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what problems do people think antitrust is going to solve?

Last week, I asked why antitrust is having a moment (it’s continued, on Planet Money and elsewhere), and why Democrats are using radical language to make fairly modest proposals. In this post, I’m going to ask what problems people think antitrust is going to solve, anyway.

Certainly a lot of the current concern about antitrust comes from a broad sense that corporations are too economically and politically powerful, that our economy has been restructured in ways that make ordinary people worse off, and that massive tech companies are able to use our data in ways that we have little control over. That’s political antitrust. And those are totally real issues.

But I want to explore some new questions being raised that are not exactly within the current scope of economic antitrust, but that are still kind of speaking its language—that are pushing to change the antitrust technocracy, not up-end it. To recap, as it has been construed for the last thirty-plus years, the purpose of antitrust is to promote consumer welfare, generally by trying to keep firms from being able to raise and keep prices above a competitive level. The focus is consumers, and prices.

Increasingly, though, people at least adjacent to the space of antitrust expertise are making claims about economic problems they think are being caused by lax antitrust enforcement, or that antitrust should be addressing. And those proposals are worth keeping an eye on, because as hard as it might be to change the expert consensus, it’s still more likely than a new anti-monopoly movement. (Though the two could certainly reinforce each other.) I see these new arguments as falling into basically three categories.

Market power has effects we didn’t realize

Market power is the ability to keep prices above a competitive level (i.e. above marginal cost). Once upon a time, people thought there was a fairly close relationship between how concentrated a market is—that is, how many companies control what share of the market—and how much market power firms have. Since the 1970s, there has been much less of a presumption that concentration, on its own, indicates market power. That means that there’s been less concern about whether we’ve got four airlines controlling 70% of the U.S. market, or that four carriers control 99% of the U.S. wireless market.

Increasingly, though, people are raising flags about other problems that might result from market power. One of these is labor monopsony—the idea that firms have market power, but as purchasers of labor, not sellers of products, and that this is driving wages down. The Council of Economic Advisers put out a report last fall suggesting this might be happening, and Democrats’ mention of “bargaining power for workers” implies this is part of what they’re trying to address. There are related arguments about market power in supply chains and the emergence of “winner take most” industries that also suggest links between concentration or market power and wages.

In theory, monopsony can be handled within the current legal framework, though it is rarely addressed in practice. So developing arguments about the effects of market power on workers, and a legal framework for addressing that within antitrust, is one conceivable new direction for antitrust.

Others are arguing that market power can lead firms to attach undesirable conditions to products that make them lower quality, even as price remains the same. In particular, some scholars, including Nobel Laureate Joe Stiglitz, have framed privacy as an antitrust issue: the product may be free, but consumers have no choice about how their data is used (and in the case of platforms like Facebook, no equivalent competitors). Privacy is hard to address within a framework focused purely on price. But in Europe, competition policy is increasingly tackling privacy issues, and Germany is currently investigating whether Facebook’s dominant position is forcing consumers to give up their privacy without having an alternative choice.

Market power has causes we didn’t realize

The Atlantic just featured a story with the dramatic title, “Are Index Funds Evil?” The article discusses the rise of large institutional investors—index funds, though not only index funds—and what it means that, increasingly, big chunks of competitors in a specific market are actually owned by the same few corporations. It goes on to discuss work by José Azar, Martin Schmalz, and Isabel Tecu that finds that this common ownership enhances market power, and that airline ticket prices are 3-7% higher than they would be under separate ownership.

In this story, index funds were the hook, but it just as easily could have been framed around antitrust. In a way, common ownership was the original antitrust question: the big trusts of the late 19th century were not single-firm monopolies, but competitors that had turned over ownership to a group of trustees that made unified governance decisions. And while research in this area is still new and findings tentative, legal scholars are already making the case that antitrust law can cover the anticompetitive effects of these horizontal shareholdings. If this work continues to hold up, this seems potentially transformative.

