Below, we have provided the full transcript of the interview with Prof. John Kwoka, the Neal F. Finnegan Distinguished Professor of Economics at Northeastern University, recorded on August 25, 2021.
This interview was done as part of the Antitrust Brainstorming Board created by CPI with the support of the CCIA.
Thank you, Prof. Kwoka, 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?
John KWOKA:
I think it’s clear to more and more people that the current antitrust framework has not worked for consumerists, but it’s also really not worked for workers, for farmers, and for entrepreneurs that are interested in entering markets and competing with large firms. And the evidence for that is everywhere. There’s now more and more evidence of anti-competitive mergers that have escaped challenges and gone through the process without being prevented. There’s the near absence of enforcement against vertical mergers and there’s a reluctance to challenge the tech companies. And so they’ve grown really without sufficient scrutiny and certainly without challenges as well. And the results really are everywhere. There are higher prices and fewer choices for consumers that otherwise wouldn’t be the case. There’s less entry and dynamism in the economy. There’s adverse effects on wages and prices, prices, for example, obtained by farmers. Growing profit margins, particularly for large companies, which kind of reflects this shift of market power and creating a great divide between the winners and increasingly those that are stagnant are losing out.
There are several reasons for this to go to your question about what needs to change. One certainly is that the courts have been increasing really demanding, what I believe, is unrealistic degree of certainty before they side with the enforcement agencies. That’s also true that the agencies budgets have stagnated over the last 10 or 12 years, preventing them from conducting serious investigations or expensive challenges to many actions and mergers. The agency have also, I think, not had sufficiently strong leadership in this area.
Then of course there are the enforcement standards themselves. The merger guidelines focus pretty narrowly on certain immediate price effects to the, I wouldn’t say exclusion, but making it more difficult to raise broader competitive concerns about what some of the mergers and practices that we’re witnessing have resulted in. Now fixing any one of these, courts, agencies, enforcement standards, fixing any one of these would be a challenge, but really all of them, I think, needs some fundamental rethinking in order to ensure that the process really works better.
I’ve suggested a large number of possible reforms in my recent book that CPI has published called Controlling Mergers in Market Power. That goes through a rather long list of areas, I think, that need revisiting and reform in order to, as you say, make the antitrust framework work for all market participants.
Do you believe the vertical merger guidelines need to be changed?
KWOKA:
Yes, I do. There was of course, an effort to, an initiative to change the vertical guidelines over the last two or three years. I and others submitted comments that reflected a number of weaknesses in the merger guidelines proposed reforms. So that in some sense, of course it’s useful that there at least was a look back on the vertical area, which has not had any guidelines or recommendations for how they should be evaluated for decades now. But it was really a missed opportunity to strengthen merger enforcement in the vertical area. So I would think that that should be on the agenda for the current administration to take a further look at the guidelines, at the vertical guidelines.
Do you approve of the shift from competition towards regulation?
KWOKA:
The tech companies, of course, raised a number of competitive issues that are either unique or have special force in the technology, high-tech area. Their practices over the past 15 or 20 years include a variety of anti-competitive practices that have been directed at potential rivals or hosted companies. Things like leveraging and self-preferencing. Some of these make it difficult for new entrance. In addition, the tech companies have acquired hundreds, almost 800, companies over the past 15 years, generally without serious investigation and not undergoing a challenge. So they’ve really vacuumed up a large number of companies some of which would have represented potential competitors. Others are extensions of their market power into areas that defend against encroachment or enhance their ability to exercise market power.
Then, of course, there’s the whole additional area of their misuse of data, both with respect to competitors, but also in the raising concerns about privacy. What’s interesting about many of these issues is that they don’t really arise within the core platform, but rather they arise because of the outward spread of the tech companies into other businesses. Businesses that they really do not need to be in or not their core innovation, but which give them incentives for misuse and mischief in other markets. And one implication of that of course is that a better separation of their core business, the core platform from these other businesses in the past could have prevented some of the incentives to distort competition that we’re now witnessing and these other markets. And, I suppose, the further implication is that separation even now into platforms and other businesses would help a great deal.
If that were done, then we could assess what should be done to ensure reasonable operations of the core platforms. So some have advocated enhanced opportunities for entry through interoperability, for example. Some have advocated regulation or common carrier approach. Those are major questions, I think, to be addressed. But what I would want to emphasize is what does not work is leaving this to the antitrust process. The antitrust process is too slow to deal with rapidly evolving businesses like this. And in addition, it’s difficult to look back and fix matters because of the way that these markets have a tendency to tip and create network effects that are virtually irreversible. Efforts to deal with some of these practices through remedies, traditional remedies, have really failed and they have failed because remedies in some settings may have a chance to work, but in the setting where most of the technology is closely held by the companies within their control to modify and adapt and evolves rapidly, and sometimes unpredictably establishing the remedial a process, something in which attempts to make companies behave in certain ways is virtually certain to fail.
