Capitalisn’t: The Most Important Guidelines You Didn’t Know About
- September 07, 2023
- CBR - Capitalisnt
As companies become increasingly big through mergers and acquisitions—especially in technology, health care, and several other industries—how should rules and regulations change with the times?
The US Department of Justice and Federal Trade Commission recently released an updated set of draft merger guidelines that could reshape the landscape of corporate mergers and acquisitions both in the United States and globally. Stanford’s Susan Athey, chief economist at the DOJ’s antitrust division, joins hosts Bethany McLean and Luigi Zingales to discuss these changes. Why did the DOJ and FTC make them? How will they impact the way companies approach mergers and acquisitions? And what do they mean for consumers, competition, labor, and the broader economy?
Susan Athey: Competition is the value, and the benefits of competition—lower prices, higher quality, long-term innovation—are really what this is all about.
Bethany: I’m Bethany McLean.
Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?
Luigi: And I’m Luigi Zingales.
Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.
Bethany: And this is Capitalisn’t, a podcast about what is working in capitalism.
Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?
Luigi: And, most importantly, what isn’t.
Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.
Luigi: Bethany, did you know that this year is the 250th anniversary of the Boston Tea Party?
Bethany: Well, of course, I knew that. At least I’m going to pretend that I did. But why are you telling me this?
Luigi: You probably learned in school that the Boston Tea Party was a rebellion against taxes. Yet at that time, American revolutionaries viewed it mainly as a fight for liberty from the British East India company’s monopoly. And, actually, the tea that was dumped in the Boston Harbor was the tea from the East India company. Issues of power and monopoly were central to the American Revolution.
Bethany: I appreciate the history lesson, but I still don’t understand why you decided to raise it just right now, when we have to start our episode on the most esoteric topic we’ve ever explored together. I don’t know, listeners might disagree. We’ve done plenty of esoteric topics, but here it is: the Biden administration’s recently issued, new merger guidelines. I think you’d better save your breath to explain to our listeners why we’re torturing them with what seems like an obscure piece of regulation.
Luigi: In fact, this is exactly the reason why I brought up the true nature of the Boston Tea Party. The fight against monopoly is as American as apple pie. In fact, probably more. In this fight, a crucial piece of regulation is the merger guidelines. The Biden administration just released a proposal for the new merger guidelines that promises to be the biggest change in antitrust in the last 50 years.
Bethany: OK. So, the merger guidelines are not obscure at all, or at least they shouldn’t be obscure. But is it really this important? Most people, including me, didn’t even really know about its existence. What makes it so important?
Luigi: Because the antitrust legislation is very vague and has not been that updated since the 1950s. During the last 55 years, a crucial role has been played by the merger guidelines. The guidelines claim that they identify potentially illegal mergers. Now, of course, the key operational word is “potentially.” The final decision on whether a merger is illegal belongs to a judge, and the judge may use guidelines, but she’s not required to use the guidelines to decide whether a merger is illegal. The guidelines are, and here I quote, “designed to help the public, business community practitioners, and courts understand the factors and frameworks that the agencies consider when investigating mergers.”
Bethany: OK. I guess at first glance, this may seem like these guidelines play a small role because after all, the final decision belongs to the judge. So, why do companies care so much about the guidelines? I guess because even if the judge ultimately finds in the company’s favor, no company wants to face a lawsuit over their merger.
And also, because the guidelines have an important announcement effect, right? It’s maybe as if the IRS announced which type of tax returns it’s going to audit. If the IRS announced that it’s very likely to audit the tax returns of people who work from home and take a home-office deduction, most people would stay away from taking the deduction for their home offices. Only a few individuals with very large and very legitimate home-office expenses would claim them. Everybody else would just prefer to absorb them rather than face the cost of an audit. And maybe that’s true of companies as well, that even if the guidelines don’t have a final effect, they have a deterrent effect.
The New York Times actually wrote this about the guidelines, which really struck me. They wrote that the guidelines would “formalize a turn towards stringency and end decades of acquiescence to corporations by both Democratic and Republican administrations.”
The Times went on to write that “this reassertion of an active government role in protecting competition has the potential to deliver significant benefits. Competition keeps pressure on prices. It encourages the development of better and more diverse products and services. It holds open the gates of opportunity, so workers can pursue other jobs or start their own businesses. It helps to ensure that prosperity and political power are broadly distributed.”
This all sounds pretty grand. And, per your point, Luigi, that this is important, Tim Wu, the Columbia Law School professor who served until earlier this year as President Biden’s advisor on technology and competition policy, said this to the New York Times. He said, “In my view, it’s the most important economic-policy thing that the Biden administration will do this year.” I mean, wow.
Luigi: I’m not so sure that’s real praise because you have to compare. What else did he do?
Bethany: Oh, interesting. Yeah, maybe you could argue the bar is low, or this is like the tallest poppy or something along those lines, maybe.
Luigi: But anyway, I think that you got it absolutely right. I think it is like an IRS announce-ment and as such may discourage a lot of people from merging, if this is credible. A lot of the things that you read from the New York Times, they’re going to happen if people take these guidelines seriously and say the regime has shifted, and as a result, it is very dangerous to even try to merge. And because I don’t want to pay the cost of trying, I won’t even start.
