Antitrust Brainstorming Board with Michael Katz

Below, we have provided the full transcript of the interview with Prof. Michael Katz, is a Professor Emeritus at the Haas School of Business & Department of Economics, University of California, Berkeley, recorded on September 10, 2021.

This interview was done as part of the Antitrust Brainstorming Board created by CPI with the support of the CCIA.

Thank you, Prof. Katz, for sharing your time for this interview with CPI.

A video of the complete interview is available HERE.

Michael KATZ:

I want to disclose to the audience that I have consulting engagements for and against several of the big tech companies, other media companies and other platforms, and they have an interest in some of the issues that we’re talking about today. I just want people to be aware of that, and to be appropriately skeptical of listening to me. My view always is, “Don’t believe what I say, just because I say it.” I want you to think about what I’m saying, validate the arguments, and I hope ultimately agree with me.

Do you think the current antitrust framework works for consumers?

KATZ:

Whether or not, I think it works depends in part what you mean by the framework. If we’re talking about the consumer welfare standard, right, because that’s been under attack in some circles lately. I think that at least the way I would interpret the consumer welfare standard, it does work for consumers. Now, what I mean by it, first off is we worry about consumers being harmed by conduct, that itself, harms competition. The US doesn’t have a pure welfare standard, it always is this thing, right? It’s not illegal in the United States to charge high prices, if you have a proper way obtained monopoly. What’s illegal is to extend your monopoly in certain ways that harm competition, and then harm consumers. I think the fundamental framework is fine, as long as you remember the importance of harm to competition, and as long as we interpret it as including long run effects and effects on quality and on innovation. Right? There’s certainly people who claim that the consumer welfare standard is taking them in short run price effects. I don’t think that’s what it should mean.

There may be a point there though the courts sometimes act that way and I’ll turn to that in a minute. The other thing I think is important in the way I can see that the consumer welfare standard is it’s really a trading partner welfare standard, that it should include sellers that we should, in some cases, worry about monopsony or our buyer cartels. What it’s really saying is that the trading partner should be protected from harms that come about, because one or more parties on the other side is harming competition. It’s really about protecting the competitive process as I see it. As I say, I think properly interpreted the consumer welfare standard is fine. I think the problem we’ve run into is that American antitrust law is really common law, that we have very general and broad statutes, and it’s left to the courts to interpret them. As part of that, the courts could come up with their own economics, and I think, in the recent decades, have really gone astray. I actually say they’ve probably gone astray over many, many decades, but they’ve gone astray in different directions.

That’s where I think there’s a problem. I think the courts have made up an economics that’s overly favorable to defendants. Maybe some examples, I think, certainly, some of the courts act like pretty much any vertical restraint is good and sets extremely high burden in order to overturn that. Look, it may well be that most vertical practices or vertical restraints are good, but I think we’ve made it too hard in the courts to attack ones that aren’t. We have this, and another disclosure I should make, I was the witness for the US Department of Justice in the case brought against American Express. I strongly disagree with a lot of the things the Supreme Court said in reviewing that case. For example, where they said, “Well, the transactions platform has to be analyzed in the context of a single two-sided market, and that a transactions platform competes only with other transaction platforms.” I think almost all the comments agree that, that last one part is incorrect. I think part, because of that, it shows that the first point’s incorrect.

Certainly, I believe the courts have made it way too hard to bring a case that’s based on effects on potential competition or nascent competition. I think we do need to do things to change them. One of them, I think is we need the legislature to do its part in the common law process, which is every so often, you have a legislative reset of how the court’s interpreting the statutes, or rewrite the statute to push that. I think we need to reset some of the presumptions. One I just mentioned, I think we need to make it a lot easier to challenge, say, a merger based on concerns that the acquired party would have become a competitor, even if it’s small today. A bunch of people say, “Well, wait a minute. That’s crazy. There’re zillions of firms that could be competitors. How do you pick which ones to worry about antitrust scrutiny?”

