Expert Excerpts: Antitrust Panel

Fiona Scott Morton, Josh Soven, and Doug Melamed

 

Fiona Scott Morton Transcript

Larry Bernstein:
We’re going to start with Fiona Scott Morton, who is the Theodore Nierenberg Professor of Economics at Yale. Go ahead, Fiona.

Fiona Scott Morton:
Hi, everybody. You asked that I talk about antitrust and digital platforms. I’ll just say for those who are very interested, that Doug Melamed and I collaborated on a report for the Stigler Center at the University of Chicago on this topic, in 2019, and that lays out a lot of details for those who are interested. Problems that come up when you try to use the antitrust laws against digital platforms, are that in the merger context, very often the competitor is a potential competitor or a nascent competitor, that isn’t fully grown yet. And there’s uncertainty about the technological path forward, and that causes some issues in merger review.

There are a number of problems, but I’ll just highlight a couple with monopolization cases, where the conduct might be difficult for the regulator or the authorities to understand clever use of interoperability, of lack of compatibility, of steering of volume and quantity that often in an online context, is the same as quality or use of exclusive contracts. All of these kinds of tools can be deployed to hamper rivals from growing or exclude rivals and generate monopolization and market power.

What does that market power do in terms of harm? It harms consumers through innovation and quality. Consumers don’t pay a lot of cash for online services, although there are plenty of advertisers paying indirectly for online services. Innovation would include direction of innovation, it’s speed, what kind of business model is being used. Quality would be quality of content moderation, maybe the addictiveness of the content, maybe just it’s the user interface. The harms that accrue to consumers on the price dimension, accrues to what you might call a barter transaction. And a lot of digital businesses I’m giving my attention and information about myself or data about myself in return for services. And those transactions can be analyzed just like money transactions in the sense that if I give you six apples and you give me six oranges in return, and then tomorrow I say, “Well, I’ll only give you one apple for the six oranges.” Then you understand that to be a price increase of apples. Even though we’re not using dollars, we can name it just the same.

And another really significant harm to consumers that comes from this anticompetitive conduct, is lack of investment by the other side of the platform, that creates the services that are the reason we’re all on the internet to begin with. So maybe that’s news, maybe that’s the movie star database, maybe that good photographs in the recipe site, but whoever’s investing on the other side with the understanding that they’re getting ad revenue or they’re getting access to consumers. If they don’t, if that money is taken by the digital platforms, then that reduces their willingness to invest.

So that’s a very high-speed tour and I think that Doug Melamed, will fill that out. I’ll just say that in fall of 2020, we had an unprecedented several months of antitrust cases being filed, both the federal government, the DOJ, and the FTC and groups of states filed cases against Google search, against Google in ad tech and against Facebook monopolization cases.

There are investigations underway at the agencies into Amazon, where by the way, I do some antitrust consulting, and Apple. So, this unprecedented burst of activity brought us kind of, I won’t say, catching us up to the Europeans, but they have a 10-year head start and we certainly caught up to some degree. I would say to the listeners on this call however, that you probably don’t think of antitrust the way experts do. I think most regular people think that antitrust laws mean the government is somehow going to control corporate power. And that’s not it, antitrust is about if you’ve done a particular wrong thing, ex post the government can come after you or private parties can litigate and try to redress the harm.

I think what most people expect antitrust to do is what would really be the province of regulation as well as antitrust. That is to say, if firms are doing something that represents an exercise of market power, and we just don’t like it as a society, can we stop it? Well, perhaps not under the antitrust laws, perhaps we have to pass a separate law to control that behavior. Like the Federal Communications Commission does for cable companies, or the Department of Transportation does for airlines. Although in my experience, they don’t do much that helps consumers with respect to airlines. But anyway, they’re supposed to.

So I think that an issue that we’re going to see front and center, is whether we’re going to get regulation in the United States. Why do I think this? Because the first hearing for ] a search case is September 2023. Then the judge has to write an opinion. Then there will be an appeal. Then there has to be another, dealing with the appeal and then the opinion there. And then maybe there would be a remedy after that. So, we’re not going to see any change in any of these markets for many, many years, and that’s going to frustrate people.

