The Perils of Industry Concentration

A comprehensive study of recent mergers found that product prices rose postmerger in nearly two-thirds of cases. Price increases are particularly burdensome for individuals and families on the lower end of income distribution.

Not only does economic consolidation exacerbate economic inequality among consumers, it also increases the economic disparities among workers. Top firms in concentrated sectors that enjoy abnormally high profits reward their employees with higher wages, a trend that is widening between-firm inequality.

Growing market power has also harmed the forces of economic dynamism. Consolidation helps explain, in part, the declining formation of new firms. The same barriers to competition that have allowed incumbent firms to expand their market share make it costlier for new firms to get off the ground. Declining startup activity means fewer incumbents face displacement by new competitors. This lack of competition contributes to private-sector underinvestment.

These trends deserve—and are beginning to receive—bipartisan attention. The Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights convened a hearing on the subject. As testimony offered during the hearing made clear, the current debate features three different understandings of the purpose of antitrust legislation, and three different standards for judging when antitrust enforcement is warranted.

Three Theories of Antitrust

Both conservatives and progressives invoke “consumer welfare” as antitrust’s core concern, but they offer divergent interpretations of this concept. Guided by the late Robert Bork’s seminal work, The Antitrust Paradox, conservatives invoke a total welfare standard that regards efficiency-enhancing mergers as presumptively legitimate, no matter how those gains are allocated between consumers and producers. For their part, progressives also focus on the consequences for consumers, but employ a broader understanding of consumer welfare that encompasses quality, innovation, and choice as well as price.

A third stance entered the fray more recently. Populists regard the consumer welfare standard as inadequate because it pays no attention to the political dimension of antitrust—in particular, to the connection between economic concentration and corporate political power. Reflecting a tradition extending back a century to the thinking of Louis D. Brandeis, populists believe that a multiplicity of businesses is preferable to a small number of large firms—for the health of local communities as well as economic sectors—even if consumers pay higher prices.

Populists offer a plausible account of the historical record. From the beginning, antitrust legislation has reflected a wide range of concerns. Some advocates have objected to excessive economic concentration because of its effects on prices and competition. Others have emphasized the civic importance of preserving local businesses, protecting small producers against the superior market power of large corporations, and safeguarding political equality.

Nonetheless, the populist stance has left both conservatives and progressives worried that a radical revision of the current framework would mean transforming antitrust into an arena of political contention without clear standards to guide administrators and judges, ultimately weakening the antitrust regime.

The Best Way Forward

Despite our sympathy for the populists’ historical understanding, we share these concerns. At the same time, we do not believe that the conservative interpretation of consumer welfare adequately reflects that animating purpose of antitrust legislation.

The need to both craft clear, predictable rules and renew vigorous enforcement inclines us toward the progressive approach, and it shapes the four proposals at the heart of our recent report.¹

First, the antitrust agencies should reinvigorate the “structural presumption” against excessive sectoral concentration and tighten the enforcement standards for horizontal mergers. This includes lowering the threshold at which prospective mergers are subject to rigorous scrutiny. The current threshold at which antitrust scrutiny is triggered has failed to prevent harmful levels of concentration, as evidenced by the data outlined above. This permissive approach has directly contributed to rising concentration. The agencies should also rely on its “look-back” authority, reversing mergers if evidence emerges showing anticompetitive effects.

Second, the agencies should update the Non-Horizontal Merger Guidelines to reflect the reality that vertical integration can have anticompetitive effects. Revisions might include dismissing the presumption that nonhorizontal mergers are pro-competitive, paying special attention to acquisitions by dominant firms, and placing the burden of proof on the merging parties to demonstrate pro-consumer effects. Updated guidelines should acknowledge that remedies that make merger approval contingent on meeting behavioral criteria (such as Google’s promise to the Federal Trade Commission not to pull content from user reviews from third-party sites) are often inadequate. Instead, as Makan Delrahim, assistant attorney general for the antitrust division of the U.S. Department of Justice, advocated in an address, the agencies should offer structural remedies, such as divestiture, as a substitute when needed.

Third, U.S. antitrust enforcement needs a new regime to deal with predatory pricing. There are few tools to wield against American antitrust. When episodes such as Mylan’s 400% price hikes for its EpiPen product stoke public outrage, the government is forced to rely on hearings and public shaming to induce corporations to lower monopoly pricing, a strategy that often fails. A predatory pricing regime would also tackle price-cutting efforts that reduce but do not eliminate a dominant actor’s profit margin but can force weaker actors to capitulate, rendering the market less competitive. For example, after Amazon’s first attempt to acquire Quidsi was rejected, Amazon initiated a price war against Quidsi, a move that ultimately forced the competing e-commerce platform to merge with Amazon.

Fourth, the transaction costs of antitrust enforcement should be reduced. This would include reinstating a rule that has allowed automatic appeals of district courts’ antitrust decisions to the Supreme Court, bypassing an entire level of appellate review. Expediting enforcement will alleviate the drain on agencies’ resources that results from the current lengthy process. The longer that monopoly abuses are allowed to persist, the more entrenched offenders become, and the more unlawful rents they can extract from consumers. Forcing firms to disgorge these ill-gotten gains after the fact is difficult at best, and there is no way of compensating potential entrepreneurs that monopolistic firms deterred from starting new businesses.

These proposals, we conclude, will work best as the basis of a reformed 21st-century antitrust regime that can command bipartisan support.

TAKEAWAYS

Market consolidation is on the rise, bringing with it several negative economic consequences. It is exacerbating income inequality among consumers and increasing wage disparities among workers, further widening between-firm inequality.

✓   The framework that has guided antitrust enforcement for the last four decades is coming under intense scrutiny, but there are multiple schools of thought regarding the best path forward.

✓   Both conservatives and progressives invoke “consumer welfare” as antitrust’s core concern, but they offer divergent interpretations of this concept. Populists regard the consumer welfare standard as inadequate because it pays no attention to the political dimension of antitrust.

✓   To reverse these troubling trends, antitrust agencies should:

• Tighten the enforcement standards for horizontal mergers
• Reverse mergers if evidence shows anticompetitive effects
• Update their guidelines to reflect the reality that vertical integration can have anticompetitive effects
• Develop new tools to deal with predatory pricing
• Reduce the transaction costs of antitrust enforcement

NOTE

1. 1. William A. Galston and Clara Hendrickson, “A Policy at Peace with Itself: Antitrust Remedies for Our Concentrated, Uncompetitive Economy,” Brookings Institute, January 5, 2018, https://www.brookings.edu/research/a-policy-at-peace-with-itself-antitrust-remedies-for-our-concentrated-uncompetitive-economy/.

Adapted from content posted on hbr.org, January 9, 2019 (product #H043T0).