Economics has a valuable role to play in antitrust enforcement, but the courts often base their antitrust decisions on unfounded empirical claims or the misapplication and misinterpretation of economics. Michael Katz proposes ways to improve courts’ use of economics.
Beginning in the 1970s, economics has played an increasingly large and explicit role in US antitrust decision making. This trend began under the influence of the Chicago School, which used price theory to argue that prevailing antitrust enforcement was far too interventionist. And it has continued even as other scholars—often making use of game theory—have pushed back on many of the claims made by the Chicago School.
Many people believe that the joint ascent of economics and the consumer welfare standard—which critics characterize as focusing on short-term price effects, although many proponents take a broader view—has led to a fall in the vigor of antitrust enforcement. While proponents of this view, such as Lina Khan, the current Chair of the US Federal Trade Commission, and Tim Wu of the National Economic Council, have primarily focused on attacking the consumer welfare standard, they have also implicitly and explicitly called for economics to play a more limited role in antitrust. Indeed, populist antitrust advocate Matt Stoller has asserted that “[t]he demand for quantitative models—which are often garbage and yet trusted by judges trained to believe in economics expertise—is just a smokescreen for replacing the rule of law with the rule of economists.”
Abandoning economics would be a mistake. Economics has a valuable role to play in antitrust enforcement, whether or not the courts continue to apply the consumer welfare standard. Economics does not tell us what the goals of antitrust policy should be. But whatever the goals, economics provides a valuable set of tools for predicting how various policy choices will affect market participants’ conduct and how that conduct will affect market outcomes and the degree to which the goals of antitrust will be attained.
This is not to say that there are no problems with the current use of economics in antitrust—there are. Courts, particularly at appellate levels, often base their antitrust decisions on unfounded empirical claims or the misapplication and misinterpretation of economics. For example, based on pronouncements regarding the economics of competition made by the US Supreme Court in Ohio v. American Express, the judge in US v. Sabre Corp., et al. reached the nonsensical conclusion that, even though the merging parties competed “as a matter of real-world economic reality,” the firms did “not compete in a relevant market.” In the Ohio opinion itself, the court failed to apply even the most basic empirical techniques when it observed that credit-card transactions volume has risen over the course of many years and concluded that American Express’s business model had spurred competition and increased transactions quantities—even though the Court made no attempt to determine what volume would have been absent American Express’s challenged conduct.
Two factors have contributed to the rise of the misapplication of economics by the courts. First, modern economics can be extremely difficult for a layperson to understand and often identifies theoretical ambiguities that are difficult to resolve empirically. This is problematic because judges are not economists and typically lack the resources needed to conduct—or even understand—sophisticated economic analyses. Thus, it should not be surprising that judges sometimes misapply economics or—out of concern that they would otherwise misapply it—avoid applying it at all.
Second, antitrust law in America is essentially common—or “judge-made”—law. The relevant portions of the principal US antitrust statutes (i.e., the Sherman Act, Clayton Act, and Federal Trade Commission Act) are remarkably brief and imprecise, and Congress has left it to the courts to flesh out their interpretation. Although this has allowed the statutes to endure as the courts incorporate new learning and adapt to new circumstances, it has also given the courts great discretion, including with respect to how various economic concepts are applied in antitrust litigation.
The complexity of modern economics and the broad discretion that Congress afforded the courts have allowed judges to create their own economics without sufficient checks to ensure this judicial economics accords with sound, mainstream economics.
How to Improve the Use of Antitrust in Court Cases
Although there is no solution that completely solves both problems, there are steps that can be taken to address the facts that economic evidence presented at trial can be very difficult for the courts to understand and that the courts have created an inappropriate set of “economic principles” to guide their application of economics to the evidence.
With regard to the difficulties of economic evidence, the courts should be encouraged to experiment with process reforms. Although these reforms generally are applicable only to trial courts, the reforms might also benefit appellate decision making by creating better records for review. There are several possible reforms that could be tried separately or jointly. For instance, courts could make greater use of court-appointed experts. A good, neutral economist might prevent some of the more egregious mistakes courts sometimes make. For example, in a predation case brought by the United States against American Airlines, the court declared that aircraft ownership costs were not an avoidable or variable cost of serving a route even when the number of aircraft on the route varied—the court failed to recognize the opportunity cost of planes that could be used on other routes or sold. In addition to assisting with basic economic concepts, an economist could also help a court sort through complicated statistical analyses or merger simulations submitted by the litigating parties.