Plus we’re going to be watching the Europeans who released a draft regulation for digital platforms in December, 2020. So just a month or so ago, they released that. And we’re going to be watching that and thinking about that, and I believe that we might actually get regulation before we get resolution to any of these antitrust cases, because they just take so long. And I think there’s a coalition of frustrated consumers and small businesses that would like to regulate them.

So what form will that regulation take? I have no idea. It’s very early days. We can watch what’s happening in Europe with their digital markets act, which is quite comprehensive and quite aggressive, to see how that starts to play out and try to figure out what’s going to happen here at home. But meanwhile, that’s all speculation and we just have our antitrust cases rolling out, which I’m happy to talk about as this program continues. I’ll stop there.

Josh Soven Transcript

Larry Bernstein:
Josh Soven, my college roommate partner at Wilson Sonsini. Go ahead, Josh.

Josh Soven:
Thanks Larry, very much. And I want to emphasize at the outset, that I’m going to talk about what I think is going on, not what I think should necessarily going on. I have a number of clients with conflicting interests on these topics. As Fiona said, in 2020, neither COVID nor politics slowed down antitrust enforcement, instead DOJ, and the Federal Trade Commission picked up the pace. The agencies brought monopolization cases against Google and Facebook and challenged a number of other transactions involving actual and potential competition. So, to pick up on the title of the program, what happens next?

Over the past 20 years, changes at the White House have not actually caused dramatic swings in antitrust policy. While the rhetoric has certainly varied, there has been constant political support for aggressive antitrust enforcement. It’s actually an incredibly popular program. I worked at the Justice Department in the Clinton, Bush 43 and Obama administrations and once you get past the party labels, I thought that their approaches to antitrust were pretty consistent.

There have certainly been a few cases that might’ve come out differently depending on the administration. But today, that’s actually a pretty short list. This time might be different. The focus on large technology companies and a few government losses in high profile cases, has certainly generated interest in legislation and regulation that could make it easier for the government to win more cases. The intuition behind this legislation is that judges might be applying too higher standard or more to the point that Fiona was talking about, that there are certain types of antitrust conduct and transactions that just aren’t technically prohibited under the existing law.

Senator Klobuchar has introduced a bill that would create presumptions that certain transactions are anti-competitive and shift the burden of proof to the parties, including any transaction where the value is greater than five billion, and any transaction where the buyer has a market cap greater than a hundred billion. There’s about a hundred companies in the US which would trip that threshold.

These presumptions and the burden shifting, could alter enforcement and litigation outcomes, but this is really not certain. This is because when the parties persuade agencies or a judge, they usually end up taking on the burden anyway, of showing that a transaction is unlikely to harm competition. When I take a client into DOJ or the FTC, I don’t ask to see the government’s case or tell them they have the burden of proof. Rather, I work to show the government that there is not a problem in the first place. The same is true when I’m in court. I usually assume that I’m going to have to prove everything anyway.

The Klobuchar bill would also reduce the government’s burden of proof for challenges to conduct by large companies that “materially disadvantage one or more actual or potential competitors.” This, as Fiona was suggesting, is targeted at the technology companies we all know well. I represent several of them. The idea is to make it harder for them to give preferences to their products over those of their competitors. The ranking Republican on the House Antitrust Subcommittee has said he supports this approach. Again, this could alter outcomes, but it’s not clear that this would happen. It’s simply not obvious that judges decide antitrust cases based on finely calibrated presumptions and assessments of the burden of proof. I think that most of them try to figure out who is actually right about what’s going on in the market and then what will happen to consumers.

As is often the case, what could matter the most is not law, but cash. There appears to be bipartisan support for significant increases in the budgets of the DOJ’s Antitrust Division and the Federal Trade Commission. If the budgets go up, the government will absolutely bring more cases. It’s inevitable. So, what should companies do? The answer is that whatever happens with the legislation and perhaps with regulation, the fundamentals probably won’t change.

First, when companies show up with real-world facts, supported by real-world documents, that they face a lot of competition, the companies have a good chance of persuading the government not to challenge their conduct and if necessary, win in court. If the Klobuchar bill passes, I just don’t think the government’s going to challenge every deal above five billion if there’s no competitive harm. Such evidence tends to make presumptions, burdens of proof and other legal obstacles, less important.

