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The Corner Newsletter, February 7, 2019: FTC Split Brings Tensions in Enforcement to the Fore — Progressive’s Tax Proposals and the Founders

In this issue, we map the new, deep divide on anti-monopoly philosophy at the FTC. And we explain why new calls to increase taxes on billionaires are part of an American anti-monopoly tradition that traces to Franklin, Jefferson, and Adams.

February 8, 2019  |  by Open Markets

Open Markets Condemns Monopolies for Breaking America’s Free Press: It’s Time to Break Monopoly

Last month, the Open Markets Institute called on Congress and the Federal Trade Commission “to immediately investigate how to protect America’s independent news media from the power and predatory business models of Google and Facebook.”  Read Open Markets’ full statement here.

Open Markets: The Podcast Market is Working and We Must Protect It

Today, the Open Markets Institute called on the Federal Trade Commission and European antitrust enforcers to block Spotify’s purchase of podcast makers Gimlet Media and Anchor. The market for podcasts is one of the few news media markets that is growing, diverse, and successful, and antitrust enforcers should head off efforts by platform monopolists to take control of the industry. In this industry, podcast producers can still profit in a fair market for advertising sponsorships and compete fairly for an audience. Read Open Markets’ press release here.

In 3-2 FTC Split, Tensions in Antitrust Enforcement Made Stark

How easy should it be to start or run an independent business? That was the immediate question the Federal Trade Commission answered last week with a 3-2 vote to allow the nation’s largest reseller of office supplies, Staples, to acquire the nation’s largest wholesaler of office supplies, Essendant.

The majority’s answer was to put independent office supply stores even more at the mercy of one of their biggest rivals, Staples. The tie-up between Staples and Essendant is what’s known as a “vertical” merger, or a merger between corporations at different levels of a supply chain. Once the corporations merge, independent resellers of office supplies will have to purchase wholesale office supplies from Staples, their biggest rival, which also just became their biggest supplier.

Within the context of U.S. antitrust law, however, the long-term importance of the rare 3-2 vote at the FTC was that it highlighted an important and growing split in the antitrust enforcement community over how to respond to “vertical” mergers, or tie-ups.

Historically, enforcers generally frowned on large vertical mergers, fearing corporations would block rivals from access to key sources of supply markets (a process known as “foreclosure”). Congress designed an antitrust law, the Robinson-Patman Act of 1936, to stop chain stores from using their bargaining power over manufacturers and wholesalers to disadvantage and drive their smaller competitors out of business.

Since the early 1980s, however, enforcers have largely been guided in their thinking by Robert Bork and other libertarian antitrust scholars. In his 1978 book, The Antitrust Paradox, Bork wrote, “Foreclosure may occasionally be a threat to individual firms. It is never a threat to competition.” In last week’s decision, a conservative majority continued to adhere to this now 40-year-old idea.

They held, for instance, that Staples had no incentive to use its increased power over the wholesaling of office supplies to harm its smaller rivals. After all, they argue, there is still one other wholesaler in the market – S.P. Richards (SPR) – and retailers still can buy from SPR if Staples tries to raise their prices or manipulate them.

Commissioner Rebecca Kelly Slaughter’s dissenting statement in the case was especially important and marked a clear return to congressional intent in enacting anti-merger law (and also is more attuned to contemporary thinking on vertical mergers than the majority’s approach is). Slaughter argued the acquisition would increase the bargaining power of both Staples and the remaining wholesaler. Slaughter also noted that FTC staff analysis indicated “the transaction would result in significant harm” to Staples’ rivals, in the form of higher prices or degraded service, “regardless of which supplier they chose for their office supply needs.”

Slaughter placed her statement in the context of a “great debate… taking place in Washington policy circles and even around the country at family dinner tables” about the rising power of dominant corporations “controlling large swaths of industries and firms across sectors of the economy.”  Vertical mergers, Slaughter wrote, “can be just as pernicious” as horizontal mergers, or mergers between direct competitors. Slaughter then expressed concern that the FTC is “too credulous about claimed procompetitive benefits unique to vertical integration” and that those benefits “often go unsubstantiated.”

In response to Slaughter, Commissioner Christine Wilson wrote a separate statement mocking critics of lax antitrust enforcement. While acknowledging “general upward trends in the number of mergers, their valuations, or the size of the largest businesses,” Wilson insisted those trends “simply do not support such a sweeping claim about the failure of American antitrust policy.”

