Critical Dialogues
Advocating Antitrust Policy
Image by Matthew Gilson
Professor of economics Dennis Carlton* tells dean Edward Snyder about his work in the Antitrust Division of the U.S. Department of Justice, including competition advocacy, the misuse of antitrust laws, interaction with foreign antitrust agencies, and assisting the Supreme Court.
Snyder: In October 2006 you were appointed deputy assistant attorney general for economic analysis, also known as chief economist, of the Antitrust Division. Tell me about the economic analysis group of the Antitrust Division.
Carlton: It’s a superb group of about 60 PhD– level economists, all of whom are very interested in industrial organization and antitrust. It’s a great concentration of people with skills ranging from the most advanced theoretical skills in game theory to very advanced skills in econometrics. We also have a wide range of ages and experience. If you want to talk about antitrust doctrines, we probably have more experience than any group in the world in answering questions and providing insight into past cases.
Snyder: It’s one of two federal agencies dealing with antitrust, the other being the Federal Trade Commission, right?
Carlton: Yes. I didn’t mean to imply that the Department of Justice was better than the Federal Trade Commission. They also have a very good group, and we interact with the FTC quite a bit. Michael Salinger, director of the Bureau of Economics there, is a good friend, and we frequently compare notes about various cases and topics. Additionally, the FTC and the DOJ collaborate when we do something abroad. If there’s a report that we submit to the Organisation for Economic Co-operation and Development, it’s typically a joint submission and we jointly represent the United States at the OECD.
Snyder: How are responsibilities divided between the Federal Trade Commission and the Department of Justice?
Carlton: On mergers, it’s based on past experience with different industries. So if a merger is in telecommunications, it would come to the DOJ, while if it’s a pharmaceutical merger, it typically would go to the FTC. There also are different responsibilities. The FTC has a consumer protection agency, so they often are involved in consumer protection issues having to do with false advertising and false information, while we don’t do that. What we have—that they don’t—is the ability to prosecute cartels criminally. We have a very active group that investigates price-fixing allegations and types of antitrust behavior that can land you in jail.
Snyder: You can go to jail if you do something wrong in the eyes of the Antitrust Division of the Department of Justice—so don’t mess around with them! What about the division’s role encouraging the rest of the government to be efficient in its regulatory activities? Is that still important? From my vantage point, that has been an important function at times.
Carlton: It had been an important function, and it ebbs and flows depending upon the interest of the front office. When I got there, I thought that was an area where the DOJ could make much greater contributions to both the federal and the state governments, so one of the programs I’ve tried to revitalize and emphasize is competition advocacy. We’ve done work—which I hope will continue after I’ve left the DOJ—setting up a program in which the DOJ will interact frequently with federal and state legislators to educate them about legislation that looks like it will interfere with competition. For example, a lot of states may have certificate-of-need requirements before they will allow a hospital to open. In many instances, those types of restrictions can be barriers to entry that protect the incumbents and lead to elevated prices.
Another point I’ve tried to emphasize is that the expertise of the DOJ economists should be used by other branches of the government. Although that may sound easy, a lot depends on the other branches being knowledgeable about our expertise. I know a number of people in Washington at different agencies from my academic and consulting work. I’ve been in touch with them, and they’ve started using the expertise of DOJ economists to help them solve problems much more often. A good example would be Eddie Lazear, a former faculty member and a good friend of mine, who’s at the Council of Economic Advisers. There had been a tradition in which the DOJ would lend an economist to the Council of Economic Advisers. This year there’s no one there, but since I know Eddie well I’ve tried to foster interaction between the two groups. I’ve really tried to make sure we’re taking full advantage of the value DOJ economists can add to other branches of government in understanding competitive problems.
Snyder: When you were asked to do the job, what did you understand to be your responsibilities as head of this economic analysis group?
Carlton: There are actually several different functions that the economists provide. Obviously one is to analyze cases. Merger cases take up a lot of the time. If two firms want to merge, the DOJ analyzes whether it raises competitive problems. If it does, the DOJ would seek to intervene in some way to have the parties correct the problems or, if they can’t be corrected, the DOJ would litigate in court to stop. Another area where there can be antitrust casework would involve what is known as Section Two claims, which typically involve misuse of market power. A good example would be the Microsoft case.