How would you ensure antitrust is enforced vigorously if no changes are made to the current antitrust system?
KWOKA:
I think that I’ve criticized past enforcement practices and policy in my book and other writings. I think that there are a lot of ways in which antitrust now can be strengthened and improved. I mean, the idea of making no changes it’s really, at this point, it’s really disheartening. So I think the need is clear, kind of widely understood really on both sides, on all sides, of the political spectrum. I think this is an important historical opportunity to make changes, fundamental changes, and the way that we approach the antitrust process. If we don’t, we don’t seize it, I think we’ll have made a serious mistake.
There are lots of different ways that changes can be made from reorganizing the agencies to establishing different legal standards, to funding the agencies differently, to revising guidelines. I think all of these are essentially important. Some of these are easier to, for the agencies themselves, to do. Certainly new leadership in the agencies can bring initiative and energy to employees. A different sense of their mission can create a willingness to act that hasn’t always been the case and can signal businesses as well, that some past practices on their part, on the businesses part, won’t really be tolerated. Then even that I think will act as a healthy deterrent to some of what we’ve been witnessing. The farther up the ladder you go, the more substantial the changes may be, the more parties may need to sign onto the changes. And so some of those may take longer, but there are certainly are things that are within the power of the agency to do fairly promptly. I think that that is a part of what may be going on at present and in the agencies, namely, to sort of seize the opportunity.
What are your thoughts regarding start-up acquisitions?
KWOKA:
Now to the present time, the antitrust process has sort of treated acquisitions of startups through the lens of potential competition, which basically rests on the question of, is the company that’s targeted for acquisition perceived to be a likely rival to the acquirer. And if so, then the removal of that target company, taking it off the board, is properly viewed as an anti-competitive signal and issue. But that approach is poorly suited to the tech sector for many reasons. The future evolution of startups is often unknown, even unknowable to the target company. Technology evolves in unpredictable ways rapidly. And sometimes in the control of the company that’s undertaking the initiative where they have a particular objective in mind, but oftentimes it’s really difficult to pin down to the outsider, certainly, and even to the insider with any certainty.
Asking that question is the target company perceived to be a likely rival is really the wrong question, because it’s not a guide to whether in fact, the company is going to emerge as a competitor. So in that weak standard that is to say, trying to employ the potential competition, key question is really unleashed a wave of acquisitions of startups. It’s resulted in this kill zone, right, around tech companies, where increasingly startups are being swept up by the dominant company, so that as we’ve seen. There’s even evidence that venture capital has dried up for new startups in that zone, because it creates the prospects of success or have simply been diminished by the overbearing presence and likely practices of the dominant company.
New standards are, in my view, kind of required to deal with startup companies and, and what sort of aquas, how acquisitions there should be evaluated and what should be allowed. And these too range from what I would say, minimal reforms to much more substantial reforms. Minimal reform would be requiring the tech companies to report all their acquisitions and including those that do not fall onto the current HSR thresholds, because many of the startups are in fact quite small. So as a simple matter of providing the agencies with the necessary information, the requirement that the tech companies or companies over a certain size, for example, report all of their acquisitions would be a first step.
A second step would certainly be to shift the burden of proof. Some have advocated so that the acquiring company has to affirmatively demonstrate the benefits to the competitive process from the acquisition that it could do that in a variety of ways, explaining what it’s successfully done in the past, what it cannot otherwise accomplish, et cetera, et cetera. At a more expansive requirement yet might be to require some ex-post of validation. That is post-merger validation of the claim to benefits to see in fact what the companies, acquiring company, promised in fact has happened by as occurred. And if not, there would be potential consequences to the deal or to the acquiring company.
But again, I think the necessity for these has been the result of the fact that the potential competition standard is not well suited. It was designed in an era where one wondered whether a truck company might become a car company. Kind of traditional fixed and sunk asset issues dominated the antitrust questions about whether one company was in potential entrant into another business. That’s no longer the right question in my mind. And so, we need to reframe that debate.
Is break-up the best solution for the digital economy and for consumers?
KWOKA:
Break-ups can be messy. And so we should not do them readily, but break-ups should not also be something to be feared or avoided altogether. We’ve successfully broken up in the U.S., with the antitrust process, a number of companies that dominated their sector. AT&T most famously, but earlier cases of dominant companies, US Steel and Standard Oil. We’ve also done this in the regulated sector, for example, electricity here in the US. And other countries have done this for telecom, for electricity again, for the railroads and other sectors where dominating companies no longer have a economic and market justification for their size and structure. And so these there’s been a considerable number of instances where the antitrust process and the regulatory process has actually succeeded in breaking up companies. And I’ve done some recent research with Tommaso Valletti that demonstrates how successful and how frequent so many of these examples really are.
