The Corner Newsletter, March 7, 2019: How to Challenge Vertical Mergers
Welcome to The Corner. In this issue, we show where the Justice Department went wrong in its challenge to AT&T’s acquisition of Time Warner. We also highlight several works recently put out by Open Markets opposing monopoly power.
Open Markets Welcomes New Director of Enforcement Strategy Sally Hubbard
Open Markets is pleased to announce that Sally Hubbard, a well-respected antitrust expert and former enforcer, is joining the Open Markets Institute as Director of Enforcement Strategy. Assistant Attorney General in the Antitrust Bureau of the New York Attorney General for six years, Hubbard brings deep expertise on critical sectors such as platform monopolies like Facebook and Google. She was honored with the Louis Leftkowitz Award for her work in investigating municipal bond derivative bid-rigging and has worked most recently as a Senior Editor for The Capitol Forum leading their monopoly coverage.
Open Markets Congratulates Lina Khan Moving to the Hill
Open Markets congratulates Lina Khan on her new position on the staff of the House Subcommittee on Antitrust, Commercial, and Administrative Law. In a tweet on Monday, Lina said, “It’s a critical moment for antitrust hearings, investigations, and oversight. Looking forward to the work ahead.”
Lina also, in her last major article for Open Markets before moving to the Hill, released an important take on the debate over how to regulate tech platforms. Co-written with Columbia Law professor David Pozen, the article is entitled “A Skeptical View of Information Fiduciaries.” Lina and Pozen argue that “The relevant inquiry for legal reformers should not just be how a firm such as Google or Facebook exercises its power over end users, but whether it ought to enjoy that kind of power in the first place.”
Open Markets Letter Calls on DOJ to Block Merger to Monopoly in Printing Industry
Yesterday, Open Markets, alongside PEN America and the Authors Guild, sent a letter to the Antitrust Division of the Justice Department calling for it to block Quad/Graphics’ $1.4 billion acquisition of LSC Communications. The merger stands to combine the country’s two largest printers of mass market books and long-run magazines, or magazines with circulations numbering in the hundreds of thousands. Not only do Quad and LSC print of nearly all the consumer magazine that one can think of, but they are also the only distributors of magazines. This means that any competing printer has to rely on Quad or LSC to get their magazines on to newsstands. The letter also makes clear that Quad and LSC’s merger threatens the open exchange of ideas and information that is essential to free press and democracy. You can read the letter here.
Open Markets Submits Amicus Brief in First Circuit on Behalf of New England Residents Cheated by Dominant Utilities
Open Markets submitted an amicus curiae brief on Friday to the U.S. Court of Appeals for the First Circuit in support of a New England residents’ class-action lawsuit against two vertically-integrated energy utility corporations. The residents accuse the utility corporations of creating an artificial shortage of natural gas in order to drive astronomical increases in monthly electricity bills. The lawsuit claims that this scheme cost ratepayers in the class $3 billion in total. A lower court dismissed the lawsuit on the grounds that the “filed rate doctrine” shielded the utilities’ actions.
The Open Markets brief called on the First Circuit to overturn the lower court’s decision because it erred in applying the filed rate doctrine to this case. The filed rate doctrine traditionally applies when a regulated utility’s rates are approved or validated before they take effect; the utilities in this case charged “market-based prices” and did not file these prices in advance of their effectiveness. The Open Markets Institute also stated that given the rollback of rate regulation in the energy industry, full enforcement of the antitrust laws is essential “to protect the public from the collusive, exclusionary, and unfair practices of producers and traders of electricity and natural gas.” You can read the brief here.
D.C. Circuit Signals Openness to Vertical Merger Challenges, Cites Open Markets
Last Tuesday, the U.S. Court of Appeals for the D.C. Circuit upheld the district court’s ruling that allowed AT&T to acquire Time Warner. The three-judge panel found no clear errors with the trial court’s opinion allowing a vertical merger between two corporations at different stages of the video programming supply chain.
Some have portrayed the decision as a general rejection of efforts to challenge vertical mergers. Yet any fair reading of the decision reveals the exact opposite. The D.C. Circuit made clear that enforcers actually have ample reason to challenge vertical mergers and multiple grounds on which to do so.
The appellate court ruled that the district court reasonably interpreted the Justice Department’s evidence on price effects and rejected the Justice Department’s argument that the merger should be blocked because it would raise prices to consumers. In doing so, the decision dealt a hard blow to the claims that the “consumer welfare” philosophy of antitrust enforcement, with its fixation on short-term prices and output (as defined by neoclassical economics), is up to the task of protecting the public from harmful concentrations of economic power.
