Do We Still Have “Faith in the Value of Competition”?


Author: Steven J. Cernak

As I prepare again to teach an antitrust survey course, part of the preparation involves rereading some of the classic foundational U.S. antitrust cases.  Many of them make some sweeping statements about how the Sherman Act embodies a national policy to order our entire economy through competition.  “The heart of our national economic policy long has been faith in the value of competition” comes from Standard Oil in 1911.  The Court went even further in 1958 in Northern Pacific Railway:

The Sherman Act … rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress, while at the same time providing an environment conducive to the preservation of our democratic political and social institutions.

Twenty years later in Professional Engineers, the Court described an argument that asserted competition might be unethical as “nothing less than a frontal assault on the basic policy of the Sherman Act.”

Were such broad statements true then?  Do they remain true now?  Is the Sherman Act “the Magna Carta of free enterprise” as the Court asserted in Topco in 1972?  After all, we have had exemptions, both legislative and court-made, for decades.  But even beyond those official exceptions, there are plenty more examples of our frequent desire for experts, not the competitive process, to supersede market outcomes.

One personal anecdote helps illustrate the point.  I have been involved in the ABA Antitrust Law Section for decades.  The ABA, like any good trade association of competitors, has its own counsel to ensure that it does not run afoul of the antitrust laws.  Years ago, however, when my day job was in-house antitrust lawyer at General Motors and my ABA assignment involved antitrust aspects of trade associations, I was asked by the Section to lead a compliance presentation for another ABA group consisting of several law school admission deans.

Our presentation started with the antitrust basics for trade associations:  The antitrust laws want to preserve competition among competitors, Sherman Act Section 1 is suspicious of agreements among competitors, trade associations are gatherings of competitors where such agreements can be reached, and law schools compete with each other in various ways, including to attract students.

After about fifteen minutes, one of the deans raised his hand and posed this hypothetical:  Some students change schools between first and second year.  Such transfers are not good for the student – usually, any issues leading to a transfer go beyond a particular school and the student should try to get help with any underlying concerns.  But the transfers also hurt the law schools – after all, we have spent considerable time, effort, and money to make that student one of ours and transfers destroy that investment.  So, could this ABA group make it unethical for law schools to solicit, or even accept, most transfer students?

My fellow presenters were taken aback and silent for a few seconds.  Had this dean not been listening when we had said a few minutes earlier that agreements not to compete among competing members of a trade association were antitrust violations?  Finally, I broke the silence.  I did a facepalm and said “D’oh!  What a great idea!  Why didn’t we think of that?  We could have gone to Toyota thirty years ago and said ‘you know, we spent considerable time, effort, and money to make those current Chevy owners ours and you selling to them will just destroy that investment.  How about we agree that you will only market to folks who have never purchased a car?’”

It took a few seconds but then the lightbulbs went off over the heads of the audience:  Yes, the competitive processes for legal education might be a little different than those for motor vehicles, but that competition still exists and antitrust law is designed to protect it.  Any agreements to short-circuit that process by having experts at the competitor-suppliers determine the customer’s best interest would be at least suspect.  My GM clients would have understood that my Toyota hypothetical was an antitrust problem.  Why didn’t this law school dean?

Was it because the deans saw themselves as “professionals” and so in some way exempt from the need to compete?  Perhaps, although the Court made clear in Professional Engineers that any hint of an antitrust exemption for professionals that some saw in Goldfarb was incorrect.  Professionals might compete in different ways but the antitrust laws still protect that competition to yield the best results for customers.

Mandatory state licensing is one way in which some professions compete differently than other industries.  Such licensing schemes can help solve informational problems and assure potential customers that the professional at least has some minimal competence before purchasing the services and suffering a costly mistake.  Yet such licensing systems can, again, be nothing more than experts, often fellow competitors, who think they know better than a competitive market.  Such systems have been expanded well beyond the traditional professions to include other occupations where informational issues do not seem present.  As former FTC Acting Chairman Ohlhausen put it at about the time she was establishing the FTC Economic Liberty Task Force to highlight the harm that unnecessary licensing can do:  Do we really need to protect “the public from rogue interior designers carpet-bombing living rooms with ugly throw pillows”?

What can this expansion of mandatory licensing systems tell us about attitudes toward competition?  Are these traditional or want-to-be professionals merely driven by greed to reduce the number of competitors and so increase their profits?  Perhaps.  In my experience, both with the law school deans and professionals on licensing boards, however, the competitor-experts developing and enforcing the ethical rules that subvert the competitive process seem to honestly believe that they are doing what is better for the profession and its customers.  Why don’t they have “faith in the value of competition?”

Doubts about the wisdom of allowing the free market to work are not limited to professionals.  In the early “90’s, I had a long-running debate with a GM executive who, while willing to follow US antitrust laws, was convinced that the country’s economy would soon be surpassed by Japan’s because we did not allow for close cooperation of competitors under the auspices of government experts like Japan’s MITI.