Wilson claimed the support of a “consensus” supposedly reached by antitrust experts over only challenging vertical mergers where both corporations are in concentrated markets, citing a statement by Georgetown Professor Steven Salop at a recent hearing at the FTC. Wilson appears, however, to have misread Salop’s position. Salop has long argued vertical mergers can be dangerous when a merging partner is dominant in a market, which is manifestly the case with Staples and Essendant.

🔊 ANTI-MONOPOLY RISING:

  • Germany’s Federal Cartel Office, its chief antitrust agency, said Facebook abused its dominance by requiring users to allow Facebook to collect data on them as a condition of access to the social media site. Consequently, it prohibited Facebook from collecting and combining personal user data across the Internet unless users opt into that collection. The ruling also forces Facebook to grant users’ access even if they refuse data collection.
  • The Green New Deal, introduced by Rep. Alexandria Ocasio-Cortez, D-N.Y., and Sen. Edward Markey, D-Mass., set forth a vision of how to address climate change and called for, among other goals, “ensuring a commercial environment where every businessperson is free from unfair competition and domination by domestic or international monopolies.”
  • The New York State Senate appointed an outspoken Amazon critic, senator Michael Gianaris, to the Public Authorities Control Board, the state body with the power to block the state’s development plan with Amazon. This follows a series of heated New York City Council meetings where Amazon executives faced opponents of the deal.
  • India’s new rule prohibiting e-commerce sites from selling their own goods on their platforms forced Amazon to remove several products from its website in India, the BBC reported. See Lina Khan explain on Twitter how these types of structural separations “have a rich history” in industries spanning telecom carriers to banks.
  • Sen. Mark Warner. D-V.A., sent a letter to Facebook CEO Mark Zuckberg taking issue with the news that Facebook paid young users to sell their privacy so that Facebook could study their activity. Warner said that he has concerns that users were “not appropriately informed” about the data-gathering and “[i]n large part for this reason, I am working on legislation to require individualized, informed consent in all instances of behavioral and market research conducted by large platforms on users.”
  • Sen. Josh Hawley, R-M.O., suggested that he would be open to working with Rep. Alexandria Ocasio-Cortez, D-N.Y., on an investigation into platform monopolists, retweeting NBC journalist Jonathan Allen’s post, which said, “Things are gonna get lit when @AOC and @HawleyMO get together to go after the tech giants.”
  • A coalition of five public interest groups and law firms, including Justice Catalyst Law and the National Consumer Law Center, filed a class action lawsuit last Tuesday alleging that a small number of businesses called “sureties,” which work through bail agents to sell bail bonds, worked together in an “antitrust conspiracy” to fix bail bond prices since 2004.
  • In a recent speech before the Commodity Markets CouncilCommissioner Dan M. Berkovitz of the Commodity Futures Trading Commission (CFTC) argued that a recent CFTC rule change to allow swaps marketplaces to create exclusive markets and to repeal a requirement for requests-for-quotes for liquid swaps “would create a swap-dealing cartel for the big banks.” The five largest banks, Berkovitz noted, control 70 percent of all swaps.
  • California Assembly Republicans will introduce legislation to “guide and refine,” according to Government Technology magazine, California’s ambitious data privacy law: the California Consumer Privacy Act. Measures would include making sure that users know what data corporations are collecting on them, can have personally identifiable information removed from a site when they cancel accounts, and make it harder for corporations to sign children up for social media platforms. One bill would forbid companies from storing voice data from devices like Amazon’s Alexa to use for marketing.

Billionaire Tax Proposals Have Deep Roots in Founders’ Anti-Monopoly Principles

Democratic presidential candidate Sen. Elizabeth Warren, D-Mass., recently proposed an annual wealth tax on households worth more than $50 million. Sen. Bernie Sanders, I-V.T., is calling for a 77 percent inheritance tax on billionaire trust fund babies. And Rep. Alexandria Ocasio-Cortez, D-N.Y., notably advocated taxing incomes over $10 million at a marginal rate of 70 percent.

