Latest / The Capitalism and Freedom in the Twenty-First Century Podcast / Antitrust Policy, The Chicago School Consumer Welfare Standard and The Rise of the New Brandeisians

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Antitrust Policy, The Chicago School Consumer Welfare Standard and The Rise of the New Brandeisians · The Capitalism and Freedom in the Twenty-First Century Podcast

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>> Jon Hartley: Welcome to the New Books Network.
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[MUSIC]
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>> Jon Hartley: This is the Capitalism and Freedom in the 21st Century podcast where
0:51
we talk about economics, markets, and public policy.
0:54
I'm John Hartley, your host.
0:56
Today I'm joined by Luke Froeb, who is a professor of management at
0:59
the Vanderbilt University Owen School of Management.
1:03
And the former chief economist at the Department of Justice Antitrust Division
1:07
and former chief economist at the FTC.
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Luke is one of the nation's foremost experts on antitrust issues and
1:13
is a leading expert in competition policy.
1:16
Welcome, Luke.
1:17
>> Luke Froeb: Yeah, thank you for having me, I'm thrilled to be here.
1:19
>> Jon Hartley: Luke, I'm curious, where did you grow up and
1:22
how did you first get interested in economics?
1:24
I know you did your undergrad at Stanford.
1:27
Was that where you got interested in economics and
1:30
where you decided that you wanted to get a PhD in economics?
1:33
>> Luke Froeb: Yeah, I grew up in San Diego.
1:35
I actually wanted to live at home and go to UCSD, and
1:38
my mom kicked me out of the house and made me go to Stanford.
1:42
So it was definitely my second choice, but-
1:44
>> Jon Hartley: You grew up in
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La Jolla, right?
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>> Luke Froeb: Yeah, 50 yards from the beach.
1:48
I mean, I had no idea, when I grew up there, it's a middle class suburb,
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and it's just, you go back there now and, my Gosh.
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>> Jon Hartley: It's funny, I met your parents once on a family vacation.
2:03
I didn't meet you, it's just a happenstance kind of thing.
2:07
But I remember I had heard a lot about you back in 2010.
2:11
And since then we've met and got to know each other a little bit, so
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you grew up in La Jolla.
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>> Luke Froeb: Yeah. >> Jon Hartley: And
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then you went to Stanford, to northern California.
2:21
Is that where you first got interested in economics?
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>> Luke Froeb: Yeah, so I wanted to be a physicist, and so
2:27
I got really excited about physics.
2:30
When I was in high school, I took a physics class and I thought,
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this is so cool.
2:35
I like the idea of modeling everything and
2:37
that you could understand the entire world with physics.
2:41
And I got to physics and, I mean, I got to Stanford and I started taking physics.
2:45
And you have to well over a half your required courses are our math and physics.
2:52
And so it didn't leave much time for much else.
2:55
And I found that I was one of the smartest kids, or
2:58
the kids who did the best in my high school, in my classes.
3:01
But when I got to Stanford, I was just an average physics student.
3:08
And my roommate was taking econ, and
3:10
he kind of explained to me what it was, I had no idea what it was.
3:13
Anyway, so he showed me some of his problems, and I could do them.
3:17
And I kind of got interested with this.
3:19
It was the exact same tools as physics, and
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I love the idea of being able to model stuff and understand stuff through models.
3:27
And so I started taking econ, and
3:31
I really liked it, and I got interested.
3:35
At the time, I was on the left side of the political way,
3:38
left side of the political spectrum.
3:40
I lived in Colombia, the social change through nonviolence co-op,
3:45
and I got interested in Marxist economics.
3:48
I studied really hard, I remember this one guy who's a senior at the house.
3:55
I was in 10th grade and he talked me through Das Kapital.
4:01
And I was taking John Gurley, who is a really good teacher, and
4:06
he was a Marxist and- >> Jon Hartley: That's the Stanford econ
4:09
department at the time.
4:10
>> Luke Froeb: Yeah, he was in the econ department at Stanford, and
4:13
he introduced me to.
4:15
I think he taught the core microeconomics class, and he was a really good teacher,
4:19
it was really fun.
4:20
And I thought, man, this is great.
4:22
And then I took his follow on Marx's class, and
4:26
I looked back, I had a copy of Das Kapital.
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That was the reading in the class communist manifesto and Das Kapital, and
4:34
there are a couple other readings.
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And I look back on that, I underlined everything.
4:41
I just tried really hard to understand it.
4:43
I could never understand it.
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And it was only about a decade later when I look back on it, I go, yeah.
4:52
They don't consider incentives,
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they just assume that everybody's gonna work for the common good.
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And, my gosh, I'll tell you a funny story.
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When I lived in Colombia, they model the house, and
5:09
they still do, I think, they run the house by consensus.
5:14
And it's really easy to decide which third world political
5:19
revolutionary we're gonna lend our support to.
5:24
But when it came, it was an old frat house, and
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there were some really nice singles and some really terrible quads.
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And when it came to decide every quarter,
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we'd decide who lived in which room, and we'd have this consensus meeting.
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And you'd have people arguing that for the good of the house and for
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the good of the social change through non violence, that was the theme of the house.
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I deserve the really nice single [LAUGH].
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And I go, this can't be right.
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And it was kind of the first inkling that I got, the idea of kind
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of collectivism just doesn't hold up with individual incentives.
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And people were just naked self interest in these.
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Who decides who gets to live in which room?
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But when there wasn't a cost to lending our support to third world
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revolutionaries, that was easy to decide.
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But anyways, it was kind of funny looking back on it.
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>> Jon Hartley: That's fascinating.
6:25
It's funny how central planning seems to work really well.
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I guess in a small family where you have sort of a dictatorial sort of parent or
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two, central planning works quite well, strangely.