Bethany: We wanted to better understand what the guidelines are all about, what effect they might have on M&A activity, and more importantly, what effect they might have on our perennial question, US capitalism.
We are very privileged to have as a guest Susan Athey, who is the Economics of Technology Professor at the Stanford Graduate School of Business. And, currently, she’s the chief economist of the antitrust division of the US Department of Justice. As such, she contributed to writing these new merger guidelines.
Luigi: But before we start talking with Susan, it’s useful to let the listeners know a bit of the history of these guidelines because they were first issued in 1968. At the time, they were influenced by the so-called structural approach. Mergers could simply be judged by the impact they had on concentration, and if they increased concentration above a certain level, mergers were considered illegal.
Bethany: In 1982, the merger guidelines adopted an efficiency test. As long as the merger was producing sufficient efficiency improvements, it would be allowed even if it was increasing prices. The Reagan administration issued these guidelines in 1982, and the guidelines said, “Although they sometimes harm competition, mergers generally play an important role in a free-enterprise economy.”
OK. These merger guidelines continued to evolve after the Reagan administration. What came next?
Luigi: In the late ’90s and particularly in 2010, the merger guidelines decided to evaluate mergers for their impact: immediate effects on prices that the consumers of the merged firms’ goods and services were facing.
Now, know that this criterion ignores the effect of mergers on producers and workers. There is an argument that this led to a dangerous degree of consolidation. This may explain why the United States now has four major airlines, three major cellphone companies, and two dominant makers of coffins.
Luigi: Yeah. Even the market for coffins has been consolidated. You cannot afford to die anymore, and . . .
Bethany: Funny but not funny.
Luigi: Thomas Philippon, who is an economist at New York University, wrote a 2019 book about the decline of competition in the United States and claims that the American economy would be roughly $1 trillion larger if the United States had maintained the level of competition that prevailed in the year 2000.
Bethany: Those facts are from an op-ed the New York Times published, which was pretty favorable about the merger guidelines, I’d say. But other people have been a lot less favorable, I think in part because there’s this age-old worry, which is that more restrictive guidelines will make American industries less competitive. And, I wonder, is that real? Is that part of the big-business lobby? It has always seemed to me this very ironic thing that companies that purport to defend the free market and defend competition are often, actually, doing everything they can to thwart any kind of competition. I’m never sure in all of this what’s lobbying and what’s truth, which I think is why it will be so interesting to talk to Susan.
Luigi: One of the things that we’re struggling to do is to convey to people why this matters because this is kind of an arcane rule that most people probably have never heard of. And so, what I would like to ask you is, imagine for a second that the guidelines are approved as is, and they stay in place for 10 years. How different would the world be 10 years from now thanks to these guidelines, and how would our listeners benefit from this different world?
Susan Athey: Well, competition has a lot of benefits for all of us. Anyone who’s had to suffer through terrible customer service, when they have a local service provider that doesn’t show up on time, they have to miss work, you stay on hold forever, it’s difficult to switch providers . . . Anybody who’s had these experiences and any businessperson who has had to rely on a dominant firm to, say, get to their consumers, to inform their consumers about their products or to distribute their products, understands the inefficiencies that can occur from lack of competition. And, also, competition doesn’t just play out in one way. Competition might occur in innovation. The competition might be longer term. Competition is perfectly valid in markets that are zero-price markets. There’s still competition there—clarifying that.
Also, we haven’t talked today about input markets, but a good economist from their textbook and the textbooks going back decades, they all talk about monopsony, and they all show the inefficiency of monopsony. And it’s very difficult as an economist to argue that we somehow like market power in the middle of a supply chain and don’t like it elsewhere. Good economics looks at the importance of competition throughout the economy, and these guidelines are a little bit more clear on the importance of market power in buyer markets as well.
Now, I should mention, I don’t want to take too much credit because Carl and I discussed at some point that he worked very hard to make sure the 2010 merger guidelines were very, very clear that monopsony, that market power among buyers, gets just the same treatment as market power among sellers. That was the innovation of the 2010 drafters, not ours, but we do elaborate more on how you would evaluate cases of monopsony, and we’ve had a lot more experience with those in the last years. And the Department of Justice had a case about mergers of publishers that was going to create harm in the author market, for example.
We also flesh out what that looks like in labor markets and bringing that up to modern realities, where we are looking at the impact of mergers on labor markets. This also, I think, should give merging firms pause that, “Oh, wow, if I’ve got two hospitals merging in a single market, and we’re the only employers of nurses, that is something I need to think about when I choose to merge with the other hospital in my city versus some other merger or not merging at all.”
I like to think about the nursing cases because, frankly, now I’m in my 50s, so it’s not so far away. At some point, I’m going to be spending more time in hospitals, and already, you have aging parents and so on. You’re spending time in hospitals. And what monopsony would mean in that case is that the firms recognize that to hire more nurses, they need to raise the wages for all the nurses.
What market power means in that case, or one way that market power would manifest, is that I hire fewer nurses in order to keep the wages down. And if we’re the only two hospitals in town or in this part of town, then I’m going to have a greater incentive after the merger to keep down my employment of nurses in order to internalize the benefits across both my hospitals of keeping those wages down.