The blowback has been predictable. The National Review likened support for increasing taxes on the very wealthy to Stalin’s mass murders of properous peasants while Michael Bloomberg called Warren’s plan unconstitutional, akin to socialism. Howard Schultz said that the idea that “every billionaire is a policy failure” is “so un-American.”

Well, it might be time for Schultz and Bloomberg to crack open their history books, because even the most superficial reading of the Founders shows that most viewed limits on inherited wealth, and steep progressive taxes on other forms of property, as fundamentally “American.” As historian Gordon Wood explains in his book, The Radicalism of the American Revolution, a defining feature of the founding generation was a deep “anger and resentment felt toward hereditary aristocracy.”

If anything, taxing aristocrats was one of America’s first – and most potent – anti-monopoly policies.

In the early years after the American Revolution, for example, every state in the union overturned British laws that, since the Middle Ages, had guaranteed first-born sons exclusive rights to their parents’ estates. Benjamin Franklin, John Adams, and Thomas Jefferson were especially scornful of unearned power and prestige that came from the eldest son inheriting his father’s entire estate. The practice created what Jefferson called an “aristocracy of wealth,” that prevented “an opening for the aristocracy of virtue and talent.” The new laws moved slowly, but inexorably, to break up most of America’s great estates upon the death of the master.

Many of the founders also embraced the idea of progressive taxation of all property. In a 1785 letter to James Madison, Thomas Jefferson remarked, “Another means of silently lessening the inequality of property is to exempt all from taxation below a certain point, and to tax the higher portions of property in geometrical progression as they rise.”  Elsewhere in the letter, Jefferson wrote that “legislators cannot invent too many devices for subdividing property…”

Does this mean the Founders were socialist levelers? Hardly. They believed in markets and private property. Indeed, far too many defended the ownership of other human beings. But, as did succeeding generations of Americans, they understood that liberty and equality of opportunity is inconsistent with rich people monopolizing political power or economic wealth. As Pennsylvania delegate Gouverneur Morris put it at the 1787 Constitutional Convention: “The rich will strive to establish their dominion, and enslave the rest. They always did. They always will.”

📝 WHAT WE’VE BEEN UP TO:

  • Art Carden calls the Bucknell economist and Open Markets board member Marcellus Andrews’ proposal for a sovereign wealth fund for all Americans “a constructive step toward reducing income inequality” in his review of Andrews’ new book, The Vision for a Real Free Market Society: Re-Imagining American Freedom.
  • The BBC Business Daily interviewed Sandeep Vaheesan about dominant tech companies and whether or not they qualify as monopolies. Vaheesan said “I think their size has unavoidable effects on innovation,” citing platform privilege and the ability to identify and buy up competitors.
  • Lina Khan spoke with The Verge’s editor-in-chief Nilay Patel on The Verge’s podcast, The Vergecast, about the power of platform monopolists like Amazon and Facebook and how antitrust and other areas of law can work to counter their power.
  • “The antitrust conversation is heating up in the US,” writes Open Markets Institute advisory board member Rana Foroohar in her Financial Times column, about the lawmakers and presidential candidates ready to seriously address platform monopolists like Facebook and Google’s harms. Foroohar points to Lina Khan, Barry Lynn, and the Open Markets Institute as leading the movement to make sure that “a broader interpretation of political power” should motivate and inform antitrust enforcement.
  • One of Bloomberg’s “Seven Fixes for American Capitalism” is an “Antitrust Pivot,” and the outlet credits Lina Khan and Tim Wu with leading the charge. Their recommendations include “preventing tech platforms from vertically integrating into different lines of business, where they can potentially favor their own services and harm rivals.”
  • Gizmodo writer Kashmir Hill’s account of blocking Facebook from her life included a conversation with Sarah Miller, who explained that the problem with Facebook is “more than just privacy violations … Will our democratic institutions stand up to these companies or let themselves be corrupted?” In her week blocking Microsoft, Hill pointed to the Open Markets Institute as “pushing for [antitrust law] to be re-embraced” by antitrust enforcers. And she interview Lina Khan for Hill’s last week where she blocked Amazon, Apple, Facebook, Google, and Microsoft from her life.
  • Slate’s discussion of the wave of media-related layoffs pointed to Google’s and Facebook’s taking up increasing shares of the online advertising dollar. It quotes a tweet from Matt Stoller proposing that Congress push Facebook, Amazon, and Google “out of the targeted ad business. You can be a common carrier or an ad company, but not both.”
  • Bimbo Bakeries decided to stop making kosher bread on many of its lines after acquiring competitor Sara Lee in 2011. While the bakery giant reversed course, The Jewish Standard interviewed Matt Stoller about the risk of monopolies erasing non-dominant cultural offerings in the name of “efficiency.”
  • Apple shut down Facebook employees’ internal company apps following news that the social network paid teens to download a data-tracking VPN in exchange for money after Apple banned a Facebook app with a similar function. In their coverage, The Chicago Tribune and The Washington Post quoted Matt Stoller, who said, “Apple does have leverage over Facebook, and they’re using it.”
  • Drawing heavily on Lina Khan’s 2017 paper, The Economic Times wrote that Amazon’s dominance and harm to competition “is difficult to understand … if we measure competition primarily through price and output.”
  • Lina Khan told The Hill that record profits from Facebook, Amazon, and Google show that “bad publicity is not turning consumers away.” Khan explains, “If anything, this shows their degree of dominance … These firms are too deeply entrenched in the day-to-day of our lives.”

