Capitalisn’t: The Populists

Kate: Hey guys, this is Kate. Luigi and I want to know how to improve the podcast, so we’ve made a survey, and it’s available on our website for you to fill out. We’d like to know stuff like what your favorite episode was and what your least favorite episode was, and what you enjoy hearing about and what you want to hear more about. So, if you could go to capitalisnt.com, the survey should be right there on the home page. Help us help you. I hate it when people say that.

Luigi: Hi, this is Luigi Zingales at the University of Chicago.

Kate: And I’m Kate Waldock from Georgetown University. You’re listening to Capitalisn’t, a podcast about what’s working in capitalism today.

Luigi: And, most importantly, what isn’t.

Kate: On today’s show, we’re going to pick up from our last episode, in which we were talking about the antitrust debate and how the debate has been changing in the past few years. On this episode, you’ll be hearing from Lina Khan, the director of legal policy at the Open Markets Institute, also a fellow at the FTC.

Now, on last week’s episode, we talked about the consumer-welfare approach to antitrust, and we heard from Carl Shapiro. The consumer-welfare approach broadly views antitrust as a mechanism to make consumers or people better off. The concern about monopolies only becomes something that the government should intervene in if those monopolies are actually hurting people, by either charging higher prices or limiting the quantity of a good that’s produced. Now, a different approach to antitrust that has arisen in the past few years, particularly in response to big tech companies like Amazon, is what’s now termed the New Brandeis Movement.

Luigi: This approach is called the New Brandeisian approach in memory of Louis Brandeis, who was an advisor to President Wilson and then was appointed to the Supreme Court. He was a very famous judge with a new perspective, not only in antitrust, but also on transparency, on regulation, and so on and so forth.

Kate: Brandeis is famous for having said, “We can have democracy in this country, or we can have great wealth concentrated in the hands of a few, but we can’t have both.”

Luigi: Joshua Wright, an antitrust expert who is a law professor at George Mason, defined the New Brandeisian Movement, and in particular, Lina Khan, as part of a “hipster” antitrust. I was included in that category. Honestly, I don’t even know what it means. I’m so not hip that I don’t even know what hipster means. Can you explain to me and the listener what that means?

Kate: What a hipster is?

Luigi: Yeah.

Kate: Well, it’s funny because the term “hipster” has always been something that’s hard to define. Historically, it was defined by the look that hipsters have. They wear, like, skinny jeans and they live in Brooklyn and they wear gratuitously large glasses and they drink really expensive coffee. Now, I think hipsters are more associated with young people who are socialists and overly ideological, even though that may be misguided.

Luigi: OK. I’m not a socialist and, unfortunately, I’m not young. I do drink a lot of coffee. Maybe that’s the only thing I have in common.

Kate: I think your glasses are a little ... Yeah, you have huge glasses.

I mean, what bothers me about that description of the New Brandeis Movement is that it’s pejorative. It makes it sound like people who are New Brandeisian are young and responding in sort of a knee-jerk, passionate way to antitrust issues, as opposed to the well-established, sound reasoning of the consumer-welfare approach, and that’s what bothers me the most. I think that there’s plenty of reasons to think that the establishment approach to antitrust hasn’t evolved properly with the times.

Luigi: Kate, I think you’re absolutely right that that is the undertone of this debate. That’s clearly the way, now that you explained to me what hipster means, that’s exactly the way in which Joshua Wright tried to say, “We are the serious economists, and everybody else is a bozo and does not have any argument for it.” So, that’s exactly what we don’t want to do.

Kate: All right, so now that we’ve presented two very biased approaches to defining the New Brandeisian Movement, why don’t we leave it up to Lina Khan to do a better job of it for us?

Luigi: So, Lina, first of all, thanks for joining us. You have become famous thanks to an article about the Amazon antitrust paradox. Can you explain to us why you’re so worried about Amazon?

Lina Khan: So, I wrote the article about Amazon because I think Amazon is a particularly elegant illustration of what’s wrong with our current antitrust regime, because it shows how a company can come to monopolize certain markets, or at least grow very dominant, but in ways that don’t trigger our antitrust laws, and so I use the story of Amazon as a way to tell the larger story about our antitrust laws.

