A Democratic Vision for Antitrust

A Democratic Vision for Antitrust

The antitrust reform project wants to contain domination and expand autonomy—key principles of a left political project.

Major tech CEOs are sworn in before the House Judiciary Subcommittee on Antitrust, Commercial and Administrative Law on July 29, 2020 (Mandel Ngan-Pool/Getty Images)

Last spring, prominent Big Tech critic Lina Khan became the new chair of the Federal Trade Commission (FTC)—an appointment widely seen as a coup for progressive reform. In her confirmation hearing, she characterized the agency’s overarching goal in terms of “fair competition.” This choice of emphasis is significant for understanding the antitrust reform project of which Khan is a leader. At its core, the project is a policy paradigm aimed at creating fair markets—markets characterized by socially beneficial competition, fair prices, and decent wages.

While both proponents and detractors of this reform project sometimes conflate competition policy with the goal of maximizing economic competition for its own sake, in reality, competition law has always assessed economic rivalry and coordination in relation to broader social ends. For a long time, that assessment has been obscured—not to mention insufficiently tethered to the original goals of federal antitrust law. The reform project aims to reorient the use of antitrust in expressly egalitarian and democratic directions.

For decades, competition law and policy have been dominated by the neoclassical law and economics paradigm, which claims that visible market design and coordination interfere with competitive dynamics that would otherwise lead to an efficient allocation of social resources, and thus to the maximization of social welfare. While recent shifts in mainstream economic thinking have led to more discussion of imperfect competition, particularly in labor markets, the “market failures” and power imbalances that justify interventions are on this view still essentially special cases. Moreover, this idealized picture of markets still obscures certain forms of background coordination—especially the often hierarchical and extractive coordination that happens within business firms—while treating other coordination mechanisms as exceptional, with the potential to distort ideal market outcomes.

Conventionally organized business firms are just one of the many means we have to coordinate economic activity; others include labor unions, producers’ cooperatives, and public price boards, to take just a few examples. Because competition law makes ground-up decisions about many forms of economic coordination, and influences the regulatory stance toward others, antitrust reforms hold the potential to affect a broad set of economic policies.

We should not act as if putatively neutral, technocratic appeals to idealized competition can replace moral and political choices about economic life. Nor, however, should we treat actual competition as inherently tainted by its association with neoclassical theory. Channeled appropriately, competition is healthy rivalry: it encourages technological and operational innovations that can have broad social benefits, and it represents an important check on arbitrary bureaucratic power by preserving outside options for workers, consumers, and businesses. Channeled inappropriately, competition can lead to the destructive undermining of rivals (in contrast to constructive outperformance), overwhelm socially valuable independent enterprises, and destroy existing market settlements characterized by fair prices and decent wages. There is no universal logic of competition for policymakers to apply, either dark or redemptive: it is legal, social, and political choices (almost) all the way down.

To move from principles to some specifics, we can look at the approach the reform project might take in three policy areas: policing corporate mergers and acquisitions, accommodating horizontal and bottom-up economic coordination, and re-regulating the law of vertical restraints. These reforms, which are mutually reinforcing, all have the power to help build a more equal and democratic legal organization of the economy.

 

Corporate Mergers and Acquisitions

In recent decades, the default assumption in antitrust has been that corporate mergers bring about technical efficiencies, because bigger firms tend to produce more or better output from the same input than smaller firms. If true, an industrial structure of large firms would “grow the pie” of the economy, even if it did not resolve distributional questions. But the evidence for this assumption is greatly overstated.

Bigger firms do not always or even usually run completely integrated operations; single firms frequently span multiple divisions and product lines, not to mention multiple production facilities. Even single production facilities do not necessarily entail efficiencies of scale (which, as David Graeber and David Wengrow observe in The Dawn of Everything, we have a persistent tendency to conflate with hierarchical organization). Whether a particular process or set of processes is attended by economies of scale or not is an empirical question that depends upon the particulars of the operations and the sector. And centralizing control of distinct production facilities, not to mention entirely distinct product lines, does not necessarily entail greater technical efficiencies. Perhaps even more problematically, even when such centralized control does seem to deliver technical efficiencies, those efficiencies often just consist of greater clout in a given market or production chain.