Second, investigation and trial strategies absolutely affect outcomes. I know it’s not what everyone wants to hear, but antitrust is not a hard science. It’s rough and tumble and fact intensive and it involves making predictions with highly imperfect information. Decisions about what evidence to present and when and how to present it, can and do determine results. For example, testimony from fact witnesses can be more persuasive than complex econometric models. The models are simply too easy for the other side to break. In contrast, credible fact witnesses who the other side cannot cross examine effectively, often carry the day.

I should note that in no sense am I impugning or critiquing all economic testimony. If you’ve ever heard Fiona testify, you’d realize she’s one of the best in the world and can be very persuasive. My point is when you try to make this more complicated than it actually is, that tends not to work with judges. Also, in merger cases, strategies about timing can also matter a lot. The conventional wisdom that there are benefits from lengthy investigations is almost always wrong. Lawyers and consultants benefit from these long investigations, not the litigants. The party that best executes a strategy to move rapidly, usually wins. If the government or the companies take forever to put their case together, bad outcomes often follow.

Finally, in a world of imperfect information, maintaining credibility is essential. If a judge thinks that the government or a company is making it up, then the legal standards, whatever they are, probably won’t help you and it’s time to warm the bus. Thanks very much and I look forward to our discussion.

Doug Melamed Transcript

Larry Bernstein:
Our final speaker today, Doug Melamed, go ahead.

Doug Melamed:
So we live in a time of populism, in which aggregations of economic and political power are perceived and feared. One result that seems rather clear is that antitrust enforcement will be more aggressive in the next few years than it has been for the past several years. However, an important disagreement about what that really ought to mean, it a disagreement between what might be called progressives and populists. The progressives, like Fiona, accept the premise on which antitrust law has been based for at least the past 40 years or so, that antitrust law is about economic welfare, and in particular, about prohibiting any competitive conduct that increases a firm’s market power. A populist is more concerned about reducing inequality in wealth and political power.

The progressives are motivated largely by case studies, court decisions, economic data that suggest an antitrust law tilts too far towards defendants and has not been enforced for the past 20 years or so. The bill introduced by Senator Klobuchar reflects the concerns of some of the progressives and seeks to correct the problem by legislation. Like the basic antitrust laws enacted in the late 19th and early 20th centuries, Senator Klobuchar’s bill focuses on prohibiting anti-competitive conduct.

The progressives concerns are disputed by antitrust conservatives and Senator Klobuchar’s bill will no doubt be roundly criticized by many, but there was plenty of legitimate reason to discuss whether antitrust laws should be recalibrated to better service objectives and promote economic welfare. In order to avoid false positives, antitrust law imposes on plaintiffs demanding proof requirements and includes legal shorthand and doctrine rules that make it difficult to challenge mergers or anticompetitive conduct by dominant firms. The question is whether the law has gone too far in that direction.

Most of the problematic rules have been made by judges and the common law approach that antitrust law has evolved. The hard question for those who think the law needs to be reformed, is whether reform is better coming from a judicial process aided by new enforcement initiatives by the antitrust agencies, such as the FTC’s case against Facebook or by new legislation. Relying on the courts will take a long time, especially given the conservative nature of the judicial system and so many active judges injustices. New legislation will subject the antitrust law to be offered on principle compromises of the legislative process. While antitrust experts from both the right and the left could probably draft pretty good legislation, it’s not clear to the Congress can enact that legislation.

One reason Congress might not do a good job on the legislative point, is that much of the impetus for any trust reform in Congress comes not from progressive, but from populists. To simplify the matter, the populist position is that they are primarily focused on inequality of economic and political power.
They’re concerned about large corporations taking actions that harm customers and suppliers, or disadvantage smaller competitors, even if the conduct of those corporations will be regarded by economist as efficient and are likely to increase economic welfare.

The broad political support is energized in part by concerns about the large tech platforms in particular, Facebook and Google, and to a lesser extent, Amazon and more recently, Twitter. These platforms are in many ways our most important communications media, and there’s a long history in this country of aggressive and in some respects, excessive antitrust enforcement against the then dominant communications media. Starting with motion picture theaters and broadcast television networks, cable networks, and now tech platforms. Even more than those earlier forms of communication, the tech platforms raised non-economic concerns about privacy, social disintermediation, and the censorship and dissemination of political misinformation. These non-economic concerns have aligned populists on the right, like Senator Hawley and Congressman Burke with populists on the left.