I think, in these tech markets we’re talking about, I think the only way someone’s really going to become successful entrant is probably through innovation and getting a positive feedback cycle going, where consumers and maybe business partners think, “Okay. This firm has a potentially winning product.” I think people in the industry, sometimes, can see these feedback cycles starting early, subject to litigation, but arguably, Facebook saw that happening with Instagram. I think that’s an area, where we need to be more aggressive. To do that, I think we’re going to have to see the legislature do something to change the standards. The Federal Trade Commission has gotten a lot of criticism for not doing more to block WhatsApp or the Instagram acquisitions. I think under the standards at the time, or maybe we’ll see under the current standards, that debut would be hard pressed to do that. Some other things, this one I don’t think will ever happen, but I think we need to clean up the market definition mess. I think we’ve gotten to the point where formal market delineation is, maybe typically, even more an obstacle to good analysis than it helped.

Now, I’m not saying we don’t need to define markets at all. We’d need to know who the competitors are. We need to have a sense of how competition is functioning, but this whole thing of trying to draw a Sharpe zero one boundaries, and follow various judicial rules, I think really has started to make a mess of things. I also think we should experiment. The courts should experiment with some process reforms. I think the court should consider, or make greater use of, because some already do. They should make greater use of court appointed experts, because one of the things that happens, and I’ve been involved in this, you get offsetting economic experts. They’re saying stuff, that to a quote-unquote, “normal person” it’s incomprehensible. A good expert tries to make it more understandable, but some of this stuff is just inherently extremely technical. I think the courts could benefit from that.

I also think that having a court appointed expert might get rid of at least some of the more egregious stuff we’ve seen in some opinions, where courts say things like, “Well, over the last 20 years, prices have fallen, where outputs gone up, therefore it must be that this industry is competitive or that the conduct at issue can’t have been bad.” That’s obviously nonsense, when you have economy wide technological progress and you have a growing economy, a growing population. Some courts have said some extremely naive things, that I think if they had an expert around to tell them, they wouldn’t have said. I also think we should do things like have written direct testimony, which I’ve done a few trials, because it gives you a chance to really lay things out. It gives the judge a chance to pour over it. Or, at least to get rid of this thing that some people may not know about, let me explain. When you testify as an expert at a trial in the US, you get up and you pretend, as if you’re a fact witness.

You just walk into the court and the lawyer, whose side is hired, who ask you questions and you answer them, you’re supposed to almost pretend like, “Oh yeah. You’re just asking me questions,” where obviously the whole thing is scripted out. I don’t see any benefit to that process versus letting the expert get up and make a presentation, and have the judge question the presentation, and perhaps even have the attorneys interrupt to try to ask clarifying questions, but I think the artifice of the structure actually, I think sometimes makes it harder to communicate the arguments. The other thing I would really like to see, which is used in Australia and New Zealand is what’s called a hot tub, where you just get the experts from the different sides up in front of the judge at the same time, and the judge puts questions to them and they answer them, but then they get to respond to each other in real time. In some cases even, of my understanding, is they even get to ask each other questions. I think that would be a great way of cutting through a lot of the nonsense.

Then the last thing that I’ll mention, that I like to see, and we are going to see it apparently, is more money for the enforcement agencies, but I think pretty much everyone’s in favor of that. That mom and apple pie.

Do you approve of the shift from competition towards regulation?

KATZ:

It concerns me, partly from my experience, when I was chief economist at the Federal Communications Commission. I mean, I would really rather see us make strong efforts to reform antitrust before we moved to widespread regulation. I mean, I sometimes worry people are doing this, and say, “Well, antitrust hasn’t worked, we haven’t tried regulation, let’s pin our hopes on that.” They don’t have a very realistic view of how complicated it’s going to be, and difficult, therefore how strong the risks are of having adverse unintended consequences. Thinking about things that people said, “Well, with platforms, we’ve got to, especially the big tech ones, we’ve got to limit what they do,” because they go into too many things, and they engage in self-preferencing, and first off, sometimes self-preferencing is a good thing. Or, we used to talk about it as an efficiency of vertical integration, but the other thing is that we start saying to platforms, “Here’s what you can and can’t do.” I think we’re very quickly going to realize that’s just extremely hard and can be consumer unfriendly.

