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The Corner Newsletter, November 2, 2018: The Case for Small Business Collusion — What Supporters of Airline Deregulation Still Overlook

In this issue, we criticize the FTC for targeting the little while letting the big play. And we wonder why the Brookings Institution is perpetuating the myth airline deregulation worked.

November 2, 2018  |  by Open Markets

OMI Executive Director Barry Lynn Attacks Consumer Welfare Standard and Explains How Google and Facebook Threaten Democracy

Open Markets Executive Director Barry Lynn testified Thursday at the Federal Trade Commission’s hearing on the “Consumer Welfare” philosophy of antimonopoly enforcement. He said the philosophy was largely to blame for the monopoly crisis America faces today, and that it continues to blind enforcers and courts to the political and economic dangers of extreme concentration. (Read his statement here. Also read his longer testimony on the issue, from a hearing in the Senate’s antitrust subcommittee, here.)

Lynn also spoke last week on the main stage of the 40th International Conference of Data Protection and Privacy Commissioners, which was held in the chamber of the European Parliament in Brussels. Lynn said that the power and business models of Google, Facebook, and other platform monopolists pose multiple dangers to our democracy. Earlier in the day, Apple CEO Tim Cook delivered an important speech on privacy to the same audience. (See Cook’s speech here.)

The Case for Cooperative Capitalism

Open Markets Managing Editor Phil Longman published a major feature story in the Washington Monthly this week calling on the FTC to stop prosecuting workers, independent business owners, and professionals for engaging in socially and economically important forms of cooperation. The FTC should instead, Longman writes, use its resources and authority to address the increasingly extreme concentration of power by private corporations over America’s economy.

Longman’s point of departure is the FTC’s recent prosecution of the church organist “cartel.” Last year, the FTC forced the American Guild of Organists to stop publishing recommended salary scales for church organists (most of whom make less than $20,000 a year) and to drop its recommendation that members not undermine each other in competing for freelance gigs at weddings and funerals.

Longman details how this crackdown on organists is part of a larger pattern. Other recent FTC targets have included animal breeders and music teachers. In recent years the FTC has also gone after public defenders, doctors and dentists in private practice, home health aides, as well as truck and Uber drivers who tried to organize.

The FTC has also targeted blue- and pink-collar workers when they attempt to improve their bargaining position through occupational licensing laws. For workers who lack a college or advanced degree, licensing provides a way to earn a credential that adds to their ability to negotiate for a decent income and better working conditions. But the FTC has repeatedly challenged members of trades who have sought to use licensing to secure their market position, arguing that this is simply “rent-seeking” by special interest groups.

Longman shows how this line of attack runs directly counter to traditional U.S. competition policy. For most of the 20th century, antimonopoly enforcers attacked collusion and concentration among large corporations, but embraced and protected cooperation among small-scale proprietors, whether they be family farmers, independent store owners, and members of craft guilds.

Rebalancing competition policy so that it fosters such forms of cooperative capitalism among small-scale producers is becoming particularly important in the new “gig economy,” Longman argues, and should become a new front in the anti-monopoly movement.

For more on the FTC’s failure to target dangerous monopolization, read the Open Markets statement opposing the FTC’s approval of a deal that combines the world’s second and third largest suppliers of industrial gases. Open Markets said the tie-up will harm American manufacturers and raise prices.

🔊 ANTI-MONOPOLY RISING:

  • The European Parliament called on the European Commission to “upgrade competition rules to reflect the digital reality and to look into the business model of social media platforms and their possible monopoly situation.” The call was part of a long resolution  in response to Facebook’s Cambridge Analytica scandal earlier this year. The resolution also stated that “Facebook not only breached the trust of EU citizens, but also EU law.”
  • More than 200 farm, food, and rural groups endorsed the Food and Agribusiness Merger Moratorium and Antitrust Review Act of 2018 put forth by Sen. Cory Booker, D-N.J., and Rep. Mark Pocan, D-Wis. earlier this year. The bills would halt agribusiness mergers for 18 months and establish a commission to study the situation. “Corporate consolidation has long been one of the greatest challenges plaguing family farmers, ranchers and rural communities,” said National Farmers Union President Roger Johnson.
  • CreativeFuture sent a letter and petition to all 2018 midterm congressional candidates calling for “platform accountability.” The letter, signed by over 400 writers, directors, producers, and other artists and containing more than 100,000 signatures overall, wants “major internet platforms (in particular, Google and Facebook) [to] assume greater responsibility for illegal content distributed on their networks that damages our members’ ability to make a living.”
  • Public Knowledge organized a coalition of groups including Common Cause; Consumers Union; the Open Markets Institute; and the Writers Guild of America, West to oppose T-Mobile’s acquisition of Sprint. On Wednesday, the coalition submitted a reply brief led by Public Knowledge to the Federal Communications Commission calling on the enforcement agency to prevent the telecommunications corporations from merging.
  • The Public Voice last week put out “Universal Guidelines for Artificial Intelligence,” which the Open Markets Institute signed on to. Some of the guidelines include a right to transparency around AI decisions, nondiscrimination, and a prohibition against instituting social credit or social profiling systems on citizens.

📝 WHAT WE’VE BEEN UP TO:

  • In an article for Fast CompanyAustin Frerick and Matt Stollerrevealed that scores of experts taking part in the FTC’s “Competition and Consumer Protection in the 21st Century” hearings have corporate clients with a deep interest in weak enforcement of the antitrust laws. Read the article here.
  • Sandeep Vaheesan spoke at the National Association of Attorneys General Antitrust Seminar in Denver. Sandeep debated the objectives of antitrust with Thom Lambert of the University of Missouri School of Law and Elinor Hoffman of the New York Attorney General’s Office. Sandeep noted that “[i]n a society where Congress is the maker of laws at the federal level, Congress should define the purpose of antitrust law. Accordingly, we look to the text and legislative intent in interpreting the antitrust laws. If we lived in a dictatorship with a ruling junta of economists, it would be different.”
  • In an article by Farhad Manjoo on the prospect of Facebook CEO Mark Zuckerberg stepping down, Barry Lynn told The New York Times that “Facebook’s problems grew out of its business model and the legal and regulatory vacuum in which it has operated — not the man who runs it.”
  • Le Figaro interviewed Barry Lynn about the risks that large corporations like Google, Facebook, and Amazon pose to markets and democratic society. He emphasized that antitrust principles can address their harms so long as leaders commit to countering their political power.
  • Le Monde interviewed Matt Stoller on the issue of why the Democratic Party has failed to adequately confront monopolies. Matt argued that doing so is vital to restoring the nation’s democratic system and economic health.
  • Der Spiegel quoted Barry Lynn about the need to address technology corporations’ power in order to stem the swells of xenophobia, fascism, or worse, in Europe, and the world.
  • Phillip Longman addressed the advocacy group, Health Over Profits, on how monopoly threatens the prospects for single-payer health care, and the need for single-price health care.
  • Sandeep Vaheesan spoke at “Digital Platforms & the Right to Sue: The Supreme Case Apple v. Pepper,” an event at Georgetown Law School’s Institute for Technology, Law & Policy. Sandeep talked about Open Markets’ amicus brief in support of iPhone owners against Apple’s monopoly over its App Store.
  • Sandeep Vaheesan debated the question “Is Big Tech Too Big?” organized by George Mason University Law & Economics Center and the House and Senate Judiciary Committees. Sandeep debated Tad Lipsky from the Antonin Scalia Law School and argued that the growth of Facebook and Google has involved mergers and conduct that likely violated existing antitrust law.
  • David Dayen used Claire Kelloway’s Food & Power reporting in an article about J.D. Scholten’s campaign with anti-monopoly elements in Iowa’s Fourth Congressional District. Dayen discussed corporate consolidation’s devastation of American agriculture, and used Claire’s story to point out that “Even farm credit companies have merged, narrowing choices for financing that every farmer needs.”

The Myth That Won’t Die – That Airline Deregulation Worked

Last Tuesday, the Brookings Institution held an event lauding deregulation of the airline industry. Typical of the speakers was Dorothy Robyn, formerly a transportation advisor to the Clinton White House. Robyn characterized deregulation as a “resounding success for consumers … Overall, I think airlines are giving passengers what they consistently indicate that they want, which is lower fares at the expense of service.”

That airline deregulation has been “success” is a commonly held idea in certain circles of liberal policy wonks. But it’s not one that many Americans share – and for good reason.