The tech platforms raise serious questions, privacy law section 230, and other laws affecting content dissemination, need to be reconsidered. The size related advantages of the tech platforms, network affection, scale and scope economies suggest that we might also consider targeted economic regulation directly of the platforms. But the broader efforts of the policy to change antitrust law, which are affected most extensively in the House Antitrust Subcommittee reports last November, raise difficult questions that populists have not addressed.

First, the progressives ignore efficiency and economic welfare. They want to reform the antitrust laws in order to protect the weak and reduce the power of the strong, even at the expense of economic welfare, but they have not assessed the cost of their proposals, nor have they assessed the extent to which the more incremental reforms proposed from the progressives will address the populists concerns.

Second, the populists want antitrust laws to be exclusively intended to further the broad objectives, such as equality of workers, a fair economy and democratic ideals. These are worthy goals, but that does not mean that those objectives should be added to the goals of the antitrust laws. Experienced teachers at law often say that conflicting objectives, soon becoming incoherent and unpredictable in application. And these laws and the bureaucracy are more susceptible to regulatory capture than laws whose enforcement and judicial decisions can be assessed by less ambiguous metrics. So, the big issue might be not whether antitrust law will change, but whether it will remain focused on prohibiting anti-competitive conduct in order to promote economic welfare.

Antitrust in a Biden Administration Panel – Morten, Soven, and Melamed Transcript

Larry Bernstein:
Doug, I’m going to start with my first question for you. We had Chad Syverson from the University of Chicago Business School, on our program a few months ago. And what he highlighted was that the return on capital at large firms is much higher than for smaller firms, and it’s been accelerating over the last 20 years. Meaning that the large firms are just much more productive than small firms, and that capital needs to go from small firms to larger firms within certain industries. Let’s not talk about big tech for now, but let’s focus in on just normal businesses. Do you see this transition of moving towards larger firms taking over smaller firms, as a means of generating economic efficiency in our economy and that holding that process back is problematic?

Doug Melamed:
Well, I think as both Fiona and Josh said, antitrust law is much more granular than the question you asked. I think the answer to your question is many acquisitions are efficiently putting together complimentary assets, whether they’re human capital, intellectual property or tangible assets, and they can create real efficiencies.

As such and they can create real efficiencies, but some transactions are not. And the task of antitrust law, is to have rules and procedures to identify those individual instances where firm engage in transactions that have no efficiency properties or very, very little, but rather threatened to nip in the bud competitive threats or to eliminate competition between firms that ought to be competing. It really is microsurgery anti-trust law, and generalities like big firms are more efficient I mean, there are also generalities you can shake are less innovative and they’re useful to understand we don’t want to go too far one direction or the other, but I’m not sure they’re going to answer the question of what’s should anti-trust law be to me.

Fiona Scott Morton:
And can I jump in here just for a second? Because the way you characterize Chad is not quite right, or rather maybe he said that, but I wouldn’t characterize it that way. You said big firms are really profitable and that shows that they’re more productive and that money should flow to them. Well, there’s an alternative hypothesis which is that, that big firms have market power. That doesn’t mean it’s productive. It means it’s in a technical sense, yes it’s earning many dollars for each ad it shows for example. But that’s not real productivity. That’s just dollars that comes from the fact that it has market power, should more money flow into that sector because it’s so productive there. Well, a big puzzle that macro economists have been working on for the last few years is that, while those big firms have lots of cash and the theory you just articulated would suggest they should expand.

They’re not. Now the macro economists spent some time working on that and came out with the idea, Oh, maybe it’s the same market power issue. That is to say, if I’m the monopolist, I don’t want to expand. The whole point of being a monopolist is that I have market power here. And I don’t want to be expanding output to the competitive level because then that would stop my ability to earn profits. So if you have a traditional productivity X hat on and you assume away market power, what Chad said is right. If you put your market power hat on, then it all makes sense. No, you’re not going to expand, and no, this firm is not more productive. They’re just selling at a higher price.

Larry Bernstein:
Fair enough. Let’s move to big tech for a second, a number of these firms Google in search for example, is doing it not through acquisition but by organic growth. How do you feel and distinguish between organic growth behavior and acquisition behavior as to what we want to achieve which is a highly competitive marketplace. Fiona why don’t we start with you?