It’s also worth pointing out that companies of course break themselves up all the time. They initiate their own divestitures where there’s a business rationale for doing so. But the point is there are practical lessons to be learned from those examples. Divestitures are simply not as common obviously. Divestitures are not as common as acquisitions, but they’re by no means infrequent. You ask about the benefits. So again, looking back on past experiences shows the sort of benefits that can occur. Properly designed break-ups will unleash new products, choices for consumers, innovation in the medium and longer term and also we’ll have benefits that really are hard to predict. Alfred Kahn famously once said that one of the great benefits of deregulation was the sheer unpredictability of the benefits that it might yield. That is we don’t know what it will produce, but we can be quite sure that market forces will induce businesses to invent and create and offer new products and services, many of which we cannot foresee, but that is of course the rationale for turning these businesses over to the unregulated sector or to greater market forces as a result of divestitures.
I think divestitures is a policy tool that should be on the table. And again, there’s no dispute about potential messiness and cost sometimes. So it shouldn’t be employed carefully, but there’s a certain, I think unwillingness to think about break-ups and divestitures out of a fear, that’s not well founded that these can’t possibly work, have never been tried, create hazards to the rest of the economy, that businesses will fail as a result. The evidence does not really support those fears.
How do you see the role of the FTC and the DOJ in ensuring competition works for consumers?
KWOKA:
The two agencies are the key players, but other agencies play an important role and long have. The telecommunications commission, of course, a surface transportation board and beyond those two, I mean, numerous other agencies have regulatory and policy authority that allows them to take actions that affect the competition. Sometimes whether they know it or not. President Biden’s recent executive order highlights all the ways that different agencies effectively make competition policy typically in their narrow domain and instruct them not to overlook these effects. So even when they don’t treat competition as the first order of business, the executive order not only authorizes them, but urges them and sometimes instructs them to take into account all of the ways that there are actions and so many markets have potential competition, potential competitive effects that were something like 75 or 80 specific recommendations in there ranging incredibly widely across a range of sectors, products and businesses that one might not normally think of as having competitive consequences, but they surely do.
I think that executive order with follow-up will be an important measure, important policy initiative to alert so much of the federal government about the need to pay close attention that they don’t give away competition matters as they pursue their primary business. Too much of that has happened in the past. And I think this executive order is a heads up that numerous agencies should be at least aware of and alert to the potential competitive consequences of their actions.
How would you reconcile competition and competitiveness? Should antitrust reforms take into account the potential impact on proposed changes vis-à-vis China?
KWOKA:
I think policy should be pretty careful here. We have, after all institutions and laws that govern certain transactions affecting trade and international competitiveness. A committee on foreign investments, for example, has specific statutory authority to consider security issues across national mergers and investments. But of course even now some international issues can sometimes affect how we analyze transactions. We’re acutely aware now that you have supply chains consolidate, are made vulnerable to interruption by let us say a pandemic or cargo ships that collide in a canal that these have ripple effects all the way down the supply chain. Supply chain consolidation can simply increase the uncertainty associated with downstream supply sources and competition. And those can be a legitimate concern with a transaction, even if the transaction appears to be benign or efficient on other grounds with respect to costs say or some other characteristic.
Again, the interruptions due to exogenous effects or political considerations or whatever, I think oftentimes have not been treated seriously enough. And the analysis, making ourselves dependent for short term cost benefits, cost benefit reasons on supply sources that are inherently uncertain, leaves us vulnerable. But I don’t think that that stretches the antitrust process. I think that simply introduces a consideration, namely, a risk and uncertainty into the framework. But beyond that, in my view, antitrust is not a tool for affirmatively addressing or altering trade flows.
Any final comments you would like to make?
KWOKA:
As I said, this is a historic moment for competition policy in the US. There is, I think, substantial agreement economics profession across the political aisle that something has gone wrong. Of course, people’s view of exactly what’s going wrong, differs a bit, but there is a consensus, I think now that new initiatives in Congress and at the agencies are, this is a moment for those. That’s not, of course the first time that’s happened. Most of our antitrust laws in the US have been passed in response to, right after if there have been economic crises or distortions. In the late 1800s, when the rise of the railroads, the early 1900s with vast trusts, the 1930s with utilities and others.
These other episodes have resulted in new legislation and new agencies and authority, new initiatives to bring the process back on track and to ensure that competition remains the beacon here. So we’re now faced, I think with a similar challenge. There have been forces that have emerged that didn’t exist or were not acutely aware of these in the past. And so the laws weren’t written with these in mind. So we’re now facing a similar, I think, major challenge with a similar, widespread concern that something has gone wrong and a similar opportunity to fix it. We must, I think, seize it in order to preserve the competitive markets that are the guiding beacon of our policy.
