Amy Klobuchar: Antitrust – A Review and a Practitioner’s Thoughts on the Senator’s Legislative Proposals

In Antitrust: Taking on Monopoly Power from the Gilded Age to the Digital Age (Knopf 2021), Senator Klobuchar reminds us that the aversion to monopoly is deeply embedded in American history.  Antitrust law confronts the push and pull of large enterprises and the benefits they create vs. the restraints they tend to impose when they achieve market power.

Settlers came to America not only in search of political and religious freedom, but also freedom from monopolies granted by Parliament.  The Boston Tea Party was a revolt against taxes on a product sold by a government-granted monopoly. Colonists had to buy from monopolies whose profits were brought to the mother country.  Those who tried to compete with the monopolies could be fined or imprisoned by the Crown’s prosecutors.  Adams, Madison, and Jefferson cited Adam Smith, The Wealth of Nations in their writings and speeches.  The Declaration of Independence was an act of economic rebellion, as well as a political and religious one. 

But other than the grant of exclusive rights to authors and inventors, the Constitution did not address the issue of monopolies. 

The book describes the nineteenth century as a time of inventions, e.g., railroads, the cotton gin, steamboats, and transition from an agrarian to an industrial economy.  Gradually, companies in an industry were acquired and aggregated under the ownership of a trust.  Shareholders received certificates entitling them to a share of earnings, but the industries were each managed by a group of trustees.  The oil, railroad, steel, meat packing, coal, tobacco, and other trusts were created.  Predatory pricing or exclusionary dealing arrangements were used to pressure companies into an acquisition.  Workers, farmers, and individual citizens had little power to prevent this.  And sometimes the conduct was aligned with corrupt politicians.

The market power of the trusts led to low wages and high rents.  Workers responded.  For example, in 1886 workers went on strike demanding an eight-hour workday from the McCormick Harvesting Machine Company.  People were killed and injured by gun fire and a handmade bomb at a demonstration.  In 1894 employees of the Pullman Company went on strike to protest wage cuts, lay-offs, and high rent on company owned homes.  Eugene Debs founded the American Railway Union.  The Grangers, an anti-monopoly movement of farmers, formed chapters in agricultural states to object to railroad prices, declining commodity prices, and grain speculators.  Beginning in 1888 more than a dozen states responded to these events and enacted antitrust laws prohibiting combinations and monopolies that raised prices or limited output.

The industrialists of the era had assembled capital, implemented inventions, and organized the construction of productive assets, creating millions of jobs,  products, and services for the American people.  But they aggregated market power, held wages down, excluded competitors, and raised prices.

In this context Senator John Sherman of Ohio introduced federal antitrust legislation in 1888.  He re-introduced it in the next Congress in 1889, and  President Benjamin Harrison signed it into law in 1890.  The Sherman Act of 1890 remains the core U.S. antitrust law today.  Section 1 of the Sherman Act prohibits contracts, combinations, and conspiracies in restraint of trade.  It makes price fixing and customer or market allocation between competitors unlawful.  Section 2 prohibits monopolies and attempts and conspiracies to monopolize.

The Act lay dormant for a decade.  Early court decisions applied it against labor unions, while acquisitions of large market shares continued to accumulate.  In 1901 Teddy Roosevelt became President.  His administration brought the Northern Securities case against the railroad monopoly.  Cases against the chemical, meatpacking, tobacco, and oil trusts followed. 

In 1914 the Clayton Act was enacted to deal with interlocking directors, exclusive dealing agreements, and acquisitions of stock. It also authorized private treble damage actions by those who were injured by antitrust violations.  That same year the Federal Trade Commission was created to deal with consumer fraud and unfair methods of competition, a concept potentially broader than the standards of the Sherman and Clayton Acts.  In 1936 the Robinson-Patman Act was enacted to protect small businesses against price discrimination by suppliers.  Also in the 1930s the Capper-Volstead and Norris-LaGuardia Acts created exemptions for agricultural cooperatives and labor unions.  In 1950 the Celler-Kefauver Act extended section 7 of the Clayton Act to cover acquisitions of assets.  The Hart-Scott-Rodino Act was passed in 1976 to require that acquisitions above a certain size be notified to the FTC and the Antitrust Division of the DOJ prior to closing.

In the 1980s antitrust came under the influence of two competing schools of economic thought.  The Chicago School, epitomized by Robert Bork’s book The Antitrust Paradox, advocated for limited antitrust enforcement.  Predatory pricing was thought to be extremely unusual and difficult to implement.  Mergers were to be analyzed using the Herfindahl Hirschman index (HHI), which takes levels of market concentration into account..

The touchstone of antitrust enforcement was whether a transaction or conduct harmed consumer welfare.  The consumer welfare standard mostly considered price effects, often to the exclusion of other factors such as effects on smaller businesses, jobs, and communities.  And “consumers” for this purpose included not only individual citizens but other companies.  The incipiency aspect of Clayton Section 7 was largely ignored; merger enforcement focused on present or near- term price effects.  Industrial efficiencies at the producer level, where they would lead to lower prices, were to be lauded.  Vertical integration was often viewed as eliminating double mark-ups and therefore treated more leniently.  Chicago School proponents argued that the core focus of antitrust should be on price fixing cartels among horizontal competitors.

In contrast the Harvard School of antitrust, led by Phil Areeda, Don Turner, Herb Hovenkamp, and Stephen Breyer, focused on maintaining the conditions of a competitive marketplace.  The Harvard School was more willing to consider   market failures caused by excessive concentrations of market power. Unconcentrated markets were preferred.  Monopoly, duopoly, or oligopoly could lead to excessive profit taking by producers at the expense of consumers. 

The past 40 years have been a debate between these two schools of thought with the Chicago School usually dominating.  Predatory pricing was held nearly impossible to accomplish (Matsushita).  Minimum and maximum resale prices were to be judged under the rule of reason taking interbrand competition into account (Leegin and State Oil v. Khan).  Refusals to deal by a monopolist were very rarely actionable because it is important to maintain the incentive for the new inventors to themselves innovate their way to a monopoly position (Trinko).  The hurdle for a section 1 complaint to allege a violation was raised (Twombly).  Perhaps most importantly, joint FTC/DOJ Premerger Guidelines were issued during the Reagan administration which remain largely in effect today.  Their use of the HHI market concentration index, and an attendant practice of focusing on immediate or near-term price effects tended to drive industries toward only 3 to 4 large players, and to tolerate vertical acquisitions and sometimes their effects of raising entry barriers.

The Harvard School of antitrust did have some victories.  The Supreme Court upheld the possibility that the aftermarket for a single firm’s parts and services could be a relevant market in which a restraint competition can occur (Image Technical Services v. Kodak).  In a tying case, patented products were no longer presumed to have market power (Illinois Tool Works).  In an antitrust class action, the nature of the damages claimed had to be consistent with the nature of the harm to competition that was proven (Comcast). 

But more often the laissez faire approach of the Chicago School prevailed.  There were some exceptions.  ATT was broken up into regional operating companies separated from long distance service.  Microsoft was sued for tying its browser to its dominant software.  The FTC blocked the merger between Staples and Office Depot.  The DOJ blocked the ATT/T-Mobile merger.  But these were extreme cases involving a sole provider, or mergers from 4 to 3 companies or in some markets 2 to 1.  Usually, antitrust focused on prosecuting horizontal cartels, which the Chicago School agreed were pernicious.

With this history as prologue Senator Klobuchar takes us to the current debate about big tech and her proposed legislative solutions – to be discussed in my next post.