Antitrust Brainstorming Board with Christopher Yoo

Below, we have provided the full transcript of the interview with Prof. Christopher Yoo, John H. Chestnut Professor of Law, Communication, and Computer & Information Science at Penn Law, 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. Yoo, 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?

Christopher YOO:

I think the current framework can serve consumers extremely well. The focus on higher quality, lower prices and greater access to goods has really yielded immense benefits and improved the economics,[…] the social welfare that people enjoy immensely.

Importantly, it made sure that antitrust didn’t favor certain competitors. You often see situations where someone complains about a practice and they’re saying, that’s hurting me as a company, but in fact, it led to lower prices for overall consumers or better products. And I understand from the company standpoint why that’s important, but there’s no reason consumers should have to pay to benefit an individual actor. And that’s an important aspect of the current regime.

The other thing is it’s kept most competition law processes from being politicized, which is another great weakness potentially of how antitrust can dis-serve consumers. And I think that the way that the current framework works, focusing on consumer welfare does that.

How could it be improved? Well, I think one way it’s already been improved is, a shift to empiricism. What you’ll find is, there used to be a great emphasis on theory. And if it’s just theory, anything that’s theoretically possible is arguable and, everything is theoretically possible. So, you end up with these sort of open-ended discussions. What I really see is exemplified and abided by the AT&T Time Warner merger, which had a theoretical argument and now improved slightly by parameterizing empirically some of the assumptions that went into that argument, went up against a broad-based empirical study that said, let’s look at the last four mergers that looked like this and see what its impact was on consumers, to see what the overall effect was. And what we’re finding is that kind of evidence is becoming much more convincing.

The other way it could be improved is a better understanding of innovation. The mysteries of how the innovative process works and the wellsprings of genius is actually very hard to know. And how to marshal resources and R&D and its relationship has proven very thorny.

The relationship between the market structure and innovation has been called the second most studied problem in economics. So, it’s not for lack of effort, I just think the problem is so complex that we’re still in the process of learning that, how that works. And as we get better about that, we’ll be able to help competition law even more.

Do you believe the vertical merger guidelines need to be changed?

YOO:

So, the US recently updated the vertical merger guidelines, in ways that are quite salutary. In fact, the guidelines had not been updated since the ’80s, it was reaffirmed in the ’90s, and it deviated quite far from practice. And I think it was essential that we update that to reflect current practice, but more importantly, one of the revolutions of the last 50 years has been a better understanding of vertical integration. We understand that in fact, the conditions for it to be harmful to consumers are much narrower than we thought 50 years ago. And in fact, there are greater pro-competitive benefits.

And consistent with the emphasis I gave on empiricism before, there have been three recent surveys by economists who either before or after ended up serving on the staff of antitrust enforcement agencies – both parties, so it’s not a partisan thing- and they both concluded that, in the vast majority of cases, vertical integration is either neutral or beneficial to consumers, and the cases in which it actually harms consumers is vanishingly small. And I’m struck by, one of them was co-authored by Francine Lafontaine, who was one of the Chief Economists in the Federal Trade Commission during the Obama Administration. And she said, she was surprised, she didn’t expect to find these results, wasn’t gunning to find that result. But she said, we should get out of the business of regulating vertical integration, so that bars it from happening.

Do you approve of the shift from competition towards regulation?

YOO:

The invocation of Public Utility Regulation really reminds me of George Santayana’s famous statement that, those who don’t know history are doomed to repeat it. What strikes me is, historically, there’s been an enormous fight in the space between, what I think of as the bell-heads and the net-heads, in the sense that there’s the old school telecom people who thought the world, saw the world one way, and there’s the progressive internet types.

I think the net-heads have had the better argument almost all the time. But this is one case where I think the bell-heads know something from history that the net-heads don’t, which is that: if you look at the ’70s, ’80s and ’90s, there was an enormous literature that discovered that really utility regulation doesn’t work that well, and they were looking for ways to improve it, looking for, frankly, for alternatives, because they thought some of them couldn’t really be fixed. It’s hard to implement, creates economic distortions, which creates welfare losses, it facilitates and can feed collusion, it dampens innovation. And, in fact, it only plausibly works for commodities. So, if something varies in quality, the tools we have for Public Utility Regulation don’t work. So, if you talk about natural gas or water or electricity, they tended to work better.