You know Amazon, most of us engage with it as a retailer, but Amazon is involved in all sorts of businesses. It’s a dominant online platform, but it also has a massive logistics network, it’s a book publisher, it’s a TV and movie producer. It has its own private brand, so it’s engaged in the direct production of goods, and that places it in direct competition with the companies that are relying on its platform. These are some of the dynamics that I explore in the article, and I describe how Amazon has grown to become Amazon in part through relying on practices that 40, 50 years ago, would have been illegal under the antitrust laws.

Luigi: But we’re not lawyers, we’re economists, and we want to know, what’s wrong from an economic point of view? We may debate what is the right antitrust law, but we’re more interested in saying, let’s try to think about whether this is good or bad for American consumers, American producers. So, what do you see wrong in Amazon?

Lina Khan: I think the underlying question is, what is our goal, what is our aim? And I think under the antitrust laws, our goal is to promote competition. It’s to promote marketplaces that are open, healthy, that promote entrepreneurship. I think the current system, where Amazon is a dominant platform, makes it into like a railroad, where all these independent producers have to ride Amazon’s rails to get to market, and Amazon’s able to abuse that power. The fact that Amazon is vertically integrated, that it’s now involved in the direct production of goods, also places it in direct competition with the companies relying on its platform, and that creates a conflict of interest, so it’s now swooping in, kind of stealing the business insights of other companies. So, I think from an economic perspective, what we’re seeing is the disjunction between risk and reward, because you see these independent entrepreneurs, businesses, undertaking the original risk of bringing a product to market, and then Amazon is able to swoop in, steal their insight, and reap the reward. So, I think these are dynamics that are not really conducive to an open, healthy marketplace.

Luigi: But before Whole Foods was actually bought by Amazon, it was a normal supermarket, and a supermarket is the old-fashioned platform, in the sense it provides access to consumers to a lot of suppliers, and Amazon was competing with its suppliers. There was a brand called 365 that was cheaper than most. I am a cheapskate, so I always bought that, and so—

Kate: Such a cheapskate, buying 365 at Whole Foods.

Luigi: A restrictive cheapskate. But, so what is the difference between Amazon competing with its suppliers and Whole Foods competing with its suppliers?

Lina Khan:The difference is that Amazon is a network monopoly. In the grocery sector, you actually have competition, so suppliers that are selling through Whole Foods have options. They can sell through Safeway, they can sell through Kroger, they can sell through local farmers markets. The companies that are relying on Amazon don’t have that level of options, and so I think that’s a basic difference that makes Amazon’s conduct more problematic in this space.

Luigi: What fraction of online sales are done through Amazon?

Lina Khan:Over 44 percent of online sales are done through Amazon, and that share is growing faster than the share as a whole. Over 50 percent of online shopping searches now begin on its platform, and I think these numbers are expected to continue to grow astronomically. Amazon just revealed that it has 100 million individuals enrolled in its prime program, and Prime is really a key engine of growth, because studies show that once you become a Prime member, less than 1 percent of Prime members are likely to even price compare. So, there’s a huge incentive to just keep using Amazon because you’ve already dished up your money for free shipping, and so, why would you look other places? And I think Amazon has done a particularly great job creating the impression of always having the lowest prices, which I think historically has been true in certain sectors, but there have also been studies in the last couple of years showing that, actually, Amazon is not always the place where you can find the lowest price.

So, I think these dynamics will continue to evolve, especially with the risk of Amazon introducing price discrimination. Price discrimination is when every person is paying a different price for the same good or service. Amazon and other online companies now have a level of information about each individual where they can start tailoring prices to a very precise degree. Uber has already admitted that it engages in first-degree price discrimination. My sense is that if Amazon starts doing it ... Well, A, we don’t know if Amazon’s doing it. It’s perfectly legal for Amazon to do it, and I think it would be in its interest. I think the question is how does Amazon and how do these other companies roll out price discrimination in a way that’s not discernible to consumers, because Amazon tried this 15 years ago and there was a huge consumer backlash.

So, I think we’re going to start seeing Amazon and other companies start relying on tailored coupons and discounts. So, if you were looking at some shoes, put them in your shopping cart but you’re like, “Mm, still not sure about those, a little expensive,” two days later, you might get a coupon in your inbox that’s just for those shoes, gives you a 30 percent discount. So, that’s another way to start implementing price discrimination but in a way that’s not as discernible.

Luigi: But people do have alternatives. You mentioned Uber. This morning, I drove here ... actually, I was planning to drive here with Uber. I looked at the price and it was higher than expected, so I switched to Lyft. So, Uber lost a customer this morning because it was trying to increase the price. We know the platforms have a big interest in bringing people on the platform. They are trying to avoid taking advantage of the consumers because, otherwise, consumers walk away. So, as long as there is an alternative, then why should we be so worried?