If we keep the nurses’ wages down, well, I’m not going to get great service in the hospital. The nurses aren’t going to like their job as much. People won’t want to move to this part of town to become a nurse. And then when I go and I need a nurse, it’s like: “Well, where are all the nurses? We have a nurse shortage.” Well, that’s what market power does. It stops those market signals from going in.
If the wages of nurses go up temporarily, that encourages people to go to nursing school. This is a good job. And it gets those resources, including the human resources, allocated efficiently. I struggle with why an economist wouldn’t agree with that. It’s in all the textbooks, and now there’s lots of evidence about it in empirical evidence and so on. Would you really think that all these markets are perfectly competitive? It just doesn’t really make sense.
I think part of that is that it can seem a little intuitive that if you started the first thing like, well, keeping wages down must be good for customers, but if you do the mathematics of the economics, when you merge, it increases the perceived cost to the firms because they realize that if they hire more workers, it’s going to increase the wages across the board.
So, even if the wages go down, their perceived cost goes up, and that’s what drives the rest of their decisions. And of course, also, if you hire less labor, you usually produce less output. This is all very classic economics from the textbooks, but for some reason people thought that it didn’t matter. But I really hope that we’ll have the nurses we need when we go to the hospital and that we won’t be reducing our hiring of factory workers and others in order to keep the wages down, especially for vulnerable workers. This is something that I’m excited about for the work of the guidelines.
Bethany: At least based on my understanding, the merger guidelines aren’t something every administration automatically redoes. Why did the Biden administration decide to redo the merger guidelines? Why now?
Susan Athey: They’ve generally been updated every 10 to 15 years. They were last updated in 2010, so we’re about due for a revision. But they also are updated to really reflect changes in the economy, as well as changes in economic research. Because if you have a phenomenon in the economy like business models, for example, changing and becoming more common, then you’re likely to both get more antitrust cases coming up around those new business models or a new technology, and economists will be likely to do both theoretical and empirical work that’s more tailored to the specifics of those circumstances.
When the antitrust agencies, the FTC and the DOJ, investigate a merger, they are looking at the economics of what is happening in that industry. They’re looking at competition and how it presents itself in this particular merger. But ultimately, if they are going to enforce the law, they’re going to bring that to court.
And so, one of the innovations in these draft merger guidelines is that they go a little bit farther to connect the economics to the law. And the law is written in the text of the Clayton Act, which is one of the main antitrust laws that we enforce, and it’s also embodied in case law, Supreme Court precedent, and circuit court precedent that’s binding within the circuit. In light of a lot of changes we’ve seen, especially with regard to digitization and the bigger importance of platforms, is intermediaries across a lot of different elements of our economy and advances in economic research, alongside that, it was a good time to update these guidelines to reflect market realities and these advances.
Luigi: I think that playing a prominent role in your guidelines is section seven of the Clayton Act, and in particular the sentence, “The law prohibits mergers when the effect ‘may be substantially to lessen competition or to tend to create a monopoly.’” And of course, this sentence is a little bit dissembling because there is a “may” and “substantially.” At the same time, that is a little off-putting. I think a lot of people have struggled with that.
And in the past, if I understand correctly, the last 40 years, this has been interpreted as, we prohibit mergers that increase market power that is measured as raising prices, reducing output, diminished innovation, and otherwise harming customers. If I understand correctly, and please correct me if I’m wrong, the new guidelines seem to interpret it more in terms of concentration in market share, a bit more like the 1968 guidelines. Is this a return to the past?
Susan Athey: I want to unpack some of the language of the Clayton Act as you described it. One element of it that we emphasize in the draft guidelines is the fact that it talks about an effect that “may” be to substantially lessen competition. And some courts have emphasized the “may.”
One thing that’s really nice about that framing is that it views the merger review process as a risk-assessment exercise. And that actually makes it much easier to bring what I would view as both a modern and a high-quality economic approach to the problem because economic models are not definitive. They are stylized; they make assumptions. The data that we have often doesn’t capture everything that we’re concerned about. It may be limited in various ways. We may not have past examples of mergers that can exactly mimic the effects we expect from this particular merger.
When an economist goes to evaluate the competition concerns of a merger, they’re not going to use their tools of economics to get a number down to a precise decimal point. But rather, the way that, at least I, as an economist, interpret the way I use my tools is that the tools show me that in a certain context with certain assumptions or with certain data limitations, a harm to competition would occur. That makes me believe that it’s likely that in the real world, with a richer environment than I was able to capture in any model, a harm to competition would occur.
By aligning us with a risk-assessment exercise, a risk assessment of a loss of competition, we allow economists to be more honest in terms of what they can and can’t do with their models and their data and to reflect the limitations of that analysis when they evaluate the merger.
Bethany: Can we unpack that one step more? What is competition?
Susan Athey: Actually, a lot of the discussion around it at the time and in early court cases operationalized that as concentration, and the terms were used a bit synonymously. But over time, we’ve developed more sophisticated, more advanced, more modern economic concepts and abilities to measure the ways in which competition plays out in different industries.
For horizontal mergers, mergers between two firms producing the same product and directly competing, all of the same tools from the previous guidelines that are used to operationalize the concept of competition are still present.