Conversely, it is also worth considering how operational efficiencies can be achieved through legal and social mechanisms other than centralized private ownership and control. “Copackers,” for instance—firms that package products for a variety of clients—can help small producers achieve the benefits of operational scale. Such facilities could be run cooperatively, by public agencies, or by nonprofits. This idea can be applied to various production and distribution processes. Public investment could be particularly fruitful, facilitating operational coordination outside traditional firm boundaries and removing the need for consolidation.

All of this takes on a sharper edge when we are talking not just about static questions of scale, or business growth through internal investment and gradual operational expansion, but about corporate consolidation and acquisition. Some acquisitions are part of a “buy or bury” business strategy used to fend off competitors; this is what Khan’s FTC alleges Facebook has done, in an amended complaint the agency filed against the social media giant last August. Such instances illustrate how a permissive attitude toward acquisitions can undermine technical efficiencies rather than promoting them.

Many investors, of course, want to engage in mergers and acquisitions precisely in order to solidify or expand their market position. Greater economic clout may enable a behemoth to obtain inputs or distribute its products on more favorable terms—but those are benefits gained at someone else’s expense, not simply through innovation and efficiency. These activities do not, in themselves, grow the pie; they simply cut it differently, so the giant gets a larger slice. (Whether some of that slice trickles down to consumers is a separate question.) It is also worth noting that system-wide, the practice of corporate mergers and acquisitions likely facilitates a wealth transfer to the corporate law and banking sectors. Even when a merger or acquisition does not ultimately take place, a permissive regulatory attitude toward them enables corporate takeover stunts that enrich a small group of shareholders and corporate insiders at the expense of genuine business investment, workers, and the broader public. Some of the conventional measures that are used to assess the success of a given merger—higher share values or payouts to shareholders—have little to do with efficiency. Neither do the worker layoffs that often accompany mergers. If you fire workers and shed production lines, you might increase share values in the short term, but true efficiency requires producing more or better with less input—not simply reducing inputs as well as outputs.

The FTC and the Department of Justice (DOJ) under the Biden administration have taken some important actions on mergers, including a challenge to Penguin Random House’s acquisition of Simon & Schuster on the grounds that it would result “in lower advances for authors and ultimately fewer books and less variety for consumers.” Merger policy is important not only in terms of the relative benefits of market decentralization; it also has the power to channel both competition and resources into internal business investment and innovation, rather than into aggressive acquisition strategies with no obvious broader social payoff. As federal agencies look to revise their merger guidelines, they could introduce changes to formalize these policy goals and to expressly discourage layoffs.

 

Horizontal Coordination

One reason that many on the left are skeptical about antitrust is the perception that the labor movement enjoyed some of its greatest successes in the context of oligopolistic industries. The history is not so simple, of course: many organizers have also spoken about the difficulties of organizing huge firms and the opportunities for organizing presented by smaller ones. Sociologist Steve Viscelli noted in The Big Rig that organizers in the trucking sector achieved major wins by leveraging the generally small size of retailers; because larger shipments needed to be broken down at multiple terminals, there were more strategic entry points for union organizing. The United Mine Workers of America offer another example: the union may not have achieved such significant victories in the twentieth century if it had been dealing with massive coal operators rather than, effectively, taking the lead in coordinating many smaller ones.

Still, union organizing in fractured, unstable markets poses significant challenges of its own. Fortunately, antitrust reforms can help address those challenges by accommodating coordination among smaller enterprises—a practice that was once conventional and was likely intended by the original antitrust statutes.

It is no accident that the most significant antimonopoly figure of the Progressive Era, Louis Brandeis, sought to stabilize markets through coordination among small players. He understood that a chaotic, fractured market was ripe either for corporate consolidation or for domination by powerful players in adjacent markets (whether buyers or sellers). Looser coordination within decentralized markets can have the same stabilizing effects as oligopolistic ownership, while avoiding concentrated employer power.