Technological change is creating new threats to competition

Finally, a fair bit of the recent chatter is basically arguing, “it’s the technology, stupid.” The dynamics of competition change as more of the economy shifts to online platforms. Because of network effects, companies like Facebook, Google, Apple, and Amazon are hard to compete with—much of their value comes from their existing user base. And because they aren’t just selling products to consumers, but connecting consumers with producers, they aren’t acquiring market power in the traditional sense. Facebook and Google are free products, after all.

But the power of network effects means that they have a tendency towards monopoly. And the fact that the four largest companies by market capitalization are platforms suggests how central platforms have become to our economy.

So we have these new companies that have become very large, and that appear monopolistic, though they also create great value for consumers. From an antitrust perspective, they don’t really appear to be a problem, because they aren’t raising prices. And the history of rapid technological change over the past 25 years, including the rise and fall of a number of once-dominant platforms, raises the question of whether even platforms behaving in anticompetitive ways pose much of a long-term threat.

Recent scholarship, though, argues that monopolistic platforms are in fact anticompetitive, that it is a problem, and that current law is poorly equipped to handle. Lina Khan’s much-circulated note in the Yale Law Journal, for example, argues that 1) platforms encourage predatory pricing—generally seen as irrational (and thus not an issue) within antitrust law—because network effects encourage pursuit of growth over profit, and 2) platforms collect data on rivals that give them an unfair competitive advantage. These sorts of issues clearly fit within the broad scope of “protecting competition,” but don’t fit easily with a consumer welfare, market power conception of antitrust.

Changing that would be a significant project, but if we have an economy that is dominated by firms whose potentially anticompetitive activity is essentially beyond the scope of antitrust, there’s not much left to antitrust. And again, the massive fine the E.U. just levied on Google—for favoring its own shopping service, consisting of companies that pay Google to be on it, over competitors in search results—suggests what this could look like. So far, the U.S. has not demonstrated much enthusiasm about expanding antitrust in this direction. But it’s not inconceivable that it could happen, and it could be done within a framework that was focused solely on competition, if not only on consumer welfare.

Again, all these challenges to the current antitrust framework are at least in the ballpark of its conversation, even if they would require pushing the law in new directions or advancing the acceptance of new economic theories. And they are not the only arguments that are in play here. For example, the question of whether inequality is facilitated by concentration or market power, or whether it has become such a central economic problem that antitrust should try to address it, have prompted enough discussion that two leading antitrust scholars have felt the need to argue that antitrust should leave inequality alone.

Unlike political antitrust, which would probably require a social movement to move it forward, these antitrust arguments have the potential to gain traction without necessarily requiring legislation or a revolution against the current antitrust regime. The 1970s shift toward Chicago-style antitrust happened, to a considerable extent, because the old economic framework seemed increasingly inadequate for explaining the world people found themselves in. As the current framework comes to seem similarly dated, this could be another moment when such change is possible.

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Written by epopp

August 10, 2017 at 1:33 pm

do we need illegal firms?

Over at Harvard Business Review, Benjamin Edelman argues that Uber’s ultimate problem isn’t bad corporate culture. It’s being an organization that is premised on being illegal. To quote:

But I suggest that the problem at Uber goes beyond a culture created by toxic leadership. The company’s cultural dysfunction, it seems to me, stems from the very nature of the company’s competitive advantage: Uber’s business model is predicated on lawbreaking. And having grown through intentional illegality, Uber can’t easily pivot toward following the rules.

And:

Uber’s biggest advantage over incumbents was in using ordinary vehicles with no special licensing or other formalities. With regular noncommercial cars, Uber and its drivers avoided commercial insurance, commercial registration, commercial plates, special driver’s licenses, background checks, rigorous commercial vehicle inspections, and countless other expenses. With these savings, Uber seized a huge cost advantage over taxis and traditional car services. Uber’s lower costs brought lower prices to consumers, with resulting popularity and growth. But this use of noncommercial cars was unlawful from the start. In most jurisdictions, longstanding rules required all the protections described above, and no exception allowed what Uber envisioned. (To be fair, Uber didn’t start it — Lyft did. More on that later on.)

Edelman goes on to make a number of fair points: by operating illegally, employees are at risk and it encourages poor corporate culture.