Lina Khan: I think the ride-sharing space is a little different in that you do still have Uber and Lyft. I think Amazon is distinct from that because it controls the railroad, because it controls the infrastructure of online commerce. Most obviously—

Luigi: Wait a second. The railroad was only one, OK? The infrastructure ... You have alternatives. You can buy books from online Barnes and Noble. You can buy stuff from other people. So, it’s not as unique as the railroad was.

Lina Khan: I think from a consumer perspective, that’s right, but I think from a producer perspective, Amazon is a railroad to them, because if you don’t sell on Amazon, you lose 60, 70, 80 percent of your sales, and so, in order to be viably in business, you have to rely on Amazon. Then, the question becomes, OK, so do we really care about producers, or do we only care about consumers? And I think that’s the debate that’s happening within the antitrust community right now. Antitrust laws are supposed to address monopsony harms. Right? They’re supposed to look at buyer power issues.

Kate: Are they, though? I thought historically there hadn’t been very strong monopsony provisions in antitrust law.

Lina Khan: So, I mean, there aren’t strong provisions for anything in the antitrust laws. They’re written very broadly, very vaguely, but antitrust, the Sherman Act, the Clayton Act, FTC Act, they were all passed in response to producer and supplier discontent. So, it was the farmers, it was the suppliers that were being discriminated against by the railroads, they were being kicked off, and so there were monopsony harms that were animating the laws. There have been some monopsony cases that the agencies have brought, and last year, Senator Cory Booker actually wrote a letter to both DOJ and FTC, asking them this question. He said, “My sense is the antitrust laws are supposed to address monopsony issues, but you guys never seem to do anything around monopsony. What’s up with that?” I think they’re still waiting to make the letters public, but the response they got really suggested that the agencies do recognize they’re supposed to address monopsony harm. But there hasn’t been as much case law and so, when they’re bringing a case, they’re going to usually try to rely on consumer harm. But the antitrust laws are supposed to and do, in fact, cover monopsony harms.

Kate: How do you think we should change antitrust law to address a company like Amazon?

Lina Khan: It’s a great question. I think, when thinking about changes to antitrust law, we have to be really careful, because the laws are vague and broadly written, and so, a lot hinges on the enforcement philosophy that the agencies are using. So, I think there are ways in which even the current law could be used to address some of Amazon’s conduct through provisions like Section 5 of the FTC Act, which gives agencies broader mandate than, say, the Sherman Act or the Clayton Act. But, that said, there are other areas of the law, like predatory pricing doctrine, that have made it virtually impossible to succeed in bringing a case. So, I think on predatory pricing, we would need a new assertion from Congress that, in fact, predatory pricing is anticompetitive. So, I think there are certain areas where even under existing authorities, the agencies could do more, but another instance is where we would probably need new statutes, new legislation, to ensure that practices that are supposed to be anticompetitive are still enforceably anticompetitive.

Kate: Can you quickly define predatory pricing and how Amazon engaged in predatory pricing?

Lina Khan: Sure. Predatory pricing is when a company is pricing a good below a certain measure of cost. There have been debates about what that is, but, broadly speaking … and usually the concern is that if a company is in the short term able to price below cost, it’s able to use that tactic as a way to kind of drive out certain competitors of business, and then, once it has the playing field to itself, it’s able to raise the price later. This is the kind of dynamic that animated the first set of predatory pricing suits. It was mostly against the big chain stores like the Great A&P.

In the case of Amazon, there have been certain instances where it has engaged in aggressive pricing wars, one example being against Diapers.com. This was a startup in around 2009 that was doing really well. Amazon actually expressed interest in acquiring it, but the founders declined. They wanted to stay independent, and so Amazon waged a pricing war. It lost hundreds of millions of dollars pricing its diapers below cost. It had actually tweaked its algorithm to track how Diapers.com was doing its pricing in order to make sure it was always just below it. You know, Diapers.com was a startup. It was still trying to prove to investors that it was viable, and the investors started feeling really shaky after seeing that Amazon was price cutting so aggressively, and then Amazon made another bid and Diapers.com ended up selling out to Amazon. What Amazon went on to do was to scale back all of the discounts it had been offering on diapers. It closed, temporarily closed the kind of moms’ membership program that was making diapers so cheap, and so, it effectively went on to raise the price once it had limited competition in this way.