A change has been made in terms of the connection of those tools to the language of the Clayton Act. The Clayton Act talks about competition. And so, we’ve done some work to try to connect the tools of econometric analysis, of what we call merger simulations, to the language of the Clayton Act of competition.
If you want to get into a little more detail, some of the tools that you would use would be evidence of head-to-head competition between firms, evidence that firms are responding to one another in their decisions, as well as evidence from economic models that might have a prediction that firms would increase prices or reduce quality.
Luigi: Let’s go to a very famous example that goes under the name of Brown Shoe. It is a 1962 decision of the Supreme Court, but one that the new merger guidelines like a lot. It is cited 11 times directly, and I didn’t even count the ones indirectly in lower-level judicial decisions.
This is a case about a company, Brown Shoe, which at that time—we’re talking 1955—was the fourth-largest producer of shoes, but with a market share of 4 percent. They bought Kinney, who was both a producer and a retailer. Now, it was a producer with a 0.5 percent market share, and as a retailer, 1.2 percent.
There was, to my understanding, no effect on pricing. If anything, the pricing might have been lower because Kinney directly bought the shoes from Brown and sold the shoes at a lower price. The Supreme Court basically invoked section seven of the Clayton Act and blocked that merger. Can you explain to us why you think that this was the right decision?
Susan Athey: No. There’s a paragraph, a very, very important paragraph of the draft guidelines that a lot of people seem to have missed. It says: “These guidelines include citations to binding legal precedent. Citations to court decisions in these guidelines do not necessarily suggest that the agencies would analyze the facts in those cases identically today. While the agencies adapt their analytical tools to new learnings, legal holdings reflecting the Supreme Court’s interpretation of a statute apply unless subsequently modified. These guidelines, therefore, cite binding propositions of law to explain core principles.”
One thing I didn’t know as an economist before I took this job, or couldn’t have explained in as much detail, is the way that the law works in the United States. A Supreme Court precedent is binding until it’s overruled, and then the district courts do findings of fact. And so, the economic analysis about how the market shares are operating and so on, that’s going to be in the finding of fact. The findings of law are about interpreting the Clayton Act.
And so, two things can be true at the same time. You might not like the way that the economic analysis was done. You might not find the economics compelling, or you might think the way that they thought about the relationship between concentration and competition might change over time. Certainly, the econometric tools have changed a lot over time, but the precedent is still precedent.
And, in fact, older cases are very commonly cited because the Supreme Court doesn’t weigh in on things all the time. In the case of mergers, it became more difficult to bring merger cases to the Supreme Court after the 1970s. There aren’t very many Supreme Court cases about mergers in more recent decades. And so, there haven’t been a lot of opportunities to update the interpretation of the law.
But that can create a challenge because you’re bringing a merger case with modern economics and old law, where the old law was written in the context of old economics. One of the things the draft guidelines are attempting to do is to show how you can bring modern economics into the old law.
Now, with the case of Brown Shoe, there are a lot of citations there. One of the ways that it is cited in the draft guidelines corresponds to the way that it’s cited in many or most merger cases, which is around market definition.
The way that it’s cited in this draft is actually reflecting a challenge that agencies have faced when bringing merger cases, when enforcing the antitrust laws. And that is that it’s easier to find harm to competition if you have a very small market—there’s a small number of firms and only those firms matter for competition. Then, if you have a merger between that small number of firms, as a second step, it’s easier to find harm to competition. Whereas if you have a big market, then it’s going to be harder to find harm to competition.
Brown Shoe defined markets using what are referred to as practical indicia, like, OK, there’s two firms, and each of them produces shovels. I’m going to think about a market for shovels, and a shovel is something that you use to dig. You describe the characteristics of the product.
Now, that can work well for undifferentiated products, but in a modern economy, say you had a merger with car producers, it might be that Mercedes and Hyundai don’t compete in the same way as, say, Toyota and Hyundai do.
In a modern world with lots of differentiated products, it’s often the case that you can define narrower markets than all cars or all motor vehicles. And the way that you do that is that using a tool called the hypothetical monopolist test, which is a more modern tool, and that’s basically a test that allows you to verify that a narrower market, say, with economy cars, is a good lens for analyzing competition.
Brown Shoe, if you just use practical indicia, might be more likely to lead you to say, “Well, cars, they’re things that drive.” Just as an example. One of the things these merger guidelines do is they reflect the fact that courts have sometimes rejected the way that agencies define narrow markets, or they have at least questioned that and sometimes look at Brown Shoe indicia as well. That’s what they’re called, Brown Shoe practical indicia of markets.
In this case, there was an example of bringing in Brown Shoe. It sometimes can make it more difficult to enforce the antitrust laws. It’s a defense-friendly way to look at markets, in many cases. But it’s also a way that sometimes courts were looking at market definition.
In these guidelines, we try to clarify how to reconcile these modern tools with this old law. And we talk about how the Clayton Act allows you to find a harm to competition in any relevant antitrust market, any line of commerce. And we talk about how there can be more than one relevant antitrust market. There can be more than one valid way to define a market. And so, that reconciles the old law with the modern economics but also allows these multiple paths to market definition.
