Antitrust Brainstorming Board with Douglas Melamed

Below, we have provided the full transcript of the interview with Prof. Douglas Melamed, the Herman Phleger Visiting Professor of Law at Stanford University, recorded on August 23, 2021.

This interview was done as part of the Antitrust Brainstorming Board created by CPI with the support of the CCIA.

Thank you, Prof. Melamed, for sharing your time for this interview with CPI.

A video of the complete interview is available HERE.

Do you think the current antitrust framework works for consumers?

Douglas MELAMED:

Yes, I think the current framework, whether you call it the consumer welfare standard or something else, I think it is right for the intended purpose, which is intended purpose of antitrust laws, I understand. Which is to prohibit anti-competitive conduct that harms competition and thereby harms consumers and suppliers. The implementation of that conceptual framework, however, I think needs improvement because over time I think it has become too difficult for plaintiffs to prevail for two reasons, I think.

First, antitrust doctrine has been informed by an excessive trust in markets and an excessive distrust, I think, in governments. And that has manifest itself in a series of specific doctrines that are intended to reduce the risk of false positives, even at the expense of false negatives. And I think that’s going too far. I think those doctrines, some of them, not all of them, some of those doctrines I think should be re-calibrated to reflect current thinking and current economic circumstances.

Secondly, I think the law has become too complex. Generalist judges don’t really have much expertise, much familiarity with antitrust law. And I think they’re often presented with very difficult complex questions. They think, I believe are really opinions in the long formalistic checklist, “What’s the market? What’s the market power? How do I categorize the conduct?” And I think we ought to try to simplify antitrust, get back to some more core principles.

Each of these problems, the complexity and the excessive concern about false positives versus false negatives, I think had a sensible starting point and appropriate humility about the government and appreciation of the difficulty of some of the issues, but inertia and etiology led to their evolution to excess. And I would focus on recalibrating the law in light of those problems, rather than arguing about the conceptual framework, which I think is well suited for the task.

Do you believe the vertical merger guidelines need to be changed?

MELAMED:

I don’t think they are perfect. Yeah, I think it would be good to make some changes there, but that wouldn’t be my first focus. I think they could be improved.

Do you approve of the shift from competition towards regulation?

MELAMED:

No, I think sourcing that as common carriers, which some have suggested, because they’re not common carriers. They’re not delivering goods with people from point A to point B, their business models are much more heterogeneous and much more complex than that. More generally, I don’t think these or any companies that are currently being discussed in this context should be subject to broad economic regulation. A sound antitrust law, a sound antitrust policy seeks, what I think of as a Goldilocks solution, not so little intervention in the market that markets are controlled by powerful private sector interests, with interests not align with those of the public, and not so much intervention the markets are controlled by government agencies that at best have a tremendous information disadvantage.

I think either of these extremes are inferior to effective market competition and competition law and policy are the focus on promoting market competition. Now, having said that, yes, narrowly targeted regulation addressing specific problems might be appropriate. Let me give you an example. US antitrust law is constrained in a way that frankly, some other competition laws around the world are not, by two factors. One, US antitrust law applies to almost all aspects of commercial conduct effecting our interstate commerce. It’s a very broad sweeping law that has to be suitable for an infinite variety of business and commercial problems. And second it’s enforced in a decentralized way with an infinite number of potential plaintiffs bringing cases before hundreds of district judges, mostly of whom are not experienced or expert in antitrust law.

the result is fairly cautious antitrust law, fairly abstract antitrust law. And even assuming that that law is optimized for each general rule in antitrust law, it might not be the optimal solution for specific problems posed by the tech platforms. So, if one believes, and there’s certainly evidence to suggest this, that some of the digital platforms have almost boundless economies of scale, and scope, and network effects. And therefore, that one can anticipate a significant market power during for long periods of time. One might say, “Look, for them, we want to have very specific targeted intervention to reduce entry barriers.” For example, requirements of interoperability were relaxed so entries can tap into some of those scale and network economies.