So, I think that’s one example, but I think if you look through Amazon’s business history, there are other examples in which it has made huge inroads into a market through pricing a good below cost, including, for example, in the e-book market, where it both priced its Kindle device below cost and also priced e-books below cost. And I think that’s something that we’re going to see with platform players, because these are winner-take-all markets in many ways, and so, there’s a huge incentive to prioritize growth over short-term profits. And I think that’s one way in which the law is no longer really registering the reality of these markets, because predatory pricing law assumes that companies are short-term profit maximizers, but in the case of the platforms, when you’re trying to capture the market by just growing as quickly as possible, it’s actually entirely rational to engage in predatory pricing, especially when you have Wall Street backing. Amazon has enjoyed a unique privilege from Wall Street to not have to report dividends. Historically, it would routinely report losses and its stock price would rise. So, I think there’s something interesting going on here, where investors are pricing Amazon stock at multiples that actually reflect market power, and so, Wall Street’s recognizing a reality that Washington hasn’t really been able to get its head around.

Luigi: So, you are considered one of the leaders in this new movement called the New Brandeisian Movement in antitrust from the famous justice, Louis Brandeis. But how do you differ from, for example, Carl Shapiro, in the view of antitrust?

Lina Khan: My sense is that Carl Shapiro views the role of antitrust as being one of maximizing consumer surplus, promoting consumer welfare, and thinks that there’s a very narrow role for it to play. I agree in the sense that I think antitrust is a law-enforcement regime, and so it is naturally responsive. So, you can’t really use antitrust as a policy lever. But I do think that thinking that antitrust law is only supposed to address consumer welfare is misguided. There’s a lot of scholarship that shows that in terms of legislative history, that was just a fiction that Bork imported into the law, and I think we’re also at a stage where we’re seeing all these merger retrospective studies that are showing, actually, mergers that were approved in fact have led to higher prices and lower output, suggesting that the consumer-welfare approach has actually failed, even on its own terms.

So, even if all you care about is consumer prices as the main metric of competition, actually, all around us we’ve seen instances where mergers have been approved and then have led to higher prices. So, I think the Carl Shapiro approach really hews very closely to a consumer-welfare approach to antitrust and a somewhat narrow definition of it, whereas I think the New Brandeisians think of antitrust law being able to target other forms of market power, such as, say, monopsony or innovation or quality harms.

Luigi: So, what do you want to maximize?

Lina Khan: Competition.

Luigi: OK, so there are two points of contention between, let’s say, for lack of a better word, Carl Shapiro and Lina Khan. One is, what is the objective of antitrust itself? The Chicago approach to antitrust pioneered by Bork, et cetera, was very clear that the role of antitrust is not to preserve competitors. Because sometimes you say you want to preserve competition. Now, “preserve competition” is a bit of a source of confusion, because are you preserving competition for what goal? Is competition a goal by itself? Do you want to keep alive inefficient producers just to have more than one producer? So, that’s the first tension.

Then, there is a second tension, which is, should we be concerned about democracy, for example, in antitrust? Not to give away the punch line, but, ironically, I am much more concerned about the second than the first. I’m with Lina more on the second than the first. So, in the first, I don’t think, and maybe because I’m too much of an economist, but I don’t think that we need to preserve inefficient competitors just to preserve competitors. On the other hand, I am worried that excessive concentration might have negative repercussions on the political dimension. And so, the Brandeisian name and label really refers to this second point.

Now, Kate, what is your position here?

Kate: I like your distinction between antitrust for the sake of preserving competition versus antitrust for the sake of preserving democracy. I agree that it’s ridiculous to say, “Oh, we need to preserve competition just for competition’s sake,” if you have an industry in which it’s very natural for there to be at most one or two companies, and anything more than that would be super inefficient. In those sorts of industries, I think the right thing to do is allow those one or two companies to dominate and just make sure that the government keeps a close eye on that industry, so that they don’t take advantage of their monopoly or duopoly power.

So, in that sense, I agree with you, but I think to your point about democracy, what’s really complicated is that there’s no good economic way of analyzing the effective monopoly power or just concentrated large companies on democracy. We don’t have a good model for that, because it’s sort of outside the realm of economics. I agree with the New Brandeis Movement in that we can’t just rely on this vague concept of consumer welfare and expect that to solve all problems.

