Economy & Business

Whither Conservative Merger Policy?

Outside an AT&T store in New York City (Reuters photo: Stephanie Keith)
Trump’s antitrust authorities have given us little cause for optimism.

When President Trump was first voted into office, there was significant speculation as to what changes we could expect to see within antitrust enforcement. The Obama administration had for eight years led an aggressive antitrust campaign, and the incoming Republican administration was viewed with a mixture of anticipation and angst, depending upon whom you asked. Would we see a return of conservative antitrust principles, with strong criminal and civil enforcement where appropriate, policy tethered tightly to economic theory and evidence, and modesty born from both an understanding of the limits of antitrust and a recognition that intervention often makes consumers worse off? Or would populist sentiments — so prominent during the 2016 election cycle — percolate into antitrust enforcement as well? Would the Trump administration look more like the Reagan administration, the Obama administration, or something uniquely its own in this regard?

One year later, the overall verdict remains unclear, but there are some concerning signs. There have been bright spots. Federal Trade Commission (FTC) acting chairman Maureen Ohlhausen’s Economic Liberty Task Force is an important step in the right direction and appropriately targets the agency’s resources at state and local regulations that clearly can reduce consumer welfare. And Assistant Attorney General Makan Delrahim has, to his credit, made a priority of reversing a trend of Obama-era antitrust enforcement by restoring respect within the Justice Department’s Antitrust Division for intellectual-property rights and their significant role in fostering competition and economic growth.

But the same cannot be said for other key areas of antitrust enforcement. Indeed, at this stage, it has become relatively clear the agencies are not pursuing a conservative antitrust agenda when it comes to evaluating mergers. Some of the biggest cases the agencies have pursued over the last year illustrate this point. Consider the FTC’s decision to block transactions such as the DraftKings–FanDuel merger. These two firms sought to expand the fantasy-sports ecosystem by introducing daily game options. Neither company had ever been profitable — as media reports at the time of the FTC’s review noted, both were running out of cash and were months behind on paying vendors. Both were competing against vastly more popular and well-funded firms such as ESPN — which pioneered online fantasy sports — Yahoo!, and CBS. And both were seriously struggling to retain users. The FTC’s decision to block this merger is heavily reminiscent of an Obama-era trend that too often prioritized adventurous theories over economically and empirically sound ones.  

But the DOJ’s decision to challenge AT&T’s proposed acquisition of Time Warner in federal court gives the greatest cause for concern from the perspective of conservative antitrust policy. This is a “vertical” acquisition: The merging parties do not compete with one another by selling substitute products to consumers, but rather are offer complements within the same chain of distribution. Time Warner creates television content, while AT&T distributes such content through its various services. The DOJ’s complaint articulates a dubious theory of harm, and fails to articulate points fundamental to economically grounded theories of harm.

The conservative view of antitrust is inherently intertwined with economic insights. And economics has quite a lot to say about vertical integration. Significant ink has been spilled by many prominent economists and jurists — including antitrust luminary Robert Bork — to develop our understanding of the subject. A clear, consistent consensus has been reached based upon not only economic theory, but also empirical evidence: Vertical restraints (including mergers) frequently yield procompetitive benefits and only on rare occasion result in any anticompetitive harms. Indeed, the DOJ’s chief economist, Luke Froeb, has explained that “there is a paucity of support for the proposition that vertical restraints and vertical integration are likely to harm consumers.” This statement is supported by a tremendous empirical literature, which recognizes that exceptions exist but also demonstrates that these exceptions are few and far between.

Is the DOJ’s AT&T complaint one of those exceptions to the rule? No. Sound vertical-merger challenges require at least the presence of significant market power and the potential for substantial foreclosure of critical inputs or access to customers. The AT&T complaint’s factual allegations lack both. The DOJ’s foreclosure theory is based upon the premise that Time Warner’s content is necessary to effectively compete in the marketplace. I enjoy Game of Thrones as much as the next person, but content foreclosure is particularly unlikely in dynamic and innovative markets like the ones in which AT&T and Time Warner operate along with several other entrenched and deep-pocketed incumbents — as well as numerous maverick players such as Netflix, Hulu, Amazon, Apple, and Sling TV, which are continuously changing the competitive landscape.

The decision to block the proposed deal is the most high-profile action the Trump DOJ has taken to date and will likely be its signature antitrust decision. Win or lose, and whether it intends to do so or not, its decision here at least creates the perception of a remarkably aggressive new stance on vertical mergers.

With populist sentiments currently driving even some conservative public intellectuals and commentators to call for expanded antitrust enforcement and greater reliance upon the wisdom of government regulators rather than competition to determine market outcomes, ensuring that enforcement is focused upon principles of economics, evidence, and respect for markets is more critical now than ever. Conservative principles of regulation, including antitrust regulation, should not bend with political winds.

The Trump administration’s merger policy thus far looks strikingly similar to the Obama administration’s.

It is still too early to tell the overall shape and direction of Trump’s merger policy. Indeed, the FTC still awaits a permanent chairman and a full slate of commissioners. But there is little evidence that conservative principles are currently guiding merger reviews. The Trump administration’s merger policy thus far looks strikingly similar to the Obama administration’s. That resemblance poses no problem if one believes the previous administration’s merger enforcement was properly calibrated to protect consumers without chilling procompetitive deals. But if one believes, as I do, that the Obama administration’s FTC and DOJ overreached, and too often succumbed to adventurous theories without sound economic and empirical backing, then the close resemblance is far more problematic.

One year into the Trump administration, the FTC and DOJ have given those who believe in antitrust intervention only when it’s relatively limited in scope and coupled with convincing evidence of market failure little cause for optimism when it comes to merger policy. It is of paramount importance that the antitrust leadership of the FTC and DOJ make the intellectual case for evidence-based merger policy consistent with a respect for markets and an appreciation of the limits of government intervention.

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