in marginal cases) raises consumer welfare. The effects of horizontal mergers are, empirically, less well-documented. See, e.g., Robert W Crandall & Clifford Winston, Does Antitrust Policy Improve Consumer Welfare? Assessing the Evidence, 17 J. Econ. Persp. 20 (2003) (“We can only conclude that efforts by antitrust authorities to block particular mergers or affect a merger’s outcome by allowing it only if certain conditions are met under a consent decree have not been found to increase consumer welfare in any systematic way, and in some instances the intervention may even have reduced consumer welfare.”). While there is some evidence that horizontal mergers can reduce consumer welfare, at least in the short run, see, for example, Gregory J. Werden, Andrew S. Joskow, & Richard L. Johnson, The Effects of Mergers on Price and Output: Two Case Studies from the Airline Industry, 12 Mgmt. Decis. Econ. 341 (1991), the long-run effects appear to be strongly positive. See, e.g., Dario Focarelli & Fabio Panetta, Are Mergers Beneficial to Consumers? Evidence from the Market for Bank Deposits, 93 Am. Econ. Rev. 1152, 1152 (2003) (“We find strong evidence that, although consolidation does generate adverse price changes, these are temporary. In the long run, efficiency gains dominate over the market power effect, leading to more favorable prices for consumers.”). See also generally Michael C. Jensen, Takeovers: Their Causes and Consequences, 2 J. Econ. Persp. 21 (1988). Some related literature similarly finds that horizontal merger enforcement has harmed consumers. See B. Espen Eckbo & Peggy Wier, Antimerger Policy Under the Hart-Scott-Rodino Act: A Reexamination of the Market Power Hypothesis, 28 J.L. & Econ. 119, 121 (1985) (“In sum, our results do not support the contention that enforcement of Section 7 has served the public interest. While it is possible that the government’s merger policy has deterred some anticompetitive mergers, the results indicate that it has also protected rival producers from facing increased competition due to efficient mergers.”); B. Espen Eckbo, Mergers and the Value of Antitrust Deterrence, 47 J. Finance 1005, 1027-28 (1992) (rejecting “the market concentration doctrine on samples of both U.S. and Canadian mergers. By implication, the results also reject the effective deterrence hypothesis. The evidence is, however, consistent with the alternative hypothesis that the horizontal mergers in either of the two countries were expected to generate productive efficiencies”). Regarding the effect of mergers on investment, see, e.g., Gordon M. Phillips & Alexei Zhdanov, Venture Capital Investments and Merger and Acquisition Activity Around the World, NBER Working Paper No. w24082 (Nov. 2017), available at https://ssrn.com/abstract=3082265 (“We examine the relation between venture capital (VC) investments and mergers and acquisitions (M&A) activity around the world. We find evidence of a strong positive association between VC investments and lagged M&A activity, consistent with the hypothesis that an active M&A market provides viable exit opportunities for VC companies and therefore incentivizes them to engage in more deals.”). And increased M&A activity in the pharmaceutical sector has not led to decreases in product approvals; rather, quite the opposite has happened. See, e.g., Barak Richman, Will Mitchell, Elena Vidal, & Kevin Schulman, Pharmaceutical M&A Activity: Effects on Prices, Innovation, and Competition, 48 Loyola U. Chi. L.J. 799 (2017) (“Our review of data measuring pharmaceutical innovation, however, tells a different story. First, even as merger activity in the United States increased over the past ten years, there has been a steady upward trend of FDA approvals of new molecular entities (“NMEs”) and new biological products (“BLAs”). Hence, the industry has been highly successful in bringing new products to the market.”).

[16] Henry G. Manne, Mergers and the Market for Corporate Control, 73 J. Pol. Econ. 110 (1965).

[17] See Harold Demsetz, Information and Efficiency: Another Viewpoint, 12 J.L. Econ. 1, 22 (1969) (“The view that now pervades much public policy economics implicitly presents the relevant choice as between an ideal norm and an existing “imperfect” institutional arrangement. This nirvana approach differs considerably from a comparative institution approach in which the relevant choice is between alternative real institutional arrangements.”).