Fiona Scott Morton:
I think we really don’t. That is to say we want a highly competitive marketplace because firms are competing on the merits with their products. And if they compete on the merits and they grow, that’s great. And, if they merge with buying up compliments and firms that aren’t creating market power, that’s great too. And the thing that antitrust laws are trying to stop are two paths to monopoly that are bad, which is purchasing my rivals or firms that are about to be my rivals in an attempt to reduce competition that I might face.

And that time become a monopolist or taking the firms that are in the market and somehow excluding them using conduct. It isn’t about a better product or doing a better job, but it’s just trying to get rid of my rivals by changing my product design so that it’s not compatible with them anymore. And it drives away customers or there’s a really long list of conduct that falls in that bucket. But basically, bad acts that are not competition on the merits. And they’re both not serving the interests of consumers. They both have competition and we have two different logs for them, but that’s just the law.

Larry Bernstein:
Josh.

Josh Soven:
I mean, to sort of break it down into buckets, the law basically says, if you produce a fantastic product and you drive everyone out of business, we’re good with that. If you’re a competing on the merits and you win just because your stuff is better, your price is lower, you innovate faster, that’s it. And that does create some heartburn for people out there. But at least today that’s been the rules of the road and the thinking is, unbalanced we’re going to do a much better, if you let people go at it and if they, obtain market power for a while then, we’re good with that. On the acquisition side, to pick up on the last comment and question, what’s bugging people a bit is that and I’m not commenting on the rightness or wrongness of this is that every once in a while, you’ll see large company A, buy small company B that has 50 super smart software engineers, a product and no profits. And then 10 years down the road, we look back and go well, maybe you could envision a better world had that not happened. That sort of acquisition at the moment it’s simply unchallengeable under the antitrust laws because the probabilities are too uncertain. Most judges would go look maybe yes, maybe no, I don’t know. It seems like 50 things has to happen for me to conclude this as a problem so no. Part of the debate that’s going on in the Klobuchar bill and otherwise is should we just go. We can’t prove it, we agree we don’t have the documents, we don’t have data, we don’t have the models, but we just think the risk of this is too great, given the size of these companies, and therefore we’re going to a bright line rule and say no more. That’s a complicated question where you pull on one string, a bunch of other things are going to happen, but-

Fiona Scott Morton:
Let me just point out that Josh just contradicted himself by saying, I can’t prove it. And previously he told us the burden of proof didn’t matter. So, it really does and the burden of proof really does matter.

Josh Soven:
No, I’m saying that you could prove Fiona, this deal isn’t going to reduce competition because I’m acquiring something with 50 employees, no revenues, no product. And there’s a hundred other people doing it. So yeah-

Fiona Scott Morton:
I disagree. There’s a lot of uncertainty and there’s a risk either way. I don’t think either side given the burdens of proof that we have in antitrust.

Doug Melamed:
Let me jump in here. I think Fiona is completely right. Uncertainty is at the heart of the antitrust laws, because many antitrust questions involve making some judgments about things that are unknowable, like future innovation or unobservable, like marginal cost. You’re going to have uncertainty, in principle there are three ways to deal with it. You could have rules that will say for the most part, we’re going to put the burden of uncertainty on the plaintiff, but making it very hard for the plaintiff to justify government intervention into the market. And that’s oversimplifying it a great deal. That’s what antitrust law has been doing for the past 40 years. The other way you could go, which is what the Klobuchar bill seems to be going and again, it’s not a black and white, but certainly in that direction is to say wait a minute, we have a lot of data that suggests that you have merger efficiency or are not realized at least as much as anticipated.

The value of mergers is not what maybe we thought. We also have data suggesting there mentioned that a lot of anti-competitive mergers have avoided antitrust will be- so maybe we should put the burden of uncertainty on the defendant. By saying, if you fall into a particular category of a high-risk merger, you’re going to lose the case. Your merger is going to be stopped unless you can somehow come up with proof that we shouldn’t have to worry about. The third alternative is to do a case-by-case ad hoc approach. A plaintiff wins a merger case only if it proves that harm to competition is more likely than not. So, you take the so-called Nascent Firm acquisition when Google buys a startup. And what if we knew the following facts, now what if we knew that there was a one chance in 10 that that startup if left alone would become the next big thing and nine chances in 10, that it would fail.