I mean, suppose going back, and we said with Microsoft, the thing with the big Microsoft antitrust case. Said, “Okay. Well, that remedy didn’t work well enough. Let’s regulate Microsoft and tell them their operating system has to stick to its niche.” Well then, a lot of the features that people take for granted in operating systems today, you never would have seen. I mean, right? In the old days, operating systems didn’t have clocks, and you would get a clock-out or something. Or, you wouldn’t have memory management or just any number of features that we take for granted now in an operating system. These software platforms, right, are just constantly evolving and innovating. I think trying to draw the boundaries is going to be a real problem. I think A, it will just be difficult, but B, it then risks distorting and stifling innovation. I’m really not a big fan of trying to regulate its companies overall. Now, there’s… Oh. I should say one other thing.

People say, “Well, we’ll just make the platforms open up or have non-discrimination, or some light-handed duty to deal, but I think all of those things, inevitably, we’re going to get into some price regulation.” Then we’re going to see massive, and I think widely, unproductive battles that are really going to be about rent seeking or rent distribution. I am not a big fan of it at this point. I do think it can make sense in a couple of areas, like say, privacy insecurity, where I don’t think promoting competition is necessarily going to solve those problems. Its conceivable competition will make some of the privacy issues worse, because it’ll drive firms to try to collect more information about consumers, so they can better compete to satisfy advertisers or somebody else seeking information. I think with security, you can get problems with greater competition and externalities across firms. Now, I’m not saying those are arguments against competition. I’m just saying, I don’t think we can pin our hopes on competition solving them, similarly with online disinformation. I may think there, we had more platforms, probably going to have more disinformation.

Again, I don’t think that’s an argument against competition, but we shouldn’t pin our hopes on that. Of course, the problem there is any attempt at regulation, rightfully, is going to run into the first amendment, and something we need to be concerned about. May I say one other thing, which ties back to where we started talking about the consumer welfare standard, where people have said, Look, we need much stronger intervention by the government to stop bigness, because we’re worried about a threat to democracy. Actually look, there may be some threats to democracy from what goes on online, but that’s different, than saying it’s because the owners are so big. But anyway, one thing I remind people of though, is if we start moving to have more government intervention in these markets, I mean, history teaches us what maybe will happen, right, is it giving the government control of these markets actually gives the incumbents yet another tool to entrench themselves, because often, right, government can serve as a tool. Right?

If you’re worried the government serves as a tool of the powerful interest, giving the government more control over markets may actually then just give the powerful interests more control over the market. I just think there’s a certain amount of… Well, let’s see what’s going on. I think as people say, “We don’t think anti-trust is working. We don’t remember the battle days where we moved away from regulation, because it wasn’t working, let’s try it again.” I do have a lot of concerns there.

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

KATZ:

I guess I’d say I’m only half joking, that if we don’t have some legislative change, the only other thing to do, we pack the Supreme Court and appellate courts, because I think giving more resources to the agencies and having the executive orders, whatever, tell them to be more aggressive. I just don’t think it’s likely to get us that far under the current standards and the current state of antitrust laws interpreted by the courts. I don’t really see a lot of change in absent legislation. Now, the one exception I would say, and this is just to say, to announce my ignorance, I guess, is that I don’t know the full extent of what the FTC could decide to do. I mean, we’ve certainly seen on some procedural things, where Chairman Khan has been very aggressive in using some of the tools available toward change, the way things are run at the FTC.

What I don’t know is how much she’d be able to do without ultimately having to get judicial approval or surviving appeal, because I don’t see my understanding of her view with antitrust getting past most of the appellate, through most of the circuits here in the US. I certainly don’t see what she wants to do standing up with Supreme Court. What I don’t know is, are there things she could do? There may be stuff that you can do to make life miserable for firms, extra judicially. I think that remains to be seen, but otherwise, I’m pretty skeptical of seeing big changes coming about in antitrust enforcement, just because the agencies decide to behave differently.

What are your thoughts regarding start-up acquisitions?