But for things that vary in terms of quality, one of the best examples is the failure of Common Carriage Regulation on cable. What they discovered is that companies, if you cap their prices, they can actually make their profit by degrading the product, by investing less on the cost side. And the irony is rate regulation in cable television, we did an experiment in ’84, where we de-regulated it, ’92, we re-regulated and ’96, we de-regulated it again. And it was a great natural experiment. And the irony is, rate regulation caused quality adjusted prices to increase, because they actually degraded the quality even more. And so, unless you’re going to engage in comprehensive quality regulation, which is frankly, as hard as rate regulations to do, quality regulations, even harder. You’ll find that it’s not the tool that people think it is, where they say, “oh, we can just do that and do it everywhere all the time”.

How would you ensure antitrust is enforced vigorously if no changes are made to the current antitrust system?

YOO:

I actually think that there are several things we could do to improve the way it’s been enforced. Two, I’ve already mentioned are, a greater emphasis on empiricism and a better understanding of innovation. One thing that the agencies have just started to do, but need to do more, is to bring more technological expertise into the process. Because, particularly as we deal with high-tech industries, being able to understand the platforms that they’re studying, has become amazingly hard. And I think that they need to think about staffing in a fundamentally different way. Second is, other authorities outside of the US have done a better job doing what we think of as retrospective studies. So, we blocked a merger, or we allowed a merger, or we intervened in a certain way, based on predictive judgments of what the likely outcomes would be.

How did that actually pan out? It’s a wonderful question that’s rarely studied and rarely asked. And in fact, it’s hard to do because the predictive judgment that may or may not have panned out because circumstances changed, because the studies all really assume if everything’s, all things being equal. And as we know, things are never completely equal, so actually correcting for all those things and figuring them out can be quite hard. But it’s not, that’s the normal problem with studying things. That’s not a reason not to proceed with those sorts of retrospectives and to try to figure out how to do things. And the other thing I would say is that, I think what has been really effective on the US regime, is that we have a judicial enforcement regime, which requires enforcement officials to prove to an independent decision-maker that they’ve made their case.

What you’ll discover is, there’s an old principle goes back to Roman Law and the Code of Justinian that no one should be a judge in their own cause. It shows up in English Laws which they call Bonham’s Case, which is worded up by Lord Coke, there’s a lot of very famous things, but it’s also showed up in the European Court of Human Rights in the Medarini decision, where they’re saying, that unless  the agency that is simultaneously an enforcement official, and the judge, has to take off their enforcement, hat and put on their judge hat and ask ‘have I proved my case beyond whatever the standard, the evidentiary standard is’. And we all know human nature, that’s a really, really hard thing to ask people to do. And the Medarini case itself said, you need Plenary Judicial Review to make this okay, because otherwise you would violate that principle of having someone being the judge in their own cause. There are deference doctrines on judicial review, but we have to be very careful to make sure that every case gets an independent review and make sure that in fact, people, I think we should enforce the Competition Laws, where the violations happen, we just have to do it in a procedural matter that instills confidence with the people around it and actually gets to good outcomes.

What are your thoughts regarding start-up acquisitions?

YOO:

I think the killer acquisition question or the nascent competitor acquisition question is a perfect example to me of the potential ambiguity theory, and the need for a better grounding and understanding what’s really going on. So, you can tell stories about how acquiring a young company could be eliminating a competitor and hurting future competition. There’s another two stories you can tell. One is that the acquisition of the nascent competitor is what made it successful, because they needed to be combined with other assets in order to move forward. The other problem is many startups, their goal, when they start up is no longer to go public and have an IPO as it once was. Many of them regard the ability to be acquired by the company as a major part of their exit strategy and part of what makes their venture valuable.