[18] Cunningham et al., supra note 7, at 692 (“Given these assumptions and estimates, what would the fraction ν of pure killer acquisitions among transactions with overlap have to be to result in the lower development of acquisitions with overlap (13.4%)? Specifically, we solve the equation 13.4% = ν × 0 + (1 − ν) × 17.5% for ν which yields ν = 23.4%. Therefore, we estimate that 5.3% (= ν × 22.7%) of all acquisitions, or about 46 (= 5.3% × 856) acquisitions every year, are killer acquisitions. If instead we assume the non-killer acquisitions to have the same development likelihood as non-acquired projects (19.9%), we estimate that 7.4% of acquisitions, or 63 per year, are killer acquisitions.”).

[19] See Value of Mergers and Acquisitions (M&A) Worldwide from 1985 to 2020, Statista (Jan. 15, 2021), https://www.statista.com/statistics/267369/volume-of-mergers-and-acquisitions-worldwide. See Gross Domestic Spending on R&D, OECD (last visited Apr. 29, 2021) https://data.oecd.org/rd/gross-domestic-spending-on-r-d.htm.

[20] See supra note 15.

[21] Running the antitrust system is itself a cost to society.

[22] See, e.g., Olivier E. Williamson, Economies as an Antitrust Defense: The Welfare Tradeoffs, 58 Am. Econ. Rev. 18 (1968). See also, Easterbrook, supra note 14; Henry G. Manne, supra note 16; William M Landes & Richard A Posner, Market Power in Antitrust Cases, 94 Harv. L. Rev. 937 (1980).

[23] Easterbrook, id., at 14.

[24] See Easterbrook, id., at 17 (“The task, then, is to create simple rules that will filter the category of probably beneficial practices out of the legal system, leaving to assessment under the Rule of Reason only those with significant risks of competitive injury.”).

[25] Id. at 15 (“They should adopt some simple presumptions that structure antitrust inquiry. Strong presumptions would guide businesses in planning their affairs by making it possible for counsel to state that some things do not create risks of liability. They would reduce the costs of litigation by designating as dispositive particular topics capable of resolution.”).

[26] See Number of Merger and Acquisition Transactions Worldwide from 1985 to 2021, Statista (May 14, 2021), https://www.statista.com/statistics/267368/number-of-mergers-and-acquisitions-worldwide-since-2005.

[27] See 15 U.S.C. §18a (1976). See also, FTC Premerger Notification Office Staff, HSR Thresholds Adjustments and Reportability for 2020, FTC Competition Matters (Jan. 31, 2020), https://www.ftc.gov/news-events/blogs/competition-matters/2020/01/hsr-threshold-adjustments-reportability-2020. See also Council Regulation 139/2004, 2004 O.J. (L 24) 1, 22 (EC).

[28] See Federal Trade Comm’n & U.S. Dep’t of Justice, Hart-Scott-Rodino Annual Report Fiscal Year 2019 (2020), available at https://www.ftc.gov/system/files/documents/reports/federal-trade-commission-bureau-competition-department-justice-antitrust-division-hart-scott-rodino/p110014hsrannualreportfy2019_0.pdf. See also, European Commission, Merger Statistics, 21 September 1990 to 31 December 2020 (2021), available at https://ec.europa.eu/competition/mergers/statistics.pdf.

[29] See FTC and European Commission, id.

[30] See U.S. Dep’t of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines (2010), U.S. Dep’t of Justice & Fed. Trade Comm’n, Vertical Merger Guidelines (2020). See also Commission Guidelines on the Assessment of Non-Horizontal Mergers Under the Council Regulation on the Control of Concentrations Between Undertakings, 2008 O.J. (C 265) 6, 25.

[31] See Federal Trade Commission & U.S. Department of Justice, Antitrust Guidelines for the Licensing of Intellectual Property 15 (Jan. 12, 2017) (“The existence of a horizontal relationship between a licensor and its licensees does not, in itself, indicate that the arrangement is anticompetitive. Identification of such relationships is merely an aid in determining whether there may be anticompetitive effects arising from a licensing arrangement.”). See also European Commission, Communication from the Commission—Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty to Abusive Exclusionary Conduct by Dominant Undertakings, O.J. C. 45, 7–20 (Feb. 24, 2009).

[32] See Antitrust Guidelines for the Licensing of Intellectual Property, id. See also, Commission Guidelines on Vertical Restraints, 2010 O.J. (C 130) 1, 46, available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52010XC0519(04)&from=EN.

[33] Easterbrook, supra note 14, at 15.