Luigi: I agree, but the question is, from a legal point of view, should we consider problems to democracy in the implementation of antitrust? The lawyers and the judges are not necessarily asking if you should do it in the narrow economic framework. They are concerned about the problem, and my fear is that we economists, unless it fits in our model, it doesn’t exist. And that’s a problem. I think that I’m 100 percent with you that these connections are vague and should be studied more, but we cannot deny that they exist.

There is a long tradition, at least from the historical perspective, linking the two. Most listeners probably don’t know that the reason why in Japan, the zaibatsu, which are conglomerates that existed before the war, were destroyed and fragmented, and the reason why the big industrial complex in Germany was destroyed after World War II is because the American troops, when they arrived, brought with themselves the Brandeisian concept that there is a strict association between dictatorship, especially fascist dictatorship, and concentration. So they, once they had the chance to be in power, destroyed ... They also tried to destroy them in order to set these countries on a more democratic way. So, it’s not that there’s not a historical record, there’s not any connection, it’s just that we cannot model it properly in our economic models.

Kate: Yeah, I think we’re on the same page, and I think we’re on the same page with regards to the possibility for overreach of the New Brandeisian approach. I totally agree with you that just preserving competition for competition’s sake could be misguided and could, in certain situations, lead to inefficiencies. On one of our last podcasts, when we talked about whether Facebook is a monopoly, I thought that we needed to amend our antitrust laws to be more specific, and now I’m sort of leaning in the direction of, “Oh, we need to have an antitrust approach that’s flexible, that can take into account ideas outside of just an economic model.” So, I’m conflicted on this. It’s a hard question.

Luigi: No, but I think it’s useful to say, “From an economic point of view, this is what we can say, this is what we cannot say,” and then say, “We are concerned about these other channels, and, to be honest, we’re not the most competent to analyze those channels, but that doesn’t mean those channels shouldn’t be analyzed or shouldn’t be discussed in antitrust, but it’s also useful to keep them separate.” Because in my reading of Lina’s work and other people’s, especially Open Market, they put all these things together, and sometimes it’s a bit hard to disentangle, and they might be connected.

So, take the view of protecting small shopkeepers, for example. I think that from a political point of view, some people might argue we need to protect small shopkeepers. Why? Because they are really instrumental to democracy. There is a long tradition of protecting small farmers because small farmers give stability to the democratic system. So, I can see somebody making that argument. I’m not sure that I want to buy that argument, but I can see somebody making that argument. That argument, to me, is different from an economic argument that the low prices of Walmart or the low prices of Amazon hurt potential suppliers, and this is something we should be concerned about from a purely economic point of view.

Kate: Again, I agree with you. I do think that the New Brandeis approach is a little bit lacking in focus. I mean, one interpretation of it is, “Oh, once companies get too big, that’s bad.” And I don’t think that that’s at all what Lina was saying. I think she was actually very precise about her economic interpretation of the New Brandeis Movement, and I would say, from Lina’s perspective, at least based on our interview with her, she thinks that the consumer-welfare approach just historically hasn’t done a good job of developing with the times and with technology. It’s a little bit too narrow in what they define as harms to consumers. They haven’t done a great job of going after monopsonies. They haven’t done a great job of going after predatory pricing. And so, in some sense, I would describe Lina ... I mean, I think I’m sure neither she nor Carl would like this description, but I think she could be considered a consumer welfarist that’s just more modern in her approach to how big companies can actually hurt consumers.

Luigi: I think you underestimate the difference there. I think that Lina said clearly, “I want to protect competition,” and she didn’t say, “I want to protect competitors,” but I think that at the end of the day, they want to protect competitors. They want to protect small producers because they think these are useful to democracy. And I think that step has not been fully proven to me.

Kate: I think you’re putting words in Lina’s mouth. Ultimately, I agree with the people on the New Brandeis side who think that the United States’ historical approach to antitrust hasn’t kept up with the times. I disagree with the people who think that we should just preserve small producers.

Luigi: So, Kate, are you going to wear your tight jeans and go to the expensive coffee shop to read more of Lina Khan’s papers?

Kate: No. I’m going to be wearing my tight jeans, going to my expensive coffee shop to read more Karl Marx.

So, we’ve talked about the consumer-welfare camp and we’ve talked about the New Brandeis camp, but on our next episode, we’re going to be talking about the recent $5 billion fine coming from the EU imposed on Google, and whether there’s actually anything the US can learn from the EU in terms of antitrust enforcement.