Categories
Antitrust Monopolization

The Decline in Monopolization Cases in One (More) Graph

DOJ, FTC, and Private Cases Filed under Section 2 of the Sherman Act
(Image license: CC BY-SA 4.0.)

Observations:

  • The decline in cases brought by the Department of Justice since the 1970s is consistent with the story of Chicago School influence over antitrust. What is perhaps less well known, but clearly reflected in the data, is that the Chicago Revolution took place in the Ford, and especially the Carter, Administrations, not, as is sometimes supposed, in the Reagan Administration, although Reagan supplied the coup de grace.

    Indeed, we have only five monopolization cases filed by DOJ over the course of the entire Carter Administration, as compared with 58 filed during the part of the Nixon Administration and the Ford Administration covered by this data series. This is consistent with the broader influence of the Chicago School over regulation of business. It was also under Ford and Carter, not Reagan, that deregulation got underway, with partial deregulation of railroads (1976), near-complete deregulation of airlines (1978), and partial deregulation of trucking (1980) (more here).

    The timing suggests that the Chicago School’s victories were intellectual, rather than merely partisan. As Przemyslaw Palka has pointed out to me, Milton Friedman consciously pursued a strategy of intellectual, rather than political warfare, because he understood that victory on the intellectual plane is more complete and enduring (a nice discussion of this may be found here on pages 218-221). As these numbers suggest, Chicago prevailed by converting its adversaries, so that even when its adversaries were nominally in political power under Carter, they implemented Chicago’s own agenda.
  • To the extent that the early part of the FTC data series is reliable (more on that below), the story in the FTC case numbers is that of the six monopolization cases brought over the past five years, following a twenty-year period during which the FTC brought only three cases. With the exception of Google, which has just been filed, there has been no corresponding uptick in monopolization cases filed by the Department of Justice.
  • The private litigation data show that in some years (1998 and 2013), private litigation across the entire United States has produced fewer monopolization cases (against unique defendants) than did a single federal enforcer–the DOJ–in 1971. The private litigation numbers for 1997 to 2020 also show that, on average, about twenty defendants face new monopolization actions each year when federal enforcers are filing near-zero complaints. To the extent that the numbers for 1974 to 1983 are reliable (of which more below), they suggest that private cases have also declined markedly since the 1970s, although there was a lag of several years between the two effects, perhaps due to the tendency of private plaintiffs to file follow-on cases to government cases.
  • Altogether, one is left with the impression that corporate America has been awfully well-behaved since about 1975.

Notes on the Data:

  • The cases brought by the Department of Justice (DOJ) come from the Antitrust Division’s own workload statistics, so I assume the numbers are accurate. For DOJ cases investigated, as well as filed, see here.
  • The cases filed by private plaintiffs come from two sources. The first, for the years 1997 to 2020, is a search for Section 2 complaints in federal court dockets via Lexis CourtLink. I must thank Beau Steenken, Instructional Services Librarian & Associate Professor of Legal Research at University of Kentucky Rosenberg College of Law, for figuring out how to search CourtLink for Section 2 cases (no easy task, it turns out).

    These are only cases for which the plaintiff, in filing the complaint, indicated the cause of action as Section 2 of the Sherman Act in the court’s cover sheet. Apart from deleting a few cases in which DOJ was the plaintiff, and a few cases in which the case was filed by mistake (e.g., the case name reads: “error”), I did not examine these cases at all, other than to note that many of the defendants look plausible (e.g., Microsoft comes up a lot in the late 1990s or early 2000s).

    Finally, I counted only unique defendants in any given year. So for example, if there were ten cases filed against Microsoft in 2000, I counted that as only one case. The reason is that multiple consumers or competitors might be harmed by a single piece of anticompetitive conduct undertaken by a monopolist, and so one would expect multiple plaintiffs to sue the monopolist based on the same conduct. For those interested in using case counts to measure enforcement, all of those cases signal the same thing, that a particular anticompetitive practice has been challenged, and so all of the cases together really only represent a single instance of enforcement. I did not, however, check each complaint to make sure that the alleged conduct was the same across all complaints. I just assumed that multiple complaints filed in a given year against a single defendant relate to the same conduct. (I did not, however, count unique defendants across plaintiff types: the Justice Department case against Microsoft was counted toward DOJ cases and and any private cases filed against Microsoft in the same year count as a an additional single case in the private cases account.)

    According to CourtLink, some federal courts adopted online filing later than others, and CourtLink only has electronic dockets. I chose to use 1997 as the start year for this count, because by that year almost all jurisdictions were online and so presumably their dockets are part of the CourtLink database. According to CourtLink, several jurisdictions had not yet moved online by that year, however, and so the counts may be slightly skewed low in the first few years after 1997 because they miss cases filed in the jurisdictions that were still offline during that period. The jurisdictions that went online after January 1, 1997, and the year in which they went online, are District of New Mexico (1998), District of Nevada (1999), and District of Alaska (2004).

