A few days ago, Tyler Cowen over at Marginal Revolution linked to a New York Times piece about antitrust scholar Lina Khan. The item, by David Streitfeld, is titled “Amazon’s Antitrust Antagonist Has a Breakthrough Idea,” NYT, Sept. 7, 2018. Much of the story is fluff although Streitfeld does tell the reader that Ms. Khan’s ideas have the potential to influence decisions by the Federal Trade Commission.

The most valuable thing I got out of it, though, was a link to “Amazon’s Antitrust Paradox,” her long article in the Yale Law Journal. I just finished reading it and my quick thoughts follow.

Nice Survey, With One Glaring Hole

It is very well written. Related to that, Khan gives a nice survey of the evolution of antitrust case law, giving due credit to the Chicago School of the 1960s and 1970s for changing the way federal judges and the antitrust enforcers think about the goals of antitrust law. Consumer welfare has become the major way to judge horizontal integration, vertical integration, aggressively low pricing, and internal growth of a firm.

There is one glaring hole in her exposition and it’s on predatory pricing. She discusses the Standard Oil New Jersey, in which muckraker Ida Tarbell alleged that SONJ was engaging in predatory pricing and does not even mention, in an article containing 464 footnotes, the pathbreaking work of John S. McGee, “Predatory Pricing: The Standard Oil (N.J.) Case,” Journal of Law and Economics, Vol 1 (October 1958), pp. 137-169. This is arguably the most important article in the literature on predatory pricing. Its bottom line, which Khan contradicts without giving evidence: Standard Oil did not engage in predatory pricing. Her’s is not a small omission. Here’s what Khan writes:

The earliest predatory pricing case in America was the government’s antitrust suit against Standard Oil, which reached the Supreme Court in 1911.50 As detailed in Ida Tarbell’s exposé, A History of the Standard Oil Company, Standard Oil routinely slashed prices in order to drive rivals from the market.51 Moreover, it cross-subsidized: Standard Oil charged monopoly prices52 in markets where it faced no competitors; in markets where rivals checked the company’s dominance, it drastically lowered prices in an effort to push them out. In its antitrust case against the company, the government argued that a suite of practices by Standard Oil—including predatory pricing—violated section 2 of the Sherman Act. The Supreme Court ruled for the government and ordered the break-up of the company.53 Subsequent courts cited the decision for establishing that in the quest for monopoly power, “price cutting became perhaps the most effective weapon of the larger corporation.”54

Consumer Welfare Not Congress’s Intent

Khan argues that consumer welfare was not the intent of the Congress that passed the Sherman Act. I agree with her. I’ve always thought Robert Bork was particularly dense on the subject. The work of Thomas DiLorenzo has convinced me that Congress passed the antitrust act, not to help consumers, but to hobble successful competitors.

While she puts little weight on harm to consumers from reining in successful competitors, she is unknowingly ambivalent. Consider these two paragraphs from her article:

This vision [of the initiators of U.S. antitrust policy] encompassed a variety of ends. For one, competition policy would prevent large firms from extracting wealth from producers and consumers in the form of monopoly profits.159 Senator Sherman, for example, described overcharges by monopolists as “extortion which makes the people poor,”160 while Senator Richard Coke referred to them as “robbery.”161 Representative John Heard announced that trusts had “stolen millions from the people,”162 and Congressman Ezra Taylor noted that the beef trust “robs the farmer on the one hand and the consumer on the other.”163In the words of Senator James George, “[t]hey aggregate to themselves great enormous wealth by extortion which makes the people poor.”164

Notably, this focus on wealth transfers was not solely economic. Leading up to the passage of the Sherman Act, price levels in the United States were stable or slowly decreasing.165 If the exclusive concern had been higher prices, then Congress could have focused on those industries where prices were, indeed, high or still rising. The fact that Congress chose to denounce unjust redistribution suggests that something else was at play—namely, that the public was “angered less by the reduction in their wealth than by the way in which the wealth was extracted.”166 In other words, though the harm was being registered through an economic effect—a wealth transfer—the underlying source of the grievance was also political.167

She can’t have it both ways. The first paragraph quoted suggests that the antitrust advocates thought high prices were the problem. The second paragraph suggests that they weren’t. But within that second paragraph, she quotes, while seeming to implicitly agree with, the idea that the large firms extracted wealth from consumers. If the large firms were pricing lower than their competitors, which they were, they can’t extract wealth from consumers; instead they create wealth for consumers.

What About Amazon?

When she moves on to Amazon, she does, admittedly, make me a little nervous about Amazon’s power. She reveals a lot about Amazon’s clever strategies that I had not known.

Could the Stock Market Be That Wrong?

Khan makes a good point about Amazon’s stock value as an indicator of future profits. She writes:

Despite the company’s history of thin returns, investors have zealously backed it: Amazon’s shares trade at over 900 times diluted earnings, making it the most expensive stock in the Standard & Poor’s 500.10

And later:

In the past, the Supreme Court’s analysis has embraced the Efficient Market Hypothesis (EMH), the idea that market prices reflect all available information.397 The Justice Department also acknowledges that market information—for example, the financial terms of an acquisition—may “be informative regarding competitive effects.”398 Applying EMH in this instance overwhelmingly suggests that these platforms are positioned to recoup their losses. Yet bringing a predatory pricing suit against an online platform would be almost impossible to win in light of the recoupment requirement. Strikingly, the market is reflecting a reality that our current laws are unable to detect.399


Competition as a Process

Khan advocates that we move away from using consumer welfare to judge antitrust policy and, instead, favor a “competitive process.” She writes:

In order to capture these anticompetitive concerns, we should replace the consumer welfare framework with an approach oriented around preserving a competitive process and market structure.

Yet the original industrial organization economists in the 1940s through 1960s talked about market structure, not competitive process. It was many in the Chicago School, especially Yale Brozen and Harold Demsetz, and many in the Austrian School, particularly Israel Kirzner, who talked about competition as a process. If we want to encourage a competitive process, we need to have the government keep its hands off Amazon but also keep its hands off Apple and book publishers who tried to compete with Amazon but were hammered by the antitrust authorities.

Khan is aware of the Apple case, writing:

In 2012, the DOJ sued the publishers and Apple for colluding to raise e-book prices.249In response to claims that the DOJ was going after the wrong actor—given that it was Amazon’s predatory tactics that drove the publishers and Apple to join forces—the DOJ investigated Amazon’s pricing strategies and found “persuasive evidence lacking” to show that the company had engaged in predatory practices.250

How about this: don’t have the antitrust authorities weigh in to hobble competitive business models that try to compete with Amazon and don’t have it weigh in to hobble Amazon either?