A New Section 5 Policy Statement Can Help the FTC Defend Competition

By: Steven C. Salop, Professor of Economics and Law, Georgetown University Law Center; and Charlotte Slaiman, Public Knowledge Competition Policy Director

The FTC is moving to increase competition. Photo by Donald Giannatti on Unsplash. Octopus photo by Masaaki Komori on Unsplash.

We generally agree with the Federal Trade Commission’s decision to rescind its 2015 Section 5 Policy Statement. Just as the Department of Justice and Federal Trade Commission Merger Guidelines are regularly updated on the basis of agency experience, legal and economic developments, so should this type of policy statement. Rescinding the old statement is particularly relevant in light of the growing recognition of the hurdles preventing effective antitrust enforcement.

Calls for reform have not come solely from Neo-Brandeisian commentators (including both FTC Chair, Lina Khan, and Tim Wu, now a member of the National Economic Council). The need for reform and a varied set of proposals has also been expressed by economics-oriented commentators, including this group of former Justice Department enforcers, Jonathan Baker and Herbert Hovenkamp, among others. Chair Khan in her statement suggested that the Commission would next consider replacing the Policy Statement with a new statement explaining how they plan to use Section 5 to increase competition. We think this would be a valuable way to show parties and courts what is coming. This article provides several suggestions that would be useful to consider and possibly include in the revised Section 5 Policy Statement. It should not be taken as an exhaustive list; there certainly may be other approaches to a revised statement that could also be effective.

A revised Policy Statement should make it clear that Section 5 is not identical to the Sherman and Clayton Act and that conduct can be challenged as an unfair method of competition under Section 5 even if it would not violate these other antitrust laws. In fact, even the original 2015 Policy Statement explicitly made this point. But the distinction between Section 5 and these other statutes is often ignored or suppressed by commentators who object to more vigorous antitrust enforcement by the FTC. Eventually, the FTC’s cases and rules under Section 5 will likely face the scrutiny of the courts. At that time, it may be particularly helpful to have a clear Policy Statement of how the FTC is interpreting Section 5. This can help maximize the impact the FTC can have, while assuaging concerns of detractors who say there is no limiting principle.

The 2015 Statement specifically declares that the Commission will apply the “rule of reason.” Chair Khan suggested that the current implementation of the rule of reason sets too high a bar on plaintiffs generally and makes it hard to bring actions against incipient conduct, such as squashing potential or nascent competitors before they can grow into full-fledged competitive threats. In particular, we would apply this concern specifically to the three-step implementation of the rule of reason commonly used in Sherman Act cases. Since the Policy Statement also explained that Section 5 is broader than the Sherman Act, there is room for reform here. Although going further might be possible, much could be achieved without needing to reject the rule of reason methodology, instead changing only its implementation. It is clear that the rule of reason methodology is broader than this single implementation, as examined in an article by Mark Popofsky. For example, the “quick look” can be seen as another implementation of the rule of reason. And implementations such as per se analysis or the Brooke Group prongs can be described as specialized implementations of the rule of reason.

We share the concerns that Sherman and Clayton Act antitrust rules often set too high a bar on plaintiffs. Antitrust has placed too little weight on false negatives (i.e., erroneous acquittals and over-deterrence), relative to the weight placed on false positives (i.e., erroneous convictions and under-deterrence), based on outdated and erroneous Chicago-School assumptions, as explained, for example, by Jonathan Baker and a recent article co-authored by Steve Salop and Andrew Gavil. Moreover, the increasing use of quantitative evidence improperly increases the relative burden on plaintiffs in mergers and elsewhere. Common statistical tests of significance are focused on avoiding false positives and place no weight on avoiding false negatives. A revised Policy Statement can make the point that the weight placed on the risk of false negatives should be increased and that this can lead to a different burden of proof placed on the Commission.

A revised Policy Statement should also clarify the policy goals the FTC will work towards in its application of Section 5. The seemingly simple policy goal of promoting “consumer welfare” has become confused and improperly limiting, so at a minimum, further discussion of the term would be needed beyond what was contained in the 2015 Statement. Robert Bork famously (and either confusedly or deceptively) used the term “consumer welfare” to mean “aggregate economic welfare,” and some commentators and courts still misuse the terms in this way. The term is better taken to mean “true” consumer welfare, that is, consumer surplus. However, unqualified application of the term “consumer welfare” would seem to exclude the welfare of workers or other input suppliers who are injured by anticompetitive conduct. In order to make clear that such harms should be considered, it would be helpful to expand the term “consumer welfare” to “counterparty welfare” instead. But, even this leaves room for courts and would-be scofflaws to discount important harms, so further clarification in the revised Statement would be very valuable.

