The New Merger Guidelines (the “Guidelines”) provide a framework for analyzing when proposed mergers likely violate Section 7 of the Clayton Act that is more faithful to controlling law and Congressional intent than earlier Guidelines. The thirteen guidelines presented in the new Guidelines go quite a long way in pulling the Agencies back from an approach that placed undue burden on plaintiffs and ignored important factors such as the trend in market concentration and serial mergers that were addressed by earlier Supreme Court precedent. The Guidelines also incorporate the modern, more objective economics of the post-Chicago school of economics. For these reasons, and others, the Guidelines should be applauded.

Unfortunately, remnants of Judge Bork’s Consumer Welfare Standard remain. In several places the Guidelines refer to a merger’s anticompetitive effects as price, quantity (output), product quality or variety, and innovation. These are all effects that can shift demand curves or equilibrium positions in the output market and thus increase consumer surplus, the only goal recognized by the Consumer Welfare Standard.

To their credit, the Guidelines also mention input markets, referring to mergers that decrease wages, lower benefits or cause working conditions to deteriorate. Lower wages reduce labor surplus (rent), a consideration that would come within a Total Trading Partner Surplus approach. However, the traditional goals of antitrust as articulated by Congress and many Supreme Court opinions, including protecting democracy through dispersion of economic and political power, protection of small business, and preventing unequal income and wealth distribution, are conspicuously absent.

The basis for these traditional goals is well known. Prominent economist Stephen Martin has documented the judicial and congressional statements concerning the antitrust goal of dispersion of power. The historical support for the goal of preserving small business can be found in a recent paper by two of the authors of this piece. Lina Khan and Sandeep Vaheesan, and Robert Lande and Sandeep Vaheesan, have laid out the textual support for the antitrust inequality goal. Moreover, welfare economists have empirically demonstrated significant positive welfare effects from democracy, small business formation, and income equality.

Indeed, the Brown Shoe opinion, on which the Guidelines heavily rely, examined whether the lower court opinion was “consistent with the intent of the legislature” which drafted the 1950 Amendments, and the opinion itself refers to the goal of “protection of small businesses” in at least two places. The legislative history of the 1950 Amendment deemed important by the Brown Shoe Court evinced a clear concern that rising concentration will, according to Senator O’Mahoney, “result in a terrific drive toward a totalitarian government.”

The remnants of the Consumer Welfare Standard are most evident in the Guidelines’ rebuttal section on efficiencies. The Guidelines open the section with the recognition that controlling precedent is clear that efficiencies are not a defense to a merger that violates Section 7; accordingly, the section is offered as a rebuttal rather than a defense. In essence, if the merging parties can identify merger-specific and verifiable efficiencies, it can rebut a finding that the merger substantially lessened competition. The Guidelines do not define “efficiencies.”  However, the context makes clear that Guidelines mean to follow previous versions of the Merger Guidelines, that assume “efficiencies” are primarily cost savings. A defendant can offer a rebuttal to a presumption that a merger may significantly harm competition, if such cost savings are passed through to consumers in lower prices, to a degree that offsets any potential post-merger price increase. There are at least six reasons why the Agencies should jettison this “efficiency” rebuttal.

First, lower prices resulting from cost savings are quite a bit different than lower prices resulting from entry (rebuttal by entry). New entry reduces concentration, but cost savings at best will only lower output price, and higher prices (or reduced output) is not the sole problem that results from high concentration except under a strict Consumer Welfare Standard.

Second, to the extent the Guidelines equate efficiencies with cost savings (as in earlier merger guidelines), they have adopted the businessman’s definition of efficiencies. In contrast, economic theory suggests that some cost savings lower rather than raise social welfare. For example, cost savings from lower wages, greater unemployment, or redistribution between stakeholders can both lower welfare and reduce prices. An increase in consumer or producer surplus that comes at the expense of input supplier surplus can also lower welfare.

Third, only under the output-market half of a surplus theory of economic welfare, which is the original Consumer Welfare Standard, can one clearly link cost savings to economic welfare, because lower cost increases consumer and/or producer surplus. As we show elsewhere, this theory has been thoroughly discredited by welfare economists. In fact, for economists, “efficiency” only means Pareto efficiency. As discussed by Gregory Werden and by Mas-Colell et al.’s leading Microeconomics textbook (Chapter 10), the assumptions necessary to ensure that maximizing surplus results in Pareto Efficiency are extreme and unrealistic. These assumptions include quasilinear utility, perfectly competitive other markets, and lump sum wealth redistributions that maximize social welfare. This discredits the surplus approach, which is the only way to reconcile Pareto Efficiency, which is what efficiencies mean in economic theory, with cost savings, which is the definition implied in the Guidelines.

Fourth, the efficiency section is superfluous. As many economists have recognized, most recently Nancy Rose and Jonathan Sallet, the merging parties are already credited for efficiencies (cost savings) in the “standard efficiency credit” which undergirds Guideline 1. After all, absent any efficiencies, why allow any merger that evenly weakly increases concentration? A concentration screen that allows some mergers and not others must be assuming that all mergers come with some socially beneficial cost savings. Why do we need another rebuttal section when cost savings have already been credited?

Fifth, there is no empirical research to suggest that mergers that increase concentration actually lower costs and pass on sufficient benefits to consumers to constitute a successful rebuttal. As one district court commented, “The Court is not aware of any case, and Defendants have cited none, where the merging parties have successfully rebutted the government’s prima facia case on the strength of the efficiencies.” We have identified nine studies measuring either cost savings or productivity gains or profitability from mergers spanning industries like health insurance, banking, utility, manufacturing, beer, and concrete industries. Five of these studies find no evidence of productivity gain or a cost reduction. The other four studies find productivity gains in terms of cost savings; but three of these four studies report a significant increase in prices to the consumers post-merger, and the remaining study does not report price effects post-merger. In other words, we have not been able to find any empirical study showing post-merger pass on of cost savings to consumers. These results are consistent with those of Professor Kwoka, who performs a comprehensive meta-analysis of the price effects of horizontal mergers and finds that the post-merger price at the product-level increases by 7.2 percent on average, holding all other influences constant. More than 80 percent of product prices show increases, and those increases average 10.1 percent.

Sixth, even if there were cost savings from mergers it is unlikely that they would be merger- specific and verifiable. Earlier versions of the Merger Guidelines expressed skepticism that economies of scale or scope could not be achieved by internal expansion (1968 Merger Guidelines) or that cost savings related to “procurement, management or capital costs” would be merger specific (1997 Merger Guidelines). In their article on merger efficiencies, Fisher and Lande write that “it would be extremely difficult for merging firms to prove that they could not attain the anticipated efficiencies or quality improvements through internal expansion.” Louis Kaplow has argued that the ability to use contracting to achieve claimed efficiencies is seriously underappreciated or studied. Verification of future efficiencies is also inherently problematic. The 1997 Merger Guidelines state that efficiencies related to R&D are “less susceptible to verification.” This problem and other verification hurdles are discussed by Joe Brodley and John Kwoka. In summary, the New Merger Guidelines could be improved by a footnote in Guideline One clarifying the multiple antitrust goals Congress sought to achieve by preventing concentrated markets through mergers. In addition, the Agencies should take seriously the holdings of at least three Supreme Court Opinions, none of which have been overturned (Brown Shoe, Phila. Nat’l Bank and Procter & Gamble Co.) that (as quoted in the Guidelines) “possible economies [from a merger] cannot be used as a defense to illegality.” There are good reasons to abandon an efficiencies rebuttal as well.

Mark Glick, Pavitra Govindan and Gabriel A. Lozada are professors in the economics department at the University of Utah. Darren Bush is a professor in the law school at the University of Houston.

In 2023, Columbia University announced that it would no longer be participating in US News’ college rankings. At the time, the conventional interpretation of Columbia’s withdrawal was that it signaled the incoming demise of US News’ college rankings. Yet to date, no other elite undergraduate university has followed Columbia in withdrawing from US News’ undergraduate rankings. Could the conventional interpretation about Columbia’s withdrawal be wrong? 

In 1988, Columbia was ranked eighteenth in US News’ college rankings. But in the years that followed, Columbia’s undergraduate rank kept improving. By 2021, Columbia had surged to an all-time high of second. Naturally, Columbia’s breathtaking climb in US News rankings raised questions. What had Columbia done so well? What should Columbia do more of? How could other universities learn from Columbia? Among the people asking these questions was Columbia’s very own math professor, Dr. Michael Thaddeus. Skeptical by nature, he started studying Columbia’s rankings surge. What he found sent shockwaves through higher education.  

In February 2022, Dr. Thaddeus released a 21-page report exposing widespread misrepresentation of data provided by Columbia University to US News’ college rankings. For example, Dr. Thaddeus demonstrated that Columbia’s reported spending per student was inflated by “a substantial portion” of the $1.2 billion spent by its hospital on patient care, a function of the university completely unrelated to education. Because US News’ rankings are calculated, in part, by how much an institution spends per student, this overstatement greatly improved Columbia University’s ranking, or at least that’s what Dr. Thaddeus alleged. 

At first, Columbia intimated that Dr. Thaddeus was mistaken. Eventually Columbia came clean. In September 2022, Mary Boyce, Columbia’s provost, said in a statement, “We deeply regret the deficiencies in our prior reporting and are committed to doing better.” While Columbia’s acknowledgement was a step in the right direction, it was also silent on a crucial question. What possessed Columbia to lie to US News in the first instance?

In the edition of the US News rankings that followed Columbia’s rankings scandal, Columbia was demoted to a rank of 18th. The drop from second to eighteenth was incredibly steep. Observers wondered how it was computed. Indeed, Columbia hadn’t submitted any new data to US News following Dr. Thaddeus’s report. Instead, US News seemingly arrived at the new ranking without accurate data from Columbia to correct the inaccurate data from the past. The speculative nature of the ranking was on display, but so too was something else. While some drop for Columbia was nevertheless proper, was the drop to 18th justified? Or was US News making an example out of Columbia?  

Finally, in June 2023, Columbia withdrew from US News’ rankings, implying that the US News ranking was reductive, flawed, and distortive. After Columbia’s deeply embarrassing rankings scandal, it’s perhaps not surprising that Columbia would leave the party loudly and in protest. But the more interesting question is, if Columbia felt this way about US News’ ranking, why did it stay at the party so long to begin with? Why did it keep lying to muscle its way into the front of the party? And now that Columbia is gone, why are others refusing to leave the party? What explains all these contradictory facts? 

One theory, the charitable theory, is that the elite college ecosystem is just naturally full of uncoordinated institutions, where each institution pursuing its own interpretation of society’s best interests somehow leads to dysfunction in the aggregate. Per this theory, US News tries its best to create a good ranking but falls short because it is impossible to create truly objective ranking. Elite colleges are constantly looking to expand access, as evidenced by their commitment to affirmative action, but they are held back by constraints of resources, now the courts, regulation, or efficiency which are all outside their control. Per this theory, the cost of elite higher education rises because of Baumol’s cost disease. And per this theory, Columbia and other elite colleges don’t purposely lie to US News. Instead, elite colleges get mixed up in vague definitions that lead to understandable mistakes in their submissions. 

But the charitable theory is sometimes hard to swallow, in light of the facts. With each passing year, a different, more cynical theory feels increasingly plausible. Per this theory, elite colleges aren’t just independent, uncoordinated actors, but members of a commercially collusive cartel. It implies that US News is a vital hub for collusion among the elite colleges, helping elite colleges coordinate systemic scarcity of seats and raise each other’s costs. It means that elite colleges aren’t committed to access but its opposite. Per this alternative, the cost of education rises because of market structure, not natural economic laws; and it suggests that if elite colleges are merely doing what’s in their best interests, it’s in the context of a rigged system they designed and uphold. Such a cynical theory is inherently speculative, but is there an obvious reason to reject the elite college cartel theory outright? 

One obvious reason for objection might be that elite colleges are often in conflict with US News, not in cahoots. To take just one example, Columbia certainly wasn’t doing US News any favors, and US News may have retaliated against Columbia. So, how could US News be a hub for collusion, when it is clearly antagonistic to those that it ranks?   

Lessons from The Toy Cartel

A few decades ago, Toys “R” Us was the dominant toy retailer in America. But Toys “R” Us’ future dominance wasn’t assured. The retail toy market was rapidly changing. Disruptive entrants had created a new form of retail experience, the warehouse club.  By 1992, warehouse club chains like Costco, Sam’s Club, Pace, Price Club, and BJ’s were expanding quickly. 

The secret to the warehouse clubs’ success was that they were able to offer far cheaper prices because they slashed all sorts of operating costs. Club stores opened in places where real estate was cheaper, operated with less staff, and decorated themselves in a spartan way. As the President of Costco testified in the 1990s, “almost invariably our presence in the community is going to have a tendency to drive prices down.” 

For Toys “R” Us, there was reason to be nervous. In the early 90s, Toys “R” Us’ average margin on toys was above thirty percent. Costco’s margin on toys was nine percent. When Toys “R” Us’ chairman was asked whether the warehouse clubs could hurt his business, he responded, “Sure they could hurt us. Yeah.” When asked, “How so?,” he sharply replied, “By selling that product for a price that we couldn’t afford to sell it at. Simple economics.”

Competition was coming, but in the early 1990s, Toys “R” Us was still the toy manufacturers’ largest and most important customer, often buying 30 percent or more of the output of Hasbro, Mattel, and others. So, to prevent warehouse clubs from catching up, Toys “R” Us organized a cartel conspiracy with the toy manufacturers. Toys “R” Us offered the toy manufacturers a stronger relationship with itself, but only if they sold inferior products to the warehouse clubs like Costco. 

The conspiracy worked. As the FTC concluded, “By the end of 1993, all of the big, traditional toy companies were selling to the clubs only on discriminatory terms that did not apply to any other class of retailers.” When the toy manufacturers sold inferior toys to warehouse clubs, fewer consumers bought their toys there. For example, Mattel’s sales to warehouse clubs declined from over $23 million in 1991 to under $8 million in 1993. But it wasn’t pure sacrifice for the toy manufacturers. After all, the toy manufacturers were benefiting from Toys “R” Us’ big purchase orders even as Toys “R” Us was benefiting from suppressing warehouse clubs’ emergence as a threat in the retail toy market. 

Still, it wasn’t an easy cartel to operate. Some of the toy manufacturers wanted it all. They wanted to have a strong relationship with Toys “R” Us and they wanted to secretly increase their sales to the warehouse clubs too. As Toys “R” Us’ then-President Roger Goddu testified, “I would get phone calls all the time from Mattel saying Hasbro has this in the clubs or Fisher Price has that in the clubs…. So that occurred all the time.” Importantly, if one toy manufacturer cheated, the other manufacturers that stayed true lost out on market share. A cartel couldn’t run like that.  

In response, Toys “R” Us had to punish the cheating toy manufacturer for defecting from this toy cartel. Toys “R” Us would withhold its own orders from that cheating firm until it got back in line by pulling out of the warehouse clubs. Punishment from Toys “R” Us was key to making the whole system work. Indeed, the toy manufacturers acknowledged as much, often explaining to Toys “R” Us executives that they wouldn’t be a part of the toy cartel unless their competitors were too.      

The structure of the toy cartel was a variation on a traditional horizontal cartel. Instead of competitors colluding among themselves, a third-party ring leader helped them coordinate. Such a cartel has many names. Sometimes, it is called “hub-and-spoke.” Other times it is known as “rim-and-wheel.” I prefer “head-and-tentacles.” Whatever one calls it, it’s often illegal; and, Toys “R” Us and the toy manufacturers found that out in both Administrative and Appellate Court after the FTC sued them for antitrust violations in 1996. 

Why Rankings Matter

Returning to the elite college market, one major question implicit in the elite college cartel theory is whether the obvious tension between US News and the elite colleges it ranks is consistent with a cartel theory. As the toy cartel demonstrates, however, antagonisms are often a natural part of cartels, far from being inconsistent with, some antagonism may be evidence of a cartel. Ultimately, wasn’t US News’ demotion of Columbia all the way down to 18th, after Columbia got caught cheating, eerily reminiscent of the punishment Toys “R” Us used to dole out to promote cartel compliance? 