Luigi: Now, if I understood correctly, your point, which is very well taken, is that basically you’re trying to look to the judicial decision for an interpretation of the law because, after all, we should follow the law, not the economics. So, you buy the interpretation of the law but not the interpretation of economics. Again, in the Brown Shoe decision, there is a statement that says: “Congress was desirous of preventing the formation of further oligopolies with the attendant adverse effect upon local control of industry and upon small business. Where an industry was composed of numerous independent units, Congress appeared anxious to preserve this structure.”
So, if I understood correctly what you’re doing, you are saying that one of the goals of enforcement should be to preserve local control of industry and small businesses.
Susan Athey: There’s another part of the draft guidelines that I think a lot of people have missed, and this adopts what is called a burden-shifting framework. And this is coming from a case called Baker Hughes. When you read the guidelines at first, commenters have noted that they start with all the reasons a merger can be anticompetitive. They start with a list of things that can be wrong with a merger.
And I do understand why a reader would infer from that that all we care about is what’s wrong with mergers, but it also has some advantages as a narrative structure because a businessperson can pick this up and look at the first three pages and see a list in plain language of reasons they might need to call an antitrust attorney.
Now, a later section of the guidelines talks about ways that parties could rebut this harm to competition. The rebuttals are, in some ways, broader than they were in the past because they mention any factors the parties might bring that would rebut harm to competition. They do maintain the old concepts of verifiability and merger specificity, so the reason that this merger doesn’t harm competition needs to satisfy some conditions.
Another important condition is that it’s passed through to the benefit of competition in the market. But what that means is that if there’s a merger that is bad for small business, the parties have the opportunity to rebut that, and they can show evidence that this merger will be good for competition.
For example, if a bigger firm is buying a smaller firm and that smaller firm was inefficient, the merging parties have the opportunity to argue that this is going to increase competition because, say, this small store now has access to better distribution or lower-cost inputs and so on. And so, it’s going to actually do a better job serving its customers and increase competitiveness.
So, that rebuttal framework is there. In some sense, it’s the answer, in my mind, to a lot of the concerns that people have raised about the guidelines. Here, this guideline is telling us that this type of merger might be bad, but I have this example where that kind of merger is good. Well, wonderful, that burden is on the parties. The merging parties need to be the ones to bring that evidence, which makes sense because the merging parties are the ones that understand the efficiencies. The merging parties are the ones that will be able to best document how they plan to bring these efficiencies to increase competition. But ultimately, if this merger is good for competition, that’s right there in the rebuttal framework.
Luigi: Just a clarification. I know that Walmart expanded organically, but imagine that Walmart buys a store in the neighborhood, and by buying the store, brings lower prices to the neighborhood, but at the same time puts a lot of small stores out of business. Is that more competition? Harm to competition? How do you evaluate that?
Susan Athey: Something like that would be fact-specific. Your case study, I think, is a good example why it’s useful to have the term “competition” in the Clayton Act rather than just short-term prices. It could be that you could show that these consumers will have better options now and forever. It’s also possible that the firm will offer lower prices today, but they may not be as attentive to the needs of the local community. They might discontinue some sections of the store that were important for the local community. They may make other changes that reduce the set of options and alternatives for local consumers.
There can be short- and long-term benefits of competition, and competition is still important. What you would need to be showing in a case like that, it’s always fact-specific, but you would need to understand why there would be competition in a way that meets the needs of the customers in these communities.
Bethany: Carl Shapiro wrote on Promarket.org that in the guidelines there is “broad skepticism, if not hostility, to mergers.” It sounds like based on what you’re saying that that’s not the way you would like the guidelines to be interpreted.
Susan Athey: Yes, I understand why Carl read them that way. And that’s an important piece of feedback as drafters. When somebody misunderstands what you’ve written, you have to take responsibility for that and take that feedback. And I would encourage people to provide feedback like that, and certainly, that’s a piece of feedback that I’ve thought a lot about since he gave it.
But I also explained to Carl and have explained to others why I don’t read them that way. Now, it’s very difficult. Anytime you write something about the benefits of mergers, merging parties will use that in court to justify a wide range of things. So, it is difficult as a drafter to draft very open-ended language without it being misinterpreted in some other ways. There’s certainly a tension in drafting, but I also think that the way that the guidelines are structured could support this misinterpretation because, again, it starts out with all the ways that a merger can be anticompetitive.
The rebuttal section is shorter, but frankly, shorter can be better. If you listed out 15 ways that a merger could be procompetitive, then you might argue if a particular merger doesn’t meet one of those 15 things on the list, then maybe it’s not procompetitive. Our approach, I think, aligns it in a more open-ended way, which can be more beneficial to the merging parties in that regard.
Another element of this that I think is more helpful to the merging parties than people perhaps originally recognized is that we’ve put in all these tools about analyzing competition. Some of them are in the appendix, but those tools are not in one place because they apply in many places. We lay out a lot of tools that talk about how you would measure competition. Those same tools can be used by parties or the agencies to understand how a merger might be good for competition. And so, those tools are available both when you make the prima facie case about harm to competition, and they’re available to parties when rebutting that a merger is good for competi-tion.