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But when you expand it to more people, I guess, to size of a frat house or a school
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or a country, things seem to go really south in terms of efficient allocations.
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>> Luke Froeb: I like to show my students at Vanderbilt.
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There's a great Tyler Cowen and Alex Tabarik at George Mason run
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this kind of online university called marginal revolution.
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And they have these great series of videos, and
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one of them is on private property rights.
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And they talk about the birth of modern China, which was in Xiaogang
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village when these villagers got fed up with collective ownership.
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And nobody's working very hard because you got all these people in the village,
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and if you produce an extra bushel wheat, you only get a fraction of that.
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And so you had people free riding, and they divided up the collective
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land into private property and signed everybody a parcel of land.
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And they call it the household responsibility system.
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And output went up by a factor of six when you have
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the incentive aligning effects of private property.
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I show that to all my students, but the same thing happened.
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Same thing happened in Vietnam, same thing happened with the pilgrims.
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When John Bradley came over on the Mayflower,
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they had collective land ownership, nobody was working.
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And then he assign private property, and
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we all learned the mythology of thanksgiving.
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The reality of thanksgiving was that it was private property that we all would be
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thankful for, so I make my kids watch that every thanksgiving.
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And then we go around the table, what are you thankful for?
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And everybody says, private property [LAUGH].
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>> Jon Hartley: That's too funny, that's too funny.
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So I think you decided to get a PhD in economics while you were at Stanford, and
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you got into the University of Wisconsin, you did your PhD there.
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I'm curious, how did you first get interested in anti-trust and
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competition policy?
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>> Luke Froeb: Yeah, so I wanted to get out of state.
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I mean, I could have gone to Stanford in retrospect.
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Anybody who's listening to this,
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who's going to econ grad school, go to the best school you can get a into.
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And so I probably should have gone to Stanford, but
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I wanted to get out of California.
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I'd spent my whole life in California, and so
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I went to Wisconsin just cuz the people were so nice there when I visited.
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And they're really good at econometrics, and that's what I was.
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I took the first year econometrics when I was at Stanford.
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And so I studied econometrics at Wisconsin, and
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I got a job down at Tulane, and that was kind of fun.
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But I gave a paper at the Justice Department, and
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I wrote my thesis when I was at Wisconsin.
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I was a time series macro econometrician, but I wrote my thesis on time series
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of profits and concentration, which was, I don't know.
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It was an esoteric topic, but
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it was using my methodology of time series econometrics.
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And I gave a paper at the Justice Department, they offered me a job, and
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I was the data guy at justice for eight or ten years.
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And then I learned at the Justice Department,
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I learned everything I know about anti-trust and competition economics.
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>> Jon Hartley: That's fantastic.
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So you grew up as a staffer, you spent many years as
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a staffer before coming back to academia.
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>> Luke Froeb: So I was about eight or ten years as an econometrician
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at the anti-trust division of the Department of Justice.
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And then I got a job offer, I decided to go on.
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My late wife and I were living in Washington, DC,
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and we were the first white heterosexuals in our neighborhood in Northeast DC.
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All the white people after the 68 riots, after MLK was assassinated.
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All the white people left everywhere in DC, and all moved to Northwest.
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And the blockbreakers were the gay men in the early 80s.
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And when they died of AIDS, then the white heterosexuals moved in.
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And so we were the first white heterosexuals on our
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block in Northeast DC.
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And there were all these kids there on our block, and
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we're a mile away from the best museums in the world,
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best free museums in the world, and none of them had ever been.
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So my wife and I, every Saturday morning, we'd take all our kids in
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our neighborhood and take them to go see all the free stuff around.
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And the most fun we had was taking them to the Tank Museum in Aberdeen, Maryland.
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There is 100 acre big plot of land out in the midst of Maryland,
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and it's just filled with every tank that's ever been produced, it's wild.
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Yeah, you can take your kids there, they can play on them, plan of stuff.
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But it was really fun to see all the old tanks.
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>> Jon Hartley: Wow, yeah, it's so
12:00
fascinating just how much history you can go see around DC.
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And it's amazing how much DC has even changed just over the decades.
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It's become an extremely wealthy place, in part because of, I think,
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some of these defense buildups during the Reagan and the Bush era.
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It kinda went from being what some people would call a seedy,
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very dangerous kinda city to a very nice and affluent one.
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I'm curious, tell me, so you went back to the FTC and
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to become their chief economist, and you became the chief economist at
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the Department of Justice Antitrust Division more recently.
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Tell me, what do these positions do?
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I guess the US is somewhat unique in that it's got two anti-trust authorities.
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It's got the DOJ, and the FTC, and different industries.
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But I'm curious, what does the chief economist do?
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What do these economists working at the FTC and the DOJ anti-trust division,
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what do they do under [INAUDIBLE]?
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>> Luke Froeb: So the chief economist has remarkably little power, and
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part of it is just the federal end of the civil service system.
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You can't fire, hire, promote, reward, punish.
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You can't do anything to align the incentives of the individuals with
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the goals of whatever your goals are.
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And the staff, they're very suspicious of the political appointees.
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And the advantage I had, at least the first time I went around,
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I knew most of the staffers from my time, or
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I knew a lot of the staffers and I was a staffer like that.
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I'd go over there and eat lunch.
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One of my best friends worked at the FTC, so I had the advantage of that.
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And so we'd have these Monday morning staff meetings,
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and the bulk of our work was just merger work.
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So every merger has to file a Hart-Scott if they're big enough.
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Now, I think it's about 55 million.
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You have to file a form with the federal government called the Hart-Scott Rodino
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form, and it goes to both agencies and
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they decide whether they wanna investigate it.
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If they both wanna investigate it, then they have to decide who gets to do it.
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And there's a little bit of a kinda historical difference.