In allowing the merger, however, the court cited Open Markets’ amicusbrief for the proposition that “[v]ertical mergers can create harms beyond higher prices for consumers, including decreased product quality and innovation.” As an example, it noted that the Supreme Court once blocked a vertical merger “without quantitative evidence about price increases.” In total, the court made three citations to the amicus brief Open Markets filed in support of the government’s case to block the merger, and specifically to highlight the harms that can come from vertical integration.
Unfortunately, the Justice Department appealed the district court’s decision mainly on the basis that it had erroneously interpreted an economist’s predictive, quantitative model. This strategic error by the Justice Department forced the appellate court to focus on how the district court handled that flawed model.
In stating that quantitative evidence is not required, the court’s decision provides the foundation for more vigorous enforcement of U.S. laws designed to limit vertical integration. This includes efforts to challenge future acquisitions by powerful platform monopolists. That’s because many such platform monopolists operate in what is sometimes termed “zero-price markets,” or markets where the products often have no dollar price. The harms to competitive market structures and consumers and businesses are real, notwithstanding the lack of easily quantifiable effects.
More broadly, the appellate court acknowledged the larger debate now underway over how to analyze vertical mergers under the Clayton Act. One citation recognized the Open Markets Institute for calling for a clear articulation of legal standards governing vertical mergers, while another relied on its gathering of an authoritative list of cases confirming that enforcers have to show a “reasonable probability” of competitive harm. The Court observed that the Justice Department’s guidelines for vertical mergers “were last updated in 1984, over three decades ago.”
Other policymakers have also recently recognized the need to re-examine vertical merger enforcement. The FTC’s hearings on “Competition and Consumer Protection in the 21st Century” devoted a day to talking about new potential vertical merger guidelines and what the proper legal standard for those guidelines would be. FTC Commissioners Rohit Chopra and Rebecca Kelly Slaughter, in particular, have sounded the alarm on vertical integration.
Slaughter, dissenting from the FTC’s 3-2 decision to allow office supply reselling giant Staples to merge with the country’s largest wholesaler of office supplies, noted that vertical mergers “can be just as pernicious in sapping our economy’s vitality.”
In a comment to the Federal Trade Commission in December, the Open Markets Institute called for antitrust enforcers to set forth new vertical merger guidelines that would recognize the competitive harms of vertical integration. To guide them, the Open Markets Institute pointed to the Department of Justice’s 1968 Merger Guidelines as a template. In implementing Congress’s intent in enacting and amending the Clayton Act, these guidelines set clear market share cutoffs and rejected an “efficiencies defense,” which would permit otherwise illegal consolidations because they allow the merged firm to achieve productive efficiencies.
ANTI-MONOPOLY RISING:
House and Senate Democrats introduced the Save the Internet Act, which would reinstate net neutrality laws, preventing Internet service providers from discriminating based on a range of factors. House Speaker Nancy Pelosi, D-Calif., said that the bill would “giv[e] to entrepreneurs and small businesses a level playing field and ensur[e] American innovation can continue to be the envy of the world.”
Sens. Todd Young, R-Ind., Elizabeth Warren, D-Mass., Marco Rubio, R-Fla., Ron Wyden, D-Ore., and Tim Kaine, D-Va., joinedSen. Chris Murphy, D-Conn., in calling for the Government Accountability Office to conduct a study on the use of non-compete clauses in employment contracts. The senators wrote: “We are concerned that the use of non-compete agreements on a large scale could slow economic and wage growth, reduce productivity and competition in labor markets, and create significant barriers to entrepreneurship and innovation.”
In a Tuesday interview, Sen. Amy Klobuchar, D-Minn., said, “We have a monopoly problem.” Later that day, she spoke about that monopoly problem in a Senate antitrust subcommittee hearing, titled “Does America Have a Monopoly Problem?: Examining Concentration and Competition in the US Economy.” In her opening remarks, she pointed to the country’s history of anti-monopoly: “Every step of the way, people saw [anti-monopoly] not as some partisan issue. They saw it as a way to encourage capitalism, encourage entrepreneurship, encourage innovation. We must look at it in that vein in addition to the consumer vein as we move ahead.”