Those same tools are available in both places, but the short-is-sweet to the rebuttal section, other than things that have been around and are very well established about merger specificity and verifiability, closing some loopholes, we talk about any benefit that is passed through to competition in the market would be considered in that rebuttal section.
To me, the economics is coming in right there. And there are many examples where, when there are scale economies or other types of considerations, mergers of, say, number seven and number six in an industry could lead to a more competitive industry in the presence of scale economies or network effects or other types of benefits. In other industries, that may be less so, and they may be differentiated products, and firms number six and seven may be serving low-income consumers or another niche, and then that merger would create a harm to competition.
It would be up to the firms to show that this particular merger is beneficial for competition. But competition is the value. And the benefits of competition—lower prices, higher quality, long-term innovation—are really what this is all about.
Bethany: I have a slightly more theoretical question. To what extent can even the best-intentioned, most intelligent economists and regulators see deleterious effects to competition coming beforehand? And to what extent is industry just always one step ahead?
If I think of two recent examples, one would be big tech. At least as I remember—and I could be wrong—I don’t remember anybody talking about the potentially damaging network effects when Facebook and Google were consolidating their empires.
Or if I think about the hospital sector today, I don’t remember anybody until recent times talking about how hospitals were using mergers in order to have must-have hospitals and negotiate contracts with insurers where what results is rising healthcare costs for everybody, and it’s good for nobody. But nobody talked about that until it was done, in effect. And so, to what extent can you see it coming, do you think?
Susan Athey: I wish more people had seen it coming. There were people who did see it coming. I think it was harder, though, to fit it into the antitrust framework of pure vertical or pure horizontal mergers, and that is one reason the antitrust community got a little stuck. And then, to be fair, you’re analyzing a lot of cases, and it can be challenging in a short amount of time to come up with a new framework for a phenomenon that hasn’t been common in the economy before.
I think that gets back to the need to update guidelines as well as to update economics. You could have written down a model of platforms, for example, and people did, and I made some efforts personally to write down those theory models. They were messy. The economics journals aren’t really that interested in a messy model that has lots of details.
But as you see these phenomena happen over and over again, then people get with the program and see, oh, that’s happening in the economy. Now, I can write down a special model. It’s a little messy. It takes a little more mathematics, a few more symbols to capture all of the detail of what’s going on, but the journals will publish it because it’s important and you see this happening in the world.
I would say that it is hard in the beginning, and probably my prediction would be that antitrust agencies will still miss these in the beginning of new patterns or business models or economic theories, but we don’t have to miss them forever.
I want to make one other point about simplicity versus complexity. I do think that there’s a sweet spot there, but trying to apply an overly simplistic model to a complex world is not simple. There’s an importance, I would say, of being realistic enough to capture the facts. I think it’s confusing for a judge if you’re talking about apples, and it’s oranges. And if the motivation for a merger and what’s in the business documents and what’s in the analysis and what you’ve seen in the industry aren’t matching up with an overly simplistic framework, then it’s just all mumbo-jumbo and you can’t really reconcile the facts and the economic evidence.
I constantly struggle and work incredibly hard in order to try to get things to be not overly complicated, but I have certainly found in everything that I have done, whether it’s teaching MBAs or advising businesses or evaluating mergers or being an expert witness in general, that being too simple is even more confusing than being complicated enough to match the facts.
Luigi: Susan, thank you very much. Can I ask you one last question, very briefly? Your boss, Jonathan Kanter, has publicly declared that he’s not going to rejoin private practice after leaving the DOJ. Are you prepared to make the same statement?
Susan Athey: That’s a great question. I’ve been thinking very hard about how I can be of most service. There is a challenge trying to be of service in the competition area if you don’t have access to facts and access to data from companies. But I think one role model is Nancy Rose, who has continued to have a relationship with the division after her time in government. Not doing any work, well, that would mean I couldn’t help the DOJ, I couldn’t help the FTC, and I’m not sure I’m ready to go there.
In some cases, I could imagine that a private plaintiff is on the side of competition. I guess I’m not even sure that my next chapter will have that much to do with competition, frankly. If the things that I’ve learned here make that the next best use of my time, to spend time on competition, then that will be a big draw. But also, actually, most of my research in the last 10 years has been about machine learning and AI and other stuff. That’s also a pretty big problem.
Bethany: I really liked her, personally. I thought she was really clear, obviously really, really invested in this, but also invested in trying to say that corporate America shouldn’t be scared of these new guidelines. I wasn’t sure, in the end, if we’re right to think that the guidelines are a big deal, and I’ll give you my on the one hand and on the other hand, because I’m really not sure.
On the one hand, I thought, based on a lot of things she said, that the people who view these guidelines as being this really sharp U-turn or, I think, language you used once in describing them, “Copernican movement,” were not right. She sounded very invested in placating people who were scared about the new guidelines.
I also wondered, since so much of this is up to the courts to decide what to do with the guidelines, in the end, does it really matter, if you have an overburdened regulatory agency that can’t bring many cases, and then courts that are biased over decades in favor of allowing consolidation?
On the other hand, I thought the note we ended the conversation on, where she talked about the Microsoft trial and the huge impact that that had, despite the fact that, in many ways, the Microsoft settlement and the outcome of the case ended up being a nothing-burger, the case itself still had an enormous impact. It could be that the guidelines, while it’s hard to trace them from guideline to effect, may have a huge effect.
