The year was 2017. A young student still in law school published a paper in the reputed “Yale Law Journal”. Typically, articles in such domain-specific journals remain of interest only to members of the academic community. But this one was unusual. It went viral and was even picked up by media outlets. The student in question was Lina Khan, who at 32 was confirmed recently as the youngest chair of the Federal Trade Commission (FTC) with bipartisan support, a rarity in Washington these days. The clue to why she became so popular among politicians and the media lies in the paper’s title: “Amazon’s antitrust paradox”. She was willing to take on “BIG TECH”, a common target for politicians across the political spectrum. Lina is one of the most prominent voices of the “New Brandeisian School” of antitrust. For anyone interested in antitrust issues, her paper is definitely worth reading. This post borrows heavily from it. Also listen to an excellent series of episodes on this topic from the podcast “Capitalisn’t” by the University of Chicago here, here and here. Understanding the “New Brandeisian School” and how it differs from the “Chicago School”, which dominated antitrust policy in the US from the 1970s until today, requires a foray into history.
The late 19th century was called the “Gilded Age” (1870–1900) in America. This was the era of “Trusts” (monopolistic cartels similar to modern-day OPEC in nearly every major industry) and “Robber barons” (wealthy industrialists who were in charge of these trusts and used their wealth, power and political influence to crush competitors, curb unionization and exploit labour). Some popular “barons” of this time include JD Rockefeller (Standard Oil trust with 90% market share in oil production at its peak), JP Morgan and Andrew Carnegie (US Steel trust with 60% market share) and James Duke (American Tobacco trust with 80% market share). The poor labour conditions of this time and the inability of small businesses to compete against these trusts resulted in a populist backlash. The shift in political winds from this backlash led to the breakup of the trusts and gave the US its three primary antitrust laws: The Sherman Act (1890), The Clayton Act (1914) and The Federal Trade Commission Act (1914).
The thing about these acts is that they're intentionally written in vague, broad terms. These laws bear no teeth unless they’re enforced by agencies like the DoJ and the FTC and interpreted by the judiciary when these agencies take companies to court. Until the 1960s, both Democratic and Republican administrations used these laws extensively to sue companies, and the courts set the parameters for their applicability. The focus of antitrust litigation until then was on what Lina calls “Economic Structuralism”, explained best in the passage below from her paper.
The courts during this time blocked both horizontal mergers (involving competitors in the same or similar business lines) as well as vertical mergers (involving one company merging or acquiring another further up or down its supply chain) that were anti-competitive. One example of a vertical merger blocked by the courts is that of a leading shoe manufacturer acquiring a leading shoe retailer. The court made a few arguments opposing the merger:
a) that the combined entity could exclude other shoe manufacturers from stocking their shoes with the retailer and reduce its own competition in the retail space
b) that the merger eliminates “potential” competition, i.e. a dominant shoe retailer could expand into shoe manufacturing tomorrow and increase competition in manufacturing. By acquiring that same retailer today, the shoe manufacturer is eliminating that future threat.
The 1970s changed everything. At this time a revolution was happening in the field of economics and antitrust. The University of Chicago (UofC) was at the forefront of both. The most prominent figure on the economic side was Milton Freidman at the UofC. The legal side was heavily influenced by Robert Bork, a graduate of UofC and Richard Posner, a professor at UofC. Bork even wrote a book at the time called “The Antitrust Paradox”, which is so influential, that it continues to be cited by the Supreme Court of the US in some of its verdicts related to antitrust. The essence of the “Chicago School” of antitrust was a focus on “consumer welfare” and “market efficiency”. The focus shifted from the economic structuralism argument of the 1960s to narrow price and quantity considerations. Concentrated market structures are bad or anti-competitive only if they cause companies to raise prices or restrict the quantity available to consumers. According to this school of thought, predatory pricing, the act of selling a product below cost and sustaining losses to drive out competition is irrational and rarely, if ever, happens. The justification they give is that a company engaging in predatory pricing has to
a) maintain it long enough to drive out competition
b) jack up prices later to recoup the losses and
c) prevent new entrants from being drawn into the sector by the attractive jacked-up price
Given the uncertainty and difficulty of achieving all three successfully, it is unlikely that firms would ever engage in it with anti-competitive intent. The supreme court citing Bork and other Chicago school thinkers applied this principle to cases on predatory pricing. In addition to providing evidence of predatory pricing, the plaintiff was now required to demonstrate that the defendant could recoup the losses in future by jacking up the prices. This requirement was a high bar and killed predatory pricing litigation in the US. Similarly, the Chicago school claimed that the goal of vertical integration was to achieve internal efficiency, not market dominance. So if the shoe manufacturer from the case highlighted earlier achieved internal efficiencies by acquiring a retailer, then they would pass on the benefits to consumers which is actually pro-competitive and should be encouraged! If it in fact didn't see any improvement in efficiency, then it has gained no cost advantage over its competitors and it doesn’t hurt competition. Furthermore, they argued that vertical mergers do not increase market share like horizontal mergers do and therefore, firms cannot raise prices and hurt consumer welfare. This argument pretty much killed vertical merger litigation too. Since then very few vertical mergers have been challenged in the courts.