Congresswoman Jan Schakowsky, D-Ill., chair of the House Consumer Protection and Commerce Subcommittee, in her opening statement at the hearing on “Protecting Consumer Privacy in the Era of Big Data,” said, “Rules alone are not enough. We also need aggressive enforcers. Unfortunately, in recent years, the Federal Trade Commission’s (FTC) enforcement actions have done little to curb the worst behavior in data collection and data security … We must understand why the FTC hasn’t used its existing suite of tools to the fullest extent, such as its Section 5 authority to ban ‘unfair methods of competition’ or its ability to enforce violations of consent decrees.” You can watch the full hearing and read her full statement here.
House antitrust subcommittee chair Rep. David Cicilline, D-R.I., told the Financial Times, “It’s an interesting idea whether there would be a way to think about separating what platforms do versus people who are selling products and information – a Glass-Steagall for the international [technology companies].” Cicilline also tweeted on Monday, “I’ve said it before. I’ll say it again. Facebook cannot be trusted to regulate itself. Congress needs to act.”
Sen. Mark Warner, D-Va., responding to reports that Google failed to inform its Nest security system users that the device contained a microphone that could listen to them and sync with Google Assistant, said, “Both responsible federal agencies and the U.S. Congress must have hearings to shine a light on the dark underbelly of the digital economy, including how incumbents are shaping the smart home ecosystem in potentially unfair and anti-competitive ways.”
Senate Minority Leader Chuck Schumer, D-N.Y., sent a letter to Alden Global Capital asking the hedge fund about its attempt to purchase Gannett, which publishes hundreds of newspapers across the country. Schumer expressed concern that the fund “has been unwilling to publicly provide relevant details regarding the proposed acquisition” and asked Alden how its purchase of Gannett would affect journalists and workers at Gannett-owned papers.
The American Enterprise Institute and the Brookings Institution, in a letter to the Senate Committee on Health, Education, Labor, and Pensions, recommended ways to bring down healthcare costs. Their second suggestion? “Ensure effective anti-trust enforcement. … Too much consolidation can lead to higher prices and lower quality.”
A bipartisan group of more than a dozen state attorneys general voiced serious concerns about T-Mobile and Sprint’s pending merger, suggesting that they may sue to block the deal. Talking about the merger, Maryland Attorney General Brian Froshsaid, “That’s dangerous for competition. That’s dangerous for consumers.” Thirty-six Democrats also signed on to a letter from Rep. Rashida Tlaib, D-Mich., to the Justice Department and the Federal Communications Commission opposing the deal.
The Department of Defense Office of Inspector General last week reviewed the Defense Department’s purchase of airplane parts from manufacturer TransDigm between 2015 and 2017. The Inspector General found that, out of 47 parts that the Defense Department agreed to purchase from TransDigm, “TransDigm earned excess profit on 46…” The excess profit percentages “rang[ed] from 17 to 4,451 percent.”
WHAT WE’VE BEEN UP TO:
In an op-ed for The New York Times on Wednesday, Matt Buck and Sandeep Vaheesan argue that despite the tweets of the President appearing to criticize platform monopolists, the Justice Department’s Antitrust Division has been quietly advancing radically pro-monopoly legal positions through its amicus brief program. Besides advancing the interests of large tech corporations, the division has also second-guessed the laws of states and cities as communities work to structure markets democratically. “Instead of … deference to corporate power and condescension to our elected representatives,” Buck and Vaheesan write, “the department should be confronting monopolies in tech and elsewhere and respecting the policy choices of state and local officials.”
Austin Frerick wrote an article for The American Conservative magazine explaining how addressing concentrated corporate power throughout the country’s agriculture and food systems can help rural American communities. “Rural American can thrive once again,” Frerick writes, “but only if we’re willing to challenge who holds power in the current system.”
Earlier last month, Lina Khan delivered a keynote address at the Publishers Association of the West’s annual conference in Santa Fe, New Mexico. She spoke about corporate concentration across the economy, from rental cars to banking and airlines, and talked about the harms of monopolies and how the “consumer welfare standard,” with its fixation on short-term price, has helped lead to the rise of a platform monopolist like Amazon.
Sally Hubbard spoke of the interlinkages between concentrated power and gender discrimination, at the Organization for Economic Cooperation and Development’s “Gender Equality in Business” event in Paris.
Lina Khan talked about her groundbreaking 2017 paper in the third part of Planet Money’s three-part series on antitrust law, as well as “some of the blind spots of the current antitrust approach” and how those blind spots benefit platform monopolists.
Matt Stoller spoke on a panel at the Cato Institute asking, “Is Big Tech Too Big?” Of Google, Matt said, “The business model is both to profit off of those dominant divisions but also to tie them together, to exclude competitors and thereby control a large share of the online advertising market.”