Luigi: You sound too much like an economist. You know that President Truman said, “I want a one-handed economist, because the economists always say, on the one hand, on the other hand. I want a one-handed economist to have a clear answer.”
Bethany: Oh, dear, that’s the one thing I’m not supposed to do as a journalist. Journalists are supposed to have—at least magazine writers are supposed to have—a point of view.
Luigi: But before I share my opinion, I want to get your impression. At the end of the day, if you were to answer the question, is this really a Copernican change, or is it a small thing? Where do you fall on this issue?
Bethany: Well, it seems to me that the guidelines themselves do have some elements of a Copernican change, and I’m still a little bit confused, but I think the whole idea of looking at monopsony and evaluating that in terms of its impact, that among other things is just a huge shift from the way things were. Competition and what it means isn’t this narrowly defined thing. It can be defined in a whole bunch of different ways.
It feels theoretically like a Copernican shift, and maybe this is what I was trying to get at earlier. But whether it’s practically a Copernican shift or whether it just results in an evolution or maybe even really nothing, if it doesn’t change how the courts hear these cases, then maybe it won’t be practically that much of a shift at all, or maybe the right answer is that it will take decades to see whether it’s . . . Decades, oh, God, I hope not. It’ll take years to see how big a shift it is.
What do you think? Do you think it’s a Copernican shift?
Luigi: I think that it’s interesting because you’re very smart. In my view, you got it right. In terms of guidelines, I think it is a Copernican change. I think that Susan is probably playing the role of the fireman or the firewoman to try to make it sound like it’s less than it is. But from my understanding, it’s a pretty significant change, in part a return to the past and in part maybe a move to the future. But sometimes the past and the future have elements in common.
Now, of course, if the judges and the rest don’t follow, this might be a nothing-burger. The worst-case scenario, which I hope is not going to happen, is that this language scares off ordinary people from merging but not the well-connected, who know that eventually they’re going to prevail in court. And so, stopping legitimate mergers by scaring them but allowing the worst ones to go through anyway. I hope that’s not the case, but there is that risk.
Bethany: Ooh, that’s one step more cynical than I was thinking. But that does raise a really good point that any company that is well-resourced enough to really prepare to litigate this will know that they can, or at least will take that chance given outgunned regulators and courts that lean in their favor. And it’s the companies that can’t afford to take the risk of litigation who won’t, and this will get decided by the price of the lawyers that the company can afford to pay, not by right and wrong. That’s a depressing scenario.
Luigi: Yeah, it’s a depressing scenario. But first of all, let me say, I think it is brilliant and right to shift the burden of proof. What they’re saying is, in those scenarios, we think that the merger is presumptively illegal, and it is upon you to prove otherwise.
I think that this is a very effective way to make it easier for the DOJ to bring cases and to make it more difficult for companies to wiggle around with a bunch of lawyers and expert witnesses. I think in that case, it’s great.
I thought it could do a better job in exempting some lower end of the distribution because while this argument is very compelling when we talk about Google buying a company, it certainly is not compelling in the Brown Shoe case.
Now, thank God, she said, “I’m not prepared to defend Brown Shoe.” That’s a very clear case and probably the clearest answer I got from her, which was very useful. But I would have been a little bit more tolerant or more clear-cut in my language on the low end of the distribution. But I think that that risk exists and needs to be managed.
Bethany: You asked her—and I’m curious both what you thought of her answer and how you feel about the question now—do you think this is a return to a past time in America before all the changes brought about by Bork, et cetera, et cetera, as we’ve discussed? And not in a bad way, by the way. I don’t mean going back in a pejorative way. I mean it possibly in a positive way. But is this a return to a way of thinking that used to prevail?
Luigi: I think that there is a group of people who really would like to have this return. Certainly, Jonathan Kanter and Lina Khan are among those, and certainly, the guidelines have been written in part with this in mind.
The only thing I’m an expert in is to have participated in a lot of antitrust debates and enough to see 99.9 percent of the economists are against this view. For them, the idea that you use antitrust for anything except as some measure of economic efficiency is an anathema. And this is not only true of the right wing. Even the so-called progressive economists, when it comes to their own turf, they don’t want anything to mess around. They want a clear world in which the only thing that antitrust does is to look at efficiency.
Bethany: Why? Can you help me understand why that is? Is it because efficiency lends itself to models, and the world is, once you start taking into account other factors, as Susan was getting at . . . Models have to intersect with reality, and economists don’t like that? Is that why, or is there another reason?
I think that’s fascinating that the economics profession to such a degree is so opposed to this. And I think you’d mentioned to me, or somehow, I knew, that Larry Summers is among them, quite opposed to this. I think I saw in some notes you sent me that he called this new rule a war on business. Is that conventional wisdom?
Luigi: Among economists, more or less. I think that maybe the best way is to hire a psychologist to figure out why they think this way. I’m not a psychologist. Let me try my interpretation.
I think it’s a combination of some people who really think that that’s the only thing that we care about, and that’s the only thing we should do. Some people who are afraid that it’s the famous camel’s nose under the tent, and when you start looking at something else, this will drift down.
