By Ben Mattison
After the 2016 election, Yale SOM economist Fiona Scott Morton, an expert on competition who served as chief economist of the Antitrust Division of the U.S. Department of Justice during the Obama administration, began having conversations with colleagues about the future of U.S. antitrust enforcement.
Republican administrations, she says, tend to enforce antitrust law less aggressively, “and that means that new enforcement topics and theories don’t get tried out.” Enforcement efforts in new areas—even if they ultimately fail—give the attorneys and economists in the Antitrust Division the opportunity to explore how antitrust law applies to a modern economy.
“The economy’s changing all the time,” Scott Morton says. “We used to have typewriters and buggy whips and bicycles, and now we have handsets and patents and social media sites and platforms and credit cards.” To keep antitrust enforcement in sync with the economy and protect consumers from monopolies and other anti-competitive behavior, “you have to try applying the law to a new area, a new sector, a new set of products: explain how competition works, explain where the harm to competition might arise or is arising, explain how a merger would harm that competition.”
The result of those conversations was an issue of the Yale Law Journal, published in May, titled “Unlocking Antitrust Enforcement” and introduced by Scott Morton, Jonathan B. Baker of American University’s Washington College of Law, and Jonathan B. Sallet, a former deputy assistant attorney general in the Antitrust Division. The papers in the collection, many of them collaborations between economists and legal scholars, examine areas in which enforcement of existing law could increase competition and help consumers.
Part of the motivation for Scott Morton and her colleagues was a belief that today, robust antitrust enforcement is badly needed to make the U.S. economy more fair and productive. There are signs, she says, that competition is decreasing, with negative consequences for consumers and the nation as a whole. She notes that there are parallels with the period in the late 19th century when the major U.S. antitrust laws were enacted.
“The rise in income inequality that we’ve seen in the last 30 years in the United States is the same kind of thing that was happening back then,” she says, “We also are seeing a really substantial effect of corporate interests in policymaking”—in the loosening of banking and environmental regulations, for example. “And that, I think, makes citizens uncomfortable, that their democracy is not working in the way that they would like it to work. I think there’s an increase in interest on the part of ordinary citizens, on the part of a lot of advocacy groups, on the part of foundations and even the Democratic Party in saying, ‘Shouldn’t competition enforcement be a really important component of public policy today?’”
Since the 1970s, some conservative economists have asserted that antitrust enforcement is counterproductive and that market forces will correct monopolies.
“That’s just wrong, I’m afraid to say,” Scott Morton says. “A monopoly gets the monopoly profit from being a monopolist and doesn’t want to lose that monopoly profit, and is willing to spend part of that monopoly profit, up to almost the last dollar, preserving it.”
In some cases, new entrants may come along and dislodge a monopoly. But the resources and market power available to monopolists means that often they can sustain their position for an extended period, to the detriment of consumers. “We need governments looking out for the welfare of citizens,” she says, “who individually can’t do anything about market structure but collectively can pass a law and allow the government to enforce that law to prevent this monopolization problem.”
Among the papers in the Yale Law Journal are two co-authored by Scott Morton, each of which argues that a relatively new but now commonplace business practice is limiting competition, with at least potential harm to the consumer.
“Horizontal Shareholding and Antitrust Policy,” written with Herbert Hovenkamp of the University of Pennsylvania, examines a growing phenomenon: when mutual funds and other large investors, seeking diversification for their customers, invest in stock of multiple competitors in a particular market. For example, Scott Morton says, a fund might own shares of United Airlines as well as American Airlines, Southwest, and Delta. In that case, the fund would have very different incentives than if it only owned one airline.
“Normally if I own Delta, I’m pleased when Delta takes away market share from United because they’re earning more profit,” she says, “If I own both Delta and United, my view is a little bit different. If Delta is taking customers away from United and causing United to have profit losses, I may gain from Delta but I’m losing from United. What I really want is for Delta and United to both gain.”
How could both competitors make more profits? Something external like lower oil prices could lower both companies’ costs. But so could competing less vigorously—for example, Scott Morton says, “they decide, ‘Well, instead of having a sale to try to steal customers from each other we’ll just stay where we are.’ So prices are higher than they otherwise would be.”
There is growing evidence, according to Scott Morton, that there is less competition when shares of rival companies are owned by large investors, but the broader impact on the economy is not yet known, nor is the mechanism by which competition is lessened. “What is it about these BlackRock, Vanguard, Fidelity mutual funds that is making a link to product market competition?” she asks. “Are they just exercising good corporate governance? Are they giving advice on strategy? Are they compensating managers a particular way? Are they having meetings behind the scenes to talk about strategy?”
More study by scholars, and perhaps an investigation by the Federal Trade Commission, is needed, Scott Morton says. “This is an enormous swathe of the economy. So if there were to be a problem, it would by definition be a huge problem.”
If there is a problem, Scott Morton and Hovenkamp argue in their paper, the remedy is available through current law. Scott Morton says, “If I’m BlackRock and I purchase shares in Coke and Pepsi or United and Delta in a way that lessens competition, that would be a violation of the Clayton Act,” the U.S. merger law preventing anticompetitive asset acquisitions.
The Justice Department wouldn’t even need to take action in this case, Scott Morton points out. “The issue of who might sue is interesting,” she says. “I mean, all of us buy plane tickets. We’re really the harmed party. In the United States private citizens can be plaintiffs in antitrust cases; we don’t have to wait for the government to do something.”
“Antitrust Enforcement Against Platform MFNs,” written with Jonathan B. Baker of American University’s Washington College of Law, looks at the antitrust implications of an experience familiar to anyone who has searched for a hotel room online. If you book a room using an online travel agency (OTA) like Expedia or Orbitz, you can feel confident that there isn’t a lower price available elsewhere—on the hotel’s own site, for example.
The reason is a common contractual restriction called a most favored nation clause, or MFN, which prohibits hotels and other vendors from offering a lower price elsewhere as a condition of booking through an online travel agency. At first glance, MFNs appear to be helpful to consumers, since they don’t have to spend extra time scouring the web for a lower price. But, Scott Morton points out, such clauses also keep competing online travel agencies from offering lower prices by lowering their commissions.
For example, suppose that one of the established online travel agencies is getting a 25% commission, which means the hotel gets $75 for a $100 room. But a new site comes along that is aimed at students. “The students are very price-elastic—they don’t want to pay much for hotels,” Scott Morton says. “Therefore the user interface is kind of crummy and the selection of hotels is not as good, but they’re really cheap.”
Since the new site has lower costs, it is willing accept a 10% commission. That means the hotel could lower the customer’s price to $85, pay a commission of $8.50, and still make a larger net profit. But because of the MFN, Scott Morton says, “they can’t lower their price to $85 unless they lower it on the other site to $85 also. It’s going to be very costly to steer business to competing OTAs that might have a cheaper business model and that therefore might be lucrative for the hotel to send business through.”
In Europe, Brazil, and elsewhere, these contractual restrictions have already been banned; in Europe, research suggests that prices have come down as a result. But they remain legal in the United States. “It’s a big divide in enforcement across the globe, and I think American consumers deserve a little more attention,” Scott Morton says. “We ought to go look: are these contract terms out there? If they’re out there, are they prohibiting the kind of competition that would be beneficial to consumers?”
Examining these new markets and thinking creatively about how antitrust law might apply to them, and whether doing so would benefit consumers, requires time that enforcers like the staff of the Antitrust Division don’t always have, Scott Morton says. “That’s a very good place for academics to make a mark. Academics sit in their offices, look out the window at the world, and see how this stuff can fit together. I think it’s a service the profession can provide to enforcers around the world.”