Another commonly stated policy goal is the promotion of the “competitive process.” The goal of using this term is to indicate that harm to one competitor is insufficient; there must be broader harm to the whole competitive process. But in the context of a Section 5 Policy Statement, this term also may sow confusion or be misused to require too high a showing from worthy plaintiffs. For example, it likely would be unwise to allow this use of the term “competitive process” to permit a cartel of sellers to fix high prices and then attempt to justify the high prices on the grounds that higher margins would lead to more innovation or non-price competition. If the agency were to use this term, it would again be useful to explain in more detail how it’s intended to be interpreted, and how it would deal with tricky edge cases such as this.

The reference to “output restrictions” being the touchstone of anticompetitive conduct should not be continued in a revised statement, or, at the very least, needs to be clarified. It is clear that there can be consumer welfare harm even if there is no reduction in output. The case of perfectly inelastic consumer demand is one long recognized example. In negotiation markets, consumer wealth can also be extracted by sellers who gain bargaining leverage without reducing output. The same concepts apply exactly to reductions in worker welfare in labor markets. As another example, William Comanor long ago explained how a large number of consumers can be harmed by restraints that benefit a small number of “marginal” consumers, despite the fact that those benefits may lead to increased output, with the result being lower overall consumer welfare. John Newman has explained how this fallacy of equating output and welfare can also arise from deceptive advertising or restraints that create prisoners’ dilemmas by externalizing costs. For example, by providing user rewards that lead to higher merchandise prices, credit cards subject users to such a prisoner’s dilemma that increases demand and leads to excessive credit card output.

Some might argue that any expansion of the meaning of “unfair methods of competition” to extend Section 5 beyond the Sherman Act will lead to the protection of so-called “inferior competitors.” But, this type of argument erroneously assumes that entry by less efficient competitors will not benefit consumers or the competitive process. In fact, entry into a monopoly market will reduce prices, and likely provide other competitive benefits, even if the entrant’s costs exceed the monopolist’s costs, as long as its costs are less than the monopoly price. Moreover, the less efficient entrant today may become the more efficient competitor tomorrow. Finally, competitors may also be injured customers (e.g., if a vertical merger facilitates coordination by input suppliers). Again, this issue requires further analysis and clarification.

We now turn to some specific suggestions for several legal and economic competition issues that might be contained in a revised Section 5 Policy Statement that follows from these principles.

We favor Section 5’s rule of reason methodology placing a substantial burden on defendants to show that their benefits outweigh consumer harms, not simply that some benefits can be “identified.” The defendant should not be permitted to rebut evidence of probable harm simply by reciting some magic words like “free rider” or “complementarity.” In the case of exclusionary conduct, Andrew Gavil and Professor Salop have further suggested that the plaintiff’s evidentiary burden should be probable anticompetitive e­ffects, not actual anticompetitive effects; that the plaintiff’s evidentiary burden should not require quantification; that direct proof of market power or anticompetitive effects should obviate the need for circumstantial proof; that the plaintiff’s burden should be lower when the defendant has substantial market power; that the plaintiff’s initial evidentiary burden should be reduced to reflect the possible absence of a valid efficiency justification; that the defendant should not be able to meet its burden of production to show cognizable efficiency benefits based on purely categorical justifications; and that the defendant’s justifications should be subjected to a less restrictive alternative standard.

In the case of mergers, we suggest the adoption of anticompetitive presumptions with a high rebuttal burden for acquisitions of potential or nascent competitors by dominant firms, as have others. Professor Salop and several co-authors have also suggested anticompetitive presumptions for certain vertical mergers, with a higher rebuttal burden placed on the defendant. In addition, it should not be necessary for the agencies to establish competitive harm with quantitative evidence.

We hope that the Commission will consider these proposals to create a distinct role for Section 5 that goes beyond the Sherman and Clayton Acts while still remaining focused on competitive effects. Changes like the ones listed here have the ability to considerably tip the scales in the direction of greater enforcement and competitive benefits. We look forward to seeing a revised statement and working with the Commission as appropriate in their effort to reclaim Section 5 unfair methods of competition authority.

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