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But basically, if there's a big merger and they wanna investigate it,
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there'll be a fight over it.
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Yeah, and the chief economist, so that's what I did as chief economist.
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The staff economists, they're organized as functional organizations and
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I've actually written a paper about this.
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I mean, some agencies sprinkle the economists
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along with the attorneys in the agencies.
14:56
But justice and the FTC have this functional organization,
15:01
where the economists do their own work and they analyze a merger and
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send it up the flagpole.
15:07
The economist criteria is, hey, is this merger good or bad?
15:11
And the attorneys have a different focus.
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Their focus is, hey, can we win this one in court?
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And so they're always at odds, or if they're doing their jobs,
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they should be at odds with each other.
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They should not be cooperating with each other, and
15:27
it was my job at the top of the food chain.
15:30
When the recommendations came up from the economists and
15:35
the recommendation came up from the attorney,
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it would be up to the senior staff members to go ahead and decide to duke it out.
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And at the staff meeting and decide, I would represent the econ point of view and
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the attorneys would represent the staff point of view.
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And sometimes I disagreed with the staff and
16:00
sometimes the lead attorneys, or not the lead attorneys, but
16:04
the attorney managers, they disagreed with their staff, too.
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And then it would ultimately go to the chairman or
16:12
to the assistant attorney general if we're over at the Justice Department.
16:18
So anyway, yeah, that was my job as the chief economist.
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>> Jon Hartley: That's absolutely fascinating.
16:24
So I wanna talk about the history of antitrust for a moment.
16:28
Late 19th century, early 20th century,
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we start with all the big trust busting era, big monopolies.
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Teddy Roosevelt, Sherman Act, Clayton Act,
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Lewis Brandy's sort of the first era of antitrust policy or
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any sort of concept of antitrust policy.
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And this is also after the first century of seeing some
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meaningful amount of economic growth in sort of the 1800.
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You get this sort of response to very, very big firms, the so called trust,
17:06
the big banks, the big oil companies, the standard oils and so forth.
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And then a few decades after the war in the 1970s, 1980s,
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we see Bork, the Chicago school, the consumer welfare standard.
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Which is very dominant from that period of time in antitrust policymaking and
17:28
how the judiciary approaches mergers and how the FTC and DOJ approach mergers.
17:35
And now we have in the sort of late 2010s,
17:39
the emergence of these so called new Brandeisians.
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And I'm curious, what do you think about this trajectory?
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And who do you think has it right here in these sort of opposing
17:51
schools of thought when it comes to antitrust policy?
17:55
>> Luke Froeb: \Well, what I've seen in my lifetime,
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so I got there at the tail end of.
18:03
There was actually a, Reagan appointed Stanford professor,
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and he had a very kind of economics approach to antitrust.
18:13
When I got to the Justice Department,
18:15
it was the tail end of Reagan all through Bush and the beginning of Clinton.
18:20
That was my tenure there and the Reagan revolution.
18:24
And so I'm kind of passing over the earliest part, but this is what I've seen,
18:29
and I don't study history.
18:30
I kind of have the Joey Ramon view of history, that's not where I wanna be.
18:36
So I don't care about history cuz that's not where I wanna be.
18:39
Rock, rock, rock and roll high school.
18:41
But, I actually don't know that much about the early history of antitrust, but
18:46
I do know the history of antitrust,
18:48
beginning with the tail end of the Reagan revolution.
18:51
And economists were firmly in control of antitrust policy.
18:57
And the attorneys, their memos would come up, and the economist memo would come up.
19:02
And they often complained that it was harder to get a merger challenge
19:07
out of the Justice Department than it was to win one in court.
19:12
And that was largely right, I mean,
19:15
mainly because the courts were, this is the time of
19:21
Von supermarket, the way they analyze mergers.
19:26
They delineate a market, and if the shares are big, they block it.
19:31
If it's a four firm going down to three firm, it's a four to three,
19:34
three to two or two to one merger, they're gonna challenge it.
19:38
But this is the time when they were challenging mergers that
19:43
were 20 to 19 mergers.
19:45
It was just nutty, there was no rationale, there's no economic rationale for it.
19:51
And the basically, starting in the 68 guidelines,
19:56
they tried to write down some rationale and say,
20:01
hey, we're concerned with market power.
20:05
And by the time that got to the 80s, and I don't know the history
20:11
of it before I got there, the economists were in charge.
20:16
And we'd say, look, is this merger gonna raise price?
20:21
And that was our main concern, and
20:25
we would build models and build empirical models.
20:30
And kinda look at cross sectionally, if there were markets
20:35
across if there's supermarkets and we see a three to two.
20:41
If we compare a three firm market with a two firm market, and
20:45
is the price higher in the two firm market?
20:47
And that would be an empirical model of merger or
20:51
we see consolidation in the industry, and
20:54
there was some data that we could look at, we asked whether price went up.
20:59
But by and large, most of our work was building models.
21:03
We'd model how firms compete and then we use the model to forecast or
21:08
simulate the loss of competition following merger.
21:12
And basically, what the major models say is that four to three, three to two,
21:18
and two to one mergers are bad, and that's basically the mergers we block.
21:23
But we'd have to support that, and
21:26
it would obviously depend on how sensitive demand was to price.
21:31
If demand is very sensitive to price and you try to raise price,
21:34
you lose a lot of quantity.
21:36
Then you're making more on the stuff you sell, but you're losing a lot of sales.
21:42
And that would make the merger unprofitable.
21:47
So that's the kind of stuff that, and we estimated demand and
21:51
we simulated, had some built models.
21:54
Then what I'm known for is building these very tractable models that
21:58
are actually used by the Justice Department.
22:01
They're online if you wanna try them out @competitiontoolbox.com.
22:06
But that actually allow the government to figure out, hey,
22:10
how much competition is gonna be lost by merger?
