EU and US economists differ on innovation and “hipster antitrust”

Pallavi Guniganti

08 February 2018

EU and US economists differ on innovation and “hipster antitrust”

L-R: Csorgo, Varma, Feinstein, Vita and Albaek, Freedom Film

While the US Federal Trade Commission’s top economist last week dismissed “hipster antitrust”, the deputy chief economist at the European Commission’s Directorate-General for Competition suggested that enforcers can “stretch” antitrust to handle dominant technology companies.

Michael Vita, acting director of the FTC’s bureau of economics, took a somewhat narrower view of what agencies should do about competition in innovation and market power than was stated by DG Comp economist Svend Albaek. They spoke in their individual capacities on a panel at the GCR Live 7th Annual Antitrust Law Leaders Forum in Miami.

Innovation

Though Albaek did not work on the controversial Dow/DuPont merger review, he said his colleagues who did were “courageous” and “showed tenacity”. The European Commission conditioned its approval for the agrochemical deal in part on the divestiture of research and development facilities, because of concerns that, post-merger, the company would innovate less than the two companies would have done separately.

Albaek laid out specific questions that, if answered affirmatively, would indicate that the merger might harm innovation efforts: is innovation an important aspect of competition? Do the merging companies significantly overlap in their R&D capabilities in defined market segments? After the merger, would only a few companies be left that innovate in those segments? Are there barriers to entry to innovating in those segments? Would the merger enable one company to appropriate or capture the spillover effects of its innovation?

“Some people have said that innovation theory of harm has no limiting principles. I think these are limiting principles,” Albaek said.

He defended DG Comp’s thinking on innovation against “some very knee jerk reactions, saying ‘no, you shouldn’t do this.’” A later speaker at the conference, Clifford Chance partner Nelson Jung, called innovation theories of harm “flimsy”.

Albaek admitted that enforcers probably cannot carry out upward pricing pressure analysis of innovation effects. But he said in Dow/DuPont, there was evidence that the companies planned to shut down overlapping R&D.

Vita said competition to produce better products is a key part of the FTC’s current challenge to the Otto Bock/Freedom Innovations tie-up of makers of microprocessor prosthetic knees, and in past merger reviews such as Nielsen/Arbitron. He also referenced the agency’s record of requiring the divestiture of overlapping products in deals where one merging company has a product in the development pipeline that would compete with a pipeline or existing product of the other company.

However, Vita said merging companies’ combination of R&D efforts, especially in industries such as pharmaceuticals, can have important efficiency rationales, as sharing knowledge can accelerate new discoveries.

“Hipster antitrust”

Vita admitted that he did not see how antitrust can be a useful tool for addressing income inequality, given that the Von’s Grocery and Robinson-Patman era of enforcement “was explicitly protectionist,” designed to shield particular inefficient businesses from the rigours of competition.

“If you care about income inequality, do you really want to pursue antitrust policies that would raise the cost of groceries?” Vita asked. Anyone who calls for major shifts in antitrust policy should articulate clearly the goals of antitrust and explain how to resolve the tensions between consumer welfare and additional aims, he said, noting that he has not seen that done.

Albaek said he agreed with Vita, but suggested there are “other things within the normal workings of antitrust where perhaps we could stretch things a little bit”, citing the example of digital markets.

While dominant companies always say competition is just a click away, he said he has not witnessed new entrants gain a greater market share than incumbents – such as when Google overtook Yahoo! in 2004 and Facebook overtook MySpace in 2009 – for some time.

“Maybe one reason it doesn’t happen is that maybe they’re buying the ones that could make it happen. Does our concept of potential competition or whatever, could that be widened a bit?” Albaek said. He noted that when his son got his first mobile phone, the 12-year-old refused to install Facebook, which “is for old people”, but does use Instagram – which Facebook bought in 2012 without any conditions imposed by antitrust enforcers.

If the dominant digital companies systematically buy up those who might introduce competition for consumers’ attention and advertising money, “maybe we could stretch a little within our normal concept,” Albaek said.

Lilla Csorgo, head of economics and policy at Hong Kong’s Competition Commission, said hipster antitrust is not currently an issue for the relatively new enforcer, but warned “that [it] is something we should be worried about.”

The Competition Commission should consider inequality and market power given Hong Kong simultaneously rates in surveys as one of the world’s most competitive markets and as one of the most expensive places to live, because its economy is dominated by conglomerates, Csorgo said.

She cited a statistic that 15 families control assets that make up 87% of Hong Kong’s gross domestic product, which in her experience left consumers with few real choices because products and services are packaged together.

“It really quite frankly is changing my perspective as to the role that I think we as antitrust people should be playing,” Csorgo said, noting that “hipster economics” is making enforcers ask if they are being aggressive enough.

She explained that Hong Kong only recently implemented a competition law, despite having long been rated as a highly competitive economy. “These conglomerates could easily have arisen anyway, but we really have a role to play and I think that we should be quite aggressive about that role,” Csorgo said.

Vita, Albaek and Csorgo spoke alongside Charles River Associates economist Gopal Das Varma. Former FTC bureau of competition director Debbie Feinstein, now a partner at Arnold & Porter Kaye Scholer, moderated the panel.

The GCR Live 7th Annual Antitrust Law Leaders Forum in Miami ended last Saturday.

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