    The source of the data for the years 1974 to 1983 is Table 6 in this article. That table gives the yearly percentage of refusal to deal and predatory pricing cases in a sample of 2,357 cases from five courts, Southern District of New York, Northern District of Illinois, Northern District of California, Western District of Missouri, and Northern District of Georgia, as well as the total number of private antitrust cases filed per year. Because I suspect that my CourtLink data represents “pure” Section 2 cases–cases in which the Section 2 claim is the principal claim in the case–I adjusted these percentages using information from Table 1 in the paper about the share of those percentages that represent primary claims. Because the total yearly private cases given in the Article did not appear to be adjusted for multiple cases filed against the same defendant in a given year, as I adjusted the CourtLink data, I therefore further reduced the results in the same proportion as my CourtLink results were reduced when I eliminated multiple cases against the same defendant, a reduction of about 40%.
  • I collected the FTC data by searching for cases labeled “Single-Firm Conduct” in the FTC’s “cases and proceedings” database. The cases and proceedings database goes back to 1996, and so I labeled years for which there were no hits as years of zero cases going back to 1996. However, the FTC website does caution that some older cases are searchable only by name and year, and presumably not by case type, so it is possible that this data fails to count cases from early in the period (e.g., late 1990s). I also paged through the “Annual Antitrust Enforcement Activities Reports” issued by the FTC between 1996 and 2008 and found a couple of cases not returned by the search of the cases and proceedings database. Finally, I included the FTC’s case against Intel, filed in 2009. I counted both administrative complaints filed in the FTC’s own internal adjudication system and complaints filed by the FTC in federal court. The FTC cases are nominally brought under Section 5 of the FTC Act, through which the FTC enforces Section 2 of the Sherman Act.
Categories
Antitrust Monopolization

The Smallness of the Bigness Problem

The tendency to ascribe the problem of inequality that ails us to the bigness of firms is the great embarrassment of contemporary American progressivism. The notion that the solution to poverty is cartels for small business and the hammer for big business is so pre-modern, so mercantilist, that one wonders what poverty of intellect could have led American progressives into it.

Indeed, the contemporary progressive’s shame is all the greater because the original American progressives a century ago, whose name the contemporary progressive so freely appropriates, did not make the same mistake. The original progressives were more modern than progressives today, perhaps because the pre-modern age was not quite so distant from them. Robert Hale, the greatest lawyer-economist of the period, wrote that

[e]ven the classical economists realized . . . competition would not keep the price at a level with the cost of all the output, but would result in a price equal to the cost of the marginal portion of the output. Those who produce at lower costs because they own superior [capital] would reap a differential advantage which Ricardo, in his well-known analysis, designated “economic rent.”

Robert L. Hale, Freedom Through Law: Public Control of Private Governing Power 25-26 (1952).

I suspect that this is absolute Greek to the contemporary progressive. I will kindly explain it below.

But first, it should be noted that the American progressive’s failure to appreciate the smallness of the bigness problem is not shared by Piketty, whom American progressives celebrate without actually reading:

Yet pure and perfect competition cannot alter the inequality r > g, which is not the consequence of any market “imperfection.”

Thomas Piketty, Capital in the Twenty-First Century 573 (Arthur Goldhammer trans., 2017). (Italics mine.)

What does Piketty mean here?

He means what Hale meant, which is that the heart of inequality does not come from monopolists charging supracompetitive prices, however obnoxious we may feel that to be, but rather from the fact that the rich own assets that are more productive than the assets owned by the poor, and so they profit more than the poor even at efficient, competitive prices.

In other words, the rich get richer because their costs are lower and their costs are lower because they own all the best stuff.

No matter how competitive the market, prices will never be driven down to the lower costs faced by the rich, because other people own less-productive assets than do the rich and competition drives prices down to the level of the higher costs associated with producing things with less-productive assets.

(Why can’t price just keep going down, and simply drive the more expensive producers out of the market to the end of dissipating the profits of the less expensive producers? Because there is always a less expensive producer! Price can therefore never dissipate the profits of them all, and anyway demand puts a floor on price: consumers are always bidding prices up until supply satisfies demand.)

Graphically, American progressives have been sweating the “monopoly profit” box without seeming to realize that it’s tiny compared to what remains once you eliminate it, which is the “economic rent” box.

Picketty, the original American progressives, and kindergartners know the difference between big and small. Why don’t we?

Categories
Antitrust

Conspiracy or Incompetence?

Let’s get this straight. The New York Times criticizes The Epoch Times today for running infomercials attacking the Chinese Communist Party’s handling of the coronavirus pandemic while making “no mention of The Epoch Times’s ties to Falun Gong, or its two-decade-long campaign against Chinese communism.”

But last week the Times ran a long piece, titled “Big Tech’s Professional Opponents Strike at Google,” that purported to reveal to readers the forces behind the Google antitrust suit while making no mention of the campaign of the News Media Alliance, of which the Times is a member, for antitrust action against Google, or the threat posed by Google to the Times’ advertising business.

Since the Times seems to think poor little Epoch Times should be disclosing its death struggle with the CCP to readers, I would like to see the Times start disclosing, in each article it writes about Big Tech, its death struggle with those companies over advertising revenues. The paper can also slap a correction to the same effect on each of the hundreds of pieces it has published over the past three years trashing its tech adversaries.

Ben Smith, who knows better, contributed to the Epoch Times piece. Let’s see him show some courage in his next column about media and tech.

So which is it? Maybe both.

Categories
Antitrust Regulation

Antitrust as Price Regulation by Least Efficient Means

Any company that has $100 billion in cash and marketable securities on its books, as Apple does, is charging excessive prices for its products, in the sense of prices higher than necessary to make everyone at Apple ready, willing, and able to continue to do the excellent job that they are doing.

Is that a problem? Unfortunately, yes, for any society that’s supposed to be a thing of the people. It means that Apple is bilking the public: taking more from the people for their iPhones and Macbooks than is strictly necessary to give Apple an incentive to produce iPhones and Macbooks.

You don’t need the money to reward investors. Otherwise you would have paid the money out already.

You don’t need the money to build more factories. Otherwise you would have built the factories already.

You don’t need the money to pay Tim Cook. Otherwise you would have upped his compensation already.

And with an AA+ credit rating, you don’t need the money for an emergency either, since it would cost you almost nothing to borrow cash in a pinch.

