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Faculty Viewpoints

Is antitrust law keeping up?

Can laws created to rein in the monopolies of the industrial age still work in the information age? After spending a year as the top antitrust economist at the U.S. Department of Justice, Professor Fiona Scott Morton describes the state of antitrust regulation today.

The first antitrust laws in the U.S. focused on monopolies. Armed with the Sherman Antitrust Act of 1890, the federal government went after railroads, sugar producers, and most famously, Standard Oil. Over the years, antitrust laws were expanded to ban price fixing, price discrimination, and interlocking boards of directors. Even though the laws themselves were written during the industrial age, they've proven flexible enough to allow the government to influence the direction of a wide variety of current industries, from sports to the movies to healthcare, where the unprecedented restructuring expected as a result of the Affordable Care Act may collide with antitrust law.

For instance, one can see antitrust enforcement as a key factor in the development of the communications revolution. In 1982, the federal government used the Sherman Antitrust Act to break up AT&T, a move that launched the modern telecom industry. Nearly 20 years later, the Department of Justice sued Microsoft over monopolistic practices. When a judge finally ended court oversight of the company in 2011, the DOJ declared that the action had helped the personal computer industry become more competitive. Whether that was true or not, Microsoft no longer held the commanding position it did in 1998. Just days ago, the government won an antitrust case against Apple for conspiring with book publishers to raise the price of e-books. Some analysts believe the ruling could discourage Apple, which has been a pioneer in electronic media, from entering future markets.

In a conversation with Yale Insights, Fiona Scott Morton, professor of economics, said that policing the antitrust realm is becoming increasingly complicated. Scott Morton, who recently spent a year as the head economist for the antitrust division of the U.S. Department of Justice, said that while the essential laws dictating antitrust haven't changed in 100 years, new technology, globalization, and changes like those in healthcare delivery have greatly expanded the realm of what can fall under antitrust. "Those are products and industries that are not well settled, perhaps, in antitrust law, or where there are new strategies being tried," she said. "Nobody has quite figured out what is legal and what is not legal."


How does antitrust law, which dates back a century, adapt to ever-changing industries?

Fiona Scott Morton: When a competition problem arises, it has to fit into the laws that we have: the Sherman Act and the Clayton Act. And those laws have old-fashioned language like, “We don’t want substantial lessening of competition,” or, “We don’t want contracts and conspiracies that restrain trade.” And how you interpret those into the modern economy takes a little bit of skill. It takes both the economist and the lawyer to think about, What is this product? How does competition work in this industry? How might competition be blocked in this industry, or consumers harmed in this industry?

So, older industries are easier, in some sense, to deal with because perhaps there is a line of cases. There have been judges deciding things about railroads for a long time, and we understand how to make those arguments and how to bring those cases.

What can be fun and interesting and novel is when you have a new sort of industry, such as a smartphone, or a new kind of problem—what do we do about patent trolls? And those are examples of products and industries that are not well settled, perhaps, in antitrust law, or where there are new strategies being tried, and nobody has quite figured out what’s legal and what’s not legal. And that makes for interesting work for both lawyers and the economists.

What kind of antitrust issues arise from the Affordable Care Act?

Scott Morton: The Affordable Care Act puts a big emphasis on getting providers into accountable care organizations. And an accountable care organization is – really the way you want to think about it, an organization that is going to take more or less a fixed fee for looking after you, and try to do that in the most efficient way possible, and share in any savings that result from not giving you care that you don’t need, for example, or reducing hospital admissions, or something like that.

How do you get different kinds of providers to work together? Well, one way is to just decide you’re working together. But another way is to merge. Another way is to say, “All right, I’m a hospital. I would like to have a rehab center that – we’ll call that ‘downstream.’ I’d like to have some primary care practices, call that ‘upstream.’ And the patients will flow from the doctor, to the specialist doctor, to the hospital, to the rehab center or the nursing home, or whatever. And there’ll be an outpatient clinic, and all of these things will be working cohesively together to provide better care at lower cost.”

Well, once you start saying there’s going to be asset transactions; there’s going to be mergers, then you get the antitrust division and competition policy involved. And the concern would be that the mergers create market power, perhaps as well or instead of efficiencies.

What do I mean by that? Well, if so many providers in a geographic area came together that they had such a high market share that there really was no choice, for people who wanted to purchase health care, except to go to those providers, then you don’t have the kind of price competition that we see as essential to a functioning competitive market.

So, you want the ACO to grow and get economies of scale and get enough providers in that it can operate efficiently at lower costs, but you don’t want the ACO to grow to the point where it’s stifling competition.

What are the antitrust issues surrounding digital businesses?

Scott Morton: Digital businesses are exciting, for people who work in antitrust law, because typically they have high fixed costs, very low marginal costs, and often network effects. So, in other words, the more people are on the platform, or use the service, the more valuable it is to me.

When you have those features to a business, there are a lot of really nifty strategies that you can use to give yourself competitive advantage. So, when your marginal cost is basically zero, you can pick any kind of pricing scheme that captures surplus from the consumer. And at the margin, you don’t have to worry about your price being above your cost and making money on that consumer, even at very low prices.

So, you can think about price discrimination, where you charge different consumers different amounts for slightly different services. You can think about subscription models. You can think about differentiating your service. I mean a classic example is stock price quotes that are in real-time versus delayed ten minutes. You know, you might offer one for free, or for hardly anything, the delay, but you might charge a premium for the on-time information. So, there’s very many different pricing schemes that could be used.

And then, in a setting with network externalities, where a first mover advantage is really crucial and sort of defeating my competition when they’re small is going to lead to a sustainable competitive advantage, there’s all kinds of behaviors in that setting that are tricky, as we saw in the Microsoft case. So, the digital business world makes for exciting antitrust enforcement, I think.

What are the antitrust issues raised by global firms and a global marketplace?

Scott Morton: There are a couple of kinds of firms that you could imagine dealing with when you’re in competition enforcement. One is the local firm. I have two trash collectors, and they’re in New Jersey, and they want to merge. And then it’s pretty clear that the effect of that is on consumers in New Jersey. There’s no jurisdiction of any other enforcement agency; you don’t have to worry.

But what if it’s something like UTC wanting to buy Goodrich, where you’ve got global firms. There are many, many sub businesses within a company like UTC. They have different presences in different countries, and there are many antitrust enforcement agencies that have to approve the deal. That’s tricky. I mean there’s no other word for it really. Those firms have to visit, have to make filings in each of those countries. They have to answer questions in each of those countries. They have to really hope that country number one doesn’t tell them, “We really want you to divest A and keep B,” while the next country says, “Divest B and keep A.” Okay, that’s a real problem for a global firm.

The current way that firms handle that is by a lot of meetings with the different enforcement agencies and by giving them what are called waivers, which allows them to talk to each other, using the confidential information given by the firm. So, the firm will submit documents describing its business strategy and market share and so on in widgets.

And then, if the American authorities can speak with the European authorities about the situation in widgets, that enables them to compare facts, to compare theories, to discuss what the harm really might be to consumers in Europe versus consumers in the United States. And perhaps, if everybody is looking to protect the consumer and shares the same facts, you’ll get to the same answer. And that’s pretty much, I think, the state of the art at the moment, hoping that we get to the same answer by sharing the same goals and the same information.

Department: Faculty Viewpoints