A different reason to scoff at the elite college cartel theory is that the mechanics of US News’ not-so-rigorous ranking surely couldn’t coordinate the policies of universities, each with billions of dollars, sometimes tens of billions of dollars, in their endowments. How could the satellite dictate the movements of the planet?  

One reason may be that rankings are an odd market. Credit rating agencies are often much smaller than the companies, states, or nations that they rate. Yet credit ratings often have huge effects on the valuations of those larger entities. For the unfamiliar, US News publishes the “definitive” college ranking. While other publications also publish rankings, US News has near monopoly market share, measured by views, in the college rankings market. Within the first few days of its annual releases, US News’ college ranking routinely captures tens of millions of views from anxious students and parents. One study finds that being on US News’ top 25 list can lead a school’s applications to go up between six and ten percent. A 2013 Harvard Business School study found that “a one-rank improvement leads to a 1-percentage-point increase in the number of applications to that college.” Empirically, when Cornell rocketed in US News’ rankings from fourteenth in the fall of 1997 to sixth in the fall of 1998, applications to Cornell rose by over ten percentage points the following cycle. To the extent that competition among elite colleges exists, Stanford Sociologist Mitchell Stevens describes US News’ rankings as “the machinery that organizes and governs this competition.” 

One reason rankings are so influential is that choosing a college is a complicated purchase. Young prospective students just don’t have the ability to forecast differences between four-year experiences with very little information about colleges themselves. Therefore, students and their parents often rely on proxy information, and the US News’ rankings are deeply influential in the admissions process. Plainly, a high US News ranking is a critical input that a college needs to compete in the elite college market. Therefore, because US News is a necessary upstream supplier for elite colleges, it is perfectly positioned to play the hub, consciously or unconsciously. Still, just because students rely on rankings doesn’t explain why students rely on US News’ ranking uniquely. How did US News become so dominant, and why can’t it be replaced?

US News’ path to dominance was paved by elite colleges. The incumbent elite universities of the 1980s implicitly agreed to lend US News an air of credibility, by filling out annual surveys, something that made US News popular with students. In parallel, US News’ helped the incumbent elite universities extend their incumbency into the future by creating a ranking that rated them highly not for their educational quality, but instead for their wealth and exclusivity. It’s unclear how conscious or unconscious this partnership between US News and elite colleges was. Maybe it was totally unconscious, with both sides merely pursuing their dominant business strategy. 

Regardless of the mental state, the descriptive truth is that this basic relationship between elite colleges and US News is still operative today. Harvard helps US News dominate the college rankings market in the present, and US News helps Harvard extend its dominance in the elite college market in the future. Bob Morse, one of the architects of US News’ rankings, admitted as much in an interview in 2009 saying, “When the public sees that the schools are wanting to do better in our rankings, they say, well if the schools want to improve in these rankings, they must be worth looking at. So, in essence, the colleges themselves have been a key factor in giving us the credibility.” Credibility is the most important factor for a ranking to be successful. Students and parents can’t independently adjudicate the quality of a ranking for the same reason that they can’t independently adjudicate the quality of a college: it’s complicated and subjective. Therefore, the ranking with the most credibility wins out with students and parents. And a path of least resistance to such credibility was to get the incumbent elites to qualify US News as worthwhile.   

US News likely knows that it can’t afford to lose the support of the incumbent elite schools; without it, US News couldn’t offer a credible ranking. US News likely knows that it cannot afford the perception of a boycott from those incumbent elite colleges. This may be why US News publishes a ranking that weights selectivity at seven percent, financial-resources-per-students at ten percent, class-size at eight percent, student-faculty-ratio at one percent, and colleges ranking each other at twenty percent. The US News ranking criteria has a very simple logic. As Washington Monthly magazine observed in 2000, “the perfect school is rich, hard to get into, harder to flunk out of, and has an impressive name.” 

There may well be evidence of hyper-elite colleges lobbying US News for changes to this or that criteria to better serve their needs. Yet even in the absence of such an explicit conspiracy, US News uses a criteria that self-justifies why incumbents are already on top of the prestige ladder. Presumably, both US News and the elite colleges know this. But the circular logic of US News’ rankings doesn’t just keep the elite colleges on top. It also incentivizes them to become more extreme versions of themselves. 

US News incentivizes colleges to pull in more applications so they can reject them. US News incentivizes colleges to stagnate enrollment growth. US News incentivizes colleges to raise prices further and spend more money per student. Worse, US News incentivizes less-elite colleges to adopt all the worst parts of the elite colleges, such as out-of-control spending. 

Plainly, incentivizing colleges to spend more money to compete in the elite market raises barriers to entry by shifting supply curves up for each participant. Plus, incentivizing colleges to be unduly rejective to attract students forces colleges to undersupply more than they otherwise would. In sum, US News’ rankings incentivize intense market dysfunctions like scarcity on the supply side.   

Per the elite college cartel theory, the role of Toys “R” Us is played by US News. US News allegedly coordinates collusion among all the different elite colleges. But the way US News allegedly coordinates its spokes is subtle and ingenious, as it facilitates seat scarcity coordination through its ranking formula instead of explicit communication. In this narrative, US News became dominant precisely because it chose to play the coordinating role that elite colleges may have wanted, and it played that role just as elite colleges may have wanted it to.

There are facts that support an inference of collusion. For one, links between US News and hyper-elite colleges are deep. In the 2000s and 2010s, Mortimer Zuckerman, the owner of US News, became a mega-donor to Ivy League colleges like Harvard and Columbia. He served on the Board of Trustees at Princeton. In that same period, US News’ monopoly consolidated. The hyper-elite colleges continued to support the regime. They didn’t boycott the rankings. They embraced them, continuing to give US News exclusive answers to surveys that no other ranking receives. When President Obama’s administration sought to roll out a public competitor to US News’ college rankings in 2013, elite college administrators rallied to kill the ranking effort. Instead, the public got a limp scorecard, and US News didn’t face a public, credible competitor. 

For another, elite colleges have horizontal links among themselves. For instance, there is large surface area for coordination in things such as lobbying for government policies, joint research, patent commercialization, and admissions. Moreover, elite colleges often have interlocking governance boards. Jurisprudentially, these types of interlocking links have supported inferences of conspiracy in many antitrust cases. 

Empirically, elite colleges have been pulled into court for allegedly collusive cartel behavior before. The Ivy League colleges were sued by the Department of Justice for fixing prices on financial aid in the 1990s. In 2022, a group of seventeen elite colleges was sued for price-fixing by a class of students on financial aid. The NCAA has been sued many times for cartel tactics that limit compensation for student-athletes. So, might seat scarcity, and exclusion of competitors, be another area where elite colleges collude?

Lastly, another factor supporting an inference of conspiracy are the market dynamics themselves. The demand for seats at elite institutions has proven to be remarkably inelastic. If the Varsity Blues scandal proves anything, it’s that people will go through a lot of trouble to capture a seat at an elite school. Importantly, inelastic demand, in other markets, has attracted cartel formation. For example, OPEC operates in the inelastic oil market. Big tobacco companies operate in the inelastic cigarette market. In those markets, cutting output by one percent has often raised prices by more than one percent, making scarcity a profitable strategy.   

In some markets with inelastic demand, a cartel isn’t needed to produce scarcity because only one or two companies control the entire market anyway. But the elite college market isn’t like that. Many different elite colleges exist. Without some machinery to coordinate scarcity, it likely would not be possible to produce systemic scarcity. 

In a system structured as ours, explicitly or accidentally, Penn’s acceptance rate necessarily drops from 47 percent in 1991 to less than 6 percent in 2023. As authors Carnevale, Schmidt, and Strohl quantify, in their book, The Merit Myth, “There are 1.5 million high school seniors with better than an 80 percent chance of graduating from one of the top 193 colleges, but those colleges annually admit only 250,000 freshmen.” As economists Kent and Smetters quantified in 2021, if elite colleges ignored relative prestige and simply maintained student quality, since 1990 their total enrollments would have doubled or tripled. Instead, Harvard, Princeton, Yale, and Stanford only increased enrollment by seven percent between 1990 and 2015. 

Let’s be clear: The artificial scarcity in slots, made possible by the ranking system, allows elite colleges to under-produce relative to a world in which such coordination was not possible; and by under-producing, the elite colleges are able to impose supra-competitive prices for admission.   

You can see the market failure all around you. Tuition prices keep rising well beyond the average inflation rate. Scarcity-induced admissions scandals like Varsity Blues continue to pop up. But perhaps the most obvious sign is that the demographics at formerly less exclusive colleges have also gone wacky. The rankings are warping the whole market into copycatting the worst parts of the hyper-elite colleges. Safety schools have morphed into reach schools. Reach schools have slipped out of sight. Seats at American universities have turned needlessly scarce, and the privileged few have largely outcompeted the aspiring many for those seats.  

Indeed, elite colleges might object to the entire conjecture of this article. They might say that there is no fusion between themselves and US News. They might claim that they are increasingly diverging from US News’ rankings. They might point to their boycott of the US News’ law school rankings. Harvard might point out that it pulled out of US News’ medical school rankings. 

Yet it’s not clear if these objections comprehensively rule out a cartel explanation. Even if elite colleges are pulling out of US News’ rankings at the graduate levels, they refuse to do so at the undergraduate level. There is absolutely no evidence that a boycott is forthcoming for the undergraduate rankings. Instead, we see only continuing participation. Importantly, undergraduate rankings matter far more than law school or medical school rankings. They matter more because an elite college’s undergraduate reputation is also often used as a proxy for its graduate programs. 

Pitiful Growth in Seats

Skeptics might also assert that elite colleges have always been exclusive, independently of US News. Elite colleges might argue that the whole reason that they’re elite is because they’re exclusive. This argument is more persuasive on first glance than on close examination. While it’s true that elite colleges must reject some students to maintain class quality, the question is one of degree. 

How exclusive does an elite college need to be? Do we need Ivy League colleges to reject 95 percent of applicants? Or will rejecting 80 percent, as they did in the 1980s, suffice? It is a false argument to assert that growth and quality are necessarily opposed. For example, before the rankings-era, Stanford increased its enrollment by over 250 percent from 1920 to 1970. It managed to stay very elite in that period of time. 

Nor is undue rejection necessary to maintain academic quality. A common quip on Harvard’s campus is that the hardest thing about Harvard is getting in. There are many students of diligent character and great intellect who are routinely rejected by the elite colleges, and those rejections have nothing to do with quality. Instead, those rejections may be the collateral damage that a hub-and-spoke cartel produces. Absent this concern for relative prestige, driven home by the rankings, the elite colleges would naturally admit more students.

Elite colleges might alternatively object that acceptance rates are a poor measure for increasing exclusion. They might argue that each student applies to far more schools than she once did. This is true. But the reason each student applies to more schools today is because she is dramatically more likely to get rejected at each one. If you leave behind acceptance rates, and merely look at raw numbers, the growth in seats at elite colleges has been pitiful. As Economists Kent and Smetters explained in 2021, “While college enrollment has more-than doubled since 1970, elite colleges have barely increased supply, instead reducing admit rates.” For example, in the 2005–06 school year, Yale enrolled 1,321 undergrads, and in 2016–17, Yale enrolled a whopping 1,367 students.  

A market fundamentalist might argue that the scarcity produced by elite colleges is opening space for formerly less elite colleges like Tulane and BU to fill the new market need by becoming more exclusive themselves. Fundamentalists might argue that the market is responding as it should, by creating more supply to meet the growing demand of qualified students eager for prestigious degrees. But, of course, such fundamentalists miss the crucial point. 

At what cost is Tulane filling in for Penn? The rankings that US News has set up requires everyone to get more expensive. So, as more  students were rejected by Penn, Tulane experienced an increase in demand for its slots, which justified higher prices. Even then it’s not a real substitute. As economists Blair and Smetters quantified in 2021, the consumer welfare loss of being rejected from Harvard, Yale, Stanford, or Princeton is estimated to be around 140 percent of the mean total tuition, an amount in the order of hundreds of thousands of dollars. This is despite the rise of the so-called substitutes. 

In the end, whether the elite colleges have explicitly colluded to produce dysfunction or whether it is some freak accident is probably the least interesting thing about the elite college market to the vast majority of Americans. For the average student coming of age, it doesn’t matter if the elite college market is dysfunctional because of an explicit conspiracy or because of an unfortunate accident of market development. What matters to the applicant is that she may not be accepted to the college of her dreams because rankings incentivize each elite college to slow growth in enrollments. With each new college scandal, a simple fact becomes more and more clear. We need a serious conversation about how to restructure this market.

Sahaj Sharda is a student at Columbia Law School and author of the book The College Cartel.

Over the past two years, heterodox economic theory has burst into the public eye more than ever as conventional macroeconomic models have failed to explain the economy we’ve been living in since 2020. In particular, theories around consolidation and corporate power as factors in macroeconomic trends–from neo-Brandeisian antitrust policy to theories of profit seeking as a driver of inflation–have exploded onto the scene. While “heterodox economics” isn’t really a singular thing–it’s more a banner term for anything that breaks from the well established schools of thought–the ideas it represents challenge decades of consensus within macro- and financial economics. This development, of course, has left the proponents of the traditional models rather perturbed.

One of the heterodox ideas that has seen the most media attention is the idea of sellers’ inflation: the theory that inflation can, at least partially, be a result of companies using economic shocks as smokescreens to exercise their market power and raise the prices they charge. The name most associated with this theory is Isabella Weber, a professor of economics at the University of Massachusetts, but there are certainly other economists who support this theory (and many more who support elements of it but are holding out for more empirical evidence before jumping into the rather fraught public debate.)

Conventional economists have been bristling about sellers’ inflation being presented as an alternative to the more staid explanation of a wage-price spiral (we’ll come back to that), but in recent months there have been extremely aggressive (and often condescending, self-important, and factually incorrect) attacks on the idea and its proponents. Despite this, sellers’ inflation really is not that far from a lot of long standing economic theory, and the idea is grounded in key assumptions about firm behavior that are deeply held across most economic models.

My goal here is threefold: first, to explain what the sellers’ inflation and conventional models actually are; second, to break down the most common lines of attack against sellers’ inflation; third, to demonstrate that, whatever its shortcomings, sellers’ inflation is better supported than the traditional wage-price spiral. Many even seem to recognize this, shifting to an explanation of corporations just reacting to increased demand. As we’ll see, that explanation is even weaker.

What Is Sellers’ Inflation?

The Basic Story

As briefly mentioned above, sellers’ inflation is the idea that, in significantly concentrated sectors of the economy, coordinated price hikes can be a significant driver of inflation. While the concept’s opponents generally prefer to call it “greedflation,” largely as a way of making it seem less intellectually serious, the experts actually advancing the theory never use that term for a very simple reason: it doesn’t really have anything to do with variance in how greedy corporations are. It does rely on corporations being “greedy,” but so do all mainstream economic theories of corporate behavior. Economic models around firm behavior practically always assume companies to be profit maximizing, conduct which can easily be described as greedy. As we’ll see, this is just one of many points in which sellers’ inflation is actually very much aligned with prevailing economic theory.

Under the sellers’ inflation model, inflation begins with a series of shocks to the macroeconomy: a global pandemic causes an economic crash. Governments respond with massive fiscal stimulus, but the economy experiences huge supply chain disruptions that are further worsened with the Russian invasion of Ukraine. All of these events caused inflation to increase either by decreasing supply or increasing demand. The stimulus checks increased demand by boosting consumers’ spending power–exactly what it was supposed to do. Both strained supply chains and the sanctions cutting Russia off from global trade restricted supply. Contrary to what some opponents of sellers’ inflation will say, the theory does not deny the stimulus being inflationary (though some individual proponents might). Rather, sellers’ inflation is an explanation for the sustained inflation we saw over the past two years. Those shocks led to a mismatch between demand and supply for consumer goods, but something kept inflation high even after the effects of those shocks should have waned.

The culprit is corporate power. With such a whirlwind of economic shocks, consumers are less able to tell when prices are rising to offset increases in the cost of production versus when prices are being raised purely to boost profit. This, too, is not at odds with conventional macro wisdom. Every basic model of supply and demand tells us that when supply dwindles and demand soars, the price level will rise. Sellers’ inflation is an explanation of how and why prices rise and why prices will increase more in an economy with fewer firms and less competition. 