But apart from those very targeted kinds of regulation, I don’t think we should be going in the direction of broad-based economic regulation. On the other hand, there are certainly non-economic problems, privacy, misinformation and the like, that might require some regulatory intervention, but that’s not for the kind of economic reasons that competition laws deals with.

How would you ensure antitrust is enforced vigorously if no changes are made to the current antitrust system?

MELAMED:

certainly there hasn’t been a lot of really vigorous antitrust enforcement, at least outside the merger area. And even there you could argue, in the past several years. I don’t know much about the cases that were brought, so I can’t say that they’ve left a lot of good cases unattended. Assuming there have been some cases where defendants prevailed and in my view, clearly, wrongly decided cases, American Express and Qualcomm come to mind. So, I think if I were advising the heads of the antitrust agencies about what they ought to do, or working with what the government in general ought to do, I think I would say two things.

First, I think they need to develop a carefully conceived enforcement program intended to promote the common law like evolution of antitrust law. Antitrust law is largely judgment. Statutes are very general, very terse and 100-plus years old. And the law has been a product of judged judicial decisions and the cases that the agencies can bring that will have the biggest impact are not necessarily the cases that get the biggest headlines today. They’re the cases that are going to nudge the law in a constructive and positive direction. So, I think what you want to do is to identify those cases and put them together and win them. And that ought to be the focus.

I think to do that, of course, among other things you have to hire the very best experts in antitrust law and antitrust economics. What you might think of as creative technocrats. And I’m a little worried that there are some indications that people who have been involved in the past, particularly those big law firms who represent big companies are kind of being blacklisted as it were, and that’s a big mistake because some of them, not all of them, of course, but some of them are among the most talented, who could be the biggest contributors to that kind of a program. So, that would be number one, a carefully considered enforcement program.

Number two, we’ve got to educate the judges. Now, most of these judges are not deeply knowledgeable about antitrust. Many of them were last taught economics, a kind of now obsolete Robert Bork view of economics. And I think we ought to figure out a way to counteract frankly, the right wing funded education programs for judges, by enlightening them a little bit about the conceptual framework. It’s not that difficult. I have a one sentence summary of US antitrust law. I think that would be a useful starting point, but there may be others. And a little bit about economics, not to turn them into economists, but to make them understand that some of the notions they may have been taught and don’t take for granted are not true. And how to think about the role of economics and antitrust law. So, that’s the two prong supply and demand, bring the right cases and educate the judges.

What are your thoughts regarding start-up acquisitions?

MELAMED:

I think they should be prohibited where they would violate sound antitrust principles. If by restrictions, you mean a general prohibition on so-called nascent acquisitions or startup acquisition, the answer is clearly no. Many of them can provide enormous efficiency benefits by combining complimentary assets. Certainly, the so-called acquihires, where you take a small company largely in order to acquire the talent, falls in that category. Those you might think of as static efficiencies. They’re also dynamic efficiencies by providing an exit path for those who make the very risky startup investments seeking community and the like.

you don’t want to throw all that out with a broad brush prohibition on nascent acquisitions. But I do think that we ought to be more aggressive than I think the law has been, or the agencies have been recently, in situations where incumbent monopolies whose monopolies seem to be protected by entry barriers and other factors that would make one expect them to endure for some time, acquisitions by name of nascent or potential competitors that pose a potentially unique or important threat to their monopolies, those should be scrutinized carefully under section two standards, using really the Microsoft test, where harm the competition can be showing in a kind of probabilistic sense by creating a risk of harm in the following sense.

Taking a possible path of ameliorating competition and eliminating that path, that should be enough for the harm to competition requirement in a maintenance of monopoly case, as it was in the Microsoft case. But if you’re going to do that, if you’re going to lower the threshold in terms of what harm the competition is required compared to what some think is section seven standard, which is proving that the harm is more likely than not, which certainly shouldn’t be the standard in section two.