There are at least two other areas where economists can get involved. There are now many more than 90 countries that have their own antitrust laws, whereas 20 to 30 years ago there were very few. Unlike the United States, which has more than 100 years of experience with antitrust, these countries don’t. So they’re searching for ways in which to craft their laws as well as interpret and administer them. Moreover, they don’t necessarily have the expertise within the country to know how to apply economics to understand the laws. In all those areas, the United States can add enormous value. We can teach foreign enforcement officials what the antitrust laws are supposed to do. We can teach them the underlying economics so they don’t turn the antitrust laws into devices that protect incumbents from hard competition. And we can try to prevent the use of antitrust laws in foreign countries to get around free trade laws. One of my concerns has been that a lot of antitrust laws can be misused to protect incumbent firms from competition from abroad. That would really be unfortunate. On the foreign side, there’s a big component where the United States can and should pay attention. Another area that’s actually been a lot of fun has to do with the Supreme Court.
Snyder: The court has been pretty busy in antitrust recently.
Carlton: There have been several Supreme Court cases. I’ve worked on some, and that’s fun. You assist in the brief, you assist at the moot court arguments, and then go to the Supreme Court and see how the solicitor general does in answering questions from the justices.
Snyder: For University of Chicago trivia buffs, Richard Posner (senior lecturer in law at the Law School) was assistant to Solicitor General Thurgood Marshall in 1965–97.
Carlton: Frank Easterbrook (senior lecturer at the Law School) also served in the solicitor general’s office; he was deputy solicitor general in 1978–79 and assistant to the solicitor general in 1974–75. There’s also a Chicago Law School graduate, Adam Hirsch, who works at the Antitrust Division’s appellate section. I’ve interacted with him a lot because the Antitrust Division is asked to give their views on cases to the solicitor general.
Snyder: That’s the grant cert (writ of certiorari), which is a rare event.
Carlton: It is a rare event. And there are several very interesting cases that will possibly be on the Supreme Court’s agenda if they grant it cert, and it raises very interesting antitrust issues.
Snyder: That must give you a big sense of accomplishment with respect to the Supreme Court, because there have been some big decisions that I’d suspect you feel good about.
Carlton: Yes. One that everybody is waiting for has to do with what’s called resale price maintenance. There’s been what’s called a per se rule against the use of resale price maintenance, and that means it’s illegal for a manufacturer to engage in a certain practice by which the retail price gets set.
Snyder: That would be the price to a consumer?
Carlton: Yes, the price to the consumer. There’s actually a tradition at Chicago, started probably by a famous article by Lester Telser in 1961 in the Journal of Law and Economics, which is published jointly by the GSB and our Law School, titled “Why Should Manufacturers Want Fair Trade?” That article has had a large effect on how people think about the consequences of resale price maintenance and led to literature that explored why resale price maintenance can be procompetitive. I think that’s a good characterization of the views of most economists: that resale price maintenance can be procompetitive, and therefore it’s inappropriate for the Supreme Court to regard resale price maintenance as a per se violation of the antitrust laws. By the time this interview is published, we’ll know if the Supreme Court has overturned that per se ruling and adopts what’s called the rule of reason approach, in which you analyze the merits of what the firm is doing and don’t just say, “No, you can’t do it.”
Snyder: So with a 47-year lag between good Chicago insight from Lester Telser to the Supreme Court decision, we might get it right.
Carlton: Yes, it takes a while. As Milton Friedman said, long and variable lags.
Snyder: I want to follow up on your very interesting answer about the globalization of antitrust and the fact that now we have a lot of countries engaging in antitrust enforcement. You pointed out a couple things, one of which is that the antitrust laws can be misused, that they can be used to protect firms. One of the things I think is different about antitrust from a lot of areas of public policy, especially in the area of what we call Section Two, exclusionary conduct, and especially price cutting, is that potentially illegal behavior is right next to what we would typically say is good behavior. It’s a very tough area for the law and public policy and economics. When countries delve into this area of antitrust enforcement, you can get some bad results. I guess the question is: Do you think it’s a good idea for countries to dive into antitrust enforcement, and if so, what should they concentrate on?
Carlton: That is a good question. As I mentioned, there are now lots of countries that have antitrust laws, and they belong to an organization called the International Competition Network. I was asked to give the keynote address a few years ago, and my topic was exactly the one you pose. What I told them is that they should start by attacking cartels. We know cartels are bad, and they should have strong enforcement against cartels, including criminal fines as well as monetary fines. They could learn a lot from the United States in how to induce cartels to fail. A good example would be our amnesty program. The United States has a program where if you are the first member of a cartel to go to the government and admit that it’s a cartel, you get leniency. The first person in the door gets leniency, while the subsequent people may not. That has turned out to be quite important in inducing firms to basically squeal on other cartel members. The amnesty program really has been in large part responsible for what is an extremely successful policy in recent years, especially in the Bush administration, of prosecuting cartels.