Sellers’ inflation is really just a specific application of the theory of rent-seeking, which has been largely accepted since it was introduced by David Ricardo, a contemporary of the father of modern economics, Adam Smith. (Indeed, this point, which I raised nearly a year and a half ago in Common Dreams, was recently explored in a new paper from scholars at the University of London.) As anyone who has ever watched a crime show could tell you, when you want to solve a whodunnit, you need to look at motive, means, and opportunity. The greed (which, again, is at the same level it always is) is the motive. Corporations will always seek to charge as high of a price as they can without being dangerously undercut by competitors. Sellers’ inflation doesn’t posit a massive increase in corporate greed, but a unique economic environment that allows firms to act upon the greed they have possessed.

Concentration is the means; when the market is in the hands of only one or a few firms, it becomes easier to raise prices for a couple of reasons. First, large firms have price-setting power, meaning they control enough of the sector that they are able to at least partially set the going rate for what they sell. Second, when there’s only a few firms in a sector, wink-wink-nudge-nudge pricing coordination is much easier. Just throw in some vague but loaded phrases in press releases or earnings calls that you know your competition will read and see if they take the same tack. For simplicity, imagine an industry dominated by two firms, A and B. At any given point, both are choosing between holding prices steady and raising them (assume lowering prices is off the table because it’s unprofitable, let’s keep it simple.) This sets up the classic game-theoretical model of the prisoner’s dilemma:

	A Maintains Price	A Raises Price
B Maintains Price	→, →	↓, ↑
B Raises Price	↑, ↓	↑, ↑

In the chart above, the red arrows represent the change in A’s profit and the blue represent the change in B’s. If both hold the price steady, nothing changes, we’re at an equilibrium. If one and only one firm raises prices without the other, the price-hiker will lose money as price-conscious consumers switch to their competitor, who will now see higher profits. This makes the companies averse to raising prices on their own. But, if both raise their prices, both will be able to increase their profits. That’s why collusion happens. But, wait, isn’t that illegal? Yes, yes it is. But it is nigh on impossible to police implicit collusion, especially when there is a seemingly plausible alternative explanation for price hikes.

As James Galbraith wrote, in stable periods, firms prefer the safer equilibrium of holding prices relatively stable. As he explains:

In normal times, margins generally remain stable, because businesses value good customer relations and a predictable ratio of price to cost. But in disturbed and disrupted moments, increased margins are a hedge against cost uncertainties, and there develops a general climate of “get what you can, while you can.” The result is a dynamic of rising prices, rising costs, rising prices again — with wages always lagging behind.

And that gets us to opportunity, which is what the macroeconomic shocks provide. Firms probably did experience real increases in their production costs, which gives them good reason to raise their prices…to a point. But what has been documented by Groundwork Collaborative and separately by Isabella Weber and Evan Wasner is corporate executives openly discussing increasing returns using “pricing power,” which is code for charging more than is needed to offset their costs. This is them signaling that they see an opportunity to get to that second equilibrium in the chart above, where everyone makes more money. And since that same information and rationale is likely to be present at all of the firms in an industry, they all have the incentive (or greed if you prefer) to do the same. This is easiest to conceptualize in a sector with two firms, but it holds for one with more that is still concentrated. At some point, though, you reach a critical mass where suddenly there’s one or more firms who won’t go along with it. As the number of firms increases, it becomes more and more probable that one won’t just go along with it, which is why concentration facilitates coordination. 

And that’s it. In an economy with significant levels of concentration — more than 75 percent industries in the American economy have become more concentrated since the 1990s — and the smokescreen of existing inflation, corporate pricing strategy can sustain rising prices due to the uncertainty. Now, if you ask twenty different supporters of sellers’ inflation, you’ll likely get twenty slightly different versions of the story. However, the main beats are mostly agreed upon: 1) firms are profit maximizing, 2) they always want to raise prices but usually won’t out of fear of either being undercut by the competition or being busted for illegal collusion, and 3) other inflationary pressures provide some level of plausible deniability which lowers the potential downside of price increases.

What Evidence Is There?

The evidence available to support theories of sellers’ inflation is one of the main points of contention between its proponents and detractors. Despite that, there is strong theoretical and empirical evidence that backs the theory up.

First is a basic issue of accounting that nobody in the traditional macro camp seems to have a good answer for. Profits are always equal to the difference between revenues (all the money a company brings in) and costs (all the money a company sends out). 

Profits= Revenue – Costs

This is inviolable; that is simply the definition of profits. As I’ve written before, this means that the only two possible ways for a company to increase profits is by generating more revenue or cutting costs (or a combination of the two, but let’s keep it simple). Costs can’t be the primary driver in our case because we know they’re increasing, not decreasing. Inflationary pressures should still have increased production costs like labor and any kind of input that is imported. Companies also have been adamant about the fact that they are facing rising costs; that’s their whole justification for price hikes. And mainstream economists would agree. They blame lingering inflation on a wage price spiral, which says that workers demanding higher wages have driven cost increases that force companies to raise prices – resulting in higher inflation. As both sides agree that input costs are rising, the only possible explanation for increased profits is an increase in revenue. Revenue also has itself a handy little formula:

Revenue = Price * Units Sold

While the units sold may have increased, price was the bigger factor. We know this for at least two key reasons: because of evidence showing that output (the units sold) actually decreased and because of the evidence from earnings calls compiled by Groundwork. Executives said their strategy was to raise prices, not to sell more products. And there’s two very good reasons to believe the execs: (1) they know their firms better than anyone, and (2) they are legally required to tell the truth on those calls. (That second reason is also evidence of sellers’ inflation on its own; if the theory’s opponents don’t buy the explanation given by the executives to investors, they must think executives are committing securities fraud.) 

In rebuttal to the accounting issue, Brian Albrech, chief economist at the International Center for Law and Economics, has argued that using accounting identities is wrongheaded:

Just as we never reason from a price change, we need to never reason from an accounting identity. My income equals my savings plus my consumption: I = S + C. But we would never say that if I spend more money, that will cause my income will rise.

This, on face, seems like a reasonable argument, except all it really shows is that Albrecht doesn’t understand basic math. Tracking just one part of the equation won’t automatically tell us what the others do…duh. But we can track what a variable is doing empirically and use that relationship to make sense of it. We would never say that someone spending more money on consumption causes their income to rise. But we certainly could say that if we observe an increase in personal consumption, then we can reason that either their income increased or their savings decreased. The mathematical definition holds, you just have to actually consider all of the variables. In fact, Albrecht agrees, but warns “Yes, the accounting identity must hold, and we need to keep track of that, but it tells us nothing about causation.” No, it tells us correlation. Which, by the way, is what econometrics and quantitative analyses tell us about as well. 

The way you get to causation in economics is by tying theory and context to empirical correlations to explain those relationships. Albrecht’s case is just a very reductive view of the actual logic at play. He continues:

After all, any revenue PQ = Costs + Profits. So P = Costs/Q + Profits/Q. If inflation means that P goes up, it must be “caused” by costs or profits.

No, again. Stop it. This is like saying consumption causes income.

Once again, Albrecht is wrong here. This is like saying higher consumption will correspond to either higher income or lower savings. Additionally, there’s a key difference between the accounting identities for income and for profits: income is broken down into consumption and savings after you receive it, whereas costs and revenues must exist before profits. This makes causal inference in the latter much more reasonable; income is determined exogenously to that formula, but profits are endogenous to their accounting identity. 

In addition to these observations, though, there is also various economic research that supports the idea of seller’s inflation. Some of the best empirical evidence comes from this report from the Federal Reserve Bank of Boston, this one from the Federal Reserve Bank of San Francisco, and this one from the International Monetary Fund.

Another key piece of evidence is a Bloomberg investigation that found that the biggest price increases came from the largest firms. If market power were not a factor, then prices should have been rising roughly proportionally across firms, regardless of their size. If anything, large firms’ economies of scale should have cut down on the need to hike prices. Especially because basic economic theory tells us that when demand increases, companies want to expand supply, which should have resulted in more products (especially from larger firms with more resources) and a corresponding drop in price increases. And yet, what we actually saw was a drop in production from major companies like Pepsi, who opted instead to increase profits by maintaining a shortfall in supply.

That said there’s plenty more, including this from the Kansas City Fed, this from Jacob Linger et al., this from French economists Malte Thie and Axelle Arquié, this from the European Central Bank, this one from the Roosevelt Institute, and more. The Bank of Canada has also endorsed the view. It seems unlikely that the Federal Reserve, European Central Bank and the Bank of Canada have all become bastions of activist economists unmoored from evidence. Perhaps it’s time those denying sellers’ inflation are labeled the ideologues.

The Case Against Sellers Inflation

A Few Notes on Semantics

Before we get into the substance of critiques against sellers’ inflation as a theory, there are a few miscellaneous issues with the framing its opponents often use. There is a tendency for arguments against sellers’ inflation to use loaded words or skewed phrasing to implicitly undermine the legitimacy of people who are spearheading the push for greater scrutiny of corporations as a part of managing inflation.

For instance, Eric Levitz says the debate sees “many mainstream economists against

heterodox progressives.” This phrasing suggests that the debate is between economists on the one hand and proponents of sellers’ inflation on the other. But that’s not true! There are both economists and non-economists on both sides of the issue. Weber is an economist, as are the researchers at the Boston and San Francisco Feds. And others, including James Galbraith, Paul Donovan, Hal Singer, and Groundwork’s Chris Becker and Rakeen Mabud are on board. Notably, Lael Brainard, the head of President Biden’s Council on Economic Advisors (and former Federal Reserve Vice Chair) recently endorsed the view.

Or take how Kevin Bryan, a professor of management at the University of Toronto described Isabella Weber as a “young researcher” who “has literally 0 pubs on inflation.” Weber is old enough to have two PhDs and tenure at UMass and–will you look at that–has written about inflation before! Presenting her as young sets the stage for making her seem inexperienced, which saying she has no publications doubles down on. But his claims are false. Weber wrote a paper with Evan Wasner specifically about sellers’ inflation. But even if we take Bryan’s point as true and ignore the very real work Weber has done on inflation and pricing, Weber still has significant experience with political economy, which helps to explain how institutional power is able to influence markets—exactly the type of thinking sellers’ inflation is based upon.

(And this is nothing compared to the abuse that Weber endured after an op-ed in The Guardian provoked a frenzy of insulting, condescending attacks from many professional economists. For more on that, see Zach Carter’s New Yorker profile of Weber and/or this Twitter thread that documents Noah Smith’s outlash at Weber.)

But even the semantics that don’t get into ad hominem territory are confusing. Here is a list of the topline concerns that Kevin Bryan raised:

Let’s just run through that list of concerns real quick:

1. What does very online even mean? Sellers’ inflation has been embraced as at least a plausible concept by the President of the United States, the European Central Bank, at least two Federal Reserve Banks, and the International Monetary Fund. If that’s not enough legitimization it’s hard to know what would be. This concern makes it sound like the proponents are random reddit users, rather than the serious academics and policy makers they are.
2. I don’t know why the presence of “virulent defenders”  undermines the idea itself. Defenders of traditional economics are virulent as well; Larry Summers called the idea of relating antitrust policy to inflation “science denial.”
3. Traditional monetary policy is often (but not always) associated with centrist, pro-business politics. Also, conventional Industrial Organization theory and even Borkian consumer welfare theories recognize a relationship between price and the structure of firms and markets, so the fundamental ideas are certainly not leftist.
4. That proponents of sellers’ inflation refer to gatekeepers shooting down these theories  seems disingenuous. Everyone who supports sellers’ inflation would probably rather be discussing it because of its merits. But when people like Bryan or Larry Summers refuse to even consider the idea as potentially legitimate, the only option left is to discuss it because of the iconoclasm. If there isn’t a story about changing academic opinions, then the story about challenges to conventional wisdom being shut out by the old guard will have to do.

All of this is to set up the next point in that Twitter thread, which is that “being an Iconoclast is not the same thing as being rigorous, or being right.” True, but dodging the debate by attacking the credibility of an idea’s advocates and taking issue with the method of dissemination are also not the same as being rigorous. Or as being right.

These are just a couple of examples, but opponents of this theory really lean into making it sound like its champions are inexperienced and don’t know what they’re talking about. Aside from being in bad faith, this also indicates a lack of confidence in comparing the contemporary story to that of sellers’ inflation.

The Theoretical Substance of the Opposition

With the semantics out of the way, it’s time to get into the meat of the case(s) against sellers’ inflation. There is no singular, unified case here, more of a constellation of related ideas. 

The first line of defense against theories of sellers’ inflation is asserting that traditional macroeconomics is good and has solved our inflation problem. For example, Chris Conlon of NYU has credited rate hikes with inflation cooling. Conlon says “I for one am glad Powell and Biden admin followed boring US textbook ideas.” But there’s a problem with that: the contemporary economic story does not actually explain how rate hikes can cool inflation without a corresponding rise in unemployment. 

The traditional story starts in the same place as the sellers’ inflation story: macroeconomic shocks create inflation. (Although the traditionalists prefer to emphasize fiscal stimulus as the primary shock, rather than supply chains. The evidence largely indicates that stimulus did have some inflationary effect, but not much. The global nature of inflation also undercuts the idea that American domestic fiscal policy could be the main explanation.) The shock(s) create a supply and demand mismatch, with too much money chasing too few available goods. After that, however, the traditional mechanism for explaining inflation remaining high is supposed to be a wage-price spiral. 

The story goes something like this: the stimulus boosted consumer demand, which overheated the economy, and created more jobs than could be filled, meaning job seekers negotiated higher pay when they took positions. They then spent that extra money which increased demand further, leading to even higher prices as supply couldn’t keep up with demand. Workers saw that their cost of living went up, so they took the opportunity to demand better pay. Companies were forced to give in because they knew in a hot labor market, their workers could leave and earn more elsewhere if employers didn’t meet workers’ demands. Once their wages went up, those workers had more spending power, which they used to buy more things, further increasing demand. That elevated prices more, as the supply-demand mismatch increased. Now workers see their cost of living rising again, so they ask for another raise. If this pattern has held for a few rounds of pay negotiations, maybe workers ask for more than they otherwise would, trying to get out ahead of their spending power shrinking again. Rinse and repeat.

But we know that this story doesn’t describe the inflation that we saw over the last couple of years. Wage growth lagged behind inflation, which indicates that something else had to be driving price increases. Plus the Phillips curve, which is meant to illustrate this relationship between higher employment and higher inflation, has been broken in the US for years. It simply does not show a meaningful positive relationship any more. 

It’s important that we understand this story as a whole. Levitz, in his piece, tries to separate the initial supply-demand mismatch from the wage-price spiral as a way of making the conventional model stack up better against sellers’ inflation. But that doesn’t actually hold because if you omit the wage-price spiral (which Levitz agrees seems dubious), the mainstream macro story has no mechanism for inflation staying high. If it were just a one-time stimulus, that would explain a one-time inflation spike, but once that money is all sent out (say by the end of 2021), there’s no source for further exacerbating the supply-demand mismatch (in say the end of 2022 or early 2023). (Remember, inflation is the rate of change of prices, so if prices spike and then stay the same afterwards, that plateau will reflect a higher price level but not sustained high inflation.) 

Similarly, focusing on only the supply-side shocks provides no reason for why inflation remained elevated long after supply chain bottlenecks had cleared and shipping prices had fallen.

The incentive shift that occurs in concentrated markets is key to understanding this. In a competitive market, firms’ response to a surge in demand is to produce more. But, when the market is concentrated and some level of implicit coordination is possible, increased production is actually against a firm’s best interest, it will just put them back at that first equilibrium from earlier. They want to enjoy the high prices and hang out in the second equilibrium as long as they can

Sellers’ inflation, at least, has an internal mechanism that can explain how we got from one-off shocks to the economy to sustained inflation. Yet its opponents wrongly describe what that mechanism is. Remember the story from earlier: the motive of profit maximization, the means of market power in concentrated industries, and the opportunity of existing inflation. The most basic objection to this mechanism is to mischaracterize it as blaming sustained upward pressure on prices on an increase in the level of greed among corporations. That’s what economist Noah Smith did in a number of blogs that have aged quite poorly. But no one is seriously arguing companies are greedier, only that there is an innate level of greed, which conventional models also assume. 