22:13
Now, to relate that back to your question about the new Brandeisians,
22:18
that intellectual tradition is still going strong.
22:22
And the Biden appointees who are trying to turn back the clock
22:27
to what I consider the battle days of antitrust, the 60s,
22:32
before we had this economic rationale for them.
22:36
They're running into resistance from the staff, they're getting mugged by the,
22:41
they say the conservative is just a liberal who's been mugged by reality.
22:46
They're getting mugged by reality.
22:48
Lena Khan came in wanting to block all mergers and
22:52
she's losing everything in court.
22:55
And you could say, well, it's the Reagan judge or the Trump judges.
23:00
They had a lot of appointees and, but by and large,
23:04
it's the development of the common law.
23:08
And the common law has evolved, again, this is not my area of expertise,
23:14
I'm just relying on basically my co author, this guy Greg Worden.
23:21
He'd spent his whole career at the Justice Department, 40 some odd years.
23:26
He's written probably 300 articles on antitrust and
23:30
written a book about the history of antitrust.
23:33
And he's told me that the courts have moved and it's very hard to move it back.
23:39
You can't just come in and say, yeah, we're gonna turn back.
23:43
We can bring cases, but we ultimately got to win them in court.
23:46
And [LAUGH] they're not very successful at kind of turning the law around.
23:53
And that's as it should be, I mean, these are enforcement agencies.
24:00
They're not there to make law, even though kind of that's probably,
24:05
if you ask Chairman Khan, that's probably what she'd say she wants to do,
24:10
she wouldn't say that in public, but.
24:13
>> Jon Hartley: So it sounds like in terms of criterion, so in this, I think,
24:17
pre-Lina Khan consumer welfare era of DOJ, FTC, and
24:22
then how the courts sort of thought about these things,
24:26
in terms of the mergers that aren't permissible.
24:30
Those are sort of horizontal mergers that are sort of three to one,
24:34
two to one, four to one type arrangements.
24:37
Now, I recall there was sort of maybe a change that vertical mergers are thought
24:41
of very differently.
24:43
If there's maybe some sort of synergies and that they're vertical
24:47
mergers being they're not competing directly against each other.
24:52
Instead they're sort of at different, the two merging firms are at different
24:57
points in the- >> Luke Froeb: The way I would phrase it,
25:00
look, is when you combine substitutes.
25:03
So I'm worried that if I raise price, I'm gonna lose money to you,
25:09
that's what I care about, but if I buy you, that changes my profit calculus.
25:15
So I'm no longer worried that I'm gonna lose consumers to you or
25:20
dollars to you, and so if I buy you,
25:23
that changes my profit calculus and I'm more willing to raise price.
25:29
That exact same logic, if you use that exact same logic on a vertical merger.
25:34
If you have a vertical merger between two different stages in the same
25:39
vertical supply chain, they're complementary products.
25:43
And if you apply that exact same logic to complementary products,
25:48
then a merger would reduce price.
25:51
It's like, why do super supermarkets own their own parking lots?
25:55
Well, if they didn't, each of them would try to raise price to capture
26:00
a share of the shopping dollar cuz you need to consume both the grocery store and
26:05
the parking lot in order to buy food.
26:08
And when they compete, they raise price, and if you let them merge,
26:12
then they lower price.
26:13
And so it's the exact same logic that leads us to challenge horizontal mergers,
26:19
would lead us to kinda let vertical mergers go through.
26:22
Now having said that, there's a little bit of complicated, the one part of the story
26:28
that I didn't get was, well, what happens to rivals, non-merging rivals?
26:33
And there is this effect called raising rivals costs that complicates
26:39
the vertical analysis, but the first order merger effect,
26:44
in vertical, is the exact opposite of horizontal.
26:49
>> Jon Hartley: So by rivals, do you mean things like collusion and price fixing?
26:52
I remember- >> Luke Froeb: No, no.
26:59
When I was at the Justice Department, we brought a vertical merger case.
27:04
And I'm not allowed to divulge the internal deliberations of
27:07
the Justice Department, but given what I just said,
27:10
you can probably figure out whether I thought that was a good case or not.
27:15
We blocked AT&T, Time Warner, and
27:17
Time Warner had content, ATA&T had distribution.
27:22
They owned Direct TV, they were everywhere.
27:24
And our theory of the case, and I supported it when I was
27:29
at the Justice Department, it was really fun to watch.
27:34
It's the first litigated vertical merger case in over 40 years.
27:39
And our theory of the case was that the merged firm, AT&T, Time Warner,
27:44
would raise the price of Time Warner content to non-merging firms like Comcast,
27:49
and that would be an anti-competitive effect.
27:53
And the pro-competitive effect, of course, as I said before, that when you
27:57
combine complementary products, there's an incentive to lower price.
28:02
And sometimes that's called the elimination of double marginalization.
28:06
It's more nuanced than that, but that's the offsetting effect.
28:10
And figuring out how to balance the raising rivals costs against the vertical
28:15
coordination or the vertical alignment of incentives, which is pro-competitive,
28:20
is very nuanced, very difficult, and those cases are a mess.
28:24
And [LAUGH] I pity the judge that has to decide that.
28:31
They do their best, but this is really nuanced kind of economics,
28:37
this PhD kind of style, nuanced stuff.
28:40
I built these vertical merger models and just explaining them to somebody with
28:46
non-merging, if you don't have non merging rivals, they're pretty easy.
28:52
But if you have the non-merging rivals, then you need game theory.
28:56
And again, I build those models.
28:58
My closest colleague is a mathematician who's interested.
29:04
We build these game theoretic models of competition and
29:07
simulate the loss of mergers.
29:09
And I just can tell you from working with these models that the simple logic of
29:13
vertical merger, they're almost always good.
