How Reforming Antitrust Can Restore a Competitive Economy

For decades, competition in America has been on the wane, leading to slower economic growth and a gaping chasm of inequality. Antitrust can help reverse the trend, but antitrust doctrines and enforcement actions once thought adequate are proving insufficient. Fixing the problem is urgent.

In the late 1970s, Robert Bork and Richard Posner published two of the most influential books ever written about antitrust law and policy. As with Posner’s broader work in law and economics, they were especially concerned that law not get in the way of efficient business practices. They argued that the antitrust rules did just that, harming the economy by systematically discouraging firms from capturing efficiencies. They maintained that antitrust advocates overstated the dangers of market power and sacrificed too much to prevent it. The two Chicago school lawyers proposed eliminating some rules and modifying others to make them less restrictive.

Bork and Posner wrote amid political conditions favorable to their deregulatory impulse. Ronald Reagan’s popularity was rising, and he would, in short order, win the presidency by promising to rescue the US economy from state strangulation. Voters, politicians, officials, and courts were increasingly receptive to Bork and Posner’s efficiency arguments, both on their intrinsic merits and to reduce the scope of government. The two lawyers wrote to persuade judges, who make the antitrust rules, except on rare occasions when Congress steps in. And they wrote to persuade the Antitrust Division of the Justice Department and Federal Trade Commission, which make federal antitrust-enforcement decisions. In both aims, the authors were successful. Even before Reagan took office, the Chicago school was making inroads in the courts and enforcement agencies.

For Bork, the antitrust paradox (his title) was that antitrust enforcement had popular support even though, in his view, antitrust law was a policy at war with itself (his subtitle). Bork contended that the antitrust law then in force was based on an intellectually incoherent mix of pro-competitive and protectionist premises. Its doctrines could not be other than contradictory— sometimes preserving competition and sometimes suppressing it. His prescription was to eliminate the contradictions, and the inefficiencies they created, by relaxing antitrust rules and their enforcement.

Of course, Bork and the Chicagoans did not know if their agenda would have the intended effect. They expected that relaxing antitrust rules would enable firms to achieve greater efficiencies. Firms would lower costs, possibly passing some of the savings through to lower prices. They would also improve their products and services, and innovate more quickly and extensively, boosting economic growth. But the Chicagoans were making a wager. The bet was that these efficiencies would more than compensate for any increased risk of firms exercising market power. If it worked, consumers would obtain long-term welfare benefits over and above any losses associated with anticompetitive practices.

We now know that the Chicagoans lost their bet. Since the implementation of antitrust deregulation, market power has widened, without accompanying long-term gains in consumer welfare. Instead, economic dynamism and the rate of productivity growth have been declining. The harms from the exercise of market power have extended beyond the buyers and suppliers directly affected to include slowed economic growth and a skewed distribution of wealth. Whatever efficiency gains the Chicago-inspired changes may have achieved have not compensated for the market-power effects of the antitrust deregulation they sought.

Market power has widened for multiple reasons. One is the Chicago school reforms to the antitrust laws themselves. Another has been the changing technological landscape of the economy. The information technology (IT) giants that now top the financial markets’ valuation charts did not exist when Bork and Posner wrote their books. And firms in all sectors are investing in IT. As it grows, the IT economy raises a host of novel and challenging competitive issues, particularly with respect to innovation. Resolving these issues appropriately takes on an out-of-size importance: the information technology sector continues to innovate while productivity growth has been slowing overall.

Information technology has transformed many industries for the better, but it also gives firms new ways to limit competition and exercise market power. Businesses can use computerized algorithms to set high prices in coordination with their rivals. Google and Facebook’s dominance of Internet advertising and Amazon’s leading share of online shopping, potentially protected from competition by network effects and economies of scale, could give those firms the power to extract excessive fees from manufacturers and service providers seeking to reach prospective customers. IT giants may be able to forestall challenges from new competitors by acquiring potential rivals before they become market adversaries, as perhaps happened with Facebook’s acquisition of Instagram.