You just don’t need those billions, which is why they are what economists call “rents:” earnings in excess of what would be necessary to make the company, and all those who contribute to its success, ready, willing, and able to carry on.

Should government do something about these rents?

Yes. But not with the antitrust laws. Because Apple’s rents are not monopoly rents. Those are the excessive returns that come from making your products stand out by trashing your competitors’ products, rather than improving your own. Antitrust prohibits that sort of behavior.

But does anyone think Apple achieved the ability to charge $1,200 for an iPhone by making Samsung products worse?

Of course not.

Which is why there is no antitrust case against Apple.

Instead, Apple’s rents are Schumpeterian: excessive returns that come from making your products stand out by improving them, rather than by trashing the products of competitors. Antitrust does not prohibit such conduct.

Nor should it, because antitrust is a slayer, breaking up the firms that run afoul of its rules, saddling them with behavioral injunctions, and taxing them with trebled damages.

Those remedies make sense when the target is a firm that has gotten ahead by trashing competitors. That sort of firm doesn’t have a better product to offer, so smashing it is no great loss to society.

That’s not true for firms like Apple that have gotten ahead by being better. Smash Apple and you might well get Apple’s prices down. But you might also end up with poorer-quality products.

Why is it that Samsung keeps churning out gimmicky phones that are just a bit too ahead of their time to work properly, whereas, iteration after iteration, Apple phones continue to please?

Who knows?

By the same token, who knows whether Apple divided two ways, three ways or four ways will still have the same old magic? Organizations are mysterious things and we should break them only when they are already broken.

That doesn’t mean that something shouldn’t be done about Apple’s prices. As is so often the case, the right approach is the most direct: tell Apple to lower them.

There’s nothing novel about doing that. It’s the way America often has dealt with high-tech firms that get carried away with their own success. It happened with the landline telephone: the states regulated telephone rates for a century, and many retain the statutory authority to do so today. No vast cultural leap would be required to regulate the prices of iPhones or other Apple products.

Regulating prices runs much less of a risk of killing the golden goose, because it’s a scalpel to antitrust’s hammer, ordering prices down without smashing the firms that charge them.

But are prices really all that Apple’s antitrust adversaries care about? I think so.

The antitrust complaint brought by Fortnite-videogame-maker Epic is admirably transparent on this score, inveighing against what it calls Apple’s “30% tax” on paid App Store apps.

True, Epic spends a lot of time arguing that Apple should stop vetting the apps that can be installed on iPhones and should also stop requiring apps to accept payments via Apple’s own systems.

But it’s hard to believe Epic really cares whether consumers can run any app they want on the iPhone, or whether consumers can make in-app purchases with Paypal instead of Apple Pay.

The real reason Epic targets app vetting and payment systems lockdown is more likely because these two Apple policies prevent Epic from doing an end run around Apple’s 30% fee by connecting directly with users.

So to use antitrust to attack Apple’s prices, Epic ends up trying to thrust a stake through the streamlined, curated environment that iPhone users love. Needless to say, we know what a platform on which you can install anything and pay in any manner looks like: it’s called the PC, that bug-ridden, bloatware-filled, hackable free-for-all from which Apple users have been running screaming for decades now.

The beauty of price regulation is that you don’t need to redesign products to get what you want. Under price regulation, Apple would be able to continue to vet apps and manage payments, and thereby maintain the experience its customers love. All the company would need to do is lower its prices.

Epic isn’t the only organization out to exploit the antitrust laws for the sake of a bit of price regulation by least efficient means. Today’s Neo Brandeisians seem to share this goal.

That is the substance of an extraordinary piece by two affiliates of the Open Markets Institute that calls for using antitrust to smash big firms, but allowing small firms to form price-fixing cartels. The idea is to redistribute wealth by reducing the prices big firms can charge and increasing the prices that the little guy can charge.

That sounds great. But why not just regulate prices directly instead of smashing the country’s patrimony to get there?

Indeed, I’m mystified by the contempt in which this supposedly-radical movement seems to hold price regulation. The movement is all for returning to antitrust’s New Deal heyday. But it has nary a word to spare for price regulation, which was a much bigger part of the New Deal and the mid-century economic settlement that followed it, during which fully 25% of the American economy by GDP was price regulated.

One wonders whether the Neo Brandeisians share the Chicago School’s old concerns about “capture.” Something tells me they might.

Nevermind that we learned long ago that the notion that administrative agencies are captured by those they regulate is too simple by half.

And no one has been able to explain to me why the judges who apply the antitrust laws are any less susceptible to capture than are government price regulators.

But I do know that most Americans don’t seem to know that their gas, electricity, and insurance rates are regulated by government agencies, which says a lot about whether price regulation is the supreme evil that antitrusters of all stripes make it out to be.

The Neo Brandeisians’ mania for competition is really just run-of-the-mill American anti-statism, with a bit of progressive polish. Consider another example of intemperate fervor for competition, one that differs from the Neo Brandeisians’ campaign against big tech only in lacking that campaign’s radical pretensions: The Hatch-Waxman Act.

Rather than follow the rest of the world in regulating prescription drug prices directly, the United States has chosen to use competition from generic drugs to drive down drug prices after patents expire. The Hatch-Waxman Act of 1984 was meant to kickstart the plan by streamlining the generic drug approval process.

It’s important to understand how ridiculous using competition to reduce off-patent drug prices really is. Far and away the greatest virtue of competition is that it leads to innovation: firms must make better products or lose out to competitors.

But when it comes to generic drugs, competition cannot lead to innovation, because generic drugs are by definition copies of old drugs!

