John Kwoka’s new book Controlling Mergers and Market Power: A Program for Reviving Antitrust in America likely will serve as a guidepost for future antitrust regulation and enforcement. Dr. Kwoka discusses facts concerning merger review and includes several actionable recommendations. This article discusses three of Dr. Kwoka’s recommendations: reviving the structural presumption, increasing the use of merger retrospective studies, and new enforcement criteria for the future of antitrust in the digital age. Whether one agrees or disagrees with these recommendations, the issues discussed by Dr. Kwoka are ones that antitrust policy-makers will have to address in the near future.
Dr. Kwoka highlights several facts, and these facts inform his recommendations. Dr. Kwoka highlights that the number of Hart-Scott-Rodino (“HSR”) reportable deals that received a second request by the Federal Trade Commission (“FTC”) or Department of Justice (“DOJ”) each year has remained steady, while the number of HSR-reportable mergers has doubled since 2010. This indicates that the percentage of deals receiving significant attention has declined over the past decade.
Additionally, Dr. Kwoka discusses the decline in the number of public firms, the national decline in new startups, the rise in corporate profits, and recent studies showing that markups in the United States have risen from twenty-one percent on average in the 1980s to over fifty percent after 2010. These facts suggest that markets have become drastically less competitive over the past forty years. Dr. Kwoka thus argues for a more aggressive antitrust policy. Specifically, he recommends blocking all mergers where the structural presumption is met (the Herfindahl-Hirschman index (“HHI”) is at least 2,500 with the change in HHI at least 200) or the number of competitors falls below four.
However, it is important to note a few possible counterfactuals to Dr. Kwoka’s assessment of competition in the United States. First, while the total number of public firms has decreased, in some cases, the geographic reach or variety of products of the remaining firms has increased and thus prevented a loss of competition. For example, Walmart might move into a town and displace a hardware store, drug store, and grocery store. This decreases the total number of firms in town by two. However, if customers did not view the hardware store, drug store, and grocery store as substitutes for purchasing products and if customers can still purchase these products at Walmart, the level of competition remains constant. Second, while increased markups may result from decreased competition, increased markups also can stem from increased product variety. If new products are more specialized, they may appeal to a narrower set of consumers who have a higher willingness to pay for these “niche” products. This can lead to higher markups. A recent study of product selection in retail stores from 2006 to 2017 finds that the “nicheness” of offered products has increased, leading to consumer demand becoming less elastic (Brand, James, “Differences in Differentiation: Rising Variety and Markups in Retail Food Stores”). A similar study, focused on the automobile industry, found that while HHIs decreased in the past twenty years, markups and product quality increased (Greico, Paul et al, “The Evolution of Market Power in the U.S. Auto Industry”). These examples suggest that the facts highlighted by Dr. Kwoka may not be sufficient to draw a conclusion that markets today are less competitive or that all mergers exceeding the structural presumption are anticompetitive. Dr. Kwoka’s recommendation also would be a departure from the Horizontal Merger Guidelines, which state that the HHI thresholds are not intended to be a rigid screen.
In making his second recommendation, Dr. Kwoka states that a lack of information among antitrust practitioners, policy makers, and judges is an “impediment to sound policy process.” In particular, the agencies have conducted very few retrospectives to determine if their decisions were the right ones to preserve competition. The importance of retrospectives is clear. Better knowledge of the success of past practices can inform how to evaluate current antitrust problems. Dr. Kwoka recommends that the DOJ and FTC carry out ex post investigations. He suggests individual case-studies as well as broader regression analyses comparing prices before and after mergers, while controlling for changing supply and demand factors. This recommended approach may be cost effective, since these agencies already have knowledge and experience in the industries and in carrying out the appropriate regression analyses.
Dr. Kwoka’s third recommendation focuses on the tech sector and nascent competition. He finds that there is a primary weakness with antitrust policy in the tech sector. Specifically, while two merging firms may have products that are close in the product space but which currently are not substitutes, all it takes is a few lines of code to turn them into fierce competitors. These types of proposed mergers raise thorny issues when analyzing the relevant market. Dr. Kwoka recommends that acquisitions of potential competitors by dominant tech companies should be per se illegal. However, this recommendation may be ahead of what economics can say about this type of competition. For example, if it is true that tech products can be retooled to compete in different product spaces, then that implies barriers to entry are low. Therefore, in some cases merger activity is unlikely to harm competition, because the competitive influence of one nascent competitor can readily be replaced by another nascent competitor. This is the type of question the FTC likely will have to address as part of its Facebook lawsuit — why WhatsApp and Instagram were close nascent competitors to Facebook while TikTok, a social media app for video sharing with over a billion daily active users, is not.
In sum, Dr. Kwoka’s new book identifies key unresolved issues inherent to antitrust policy in the United States. Dr. Kwoka also highlights several facts and makes policy recommendations based on these facts. However, a full consideration of the economic literature suggests that there are counterfactual examples that may lead to different competitive outcomes than those highlighted by Dr. Kwoka and which inform his policy recommendations