29:17
It's really hard to find a vertical merger where
29:20
the effect on non-merging rivals offsets the benefits to consumers
29:25
of the vertical coordination between the merging products.
29:29
>> Jon Hartley: Fascinating, I'm curious,
29:31
I'm gonna press you a little bit on models.
29:35
I'm fascinated by this topic in general, and it is a very, unlike other
29:40
areas of economics, I feel like applied microeconomics, think about tax policy.
29:47
You have these sort of natural experiments where you can look at a tax change and you
29:52
have a, say, a treated state that lowered tax rates and a control state that didn't.
29:57
And you sort of look at the differences on various outcomes like revenues or
30:01
growth or something like that.
30:03
You measure that as your treatment effect and you can do that in a lot of place.
30:06
But competition is just inherently a very difficult and
30:11
sort of very model-driven type of economics industrial organization.
30:18
Even though we call it the new empirical industrial organization or
30:22
the new empirical IO sort of revolution of the 80s and 90s, it still relies on,
30:26
even though it's empirical, it still relies on a lot of model assumptions.
30:31
So I'm curious, when you think about measuring consumer welfare,
30:36
this is the whole idea that you can reduce deadweight loss and
30:40
increase both consumer surplus and producer surplus by making sure that we
30:45
have competition, and that we don't have monopolistic firms.
30:49
That's sort of the theory.
30:51
But I'm curious, do you use in terms of your actual metrics and data,
30:55
do you use things like, say,
30:57
Hirschman indices to measure the impact on concentration in an industry?
31:02
Sometimes it's vague what your denominator is or how big is your industry.
31:08
For example, you could look at something like Google or Google search.
31:12
Google dominates say 90 some odd percent of the online search category.
31:18
But if you were to say that the real industry that Google's in is marketing and
31:23
marketing revenues or something like that,
31:26
it probably is a very small share of sort of marketing industry revenues.
31:30
But I'm curious, are there other things like [CROSSTALK].
31:34
>> Luke Froeb: I gotta say something about the Google Search case.
31:36
So I'm not working on this case, so
31:39
I can freely opine about it, but it's got a huge problem.
31:45
So first of all, they have to delineate a market narrowly enough so that they
31:50
can say to a judge, this merger is gonna eliminate competition in this market.
31:56
And they've denominated, they've delineated.
32:00
What they call a vertical, I mean, a general search market.
32:04
So Google, Bing and Yahoo, Duck Duck Go is really tiny, but those three,
32:10
and Google has probably high 80s, 90% of the general search market.
32:16
And one of the things that the repudiated merger guidelines by
32:21
the Biden administration says, we're concerned about market power.
32:27
And you think, okay, first of all, how would you look at market power in,
32:33
how would you exercise market power in search?
32:36
Well, you'd raise the price of advertising, which gets you right back to,
32:40
okay, is this a market for advertising?
32:43
And if they raise the price, is it a market for targeted advertising?
32:48
And so they've defined this general search model, which is very narrow.
32:54
But here's the huge problem.
32:56
This is with monopolization cases.
32:58
So the antitrust laws, there's three parts of the antitrust laws.
33:02
One is horizontal collusion.
33:05
You don't rig bids, allocate customers, or agree not to compete with your rivals.
33:12
But if you do, don't use the phone cuz it's so unbelievable.
33:17
Whenever we prosecute these criminal cases, people calling each other
33:22
up before auctions, first thing we do is subpoena the phone records.
33:27
And they always kind of put them in a prisoner's dilemma, and
33:31
they always kind of fess up.
33:33
But the other part is horizontal mergers, price fixing.
33:37
Those are kind of loss of horizontal competition.
33:40
That's fairly easy to understand.
33:42
The monopolization cases are much, much harder to understand.
33:47
First of all,
33:48
you've got this paradox that were only going after really successful firms.
33:52
So Google is a really successful firm.
33:54
How did they get that way?
33:55
They innovated more than anybody else.
33:58
I mean, I remember when I was back at the FTC, Google came in, gave a presentation
34:03
to us, and they talked about how they developed their search tools.
34:07
And so what they do is they find something wrong with their search tool.
34:12
And the example they gave us was, when you search for
34:16
Essex, it came up with porn sites.
34:19
And they say, okay, something's wrong with our algorithm.
34:23
And it's a very complicated problem.
34:28
But they've simplified it down to when you put a query in,
34:32
they put it in their own language.
34:34
And when they turn that language into a search, they have this reduced set
34:39
of instructions that give you an answer in less than a half second.
34:43
I mean, if they can't do that, people won't use it.
34:47
And so they've got this pretty complicated system.
34:51
And so when they find problem like Essex, they play around with the code and
34:55
they figure out what the problem is.
34:57
And then they AB test it.
34:59
So then they take a bunch of queries and they send them, they're coming
35:04
to Google search and they send it to the new and upgraded Google search.
35:09
And they send some to the old search and
35:12
then they show a bunch of people on Amazon Turk.
35:15
You know what Amazon Turk is?
35:17
>> Jon Hartley: Yes. >> Luke Froeb: So they have paid
35:18
people who look at the two searches and say, well, this one's better or
35:23
this one's not better, and
35:25
they won't adopt an innovation unless if it lowers the quality of the search.
35:30
And they've been doing that for 20 years.
35:32
And it's no wonder they have the best search engine in the world.
35:36
And because they've been working harder on it than anybody else.
35:41
And the fact that they're big, I don't know,
35:44
there's so many problems with that thing.
35:46
And here's the killer.
35:48
But here's the killer.
35:49
So if you could look at all the big monopolization cases that occur once
35:54
a generation, you look at the IBM case, you look at the Microsoft case,
35:59
you look at the Google case, those are all monopolization cases.
36:04
There's no relief.
