Regulators across the West are in need of a shake-up

WHEN YOU come into contact with the competition establishment in the rich world—regulators, academics, lawyers —the cruellest comparison is with financial watchdogs before the 2008-09 crash. They are the proud custodians of an internally logical set of rules, developed over years, that do not seem to be producing good results and cannot easily be communicated to anyone outside the priesthood. Most competition authorities are unwilling to be held accountable for the level of competition in the economy; indeed they go further and insist that it is impossible to measure. Given the profound consequences of a rise in corporate power, that is an unsustainable position and will have to change.

The regulatory regimes on either side of the Atlantic have a lot in common. In America, the Federal Trade Commission (FTC, answerable to Congress) and the Department of Justice (DoJ, a creature of the executive) look at firms and bring cases to court. In Europe the European Commission and national regulators divide the load. The commission can punish firms, which can then go to the courts to appeal. The original laws are short and vague: America’s Sherman act of 1890 has 769 words, and the pertinent passages in the Treaty of Rome of 1957 contain 396 words. At any moment the courts interpret these fastidiously, but over time they have been highly inconsistent.

The apparatus says its purpose is consumer welfare. Its actions fall into three categories: punishing cartels, policing mergers and dealing with dominant firms that abuse their position (Europe sometimes looks at state aid, too). The offences that firms are booked for are technical, such as “foreclosing”—refusing to supply another firm—and “tying”—forcing people to buy particular bundles. Judged by cartel decisions and abuse of dominance cases, activity by regulators has fallen since the 1970s in America and been steady in Europe (see chart). Between them, those regulators employ 6,000 people and keep lots of lawyers in silk.

They suffer from three main problems. The first is a lack of curiosity. The big economic trends are high profits, high and persistent returns on capital, takeovers, tech platforms, some spread of tech through older sectors, a decline in new entrants and the use of “moats” such as patents to protect them from competition. Investors have been aware of this for at least 15 years, and the best ones have profited hugely from it. The world of macroeconomics woke up in 2015 after a landmark paper by Jason Furman and Peter Orszag on the link between companies and inequality, and there has been a surge of studies since.

In America the DoJ and FTC have been woefully behind. They seem to lack basic knowledge about the economy, although both bodies have newish bosses who may change that. Europe’s trustbusters have a better record. They began to examine digitisation several years ago. They have also been strict with telecoms and airlines, two of America’s problem areas.

The second problem is a lack of clarity. There is no definition of what competition, or its absence, looks like, other than the near-tautology that it is whatever is good for consumers. Instead there are technical offences. Many of the measures used to gauge these look strange. Lots of emphasis is placed on whether prices rise. But consumers can suffer even while prices fall: the cost of a long-distance call was dropping even when telecoms was a monopoly but collapsed after deregulation. In many modern markets there is no price. Payment is in kind, for example in the form of data, not cash.

Competition authorities sometimes look at profitability, but choose some odd definitions. They consider whether prices exceed marginal cost, which is undetectable in the real world. They look at gross margins, but these are not statutorily defined by American or European accounting regulators and are arbitrarily computed by each firm at its discretion. Sometimes experts discuss absolute profits, but rarely the capital used to create them. In this last respect the system has regressed over the past century. The fact that Standard Oil made large profits relative to its capital base was viewed as important during the court case which raged in the early 1900s. Today that would be viewed as risqué.

The third problem is that competition regulators have been captured. Financial regulators were swayed by theories about the efficiency of financial markets and by a revolving door between the public sector and the firms they were supervising. That led to denial about the build-up of risk before 2008. Competition regulators have a dated view of the economy and, in official forums about how to reform competition policy, lawyers acting for private firms are given undue weight. Academics are paid as witnesses or are sponsored by firms without disclosing it. Officials rotate between the agencies and law firms which defend big companies. Consumers rarely have a voice. In America things have slipped so badly that a material conflict of interest is not considered a disqualifying condition, or even a relevant consideration, for someone to pronounce on antitrust policy and be taken seriously.

Hot stuff

Imagine disregarding the existing apparatus and starting again from scratch. The first step would be to identify the hotspots in the economy where competition might be a problem (see article). The next step is translating this economic and financial analysis into a legal one. This is like working rock into flints. In both Europe and America a body of case law and rules has defined narrow kinds of misdemeanour, but these apply to old industries and have to be adapted to present circumstances. Prosecutors have been creative over the 128 years since the Sherman act, but recently they have struggled to fit the modern world into the doctrines of old law. A particular weakness is dealing with firms that are already powerful, which has become more important since a takeover boom has already been waved through.

The European Commission’s competition arm is an example of what happens when well-meaning energy is used to contort economic worries into a flawed legal framework. It has scrambled to find ways in which tech firms might be deemed to offend existing doctrine. It has examined whether, from the mid-2000s, Google forced manufacturers to pre-install its browser (technically “tying”), fining it $5bn this year. Last year it fined Google $3bn for favouring its own shopping site in its search results. In 2016 it found Apple guilty of receiving state aid through tax breaks from Ireland. The impression is of a scattergun approach, with long delays and fines that are a tolerable cost of doing business for tech firms. The mismatch in clout was highlighted by Facebook’s takeover of WhatsApp in 2014. The commission permitted it on the basis that the two firms would not link their data. They then did. On September 26th Brian Acton, a founder of WhatsApp, indicated to Forbes magazine that this had been the plan all along. Facebook has been fined $125m—a rounding error for such a firm—for misleading the regulator. The deal will not be reversed.

The legal frameworks need to be updated. One source of optimism is Germany. In 2017, at the behest of the Bundeskartellamt, the competition watchdog, it made several tweaks to the law to modernise it for the digital age. Among other things, these confirmed that a market can exist even if money does not change hands, with payments made in data, for example. They also changed the threshold for looking at takeovers in order to capture expensive purchases of small firms with few revenues, which typically happen when big firms buy putative competitors. Germany also has more legal flexibility to scrutinise powerful firms that treat customers unfairly, which it has used to investigate Facebook’s approach to customers’ data. Andreas Mundt, the Bundeskartellamt’s president, says: “We cannot pretend that nothing has happened in the economy and we are living in the 1990s. We need to adapt our instruments and tools and proceed into the digital world.”

In America the chance of turning sensible economic analysis about competition into action appears small. Part of the reason is the rickety architecture. The two agencies, the FTC and the DoJ, have retreated from a swathe of the economy that does not work well. A legal doctrine established in 2004, in a case known as Trinko, states that the benefits of antitrust action in regulated sectors, “will tend to be small”. That may have led trustbusters to steer clear of industries with abnormally high returns, including telecoms, health care and airlines. The sectoral regulators may have been captured, and the economy-wide trustbusters look away.

Compounding all of this are the courts in America. In Europe the commission has the benefit of the doubt: it makes decisions and then firms can appeal. In America the courts must decide, giving them enormous clout. Their reluctance to act has intensified since the 1980s, partly as a result of an ideological shift (see article). Some experts, and even senior officials, talk about starting over and redrawing the entire antitrust architecture, much as America did in 1890 when it passed the Sherman act, and again in 1914 when the FTC was formed.

One option would be for Congress to write a completely new law, and create a new enforcer and even a new court system to handle competition. A watered-down option would be to pass a new law that gave the courts specific guidance about how to interpret existing competition law. At the moment competition policy is not a political priority for mainstream politicians, in America or elsewhere in the rich world. But if reform does not happen, the risk is that something uglier will fill the vacuum.