The Biden Administration’s Recent Antitrust Wins Help Us All

NEW YORK – Competition is what makes markets work (when they do). But firms don’t like competition because it tends to drive down profits. For the typical businessperson, whose objective is reaping gains above the normal return on capital, that is no fun. As Adam Smith observed 250 years ago, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

For at least 130 years, the US government has been trying to ensure competition in the marketplace. But it has been a constant battle. Firms are always coming up with new ways to circumvent competition; their lawyers are always devising new methods to avoid the reach of the law; and the government has failed to keep up with either of these practices, let alone with rapid advances in technology.

Hence, there is now overwhelming evidence of an increase in market power in the United States. That means bigger corporate profits (far exceeding risk-adjusted returns), higher market concentration in sector after sector, and fewer new entrants. Americans like to think that they have the most dynamic economy the world has ever seen, one that is now on the cusp of a new innovative era. But the data refute such claims.

Consider the standard measure of innovation: total factor productivity, which refers to the growth in output beyond that which can be explained by an increase in inputs like labor and capital. In the 15 years prior to the COVID-19 pandemic, the overall growth of TFP in the US economy was only one-third of what it had been in the preceding 15 years. So much for entering an innovation age! Making matters worse, rising market power is also a key factor contributing to increased inequality, as I argued in my book People, Power, and Profits.

Fortunately, in this era of never-ending dismal news, there has been a positive development on this front. Efforts by US President Joe Biden’s administration to sustain and enhance competition seem to be bearing fruit. For example, owing to pressure from federal antitrust authorities, a $20 billion merger between Adobe and Figma (a “collaborative web application for interface design”) has been called off. Moreover, the biotech corporation Illumina has agreed to divest itself from GRAIL, after the US Federal Trade Commission alleged that the pair-up “would diminish innovation in the US market for multi-cancer early detection (MCED) tests while increasing prices and decreasing choice and quality of tests”—a view affirmed last month by the US Fifth Circuit Court of Appeals.

Even more significantly, the FTC and the Department of Justice have issued updated merger guidelines that demarcate important new boundaries that remain firmly embedded in US antitrust legal traditions. For example, the guidelines cite the 1914 Clayton Act, which was designed to nip anticompetitive situations in the bud by prohibiting mergers and acquisitions whose effects “may be to substantially lessen competition.” That “may” is crucial, because nothing can be foreseen with absolute certainty. In 2012, one could have been quite confident that Facebook’s acquisition of Instagram would reduce competition. But Barack Obama’s administration was not as alert to the agglomeration of market power as the Biden administration is.

The new guidelines also place a greater emphasis on entrenchment, the idea that acquisitions and mergers may deepen, expand, and prolong a firm’s market power. This change implies that competition will be viewed as a dynamic phenomenon, as it should be. Importantly, not only horizontal mergers (between firms in the same line of business) but also vertical ones (where a firm acquires a critical supplier or client) will be subject to greater scrutiny.

We have long known that under conditions of limited competition (which is the reality in many sectors across many countries), such mergers can have powerful adverse effects. Yet “Chicago economists,” insisting that markets are naturally competitive, argued that antitrust authorities should focus only on horizontal mergers and acquisitions, and the courts generally agreed. The Illumina/GRAIL decision suggests that judges have begun to recognize the dangers posed by vertical mergers.

By the same token, the new guidelines will help antitrust authorities deal with the big platforms where much of today’s anticompetitive behavior is occurring–from credit cards, airline booking, and theatre tickets to ride sharing. (Full disclosure: I have been an expert witness in some of these cases.) The sustained high returns accruing to dominant platforms have become obscene. It is especially important to nip the growth of market dominance here in the bud; the new guidelines’ dynamic approach could be particularly effective.

We all suffer from market power, because it distorts markets in ways that reduce overall productivity and allows firms to raise prices, thus lowering standards of living. At the same time, the combination of growing market power and weakening worker power has held down wages, eroding living standards still further.

Smith was right: The fight against market power is never-ending. But the Biden administration at least has scored a point for ordinary Americans. It is yet another impressive achievement in an extraordinarily hostile political environment.