If a generic drug company were to innovate in order to get ahead of its competitors, its product would need to go through full-blown clinical trials in order to receive FDA approval and would also likely receive patent protection, instantaneously removing it from the competitive generic drug market and driving up its price. So the innovation rationale for competition just doesn’t exist in the context of generics.

But we decided to promote competition anyway, purely for the purpose of reducing off-patent drug prices.

It kind of worked.

Prices for many off-patent drugs fell. But not for all off-patent drugs. As scandals involving Daraprim (of pharma bro fame) and the Epipen show (the latter in the device context), it turned out that competition does not always come to the rescue once patents expire and regulatory hurdles are lowered.

More importantly, the cost of maintaining the system turned out to be immense. Firms responded by finding ways to prevent their drugs from going off-patent, leading to interminable patent and antitrust litigation. Just google “reverse payment patent settlements”–one of the mechanisms used by drug makers to undermine competition–and behold the flood of ink spilt on this avoidable disaster.

Worse, we have learned in recent years that generic drug quality is actually pretty terrible, even dangerous: competition is killing the golden goose.

Not, in this case, because Hatch-Waxman led to the break-up of big firms, but because when competition is just about getting prices down, firms will skimp on production costs. Ruinously low prices are, incidentally, supposed to be another of the great problems with price regulation–that regulators will dictate prices that are too low to cover costs–but it turns out that competition is at least as good at undershooting.

So what we could have gotten from a rate regulator in four little words–“lower your damn prices”–Hatch-Waxman accomplished in a patchwork way, at the cost of interminable litigation and sketchy pills.

Which leads me to ask: can Congress please do something about Apple’s $100 billion cash pile? How about putting aside $25 billion (just to make sure Apple has a nice cushion against shocks), and then rebating the other $75 billion to everyone who has ever bought an Apple product, pro rata? You can be sure Apple knows who they are.

And while Congress is at it, they can take a look at Microsoft and Alphabet, too.

For $100 billion is not actually the largest hoard in Silicon Valley.

Categories
Antitrust Monopolization

The Original and Purest Form of Anticompetitive Conduct

Still in those early days trade depended not upon the quality of the goods but upon the military force to control the markets. The Dutch consequently valued the island chiefly on account of its strategical position. From Formosa the Spanish commerce between Manila and China, and the Portuguese commerce between Macau and Japan could by constant attacks be made so precarious that much of it would be thrown into the hands of the Dutch, while the latter’s dealings with China and Japan would be subject to no interruptions.

James W. Davidson, The Island of Formosa, Past and Present (1903).

Here Davidson nicely contrasts monopolies based on product quality with monopolies based on force, capitalism with mercantilism. I do not think it is too much to say that democracy, or at least a genuine republicanism, even if autocratic in administration, is the principal bulwark between the two, and that antitrust, when used properly, is meant to round off any remaining mercantilist edges.

When used improperly, antitrust is of course a gunboat all of its own.

Categories
Antitrust

Forbidden Fruit

As if to remind those who might still be confused about what the antitrust movement against the tech giants is really about, newspapers are now making common cause with app developers to force Apple to delay new privacy protections that would have allowed app users to opt out of targeted advertising.

That’s right, the same newspapers that have been savaging the tech giants for years as evil privacy foes are fighting to stop Apple from making it harder for app developers to exploit your data.

Why? Because newspapers make money from advertising, of course. They’re the app developers who want to continue to spy on you.

In this light, it’s hard not to see the calls for antitrust action that newspapers have been slinging at the tech giants as coming from the emptiness of their pocketbooks rather than the goodness of their hearts. It is the hackneyed tale of yesterday’s technology trying to use politics–and the antitrust laws–instead of excellence to survive in the market.

Readers think newspapers are in the news business; actually, their business is selling ads. But Google and Facebook do that better, because, as the Times recently noted in relation to Google parent Alphabet:

consumers interact with the company nearly every time they search for information, watch a video, hail a ride, order delivery in an app or see an ad online. Alphabet then improves its products based on the information it gleans from every user interaction, making its technology even more dominant.

Katie Benner & Cecilia Kang, Justice Dept. Plans to File Antitrust Charges Against Google in Coming Week, N.Y. Times, Sept. 3, 2020.

The result has been a catastrophic decline in newspaper revenues.

Rather than do what they should have done all along, which is cut the cord with advertising and build their business around a more wholesome revenue stream–one that doesn’t involve trying to manipulate their readers into buying products they don’t really want to buy–or seek public funding à la the BBC for what is after all a sacred public function, the media industry has appeared to engage in a campaign to scare the tech giants into giving media a share of their advertising revenues.

The “tech-lash” of the past decade? That looks an awful lot like a message from media to big tech: pay up, or we’ll wreck your reputation. Wasn’t that driven instead by concerns about privacy? The media’s opposition to Apple’s privacy safeguards today gives us the answer: not so much.

The drumbeat of articles about the courageous antitrust scholars daring to take on big tech (few of whom actually are antitrust scholars)? That looks an awful lot like a message from media to big tech too: pay up, or we’ll get the law to break you into pieces. Wasn’t that driven instead by concern that there’s too much concentration in America? The News Media Alliance’s multi-year campaign for an antitrust exemption that would allow newspapers to cartelize gives us the same answer: not so much.

The House antitrust investigation into big tech, led by a congressman who has been doing the bidding of the News Media Alliance? That too looks an awful lot like a message.

Oh, and before I forget, that fawning story in the Times about Tim Sweeney, CEO of Epic games, the scrappy maker of Fortnite that is leading an antitrust “crusade” against Apple in search of lower fees? Funny how it doesn’t mention that much of the media industry, including the Times, is publicly supporting Epic, and demanding lower fees for their apps too.

If the pen is mightier than the sword, it is perforce mightier than the microchip. The tech giants have already started to open their pocketbooks. It will be interesting to see how badly they cave.