And it also has this element of using populism in a negative way. “Oh, caring about the small shops, only populists do that, but sophisticated technocrats, they look at the big picture.” And others simply, more naively, study economics in which we more or less focus just on efficiency. And there is even a theorem, the second welfare theorem, that says, “Oh, you can reach any point in the space of outcomes just by changing the budget constraints.”
The way we delude ourselves is to say: “Our role as economists is to get to efficiency. Politicians need to deal with distribution. They can do whatever they want with distribution because if we take care of efficiency, then we’re done.”
Maybe 50 years ago, this was something that some people could believe, but these days, when we see how distribution affects the ability to vote in favor of more distribution because there are political effects, you start to wonder to what extent the two things are not intrinsically connected. And so, I think it’s a bit naive at this point to think that you can separate the two neatly and ignore one and just focus on the other.
Bethany: I really did like her broader point about simplicity being sometimes dangerous. And simplicity has this clarion call that if you can come up with a way to boil something down to a statement or a model or a way to make a messy world seem cleaner somehow, it feels like a phrase I often use, truth with a capital T, but really all that might mean is that you are just completely beside the point. That you’ve managed to just simplify at the expense of achieving any kind of clarity.
I think that’s always this ongoing battle or tension or duality, or whatever you want to call it, between simplicity and complexity. How much complexity do you need to introduce into simplicity to make it meaningful? And how much do you need to clarify the complexity in order to say anything that anyone can understand? Anyway, does that make sense?
Luigi: Yeah. Look, Susan Athey is a brilliant economist, but she is very good at answering questions and also not answering questions. I think she was very good at avoiding the most difficult part. The part that I don’t know her well enough to say, and it’s hard to tell in any case, is to what extent she is playing the role of the mediator by design as part of a grand strategy. To what extent is she playing this role because she’s caught between a rock and a hard place? To me, it’s pretty clear that there is a group of scholars who want to bring antitrust back in a more, if you want, Brandeisian fashion, caring about democracy and caring about other things. They want to do it through the merger guidelines, and their justification is, after all, the previous change was done through the merger guidelines.
What is very important is the law. All of the so-called Chicago antitrust revolution was not conducted through law. It was conducted through merger guidelines and interpretation.
Now, what I would have expected from Susan, if I were Susan, I would have embraced trying to develop new models that justify the new approach. She’s a brilliant modeler, and so I think she can do much better than I could possibly do in terms of incorporating, for example, the litigation cost.
One funny thing—I asked around, but nobody can give me an answer as to why—is that all these definitions of efficiency that we use ignore litigation costs. And, as you know better than I, litigation costs are huge and can really change . . . If I go to a rule that maybe is less elegant but dramatically reduces litigation costs, I increase efficiency tremendously. So, my inclination is to say, “Why do you use a market share rather than a market power definition?”
Then say: “Yeah, market power is a better measure. However, it is so hard to establish and litigate that the cost is bigger than the benefit. Period. Let’s move on.” And you don’t need to go to some complicated judicial decision to arrive to this conclusion. For example, this idea of information, we can regulate much less efficiently if you have just one firm because information doesn’t flow. It is not that difficult, especially for Susan, to model this and show that this is a problem.
I don’t know whether she has not done it because her heart is not in it—at the end of the day, she is in between the old guard and the new guard—or because she’s playing a role to mediate between the old guard and new guard. But in a sense, she is underplaying the role of these merger guidelines. To me, they really are big, and they might fail, and I told you the ways they might fail. However, in this scenario, as you said, it is the best thing that they have done—probably the only thing they could have done, given that, I’m sorry to say, part of the Democratic Party is still reluctant to make any change.
Bethany: That’s actually really interesting because maybe by me thinking that perhaps the merger guidelines are potentially a nothing-burger, maybe that’s exactly what she was going for. That was exactly what she wanted the takeaway to be. The merger guidelines could be a Trojan horse, right? That once they’re accepted and implemented, they can have every bit as big an impact as the . . . I guess I knew, but I had not quite put into words that all the changes that took place with the weakening of any restrictions on mergers over the last 50 years, 40 years, were done through the guidelines as well.
In that case, you could view her strategy in the way in which I thought maybe this was a nothing-burger as part of a very clever strategy. And for sure, there is some kind of explicit or implicit mediation strategy going on because the Department of Justice wouldn’t make her available to talk to us otherwise. I mean, she’s doing this with the approval of the department, and so, there’s that. Anyway, it’s very interesting.
Luigi: That’s for sure. But what is interesting is that they sent us Susan, not Jonathan Kanter or Lina Khan.
Bethany: Yes. Precisely to your point, it might be because Susan is the one who can get the Trojan horse in and who can convince us that this is just a nothing-burger and, “Oh, don’t look over here. Don’t worry about it. No big deal. Look at all these things that are still promerger. This is great.”
I don’t know. I like that interpretation, I have to admit. There’s something sort of deliciously Machiavellian or clever about that that I like. Maybe just because my instinctive reaction is that we do need to rethink merger guidelines, and so, I like the idea of them very cleverly disguising the wolf in the sheep’s clothing of Susan Athey.
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