Corporate & Securities Law

Antitrust, The Bailout, and the Coming Boom in Monopolization Enforcement

From the WSJ comes an editorial from Martin Neal Baily and Matthew Slaughter describe a forthcoming report from the Private Equity Council making the link between product market competition and productivity:

A central theme of this report is the critical role that competitive product markets play in spurring productivity growth and boosting standards of living. One of the great U.S. policy successes of recent decades has been the bipartisan removal of regulations that stifle competition and innovation in product markets. U.S. industries that face strong competitive intensity are more productive than highly regulated or otherwise sheltered industries. This competition, in turn, yields higher incomes and greater choices for consumers.  Maintaining the productivity benefits of product market competition requires sound choices in areas including trade and investment, regulation and infrastructure.

Whatever one thinks of recent economic events or the merits of the various bailout proposals, policy makers must be sensitive to the negative relationship between regulations that impose barriers to trade and stifle incentives to compete and product market competition, the incentive to innovate, and economic growth.  We normally think of antitrust as playing a role to ensure that cartel behavior and other market failures do not hinder the competitive process and ensure that consumers reap the benefits of competition.

Relatedly, here has been a lot of speculation of late on what an Obama antitrust regime will look like in light of the recent economic turmoil.   We know there’s been a promise to “reinvigorate antitrust,” but its difficult to know precisely what that means.  All things equal, and unconstrained by economic events, I’ve suggested what I think will be the major changes in the Obama administration in this post.  The major and visible areas where I think a major changes are coming: (1) convergence between the FTC and DOJ on reverse payments in favor of the FTC’s position, (2) convergence between the FTC and DOJ toward the FTC position perhaps coupled with some public statements backing away from the Section 2 Report, (3) the resurrection of Dr. Miles through the proposed Clinton-Kohl and Biden Bill, (4) a marginal increase in merger challenges, and (5) expanded use of Section 5 at the FTC to challenge patent holdup cases.

But perhaps the most visible and significant change will be an increase in the number of monopolization cases relative to the last 8 years.  Here’s what I said previously:

Look for a few big name monopolization suits in prominent industries: health care, pharmaceuticals, microprocessors. I suspect that Post-Chicagoans hoping that the Obama administration is their chance to pursue a lot of monopolization cases are going to be a little bit disappointed.

But will recent economic events change these predictions?  Will the next administration’s antitrust agenda be constrained at all by political or pragmatic considerations brought about by what can fairly be described as a wholesale departure from the commitment to free market principles that the Sherman Act embodies?  (See, e.g. Thom’s post on the draft bailout legislation)   Here are a few possibilities:

1. Current economic conditions and the U.S. rush to regulate results in an expansion of regulation that shrinks the scope of antitrust and its relevance over the next several years;
2. Single firm monopolization suits and merger challenges, on the margin, become less attractive because beating up on firms that employ a lot of people and are not doing is less popular than suing a thriving deep pocket (this is the possiblity that David Boies raises with respect to mergers in this NY Times piece predicting that ?Preserving jobs and economic stability will be perceived as more important than preserving competition,?;
3. Anti-corporate sentiment makes antitrust actions against large firms politically palatable even in the face of job losses.  This seems to be the approach that both candidates took throughout the election, linking antitrust violations to fraud and corruption, and promising to crack down on such excesses (to be fair, this approach seemed to resonate more with Senator McCain than President-Elect Obama).

1 and 2 lead to less antitrust.  3 leads to more.  One could be a bit more subtle in the analysis and decompose these effects across mergers, cartels and monopolization.  In my own view, I tend to believe that cartel enforcement will not change at all.  And that is a good thing.  I believe that (2) will be largest with respect to merger challenges and so might have act as a small constraint on the Obama regime’s stated desire to increase merger enforcement activity than would have otherwise been the case.  (1) might also have a small impact on mergers, but (3) will not.

The place where all the action is, I think, is monopolization.  The Obama camp is not going to want to be perceived as creating job losses.  I think that is most likely to be the case in attacking mergers between firms in a financial nose dive.   But attacking the big bad monopolist is different.  Monopolists are not perceived to be in dire financial straits (even when they are).  They have deep pockets.  They are Microsoft.  Single firm conduct can be sold to the public as exploitative and coercive and maybe even linked to the sort of anti-corporate sentiment that has been generated in fraud and corruption cases.  On top of this, with the FTC v. DOJ split on monopolization which is likely to be resolved in favor of the dissenting FTC Commissioners, the promise to return to Clinton administration like monopolization enforcement numbers, this is a bad time to be a firm with a dominant position — especially in highly visible industries (Pharma, health care, and tech come to mind).

Very bad.

Full post as published by Truth on the Market on December 13, 2008 (boomark / email).