Of course, there are limits to the amount of sympathy one can feel for Google or Facebook. Those companies may be better at what they do than newspapers, but they are better at doing something antisocial: the spying and manipulation that constitute modern commercial advertising. The newspapers’ fight to get cut in on the spoils is ugly, but one set of rogues deserves another.

Apple is different. The company makes most of its money selling products that genuinely make life easier. And as the company has not tired of reminding us, the fact that its business is not mainly advertising means that its interests are more closely aligned with those of consumers when it comes to privacy than are the interests of any other player in this fight.

Which is why the newspapers’ attacks on Apple are a new low.

For a time, not competing with newspapers for advertising seemed to buy Apple some safety from the media’s antitrust crusade. But when the antitrust shakedown seems to be working against companies that wiped out your old-economy advertising business, why not extend it to one that wants to put the screws on your new-economy advertising business, and see if you can extract lower app store fees while you are at it?

Today’s antitrust movement against big tech may be many things to many people, but one thing it’s not is a progressive movement, even if some of its proponents delight in wrapping themselves in the progressive banner.

That should have been obvious to anyone watching the movement attract Trump Administration backing in assaulting what are probably the most progressive corporations ever. (It’s not normal for corporate employees to block management from accepting lucrative military contracts, and then not get fired.)

But at least now it is completely clear. For “when they tasted of the apple their shame was manifest.”

Categories
Antitrust

You Furnish the Briefs

No court has ever, in 130 years of antitrust practice in the United States, taken the position that dominance in and of itself, absent bad conduct, is illegal. But if you were a reader of The New York Times, you could be forgiven for thinking that as a matter of American law big is bad:

Alphabet was an obvious antitrust target. Through YouTube, Google search, Google Maps and a suite of online advertising products, consumers interact with the company nearly every time they search for information, watch a video, hail a ride, order delivery in an app or see an ad online. Alphabet then improves its products based on the information it gleans from every user interaction, making its technology even more dominant.

Katie Benner & Cecilia Kang, Justice Dept. Plans to File Antitrust Charges Against Google in Coming Week, N.Y. Times, Sept. 3, 2020.

Google is an obvious target for the Times, of course, because Google has eaten its lunch in the competition for advertising dollars. But it’s not an obvious target for anyone who knows something about antitrust, which isn’t in the business of smashing firms that win by being better.

But The New York Journal got its war by whipping Americans into a frenzy against an enemy of its choice. Why shouldn’t The New York Times get its antitrust case against Google?

Unlike in 1898, however, the only Americans who have actually been whipped into a frenzy are the elites: surveys show that Americans still love Google and the other tech giants, at least when they’re not being asked leading questions like: should the government “break up tech companies if they control too much of the economy?” (Actually, the best thing about the surveys is that the tech company Americans like least is the one that elites probably like most: Twitter.)

I suppose that it’s only the elites who matter, however, even those who might pretend not to read the Times. AG Barr is so intent on rushing out a case against Google, presumably because he’s been blinkered into thinking it will clinch a win in November for President Trump, that his line attorneys are in open revolt:

Justice Department officials told lawyers involved in the antitrust inquiry into Alphabet . . . to wrap up their work by the end of September[.] Most of the 40-odd lawyers who had been working on the investigation opposed the deadline. Some said they would not sign the complaint, and several of them left the case this summer.

Katie Benner & Cecilia Kang, Justice Dept. Plans to File Antitrust Charges Against Google in Coming Week, N.Y. Times, Sept. 3, 2020.

As PBS tells it: “Remington, who had been sent to Cuba to cover the insurrection, cabled to Hearst that there was no war to cover.” Hearst replied: “You furnish the pictures. I’ll furnish the war.”

Categories
Antitrust Monopolization Regulation

Antitrust’s Robocall Paradox

Today’s antitrust movement loves to point to the breakup of AT&T as an example of what antitrust enforcers can do when they put their minds to it. The only problem is that the breakup of AT&T was a disaster, and The Wall Street Journal has kindly provided a new example of that today: robocalls.

The breakup of AT&T was a politically-motivated hit, a Nixon-originated project that became the only monopolization case carried through to a conclusion by a Reagan Justice Department that otherwise wanted nothing else to do with antitrust. The target was widely recognized as the standard bearer of progressive managerialism and a leader in progressive labor practices. (Remind you of some other firms that have found themselves in the cross-hairs of an otherwise do-nothing Antitrust Division today?)

The country has little to show for the breakup forty years later. It didn’t eliminate the fundamental bottleneck associated with telephony: the massive last-mile infrastructure required to get calls into consumers’ handsets. That infrastructure is today mostly owned by just three firms, the new AT&T, Verizon, and T-Mobile, because it exhibits great economies of scale.

While the breakup did bring down long-distance rates, that’s a bug, not a feature. The only reason the old AT&T charged high long-distance rates was because the company was engaged in progressive redistribution of wealth, scalping businesses and well-off long-distance powerusers to the end of providing dirt-cheap local phone access and “universal service” to the masses.

Any economist who knows his Ramsey prices will tell you that’s not the most profitable way to set your rates, because long-distance calling is a luxury, but basic phone access is a necessity (911, anyone?). To get the most profit out of the public, you want to charge high prices for the necessity–because people will pay those prices whatever they may be–and low prices for the luxury. The trouble with that from the perspective of distributive justice is that it’s a regressive rate structure: charging the masses high prices and elites low prices.

Which is just what happened after the breakup of Ma Bell.