And there are some minor efficiencies to Google to have its assets. A more likely case for that startup would say, that’s a lawful merger, but maybe you could look at It in terms of expected value and say on those facts it’s a bad bet to let that merger go through. Because the upside if we’re wrong are very small
and the downsides if we are wrong are huge. It seems to be those are the three old truths that the law face and they’re very difficult because of the institutional context, making decisions under uncertainty.

Josh Soven:
Yeah. I think as a practical matter, what’s the issue is whether you want to lower the threshold perhaps dramatically if we’re saying, we find the risk of large company buying small company to be unacceptable. That’s what’s really being debated here. Should it be 50 percent? Should it be 30 percent? Should it be 10? Should it be two? And there’s different consequences, which flow from where you set that bar. That’s my point.

Larry Bernstein:
I want to just change subjects slightly. The big antitrust breakup of my lifetime was the breaking up of ATT its local phone companies which later got merged together again. But it was an example of one company having monopolistic power over an industry. And it reminds me a little bit of, if we decided to break up Google for example, maybe ATT is the best example. I was just wondering what you guys think about the ATT breakup, whether or not that was a success, Fiona the reason I bring up this example was it sort of reminded me of how you opened your discussion with, it’s going to take 10 years, it’s going to be complicated, a bunch of appeals.

I remember that case Judge Greene was analyzing ATT for a decade. And the market really moved over that time period between what was original problem and what we ended up doing about it. And I also wonder to know, was that even a success or a failure at the end of the day or maybe it didn’t even matter. So, Fiona let’s start with you, how do you think about the ATT break up ?

Fiona Scott Morton:
I don’t know the age distribution of this podcast. I will say that the ATT breakup is a complete Lodestar for anybody over the age of 55 or thereabouts. I’m just under, I was in high school when it happened. So, it wasn’t a big deal for me and I think for anybody under the age of 55, they don’t see it. They don’t understand what happened, they don’t understand why it was such a big deal. And a lot of what made it such a big deal was the physical nature of it. There were wires, there were centers where the wires had to meet other wires and who’s going to pay for those centers and how was interconnections going to be done? And what products were there because this shift from analog to digital was happening at the same time.

And there was this long distance versus local loop, and the local loop was a legitimate, natural monopoly. You didn’t want 17 wires going to your house. So, the issue is in the ATT case where I think maybe not so useful in terms of the parallel to today’s digital platforms, but you’re right. That in terms of its importance in the economy and it’s touching everybody, it’s probably the best analogy. And so that’s why it’s so popular even today, with Tim Root’s book and other people really focusing in on how great it was. Now, was it great? I think we’ll never know the counterfactual, lots of people think that Judge Greene made lots of terrible decisions. Other people think that it was marvelous. So, I don’t have an opinion on that, but maybe I’ll ask Doug since he was more mature at the time?

Doug Melamed:
Although I’m older than you and therefore scarred by the ATT experience, I don’t claim the really deep expertise in the history of that industry. But I do want to add a couple of thoughts. First, the ATT decree was a remedy. In a case brought challenging Anti-competitive conduct. It wasn’t just a decision by the government, let’s break them up. Second and maybe more important for this purpose. Breaking up ATT may have made conceptual sense economically because it disabled AT T from [disadvantaging competitors and long distance service, which was the crux of the problem.

But it made sense as a business matter because the units that were separated could readily be turned into efficient standalone business units. When you’re dealing with something like the Google search platform or the Facebook social network platform, it’s not at all obvious to me that there is an efficient way of breaking them up, or even if you tried to break them up, they wouldn’t tip back to dominant networking platforms in those lines of business in any event.

So I really think that while the ATT theme, what went down was probably a real success and is part of the story of the innovation and telecommunications. It’s not a very good example with respect to the current tech platforms.

Larry Bernstein:
Let me try a different example with Amazon. I view Jeff Bezos decision to have the Amazon marketplace on the same platform as his Amazon products to be just extraordinary. His decision to allow any possible competitor to offer any good at a lower price and market it directly in competition with his own, is something so out of the ordinary with regard to how most corporations act. Clearly this is one of the most dynamic of retail platforms to ever exist.