If you’re going to lower that threshold, then I think you have to take a careful look at possible efficiency justifications with the burden of the proof on the merging parties to show merger specific efficiencies that outweigh whatever risks the plaintiff established. So, I think if we have an aggressive section two approach to nascent acquisitions by incumbent monopolies, we ought to be able to address the problem in a way that doesn’t require a broad based prohibitions on acquisitions, almost all of which are likely to be harmless, and many of which might have real benefits.

Is break-up the best solution for the digital economy and for consumers?

MELAMED:

If by break-up, you mean looking at some of the big digital companies in particular, you can tell are big and they seem to be part of that, break them up. I think that would be, as a rather general matter, a dreadful idea. I can imagine particular divestiture revenues that might make sense. I’ll get to that in a minute, but as a general matter, break-ups can be very disruptive and costly. You’re disrupting existing businesses, you’re going to destroy existing economies of scale and scope. So, clearly, you’re going to have a real hit, at least in the short run, on economic welfare. And I’m not sure you’re going to solve any long-term problem, because if there really are important economies of scale and scope and network effects, you would expect there to be some kind of tipping back.

In the Microsoft age, people had talked about the baby Bills are going to break Microsoft into three companies. If you do that, you’re going to wind up eventually with one big Bill and two dead Bills, and you really haven’t accomplished very much. So, I think a general program of breaking up these companies would really be a dreadful idea. On the other hand, narrowly targeted remedies to restore competition that had been harmed by proven anti-competitive conduct by the platforms, that would surely make sense. So, if some of these acquisitions are anti-competitive, you have to take into account all the costs and benefits, but you can consider the investitures. Certainly remedies to ameliorate the problems from anti-competitive conduct might be appropriate, but not in general.

Now the second part of your question or the third, depending on how you look at it, I guess, was about the separation of businesses. I guess some people call that vertical separations. In other words, a general prohibition on permitting the ability of the powerful platforms to compete against businesses that use the platforms. I think that would probably be an even worse idea. Look, if you have that kind of vertical separations, you’d have huge costs in terms of lost economies of scale and scope. People tell the stories of Amazon taking information from a vendor and then building a better mousetrap and competing against that vendor. Well, that part of the story, if that’s the whole story, that’s a story of efficiency. That’s a story of building a better mousetrap.

I don’t know why you’d want to have a flat prohibition on that. You’re going to deter platform innovation? There’s a lot of important economic developments coming, platforms are vital for time and grow into what formally were adjacent businesses that would be separated by these rules. And you’re going to insulate what might be called the edge providers, the third parties. If you insulate them from competition, and certainly if they have market power, that’s not a desirable outcome. But here too are specific remedies for proven anti-competitive conduct. If Amazon did something wrong and behaved in an anti-competitive way to exclude a rival, by all means, you ought to have appropriate remedies, including perhaps some kind of divestiture and some kind of, “Don’t enter this space again.” The sin no more kind of remedies. But again, I keep coming back to this state and these are remedies for anti-competitive conduct, not some effort by the government to restructure these industries by break-up.

How do you see the role of the FTC and the DOJ in ensuring competition works for consumers?

MELAMED:

The first thing you want is vigorous enforcement, bringing the cases that you want to bring and bark on the kind of program I was talking about earlier, the program of strategic antitrust enforcement to nudge the evolution of law in the right way. I think that’s the most important thing. Plus, competition advocacy. Agencies have traditionally done that. This is an important time, important opportunity. You have the Tim Wu group in the White House and the President’s executive order indicate a real interest in the White House to spread the gospel of antitrust, which is really important. There are a lot of laws in this country, state, local, and federal and agencies who largely are intended to protect incumbents from competition, rather than to promote competition.

The agencies can contribute as competition advocates in an effort to reverse that and replace those restrictions with real competition where possible. And then of course, an advocacy program would not be just domestic. It could be international. It should be international as well. It’s really important to promote sensible, consistent regulation among the important international jurisdictions and competition authorities, to promote vigorous competition and to prevent some of the real costs of a cacophony of inconsistent regulation around the world, the extra territorial costs of companies, multinationals having to deal with investigations of the same conduct over and over by agencies all around the world. International conflicts in the sense of rules in one jurisdiction that require companies to take conduct that’s prohibited in other jurisdiction.