First proposed more than 150 years ago, long advocated by notable jurists including Judge Richard Posner and Justice Stephen Breyer, and regularly used in Europe, court-appointed expert witnesses still appear to be rare in US courts. There are, to be sure, potential objections to the use of court-appointed experts. One is the concern that some economists will have very strong views and end up trying to sway the judge rather than provide purely neutral technical advice. However, this issue can be addressed, at least in part, by allowing the parties to object to a proposed expert. Moreover, under the Federal Rules of Evidence, any party has the right to cross-examine the expert if one is appointed. Surely, this is a more transparent process than relying on the economic advice of anonymous law clerks.
“Abandoning economics would be a mistake. Economics has a valuable role to play in antitrust enforcement, whether or not the courts continue to apply the consumer welfare standard.”
Another reform would be to move away from the current practice of treating expert witnesses like so-called fact witnesses, whereby an expert gives direct testimony by answering—without notes—a series of questions posed by an attorney. It is common for hundreds of pages of expert reports to be condensed to a couple of hours of live testimony, or even less. Written direct testimony, which is used by some judges, allows for a much more complete and careful presentation of the economic evidence. Those judges who find oral presentations helpful could allow expert witnesses to drop the pretense that they are spontaneously answering questions, and instead allow experts to make prepared presentations, as in an academic seminar. The other party to the litigation would, of course, still have a chance to cross examine the witness.
More broadly, it would be better if attorneys did less to chaperone the experts that they have retained. For example, under current practice, the attorney that has retained the expert can ask questions to clarify issues that may have arisen during the witness’ cross examination by opposing counsel. However, experts are not allowed to raise issues on their own, despite very likely having a much better understanding of the issues than the attorney leading the redirect.
A particular form of giving experts the freedom to explain themselves directly is to use of so-called “hot tubs”—or more dryly, “concurrent expert evidence.” Typically, the experts retained by the opposing parties appear in court separately from one another and never directly interact before the judge. By contrast, under the hot tub procedure, the opposing experts appear together and question and debate each other in front of the judge without interference from the parties’ attorneys. This process lets the experts respond to one another’s arguments directly and in real time. In preparation for a hot tub, the court may instruct the experts jointly to create a document that identifies areas of agreement and disagreement, which can increase the efficiency of the process and narrow the court’s focus to the critical issues. This process has been tried by some US courts and has been successfully used in Australia for decades. A British review of the practice found that judges generally felt that hot-tubbing improved the quality of expert evidence and assisted the court in resolving issues disputed by the experts.
Another approach to improve the use of economics in judicial decision-making would be to train judges to be better consumers of economics. Many judges attend two-or-three-day workshops that expose them to the fundamentals of antitrust economics. It is, however, impossible to master the relevant substance in such a short time period. Indeed, one study found that attending a workshop lowers the probability that a judge’s decision will be appealed in economically simple cases but not complex ones. It would be useful to focus more on giving judges a set of techniques to help them formulate questions to put to the experts before them and to skeptically assess the answers. A concern with such programs is that the presenters may offer only a narrow perspective on the issues and unduly influence subsequent judicial decision making, which highlights the importance of having programs offered by neutral bodies.
In part because economics can be difficult to apply, the courts have developed various rules of thumb, procedural requirements, or presumptions regarding certain facts or economic relationships. In important instances, the courts’ misinterpretation and misapplication of economics have led to rules, procedures, and presumptions that are out of line with mainstream economic thinking.
The courts’ treatment of vertical mergers is one example. A vertical merger brings together two firms that are in a supplier-buyer relationship, such as when AT&T (among other things a video programming distributor) acquired Time Warner (a video programming creator). To a large extent, the courts currently act as if vertical mergers are almost always beneficial. However, although vertical mergers can promote better coordination over product design and pricing, they can also create the possibility that unintegrated rivals will be foreclosed. The empirical literature on the actual effects of mergers is limited and inconclusive. Thus, the courts do not have a sound basis for the presumption that vertical mergers are almost always beneficial.