[34] It requires only limited government resources to function, compared to, for example, a system that reviews every merger in detail.

[35] Companies can self-assess whether their mergers are likely to be struck down by authorities and adapt their investment decisions accordingly.

[36] Even in-depth merger investigations are typically concluded within months, rather than years.

[37] See Demsetz, supra note 17, at 1 (“The view that now pervades much public policy economics implicitly presents the relevant choice as between an ideal norm and an existing “imperfect” institutional arrangement. This nirvana approach differs considerably from a comparative institution approach in which the relevant choice is between alternative real institutional arrangements.”).

[38] See Cunningham et al., supra note 7; Zingales et al., supra note 7; Kevin A Bryan & Erik Hovenkamp, Antitrust Limits on Startup Acquisitions, 56 Rev. Indus. Org. 615 (2020); Mark A. Lemley & Andrew McCreary, Exit Strategy, Stanford Law and Economics Working Paper No. 542 (2020), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3506919.

[39] See Cunningham et al., id. at 650 (“We argue that an incumbent firm may acquire an innovative target and terminate the development of the target’s innovations to preempt future competition. We call such acquisitions ‘killer acquisitions,’ as they eliminate potentially promising, yet likely competing, innovation.”).

[40] See, e.g., Axel Gautier & Joe Lamesch, Mergers in the Digital Economy, Info. Econ. & Pol’y (2000) (“There are three reasons to discontinue a product post-acquisition: the product is not as successful as expected, the acquisition was not motivated by the product itself but by the target’s assets or R&D effort, or by the elimination of a potential competitive threat. While our data does not enable us to screen between these explanations, the present analysis shows that most of the startups are killed in their infancy.”).

[41] John M. Yun, Potential Competition, Nascent Competitors, and Killer Acquisitions, in GAI Report on the Digital Economy (Ginsburg & Wright, eds. 2000).

[42] See Zingales et al. supra note 7.

[43] See, e.g., Kevin Caves & Hal Singer, When the Econometrician Shrugged: Identifying and Plugging Gaps in the Consumer-Welfare Standard, 26 Geo. Mason L. Rev. 396 (2018) (“Or imagine the platform was appropriating or “cloning” app functionality into its basic service. The only potential harm in this instance would be that independent edge providers would be encouraged to exit or discouraged from entering in future periods. In theory, edge providers might be discouraged to compete in the app space given what they perceive to be a slanted playing field.”).

[44] See, e.g., Eric Fruits, Justin (Gus) Hurwitz, Geoffrey A. Manne, Julian Morris, & Alec Stapp, Static and Dynamic Effects of Mergers: A Review of the Empirical Evidence in the Wireless Telecommunications Industry, OECD Directorate for Financial and Enterprise Affairs Competition Committee, Global Forum on Competition, DAF/COMP/GF(2019)13 (Dec. 6, 2019) at ¶ 61, available at https://one.oecd.org/document/DAF/COMP/GF(2019)13/en/pdf (“Studies that do not consider these [non-price] effects are incomplete for purposes of evaluating the mergers’ consumer welfare effects, and [are] all-too-easily used by advocates to misleadingly predict negative consumer outcomes. This is not necessarily a criticism of the studies themselves, which generally do not make comprehensive policy conclusions. The reality is that it is exceptionally difficult to comprehensively study even price effects, such that a well-conducted study of price effects alone is a valuable contribution to the literature. Nevertheless, in the context of evaluating prospective transactions, the results of such studies must be discounted to account for their exclusion of non-price effects.”).

[45] Luís Cabral, Merger Policy in Digital Industries, CEPR Discussion Paper No. DP14785 (May 2020) at 12, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3612854.

[46] See Carl Shapiro, Antitrust in the Time of Populism, 61 Int’l J. Indus. Org. 714 (2018).

[47] See Henry G. Manne, supra note 16.

Comments of the International Center for Law and Economics on the FTC & DOJ Draft Merger Guidelines

Executive Summary We appreciate the opportunity to comment on the Draft Merger Guidelines (Draft Guidelines) released by the U.S. Department of Justice (DOJ or Division) . . .

Executive Summary

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

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

Our main recommendations are as follows:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A.      Should Concentration Thresholds Be Lowered?

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

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

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

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

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

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

B.      Empirical Trends in Concentration

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

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

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

1.        National versus local competition

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A related paper explores this phenomenon in greater detail.[34]