Contact Us


Disruptive Competition Project

655 15th St., NW

Suite 410


Washington, D.C. 20005

Phone: (202) 783-0070
Fax: (202) 783-0534

Contact Us

Please fill out this form and we will get in touch with you shortly.
Close

An Overview of Carl Shapiro’s Paper on “Antitrust in a Time of Populism” (or Why the Consumer Welfare Standard Is Needed)

· December 13, 2017

Antitrust is sexy again”, says Professor Carl Shapiro from University of California at Berkeley, who also served as a Member of the President’s Council of Economic Advisers during the Obama administration. But as Prof. Shapiro argues in his latest publication, antitrust policy is not, and should not be treated as, an antidote to all political and economic maladies of the day.

Prof. Shapiro asserts that “the role of antitrust in promoting competition could well be undermined if antitrust is called upon or expected to address problems not directly relating to competition.” Under this premise, the author suggests antitrust remedies to address competition-related problems that analyses of economic data prove to exist.

Before detailing his suggestions to revamp competition policy, Prof. Shapiro debunks some of the economic reports that have been used as the basis “of some calls to” change the U.S. antitrust framework. The author agrees that there has been increased concentration in some markets that raise antitrust concerns. However, the author takes issue with the conclusions drawn by the April 2016 report by the Council of Economic Advisers (“CEA Report”), which concluded that there is increasing market concentration. Namely, Prof. Shapiro argues that the CEA Report is widely cited as evidence for increasing concentration across industries despite its carefully worded caveats, but that the metrics don’t show that fact. Simply put, according to the author the numbers used by the CEA say nothing about trends in market concentration in properly defined relevant markets and thus tell us little about market power – which is the core of antitrust analysis.

As Prof. Shapiro recalls, the CEA Report examines change in revenue of the 50 largest firms across various industries between 1997 and 2012. But this doesn’t actually tell us much about concentration, for two reasons. First, everyone agrees a 50-firm industry isn’t consolidated, and second, the CEA Report uses two-digit NAICS codes, which are so broad that they don’t actually track industries, much less relevant markets.

Prof. Shapiro then turns to the Economist report in March 2016 issue titled “A Widespread Effect,” trying to display data regarding the four-firm concentration ratio in some 893 “individual industries,” in the United States from 1997 and 2012. Again, he points out that the data used in said piece simply reflect that large, national firms have captured an increasing share of overall revenue during the past 20 years in several businesses. However, it does not reflect increased concentration or lessened competition at the local market level where competition actually mostly occurs. In other words, measuring concentration in industries alone says nothing about the state of competition.

Further, Prof. Shapiro focuses on the issue of variations in corporate profits as a percentage of national GDP, which he notes has seen a substantial increase. The data shows profits as a percentage of GDP increased from 7%-8% up to 11%-12% over the last thirty years — roughly 50%. In this regard, Prof. Shapiro makes some important observations, namely: (i) the increase may be a result of accounting practices, as actual economic profits may differ significantly from accounting profits, or a result of increased exports by U.S. firms; and (ii) the increase may also indicate a move towards incumbency rents to now-entrenched fewer players.

Finally, Prof. Shapiro highlights that technological changes, widespread use of IT by industries, changes in merger control laws in 1982, overall productivity decline in the U.S., and productivity gaps between firms, have also contributed to the modest increase in concentration in industries as indicated, for example, by the Economic Census data.

Prof. Shapiro’s analysis validates what industrial organization economists have agreed upon for at least 50 years: that it is extremely difficult to measure market concentration across the entire economy in a consistent and meaningful way. This is the main reason why, Prof. Shapiro points out, that it is important to study the process that has led to increased concentration in properly defined markets, and if there has been consumer harm as a result of the increased concentration.

In other words, the key issue is whether a modest increase in concentration has been accompanied by a decline in competition, producing consumer harm. And as such, the consumer welfare standard becomes the key analytical framework. In light of this, Prof. Shapiro questions whether any of the above have implications for competition policy going forward. He ultimately suggests the following prescription:

a) strengthening cartel enforcement efforts to ensure that increased concentration does not facilitate cartel formations and vice versa;

b) enhancing the existing merger control regime by treating horizontal mergers more strictly and possibly looking at cases of potential harm to competition more carefully;

c) taking a tougher approach to exclusionary conduct by dominant firms – in doing so one must focus on the impugned conduct and not on the size of the firm per se. ‘Big is bad’ logic needs to steered clear off while conducting antitrust analysis.

Interestingly, Prof. Shapiro cautions against pandering to calls for breaking up big tech companies or regulating them more strictly simply due to their size and absent any anticompetitive conduct, referring to this strategy as counterproductive and ill-conceived. Instead, Prof. Shapiro bats for other policy tools, regarding regulations relating to privacy, data ownership and portability, or open interfaces and interconnection as more suitable remedies.

Finally, the author reminds us that the ultimate aim of antitrust is to preserve the competitive process and enhance consumer welfare, and that pursuing populist motives or using antitrust policy as remedy for every ill is counterproductive. Instead, he calls for using the current momentum around antitrust policy to strengthen the Sherman Act to address the real antitrust concerns of the day.

Prof. Shapiro’s conclusion is clear: Antitrust policy is not the panacea for every ill, and the larger political and social problems that the U.S. faces today should be addressed outside the competition toolkit which should be enforced taking into consideration harm to consumers, i.e. consumer welfare.

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.