I’m wondering, even though it has succeeded in allowing everyone to transact on the Amazon platform, I still believe that Amazon is still considered the bad boy in the room. Is there anything Amazon could have done or should have done to make their platform more competitive and transparent? And do you see antitrust getting involved in this, or do you see more of a legislative solution if we want to curb Amazon’s growing retail power?

Fiona Scott Morton:
Just remember I do some consulting firms onsite limited amount to say here.

Larry Bernstein:
Okay.

Fiona Scott Morton:
But I will say that the business of having a marketplace plus a retail operation in the same spot gets you network effects. That is to say, everybody can go to the same place to find what the retailer offers, which is not going to be all products right? You’re not going to have a retailer that says I offer every product on the planet. But at the same time, it’s very convenient for a consumer to be able to go to that spot and see what other retailers on the planet have to offer because they’re selling them through a marketplace that has the same interface. So, there’s a lot of consumer benefit to the marketplace idea because it’s so scalable and everybody who’s got something to sell can go there.

And that creates lots of long tail niche products to sell to consumers like me. I think that it’s not as crazy an idea as you might think upfront. I mean, I sense you’re in sort of disbelief, I have a store. Why am I inviting other people into my store?

Larry Bernstein:
Yeah.

Fiona Scott Morton:
But I think part of the answer is I’m going to attract more consumers by doing that. And that’s going to feed back into a positive feedback loop.

Doug Melamed:
Let me add something to that because I do have some trepidation because Fiona of course is the economist here but what Amazon is doing doesn’t surprise me at all, grocery stores have house brand selling against somebody else’s brand. And the reason is that the big chicken item in terms of where Amazon gets its value and its profits is in its platform. So, it wants to enhance the value of its platform by making it as valuable to consumers as possible. Attracting more consumers, making more sales and so on.

Doug Melamed:
It also gets involved in the product business, knowing that some situations where the relative importance is different, a platform might well say, I’m going to undermine the value of my platform by excluding rivals in the adjacent business so I can make a fat profit in the adjacent business. But that would be true only where that profit in the adjacent business is of more value to Amazon, then the lost value to its platform. So, it seems to me that our Amazon from what I know of the business, it’s doing them a perfectly rational, economically sensible and efficient thing.

Larry Bernstein:
Let me clarify my shock for a second. If you went to a Walmart, you just wouldn’t see someone from Target offering to sell a similar product and a similar price in the store. That’s what I find amazing. You’re right, I’m not surprised when a grocery store offers a house brand or Nestle side by side and offer it at a slightly different price. But in this example, Amazon often doesn’t make the product. Let’s just simplify it, they’re offering them a book for $21 and then someone else is offering the same new book for $16, there are differences in shipping speed, et cetera. That’s what I find amazing.

Fiona Scott Morton:
Yeah. So, remember when they started they were a different channel. It was like having a store in France and you wouldn’t be surprised if the store in France had a mini store in America because they weren’t otherwise on the ground in America, their store was in France. So that was the brick and mortar versus e-commerce. And if you didn’t have your own e-commerce store, you could join Amazon’s e-commerce store. I think that’s one way to think about it. Also keep in mind there’s two different kinds of sellers on a platform like that. There’s what you might call the brand owner. The people that actually do the manufacturing or conceive of the brand. And then there are resellers, which are more what you’re talking about. Another retailer that specializes in chocolates or something. And they’re going to put their chocolate store onto an e-commerce site. And that’s different than the brand owner of a particular kind of chocolate. That’s thinking, how do I get this to consumers? And maybe picks Amazon as one of many places it’s going to sell through, or the only place it’s going to sell through.

Doug Melamed:
Amazon sells a lot of products in my experience as a consumer, that are also sold by the brand owner at its own website.

Larry Bernstein:
Yeah, for sure.

Doug Melamed:
It does compete in distribution as well as in product sales.

Larry Bernstein:
Yeah, I totally agree. I go to Amazon, I could buy directly from the producer, oftentimes they can’t get it to me in my two-day period for free. And you can’t use one click. You’ve got to put in your credit card information. And there’s other, I’ll call it non-cash related price issues that resulted in my purchase decision making process. Let me go onto a new topic within antitrust in Senator Klobuchar’s bill, she also has a reference to creating this group within the FTC to sort of do a post-mortem analysis. Was in fact competition hindered as if we can learn from the experience. Sort of like evaluating Judge Greene years later. Josh, you worked at these organizations like the FTC. What would be the value of having that historical exercise of competition within an industry to reevaluate previous decisions? Is this good learning that would be helpful? Does government do this well? Will it be used properly? What are your thoughts of having the FTC do a postmortem?

