ICYMI: The Economist Takes Antitrust Enforcers to Task

Washington DC - Last Thursday, The Economist published a special report calling attention to the dangerous levels of market concentration in the U.S. economy and taking antitrust authorities to task for their inaction.

The articles in the report -- “Regulators Across the West are in need of a shake-up”, “The Next Capitalist Revolution” and “Which American industries are most in danger of monopoly?”-- outline the ways U.S. antitrust enforcers, namely the Federal Trade Commission and Department of Justice, are “woefully behind,” “seem to lack basic knowledge about the economy,” and “have been captured…[and] rotate between the agencies and law firms which defend big companies.” The report points to this dereliction of duty as a root cause of today’s radically concentrated markets and sharp decline in the public’s faith in capitalism.

Hitting on some of the themes in the articles, Matt Stoller and Austin Frerick recently wrote in Fast Company about the pervasive conflicts of interest among those who shape and inform antitrust enforcement.

From The Economist:

“Regulators across the West are in need of a shake-up” can be read in full here and is excerpted below:

They suffer from three main problems. The first is a lack of curiosity. The big economic trends are high profits, high and persistent returns on capital, takeovers, tech platforms, some spread of tech through older sectors, a decline in new entrants and the use of “moats” such as patents to protect them from competition. Investors have been aware of this for at least 15 years, and the best ones have profited hugely from it. The world of macroeconomics woke up in 2015 after a landmark paper by Jason Furman and Peter Orszag on the link between companies and inequality, and there has been a surge of studies since.

In America the doj and ftc have been woefully behind. They seem to lack basic knowledge about the economy, although both bodies have newish bosses who may change that. Europe’s trustbusters have a better record. They began to examine digitisation several years ago. They have also been strict with telecoms and airlines, two of America’s problem areas.

The second problem is a lack of clarity. There is no definition of what competition, or its absence, looks like, other than the near-tautology that it is whatever is good for consumers. Instead there are technical offences. Many of the measures used to gauge these look strange. Lots of emphasis is placed on whether prices rise. But consumers can suffer even while prices fall: the cost of a long-distance call was dropping even when telecoms was a monopoly but collapsed after deregulation. In many modern markets there is no price. Payment is in kind, for example in the form of data, not cash.

Competition authorities sometimes look at profitability, but choose some odd definitions. They consider whether prices exceed marginal cost, which is undetectable in the real world. They look at gross margins, but these are not statutorily defined by American or European accounting regulators and are arbitrarily computed by each firm at its discretion. Sometimes experts discuss absolute profits, but rarely the capital used to create them. In this last respect the system has regressed over the past century. The fact that Standard Oil made large profits relative to its capital base was viewed as important during the court case which raged in the early 1900s. Today that would be viewed as risqué.

The third problem is that competition regulators have been captured. Financial regulators were swayed by theories about the efficiency of financial markets and by a revolving door between the public sector and the firms they were supervising. That led to denial about the build-up of risk before 2008. Competition regulators have a dated view of the economy and, in official forums about how to reform competition policy, lawyers acting for private firms are given undue weight. Academics are paid as witnesses or are sponsored by firms without disclosing it. Officials rotate between the agencies and law firms which defend big companies. Consumers rarely have a voice. In America things have slipped so badly that a material conflict of interest is not considered a disqualifying condition, or even a relevant consideration, for someone to pronounce on antitrust policy and be taken seriously.

“The next capitalist” revolution can be read in full here and is excerpted below:

Countries have acted to fuel competition before. At the start of the 20th century America broke up monopolies in railways and energy. After the second world war West Germany put the creation of competitive markets at the centre of its nation-building project. The establishment of the European single market, a project championed by Margaret Thatcher, prised open stale domestic markets to dynamic foreign firms. Ronald Reagan fostered competition across much of the American economy.

A similar transformation is needed today. Since 1997 market concentration has risen in two-thirds of American industries. A tenth of the economy is made up of industries in which four firms control more than two-thirds of the market. In a healthy economy you would expect profits to be competed down, but the free cashflow of companies is 76% above its 50-year average, relative to gdp. In Europe the trend is similar, if less extreme. The average market share of the biggest four firms in each industry has risen by three percentage points since 2000. On both continents, dominant firms have become harder to dislodge.

Incumbents scoff at the idea that they have it easy. However consolidated markets become domestically, they argue, globalisation keeps heating the furnace of competition. But in industries that are less exposed to trade, firms are making huge returns. We calculate the global pool of abnormal profits to be $660bn, more than two-thirds of which is made in America, one-third of that in technology firms (see Special report).

Not all these rents are obvious. Google and Facebook provide popular services at no cost to consumers. But through their grip on advertising, they subtly push up the costs of other firms. Several old-economy industries with high prices and fat profits lurk beneath the surface of commerce: credit cards, pharmaceutical distribution and credit-checking. When the public deals with oligopolists more directly, the problem is clearer. America’s sheltered airlines charge more than European peers and deliver worse service. Cable-tv firms are notorious for high prices: the average pay-tv customer in America is estimated to spend 44% more today than in 2011. In some cases public ire opens the door to newcomers, such as Netflix. Too often, however, it does not. Stockmarkets value even consumer-friendly entrants such as Netflix and Amazon as if they too will become monopolies.

“Which American industries are most in danger of monopoly?” can be read in full here and is excerpted below:

The first question is whether a moat exists. We include firms in concentrated markets, or ones that are heavily regulated or reliant on patents, or whose customer is the state. The next point to decide is whether companies are highly innovative or not. Schumpeter would, correctly, argue that firms which innovate deserve a window of competitive advantage. The third filter is the size of firms’ rents, or the free cashflow generated above a hurdle rate, which could reflect either innovation or a lack of competition (we assume a 12% hurdle rate, exclude goodwill and treated as an asset with a ten-year life).

Then we consider openness, or whether market shares and returns on capital shift around, and whether new entrants exist. Finally, in a nod to worries about Amazon and Netflix, we consider the capacity for firms with keen prices and low rents to engage in long-term “clawback” by eventually cranking up prices in the future. It is a bad idea to punish firms that are a source of disruption, but worth keeping an eye on what they may do in future.