Although Congress has traditionally relied on the courts to flesh out the meaning of the antitrust statutes, Congress retains the authority to update or supplement the statutes to guide the courts where they are not applying the statutes as Congress would wish. Indeed, there are currently several bills before the US House and Senate addressing antitrust standards, particularly with respect to Big Tech. Although I have strong reservations regarding the specific proposals, legislation may be the only practical mean of improving the application of economics at the appellate level.
Some have called for Congress to prescribe strong, simple presumptions that would favor plaintiffs as a counter to the courts’ perceived favoritism towards defendants. For example, a US House Majority Staff report recommended that “any acquisition by a dominant platform would be presumed anticompetitive unless the merging parties could show that the transaction was necessary for serving the public interest and that similar benefits could not be achieved through internal growth and expansion.”
A better approach would be to reset several existing presumptions to be neutral starting points that direct courts to weigh the particular harms and benefits of the challenged conduct, rather than tipping the scales one way or the other. Admittedly, neutral presumptions can impose greater decision-making burdens on courts than do strong, prescriptive presumptions. However, legislators, practitioners, and academics do not know enough to formulate strong, general presumptions that would lead to good decisions in most cases. For example, given the current state of the economics literature, there is no sound basis for presuming either that vertical mergers are almost always good or that they are almost always bad. A neutral presumption and case-by-case application of economic reasoning is more appropriate.
The fact that we don’t know enough to formulate good general presumptions leads to a final recommendation for improving the use of economics by the courts: improve economics. Specifically, economic researchers should address questions of relevance to the courts and should generate answers of the form that can actually be used by the courts. For example, academic papers often use specialized formal models to show that a business practice can benefit or harm competition, depending on facts that may be almost impossible to observe in practice. Economic research is much more useful to the courts when it identifies robust and observable indicators of whether a practice is harmful or benign.
When conducting research, it is also important for economists to recognize how it will be used by the courts, both to increase the chance that it will useful and to avoid unintended consequences. The study of multi-sided platforms (i.e., firms that facilitate interactions among different groups of users, such as Airbnb, which helps landlords and short-term renters interact) offers a cautionary tale in this regard. Although platforms have long been around, the study of platform economics has been one of the biggest and—as an academic pursuit—most successful areas in industrial organization research over the past two decades. However, the courts, with the assistance of some economists, have used the alleged newness of multi-sided platforms to craft new rules that make little sense, except as attempts to weaken enforcement.
For example, based on its (mis)reading of the research literature, the US Supreme Court in Ohio found that a transaction platform must be analyzed as operating in a single, two-sided market—rather than two, closely related markets—even though there are strong economic arguments against this approach to market definition. Moreover, the Supreme Court’s market-definition rule in Ohio has significant implications for the determination of what constitutes a competitor (which led to the confusion in Sabre), the allocation of the burden of proof between the litigating parties, and the sets of consumers whose welfare is taken into consideration. Little, if any, of the economic research that preceded Ohio took these implications into account in deriving recommendations for defining markets. Had it done so, at least some of the literature might have done more to caution against the use of a single, two-sided market.
Most, if not all, of these recommendations have been made before, typically with little effect. But given the widespread dissatisfaction with the current state of US antitrust, it is time to try again. Doing so is far more attractive than abandoning economics or pretending that the world is not as complex as modern economics tells us it is.
Disclosure: The author consults for a variety of private companies and governmental entities on antitrust and regulatory issues, particularly with respect to network, online platform, and technology industries (some of this work he is not authorized to disclose). He testified as an expert for the plaintiffs in United States of America, et al. v. American Express Co., et al. and as an expert for the defendants in United States of America v. AT&T Inc., DIRECTV Group Holdings, LLC, and Time Warner Inc. He is also a Senior Consultant with Compass Lexecon. This article should not be construed as representing the views of any of the author’s clients.
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