One way to implement this vision would be through an antitrust exemption for small enterprises. Contemporary precedent for such a move exists: the FTC’s sister agency in Australia recently enacted a sweeping exemption to permit joint bargaining among small and medium-sized enterprises, an idea that has only been advanced in isolated sectors in the United States thus far. Labor academics in Australia have taken an interest in the exemption for three reasons: it expands coordination rights for owner-operators and workers beyond the bounds of employment (with the potential to expand the membership and strength of important unions like the Transport Workers’ Union); it has the potential to facilitate organizing among workers in smaller enterprises; and it represents a possible convergence of competition law and labor law principles.

Franchising arrangements illustrate how this might work in the United States. Franchising is a stark example of how regulation in recent decades has favored centralized control as an economic coordination mechanism while discouraging bottom-up democratic coordination, whether through labor or franchisee organizations. As economist Brian Callaci has pointed out, joint bargaining by franchisees was considered and discarded in early policy debates about how to regulate the sector. If franchisees could organize and bargain collectively with the franchisors who currently exert unilateral control over contracts, prices, and (effectively) labor conditions, this would significantly change the landscape for worker organizing as well.

While U.S. competition agencies may not have quite the same power as their Australian counterparts to enact class exemptions, this does not mean their hands are tied. The FTC and the DOJ can proactively issue new enforcement guidance regarding coordination among smaller players, which would have a persuasive influence in courts as well. The FTC could also use its investigatory powers to assess whether the absence of an exemption may be inhibiting socially beneficial joint action by smaller actors. This could be included in the agency’s new supply chain market study. The COVID-19 crisis has revealed profound operational inefficiencies in the most vulnerable links in the supply chain, namely port truck drivers. As it stands, antitrust law has operated to bar organizing among these drivers and thus to deny them a voice in the management of the supply chain; an explicit or de facto exemption has substantial potential to change their conditions and help transform the supply chain. In these and other ways, the agencies can help to lay the groundwork for broader legislative action.

 

Vertical Restraints

Current antitrust law enables the franchising business arrangement in two ways: in its acceptance of vertical domination (by franchisors, of franchisees) and in its prohibition of horizontal coordination (among franchisees). The same pattern characterizes the so-called gig economy, wherein large, well-financed firms like Uber dictate prices and operating terms to drivers while leveraging antitrust prohibitions on horizontal coordination to contain drivers’ efforts to organize.

Midcentury antitrust law prohibited such vertical domination beyond firm boundaries, reasoning that powerful firms cannot use contracts to preempt and dominate the business judgment of independent enterprises. That is exactly what both franchisors and gig-economy firms do—dictating the prices that putatively independent enterprises charge to consumers (and often also the terms on which they acquire business inputs, whether widgets or potatoes). These changes to antitrust law have been driven ultimately by the theory that the same alleged efficiencies achieved by permissive merger policy can be realized through contractual integration (or domination) as well. But while it is true that economic coordination beyond firm boundaries can bring about genuine technical efficiencies, there is no obvious reason why this coordination must take the form of control rather than cooperation.

Re-regulating vertical restraints may require more technical finessing than either merger or horizontal coordination policy. Contracts are necessary in a complex economy, and many involve vertical relations between actors with different levels of resources or power. Any reform effort will need to identify objectionable terms, and either prohibit them entirely or prohibit them for firms occupying dominant positions. The precedent of midcentury American antitrust practice shows that it can be done, with powerful if indirect democratic effects.

 

The reforms discussed here, while not exhaustive, are tied together by the idea that we can use antitrust law to help contain domination and expand autonomy—key principles of a left political project. Competition can be destructive—the “competition that kills,” as Brandeis once called pricing below costs—or it can serve a valuable economic purpose. The point is that markets are not self-coordinating. Instead, it is within our power to channel competition to socially useful ends, and to cultivate coordination mechanisms that create a more democratic, sustainable, and fair economy.


Sanjukta Paul is assistant professor of law at Wayne State University and is completing a book (Solidarity in the Shadow of Antitrust: Labor & the Legal Idea of Competition) for Cambridge University Press.


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