The court and later Congress forced the Baby Bells that owned the last-mile infrastructure to connect long-distance carriers’ calls, enabling massive entry into the long-distance market and driving down long-distance rates. But consumers don’t just pay for long distance, they also must pay for basic call connection that allows long-distance calls to reach consumers’ handsets.

The price of that went up, for everyone, not just long-distance callers, because the last mile remained a bottleneck, an infrastructure so expensive that few firms can survive in the market. Which is why the Baby Bells, which controlled that infrastructure, never went away.

Liberated from a dominating headquarters weaned on a New Deal politics that demanded the sacrifice of profits in favor of progressive pricing, the Baby Bells now charged whatever they wanted. At last they could enjoy whatever cream they might be able to skim from a public that needs phone service and has nowhere to go. The fact that they dominated regional markets, but not long-distance, gave them the political cover that hulking monopoly Ma Bell never had.

Free to grow fat, they matured into the tri-opoly we have today, one that has distinguished itself in its adherence to the maxim that the greatest reward of monopoly is a quiet life by supplying America with slower mobile internet service than almost any country in the developed world.

But at least we got competition in long distance, right? Now anyone with $10,000 in working capital and a closet to store some routers can be a long-distance provider. Isn’t that a win for local self-reliance?

More like a win for fraud and robocallers, according to the Journal, in a story about the “dozens of little-known carriers that serve as key conduits in America’s telecom system,” connecting robocalls that “in total bilked U.S. consumers out of at least $38 million in 2019.”

The Journal treads lightly here–after all it’s got as much to gain as any newspaper from the current antitrust campaign against the tech giants that have out-competed the paper for advertising revenue in recent years–but it’s hard to disguise the culprit:

These small carriers took hold in the decades following the 1984 breakup of AT&T’s phone system monopoly, which was designed to lower the costs of long-distance calls. They mushroomed during the introduction of internet-based calling services in the 2000s.

The emergence of these small phone companies was in many ways a positive development for consumers who now pay less for long-distance calls. The downside is that the system wasn’t designed to discern between legitimate and illegitimate calls, which are sometimes mixed together as they are passed along. U.S. regulators generally didn’t require these carriers to block calls and in some cases forbade them from doing so as a way of limiting anticompetitive behavior. Some telecommunications experts say that opened the door for smaller carriers to hustle business from robocallers, or simply turn a blind eye to suspect traffic.

Ryan Tracy & Sarah Krause, Where Robocalls Hide: the House Next Door, Wall Street Journal, August 15, 2020.

Would there have been robocalls if we still had Ma Bell? Unlikely for a company that was so obsessed with control over its network that it famously stamped “BELL SYSTEM PROPERTY – NOT FOR SALE” on every handset in America.

(I do have to admit, however, that another communications monopoly still with us today provides something of a counterexample. The largest category of mail delivered by the U.S. Postal Service is advertising.)

Categories
Antitrust Civilization Monopolization Paradise Lost World

Permian-Triassic Extinction Event Antitrust

The Great Dying deconcentrated markets:

The complexity of an ecosystem can be estimated by the relative number of species: if a handful of species dominate, and the rest carve out a marginal existence, then the ecosystem is said to be simple. But if large numbers of species coexist together in similar numbers, then the ecosystem is far more complex, with a much wider web of interactions between species. By totting up the number of species living together at any one time in the fossil record, it’s possible to come up with an “index” of complexity, and the results are somewhat surprising. Rather than a gradual accrual of complexity over time, it seems that there was a sudden gearshift after the great Permian extinction. Before the extinction, for some 300 million years, marine ecosystems had been split roughly fifty-fifty between the simple and complex; afterwards, complex systems outweighed simple ones by three to one, a stable and persistent change that has lasted another 250 million years to this day. So rather than gradual change there was a sudden switch. Why?

According to paleontologist Peter Wagner, at the Field Museum of Natural History in Chicago, the answer is the spread of motile organisms. The shift took the oceans from a world that was largely anchored to the spot — lamp-shells, sea lilies, and so on, filtering food for meager low-energy living — to a new, more active world, dominated by animals that move around, even if as inchingly as snails, urchins and crabs. Plenty of animals moved around before the extinction, of course, but only afterwards did they become dominant. Why this gearshift took place after the Permian mass extinction is unknown, but might perhaps relate to the greater “buffering” against the world that comes with a motile lifestyle. If you move around, you often encounter rapidly changing environments, and so you need greater physical resilience. So it could be that the more motile animals had an edge in surviving the drastic environmental changes that accompanied the apocalypse . . . . The doomed filter feeders had nothing to cushion them against the blow.

Nick Lane, Life Ascending: The Ten Great Inventions of Evolution 145-46 (2009).

There is much food for antitrust thought in evolutionary history if you think of firms as representing methods of extracting value from the consumer environment. That makes them like species, all the members of which tend to use the same methods of extracting value from the natural environment. One species of bird uses long bills to get worms. Another uses short bills. And so on.

The Advantage of Incumbency

The Great Dying teaches a number of lessons. First, like the Cretaceous–Paleogene extinction event about which I have written before, it suggests the advantages of incumbency. The fact that less motile organisms have not reattained their former dominant position in the 250 million years of relative competition that has prevailed since the Great Dying tells you that less motile organisms were not particularly competitive relative to motile organisms. And yet for the 300 million years until the Great Dying they dominated, despite the parallel existence of more motile organisms. Why? Perhaps simply because they evolved first.

Industrial organization economists have long warned about these “first-mover advantages,” but the antitrust laws ignore them. The “conduct requirement” in antitrust holds that simply being dominant is not an offense in itself. There are plenty of good reasons for that rule, because it’s easy to use it to punish justified market success. But one bad reason to support the rule is that the dominant firm is always the better firm. If the history of the Great Dying is any guide, incumbency does sometimes protect uncompetitive firms.