The strawmanning continues when we get to the means, which is what this Business Insider piece by Tevan Logan of Ohio State does by pointing out how Kingsford charcoal tried and failed to rent seek by raising prices, which just caused them to lose market share to retailers’ generic brands. Exactly! The competition in the charcoal market demonstrates why consolidation is a key ingredient in sellers’ inflation. If Kingsford had a product without so many generic substitutes, then consumers would not have had the chance to switch products. And that’s why a lot of the biggest price hikes occurred with goods like gas, meat, and eggs, all of which are controlled by cartel-esque oligopolies.

The opportunity component actually seems to be a point that there’s broad agreement on. For example, Conlon says that the “idea that firms might raise prices by more than their costs is neither surprising nor uncommon.” He goes on to suggest, however, that this is likely because firms expect costs to continue rising. There’s certainly an element of truth to that, but also consider the basic motivation of corporations: maximizing profits. As a result, if companies expect their costs to rise by, say, 5 percent over the next year and they’re going to adjust prices anyway, why not raise prices by 7 percent, more than enough to offset expected cost increases? 

The theoretical case against sellers’ inflation is, as Eric Levitz noted, “deeply confused;” he was just wrong about which side was getting stumped. 

The Empirical Case Against Sellers’ Inflation

The other side of the opposition to sellers’ inflation focuses on the empirics. To be fair, there’s certainly more work that needs to be done. But that’s about as far as the critique goes. The response is just “the data isn’t there.” I’ll refer you to Groundwork’s excellent work on executives saying that they are raising prices beyond costs, Weber’s paper, the Boston and San Francisco Fed papers, Bloomberg’s findings about larger firms charging higher prices, Linger et al.’s case study of concentration and price in rent increases, and the IMF working paper. 

Setting aside the very real empirical evidence in support of seller’s inflation, the argument about a lack of empirics still gives no reason to default to the traditional model of inflation. Even if we accept a lack of data for sellers’ inflation, we have quite a lot of data that directly contradicts the mainstream story. Surely, something unproven is still preferable to something disproven.

Some economists like Olivier Blanchard have raised questions about methodology and the need for more work. Great! That’s what good discourse is all about; being skeptical of ideas is fine, as long as you don’t throw them out on gut instinct. Unfortunately, critics often simply reject the theory, rather than express skepticism. When they do, however, they often fall into the same methodological gaps in which they accuse “greedflation” proponents. For example, Chris Conlon egregiously conflating correlation and causation of the Fed’s monetary policy. Or Brian Albrecht taking issue with inductive logic while siding with a traditional story that makes up ever more convoluted, illusory concepts. 

So Where Does That Leave Us?

The traditional model of inflation is broken. The Phillips curve is no longer a useful tool for understanding inflation, a wage-price spiral flies in the face of reality, and there’s no viable alternative mechanism for sustained inflation within the demand-side model. Enter sellers’ inflation.

From the same starting point, and drawing on several cornerstone pieces of economic theory, sellers’ inflation is able to provide a consistent vehicle for one-off shocks to create prolonged upward pressure on price levels as firms exercise their market power. The bedrock ideas of the theory are consistent with seminal economic thought from the likes of David Ricardo and even Adam Smith himself and has the support of a number of subject matter experts. Is it a perfect theory? No, but to paraphrase President Biden, don’t compare it to the ideal, compare it to the alternative. More empirics would be preferable, but the case for sellers’ inflation remains much stronger than the case for a fiscal stimulus igniting a wage-price spiral, which is entirely anathema to most of the evidence we do have.

One way or another, inflation is trending down and, by some measures, is closing in on the target rate again. Many have rushed to credit the Federal Reserve for following the textbook course, but they don’t have any internal story about how the Fed could have done that without increasing employment. As Nobel laureate Paul Krugman (who supported rate hikes and once bashed the theory of sellers’ inflation) asked, “Where’s the rise in economic slack?” The conventional story is missing its second chapter and yet its advocates are eager to point to an ending they can’t explain as all the justification they need to avoid reconsidering their priors. One possibility Krugman notes, which Matthew Klein explicates here, is that inflation really was transitory the whole time. The sharp upward pressures were, indeed, caused by one-off shocks from the pandemic, supply chains, and Russian aggression, but the effects had unusually long tails. This theory aligns very well with sellers’ inflation; corporate price hikes could simply be the explanation for such long lasting effects. 

Additionally, as Hal Singer pointed out, the recent drop in inflation corresponds to a downturn in corporate profits. Some, including Noah Smith (in that tweet’s comments), disagree and argue that both lower profits and less inflation are caused by new slack in demand. But that doesn’t really match what we’re seeing across macroeconomic data. True, employment growth has slowed, as has the growth of personal consumption, but that still doesn’t match up with the type of deflationary pressure that we were supposed to need; Larry Summers was citing figures as high as 6 percent unemployment. Plus, the metrics that do show demand softening largely only show that employment and consumption are steadying, not decreasing. On top of that, the contraction in output that The Wall Street Journal identified makes the case for simple shifts in demand driving price levels dubious. Additionally, if a wage-price spiral were at fault, leveling off employment growth would not be enough, the labor market would still be too tight (aka inflationary), hence why we’d need to increase unemployment. 

Good economic theories always need more work to apply them to new situations and produce quality empirics. But pretending that sellers’ inflation is a wacky idea while the conventional macro story maps perfectly onto the economy of the past three years is thumbing your nose at the most complete story available, significant empirical evidence, and centuries of economic theory.

Dylan Gyauch-Lewis is Senior Researcher at the Revolving Door Project.

The Federal Trade Commission’s scrutiny of Microsoft’s acquisition of game producer Activision-Blizzard did not end as planned. Judge Jacqueline Scott Corley, a Biden appointee, denied the FTC’s motion for preliminary injunction, ruling that the merger was in the public interest. At the time of this writing, the FTC has pursued an appeal of that decision to the Ninth Circuit, identifying numerous reversible legal errors that the Ninth Circuit will assess de novo.

But even critics of Judge Corley’s opinion might find agreement on one aspect: the relative lack of enforcement against anticompetitive vertical mergers in the past 40+ years. As Corley’s opinion correctly observes, United States v. AT&T Inc, 916 F.3d 1029 (D.C. Circuit 2019), is the only court of appeals decision addressing a vertical merger in decades. Absent evolution of the law to account for, among other recent phenomena, the unique nature of technology-enabled content platforms, the starting point for Corley’s opinion is misplaced faith in case law that casts vertical mergers as inherently pro-competitive.

As with horizontal mergers, the FTC and Department of Justice have historically promulgated vertical merger guidelines that outline analytical techniques and enforcement policies. In 2021, the Federal Trade Commission withdrew the 2020 Vertical Merger Guidelines, with the stated intent of avoiding industry and judicial reliance on “unsound economic theories.” In so doing, the FTC committed to working with the DOJ to provide guidance for vertical mergers that better reflects market realities, particularly as to various features of modern firms, including in digital markets.

The FTC’s challenge to Microsoft’s proposed $69 billion acquisition of Activision, the largest proposed acquisition in the Big Tech era, concerns a vertical merger in both existing and emerging digital markets. It involves differentiated inputs—namely, unique content for digital platforms that is inherently not replaceable. The FTC’s theories of harm, Judge Corley’s decision, and the now-pending appeal to the Ninth Circuit provide key insights into how the FTC and DOJ might update the Vertical Merger Guidelines to stem erosion of legal theories that are otherwise ripe for application to contemporary and emerging markets.

Beware of must-have inputs

In describing a vertical relationship, an “input” refers to goods that are created “upstream” of a distributor, retail, or manufacturer of finished goods. Take for instance the production and sale of tennis shoes. In the vertical relationship between the shoe manufacturer and the shoe retailer, the input is the shoe itself. If the shoe manufacturer and shoe retailer merge, that’s called a vertical merger—and the input in this example, tennis shoes, is characteristic of a replaceable good that vertical merger scrutiny has conventionally addressed. If such a merger were to occur and the newly-merged firm sought to foreclose rival shoe retailers from selling its shoes, rival shoe retailers would likely seek an alternative source for tennis shoes, assuming the availability of such an alternative.

When it comes to assessing vertical mergers in digital content markets, not all inputs are created equal. To the contrary, online platforms, audio and video streaming platforms, and—in the case of Microsoft’s proposed acquisition of Activision—gaming platforms all rely on unique intellectual property that cannot simply be replicated if a platform’s access to that content is restricted. The ability to foreclose access to differentiated content that flows from the merger of a content creator and distributor creates a heightened concern of anticompetitive effects, because rivals cannot readily switch to alternatives to the foreclosed product. This is particularly true when the foreclosed content is extremely popular or “must-have,” and where the goal of the merged firm is to steer consumers toward the platform where it is exclusively available. (See also Steven Salop, “Invigorating Vertical Merger Enforcement,” 127 Yale L.J. 1962 (2018).)

The 2020 Vertical Merger Guidelines fall short in their analysis of mergers involving highly differentiated products. The guidelines emphasize that vertical mergers are pro-competitive when they eliminate “double marginalization,” or mark-ups that independent firms claim at different levels of the distribution chain. For example, when game consoles purchase content from game developers, they may decide to add a mark-up on that content before offering it for consumer consumption. (In the real world of predatory pricing and cross-subsidization, the incentive to add such a mark-up is a more complex business calculation.) Theoretically, the elimination of those markups creates an incentive to lower prices to the end consumer.

But this narrow focus on elimination of double marginalization—and theoretical downward price pressure for consumers—ignores how the reduction in competition among downstream retailers for access to those inputs can also degrade the quality of the input. Let’s take Microsoft-Activision as an example. As an independent firm, Activision creates games and downstream consoles engage in some form of competition to carry those games. When consoles compete on terms to carry Activision games, the result to Activision includes greater investment in game development and higher quality games. When Microsoft acquires Activision, that downstream competition for exclusive or first-run access to Activision’s games is diminished. Gone is the pro-competitive pressure created by rival consoles bidding for exclusivity, as is the incentive for Activision to innovate and demand greater third-party investment in higher quality games.

Emphasizing the pro-competitive effects of eliminating double marginalization—even if that means lower prices to consumers—only provides half of the picture, because consumers will likely be paying for lower quality games. Previous iterations of the Vertical Merger Guidelines emphasize the consumer benefits of eliminating double marginalization, but they stop short of assessing the countervailing harms of mergers involving differentiated inputs. They should be updated accordingly.

Partial foreclosure will suffice

During the evidentiary hearings in the Northern District of California, the FTC repeatedly pushed back against the artificially high burden of having to prove that Microsoft had an incentive to fully foreclose access to Activision games. In the midst of an exchange during the FTC’s closing arguments, FTC’s counsel put it directly: “I don’t want to just give into the full foreclosure theory. That’s another artificially high burden that the Defendants have tried to put on the government.” And yet, in her decision, Judge Corley conflates the analysis for both full and partial foreclosure, writing, “If the FTC has not shown a financial incentive to engage in full foreclosure, then it has not shown a financial incentive to engage in partial foreclosure.”

Although agencies have acknowledged that the incentive to partially foreclose may exist even in the absence of total foreclosure (see, for instance, the FCC’s 2011 Order regarding the Comcast-NBCU vertical transaction), the Vertical Merger Guidelines do not make any such distinction. Again, that incomplete analysis hinges in part on the failure to distinguish between types of inputs. Take for instance a producer of oranges merging with a firm that makes orange juice. Theoretically, the merged firm might fully foreclose access to oranges to rival orange juice makers, who may then go in search for alternative sources of oranges. Or the merged firm might supply lower quality produce to rival firms, which may again send it in search of an alternative source.

But a merged firm’s ability and incentive to foreclose looks different when foreclosure takes the subtler form of investing less in the functionality of game content with a gaming console, subtly degrading game features, or adding unique features to the merged firm’s platforms in ways that will eventually drive more astute gamers to the merged firm (even though the game in question is technically still available on rival consoles). Such eventualities are perhaps easier to imagine in the context of other content platforms—for example, if news content were less readable on one social media platform than another. When a merged firm has unilateral control over those subtle design and development decisions, the ability and incentive to engage in more subtle forms of anticompetitive partial foreclosure is more likely and predictable.

In finding that Microsoft would not have a financial incentive to fully foreclose access to Activision games, Judge Corley’s analysis hinges on a near-term assessment of Microsoft’s financial incentive to elicit game sales by keeping games on rival consoles. (Never mind that Microsoft is a $2.5 trillion corporation that can afford near-term losses in service of its longer-view monopoly ambitions.) Regardless, a theory of partial foreclosure does not mean that Microsoft must forgo independent sales on rival consoles to achieve its ambitions. To the contrary, partial foreclosure would still allow users to purchase and play games on rival consoles. But it also allows for Microsoft’s incentive to gradually encourage consumers to use its own console or game subscription service for better game play and unique features.

Finally, Judge Corley’s analysis of Microsoft’s incentive to fully foreclosure is irresponsibly deferential to statements made by Activision Blizzard CEO Bobby Kotick that the merging entities would suffer “irreparable reputational harm” if games were not made available on rival consoles. Again, by conflating the incentives for full and partial foreclosure, the court ignores Microsoft’s ability to mitigate that reputational harm—while continuing to drive consumers to its own platforms—if foreclosure is only partial.

Rejecting private behavioral remedies

In a particularly convoluted passage in the district court’s order, the Court appears to read an entirely new requirement into the FTC’s initial burden of demonstrating a likelihood of success on the merits—namely, that the FTC must assess the adequacy of Microsoft’s proposed side agreements with rival consoles and third-party platforms to not foreclose access to Call of Duty. Never mind that these side agreements lack any verifiable uniformity, are timebound, and cannot possibly account for incentives for partial foreclosure. Yet, the Court takes at face value the adequacy of those agreements, identifying them as the principal evidence of Microsoft’s lack of incentive to foreclose access to just one of Activision’s several AAA games.

In its appeal to the Ninth Circuit, the FTC seizes on this potential legal error as a basis for reversal. The FTC writes, “in crediting proposed efficiencies absent any analysis of their actual market impact, the district court failed to heed [the Ninth Circuit’s] observation ‘[t]he Supreme Court has never expressly approved an efficiencies defense to a Section 7 claim.’” The FTC argues that Microsoft’s proposed remedies should only have been considered after a finding of liability at the subsequent remedy stage of a merits proceeding, citing the Supreme Court’s decision in United States v. Greater Buffalo Press, Inc., 402 U.S. 549 (1971). Indeed, federal statute identifies the Commission as the expert body equipped to craft appropriate remedies in the event of a violation of the antitrust laws.

In its statement withdrawing the 2020 Vertical Merger Guidelines, the FTC announced it would work with the Department of Justice on updating the guidelines to address ineffective remedies. Presumably, the district court’s heavy reliance on Microsoft’s proposed behavioral remedies is catalyst enough to clarify that they should not qualify as cognizable efficiencies, at least at the initial stages of a case brought by the FTC or DOJ.

If this decision has taught us anything, it is that the agencies can’t come out with the new Merger Guidelines fast enough. In particular, those guidelines must address the competitive harms that flow from the vertical integration of differentiated content and digital media platforms. Even so, updating the guidelines may be insufficient to shift a judiciary so hostile to merger enforcement that it will turn a blind eye to brazen admissions of a merging firm’s monopoly ambitions. If that’s the case, we should look to Congress to reassert its anti-monopoly objectives.

Lee Hepner is Legal Counsel at the American Economic Liberties Project.

At some point soon, the Federal Trade Commission is very likely to sue Amazon over the many ways the e-commerce giant abuses its power over online retail, cloud computing and beyond. If and when it does, the agency would be wise to lean hard on the useful and powerful law at the core of its anti-monopoly authority. 

The agency’s animating statute, the Federal Trade Commission Act and its crucial Section 5, bans “unfair methods of competition,” a phrase Congress deliberately crafted, and the Supreme Court has interpreted, to give the agency broad powers beyond the traditional antitrust laws to punish and prevent the unfair, anticompetitive conduct of monopolists and those companies that seek to monopolize industries. 

Section 5 is what makes the FTC the FTC. Yet the agency hasn’t used its most powerful statute to its fullest capability for years. Today, with the world’s most powerful monopolist fully in the commission’s sights, the time for the FTC to re-embrace its core mission of ensuring fairness in the economy is now.