The “New Brandeisian School” traces its intellectual roots to Louis Brandeis, a US Supreme Court judge between 1916 and 1939. Brandeis was worried a lot about monopoly power and he looked at it through a much broader lens of checking “private concentration of economic power” and preserving “industrial liberty”. He feared that the structure of markets has a strong influence on how individuals experience liberty in their everyday lives. According to him, an individual’s experience of power comes from day-to-day interactions in the economic sphere such as negotiating pay or terms of business with a trading partner, not so much from their interactions with the government. The New Brandeisians also believe that the focus of antitrust should be on market structures and processes and not on narrow outcomes like prices and quantities. The goal of antitrust law should be to ensure that markets are structured in a way that promotes competition. This style of thinking harkens back to the days before the Chicago School when antitrust was used to break trusts even when they were not directly hurting consumer welfare.
The clash between these two schools becomes particularly sharp when it comes to Big Tech. Lina’s paper explains the difference in thinking between the two schools in the context of Amazon and other Big Tech firms.
- The Chicago school identifies predatory pricing as irrational and extremely unlikely to lead to monopolistic markets because firms engaging in it have to maintain it for a while, then jack up prices to recoup losses and prevent new entrants at that higher price. But modern-day tech companies are “platforms” where scale matters. They are winner-take-all markets and investors are more than willing to spend billions in loss-making companies and only worry about profitability after they’ve attained market dominance. The New Brandeisian school argues that this enables firms to engage in predatory pricing with impunity and the current “recoupment test” framework makes it unlikely that a plaintiff will win by taking such a company to court
- The paper also discusses how vertical integration by firms like Amazon can prove to be anti-competitive. This is despite the Chicago schools assertion that vertical integration is irrelevant to consumer welfare or is actually pro-competitive. For example, Lina explains how Amazon’s ability to negotiate steep discounts with delivery companies like UPS due to its sheer size caused other sellers on Amazon to face higher delivery charges. This enabled Amazon to integrate vertically into the delivery market and capture Amazon marketplace sellers’ delivery businesses through its Fulfilment-By-Amazon (FBA) service.
There are several more examples in the paper of how when it comes to Big Tech and any such “platform-based”, “winner-take-all” markets, the current framework of antitrust falls woefully short in identifying and curbing anti-competitive practices.
Since Lina’s confirmation, the current administration has also appointed Tim Wu (another prominent New Brandesian credited with playing an important role in the “net neutrality” debates) to the National Economic Council (NEC) as an antitrust czar. President Biden also signed an executive order on promoting competition stating that it is their policy to “enforce the antitrust laws to combat the excessive concentration of industry, the abuses of market power, and the harmful effects of monopoly and monopsony” and also to “enforce the antitrust laws to meet the challenges posed by new industries and technologies, including the rise of the dominant Internet platforms”. The focus on the concentration of industry rather than consumer welfare demonstrates the influence of the New Brandeisians. The stress on monopsony power and not just monopoly power is also very interesting. Monopsonies are monopolies in the buyer markets, where a single firm or group of firms have so much buying power that they can dictate terms to their suppliers. Coupled with actions by the EU also geared towards reining in big tech, this could be the start of a new era of populist antitrust regulation.