But here’s another take. What if some industries need to be developed through illegality? For example, right now in the US, many marijuana firms are operating in a de facto state of illegality, with Federal law (which supersedes state law) outlawing recreational marijuana. Despite this problem, many dispensaries remain committed to marijuana distribution and they innovate. My conjecture is that their practices will set the standards for the future recreational marijuana industry. Even in Edelman’s article, he refers to Napster, which illegally made music easier to distribute. They broke the law, but created a new market in the process.

In these three cases (Uber, Napster, US marijuana distributors), the market was expanded and developed through illegality. This suggests to me that Edelman’s point is good – firms working illegally may be saddled with too many problems. But it elides an even bigger point. Various regulations and state granted monopolies create needless zones of illegality. For some markets to develop, somebody has “break the rules to make the rules.” In many cases, that can be a good thing.

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Written by fabiorojas

June 28, 2017 at 4:12 am

the antitrust equilibrium and three pathways to policy change

Antitrust is one of the classic topics in economic sociology. Fligstein’s The Transformation of Corporate Control and Dobbin’s Forging Industrial Policy both dealt with how the rules that govern economic life are created. But with some exceptions, it hasn’t received a lot of attention in the last decade in econ soc.

In fact, antitrust hasn’t been on the public radar that much at all. After the Microsoft case was settled in 2001, antitrust policy just hasn’t thrown up a lot of issues that have gotten wide public attention, beyond maybe griping about airline mergers.

But in the last year or so, it seems like popular interest in antitrust is starting to bubble up again.

Just in the last few months, there have been several widely circulated pieces on antitrust policy. Washington Monthly, the Atlantic, ProPublica (twice), the American Prospect—all these have criticized existing antitrust policy and argued for strengthening it.

This is timely for me, because I’ve also been studying antitrust. As a policy domain that is both heavily technocratic and heavily influenced by economists, it’s a great place to think about the role of economics in public policy.

Yesterday I put a draft paper up on SocArXiv on the changing role of economics in antitrust policy. The 1970s saw a big reversal in antitrust, when we went from a regime that was highly skeptical of mergers and all sorts of restraints on trade to one that saw them as generally efficiency-promoting and beneficial for consumers. At the same time, the influence of economics in antitrust policy increased dramatically.

But while these two development are definitely related—there was a close affinity between the Chicago School and the relaxed antitrust policy of the Reagan administration, for example—there’s no simple relationship here: economists’ influence began to increase at a time when they were more favorable to antitrust intervention, and after the 1980s most economists rejected the strongest Chicago arguments.

I might write about the sociology part of the paper later, but in this post I just want to touch on the question of what this history implies about the present moment and the possibility of change in antitrust policy.

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Written by epopp

January 9, 2017 at 6:51 pm

honey, we have to talk about sears

A little while back, I asked how Sears was able to survive as a firm. Once a titan of the American economy, Sears was now a shell of its former self. From a write up in Salon (!) magazine:

Sears Holdings, which owns Sears and Kmart, reported on Thursday a loss of $748 million for the three months ending on Oct. 29. This is the company’s 20th consecutive quarterly loss, and worse than the $454 million loss the company posted in the same period last year. Revenue fell nine percent last quarter to $5.21 billion. Same-store sales, a key retail metric, dropped 10 percent at Sears and 4 percent at Kmart. The company lost $1.6 billion in the first ten months of the year, compared to $549 million in the same period last year, according to its regulatory filing.

These grim numbers were announced a week after the departure of two top-level executives: James Balagna, an executive vice president in charge of the company’s home-repair services and technology backbone, and Joelle Maher, the company’s president and chief member officer. Former Goldman Sachs banker Steve Mnuchinalso resigned from the Sears board last week after President-elect Donald Trump nominated him to head the Treasury Department.

When we discussed Sears, CKD suggested the issue wasn’t firm profitability. It was the relative benefits of bankruptcy court vs. a massive real estate sell off. If so, then the pattern of executive hires and behaviors makes sense. But that raises a deeper point. Why didn’t Sears keep up with the rest of the retail market?