The FTC appears to agree. Last year, the agency issued fresh guidance for how and why it will enforce its core anti-monopoly law, and the 16-page document read like a promise to once again step up and enforce the law against corporate abuse just as Congress had intended. 

Why Section 5?

The history of the Section 5—why Congress included it in the law and how lawmakers expected it to be enforced—is clear and has been spelled out in detail: Congress set out to create an expert antitrust agency that could go after bad actors and dangerous conduct that the traditional anti-monopoly law, the Sherman Act, could not necessarily reach. To do that, Congress crafted Section 5 so that the FTC could stop tactics that dominant corporations devise to sidestep competition on the merits and instead unfairly drive out their competitors. Congress gave the FTC the power to enforce the law on its own, to stop judges from hamstringing the law from the bench, as they have done to the Sherman Act. 

As I’ve detailed, the Supreme Court has issued scores of rulings since the 1970s that have collectively gutted the ability of public enforcement agencies and private plaintiffs to sue monopolists for their abusive conduct and win. These cases have names—Trinko, American Express, Brooke Group, and so on—and, together, they dramatically reshaped the country’s decades-old anti-monopoly policy and allowed once-illegal corporate conduct to go unchecked. 

Many of these decisions are now decades old, but they continue to have outsized effects on our ability to policy monopoly abuses. The Court’s 1984 Jefferson Parish decision, for example, made it far more difficult to successfully prosecute a tying case, in which a monopolist in one industry forces customers to buy a separate product or service. The circuit court in the government’s monopoly case against Microsoft relied heavily on Jefferson Parish in overturning the lower court’s order to break Microsoft up. More recently, courts deciding antitrust cases against Facebook, Qualcomm and Apple all relied on decades of pro-bigness court rulings to throw out credible monopoly claims against powerful defendants. 

Indeed, the courts’ willingness to undermine Congress was a core concern for lawmakers when drafting and passing Section 5. Three years before Congress created the FTC, the U.S. Supreme Court handed down its verdict in the government’s monopoly case against Standard Oil, breaking up the oil trust but also establishing the so-called “rule of reason” standard for monopoly cases. That standard gave judges the power to decide if and when a monopoly violated the law, regardless of the language of, or democratic intent behind, the Sherman Act. Since then, the courts have marched the law away from its goal of constraining monopoly power, case by case, to the point that bringing most monopolization cases under the Sherman Act today is far more difficult than it should be, given the simple text of the law and Congress’ intent when it wrote, debated, and passed the act.

That’s the beauty and the importance of Section 5. Congress knew that the judicial constraints put on the Sherman Act meant it could not not reach every monopolistic act in the economy. That’s now truer than ever. Section 5 can stop and prevent unfair, anticompetitive acts without having to rely on precedent built up around the Sherman Act. It’s a separate law, with a separate standard and a separate enforcement apparatus. What’s more, the case law around Section 5 has reinforced the agency’s purview. In at least a dozen decisions, the Supreme Court has made clear that Congress intended for the law to reach unfair conduct that falls outside of the reach of the Sherman Act.

So the law is on solid footing, and after decades of sidestepping the job Congress charged it to do, the FTC appears ready to once again take on abuses of corporate power. And not a moment too soon. After decades of inadequate antitrust enforcement, unfairness abounds, particularly when it comes to the most powerful companies in the economy. Amazon perches atop that list. 

A Recidivist Violator of Antitrust Laws

Investigators and Congress have repeatedly identified Amazon practices that appear to violate the spirit of the antitrust laws. The company has a long history of using predatory pricing as a tactic to undermine its competition, either as a means of forcing companies to accept its takeover offers, as it did with Zappos and Diapers.com, or simply as a way to weaken vendors or take market share from competing retailers, especially small, independent businesses. Lina Khan, the FTC’s chair, has called out Amazon’s predatory pricing, both in her seminal 2017 paper Amazon’s Antitrust Paradox, and when working for the House Judiciary Committee during its big tech monopoly investigation. 

Under the current interpretation of predatory pricing as a violation of the Sherman Act, a company that priced a product below cost to undercut a rival must successfully put that rival out of business and then hike up prices to the point that it can recoup the money it lost with its below-cost pricing. Yet with companies like Amazon—big, rich, with different income streams and sources of capital—it might never need to make up for its below-cost pricing by hiking up prices on any one specific product, let alone the below-cost product. Indeed, as Jeff Bezos’s vast fortune can attest, predatory pricing can generate lucrative returns simply by sending a company’s stock price soaring as it rapidly gains market share. 

If Amazon wants to sell products from popular books to private-label batteries at a loss, it can. Amazon makes enormous profits by taxing small businesses on its marketplace platform and from Amazon Web Services. It can sell stuff below cost forever if it wants to–a clearly unfair method of competing with any other single-product business–all while avoiding prosecution under the judicially weakened Sherman Act. Section 5 can and should step in to stop such conduct. 

Amazon’s marketplace itself is another monopolization issue that the FTC could and should address with Section 5. The company’s monopoly online retail platform has become essential for many small businesses and others trying to reach customers. To wit, the company controls at least half of all online commerce, and even more for some products. As an online retail platform, Amazon is essential, suggesting it should be under some obligation to allow equal access to all users at minimal cost. Of course, that’s not what happens; as my organization has documented extensively, Amazon’s captured third-party sellers pay a litany of tolls and fees just to be visible to shoppers on the site. Amazon’s tolls can now account for more than half of the revenues from every sale a small business makes on the platform. 

The control Amazon displays over its sellers mirrors the railroad monopolies of yesteryear, which controlled commerce by deciding which goods could reach buyers and under what terms. Antitrust action under the Sherman Act and legislation helped break down the railroad trusts a century ago. But if enforcers were to declare Amazon’s marketplace an essential facility today, the path to prosecution under the Sherman Act would be difficult at best. 

Section 5’s broad prohibition of unfair business practices could prevent Amazon’s anticompetitive abuses. It could ban Amazon from discriminating against companies that sell products on its platform that compete with Amazon’s own in-house brands, or stop it from punishing sellers that refuse to buy Amazon’s own logistics and advertising services by burying their products in its search algorithm. The FTC could potentially challenge such conduct under the Sherman Act, as a tying case, or an essential facilities case. But again, the pathway to winning those cases is fraught, even though the conduct is clearly unfair and anticompetitive. If Amazon’s platform is the road to the market, then the rules of that road need to be fair for all. Section 5 could help pave the way. 

These are just a few of the ways we could see the FTC use its broad authority under Section 5 to take on some of Amazon’s most egregious conduct. If I had to guess, I imagine the FTC in a potential future Amazon lawsuit will likely charge the company under both the Sherman Act and the FTC Act’s Section 5 for some conduct it feels the traditional anti-monopoly statute can reach, and will rely solely on Section 5 for conduct that it believes is unfair and anticompetitive, but beyond the scope of the Sherman Act in its current, judicially constrained form. For example, while the FTC could potentially use the Sherman Act to address Amazon’s decision to tie success on its marketplace to its logistics and advertising services, the agency’s statement makes clear that Section 5 has been and can be used to address “loyalty rebates, tying, bundling, and exclusive dealing arrangements that have the tendency to ripen into violations of the antitrust laws by virtue of industry conditions and the respondent’s position within the industry.”

Might this describe Amazon’s conduct? Very possibly, but that will ultimately be up to the FTC to decide. Suing Amazon under both statutes would invite the court to make better choices around the Sherman Act that are more critical of monopoly abuses, and help develop the law so that the FTC can eagerly embark on its core mission under Section 5: to help ensure markets are fair for all.

Ron Knox is a Senior Researcher and Writer for ILSR’s Independent Business Initiative.

For those not steeped in antitrust law’s treatment of single-firm monopolization cases, under the rule-of-reason framework, a plaintiff must first demonstrate that the challenged conduct by the defendant is anticompetitive; if successful, the burden shifts to the defendant in the second or balancing stage to justify the restraints on efficiency grounds. According to research by Professor Michael Carrier, between 1999 and 2009, courts dismissed 97 percent of cases at the first stage, reaching the balancing stage in only two percent of cases.

There is a fierce debate in antitrust circles as to what constitutes a cognizable efficiency. In April, the Ninth Circuit upheld Judge Yvonne Gonzalez Rogers’ dismissal of Epic Game’s antitrust case against Apple on the flimsiest of efficiencies.

A brief recap of the case is in order, beginning with the challenged conduct. Epic alleged Apple forces certain app developers to pay monopoly rents and exclusively use its App Store, and in addition requires the use of Apple’s payment system for any in-app purchases. The use of Apple’s App Store, and the prohibition on a developer loading its own app store, as well as the required use of Apple’s payment system are set forth in several Apple contracts developers must execute to operate on Apple’s iOS. The Ninth Circuit found that Epic met its burden of demonstrating an unreasonable restraint of trade, but Epic’s case failed because Apple was able to proffer two procompetitive rationales that the Appellate Court held were non-pretextual and legally cognizable. One of those justifications was that Apple prohibited competitive app stores and required developers to only use Apple’s payment system because it was protecting its intellectual property (“IP”) rights.

Yet neither the District Court nor the Ninth Circuit ever tell us what IP Apple’s restraints are protecting. The District Court opinion states that “Apple’s R&D spending in FY 2020 was $18.8 billion,” and that Apple has created “thousands of developer tools.” But even Apple disputes in a recent submission to the European Commission that R&D has any relationship to the value of IP: “A patent’s value is traditionally measured by the value of the claimed technology, not the amount of effort expended by the patent holder in obtaining the patent, much less ‘failed investments’ that did not result in any valuable patented technology.”

Moreover, every tech platform must invest something to encourage participation by developers and users. Without the developers’ apps, however, there would be few if any device sales. If all that is required to justify exclusion of competitors, as well tying and monopolization, is the existence of some unspecified IP rights, then exclusionary conduct by tech platforms for all practical purposes becomes per se legal. Plaintiffs challenging these tech platform practices on antitrust grounds are doomed from the start. Even though the plaintiff theoretically can proffer a less restrictive alternative for the tech platform owners to monetize their IP, this alternative per the Ninth Circuit must be “virtually as effective” and “without increased cost.” Again, the deck was already stacked against plaintiffs, and this decision risks making it even less likely for abusive monopolists to be held to account.

Ignoring the Economic Literature on IP

In addition to bestowing virtual antitrust immunity on tech platforms in rule-of-reason cases, there are important reasons why IP should never qualify as a procompetitive business justification for exclusionary conduct. Had the Ninth Circuit consulted the relevant economic literature, it would have learned that IP is fundamentally not procompetitive. Indeed, there is virtually no evidence that patents and copyrights, particularly in software, incentivize or create innovation. As Professors Michele Boldrin and David Levine conclude, “there is no empirical evidence that [patents] serve to increase innovation and productivity…” This same claim could be made for the impact of copyrights as well. Academic studies find little connection between patents, copyright, and innovation. Historical analysis similarly disputes the connection. Surveys of companies further find that the goals of patenting are not primarily to stimulate innovation but instead the “prevention of rivals from patenting related inventions.” Or, in other words, the creation of barriers to entry. Innovation within individual firms is motivated much more by gaining first-mover advantages, moving quickly down the learning curve or developing superior sales and marketing in competitive markets. As Boldrin and Levine explain:

In most industries, the first-mover advantage and the competitive rents it induces are substantial without patents. The smartphone industry-laden as it is with patent litigation-is a case in point. Apple derived enormous profits in this market before it faced any substantial competition.

Possibly even more decisive for innovation are higher labor costs that result from strong unions. Other factors have also been found to be important for innovation. The government is responsible for 57 percent of all basic research, research that has been the foundation of the internet, modern agriculture, drug develop, biotech, communications and other areas. Strong research universities are the source of many more significant innovations than private firms. Professor Margaret O’Mara’s recent history of Silicon Valley demonstrates how military contracts and relationships with Stanford University were absolutely critical to the Silicon Valley success story. Her book reveals the irony of how the Silicon Valley leaders embraced libertarian ideologies while at the same time their companies were propelled forward by government contracts.

In an earlier period, the antitrust agencies ordered thousands of compulsory licensing decrees, which were estimated to have covered between 40,000 and 50,000 patents. Professor F.M. Scherer shows how these licenses did not lead to less innovation. Indeed, the availability of this technology led to significant economic advances in the United States. In his book, “Inventing the electronic Century,” Professor Alfred Chandler documents how Justice Department consent decrees with RCA, AT&T and IBM, which made important patents available to even rivals, created enormous competition and innovation in data processing, consumer electronics, and telecommunications. The evidence is that limiting or abolishing patent protection has far more beneficial impact than its protection, let alone allowing its use to justify anticompetitive exclusion.

Probably the weakest case for the economic value of patents exists in the software industry. Bill Gates, reflecting on patents in the software industry said in 1991 that:

If people had understood how patents would be granted when most of today’s ideas were invented and had taken out patents, the industry would be at a complete standstill today…A future start-up with no patents of its own will be forced to pay whatever price the giants choose to impose.

The point is that there is very little support for antitrust courts to elevate IP to a justification for market exclusion. The case for procompetitive benefits from patents is nonexistent, while much evidence supports an exclusionary motive for obtaining IP by big tech firms.

As Professors James Bessen and Michael Meurer show, patents on software are particularly problematic because they have high rates of litigation, are of little value, and many appear to be trivial. In particular, Bessen and Meurer argue that many software patents are obvious and therefore invalid. Moreover, the claim boundaries are “fuzzy” and therefore infringement is expensive to resolve.

When asserted in a rule-of-reason case under the Apple precedent, software patents would seem to escape all scrutiny. The defendant would simply assert IP protection without any obligation to reveal with specificity the nature of the IP. The plaintiff then would have no way to challenge validity or infringement or to be able to demonstrate an ability to design around the defendant’s IP. Instead, they must show, per the Ninth Circuit’s opinion, that there is a less restrictive way for the plaintiff to be paid for its IP that is “virtually as effective” and “without increased cost.” This makes no sense at all. It would make far more sense to force any tech platform that seeks to exclude competitors on the basis of IP to simply file a counterclaim to the antitrust complaint alleging patent or copyright infringement and seeking an injunction that excludes the plaintiff. In such a case, the platform’s IP can be tested for validity. The exclusion by the antitrust defendant can be compared to the patent grant, and patent misuse can be examined.

Ignoring Its Own Precedent

It is unfortunate that the Apple court did not take seriously the Circuit’s earlier analysis in Image Technical Services v. Eastman Kodak. There, Kodak defended its decision to tie its parts and service in the aftermarket by claiming that some of its parts were patented. The Court noted that “case law supports the proposition that a holder of a patent or copyright violates the antitrust laws by ‘concerted and contractual behavior that threatens competition.’” The Kodak Court’s example of such prohibited conduct was tying, a claim made by Epic. Because we know that there are numerous competing payment systems, and because nothing in the Ninth Circuit’s opinion addresses the specifics of Apple’s IP that must be protected, it is likely the case that Apple does not have blocking patents that preclude use of alternative payment systems. And if this is the case, Epic alleged the very situation where the Ninth Circuit earlier (citing Supreme Court precedent) found that patents or copyrights violate the antitrust laws. Moreover, the Ninth Circuit thought it was significant that Kodak refused to allow use of both patented or copyrighted products and non-protected products. This may also be true of Apple’s development license in the Epic case. The Court didn’t seem to think that an inquiry into what IP was licensed by these agreements to be significant.

In sum, use of IP as a procompetitive business justification has no place in rule-of-reason cases. There is no evidence IP is procompetitive, and use of IP as a business justification relieves the antitrust defendant of the burden to demonstrate validity and infringement required in IP cases. It further stacks the deck in rule-of-reason cases against plaintiffs, and unjustly favors exclusionary practices by dominant tech platforms.

Mark Glick is a professor in the economics department of the University of Utah.

The mid-sized town of Springfield maintained a speed limit of 25 miles per hour on a one-mile stretch of Main Street that was home to both an elementary school and a middle school. The speed limit had been in force for decades. Children as young as three walked on the sidewalks and sometimes unexpectedly darted across the street. By forcing drivers to slow down, the speed limit minimized the risk of serious injury and death. While collisions occurred occasionally on this busy road, no pedestrian, driver, or passenger, had ever suffered a serious injury. For years, the 25-mph limit attracted little attention, positive or negative, and was accepted by residents as a fact of life in the town.