Sometimes, even antitrust lawyers do not seem to trust the competitive process.  The best recent example is the reaction of many antitrust experts to the Department of Justice case against Apple regarding ebooks.  In brief, the DOJ alleged—and a court found and the Second Circuit upheld – that Apple had been a ringleader of a conspiracy among competing publishers to change how ebooks were priced and distributed so Apple could enter a market then dominated by Amazon.

To me, it seemed like straightforward “hub and spoke” conspiracy case—and, once I saw the evidence of extensive communications among the publishers and with Apple, a fairly easy one at that.  But some of my antitrust colleagues saw it differently.  In some complicated way, Apple and the publishers were the good guys and should be commended, not punished, for getting together and trying to overturn the market result of wild Amazon ebooks success.

To be clear, none of these antitrust colleagues were counsel to Apple, who could only be expected to vigorously defend their client.  Also, none of them suggested that Amazon was guilty of predatory pricing or some other traditional monopolization theory.  Such an argument that Amazon was distorting the competitive process, much like some of the ones being made about various BigTech giants now, would have been understandable.  Instead, the argument seemed to be that the decision to collude by competitor-experts was somehow smarter than the decisions made by millions of consumers in  a competitive process.  Why?

Fortunately for me, Prof. Chris Sagers had exactly the same reaction and proceeded to write a book about it.  If you have not yet read United States v. Apple:  Competition in America, you need to download it to your Kindle right now (irony intended).  It not only tells the story of the case and its main actors, it gives a history lesson on books and their place in culture, from papyrus and parchment to paperbacks and ebooks.  Through the lens of that case and history, it tackles the broader questions raised here.

As Sagers puts it, the government’s case had some strong detractors, including some who usually “are confident that virtually no conduct violates antitrust and that the size of even the biggest firms is irrelevant,” who saw Apple’s conduct as necessary to counter a dominant Amazon.  [p. 5]  But “what united the critics [of the case on the left and right] was their shared confidence that markets alone could not be trusted to reach a good outcome.” [p.9]  Why?

The answer is not a simple, single one, given that the case’s critics were not monolithic.  But one large cause that Sagers fleshes out in captivating detail is that Apple, the book publishers and some of their supporters—just like the engineers in Professional Engineers and even the toilet bowl manufacturers in Trenton Potteries –-were convinced that their expert view of the innovation and quality best for book customers was superior to the results of competition.  But as in those earlier Supreme Court cases, when those experts are competitors in the market, traditional antitrust law says enforcers should step in.  As Sagers puts it, “the goal of enforcement in Apple was not really to make books cheap, but to let markets work out those innovation gains for the greater good.” [p. 142]

I share Sagers’s view that antitrust enforcement in the Apple case was an appropriate antitrust intervention to stop alleged experts from altering the results of a competitive market.  Where I part ways with Sagers is with some of his discussion later in the book calling for greater enforcement of Sherman Act Section 2, antitrust’s monopolization law.  In some of his comments, Sagers seems to be falling into the same trap as the Apple case critics and would have some experts—whether politicians or antitrust enforcers and courts—substitute their judgments for outcomes in what I think are competitive markets.

For instance, he suggests that instead of our current antitrust policy of only going after actions of monopolists that help them attain or maintain that monopoly, “we could have a policy of breaking up big firms or setting caps on their size as a proxy for direct examination of the details of each given case.”  [p. 238] To me, such a policy would substitute the guess of some expert – regulator? court?—as to the correct number and size of firms in place of the results generated by countless market participants.  Better to use antitrust law to ensure that that there were no obstacles erected by the monopolist—or any government facilitators—to a competitive market outcome.

Similarly, I would reject on multiple grounds his suggestion that “a competition law concerned only with allocational efficiency or consumer welfare would ban or regulate monopolists without exception.”  The one most pertinent here is that any banning of a monopoly “which was not gotten through illicit exclusionary means” [p. 208] would simply be replacing the result of competition with the judgment of the expert who determined that a successful firm had gained a “monopoly” but that breaking it up would be better for customers.  I would prefer to have “faith in the value of competition.”

None of my comments should be read as defending all actions by all monopolists or suggesting that current Section 2 enforcement should be curtailed.  Where our experience or economic knowledge gives us confidence that certain actions by large and powerful firms are disrupting the proper working of a competitive market, antitrust law should step in.  But that intervention should be aimed at allowing the competitive market to work, not to substitute our judgment.  If democratic capitalism really has “lengthened the life span, made the elimination of poverty and famine thinkable, [and] enlarged the range of human choice,” [Novak, The Spirit of Democratic Capitalism] then we should have greater “faith in the value of competition,” make sure we use antitrust law to protect it, and continue to explain such a policy is in our country’s best interest.

Photo: Standard Oil, Odell, Illinois Route 66 by Mobilus in Mobili (license).

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