So you face the prospect if you do this wrong, of cutting off the value of it, the potential value of a startup, by reducing its value by limiting the ways that it can actually monetize the investments that it’s done. And if that’s the case, you only limit them to either building the product themselves and going IPO and becoming a true unicorn, which is a much higher ask. So, the irony is, this could actually be extremely harmful innovation, even though it’s intended to benefit consumers or action to benefit the innovators themselves. A very common example is, that people point to is, Google’s acquisition of Android. Now, Android is obviously a tremendously successful product. At the time it was acquired by Google, it had six employees and no revenue. And so, you’d need a set of rules that would separate the startups that are going to turn into competitors and the ones that are going to be complimentary products or smaller innovations that need to be integrated into a larger whole, and are best done, perhaps by being acquired by a different company.

Until we have the tools to separate that, separate those two scenarios, blocking nascent competitor acquisitions just as a matter of course, risks actually hurting the innovative process, hurting consumers, and hurting the very innovators it’s designed to protect.

Is break-up the best solution for the digital economy and for consumers?

YOO:

Breakups from an antitrust standpoint have been extremely rare, and for good reason. There is a handful of very significant ones in the US: Standard Oil, American Tobacco, and AT&T, immediately to mind. But breaking up a company – we’re not talking about blocking a merger, but an established company long after it’s been formed – is rare because it’s extremely expensive and doesn’t always create the benefits that we envisioned. So, most of the breakups that are currently under discussion are breakups of what we call vertically integrated businesses, as opposed to a horizontal breakups. And the breakups of the vertically integrated businesses, for the reasons I mentioned before, are questionable in terms of the overall economic evidence. The surveys of the peer reviewed economic literature, and peer review is still the gold standard of how we decide, validity, as I said before, that literature has been shown that vertical integration tends to be beneficial to consumers or neutral, and that the cases in which it’s harmful are very, very rare, and this is done by a very broad base of people who’s have excellent reputations, it’s not a part of this land or some conclusion they’re trying to reach. And in that, the idea of breaking them up vertically, probably won’t you’ll consumer benefits based on the evidence.

Now, in a particular case, if you could show it, I could, with a theory and evidence, back it up, you can try to make the case. But it does really signal that extreme caution should be used. The other thing is, it’s not just vertical breakups you talk, as you mentioned, there’s lots of business restrictions. And if you look at the history particularly of the AY&T breakup, the line of business restrictions are extremely hard to police, require a lot of judicial oversight, there was this huge backlogs and requests for waivers and modifications that the courts had to deal with. And in a technologically dynamic environment, like the ones we have today, that’s going to be even harder than it was in the 1980s, because telephone service was relatively sleepy. You could still to this day, plug a telephone into the wall, from the telephone, from the early 20th century, and it would still work. The basic principles haven’t changed that much. You can’t say that today. And so, I would draw a line from Holmes, who said a page of history is worth the volume of logic. What we learn is we have all these great theoretical arguments about how breakups might be beneficial.

If you actually look at the historical record and see how these have done in the past and how structural separation, a lot of business rejections have played out in the past, what you discover is, there’s some really interesting empirical studies that show, that has led to billions of dollars of consumer welfare loss. Because of, it’s delayed products or caused them to be implemented in ways that were better done on a vertically integrated basis. That actually was tremendously harmful for consumers in ways of the study, econometrically, and provide a very useful guidepost to me of, or a caution sign before proceeding down that route.

How do you see the role of the FTC and the DOJ in ensuring competition works for consumers?

YOO:

The fact that you’re asking me about two agencies, points to one of the more curious features of US competition law. Why we have two agencies is largely explained by path dependent reasons that no one can really justify. People have been proposing unifying them for years. I could go into that debate now, but at this point, I don’t think it’s really on the table. It wouldn’t really be productive, but just to respond, to mention that it’s one of the great curiosities of US Competition law.

Obviously, the Enforcement officials should bring cases where it’s warranted and whether the evidence supports it. I think everyone understands that agrees with that, so that’s not what the question. And then there are a number of other rules, the FTC and the DOJ can play. One of the interesting ones is, I’ve mentioned already, is retrospective studies, to try to understand how things have gone in the past.