One day though, a group of prominent businesspeople and professionals petitioned for a change. These local notables called on the mayor to eliminate the speed limit because it contributed to congestion on the important road and delayed drivers from reaching their destination. In their petition, they contended that removal of the speed limit would allow people to spend less time on the road and more time being productive at their place of work and socializing with their near and dear. They commissioned an economic study that concluded that removing the speed limit would allow children visiting their grandparents to spend less time in the car and more time with their doting grandma or grandpa. Attempting to preempt concerns about road safety, they claimed the speed limit was not necessary, as drivers would naturally be concerned for the safety of kids. They argued that police could pull drivers over for reckless behavior or for driving unsafely. Further, drivers who negligently caused injuries or deaths would face serious consequences, including prison. That threat would deter dangerous driving.

Given the standing of opponents of the speed limit, the mayor soon after lifted speed restrictions on the road. He declared, “The 25 mph may have worked when we led more leisurely lives and could afford to spend an extra 10 or 15 minutes in traffic. But that is the past, we are all busy people now. The speed limit is an impediment to the smooth flow of traffic today.” He did not dismiss concerns about traffic safety and directed the town’s police force to pull over drivers who drive in an “unreasonably unsafe manner.”

The new system appeared to work fine at first. Vehicles proceeded past the schools much faster than they had previously. Congestion was a thing of the past. As proponents of the repeal predicted, the people of Springfield were getting to spend a little more time with their coworkers, friends, and families.

But the repeal of the speed limit was not an unalloyed benefit for the town. With a local bottleneck relieved, many people stopped using the town’s famous monorail and got into their cars, trucks, and vans instead. Many living near Main Street who had previously walked to nearby grocery stores and restaurants started driving. Although traffic congestion on Main Street had been addressed, it had a cost. Rescinding the speed limit encouraged more driving and increased air pollution.

Some drivers who scrupulously followed the 25-mph speed limit began to drive more aggressively. Because there was no speed limit, some felt emboldened to drive past the school at 50 mph or faster, so long as they couldn’t spot any children in harm’s way. That speed was not illegal under the letter of the law unless an observing police officer deemed it to be “unreasonably unsafe.” No one knew quite what this meant. It was rumored that police officers considered the time of day, level of traffic, weather conditions, the proximity of children to the road, and the importance of driver’s trip before passing judgment. When teachers at the elementary school complained that the sound of cars sometimes traveling at 70 mph scared the young children, the mayor said, “While we can’t quantify the subjective terror felt by kids, we can measure the shortened commutes for Springfielders.” To keep their children safe, the elementary school ended recess and other outdoor activities for all children up through fourth grade.

Enforcement of the new “unreasonably unsafe” standard for the rule also drew concern. When a local executive was pulled over for driving 80 mph, the police officer, whose conversation was recorded on a bodycam, let him off with a friendly “warning,” obsequiously saying, “I get it, sir. You are a busy man. If we had kept the 25 mph as some wanted, you’d be spending time stuck here, instead of tending to your important work.”

But others were not so lucky. Black drivers, especially those driving late model cars, were frequently pulled over for going 30 mph. That was only five miles per hour faster than the old speed limit, but many officers deemed it “unreasonably unsafe.” The discriminatory pattern of enforcement was impossible to ignore.

Proponents of the new approach dismissed growing criticisms. They said the improved flow of traffic trumped other considerations. They conceded fewer people were taking the monorail and walking for short trips, but insisted these are not “traffic-related” issues. The city should address these problems though other measures, they said. Moreover, discriminatory enforcement was not inherent to the new standard and could be resolved. The mayor pledged to improve police training and socialize officers “not to see color” in performing their duties.

But after one deadly incident, even the strongest proponents were at a loss for defenses. One afternoon, the 20-year-old scion of a local real estate magnate took his new red Ferrari out for a spin. He wanted to test its acceleration and went from zero to 60 mph on Main Street in four seconds. Focused on his immediate aim, he did not notice a 12-year-old schoolboy who had run into the street to retrieve an errant soccer ball and struck him. The boy was killed instantly. The local prosecutor pledged to prosecute the driver and seek the maximum possible sentence. But whatever the result, no prison sentence would bring the young boy back to life or provide solace to his parents and siblings.

The tragic death of the child made clear to almost everyone that the new system was a failure. While its proponents rationalized or offered solutions for increased driving, forcing schoolchildren indoors, and discriminatory enforcement, they had no ready answers for the clearly avoidable fatality. The old 25-mph speed limit had created modest inconveniences, but it would have prevented the fatal accident. In addition to allowing schoolchildren to play safely outside, the old rule encouraged people to use public transit and to walk and reduced the potential for subjective and discriminatory law enforcement. It was an example of what the economist Gardiner Means called a good “canalizing rule.”

For the past 40 years, the federal judiciary has followed the model of Springfield and overturned or weakened bright-line antitrust rules for mergers and other business practices. For instance, the Supreme Court held that manufacturers dictating resale prices on their goods to retailers and wholesalers through contract—an example of a “vertical restraint” imposed on a firm at another level in the same supply chain—was no longer a categorically illegal practice. In place of such clear “speed limits,” it adopted the rule of reason as its default analytical framework—a standard that requires case-by-case assessment of “effects” and has practically legalized many formerly restricted business practices.

Much like Springfield’s decision gave license to residents to drive as they wish on Main Street, the courts have granted corporate executives broad discretion to compete and grow their enterprises as they wish. In theory, this case-by-case approach allows business leaders to engage in socially beneficial mergers and to use vertical restraints to protect against harmful free riding. But as the story of Springfield shows, legal rules are used not only to decide specific cases but also to structure individual and organizational behavior.

Congressional and regulatory enactment of bright-line rules on mergers and unfair practices would channel business strategy in different and better directions. Strong rules against mergers, such as a general prohibition on all acquisitions by firms with more than a 30% share in any market or $10 billion in total assets, might sacrifice the occasional beneficial consolidation (there are ample grounds to be skeptical of such losses to be sure). Yet these bright-line rules would channel business strategy toward internal expansion and development of new production methods. Similarly, a prohibition on non-compete clauses could prevent an employer from stopping an employee from departing for a rival after receiving valuable training on the job, but it would also encourage employers to retain workers through regular raises and promotions and fair treatment and to use more targeted tools for protecting their proprietary information. And bright-line rules for antitrust enforcement would limit governmental discretion and the ability of unscrupulous officials to reward friendly businesses and punish their perceived enemies. These rules would deprive the CEOs of the largest corporations of autonomy and surely make them unhappy. But for the rest of us, life would be better.

The announced PGA-DP World Tour-LIV Golf “partnership” (read, merger) has reverberated throughout the sporting world, sending shockwaves across not only the golf industry but the sports world as well. ESPN reported players reacting with “complete and utter shock” at the announcement, as did, much of the sports media, calling the news “stunning”.

Let’s clear the air. None of this was surprising in the slightest.

The golf industry merger is but the latest example of, as the Propellerheads and the legendary Dame Shirley Bassey melodically put it, history repeating. Sports historians and economists have recounted the episodes of consolidation that have precipitated the modern-day U.S. professional sports leagues. These commercial joinders all share a common theme: a response by an entrenched, dominant entity faced with the threat of entry and the prospect of seeing its monopsony power diluted by the crucible of competition.

The real question with which golfers, as the primary interested party, should concern themselves is quo vadem: where do we go from here? This article aims to shed some light on that question by first recounting what has befallen athletes in other leagues following similar consolidation, evaluating what similar or differing conditions characterize this golf industry consolidation, then evaluating what path such conditions presage for current players. Finally, I address what steps players could take to protect their interests from any wage suppression that may result from the merger.

Wage suppression warrants concern here for the same reason it has in other sports cases (not to mention the broader labor market): the leverage of monopsony power. Monopsony power in a labor market reflects an entity’s ability to restrain wages below the levels that would prevail under competitive conditions. Such actions reflect worker exploitation, defined as the ability to reduce wages below the marginal revenue product (MRP) of labor (the marginal revenues generated by the next unit of labor). When faced with an upward sloping labor supply curve, a firm will set its wages at MRP, just as, under similar competitive conditions in an output market, a seller will set its price equal to marginal cost.

As the FTC has observed, the exercise of monopsony power in input markets reflects the mirror image of monopoly power in output markets. Historically, the PGA Tour has behaved like a monopsonist: it unilaterally set Tour members’ pay below competitive levels, reduced the input of labor, and excluded competitors. (Those familiar with the NCAA antitrust litigation will immediately notice its similarities to the PGA.)

The PGA Tour’s actions mirror those of other entities that held the same power over workers. Faced with the possibility of increased competition for labor, a monopsonist will commonly seek to either 1) prevent such entry or 2) acquire the entrant, and thus reduce or eliminate workers’ ability to choose among alternatives. Prior to the announced merger, the PGA Tour sought to do just that, by threatening golfers who considered joining LIV.

On that note, let’s start with a quick trip down memory lane to acquaint ourselves with how much this latest merger resembles previous sports industry consolidation.

In 1962, the AFL sued the NFL, alleging the latter had monopolized the market for professional football leagues; the district court ruled against the AFL, finding that the NFL did not have monopoly power. In the following year, the 4^th Circuit Court of Appeals affirmed the lower court’s finding against the AFL, ending the litigation. In June of 1966, following a series of secret meetings, the two leagues announced the decision to merge. The September 1975, Congressional oversight hearings on the NFL labor-management dispute provide some details of the effects on labor. In his statement, Ed Garvey, Director of the NFL Players’ Association president at the time explained that, between the birth of the AFL and 1966, little if any bargaining between labor and management in the NFL occurred, noting that “Because of competition for player services, salaries nearly tripled, and the NFL was anxious to institute some fringe benefits to attract players to the NFL. When merger plans were announced in the summer of 1966, efforts were mounting within the NFLPA to oppose the merger, but Congress exempted the merger before there could be any serious opposition mounted.” The exemption refers to Congress’ statutory enshrinement of monopoly and monopsony power for major sports leagues in the form of 15 USC Ch. 32, §1291, “Exemption from antitrust laws of agreements covering the telecasting of sports contests and the combining of professional football leagues.” The provision passed in 1966 amended the Sports Broadcasting Act of 1961 to exempt merging sports leagues from antitrust laws as long as the merger “increases rather than decreases the number of football clubs.”

A similar scenario played out in the history of professional basketball in the United States, in which the rise of the American Basketball Association (ABA) militated against the exercise of monopsony power by owners of National Basketball Association (NBA) teams. As sports economist David Berri observed in the Antitrust Bulletin, while NBA players received a wage share of approximately 27 percent in 1970, “By 1972–1973, the NBA had to increase salaries to prevent players from joining a league that clearly was a legitimate competitor.” At the time, the leagues considered merging; however the existence of a reserve clause that gave a team control over a player’s mobility represented an untenable situation for the athletes, who sued to block it in 1970. (Robertson v. National Basketball Association, 556 F.2d 682 (2d Cir. 1977). The 1976 settlement culminated in the Oscar Robertson Rule and resulted in the elimination of the reserve clause (also known as the “option clause”) and rise of free agency rules that exist today.

National Hockey League (NHL) player wages also benefited from inter-league competition. Like other professional sports leagues, the NHL included a reserve clause in player contracts, bestowing exclusive negotiating rights on the original team with which a player signed. In the early 1970s, the World Hockey Association (WHA) entered the market, seeking to fill demand for teams in various major cities that represented relatively smaller markets than those having NHL teams.

Like LIV Golf, the WHA attracted top players by offering greater mobility and the potential for more lucrative compensation. As a result, it signed sixty-seven players, including the legendary Bobby Hull, in its inaugural 1972 season; for the following year, the WHA also signed another hockey superstar, Gordie Howe. While NHL sued to block the players from leaving from the WHA (just as the PGA threatened potential LIV signees with expulsion), a Massachusetts district court denied injunctive relief, allowing two stars, Gerry Cheevers and Derek Sanderson to join the WHA. Concurrently, a federal court in Philadelphia enjoined the NHL from taking legal action to enforcing its reserve clause. (In total, litigation between the WHA and NHL spanned four separate suits.)The following year, 1973, the NHL abolished the reserve clause, replacing it with a one-year option. The 1975 collective bargaining agreement between the NHL and its players’ association included additional modifications, including guaranteed contracts and enabling players to enter into contracts without an option year. Negotiations between the NHL and WHA culminated in the June 22, 1979 NHL expansion, where four WHA teams, the Edmonton Oilers, New England (now Hartford) Whalers, Quebec Nordiques (now Colorado Avalanche), and Winnipeg Jets received NHL expansion slots and the rest of the WHA folded.

At this point, the common thread between the NFL, NBA, NHL and Major League Baseball merits emphasis, as it highlights the dichotomy between the PGA Tour and other major professional sports leagues. While athletes in other leagues have the benefit of a union and a collective bargaining agreement between the players’ association and the league, PGA Tour athletes do not. (Somewhat ironically, the caddies themselves do: The Association of Professional Tour Caddies.) The presence of a union could have cautioned Tiger Woods and Rory McIlroy, who apparently turned down a combined $1.5 billion from LIV only to now find themselves in the same position but sans the lucrative offer.

In response to the threat of entry, the PGA adopted a tripartite strategy that was one part carrot, one part stick, and one part a morality play. The latter, of course, referenced the source of LIV’s funding: a Saudi regime run by crown prince Muhammad bin-Salman, whom the US government found approved the brutal murder of Washington Post journalist Jamal Khashoggi. Of course, the merger exposed the lack of sincerity in such appeals. The carrot refers to the fact that the PGA Tour previously announced more than $100 million in purse increases for 2022, an apparent response to the threat of competition that resembles similar action by the NBA and NFL discussed above. Indeed, the PGA Commissioner acknowledged the treat to the Tour’s margins that LIV represented. As CBS Sports Adam Silverstein reported, Monahan explained that “f you just look at the environment we’re in, the PIF was controlling LIV, and we were competing against LIV.It felt good about the changes we’d made and the position we were in, but ultimately, to get the competitor off the board — to have them exist as a partner, not as an owner…” The PGA also leveraged its stick, banning golfers who participated in LIV tournaments.

The PGA Tour’s threats of lifetime bans against players who sought to avail themselves financially of LIV’s competition with the PGA Tour also bears close resemblance to the reserve clause that existed in baseball (and other major sports). The reserve clause in a contract bound a professional baseball player to a single team; prior to 1887, baseball contracts stipulated that the player agreed to “abide by the constitution and bylaws of organized baseball” a phrase remarkably similar to the language used by PGA Tour Commissioner Jay Monahan in his letter to tour members reminding them that “You have made a different choice, which is to abide by the Tournament Regulations you agreed to when you accomplished the dream of earning a PGA TOUR card.”

The 1889 version of the baseball contract included a clause that permitted a team to “reserve” a player for the following season at a rate at least as high as the player’s current-year compensation. As economists James Quirk and Rodney Fort explained in their book “Pay Dirt: The Business of Professional Sports Teams”, interpretation of the clause effectively granted the owners a perpetual option to retain a player’s services over his entire career, particularly considering that owners agreed not to hire players from other teams’ reserve lists. Subsequently, following the Supreme Court decision in Federal Baseball Club v. National League, 259 U.S. 200 (1922), which granted baseball’s antitrust exemption, the following clause was incorporated in every player contract from the 1920s into the 1950s:

[If] the player and the club have not agreed upon the terms of such contract [for the next playing season], then … the club shall have the right to renew this contract for the period of one year on the same terms, except that the amount payable to the player shall be such as the club shall fix in said notice…

This incarnation of the reserve clause lasted nearly a century, binding a player to a team and prohibiting his ability to obtain better wages elsewhere. During the 1957 Congressional hearings on organized professional team sports, Major League Baseball reported revenues from the previous five years. In a recent paper, sports economist David Berri analyzed these data, showing that, during this period, MLB paid less than 25% of the revenues to players, a clear indication of the wage-restraining effects of the reserve clause. The first major cracks in owners’ hegemony over labor came at the hands of Golden Glove winner Curt Flood in 1969. Upon being traded from St. Louis to the Philadelphia Phillies and told that he had no say in the matter, Flood filed suit, Flood v. Kuhn, 407 U.S. 258 (1972), telling Commissioner Bowie Kuhn that “I do not regard myself as a piece of property to be bought or sold.” While the Supreme Court ruled 5-3 in 1922 to exempt baseball from the jurisdiction of the Sherman Act, an agreement between Major League Baseball and the players’ union granted free agency to players with at least six years of tenure beginning after 1976. This agreement accorded greater bargaining power to players and permitted them to capture a higher wage share. The eponymous 1998 Curt Flood Act revoked baseball’s antitrust exemption as it related to the employment of players, allowing them to enjoy the fruits of competition for their services.