36:05
What are you gonna do?
36:07
I mean, and what are we gonna do to Google?
36:10
We say, hey, you can't have such a good search engine.
36:14
You gotta give some share to somebody else, I mean.
36:17
Or in Europe, they gave people a choice.
36:20
They say, hey, you can't be the default engine on Android.
36:24
And so they gave consumers a choice.
36:26
And what did consumers choose?
36:28
They all chose Google because everybody knows it's better.
36:31
So now you're the antitrust authorities.
36:33
What the F, is the Justice Department gonna do if they win this case and
36:38
there's no relief?
36:40
And if you look ahead, reason back chapter five of my textbook, what everybody
36:44
should do is look at, okay, what are we gonna do if they win this case?
36:48
Well, they don't know what they're gonna do, there's no relief.
36:51
And if there is no solution, there is no problem.
36:55
And that's the real problem with these cases.
36:59
There was no solution in the IBM case.
37:01
There was no solution in the Microsoft case, and
37:04
there certainly is no solution in the Google case.
37:06
That's not gonna make everything, it's not gonna harm consumers, and
37:10
maybe that's the reason they want it.
37:12
[LAUGH] If I were a conspiracy theorist, they're very clever.
37:15
They get rid of this consumer welfare standards so they can break up Google and
37:19
not be accused of harming consumers because we don't care about that.
37:23
I don't know. >> Jon Hartley: So,
37:23
Luke, I wanna get a little bit more into the details of how exactly we
37:28
measure the impacts on consumer welfare and the types of models.
37:32
I wanna push a little bit on the types of models that you're using because empirical
37:37
IO, it still relies on models and some model assumptions.
37:40
Unlike, say, applied micro, where you have sort of like a treatment and control
37:46
group and the treated area receives the tax cut and the control group doesn't.
37:51
You can look at various outcomes like output, or
37:54
you can look at things like tax revenues and so forth.
37:58
In IO and antitrust sort of economics,
38:01
you're relying on some sort of assumptions.
38:06
What does the demand curve look like?
38:09
How do you measure the amount of consumer welfare that's gained or lost?
38:12
The whole theory kind of hinges on yet
38:15
that a monopolist has a demand curve that looks a certain way.
38:18
An oligopolist has demand curves that look a certain way in a perfectly competitive
38:23
market.
38:24
Demand curves that look in some way.
38:25
You have to measure demand curves somehow and
38:28
you have to measure cost curves somehow.
38:30
I'm curious, do antitrust authorities, how do they measure markups when you
38:35
have difficulties measuring things like marginal cost?
38:39
It's not easy to attribute marginal costs.
38:43
Certainly if you're working with a multinational company,
38:46
things can be a little bit difficult.
38:48
How do you measure opportunity cost?
38:50
Do you assume things like Carnot competition that has a big element to it?
38:56
Do you things like BLP, Barry Levenson?
38:58
>> Luke Froeb: That's a great question.
39:01
When you're doing model based inference, you can use the model to
39:05
basically fit the model to what you can observe, which is the current data.
39:11
And typically you don't have very good data.
39:13
You don't have the time or luxury to run a complete generalized demand system.
39:19
You're lucky if you get an aggregate elasticity and some shares, and
39:23
that's about it.
39:24
But been a lot of effort on the demand side saying, okay,
39:28
let's try to develop these really cool conceptual,
39:33
these flexible functional forms,
39:36
develop these really interesting ways to estimate them.
39:41
There just isn't time in a merger investigation to do that.
39:44
And it doesn't matter the times when we've been
39:49
able to get a sophisticated demand model like BLP and
39:54
estimate it and then simulate the effects of the merger.
39:59
It just didn't matter that much.
40:01
And one of the things you also asked about was relative, just a simple
40:06
functional form like the logit model, which has just two parameters.
40:11
And so you give me some prices, shares, and
40:13
aggregate elasticity of demand, and I can simulate a merger.
40:17
And if you tell me that these two products are closer than others,
40:23
put them in a nest, and you give me some accounting data,
40:28
and I can calculate price cost margins, and I can fit the model to those data.
40:35
Or if I don't have those data, I can assume a competitive interaction,
40:40
write down all the first order conditions that define the Nash equilibrium.
40:45
And then use those to back out the marginal, the unobserved marginal costs.
40:51
So, in the first, that's called calibration,
40:55
cuz it's not really estimation, but you see,
40:58
calibrate the model to the shares and the prices and the elasticities,
41:04
and any margins you can observe, it's maybe four or five pieces.
41:09
The shares and the prices say it's a five firm industry.
41:13
So that's ten pieces of information.
41:15
And then you get an elasticity, and that's another piece of information.
41:21
And you can use all that information and back out the parameters of the model.
41:27
And then you say, okay,
41:29
well, what about if these two firms are closer substitutes than each other?
41:34
Okay, we'll put them in a nest that adds another parameter.
41:36
You give me a margin, and I can back out that nest parameter.
41:42
>> Jon Hartley: Fascinating, and yet,
41:44
I'm sure there's quite a little bit of art, as well as.
41:50
>> Luke Froeb: Modeling is an art, yeah.
41:52
Yeah, it's a real art.
41:55
And you got to be flexible enough that one of the kind of the really cool things
41:59
about consulting, I'll put a plug in for consulting to all the grad students or
42:04
any grad students that are out there.
42:06
When you're an academic economist, you choose the questions you answer,
42:11
and you choose questions that you can answer precisely.
42:15
And so the questions that we can answer precisely are really,
42:19
really narrow ones, and nobody gives a damn about them.
42:23
But the ones that people care about are the, kind of the less precise.
42:29
Is this merger gonna raise price?
42:31
And typically, there's not enough information to run.
