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The Neo-Brandeis Movement’s Pocket Book Problem

· March 16, 2018

Are people willing to pay more for a social experiment in antitrust policy in the interest of potential benefits that are hard to measure? That is the question facing proponents of the neo-Brandeis movement, named for the aggressive proponent of antitrust intervention and Supreme Court Justice Louis Brandeis. Neo-Brandeisians seek to replace the consumer welfare standard with a more nebulous standard that considers more (and often competing) factors. Although called neo-Brandeis, this movement is not new and was already rejected in the 1960s.

The consumer welfare standard has been the guiding principle of modern antitrust law for one simple reason: Antitrust enforcement under the consumer welfare standard produces a measurable benefit to consumers and is administrable by courts that need solid evidence on which to base their decisions. The consumer welfare standard asks whether the behavior being challenged leaves consumers worse off by making them pay more, get less, or miss out on innovation that they would otherwise have if the behavior did not occur. If consumers are worse off on balance, then the anticompetitive behavior can be challenged under the antitrust laws.

The consumer welfare standard means that antitrust laws punish anticompetitive behavior and not “big” behavior. Anticompetitive behavior will leave consumers worse off, but big behavior is different. When a company wants to win big, the most direct approach is to beat their competitors with better products, prices, or innovation. A company that is swinging for the fences is looking to wow customers with something amazing, and to capitalize on this success through earning a big market share. We’ve seen this repeatedly in technology industries in the form of leapfrogging rivals’ technology or figuring out ways to put out the same product at a dramatically reduced price – often free. Big behavior is encouraged by the consumer welfare standard as long as it doesn’t stray into anticompetitive behavior.

Ditching the consumer welfare standard means that consumers will inevitably pay more and get less quality and innovation as the result of the enforcement of antitrust law. That’s a tough sell. The problem comes from the fact that when you change from a standard with one clear goal to a more general standard with multiple goals, like a public interest standard, you will run into situations where pursuing one goal will come at the cost of another. Antitrust luminary Herb Hovenkamp puts the neo-Brandeis problem another way: “As a movement, [neo-Brandeis] antitrust often succeeds at capturing political attention and engaging at least some voters, but it fails at making effective – or even coherent – policy. The coherence problem shows up in goals that are unmeasurable and fundamentally inconsistent, although with their contradictions rarely exposed.”

These coherence problems would be apparent were a case ever tried under a public interest standard. Take a merger where the resulting firm will be able to offer lower prices due to better economies of scale and there is no negative effect on competition, but the merged firm will have more cash on hand and a greater incentive to increase lobbying spending to secure favorable regulations and more public contracts. Which interest should prevail, lower prices or a concern over the potential political impact?

Or, imagine that a firm has developed groundbreaking (and patented) technology to completely roboticize its manufacturing, which will lower labor costs and greatly increase output. If the company then captures the market, is this behavior an illegal acquisition of monopoly power under a public welfare standard because it resulted in laying off workers and using a patent-protected technology that is so advanced that rivals are disadvantaged by not having access to it? The public may have an interest in maintaining employment and sharing technology, but consumers would benefit from a giant leap in technology. This example is not purely theoretical; Tesla’s current long term goal for winning the market for electric cars is to design a fully automated factory. And again, we must ask whether antitrust law is the best venue for dealing with larger questions of the impact of technology on labor markets or intellectual property policy.

The key criticism of the neo-Brandeis movement is that the consumer welfare standard is incapable of handling non-price related harms and therefore we need to move on to a more expansive standard. While some criticism of the consumer welfare standard may be helpful, this is like saying that a car’s turning radius is too wide so we should replace it with a boat. The best answer is to just modify the car to handle the few situations where turning radius matters. Antitrust law is already doing just that – non-price theories of harm, like harm to innovation, have been used in cases and are continuing to develop. In United States v. Microsoft, the judge relied on a harm to innovation theory that Microsoft’s anticompetitive activities held up emerging technologies that might eventually threaten Microsoft’s dominance. And in In re Intel Corp., the FTC charged that Intel bullied its customers into surrendering the rights to their innovations, deterring these customers from innovating in the first place. These harm to innovation theories fit under the consumer welfare standard because consumers are worse off when they do not get to enjoy the benefits of missed innovation.

Adopting a standard that attempts to balance competing public interest goals at the expense of consumer welfare would be a difficult pill to swallow. Hovenkamp cautions against adopting such a standard, stating that “[a] scattergun application of the antitrust laws so as to make big firms smaller and prices higher could cause irreparable harm, not only to consumers, but to the entire economy.”

Competition

Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.