More recently, a group of approximately 1,200 fighters who sued the Ultimate Fighting Championship (UFC) mixed martial arts (MMA) promotion company, won class certification. The Plaintiffs alleged that Zuffa, Inc. (d/b/a, UFC) sought to exclude competition from other promoters in an attempt to exert monopsony power to restrain fighters’ wages. In doing so, Plaintiffs claimed that 1) Defendants’ use of long-term exclusive contracts prevented them from competing elsewhere, 2) Defendants leveraged market power over the labor to force fighters to resign contracts, effectively locking them into perpetuity, 3) acquiring and terminating rival MMA promoters. Documents revealed in the litigation indicated that fighters’ wage share is only approximately 17 percent. Critically, this figure represented a substantial drop from the approximately 29 percent wage share that existed prior to the UFC’s acquisition of Strikeforce.

So what does all this presage for golfers’ futures? Absent potential regulatory intervention, nothing positive.

Two primary external forces counteract the exercise of monopsony power: 1) competitive entry and 2) collective bargaining. While lacking the latter, golfers benefited from the former in the form of LIV, which exposed the PGA’s ability to restrain compensation below competitive levels as evidenced by the purse increases once LIV became a viable competitor. Post-merger, golfers have neither and now find themselves facing an even stronger monopsonist. If golfers hope to maintain any semblance of a fair wage split with the newly formed industry leviathan, their primary recourse is organization into a Professional Golfers Union that can bargain collectively on their behalf. Otherwise, the outcome will mirror the UFC and the state of inequality in American society generally: a small cadre of patricians surrounded a multitude of workers fighting over table scraps. Of course, the newly merged entity will fight tooth and nail against such organization; those with market power seldom if ever concede it willingly. Nonetheless, one would do well to remember that the NBA has crossed swords with its Players’ Association numerous times, yet both sides have prospered. And so has the game.

Ted Tatos teaches econometrics at the University of Utah and regularly consults on economic issues involving antitrust, intellectual property, labor issues, and others. He can be reached at ttatos@eaecon.com.

Many in the anti-monopoly movement are celebrating the recent DOJ victory against the Northeast Alliance (NEA). It’s a rare enforcement action in the airline industry, and a rare decision that gives a clear victory to the DOJ.

But I will not be celebrating. What follows is my attempt to read the potential tea leaves from the NEA decision in looking forward to the JetBlue/Spirit merger. The TLDR: Don’t count the JetBlue/Spirit merger down and out based upon the NEA decision. While I’m pleased with DOJ’s victory, one step forward does not eradicate the giant leaps backward that have befallen the airline industry in the past few decades.

Fake Remedies and Abdication of Responsibility

In every instance of past consolidation in the airline industry, the DOJ (a) did nothing; (b) compelled the divestiture of slots and gates; or (c) filed a complaint, then got spanked by politicians into settling for slots and gates.

A couple of examples should suffice.

In 2013, the DOJ entered into a consent decree in the proposed merger of U.S. Air and American Airlines. The remedy, as is often the case, focused on the sale of slots and gates at LaGuardia Airport, as well as gates at other airports.

Yet the complaint stated that competition would have been enhanced with the emergence from bankruptcy of American Airlines as a standalone competitor. The complaint also argued that the industry had suffered from consolidation (from nine to five majors), and that fares increased due to that consolidation.

So, it’s only natural that slots and gates at a few airports would fix that, right? Not according to the complaint. Head-to-head competition would be eradicated. And it’s hard to start a network carrier, I might add, even with access to slots and gates.

One other example is in order. In the United-Continental merger, despite 18 overlapping markets (routes), the DOJ closed the investigation into the merger with the parties’ agreeing to sell slots and other assets in Newark to Southwest Airlines.

Slots and gates solve all ills in the airline industry. Got it. Unless you’re in one of those overlapping markets, where there is no obligation of the winning bidder of said slot to service the same route. Or unless you’re in rural America, where service has either disappeared completely or is much more expensive.

I don’t want to rehash the entire history of consolidation in the airline industry or the significant role that DOJ has played in shaping that development, but these two transactions are just a few on the path of placating the airlines by essentially creating a “tax” on the transaction that did not cure the anticompetitive ills of the mergers whatsoever. I do not, by the way, blame my former colleagues on staff at the DOJ for this. My blame goes higher up than the trial attorneys and paralegals who work those cases.

Given these data points, does the decision by Judge Sorokin represents a “sea change” in antitrust enforcement in the airline industry? I think not. Let’s break the decision down by some key elements: Concentration, efficiencies, and entry. I’ll also add a comment about the role of economists in that analysis.

Concentration Is Not New

Judge Sorokin discovered what many of us know already: “The industry is highly concentrated. Four carriers control more than eighty percent of the market for domestic air travel: the three GNCs (American, Delta, and United) and Southwest. The remainder of the market—less than twenty percent—is generally split among nine smaller carriers.” 

At mainstream antitrust conferences, where consultants are rewarded for taking positions aligned with the most powerful, one might find a variety of people telling you that the airline industry is not concentrated. Since 2001, American bought TWA, U.S. Airways bought America West, American merged with U.S. Air, Delta with Northwest, United with Continental, and Southwest with AirTran. The full list can be found here. In each instance, DOJ was complicit. And, by the way, the market was highly concentrated before those decisions. Take DOJ’s complaint in U.S Air/American: “In 2005, there were nine major airlines. If this merger were approved, there would be only four. The three remaining legacy airlines and Southwest would account for over 80% of the domestic scheduled passenger service market, with the new American becoming the biggest airline in the world.” Indeed, many of the HHIs in the markets in question in that merger exceeded 2,500, or what the Merger Guidelines consider to be “highly concentrated markets.” 

After that merger, others followed. Alaska and Virgin merged, Southwest bought some locals, and United bought ExpressJet.

So it is only natural that the DOJ allege concentrated markets in its complaint in the JetBlue/Spirit Merger: According to the agency’s calculations, the merger increases concentration in 150 routes, including 40 nonstop routes. The complaint alleges the risk of heightened coordination among the remaining airlines as well and lower innovation in service.

In short, there is nothing new on the concentration side. ‘Twas ever thus (at least the past 20 years). This suggests that high concentration is not predictive of stopping an anticompetitive merger.

Efficiencies Arising from the Elimination of Competition

Judge Sorokin was skeptical of the claimed efficiencies in the NEA: “American’s Chief Executive Officer (‘CEO’) described the numerous challenges created by mergers, as well as the “inordinate amount of management time and attention” required to integrate two airlines.”  Prior mergers touted those great efficiencies. Some during that time period (me included) argued that those efficiencies do not pan out, take longer to achieve, and may be ethereal.

But the parties to the NEA claimed efficiencies even absent merger. Judge Sorokin rejected the claimed efficiencies, ruling they were insufficient to rebut the claimed harms in the NEA litigation. As Judge Sorokin pointed out: “These features arise only if the defendants mimic one carrier, elect not to compete with one another, and cooperate in ways that horizontal competitors normally would not. This elimination of competition negatively impacts the number and diversity of choices available to consumers in the northeast. As such, ‘benefits’ arising in this way cannot justify the defendants’ collusion.”

It’s hard to read that conclusion without thinking about the claims of merger efficiencies in the past. It suggests that the efficiency claim would have been stronger if the NEA members had merged rather than formed an alliance. If that’s the right reading, that could spell trouble for the DOJ in JetBlue/Spirit.

So again, nothing new here, except it was defendants arguing that merger efficiencies are hard to achieve, and in essence claimed that the NEA achieved the same efficiencies without requiring integration. Again, the U.S. Air/American complaint was skeptical of such purported efficiencies: “There are not sufficient acquisition-specific and cognizable efficiencies that would be passed through to U.S. consumers to rebut the presumption that competition and consumers would likely be harmed by this merger.”

Often times, those statements are made in hopes of “out of market” efficiencies counting in favor of the transaction. As the Commentary to the Merger Guidelines states, “Inextricably linked out-of-market efficiencies, however, can cause the Agencies, in their discretion, not to challenge mergers that would be challenged absent the efficiencies. This circumstance may arise, for example, if a merger presents large procompetitive benefits in a large market and a small anticompetitive problem in another, smaller market.” While that Commentary goes against everything that Philadelphia National Bank stands for, it is nonetheless continued policy. Just ignore the citation to Philadelphia National Bank in the complaint. That’s on presumptions.

Nonetheless, the complaint in Jet Blue/Spirit states that “Defendants have not yet described any procompetitive efficiencies in the alleged relevant markets.”

The American Antitrust Institute has been shouting this point for at least a decade. Take Diana Moss’s paper in 2013, explaining that: “System integration (e.g., integrating reservation and IT systems and combining workforces) in some past mergers has been difficult, protracted, and more costly than what was predicted by the airlines.” Others, including yours truly, have asserted the same.

Entry Is Not Easy

Judge Sorokin indicates that barriers to entry into the markets where NEA operates are significant, with likely entry not mitigating the anticompetitive effects. For example, in Boston and New York City, the judge describes the entry barriers as insurmountable: “By ending competition between American and JetBlue, the NEA means that seventy-three percent of domestic flights at Logan are controlled by two (rather than three) entities: Delta and the NEA. In New York, where entry or expansion by any airline is severely limited due to the FAA’s slot constraints at JFK and LaGuardia, the NEA ensures that eighty-four percent of the slots at JFK and LaGuardia are held by the same two (rather than three) entities that now dominate Logan.”

The JetBlue/Spirit complaint concurs: “New entrants into airline markets face significant barriers, including: difficulty in obtaining access to airport facilities or landing rights, particularly at congested airports; existing loyalty to particular airlines; and the risk of aggressive responses to new entry by a dominant incumbent.” 

Curious. If entry is as difficult as the current DOJ and Judge Sorokin now suggest, where were those concerns in the prior two decades, when gate and slot sales were held out as the great elixir to lost actual competition?

Not All Economists

Judge Sorokin found defendant economists’ testimony problematic, lacking in nuance, and biased: “The apparent bias of the defendants’ retained experts is reason enough to reject the

opinions and conclusions they rendered in this case.”  Again, this is not a surprise. Matt Stoller’s description of people in lab coats who never get graded on their assignments is apt.

Much has been written about the repeated use of economists to weave magical models that later result in unhappiness for consumers. ProPublica had a piece on the expert economist market four years ago, titled “These Professors Make More Than A Thousand Bucks an Hour Peddling Mega Mergers.”  The title is a bit dated, due to the inflationary effects in the economic expert market—$1,000 is considered affordable now. Regardless, this practice is ages old. Agencies almost expect certain economists to walk in the door peddling particular mergers. I should disclose my own personal experience getting stomped by Dan Rubinfeld as I sought to stop the United/Continental merger. Consolidation in 18 nonstop markets was simply insufficient to be a problem for defendants’ economist, who was far more prepared, diligent, and careful.

I do not take Judge Sorokin’s judgment of defendants’ economists as a judgment of all experts. I take it to mean that economists must do more to shore up their assertions and conclusions apart from merely proclaiming themselves to be gods of knowledge. In other words, experts should not engage in “sweeping assertions,” “unnuanced and poorly reasoned conclusions,” “overly simplistic view[s],” “absurd” reasoning, or other analysis the court finds is entitled to ultimately “no weight.”

In short, maybe courts will start treating defendant’s economic experts like they treat plaintiff’s economic experts. And yes, that means they’ll get the blame for losing, even if it not deserved. It might also mean that JetBlue/Spirit should think about its expert reports carefully, and who gives those reports.

Conclusion

Before I get emails pointing out that policies and administrations change: I know. But those policies have an effect on the law as it is applied. Just as one example, there is no meaningful or substantive judicial review of consent decrees. And thus, when the DOJ became the Surface Transportation Board of the friendly skies (blessing all mergers that came before it), there was no countervailing power to stop it. Those impacts cannot be undone. They are permanent.

So, while I’m happy about Judge Sorokin’s decision, it doesn’t predict the future. The DOJ may very well still lose JetBlue/Spirit if it goes to trial. And if does lose, it only has its prior self to blame.

In the last thirty years, the United States has experienced a whirlwind of concentration among food suppliers. This elimination of competition is an urgent problem not only because consumers are faced with higher prices and less food choices in grocery stores, but also because the largest agribusinesses on Earth (“Big Ag”), as a result of their massive economic and political power, clog up the workings of our political system to the detriment of democracy and the planet.

Big Ag’s rising profits have been shown to be a driving force behind inflationary food prices again and again. A recent analysis by the White House explained that “If rising input costs were driving rising meat prices, those profit margins would be roughly flat, because higher prices would be offset by the higher costs.”

In addition to these already egregious displays of power and control, Big Ag also destroys the planet’s natural resources, violates existing labor laws, engages in atrocious and inhumane animal processing practices, and puts small farms out of business. Both the legal and economic arrangements that enable this behavior create an unfair political economy that’s immensely profitable and partial to large agribusinesses; these forces allow massive corporations like Monsanto, Tyson, Cargill, and John Deere to largely evade antitrust scrutiny.

As a result, Big Ag players garner enormous market power and uneven political clout, positioning themselves to create even more favorable legislation with which to entrench their dominance in each sector of agriculture, from beef to farming equipment to poultry to seeds.

It Begins on the Farm

An immediate example of Big Ag’s might is in farming equipment. Before the 1930s, over 160 companies sold farm equipment in response to growing industrialization and mechanization of farming. Through industry consolidation, however, John Deere emerged as the leading supplier of agricultural machinery in the United States. Today, John Deere stands alone as the dominant player, commanding roughly 53 percent of the market for large tractors and 60 percent for combines. From 2005 to 2018, John Deere acquired a staggering twelve companies that specialized in sectors ranging from farm equipment to precision technology.

In February, the Department of Justice filed six lawsuits in an effort to crack down on Deere’s monopoly power, engaging in a right-to-repair battle in four states. The lawsuits allege that Deere has illegally attempted to control the repair of Deere equipment, such as tractors and combines, using electronic-control units. The filing contends that the farming equipment giant and its dealerships monopolize the market for repair and maintenance services by designing proprietary Deere equipment, which requires Deere-controlled software for the diagnosis and maintenance functions. That software is exclusively available to technicians authorized by Deere. This arrangement leaves many independent shops and farmers beholden to Deere-authorized vendors when repairing their equipment. In this way, Big Ag poses a sort of private tyranny over those who have to rely on their equipment to make a living, and they are largely left unaccountable to the public and consumers.

Merger Mania

The tentacles of Big Ag reach beyond equipment into our milk and meat supply. Industry concentration in dairy has led to fewer farms and more mega-dairy operations, diminishing the profits of small family farms. The beef industry similarly has become more heavily concentrated. Today, only four firms—Tyson, Cargill, JBS, and National Beef Packing Co.—control over 70 percent of the nation’s beef supply, and they processed roughly 85 percent of cattle in the United States in 2018.

The level of concentration occurred at such a breakneck pace since the 1980s that Department of Agriculture economists characterized this wave of mergers as “merger mania,” during which concentration soared from 35.7% in 1980 to 71.6% by 1990 in the beef packing sector.

For instance, through mergers in the agriculture industry, “the four largest meatpackers have increased their share of the market from 36% to 85%, and the largest four sellers of corn seed accounted for 85% of U.S. corn seed sales in 2015, up from 60% in 2000.

Due to the resulting power over consumers and input providers, these mega-corporations are doing better than ever. The level of concentration, and the control over factory farming that it grants, are partially responsible for Tyson Foods’ beef sales jumping to $5 billion in the first quarter of 2022, lifting overall sales to $12.93 billion. Tyson Foods realized over a billion dollars in new dividends and stock buybacks. Add this to the more than $3 billion already they paid out to shareholders since the pandemic. In beef processing, corporate profits skyrocketed by $96.9 billion in the third quarter of 2021 alone.

