Antitrust Update Blog

“New Brandeis” Antitrust Concepts Hit the Campaign Trail

As we discussed in a previous post, a new school of thought about antitrust law (or, rather, a new application of old antitrust principles) has received increasing attention in recent months.  The so-called “New Brandeis” approach seeks to shift the focus of antitrust law from consumer welfare alone to include the competitive structure of markets.  Recent attention to these arguments is often traced to the publication of Lina Khan’s Yale Law Journal article "Amazon's Antitrust Paradox."  (Khan, who previously served as an advisor to FTC Commissioner Rohit Chopra, was just hired as counsel for the House Judiciary Committee’s Subcommittee on Antitrust, Commercial and Administrative Law.)[1] Indeed, as we discussed last week, the Senate Judiciary Committee held hearings focusing on potential changes to the consumer welfare standard currently used by federal courts in evaluating antitrust claims.

The primary critique made by the New Brandeisians is that modern antitrust law is singularly focused on promoting consumer welfare in the form of low prices, but this approach ignores both legislative history (which shows that statutory drafters were concerned with dominant market power regardless of its effects) and the potential deleterious impacts of monopoly other than supracompetitive pricing (such as the diversity and quality of goods available in a market).  According to New Brandeisian critiques, these problems can be corrected by shifting the focus of the law back to the structure of markets, thereby ensuring they remain open and competitive.  New Brandeisians argue that the failure to make these corrections leave current antitrust jurisprudence ill-suited to protect against the anticompetitive issues posed by the internet, the technology sector, and related industries.  In these industries, they argue, companies use tactics to grow their market power that the law currently regards as unobjectionable, but nonetheless have long-term anticompetitive effects on the markets in which they operate. 

For example, many antitrust economists and other practitioners argue that predatory pricing (pricing goods below cost in an attempt to drive rivals out of business) is of minimal concern on the grounds that a monopolist will almost never be able to recoup their losses by raising their prices after competitors exit the market and the likelihood of complete existing is small.  New Brandeisians, however, argue that tech companies that operate platforms such as Amazon or Facebook may be able to successfully engage in this practice (without recouping foregone profits) because network effects spur a winner-takes-all race where an increase in market share increases the durability of that share.  The two-sided nature of platforms and the diversity of their offerings may make it harder to detect recoupments (to the extent they occur) if they are extracted from producers (rather than consumers) or on a product different from the one that was predatorily priced.  The potential for invisible recoupment is exacerbated by the ability of e-commerce companies to offer individual prices to individual customers, which makes it difficult to even measure prices in the aggregate.

Antitrust law today is similarly reluctant to challenge vertical integration by firms for fear of the loss of efficiency such integration may bring and the difficulty in demonstrating actual adverse competitive effects. But as a potential counterexample, in her article Khan explains that through vertical integration, Amazon has begun competing with firms that depend on it.  For example, Amazon is able to extract large discounts from shippers because of its size, but shippers then try to make up for these discounts by extracting higher prices from independent sellers.  This “waterbed effect” helped grow Amazon’s Fulfillment-by-Amazon (“FBA”) service through which it stores, packs, and ships the goods of independent sellers.  “[B]ecause Amazon had secured discounts unavailable to other sellers, it was cheaper for those sellers to go through Amazon than to use UPS and FedEx directly. Amazon had used its dominance in the retail sector to create and boost a new venture in the delivery sector, inserting itself into the business of its competitors.”  A seller that uses the FBA service is likely to be listed higher on Amazon search results, so the growth of its logistics arm reinforces its hold on the e-commerce market.  Amazon can also use the data it gathers from sellers and customers to evaluate what product markets to enter as a manufacturer under its AmazonBasics brand.  And once it starts manufacturing a product, it can boost its visibility and adjust its pricing to help it outsell its rivals.

Khan proposes two solutions to the issues she flags: direct regulation of certain platforms as public utilities or common carriers or structural remedies, like prohibiting companies from getting into certain lines of business and requiring divestment of some business units.

As we noted previously, Khan’s article (and the New Brandeis approach) is both the subject of criticism and support.  But at least one declared presidential candidate—United States Senator Elizabeth Warren—has aligned herself with the New Brandeis arguments.  In early March, Warren called for “[r]estoring competition in the tech sector” through “break[ing] up Big Tech.”  In a blog post, she claims that “big tech companies have achieved their level of dominance in part based on two strategies: using mergers to limit competition [and] using proprietary marketplaces to limit competition.”  She then explains that, going back to the Progressive Era, America has recognized that “ownership of a network and participating on the network caused a conflict of interest,” and instead of nationalizing such industries, America has “required structural separation between the network and other businesses, and . . . demand[ing] that the network offer fair and non-discriminatory service.” 

Senator Warren advocates addressing perceived problems posed by tech platforms in two ways.  First, Congress would pass legislation “that requires large tech platforms to be designated as ‘Platform Utilities’ and broken apart from any participant on that platform.”  Larger companies that meet the definition of a “platform utility” would be “prohibited from owning both the platform utility and any participants on that platform”; “required to meet a standard of fair, reasonable, and nondiscriminatory dealing with users”; and “not be allowed to transfer or share data with third parties.”  Smaller platforms would not have the same structural impediments but would also need to abide by the same standard of fair, reasonable and nondiscriminatory dealing with users.  Under this law, Amazon Marketplace, Google’s ad exchange, and Google Search would “platform utilities.”  “Therefore, Amazon Marketplace and Basics, and Google’s ad exchange and businesses on the exchange would be split apart. Google Search would have to be spun off as well.”  Second, her administration “would appoint regulators committed to reversing illegal and anti-competitive tech mergers.”  Some mergers Senator Warren would unwind include Amazon’s acquisitions of Whole Foods and Zappos; Facebook’s acquisitions of WhatsApp and Instagram; and Google’s acquisitions of Waze, Nest, and DoubleClick.

It is far too early to tell whether any of these ideas will gain further traction during the upcoming election (or further in the future), but their increasing prominence in debates about antitrust law make them worth monitoring. We’ll continue to post future updates about future developments.

 

[1] Representative David Cicilline, the chairman of this subcommittee, published an opinion article in the New York Times on March 19, 2019 calling for the Federal Trade Commission to investigate Facebook for potential antitrust violations, particularly in relation to how it exploits the data it has amassed.  He warned that if the FTC found that Facebook had violated a consent decree governing its use of user data, “a fine in the low billions of dollars” would be an insufficient punishment that would merely “amount to a slap on the wrist” for the company.