42:35
There's no good natural experiments, either cross-sectionally or
42:40
with time series data, or the data are not available, or it's in lousy condition.
42:46
And so you really have to go to a model-based counterfactual.
42:50
And so you say, okay, the observed world is what I can observe in
42:54
the counterfactual is the post merger world that I can observe.
42:58
And once I calibrate the model to the observed world, I can use it to forecast
43:03
or simulate the unobserved counterfactual, which is the post merger world.
43:09
And sometimes the counterfactuals are different.
43:13
We observe the monopolized world or we observe the collusion world.
43:19
And we wanna know what would have happened if these guys were competing.
43:23
Well, we can calibrate a model to a collusive observed equilibrium and
43:27
then back out the, then use those parameters to figure out what
43:30
the equilibrium would look like if they were all competing.
43:34
And they're basically Nash equilibrium models.
43:39
And we've developed these models that work for bidding, for
43:44
bargaining, for price setting, for quantity setting, for
43:48
advertising, with capacity constraints, you name it.
43:53
I mean, that's what we do.
43:54
We build models, the tractable models that we can calibrate to just
44:00
a few pieces of information for all different kinds of industries.
44:05
And that's been my professional life.
44:08
It's really fun, it's really interesting and it's fascinating.
44:12
>> Jon Hartley: Well, it's fascinating, this whole approach, I think, to using
44:18
models to think about how competition impacts consumer welfare output.
44:24
The whole idea, it all goes back to that theory about if you have a monopolist
44:30
compared to the perfectly competitive case, you have less queue or less output.
44:35
And this is sort of everything in between that trying to think about how
44:40
mergers impact things like output and consumer welfare.
44:44
I'm curious, I wanna just ask one question here on big tech and
44:48
sort of national security, which I think is a little bit different.
44:53
I think a bit of a newer front in these discussions.
44:58
And it's different, I think, from just the simple lean
45:03
economy approach of everything that's big is bad, or,
45:08
for example, the approach of they've gone after
45:12
the Microsoft acquisition of Activision Blizzard.
45:17
I think the big tech national security thing is a little bit different.
45:21
And I think that's one area that certainly irks some Republicans and
45:26
quite a few Democrats as well,
45:28
which is even though tech firms provide lots of consumer surplus,
45:33
you have all these apps like Gmail and Facebook they give away for free.
45:38
There's some caveat and that they're selling your data and
45:40
there's been some property rights issues there.
45:42
They do sort of have a tremendous amount of political power.
45:45
Twitter censored, the Hunter Biden New York Post, laptop stories or
45:49
false news weeks before the 2020 election.
45:52
It turns out that story was actually true.
45:54
Apple is now canceling Jon Stewart's show, apparently because it is talking
45:58
negatively about the Communist Party of China.
46:00
There's some argument, which is really a political argument, not an economic one,
46:04
that these companies may be influenced or captured by foreign enemies.
46:08
In that sense, are Google and Facebook too large and
46:12
too powerful in a political sense?
46:14
Should political,
46:15
national security considerations matter when it comes to antitrust regulation?
46:18
Or is this really more in the domain of something like rather than,
46:23
say, the Department of Justice and the FTC?
46:26
>> Luke Froeb: Yeah, I think that there are valid privacy concerns,
46:31
and the tech giants are doing their best to address those
46:36
privacy concerns cuz obviously the GDPR has been been.
46:41
Yeah, one thing you did not ask me about is
46:45
the difference between China, the US and the EU.
46:49
And, my gosh.
46:51
We'll talk about that in a sec.
46:53
But the GDPR has almost killed innovation in Europe,
46:58
what is just amazing to me is the lack of innovation in Europe.
47:04
I mean, if you look, there's a lot of metrics that you could use.
47:10
You can use the number of unicorns.
47:12
There's actually a guy at Stanford, this Ilya,
47:16
I forget he's got a Russian name, ST last name, but he collects data on unicorns.
47:21
He'd be a great guy to interview on your show.
47:24
The number of unicorns in Europe is pitiful.
47:27
I mean, they really undercooked their coverage.
47:30
Or relative to the US, you look at the age of companies on, say, the CAC 40.
47:38
What's the age of the top ten firms in Europe versus the top ten firms in
47:42
the United States?
47:43
They're all over 100 years old in Europe.
47:46
In the United States, they're 25 years old.
47:48
That's the average age of the top ten firms.
47:50
And I think that just goes to the dynamism of our economy and
47:54
the huge advantage we have over Europe.
47:56
And the question that I kind of, against that backdrop, to get back to
48:02
your question, is, whom do you want deciding what the future looks like?
48:07
Do you want these firms that are beholden to their customers and
48:11
that are constrained by competition?
48:14
Do you want them deciding, or
48:16
do you want some government official deciding, like Lena Khan or me?
48:21
Do you want us deciding what should go down?
48:24
And I think the answer is absolutely clear.
48:27
And if we want innovation, which I think that in your grad school classes,
48:33
you learn about the solo growth models and technological growth,
48:38
and this is growth that can't be explained by growth and labor.
48:44
Think about a production function, you've got output as a function of capital and
48:48
labor, and then you try to fit that model to the data, and
48:52
you see there's a huge component that's unexplained by either capital or labor.
48:56
They call that total factor productivity, and you'll learn about that.
49:02
That is the technological innovation that drives our standard of living,
49:08
I mean, we have grown and what makes us the richest country in the world
49:14
is that we started growing a lot faster than anybody else a long time ago.
49:20
China has been unbelievable since 1978,
49:25
when they kind of got private property and
49:29
kind of got this version of capitalism.
49:34
They've grown really fast, and
49:36
their standard of living has gone up really fast.
49:40
But it's this incentive alignment kind of letting the markets do their work,
49:45
and President Xi, I think, has probably killed the goose that laid the golden egg,
49:51
by attacking all the growth firms in China.