As far as Section Two behavior, or exclusionary conduct, the difficulty is precisely the one you mention. A lot of things that exclude a rival can help consumers. So low prices exclude a rival but they help consumers. It’s important to draw the line between what harms a competitor versus what harms consumers. A lot of times, our antitrust laws in our history have been wrongly used; courts have wrongly protected competitors rather than competition. That has changed. The United States has had, within the last 40 years, a much more rational antitrust policy. I worry that foreign countries that lack the U.S. experience may repeat some of our errors and use the antitrust laws to protect incumbent firms from competition. It’s a serious concern. The Europeans are getting increasingly sophisticated in their use of economics, and they have geared up rapidly in using sophisticated economics to understand antitrust cases. There’s still a difference between how they view exclusionary conduct cases and how we view them, but the gap is narrowing. The narrowing of the gap is occurring in large part because of a common economic training that economists get, and also mounting evidence of the harmful effect of what I’d call improper prosecutions of Section Two—allegedly exclusionary conduct—that in fact is procompetitive.
I also worry about other countries that are just implementing antitrust laws. China is just starting to figure out what it wants to do with antitrust laws. There have been a lot of interactions with the DOJ and the Chinese authorities, and I think it’s important to make sure laws don’t get misused in countries with no history of a deep understanding of the importance of competition. One way antitrust law can be misused is if it’s improperly interpreted by judges who have no understanding of the purpose of antitrust. At Chicago, we’ve always thought you need to know economics to have a reasonable antitrust law. That’s absolutely correct. Therefore, one very important area for the United States and the DOJ to add value is to train foreign enforcement officials. I think there can be a very large payoff from that. That’s also something the University of Chicago can do: It can have programs on the topic in Chicago, London, and Singapore. There’s a lot of interest in all parts of the world to learn more about how economics can be used to improve antitrust policy.
Snyder: When you look at European countries as they implement their laws and move down the enforcement curve, so to speak, they’re now moving toward aspects of private antitrust enforcement. What do you think of that?
Carlton: Government has limited resources. We know from the law and economics movement that was started here at the Law School that you want to give people incentives to bring cases to deter inefficient behavior by firms. I think setting up a system in which there’s private action is something that absolutely can be desirable. I know a lot of law firms in the United States are excited about the possibility of private actions in Europe, and maybe they can learn from some of our mistakes and constrain some of the more outlandish abuses that have occurred with some class action lawsuits, but in general I think private enforcement is a good idea.
Snyder: Another topic I wanted to ask about is the relationship between country competitiveness and antitrust laws—in particular, the United States. There’s a lot of discussion now in the U.S. about the competitiveness of the U.S. financial services sector. I’m curious to get your views—not on any specific mergers, because I suspect you don’t want to make any comments for the record, but more generally, how do you think about a merger between two domestic entities when there’s an argument that it might make the domestic industry more competitive in the context of international competition? Should the antitrust laws take that into account when they are evaluating a proposed merger between two domestic entities?
Carlton: There is a debate in the United States as to whether you should stop a merger if it leads to a decline in consumer surplus. In contrast, an alternative criteria would be stopping a merger if it leads to a decline in total surplus. The difference is that in one you’re focusing on U.S. consumers—that’s the consumer surplus criteria—and in the other you are looking at the sum of the surplus to both consumers and producers in the United States. The way our laws are written, many people interpret them to mean that in the United States we focus only on consumers, which means that if there is an efficiency that results, it doesn’t count unless that efficiency translates into lower prices to domestic consumers. I think there should be a debate on that. As economists who are used to doing cost-benefit analysis, we know that total surplus is the usual criteria we use. The United States has the luxury of being a very large country, which means a lot of our markets are large, even our domestic markets. So if two firms merge they usually can achieve economies of scale, and most times if there are efficiencies, they get passed on. In other countries that are much smaller, take New Zealand, when two firms merge there, they may have been the only two firms. When a market can support, say, only one or two firms, and if a country like New Zealand depends a lot on international trade, you could expect that country to be very concerned about its international competitiveness. Interestingly in New Zealand, unlike the United States, the criteria looks at total surplus, not just consumer surplus, because having successful international firms is so important to New Zealand. I’ve been surprised at how few countries have a total surplus criteria. If you said, “We’ll let a merger go through because it leads to ultimate efficiency, even though sometimes prices may not go down or may even go up for domestic consumers,” that would be a hard sell, politically. That’s why there’s difficulty getting agencies to use a total surplus criteria. In point of fact, though, I think it would be the rare case that a merger that leads to efficiencies, at least in the United States, didn’t also lead to benefits to U.S. consumers. Therefore, although there can be a difference in outcomes depending on whether total consumer surplus is used, I don’t think it’s of much practical import in the United States. But in other countries it could be, and how those countries deal with the problem remains to be seen. New Zealand has tried to deal with the problem in a number of clever ways. I’ve been impressed with the thought that New Zealand has given to its antitrust laws.