Economic Power Translates into Political Power

Though it is hard to pinpoint a specific and clear approximation of the political power large agribusiness has achieved, each industry as a whole has immense political power resulting from their economic growth and profits from concentration. This is malfeasance in the highest order. Food monopolists and other dominant players in our agriculture system have the ability to contribute a large amount of campaign funds to key lawmakers in charge of legislating the sectors where mega corporations have a direct interest.

Farm subsidies in the United States largely support private associations and large corporations. These subsidies account for roughly 39 percent of farm income while the biggest agriculture firms continue to make record-breaking profits. The United States government gives away free money to private corporations that continue to increase their profits without contributing back into the public coffers or without providing adequate care to farm animals or adequate compensation (or safety) to the labor that generates the profit.

One example is the National Cattlemen’s Beef Association (NCBA). Researchers have long understood how clear the intent to monopolize is through the political clout of large, private trade associations, like the NCBA, which is directly paid a proportion of the proceeds from the U.S. government from every beef sale (like supermarkets steaks or hamburgers from a fast-food restaurant). In addition to lobbying for the further consolidation of the meat-processing industry, the NCBA uses these proceeds to lobby for Americans to eat more meat and to oppose district court judges who are sympathetic to animal rights.

The Social Costs Are Adding Up

Food production and industrial farming pose existential threats to critical ecosystems and rural populations, accelerating climate change by polluting and contributing massively to greenhouse gasses. The natural resources needed to sustain the increasing industrialization of our agricultural infrastructure are exhausted at the behest of large industry titans not in the least bit compelled to employ sustainable environmental practices. These effects are undesirable to everyone but to large agribusiness polluters, which perversely gain a greater capacity to pollute and contribute to climate change to a meaningful degree as they grow in scale and size.

The broader societal costs of the size, power, and dominance of food monopolies are far reaching. Economic power garnered from consolidating food industries, especially during the ongoing COVID-19 pandemic, yields uneven political influence—where corporations shape laws to get enacted in their favor, which in turn garners them more control of the food system. In the legal system, the problem of agriculture monopolies cannot be adequately dealt with on purely economic grounds either. This is because of the popularized role that economic analysis plays in assessing anticompetitive harm. With its fixation on short-run consumer price effects, the current economic lens cannot fully capture the ways in which Tyson, Bayer, or Monsanto grow their market power. Like other dominant players in industries, major corporations within Big Ag also mold political outcomes in their favor to avoid critical enforcement. They achieve this by influencing the anti-monopoly policies enacted to proscribe and limit their size in the first place, positioning themselves to dictate the terms for which market activity is stimulated.

When applying the law, antitrust courts should abandon the antiquated Chicago School dogma, which naively assumes that markets are self-correcting and that consumer welfare is paramount. When it comes to assessing the true harms of food monopolies and food barons, which undermine the rights of local farming operations, antitrust authorities should instead consider a broader set of anti-monopoly goals in order to disperse power more evenly among local farming operations nationwide.

To continue to permit consolidation in the aforementioned ways is anti-democratic. A strategy to implement these tools simply requires the political will to hold Big Ag corporate titans accountable by legally compelling them to relinquish control of their hordes of wealth, industry control, and attendant political influence.

Tyler Clark is an economist working on anti-monopoly, corporate power, and antitrust research. A recent graduate of the M.S. program in economics at the University of Utah, Tyler hopes to return and pursue a JD specializing in antitrust law. You can follow him on Twitter @traptamagotchi.

Just weeks after a series of high profile train derailments headlined by the disaster in East Palestine, Ohio, the Surface Transportation Board (STB) decided to double down on the current railroad oligopoly. The STB approved a merger between Canadian Pacific Railway and Kansas City Southern Railway Company, cutting the number of major “Class I” rail companies in the United States from seven down to six. This decision is diametrically opposed to the public interest and seriously undermines trust in rail regulators.

The merger approval clearly violates President Biden’s Executive Order on Promoting Competition in the American Economy, which explicitly directed the STB to begin rulemaking to make it harder for railroads to engage in anticompetitive practices. The order instructed the chair to “consider rulemakings pertaining to any other relevant matter of competitive access, including bottleneck rates, interchange commitments, or other matters.” Instead, the STB has abetted concentration that makes it harder to regulate.

Because the decision goes against Biden’s overarching competition agenda, the Revolving Door Project today released a letter with RootsAction and FreedomBLOC calling for President Biden to relieve Martin Oberman from his chairmanship at the STB. This backtracking requires a major course correction that can only be achieved by a change in leadership. 

Besides being antithetical to one of the defining policies of the Biden administration, the STB’s decision breaks from other parts of the administration. As the FTC and DOJ Antitrust Division have redoubled their efforts to push back on monopolization across the economy, the STB approved the first big freight-rail merger since the 1990s. But it’s not just the FTC and DOJ going in the opposite direction of the STB; Secretary Pete Buttigieg and his Department of Transportation have recently raised their scrutiny of transportation mergers, highlighted by blocking airline consolidation. 

And while Buttigieg has not explicitly chimed in on the rail merger, other regulators did, warning the STB against approval. The DOJ Antitrust Division warned against the merger, saying it could “empower the merged railroad to deny shippers access to the lowest cost or fastest end-to-end routings. […] The railroad sector in particular, with its relatively high fixed and sunk costs, often enjoys substantial structural entry barriers and advantages that may facilitate or incentivize anticompetitive behavior.”

Additionally, a majority of the Federal Maritime Commission opposed the merger, arguing that “the proposed consolidation does not ensure that the anticompetitive effects of the transaction outweigh the public interest in meeting significant needs.” As I’ve written before, the FMC has a history of serious dovishness on consolidation, making such a strong position all the more notable. The merger is even being opposed by another railroad; Union Pacific is suing to block the STB’s decision.

Besides undermining the administration’s broader policy agenda, the STB’s decision will also undermine safety in the rail industry. What’s the basis for such a strong claim? The STB’s own analysis found the merger would “slightly increase” risks of derailments. Taking their analysis at its word, even slight increases in such risks seem folly after Norfolk Southern set East Palestine ablaze with a single derailment. That incident highlighted how underequipped and unprepared regulators were to deal with any derailment. Allowing an increase in that risk just to enable more corporate profits is a bad trade for the American people. 

Another cost of the merger is less effective oversight. As I wrote in The Sling in March, “More industry concentration makes effective regulation harder. As firms increase in size, they gain more and more of a resource advantage over their regulators. One behemoth corporation can often hire more lawyers and cultivate more relationships with lawmakers in order to obfuscate enforcement measures than multiple smaller ones could.”

Of course, there are corporate-friendly defenders of the merger. The Economist argued that the merger “may end up enhancing competition” because the two rail companies do not directly compete—there are no overlapping tracks—and because the merged entity “will provide the first train lines running from Canadian ports through the heart of the United States into Mexico. This is poppycock: A merger that doesn’t involve head-to-head competitors can still be harmful if it enables the merged firm to engage in anticompetitive behavior such as blocking rival’s market access.

Indeed, The Economist gives the game away in the very next paragraph, admitting the rail “industry is also consolidating, which leads to greater pricing power.” There’s only one consolidation going on and it’s the one they’re seeking to defend. If pricing power will increase simply by virtue of consolidation, that means that even though the current lines don’t overlap, the merger facilitates anti-competitive behavior. Full stop.

This is exactly the point the DOJ made in its statement to the STB as well. As they put it:

Even beyond the elimination of head-to-head competition, mergers that increase market power can harm competition in several ways. The merger can empower the merged railroad to deny shippers access to the lowest cost or fastest end-to-end routings. Likewise, in the absence of a complete refusal to interchange traffic, mergers may enable firms to foreclose competition in other ways, such as raising costs for their rivals through control over inputs or access. Such mergers also can create a more conducive structure for post-merger coordination between direct competitors by facilitating communication or discipline through the new integrated asset. The railroad sector in particular, with its relatively high fixed and sunk costs, often enjoys substantial structural entry barriers and advantages that may facilitate or incentivize anticompetitive behavior. For example, railroads may anticompetitively refuse to interchange traffic and/or favor the newly integrated company’s long-haul route over a more efficient joint line route.

Four of the other five Class I railroads agree, having opposed the merger because of how it would enable the new CPKC to block competitors from accessing important junctions, particularly Houston. This comes after earlier concerns from Union Pacific and BNSF around the Houston terminal. In short, the massive market power the merger grants CPKS will allow for the firm to undermine competition by blocking other railroads from readily accessing interchanges and other rail that Kansas City Southern currently shares with other shippers. Despite the two firms not directly competing in their current routes, the vertical integration creates the opportunity to force business away from other railroads because of the degree of control over their competitors’ ability to operate competing routes.

The Canadian Pacific-Kansas City Southern merger undermines administration policy and directly contributes to further anticompetitive practices in the rail industry. It is also likely to cause worse service, job cuts, weaker oversight, and higher prices, among other harms. President Biden should heed his Transportation Department, Justice Department, and Federal Maritime Commission and appoint new leadership at the STB.

Dylan Gyauch-Lewis is a researcher at the Revolving Door Project.

Paradigm change is hard. It took over a year to overcome significant ridicule from neoliberal economists and pundits for the evidence to be so compelling as to flip the consensus on the causes of inflation. Business press outlets from the Wall Street Journal to Bloomberg to Business Insider now perceive what some heterodox economists have recognized for a while—that companies in concentrated industries were exploiting an inflationary environment to hike prices in excess of any cost increases they were incurring. (Alas, The Economist refuses to see the light.) Even Biden’s director of the National Economic Council, Lael Brainard, refers to this bout of inflation as a “price-price spiral, whereby final prices have risen by more than the increases in input prices.”

It’s hard to assign credit for flipping the script, but a few brave economists deserve mention. Isabella Weber, an economist at the University of Massachusetts, published a provocative article, co-authored with Evan Wasner, titled “Sellers’ Inflation, Profits and Conflict: Why Can Large Firms Hike Prices in an Emergency?” They explain how firms with market power only engage in price hikes if they expect their competitors to follow, which requires an implicit agreement that can be coordinated by sector-wide cost shocks and supply bottlenecks.

Josh Bivens of Economic Policy Institute debunked the neoliberal claim that wage demand was driving inflation, showing instead that corporate profit was responsible for more than one third of the price growth. Mike Konzcal and Niko Lusiani of the Roosevelt Institute demonstrated that U.S. firms that increased markups in 2021 the most were those with the higher mark-ups prior to the economic shocks, an indication that concentration was facilitating coordination. (If one were to expand the list of thought influencers beyond economists, you’d have to start with Lindsay Owens of the Groundwork Collaborative, who has been analyzing what CEOs say on earnings calls since the onset of inflation.)

With the new consensus, we need think creatively about attacking inflation. We have more than one tool at our disposal. Rate hikes might ultimately slow inflation, but at enormous social costs, as that mechanism requires putting people out of work so they have less money to spend. What’s worse, rate hikes are regressive, with the most vulnerable among us bearing the largest costs. Solving the inflationary puzzle calls for a scalpel not a chainsaw: We need to identify the industries that contribute the most to inflation (e.g. rental, electricity, certain foods), and then tailor remedies that attack inflation at its source. To use one analogy, it wouldn’t make sense to bulldoze a house because a fire was burning in one room. You’d find that room and put out the fire. I am calling for seven policies in particular.

(1) More Bully Pulpit. The President should use the bully pulpit more—recall JFK’s turning back steel price hikes in 1962. Biden called out junk fees in his state of the union address, causing airlines to remove unwarranted fees for families sitting together. Clearly, Biden can’t hold a press conference about a misbehaving industry daily. But he has not come close to tapping this well.

(2) More Congressional Hearings. Congress should hold hearings to call executives to account for price gouging. Although Congress has held hearings with experts, they have yet to summon the CEOs of industries employing massive price hikes, seemingly in coordination—as if they were some tacit agreement to raise prices in unison. I’d start by calling the CEOs of the packaged food makers, PepsiCo, Unilever, and Nestlé, who bragged last week to investors about record profits, massive price hikes, and enduring pricing power.

(3) The FTC to the Rescue. The FTC should investigate firms for announcing current or future price hikes (or capacity reductions) during earnings calls under the agency’s unique Section 5 authority to police “invitations to collude.” These cases of “tacit collusion” are much harder to prosecute under the Sherman Act. If the FTC were to publicly announce an investigation into a firm or industry—airlines (admittedly outside the FTC’s jurisdiction) or retail would be a good place to start—it would force CEOs economywide to exercise more caution about sharing competitively sensitive information on earnings calls.

(4) Limits on Concentrated Holdings: The cost of shelter makes up a significant share of the core CPI. Cities or states should move to limit the holdings of any individual firm within a given census tract. My OECD paper, co-authored with Jacob Linger and Ted Tatos, showed the nexus between rental inflation and concentration in Florida. A natural cap for a single owner would be five or ten percent of all rental properties in a neighborhood. Raising interest rates, our default anti-inflation tool, perversely puts home ownership out of reach of millions of families, driving them to the rental markets, which bids up rental rates, which is one of the primary drivers of inflation.

(5) Price Controls Should Be on the Table. Price controls are the ugly stepsister in economics. But when backed by a public campaign, they have proven to be effective. Congress imposed price caps for insulin copays in the Inflation Reduction Act, but only for those patients covered by Medicare. Insulin makers, beginning with Eli Lilly, saw the writing on the wall, and voluntarily imposed the $35 cap on all patients. So long as caps are sparingly used in mature industries, the standard investment concerns of economists should be mitigated. The lesson from insulin is that the mere talk of price controls can induce an industry to temper their enthusiasm for price hikes.

(6) Government Provisioning. The threat of government provisioning is another lever that may force private industry to behave. To wit, California offered a $50 million contract to makes its own insulin, which coincided with Eli Lilly, Sanofi and Novo Nordisk preemptively reducing their prices. This playbook could be used in other industries where inflation remains stubbornly high. We can anticipate libertarians screaming “socialism,” but if the cost of inaction is more rate hikes and unemployment, I’d take the libertarian jeers any day.

(7) Fix Antitrust Law. Congress should amend the Sherman Act to give the DOJ, state attorneys general, and private enforcers a better shot at policing tacit collusion among firms in concentrated industries. Courts have implicitly adopted the notion that oligopolistic interdependence is just as likely to achieve prices inflated over competitive conditions as agreement, and so “merely” alleging or putting forward evidence of parallel pricing, excess capacity, and artificially inflated prices is insufficient to prove agreement under Section 1. But why should we presume that it is just as easy to maintain artificially inflated prices tacitly than through agreement?

Congress should flip the presumption. In particular, Section 1 of the Sherman Act should be amended so that the following shall create a presumption of agreement: Evidence of parallel pricing accompanied by evidence of (a) inter-firm communications containing competitively sensitive information, or (b) other actions that would be against the unilateral interests of firms not otherwise colluding, or (c) prices exceeding those that would be predicted by fundamentals of supply or demand. Moreover, the Sherman Act should be amended to permit courts to sanction corporate executives who participated in any price-fixing conspiracy upon a guilty verdict, by barring the executives from working in the industries in which they broke the law, either indefinitely or for a period of time.

Industrial organization gatekeepers like to poo-poo the idea of using competition tools to attack inflation, noting that antitrust moves too slowly. This is needlessly pessimistic. It bears noting that none of the seven remedies suggested here involve bringing a traditional antitrust case against a set of firms pursuant to the Sherman Act. The common thread that binds the first six remedies is inducing a short-run shift in industry behavior. A forced divestiture of rental properties over a holding limit would inject downward-pressure on rents in the short run. CEOs don’t want to be called out by the president or called to testify before Congress to explain their record-breaking profits attributable to massive price hikes above any cost increases. A public investigation by the FTC into invitations to collude via earnings calls would also have an immediate effect on CEOs. Nor would CEOs take lightly to being barred for life from an industry for participating in a price-fixing scheme.

The seven interventions outlined here will require an all-of-government approach. Biden should create a task force to carry out these policies and issue an executive order to signal his seriousness to other agencies. There are two paths for Biden’s legacy: Do nothing about inflation and leave it to the Fed to engineer a recession that likely ends his presidency, or grab the reins himself. With the new consensus emerging that profits (and not wage demands) are driving inflation, the time has come to change our approach.