Sally Hubbard spoke to the BBC Business Daily about “Twenty-first century monopolists” saying that many platform monopolists “have been successful in some ways, but along with that success they’ve also done a lot of anticompetitive conduct.” One way that “they’ve gotten very big and successful has been through acquisitions. Collectively the tech giants have acquired hundreds of companies, hundreds, including competitive threats.”
Barry Lynn spoke to Wired about new European Union rules requiring platform monopolists to rein in, and mandate greater transparency and disclosure of some of those platforms’ business practices. “These rules do not get to the heart of the problem,” he said. “Google, Facebook, Amazon manipulate the ways in which people who are selling something interact with people who are buying things, and they manipulate it for their own self-interest.” Wired also quoted Lina Khan explaining that, “The effort to ban the combination of abrupt account closures & no opportunity to appeal is good – but Amazon, for example, would probably argue that it already offers ‘clear reasons’ for all suspensions (a claim that vendors would dispute).”
Matt Stoller was skeptical of the FTC’s new plan to create a technology task force to monitor platform monopolists. Stoller criticized the FTC for not “want[ing] to do their No. 1 job, which is to police markets for unfair and anticompetitive behavior.” Techdirt, Wired, and The Washington Post quoted from Stoller in their coverage of the decision. He also talked about it with Bloomberg’s Emily Chang and David McLaughlin last Wednesday. You can watch that interview here.
Similarly, the Open Markets Institute and Sarah Miller called for the FTC to “do its job” in The Wall Street Journal and The Mercury News. Talking to Morning Consult about growing public pressure on enforcers to act, Miller said, “I think people have started to see and notice a lot of the crazy ways that these companies operate through targeted advertising … As these companies really try to entrench themselves in our lives, it’s become more obvious.”
Matt Stoller, discussing in Vice whether Sen. Elizabeth Warren’s foregoing of fundraisers with wealthy donors meant that rich “Obama donors were losing control of the party,” said, “It’s a battle … To paraphrase Churchill: It isn’t the beginning of the end, but it is the end of the beginning.”
Politico quoted Matt Stoller, responding to reports that President Trump pressured the Justice Department to challenge AT&T’s acquisition of Time Warner, tweeting, “If this is true, Trump should be impeached.”
In The American Conservative, Gracy Olmstead’s wrote about the many harms of a concentrated seed market and drew repeatedly from Claire Kelloway’s Washington Monthly article earlier this year. Kelloway noted that farmers are not only “paying monopoly prices for a diminishing selection of seed strains produced by [a] handful of giant corporations, they also are paying monopoly prices for fertilizers and pesticides, often to the same corporations.”
VITAL STAT: 201, $3,534
Cost in hours and money, respectively, to the average American of reading privacy policies every year, according to a 2008 study by Aleecia McDonald and Lorrie Cranor.
WHAT WE’RE READING:
The Billionaire Boondoggle: How Our Politicians Let Corporations and Bigwigs Steal Our Money and Jobs (Thomas Dunne Books, Pat Garofalo): A detailed, well-written account that marshals rigorous research and reporting to show why communities’ tax giveaways to Hollywood, sports teams, casinos, and corporate titans, like the ones the country saw during Amazon’s HQ2 ordeal, make little sense for anyone else.
From Gutenberg to Google: The History of Our Future (Brookings Institution Press, Tom Wheeler): A thoughtful history of the “two great network revolutions” that shaped our world: first, the printing press, then second, the railroad and telegraph. Wheeler writes on what this history suggests for our current third network revolution in “artificial intelligence, virtual reality, blockchain, and the need for cybersecurity.”
“How the Federal Government Rigs the Game Against Small Businesses” (Washington Monthly, Stacy Mitchell): Why the FTC’s recent 3-2 approval of the merger between office supply reseller Staples and office supply wholesaler Essendant demonstrates that “[t]he government is systematically structuring markets so that even the most competitive ones face almost impossibly long odds.”
Read Open Markets’ comment to the FTC criticizing its decision as “add[ing] to the legitimacy crisis facing the commission” here.
“The Sprint T-Mobile Merger Could Mean Higher Cell Phone Bills for Low-Income Americans” (TalkPoverty, Keldon Bester): Why the merger between the telecom giants would be especially harmful to low-income Americans.
Written by Barry Lynn, Phil Longman, Sandeep Vaheesan, and Matt Buck
Edited by Barry Lynn, Phil Longman, Sandeep Vaheesan, Katherine Dill, Claire Kelloway, and Matt Buck