In response, the need for stronger antitrust enforcement has become more politically prominent. “In every corner of our economy, competition is increasingly choked off,” Senator Elizabeth Warren stated in 2017. “Airlines, banking, health care, pharma, agriculture, telecom, tech—in industry after industry, a handful of giant corporations control more and more and compete less and less It is time to do what Teddy Roosevelt did: pick up the antitrust stick again.” The Obama White House pointed to indicators of declining competition. During the 2016 campaign, candidates Hillary Clinton and Donald Trump both sounded antitrust themes. Trump announced plans to block a large media merger, apparently on competition grounds, and suggested that Amazon has an antitrust problem. It has been decades since competition policy has received this much public attention.

Today’s antitrust paradox is not Bork’s: it is the surprising conjunction of substantial market power with well-established and extensive antitrust institutions. Antitrust doctrines and enforcement actions once thought adequate to protect competition are proving insufficient. Fixing the problem is urgent. The longer that anticompetitive practices persist, the greater the harm to the economy. The more our antitrust institutions fall short, the more politically difficult it will become to fix them. Instead, the public will favor more draconian regulatory responses, such as treating businesses in more sectors of the economy as public utilities when effective competition would have been possible. These could cause dramatic efficiency declines that antitrust avoids. The Chicago school’s failures increasingly cast our antitrust institutions in a bad light. Bork, Posner, and their ilk sought to improve economic performance by reshaping antitrust, and their method for achieving that outcome—economic analysis—is appropriate. The problem is the particular medicine they prescribed.

In my new book The Antitrust Paradigm, I explain how to foster economic competition by strengthening antitrust. I explain why antitrust law should and does embrace technical, economic-oriented analysis in the service of political as well as economic ends. I use an economic framework to identify potential competitive harms from dominant information technology platforms and other distinctive features of the modern economy. I show why we can expect antitrust, by deterring the exercise of market power, to produce the economic benefits that Chicagoans blamed it for stifling.

In the book, I present evidence of substantial and widening market power and identifies the economic harms resulting from its exercise. I also explain how an effective antitrust enforcement regime benefits the economy by channeling firms toward the pursuit of better and cheaper goods and services.

Economic analysis and history both suggest as much. The antitrust regime prevailing at mid-century had solved a central political problem: how to deal with the effects of monopoly power that developed with industrialization. The resulting political consensus has endured for more than seven decades, even through the Chicago-inspired antitrust deregulation.

Yet, our contemporary antitrust paradox works to undermine that political consensus. A conservative Supreme Court’s lax antitrust enforcement threatens to reject the antitrust approach by stealth. We may soon reach a point where the political consensus breaks down, with antitrust effectively replaced by a laissez-faire approach allowing firms to operate with little or no governmental supervision, inviting even greater exercise of market power. Eventually, this could create the conditions for a political backlash, resulting in extensive regulation of large firms rather than the restoration of antitrust.

At the moment, we cannot count on the political branches to stand in the way of the Supreme Court. The White House is controlled by the political party that tends to advocate a less interventionist approach to economic policy and Congress is closely divided. Non-interventionism will continue to win the lion’s share of campaign-finance support, as large donors and their firms tend to benefit from hands-off market power regulation.

Our current president seems to invite deal-making between the government and individual firms. Three political threats to antitrust that could flow from such activity, regardless of the party in power: partisan misuse, special-interest protectionism, and the development of a vicious cycle of crony capitalism, in which firms with market power exploit it to secure the political power that helps protect or extend it. This further erodes antitrust, creating more market power and so forth. Maintaining norms against direct political influence in enforcement is therefore essential.

Antitrust rules balance the costs of insufficiently deterring anticompetitive conduct against the costs of excessively chilling pro-competitive conduct and the costs of administration. I argue that substantial and widening market power justifies more interventionist rules and judicial presumptions in the United States. With the growing importance of burden-shifting in the formulation of antitrust rules, courts can be expected to rely increasingly on presumptions to structure antitrust analysis. Antitrust rules can be reformed to enhance deterrence of harmful conduct by identifying ways to strengthen and supplement the presumptions courts employ when reviewing horizontal mergers.

In the book, I take on nine erroneous arguments against antitrust intervention, including the assumptions that markets self-correct, that the harms from unwise judicial precedents outweigh those of market power, and that antitrust institutions are subject to manipulation by complaining competitors. Such arguments do real damage when they find sympathetic ears at the Supreme Court and enforcement agencies and justify hands-off conduct by those who might otherwise bristle at the anticompetitive activities of large firms.