Another problem that people haven’t paid attention to that I think is really important, which is a problem with false positives. Now, even if multiple jurisdictions have the very same substantive laws, if multiple jurisdictions are looking at the same conduct, having multiple bites at the apple as it were, there’s an increased risk of false positive. In the sense, the second agency to look at the conduct can correct the false negative. It can’t correct the false positive. So, the aggregate effect that multiple jurisdictions looking at the same conduct is that you’re going to have a lot of uncorrected false positives. Not many uncorrected false negatives, the law’s going to tilt too far in the wrong direction. So, international advocacy I think could be a very important part of that program to help manage your consumers.

How would you reconcile competition and competitiveness? Should antitrust reforms take into account the potential impact on proposed changes vis-à-vis China?

MELAMED:

It depends what you mean by competition. If you’re referring to that way that it’s currently understood in antitrust law, that is to say an idea rooted in the prohibition of anti-competitive conduct, and otherwise permitting those who succeed in the marketplace by competition on the merits, by efficient conduct, by building a better mousetrap, permitting them to reap the fruits of their success, then there really is no constant. Because in that framing, efficiency and innovation are rewarded and it’s efficiency and innovation needed for international competitiveness.

But if by competition, you mean rivalry, contributing rivalry in the sense of breaking up or constraining big companies in order to leave room for smaller, often less efficient competitors, then there is likely to be a substantial tension, because efficiency and innovation would then be inhibited. And if that’s what you mean by competition, I would say we should temper our enthusiasm for it for fairness-type competition. By among other things, a focus on how that policy could harm us in terms of global economic competition. And obviously, China is, I guess, our biggest global rival right now that we should be concerned about.

Now, there is a theoretical middle ground, I guess, and that is what you might call, no fault intervention. Not to promote equality or fairness, but to enable efficient competition. So for example, you might want to have a targeted divestiture, if you really think you’re going to be promoting competition in an important industry. Or as I said earlier, requirements of interoperability would like to promote competition, without regard to whether there’s been any competitive conduct in the past. I think conceptually, theoretically, that makes sense because there you’re already promoting efficiency, not undermining it by your intervention.

But the problem, and it’s one that the solution has alluded in the past, even some very distinguished proponents of no fault intervention. People like Phil Neil, and Don Turner, and Nobel Prize Laureate, Oliver Williamson. They’ve all said we ought to do something like this, but they’ve never come up with suitable criteria to identify when you should do it and when this is going to become a political pinata. So, I think there is that theoretical opportunity, but we have to be very careful. But in general competition, vigorous competition enforcement, if we mean prohibiting anti-competitive conduct, there’s no tension between that and international competitiveness. But if we get into more fairness-based, equality-based competition enforcement, then there really might be a serious tension.

Any final comments you would like to make?

MELAMED:

I’m going to say one thing that maybe is implicit in what I’ve said already, but I just think that public and political focus in recent years on industry concentration and inequality has led to a widespread non-sequitur. It is the idea that because antitrust law can ameliorate economic concentration and inequality, antitrust laws should be significantly changed in order to address those problems today. I think that’s a real non-sequitur. Many of today’s problems of concentration and inequality, and they’re serious real problems that need to be addressed, they’re not antitrust problems in the sense that they’re not rooted in anti-competitive conduct.

And let’s remember through all the talk about the legislative purpose in antitrust law, the statutes, the core statutes are all about conduct, not about size and power. They’re about restraints of trade, the act of monopolizing and mergers. So antitrust law has enough work to do to deal with the problems of anti-competitive conduct. It should not be deputized in my view or distorted to solve problems of inequality and size that are not rooted in anti-competitive conduct. Those problems should be addressed by other tools and other means.