Jeff Sward, founding partner of retail consultant Merchandising Metrics, doesn’t share Hollar’s optimism.

“What does Sears stand for?” Sward told Salon. “Sears unfortunately stands for so many different things that I don’t think there’s anything that’s a standout. I would go to Sears for appliances and tools, but I’ve certainly never thought of them as a headquarters for apparel.”

Sward says the issue isn’t that Sears doesn’t have good products and competitive prices. Instead, he said, the problem facing Sears is that it isn’t the first choice for buyers of any of its core product categories. If consumers need tools, they go to Home Depot or Lowe’s. If they want outdoor or work apparel, it’s Dick’s Sporting Goods, not Sears. Electronics and home appliances? That’s for Best Buy. And who’s buying apparel and shoes at Sears?

The bottom line is that the department store model of the early 1900s is incredibly hard to sustain in the modern environment. Where discovery of the “big box model” by Home Depot and the online model of Amazon, a lot of department store chains either folded or refocused. Sear, with way too much real estate and sluggish executive team, couldn’t make the pivot. Not surprisingly, you then attract investors who are more interested in hollowing out the firm, like the Sears/Kmart holding group that also took on Borders before it died.

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Written by fabiorojas

December 12, 2016 at 12:36 am

summer reading: spotlight on conflict and decision-making by consensus at premium cola

As some of our dear orgtheory readers know, I am always on the look-out for interesting articles about how organizations use collectivist or participatory-democratic practices. One recent publication I would like to highlight involves a collectivist group fueled by a common love of cola, coffee, and beer.

Fans of a caffeinated soft drink, frustrated by Afri-Cola new owner’s refusal to change the recipe back to the original*, became the new owners and producers of the drink. Not only did they band together to revive the original product using what they considered to be more ethical market standards, they organized using the practice of decision-making by consensus.**

Participatory-democracy invariably elicits conflicts that might be avoided or suppressed under more hierarchical organizations. Members have to learn how to manage contention if they wish to stay cohesive. Premium Cola‘s members had to learn how to do this via a discussion email list.

Husemann, Ladstaetter, and Luedicke’s (2015) “Conflict Culture and Conflict Management in Consumption Communities” examines the types of conflicts and actions taken to address these conflicts within Premium Cola. The authors note the generative qualities of routinized conflict, including the reaffirmation of commitment to a collective mission:

When analyzing the Premium community’s conflicts, we found that the community’s conflict culture involved a limited set of routinized and recurring conflict behaviors. Members use behaviors such as inviting conflict, showing respect for otherness, or releasing aggressions to argue different topics, but use them in similar ways. Many of these behaviors are known from normative conflict sociology as conflict cultivation practices, i.e. routinized behaviors that conflict parties use to perform conflicts in civilized and productive, rather than destructive, ways. Through inventing, selecting, abandoning, enacting, or improving such routinized conflict behaviors, Premium community members are able to produce value rather than destroy value through uncontrolled or abusive conduct.

In contrast, transgressive conflict, in which participants break multiple norms, can lead to abusive interactions. These lead to more active interventions, including the eventual expulsion of a member over his repeated sexist comments about the hiring of a female intern and insults of other members. While the exchanges threatened corrosion, the subsequent actions taken reaffirm Premium Cola’s identity and commitment to community.

* The original recipe had less sugar and more caffeine than the newer recipe.

**More about the fascinating history and ethos of Premium Cola is available here, where the Ladstaetter and Luedicke describe Premium Cola as follows:

…the Premium Cola community can be seen as a group of “productive activists,” e.g.,
prodactivists, that combines the roles of producers, consumers, and social activists to promote change in the capitalist market system by demonstrating how market exchange can be both successful and ethical.

Written by katherinechen

June 29, 2015 at 3:39 pm

the poetry of the corporation

With Fabio on much-deserved blogcation, I’m going to try to throw up some more frequent short posts over the next couple of weeks to keep the ball rolling. Although I’m 100% sure I’m not going to pull off daily posting. It turns out, though, that blogging is a lot like other kinds of writing deadlines, in that the longer you wait, the better the job you feel you have to do to make up for having taken so long.