But one of the more interesting things they can do is, what we think of as Competition Advocacy, which is, they actually, the Competition Advocacy Group in the Antitrust Division under Makan Delrahim, convened a number of workshops to actually understand problematic areas or difficult to understand areas before a case was in front of them to try to increase the general understanding of them, and the kinds of information that they need. So, they held hearings on real estate, on labor markets, which has been something that’s been relatively under studied, and one that I had the privilege of participating in is, the interaction between regulation and competition law. Sometimes they’re, help each other, but there are certain circumstances under which regulation can be anticompetitive. It can actually create entry barriers or make it raise the costs of different entrants, makes it harder for smaller providers or new coming, incoming providers, new entrants to survive. And it’s a really interesting idea. It’s just that, the FTC and the DOJ have a role to show those effects, to actually offer comments and intervene in different decision-making processes. And that applies not only domestically within the US, but internationally as the US, as both of those agencies have done over the years from time to time.

How would you reconcile competition and competitiveness? Should antitrust reforms take into account the potential impact on proposed changes vis-à-vis China?

YOO:

One of the most interesting experiences I have when I started teaching, is I started looking at the trade laws, specifically the anti-dumping laws, and compared them to competition law. And I said to my friend who, a scholar who was teaching in both trade and in competition law, I said, this doesn’t make any sense. This has nothing to do with good competition principles. And he said, what makes you think trade has anything to do with competition principles? And his point was, it’s often hugely political. And in fact, unfortunately, that’s the case. Now what’s striking to me is, for about the last 60 to 70 years, we’ve seen a general commitment to bring those principles more in line, which is trade has been largely focused on lowering tariffs, allowing markets to govern more, limiting government intervention in markets and state ownership of enterprises.

It’s never been perfect, but through things like the WTO and GAP and regional agreements and bilateral trade negotiations, we’ve seen a steady commitment and movement towards making trade policy look more like competition law. And it’s striking to me, how beneficial that has been to consumers. So, you mentioned China, as people generally know, during the Trump Administration, the US entered into a large trade war with China. That has had lots of winners and losers. Now, obviously there are some industries, domestic industry in the US who did very well by this, the ones that are being protected. But on the other hand, there are other sectors that have done very badly though, the components that incorporate the tariff goods that as inputs, seems their prices to go up, but most importantly, US consumers have seen their prices go up on a whole range of goods across the board.

In other words, it’s a classic example of, we’re benefiting a few companies and harming consumers as a whole. And in fact, this is what you lose when you start to build in those sorts of, if you will, competitiveness questions into competition law. And in fact, what you see this is, I actually think that it would be a mistake to build this too much into China. There is a appropriate role for what I think it was, retaliatory tariffs, because you do have to make things line up. And if someone, you can’t do it unilaterally, you do need to do this cooperatively, and that is a means by which we get there. But to me, introducing ques ideas of competitiveness and industrial policy into competition law is a way, is an open invitation to benefit competitors instead of consumers in ways that are inconsistent with competition.

Any final comments you would like to make?

YOO:

The funny thing is, I think that antitrust law has followed a tried-and-true formula, that has really stood the test of time, which is, if you’re going to bring a case, you need to have a plausible and coherent theory backed by evidence and enforced by a remedy that’s actually tailored to the theories of the evidence you provided. So it, and it’s a trickle event, it served us really, really well in disciplining the kinds of arguments that people make. And in terms of the economics, that has to be not just theoretically plausible, but it actually has to, people have to have the incentive to do it. And in fact, it has to have an adverse effect on welfare instead of a beneficial effect of welfare. All of which is a very, has to be shown empirically in ways I think are very important.

I think that’s had a tremendously disciplining effect on antitrust law that’s been hugely beneficial. Because a lot of times you see somebody does a practice and that doesn’t seem right to me, or that’s raises some concerns, but unless you really make them articulate it, you can actually do a lot of harm. And in fact, making sure that we think through things is important for a rule of law purposes, it’s important for fairness to the parties, but actually to me, most importantly, is important for consumers, because a lot of us can tell stories or find specific examples of ways that we’re particularly harmful, but until we actually know the net effect in a similar systematic way, intervention could actually be dis-serving the very people that competition law is intended to benefit.