Start with the premise that deregulation has brought lower fares. In reality, after adjusting for inflation and changes in energy prices, fares were falling faster before deregulation went into effect in 1978 than they did afterwards. Indeed, if one accounts for the decline in the quality of the product, including factors such as smaller seats, fewer direct flights, baggage fees, and rampant price discrimination against people who need to change their travel plans, the real cost of flying has arguably not improved at all even on highly traveled routes.

Meanwhile, as Phil Longman and Lina Khan have documented, in “flyover” America, the stripping of air service to cities such as St. Louis, Minneapolis, Cincinnati and Memphis – due mainly to the wave of mergers over the last 20 years – has played a huge role in driving business from these heartland communities and driving up regional inequality.

In the case of Memphis, for instance, the local airport saw passenger volumes fall from more than 11 million passengers in 2007 to just 4 million in 2017, following the merger between Delta and Northwest Airlines in 2008.  The New York Times in May wrote about Memphis’s woes, quoting Memphis International Airport CEO Scott Brockman saying, “Probably the biggest impact was the psychology on the community — ‘Oh, my God, we’re not going to be a real city any more.’”

The American public certainly gets this. Airlines consistently rank among the lowest of all industries in surveys of customer satisfaction. The deterioration of airlines service has become such a commonplace of American life that The Wall Street Journal recently did a playful interview in which the paper asked Delta and American Airlines’ CEOs to sit in one of their coach seats, and “explain why they think the skimpy confines of coach today are acceptable.” Their answers? You’re welcome to buy more space.

Some speakers at Brookings acknowledged customer dissatisfaction with airlines. “I think airlines have really shot themselves in the foot,” said MIT professor Nancy Rose.

But aside from a brief comment from Rose, who urged antitrust enforcers “to take a pretty skeptical view at this point forward of any additional consolidation,” no one talked about how the combination of deregulation and monopolization has failed many Americans. Even the great intellectual champion of airline deregulation, Alfred Kahn, understood that deregulated markets can’t be efficient if they become cornered. Emphasizing the need for strong antitrust enforcement to stem an airline merger wave in 1986, Kahn said, “This administration had better be tough on applying antitrust laws.” That didn’t happen, and today a mere four airlines control nearly 70 percent of the U.S. domestic markets. At 40 of the 100 largest U.S. airports, a single airline controls a majority of the market; at 93 of the top 100 airports, one or two airlines control a majority of the seats.

To make matters worse, those same four airlines also share a number of large investors. That’s one of the findings of a major study in the Journal of Finance published earlier this year by José Azar, Martin C. Schmalz, and Isabel Tecu. The authors find that this common ownership results in the four airlines competing less fiercely with one another. “[E]ach of Southwest’s top-six shareholders is among the top-10 shareholders of American and Delta, and five of them are among the top-10 holders of United as well.” Warren Buffett’s Berkshire Hathaway, Vanguard, and BlackRock alone are among the top five shareholders in all four major airlines.

📈 VITAL STAT:

The number of people that could soon control most of the world’s public companies, thus presenting “The Problem of Twelve,” argues Harvard law professor John C. Coates in a new paper. Referring to the size of the board of a typical public company, “The Problem of Twelve” means that “We are rapidly moving into a world in which the bulk of equity capital of large companies with dispersed ownership will be owned by a small number of institutions.” This is because the rise of passive investing “is concentrating power over all public companies in the hands of one board-sized group,” Coates finds.

📚 WHAT WE’RE READING:

  • The Curse of Bigness: Antitrust in the New Gilded Age (Columbia Global Reports, Tim Wu): A concise and accessible history of antitrust laws, including how the University of Chicago (and Harvard) wrecked them and how we can revitalize them. Some of Wu’s proposals include tougher merger enforcement using bright-line and per se rules, as well as warming to the old idea that corporations that are too monopolistic have to be broken up.
  • “The Growth of Sinclair’s Conservative Media Empire” (The New Yorker, Sheelah Kolhatkar): How Sinclair acquired and takes advantage of its enormous power over local television stations across the country to exploit one of peoples’ most trusted sources of news in the service of its partisan, ideological agenda, all to the detriment of local journalism and the civic square.

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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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