Antitrust rules can address four competitive problems new to the information economy or exacerbated by it: algorithmic coordination; exclusionary conduct by dominant platforms; threats to innovation; and harms to users on all sides of platforms—suppliers as well as customers. Giant Internet enterprises have been charged with monopolizing a wide range of online markets, and corporate investments in information technology, even by non-IT firms, may also be associated with the exercise of market power. In light of these competitive concerns—but also keeping in mind the economic benefits flowing from the IT sector—I suggest presumptions courts should adopt to more effectively deter exercises of market power.

One possible anticompetitive consequence of artificial intelligence capabilities we already possess is the prospect that firms will coordinate through pricing algorithms. That prospect should alter how antitrust laws infer agreement among rivals from circumstantial evidence when firms raise prices in parallel. The algorithmic-coordination problem also has implications for horizontal merger policy.

Exclusionary conduct by information technology platforms is another concern. Through a range of mechanisms, platforms can harm competition—some familiar and others newly enabled by big data. For example, access to detailed information about individual buyers and suppliers may permit exclusion through targeted discounts. The use of price as an exclusionary instrument is particularly worrisome because the Supreme Court has raised the bar for challenges to predatory pricing. In the book, I suggest ways courts should employ or modify presumptions to push back.

The cutting-edge nature of the information economy calls for antitrust attention to competitive harms to innovation, not just harms on the more familiar competitive dimensions of price, output, and quality. Antitrust enforcement is called for when business conduct harms competition by suppressing new business models, technologies, or products, but antitrust enforcers must be wary because action against firms engaged in research and development also could chill innovation. Courts and enforcers can do more to deter competitive threats in innovative industries, while limiting the chill to pro-competitive conduct, and deal with threats to innovation competition and future product competition from mergers and the exclusionary conduct of dominant firms.

In certain circumstances, antitrust law should allow benefits to some economic actors to offset harms to others. This question is becoming increasingly important with the growing prominence of information technology platforms. The question is whether competitive harms to one group of economic actors—which could be suppliers or workers paid prices below competitive levels as well as buyers charged prices above competitive levels—can be offset by linked benefits to other end users. Antitrust law allows benefits to offset harms within markets but not across markets, except as a matter of prosecutorial discretion in merger reviews. Accordingly, platforms cannot justify anticompetitive conduct that harms users on one side by showing benefits to users on another side. That rule sensibly prevents courts from having to engage in impossibly complex analyses and helps protect political support for the antitrust laws. To prevent the rule from discouraging economic growth, occasional exceptions could be made where the benefits are greatly disproportionate to the harms.

Notwithstanding substantial and widening market power, the threatened stealth rejection of antitrust, and novel competitive challenges raised by the IT-infused economy, all is not lost. Restoring the antitrust enterprise in the shadow of a Chicago School-inspired Supreme Court majority unsympathetic to changing course can be accomplished.

Doing so will not be easy. It will require progress on many fronts: increased awareness that market power is substantial, widening, and harmful; political mobilization to restore antitrust; leadership from the antitrust enforcement agencies; litigation to exploit the space created by lower courts willing to question the Chicago school; and reliance on economic arguments. The Supreme Court is committed to an economic approach and will only change its antitrust stance if the majority is convinced that doing so makes economic sense.

One goal of The Antitrust Paradigm is to challenge the prevailing Chicago approach. Another goal is to show how antitrust can be reformed to improve economic outcomes. In addition, I seek to demonstrate that, even though antitrust law evolves as political priorities shift, antitrust disputes can and should be resolved on the basis of economic analysis. Finally, I hope that readers disposed against antitrust because they believe it does not do enough to curb the political influence of large corporations will come to see antitrust as a step in the right direction. It doesn’t eliminate the potential political harms of concentrated economic power, but by enhancing competition, it reduces the threat.

For decades, competition has been on the wane—a trend exacerbated by the growth of information technology. With this trend has come slower overall economic growth and a gaping chasm of inequality. Antitrust can help reverse the trend. It can help our society secure the benefits of a changing economy by ensuring that, no matter what businesses do, they do it in the context of competitive markets.

Excerpted from The Antitrust Paradigm: Restoring a Competitive Economy by Jonathan B. Baker, published by Harvard University Press. Copyright © 2019 by the President and Fellows of Harvard College. Used by permission. All rights reserved. Jonathan B. Baker, a former chief economist at the FTC and the FCC, is a Research Professor of Law, American University Washington College of Law.

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