So with that in mind, a little poetry of the corporation to start your weekend — particularly apt in light of the recent Hobby Lobby decision and debates about corporate personhood, h/t Professor Mondo.

CORPORATE ENTITY

by Archibald MacLeish

The Oklahoma Ligno and Lithograph Co.
Of Maine doing business in Delaware, Tennessee,
Missouri, Montana, Ohio and Idaho,
With a corporate existance distinct from that of the
Secretary, Treasurer, President, Directors or
Majority stockholders, being empowered to acquire
As principal, agent, trustee, licensee, licensor,
Any or all, in part or in parts or entire –

Etchings, impressions, engravings, engravures, prints,
Paintings, oil-paintings, canvases, portraits, vignettes,
Tableaux, ceramics, relievos, insculptures, tints,
Art-treasures or master-pieces, complete or in sets –
The Oklahoma Ligno and Lithograph Co.
Weeps at a nude by Michelangelo.

 

According to wiki, poet Archibald MacLeish was also instrumental in starting the Research and Analysis Branch of the Office of Strategic Services during WWII. The Research and Analysis Branch, as it happens, was one of the places to be if you were an academic during World War II. In economics, it housed Ed Mason, Walt Rostow, Moses Abramowitz, Carl Kaysen, Wassily Leontif, among others. So it all comes around.

Written by epopp

July 11, 2014 at 9:00 pm

lifting the crimson curtain: Manufacturing Morals: The Values of Silence in Business School Education

As a grad student, I always found crossing the bridge over the Charles River from Harvard University to the Harvard Business School (HBS) to be a bit like approaching Emerald (or more appropriately, Crimson) City. On the Allston side, the buildings seemed shinier (or, as shiny as New England vernacular architecture allows), and the grounds were undergoing constant replantings, thanks to a well-heeled donor. In addition, HBS has loomed large as an institution central to the dissemination of organizational theory and management practices, including Elton Mayo’s human relations.

HBS has certain peculiarities about teaching and learning, like the use of case studies which follow formulaic structures as the basis for directed class discussion.* Moreover, instructors follow a strict grading break-down: mandatory “III”s assigned to the lowest-performing students of classes – a source of concern, as students with too many IIIs must justify their performance before a board and possibly go on leave.** To help instructors with grading, hired scribes document student discussion comments.***

Such conditions raise questions about the links, as well as disconnects, between classroom and managerial leadership, so I was delighted to see a new ethnography about business school teaching at the UChicago Press book display at ASAs.

With his latest book, Michel Anteby lifts the crimson curtain from HBS with his new book Manufacturing Morals: The Values of Silence in Business School Education (University of Chicago Press, 2013).

anteby-jacket

Here’s the official blurb:
“Corporate accountability is never far from the front page, and as one of the world’s most elite business schools, Harvard Business School trains many of the future leaders of Fortune 500 companies.  But how does HBS formally and informally ensure faculty and students embrace proper business standards? Relying on his first-hand experience as a Harvard Business School faculty member, Michel Anteby takes readers inside HBS in order to draw vivid parallels between the socialization of faculty and of students.

In an era when many organizations are focused on principles of responsibility, Harvard Business School has long tried to promote better business standards. Anteby’s rich account reveals the surprising role of silence and ambiguity in HBS’s process of codifying morals and business values. As Anteby describes, at HBS specifics are often left unspoken; for example, teaching notes given to faculty provide much guidance on how to teach but are largely silent on what to teach. Manufacturing Morals demonstrates how faculty and students are exposed to a system that operates on open-ended directives that require significant decision-making on the part of those involved, with little overt guidance from the hierarchy. Anteby suggests that this model-which tolerates moral complexity-is perhaps one of the few that can adapt and endure over time.”

Check it out! And while you’re at it, have a look at Anteby’s previous book, Moral Gray Zones (2008, Princeton University Press).

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Written by katherinechen

August 27, 2013 at 10:43 pm