KATZ:

I don’t think the US should impose blanket restrictions, which some people are calling for, and saying, “Look, if you get too big, that’s it. You can’t acquire anybody else.” I think that’s a mistake. I mean, that’s one of my concerns with some of the legislation. I think some way, some of the people would conceive of regulation, is that it’s not looking case by case, which is one of the virtues of antitrust. That is, we really look at the facts of the case. I think we need to treat different acquisitions differently. I mean, the fact is entry for buyout is a mechanism for encouraging innovation in a lot of cases. There are firms that are working on ideas or products, where they’re never going to become a mainstream competitor to the company they’re selling out to. They’re not trying to. They don’t have the range of assets. I think we shouldn’t ban mergers like that. There may be ones that are still problematical, because the IP involved and what it would mean for other competitors, there’re things we’d have to think through, but I certainly wouldn’t want to see a ban.

What I would like to see as you mentioned, I mentioned earlier, which is that we look more carefully, and I think probably have to lower the standards, or shift the balance in type one and type two errors, when we’re looking at an acquisition of a startup that does have the potential to become a competitor to the acquirer. There, I would like to see it, but I wouldn’t do it as a blanket restriction.

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

KATZ:

Given some, that I said a little bit ago, that will surprise you to say. I certainly don’t think it’s the best. Again, I think the notion of blanket policy of breaking up the really big tech firms, I think is a huge mistake. I mean, it might be an appropriate remedy in specific cases. I don’t have an opinion on it, because I don’t know enough of the facts, but I mean, it could be in the case of Facebook’s acquisitions, right, of Instagram or WhatsApp, but they should be spun up, but that’s something you really need to look at the facts and dig into. I don’t think it’s something that somebody can make a sweeping statement and say, “Oh. Well, I’ve thought about it for five minutes. Yeah. Let’s break everybody up.” As I said before, I think for software, especially for software based platforms, I think it’s a big problem, because if people don’t know where the boundaries are, it runs the risk of cutting off expansion into new features and innovation.

I think we’re going to end up getting in endless disputes about where the boundaries are, then what the treatment has to be across them. Yeah. I’m just not a big fan of that wholesale call for breakups.

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

KATZ:

I mean, I take a very literal interpretation of what you just said. It’s ensuring competition works for consumers and address the part, not about how do they ensure that there’s competition, but how do they ensure that when there’s competition, it’s good for consumers. I think there is really a much bigger role for the Federal Trade Commission, because I think there is more, I believe, they could do to make sure the consumers are as well informed as they can be. Especially on things like privacy and security, which as I said, I don’t think competition alone is going to solve, it could make it worse. I think it’s really important that consumers be well-informed about what the privacy policies and practices of the companies they’re dealing with actually are, be well-informed about security. I think there is a role, especially for the Federal Trade Commission on the consumer protection side, to put consumers in a position to, I guess use an old fashioned terminology, better exercise consumer sovereignty and make the competitive process work better.

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

KATZ:

I think fundamentally, that there’s not a trade off, that I think that promoting competition does promote competitiveness, ultimately. I guess an exception to that is, if you’re talking about trying to use antitrust policy to harm foreign competitors, right, which certainly, some people have accused the Europeans of trying to do vis-a-vis American firms, but I don’t think we should be talking about doing anything like that in the US. If you’re not trying to use it, antitrust as a weapon against foreign firms, the other way sometimes talked about is, and I think Japan is sometimes described this way in past decades, saying, “Well, maybe we should have lax antitrust, so that our industry could build up, then be ready to compete on a global scale.” I don’t think that’s an argument that would work, certainly for the US.

I mean, take possible basis for the argument and say, “Well, the firms who have trouble raising capital, and there’s a huge investment upfront, and there’s problems with the competition.” Whether that’s ever true, hold to the side, in the current US economy, there are firms that certainly seem to have no trouble raising billions and billions of dollars, and losing a lot of money for a long time, in order to get started. I just don’t think we need to be protecting those firms by having lax antitrust. I think, antitrust, as I say, we should be promoting competition as much as we can, and that ultimately will lead to competitiveness. I’m old enough to remember, you go way back, the US auto industry is one of the problems they had. There wasn’t enough competition, then it made it possible for the Japanese to come in and really push the US industry to the brink. It would have been, I think, in a much better position in terms of competitiveness, if there had been more domestic competition in the first place.