49:54
But, I mean, the counterfactual to that thing is, okay, yeah,
49:59
you might be right that there is some threat to national security,
50:04
I mean, what's the counterfactual?
50:07
So do you want the government controlling these firms?
50:10
I mean, the cost would just be enormous, and always think about, well,
50:13
what's the alternative?
50:15
Well, so we got a bunch of government bureaucrats deciding what
50:20
these firms can do, and there's always a balance.
50:24
When we go from administration to administration,
50:28
it's a little movement left, right, but
50:32
basically in any trust, we agree on what the goal is.
50:36
The Biden administration has been an outlier in that, they wanna turn back
50:41
the clock, and the institutions of government are not letting them,
50:46
the courts not letting them, and Congress isn't letting them.
50:51
And that's the beauty of our checks and balances,
50:54
you can't just come in here with what I would call a zealous, actually,
51:00
I've never heard that word without overzealous over in front of it.
51:05
But a zealous enforcer who thinks that way too many mergers and
51:10
that's harmed American consumers, and
51:14
I think that's just a radical misreading of what's happened.
51:20
And we are so frigging lucky to live in the United States,
51:25
where we have this relatively open, innovative economy,
51:30
cuz that's what's making us rich, and let's not lose sight of that.
51:36
And all you have to do is look at places like Europe,
51:40
if you wanna innovate in Europe, first of all,
51:43
they can't tolerate the kind of inequality that comes from innovation.
51:47
They couldn't tolerate a Jeff Bezos in Europe, so
51:52
Jeff Bezos wouldn't be able to innovate in Europe,
51:56
not to mention the regulatory miasma that makes it hard to
52:01
move assets to higher valued users, it's too difficult.
52:07
And I think when I talk to my colleagues in Europe,
52:10
that's what they're concerned about, the regulatory overlay that's killing growth,
52:14
I mean, they just don't see the same trade-offs that we do.
52:18
I mean, you talk about your question kind of implying, hey, we need more government.
52:24
And I'm immediately thinking about the trade-offs, and
52:27
I'm thinking, my gosh, what would be given up with more government control?
52:32
And they just don't think about trade-offs that way, and President Xi,
52:36
I don't think, does either.
52:38
And you haven't even mentioned the really big elephant in the room,
52:44
which is the declining birth rates.
52:48
I mean, China's dead, Europe's dead, and we would be dead but for the immigration,
52:54
and we've got lots of immigration, so we still have a decent growth pyramid.
52:59
And China's growth pyramid is starting to get inverted, as is Europe's.
53:05
And the ironic or unintended consequence of the illegal immigration,
53:11
obviously, there's a right way to do that, we want security checks,
53:17
make sure we're not letting in terrorists.
53:21
But the benefit of letting a lot of young, healthy people in the United States
53:27
in the prime of their life, that's gonna save our aging population,
53:32
saving us from kind of the demographic death that is China and
53:36
the EU anyway- >> Jon Hartley: And not to mention illegal
53:39
migrants, too, certainly migrants from India in particular
53:44
tend to be much more innovative in terms of their patenting output than,
53:50
say, the average American who's born here.
53:54
So it's fascinating, I mean,
53:56
there's been a lot of work that's been done on the connection between
54:00
immigration and innovation by folks like Bill Kerr and others.
54:04
And I fully agree with you that I think these antitrust regulations
54:08
closely align with economic growth challenges and innovation.
54:13
And it seems I totally agree with your analysis that so far,
54:17
it seems like the new brandishian Lina Khan has not been successful so far,
54:22
and that they've just continued to lose cases that they've brought.
54:27
That certainly the judiciary, the FTCDOJ staff, and much of Congress is
54:32
very much opposed to their attempt to overturn the consumer welfare standard.
54:38
>> Luke Froeb: So I've been thinking about this, so I have been actually modeling
54:43
the antitrust process and kind of looking at what chair Khan is doing.
54:48
There's filing fees that you have to file before you even think,
54:53
and they've made that thing really long, onerous and
54:57
kind of open, and it's really hard to gather the information,
55:02
they've quadrupled the filing fees.
55:05
And if you think about that as a tax on mergers,
55:08
kind of think about there's good mergers and there's bad mergers.
55:11
Well, we're deterring good and bad mergers, so if you think that most of
55:15
the mergers are bad, you're thinking, hey, let's tax the hell out of the mergers.
55:20
But if you think that, hey, 98% of the mergers that come through
55:25
the Justice Department never even get a second request, so most of those are good.
55:32
We're deterring a lot of good mergers called those type one errors
55:36
instead of filtering.
55:38
And you think about, I don't want a tax that deters all merger,
55:43
I wanna filter that distinguishes the good from the bad.
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And what this agency has done is they've dramatically raised the cost,
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they've dramatically increased the uncertainty of the process,
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and the cost and the uncertainty are deterring all mergers.
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You think about what's the wealth creating engine of capitalism?
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It's the movement of assets to higher valued users, and
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our biggest and most valuable assets are corporations.
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And if we can't move those to higher value users,
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we're gonna kill the goose that laid the golden egg.
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>> Jon Hartley: Absolutely, I fully agree with that.
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This has been such an interesting conversation, Luke,
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it's been a real honor to have you on, thank you so much for joining us today.
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>> Luke Froeb: I enjoyed it, and thank you very much.
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>> Jon Hartley: Today, our guest was Luke Froeb,
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who is a professor of management at the Vanderbilt University Owen School
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of Management and the former chief economist at the Department
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of Justice Antitrust Division and the former chief economist at the FTC.
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This is the Capitalism and Freedom, the 21st Century Podcast where we talk about
56:50
economics, markets and public policy.
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I'm Jon Hartley, your host, thanks so much for joining us.
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