📈 VITAL STAT:

$500 million

Amount that Spotify intends to spend on acquisitions in 2019. The streaming giant recently purchased podcast networks Gimlet Media and Anchor, Gimlet for $230 million, in a market that brought in $314 million in 2017 and is set to grow to $659 million by 2020.
Read Open Markets’ press release warning about the dangers of consolidation in this industry here.

📚 WHAT WE’RE READING:

  • “How to Stop Facebook’s Dangerous App Integration Ploy” (The New York Times, Sally Hubbard): Facebook’s plan to combine its Instagram, WhatsApp, and Messenger apps threaten to “cement Facebook’s monopoly power by enriching its data trove, allowing it to spy on users in new ways.” Hubbard explains how the FTC and Congress could help make sure that we’re “protected from Facebook.”
  • “Why the Latest Layoffs are Devastating to Democracy” (The New York Times, Farhad Manjoo): Manjoo lays out why the recent “blood bath” of media layoffs that have hurt journalists at outlets ranging from TechCrunch to BuzzFeed to local papers like The Bergen County Record all suffered from “the inability of the digital advertising business to make much meaningful room for anyone but monopolistic tech giants.”
  • “The Merger Incipiency Doctrine and the Importance of ‘Redundant’ Competitors” (Wisconsin Law Review, Peter C. Carstensen and Robert H. Lande): Merger law is supposed to stop an industry’s trend to monopoly. In their recent article, Carstensen and Lande explain why the antitrust laws call for market structures with “resilient redundancy.”

Open Markets Welcomes New Fellow Beth Baltzan

Open Markets is thrilled to announce Beth Baltzan will be joining OMI as a new Fellow. Beth will be focusing on monopoly power in international trade and its consequences for national security.

Beth has deep experience in trade policy, serving as the Democratic Counsel to the House Ways and Means Committee from 2012 to 2016 where she worked on the Trans-Pacific Partnership and the Trans-Atlantic Trade and Investment Partnership Agreement. Previously, she served on the Public Company Accounting Oversight Board and worked on detail for the Senate Permanent Subcommittee on Investigations, where she was the principal author of the JP Morgan London Whale report.

TOMORROW, Friday 2/7 from 11 a.m. to 2 p.m. –Roger McNamee, Meredith Broussard, Jonathan Tepper, and Tim Wu Talk Antitrust, Tech

Tomorrow, from 11 a.m. to 2 p.m., Yelp Public Policy is hosting an event, “Vanguard of the Techlash: Will Antitrust Offer a Way Forward?” Featuring McNamee, NYU professor Meredith Broussard, Myth of Capitalism author Jonathan Tepper, and Columbia professor Tim Wu, the event will discuss the dangers of platform monopolists and how antitrust can help to counter their power. House antitrust subcommittee chair Rep. David Cicilline, D-R.I., will provide closing remarks.
Lunch will be provided, and copies of the books will be available for the authors to sign.

You can RSVP to the event by emailing [email protected], or you can livestream the event here.

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In America today, wealth and political power are more concentrated than at any point in our country’s history.

The Open Markets Institute, formerly the Open Markets program at New America, was founded to protect liberty and democracy from these extreme -- and growing -- concentrations of private power.

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