Josh Soven:
Right, now that is a great question. Retrospectives as they’re called in the trade are sort of the catnip of the antitrust agencies now. They’re very appealing. Properly targeted in certain industries, they can produce learning. And certainly, what I think the government has done in a few cases, the hospital sector being one of them is they went back and looked at some cases and figured out a better way to litigate cases in turn to losing streak into a winning streak. The challenge of them is twofold. One, they suck up enormous amounts of resources and sometimes those are better spent on forward-looking matters rather than going back and to just the number of variables you often have to sort through in order to come out with a result, which you’re going to have some confidence in is often just daunting.

That the longer back you’re going, the more premier stations and the more branches on the decision tree. So the answer is, it can work in a finite number of circumstances, but across the board they’re tough.

Doug Melamed:
I’m sorry, except for concern about the proposal. And that is, I’m not sure it’s a good idea to have this body housed in the FTC, maybe a third party, maybe GAO or something like that outside the agencies, especially in so far as you’re talking about reviewing DOJs work because there’s frictions as it is between the agencies. And I’m concerned that there will be complicated interest in either downplaying or exaggerating criticisms of the other agency.

Larry Bernstein:
Excellent point, I guess my one last question before I go to optimism. One of the big losses in the Antitrust Department during the Trump administration was the Time Warner merger with ATT, particularly I’ll call it a vertical merger that the antitrust department decided to challenge and then ultimately failed. I’m just wondering from the various speakers, what they thought about that, and whether or not legislation would help them prevent vertical mergers or is that something that the government shouldn’t be involved in? Fiona can I start with you on that one?

Fiona Scott Morton:
Yeah, inherently more difficult because there’s two levels of analysis. You’ve got an input, supplier merging with something downstream and ultimately when we worry about competition we worry about horizontal competition. So somehow that vertical link is affecting horizontal competition and you have to trace that out and there’s many variations of how that might happen or not happen. And so that causes those cases to be just more complex, and when the burden is on the plaintiff to show that there’s harm once again, that then just becomes harder to do in court because you’ve got something complex and a general interest judge who might be a bit bored and it doesn’t go well for the government.

Fiona Scott Morton:
So I think that reorienting courts to what the dangers are in vertical mergers, that they are a viable kind of merger that we should be worried about and that the burden recalibrating this burden, so that you say to a court, look if there’s an appreciable risk of harm here, we don’t want this merger to go forward. So it’s not that we need to trace out every exact thing that’s going to happen in the future and nail it down. We have to show that there’s a substantial enough risk that consumers don’t want to go there. So, that’s what I would hope that legislation would do.

Larry Bernstein:
Josh you are going to get even on that one.

Josh Soven:
Yeah, Sure. And the people who brought that case are all friends of mine. I admire and respect them a lot and they worked really hard, but no surprise at all in the outcome. It’s the honest suggesting I mean, that case involved 22% of distribution in the form of Direct TV, buying 12% of content in the form of time Warner with no evidence that prices were going to go up to consumers. I don’t think judge Leon was bored. I think that’s what he picked up on under the existing law, the government is going to lose that case. And so the fact that they lost was not a surprise at all.

Doug Melamed:
I think the government theory on that case was a sound theory and the courts agreed with that. They lost on the facts. The record was not into the government. Maybe it was just bad facts, maybe a bad lawyer I doubt that, or maybe antitrust law in some ways has gotten too complicated and we need to figure out ways to simplify.

Larry Bernstein:
You know, I think it’s interesting. It doesn’t appear that the acquisition has resulted in tremendous opportunities for AT and T and there’s been rumors recently that one will be sold potentially to one of its horizontal competitors so that they can get their value from it. In any case-

Fiona Scott Morton:
Let’s point out that the CEO of AT and T said that he wanted HBO to be distributed widely, that was his only goal. And then proceeded to see anyway that HBO was not sold to Sling TV anymore, Sling TV being a competitor of AT and T. And that was a major reason people were signing up for Sling because they could get HBO that way. So the foreclosure that the government predicted namely important content assets being withheld from competitors of AT and T happened immediately even before the appeal.