Competition’s Good Side or The Virtue of Theft

The Great Dying’s second lesson for antitrust has to do with motility, for motility means, at least in part, predation and theft. Creatures that move can seek out new environments not yet colonized by stationary organisms feeding off minerals or sunlight. But one of the major things that motile organisms also do is to predate. Motility lets you range across the environment eating the organisms that have done the hard work for you of generating energy from light and inanimate matter.

We think of theft as being a problem in the law. We like to say that theft reduces incentives for innovation and economic growth because it means that innovators can’t fully reap the fruits of their productive labors. The plant that has a leaf torn off by some vicious armored predator has done the environmentally-friendly work of converting light to energy without so much as emitting a single carbon atom, and yet here the fruits of its labors have been stolen from it. Fortunately, we say, in the business context the law is there to stop such theft.

But the fact that the flourishing of motility after the Great Dying was correlated with an increase in ecosystem complexity—a reduction in species dominance—suggests that theft is not necessarily bad, at least if deconcentration of markets is your thing.

This is a familiar point, approached from a different angle. Industrial organization scholars have long pointed out that the strength of intellectual property protection matters. Make the patent term too lengthy and innovation will fall below optimal levels, because inventors won’t be able to build on prior art to create the next generation of inventions. It follows that if patent rights are too strong, then theft of intellectual property could actually lead to more innovation, and richer and more complex markets. Similarly, when a monopolist ties up a source of supply and uses it to suffocate competitors, theft would bring more competition to the market.

Antitrust recognizes the importance of theft for competition, although antitrust—probably wisely—doesn’t say so in quite such stark terms.

Every time antitrust enforcers order a dominant firm to supply an essential input to competitors—and antitrust does do that occasionally, even in the United States—antitrust is, objectively speaking, revising a property right. Which is to say: authorizing disadvantaged firms to steal from the dominant firm.

The nice thing is that when you’re the law you get to define the boundaries of the law, so you can plausibly say it’s not theft that you’re authorizing, but rather that the dominant firm’s ownership rights over the essential input never actually included the right to deny the input to competitors.

Regardless how it’s characterized, antitrust’s forced dealing remedy does allow other firms to take the fruits of the defendant’s labors, and for a price that must be less than their value, otherwise the taking would provide no competitive succor to the beneficiaries. That’s legalized predation in the biological sense. The aftermath of the Great Dying suggests that it’s probably justified, at least if the goal is to deconcentrate markets.

Competition’s Bad Side or The Horror of Predation

But at the same time, one must proceed with caution in celebrating the complexification of ecosystems that followed the Great Dying, because complexity and competition are not ends in themselves.

There’s a reason for which biologists also refer to the great age before any predators had evolved, the Ediacaran period, as the “Garden of the Ediacara.” We can view the rise of motility and predation, and the demise of filter feeder dominance after the Great Dying, as leading to a golden age of competition and complexity. It’s the golden age we live in today (or lived in until we started wiping out large parts of it starting with the end of the last ice age).

Or we can view the rise of motility and predation as destroying a peaceful Eden in which life competed principally on the virtuous project of converting the inanimate into the animate, of extracting energy from the physical environment, rather than from other living things.

From this perspective, if over the first 300 million years of the existence of complex life evolution tended to hit a wall, and for eons life did not get much better at converting the inanimate to the animate, then that says something about the limits of biology. It does not tell us that the motility, predation, and theft that followed represented an improvement.

From this perspective, the rise of motility and predation was instead a symptom of evolution’s defeat. When life could no longer advance by getting better at converting inanimate matter to animate matter, it turned on itself, leading to the hell of predator-prey competition that has characterized the past 250 million years. If only there had been a world government in the Ediacaran capable of enforcing the basic rules of criminal and property law!

Life would have stayed happy.

In general, the antitrust laws today are much more sympathetic to this dark view of predation than to the other. Antitrust enforcers for the most part shy away from revising property rights. And the legal system as a whole, of which antitrust is just a part, gives great priority to property. The natural world is, of course, the state of nature. And if there is one thing that separates civilization from the state of nature, it’s the concept of property, the notion that theft is to be curtailed, and that evolution within civilization is to take place along the old Ediacaran lines, with each attempting to better himself other than at the expense of others.

Over its first 300 million years, complex life does seem to have hit a wall in bettering itself through virtuous, non-predatory competition, at least so far as the biochemistry of energy production out of inanimate matter is concerned. Our inability to generate energy other than by burning fossil fuels shows that for all our own ingenuity we humans haven’t managed to outdo nature either. We live off the productive labors of other creatures, including both living plants and those dead so long as to have been ground into oil. That makes us, and the horror we have meant for the planet, the logical extreme end of the triumph of motility and predation after the Great Dying.

But the fact that civilization’s vision, honored however often in the breach, is fundamentally Ediacaran, suggests to me that there is hope. Climate disaster is effectively forcing us to extend the property laws we enforce within civilization to the life outside of it. With luck, the virtuous, non-predatory competition that results will help us achieve the breakthrough that life could not, and allow us to advance into new methods for generating energy from the inanimate.

Categories
Antitrust Monopolization Regulation

Wherein Henderson and Kaplan Confuse Value and Cost

Or Why We Need More Inframarginalism

Todd Henderson and Steven Kaplan commit one of the more basic economic mistakes I have encountered, one all the more embarrassing because they are Chicago lawyers and economists.

They write that the private equity industry should not be judged based on its low returns net of fees because “[w]hile this is the appropriate metric for the decision about whether an individual should invest, what matters for society is how much wealth they create above the next-best alternative.” If you don’t net out the fees, they argue, then private equity shows large returns, and those returns reflect the creation of social value.