Snyder: You were the only economist serving on the Antitrust Modernization Commission. My understanding is that the overarching question was: Should there be fundamental changes in the antitrust laws to make them more relevant for an economy where there is globalization and rapid technological change? The commission submitted its report to the president on April 2. Could you tell us a little bit about what conclusions you reached?
Carlton: There were 12 people on the commission and I was serving with 11 other very intelligent lawyers. I thought it odd that there was only one economist, especially since all the other lawyers agreed that economics was central to the understanding of the antitrust laws.
I should note that there were a few precursors to this commission. One of the more famous was the Stigler Commission, headed by George Stigler in 1961. Those reports were much shorter than ours, which is about 500 pages, so it’s very comprehensive.
The short answer to the question you pose is that the antitrust laws are perfectly flexible enough to deal with new circumstances of technological change and of globalization. Having said that, there are numerous recommendations we make, most of which I agreed with, some of which I did not. One area we focused on that I found especially interesting had to do with intellectual property and the interaction between the patent laws and antitrust laws. It’s a very important area. It’s an area where there should be some improvement, and we made several suggestions. Another area where we did some work fits into our earlier discussion of Section Two and exclusionary behavior and how hard it is to draw the line between procompetitive and anticompetitive behavior. There have been some decisions in cases involving bundling, when two products are sold together in a package. Some of those decisions have economic logic that, to put it charitably, is unclear. We explained—although I don’t think we went far enough, so I had an additional discussion in my separate statement—how economic principles could be used in those cases in a different way than the court had used them. Finally, we recommended that the Robinson-Patman Act be abolished. I have no idea if that’s possible politically, but it would certainly help if we got rid of it. It’s a law that prevents various types of price discounting unless they can be “cost justified.” Numerous studies have shown that it has caused consumers to pay higher prices than they would otherwise pay.
Snyder: Who preceded you in the role of chief economist at the Antitrust Division?
Carlton: The acting deputy was Ken Heyer before I took over the job. Before that it was David Sibley. Starting in the early 1990s the list includes Bobby Willie, then it was Janusz Ordover, Tim Bresnahan, Dan Rubinfeld, Joe Farrell, Michael Katz, Andrew Joskow, Carl Shapiro. I probably left out one or two. What’s interesting is that it’s a pretty good group if you look at their contributions to the field of industrial organization. It’s really been a great job where I think people go, in part, for the experience of being able to take part not only in shaping antitrust policy but also in getting access to information on cases that you might not otherwise be able to see. I think it changes how you think about competition, and it also probably changes what you think are interesting questions to research.
I should have mentioned that I was pleasantly surprised to see that there’s ongoing research at the economic analysis group at the DOJ, and academic-quality research is one of the benefits of taking a job there. I’ve embarked on some interesting new research projects that I hope will pan out over the next few years, and I would expect to continue to collaborate with several people at the DOJ.
Snyder: You’ve been pretty productive just in the last six months. In that regard, is there anything that you expect will be different when you come back to Chicago?
Carlton: I’d like to think that the weather would get better, but I’m not sure about that.
Snyder: How about the reverse—how has Chicago helped you in your job?
Carlton: I was in the economics department, the Law School, the business school, and I’ve taught at all three places. I think Chicago helps you tremendously. The intellectual atmosphere, where you really question absolutely everything, no matter how prominent the person who’s making the statement, forces you to think hard and use microeconomics very seriously all the time. It’s a constant development of what eventually becomes intuition, but really you never let intuition supplant rigorous analysis. One of the key lessons Chicago teaches you is the use of the combination of rigorous microeconomics with empirical verification. That’s the lesson I take from Chicago, and it explains why Chicago has been so successful in influencing economics.
* The views he expresses are his own and do not necessarily represent those of hte U.S. Department of Justice.