What Henderson and Kaplan have done here, in case you missed it just now, is to argue that an industry is productive by redefining a cost—and not just any cost, but that sacredest of sacreds, the fund fee—as social value.

But if they really mean to do that, which I doubt, then they’re actually making the case that private equity earns excess—read unnecessary—profits. Profits that represent a redistribution of wealth from consumers to private equity firms.

Unfortunately, Costs Are Costs

Let’s say that you decide to build a fence, but you’re terrible at it. You nail in all the slats askew and some of them fall off on the way to market. The cost to you was $50 in materials and $30 in labor, judged by the wage in your next best alternative line of employment.

Because your fence is a disaster, however, you are only able to sell the thing for $70, resulting in a loss of $10. Economics teaches that your fence business is a waste of economic resources. You expended $80 in combined value of resources to generate a product that created only $70 of value for consumers.

But Henderson and Kaplan say no. You have created $20 in value, the difference between the price of $70 paid by consumers and your materials costs of $50, because, well, if we ignore your $30 in labor costs, then you did!

What they don’t seem to realize is that the only way you can actually make that $30 in labor costs evaporate is if you don’t actually have an opportunity cost there for your labor; no one would have paid you a dime at any alternative employment. But if that’s true, and your costs really are just $50, then you didn’t need to charge $70 for the fence in order to have an incentive to build it. You just needed to charge $50, and so your $20 in profits are pure and unnecessary appropriation of surplus.

Which means that Henderson and Kaplan are inadvertently arguing that private equity is overpaid.

The Distinction between Value and Cost

But I really don’t think that’s what Henderson and Kaplan mean to argue. I think they are just confused about the relationship between value and cost, a confusion that is, alas, all too common in debates regarding law and economics, as I outline in a recent law review article.

The distinction between value and cost turns in fact on another distinction, that between utility and value.

The fence, even a badly constructed fence, has some utility for consumers, and that utility is measured by the maximum price that consumers are willing to pay for the fence: $70. In trying to avoid netting out costs and focusing instead on gross magnitudes, Henderson and Kaplan seem to be trying to say that utility and social value are one and the same.

But that $70 doesn’t represent value for society, because it does not account for the costs—the disutility—associated with generating it. If society must give up $80 in order to make a $70 fence, then society loses. Utility and social value just aren’t the same thing, as any careful undergraduate economics student should know.

To figure out how much value a business creates, you have to compare the utility the firm generates for those who use its products with the disutility—the costs!—the firm must create in order to produce those products. That is, value is a net quantity, it’s the difference between the maximum that consumers are willing to pay for the product and the cost of producing it. So the social value of private equity isn’t measured just by the gross returns that it generates, but by the returns it brings in net of costs.

All costs.

Fund Fees Are Costs

Including fund fees.

Costs in the economic sense are all harms that must be suffered in order for production to take place. The lost fees associated with not engaging in their next best alternative mode of employment outside of the private equity industry represent a cost, a harm, incurred by private equity funds in pursuing their work of privately acquiring and running firms. The fees that private equity firms charge must therefore be high enough fully to compensate them for this harm, otherwise they would not do private equity.

Henderson and Kaplan simply cannot ignore those fees in calculating the social value of private equity. They measure the harm of opportunities foregone to engage in private equity, the very harm of not sending physicists and engineers into physics and engineering, but instead allocating them to private equity funds, that critics of private equity decry.

If private equity can’t generate a decent return after netting out those costs, then private equity is social waste.

Unless They Represent Redistribution

The only way private equity fees don’t count as costs is if they not only fully compensate private equity firms for not engaging in some other line of business, but go beyond that to provide additional compensation. In which case some portion of the private equity fee can only represent one thing: an appropriation by private equity of the social value that private equity generates.

That is, private equity fees can only be ignored in the calculation of social value, as Henderson and Kaplan argue that they should be, if they represent an appropriation, by the private equity industry, of social value, defined as the value generated by their activities in excess of costs. And because Henderson and Kaplan appear to argue that we can count all private equity fees as social value, they are arguing that all private equity fees represent pure redistribution of social value from consumers to firms.

But precisely because social value is value in excess of cost, defined as the minimum necessary to compensate for all harms, it is value that does not need to be paid to firms in order to induce them to create social value. (Okay, it is necessary to pay private equity a penny more than cost, so that doing private equity makes firms strictly better off than they would be in their next-best alternative employments. Or just a ha’penny. Or a mill. But you get my point.) So what Henderson and Kaplan are arguing, in effect, is that private equity is taking more out of markets than is necessary to induce them to do private equity.

Government could, if Henderson and Kaplan are right, therefore dictate lower private equity fund fees without reducing social value one bit. Which sounds like a great idea to me.

Inframarginalists Don’t Make This Mistake

What really seems to have gotten Henderson and Kaplan into hot water is a lack of attention to the distribution of wealth between buyers and sellers in individual markets, what Michael Guttentag once described to me in conversation as “inframarginalism,” in contrast to the “marginalism” of a microeconomics that focuses on problems of efficiency.

What matters for efficiency-oriented lawyers and economists is that all units of output for which buyers are willing to pay marginal cost actually get produced. Which means that marginalists are interested in the cost-benefit analysis of the marginal unit of production.

Inframarginalists, by contrast, are interested in how the aggregate social value created over all of the other units produced by the firm—the inframarginal units—is distributed between buyers and sellers.

So social value is a bread and butter concept for inframarginalists. If they can’t define it properly—by netting costs out of willingness to pay—they can’t do their work.

And because inframarginalists know where social value begins and ends, they are unlikely to make the same mistake as Henderson and Kaplan.