Antitrust and Deregulation.

• Author: Shelanski, Howard
• Position: A - Symposium: Unlocking Antitrust Enforcement

INTRODUCTION

For over a century, antitrust law has provided the principal framework for competition enforcement in the United States, with the Department of Justice (DOJ), the Federal Trade Commission (FTC), and private plaintiffs pursuing cases under the Sherman Act and Clayton Act. For at least as long, however, federal regulatory agencies have also implemented competition policy pursuant to statutes governing industries like telecommunications, electric power, transportation, securities, health care, and agriculture. Sometimes industry specific regulations limit competition, (1) and at other times they protect and promote competition. (2) Even when regulations appear to block competitive entry, they usually do so to manage a separate market failure and mitigate its harmful consequences. The Federal Communications Commission (FCC), for example, blocked competitive entry into the long-distance telephone business so that high-priced long-distance service could subsidize local telephone rates, which state regulators held to a low level to prevent "natural" local service monopolies from exploiting ratepayers. (3) The FCC feared that a competitor entering the long-distance market would target the most profitable customers and siphon off the revenues the Bell System (4) used to cross-subsidize regulated local rates. Whether rules appear to foster or limit competition, regulation has played an important role alongside antitrust law in U.S. competition policy.

This Feature examines the relationship between antitrust enforcement and the changing level of regulation in the economy. Because both antitrust and regulation are forms of government intervention, it might seem logical to assume that they should rise and fall together with different administrations' views about the proper role of government. Contrary to that political logic, this Feature argues that antitrust enforcement should instead run countercyclical to regulation, especially during strongly deregulatory cycles. The comparative importance of countering deregulatory shifts arises because while increased regulation can trigger doctrinal barriers that keep antitrust enforcement out of regulated markets, reduced regulation triggers no such mechanism for pushing antitrust back into deregulated markets. (5) Enforcement gaps can therefore emerge when agencies withdraw rules that govern competition, especially where antitrust has been inactive due to that regulation. It is thus particularly important that antitrust authorities pay attention to changes in industry regulation, so they can step into any gaps caused by receding competition-related rules.

Because regulation can limit the scope of antitrust enforcement, an administration's approach to regulation has important implications for its overall competition policy. An administration inclined toward greater intervention might expand use of its regulatory authority, possibly issuing competition-focused rules that displace antitrust law in markets where the rules apply. Whether such new rules would improve consumer welfare depends on the comparative effectiveness of antitrust enforcement and regulation in the affected markets and on what other benefits or costs the rules might bring. By contrast, an administration that pursues a deregulatory agenda might repeal competition-focused regulations or refrain from enforcing them, leaving anticompetitive activity in the affected markets unaddressed unless antitrust enforcement steps in. (6)

Empirical evidence shows that antitrust enforcement and regulation have not always changed in the same direction. (7) Beyond the fact that both policy tools represent forms of government intervention, there is no clear reason why they should. Comparative policy priorities offer one reason why the political intuition that antitrust and regulation move together might not hold. Regulation tends to follow specific policy concerns--the environment, worker safety, immigration, and health care, for example--and therefore might increase for some objectives and stay steady or retreat for others, depending on an administration's policy goals. A given administration might or might not choose to prioritize antitrust enforcement's objective of promoting competition, possibly causing antitrust to rise or fall independently of regulation.

Ideological and pragmatic considerations might also lead to varying relationships in the trends of antitrust and regulation. A strongly market-oriented administration might decide that neither competition-enforcing rules nor antitrust is necessary, and reduce both forms of intervention. Alternatively, an administration suspicious of regulation might view antitrust as a less burdensome way to govern competition and replace regulation with antitrust enforcement, causing the two kinds of intervention to trend in opposite directions.

The relationship between antitrust enforcement and regulation thus depends on policy choices about the importance of competition enforcement and the institutions through which to accomplish that enforcement. Those policy choices raise an underlying normative question: how should antitrust enforcement and regulation relate to each other?

In addressing that question, this Feature argues that economics, legal doctrine, and current debates over competition policy all provide good reasons for antitrust enforcement to run counter to deregulation. Part I discusses why deregulation can lead to an enforcement gap, especially during an aggressive de-regulatory cycle. Part II then turns to the question of how antitrust authorities should respond to the enforcement gaps potentially created by deregulatory cycles, explaining why sound economic policy, the clarification of precedent, and the politics surrounding competition enforcement all weigh in favor of keeping antitrust enforcement strong as regulatory intervention weakens.

1. DEREGULATION AND CAPS IN COMPETITION ENFORCEMENT

   1. Antitrust and Regulation as Policy Alternatives

      A variety of institutions can govern economic competition. Decentralized, capitalist economies generally rely on markets themselves to provide the incentives and discipline necessary to keep prices low, output high, and innovation moving forward. (8) But sometimes market forces alone cannot ensure efficiency and economic welfare--for example, when the market structure has changed due to mergers or the rise of a dominant firm, or when the market is an oligopoly susceptible to parallel conduct or collusion. In such cases, governance of competition by a nonmarket institution might be warranted. Because concentrated markets or even monopolies can arise for good reasons related to efficiency, innovation, and consumer preference, the governance of competition more often involves vigilance than liability or injunctions. Then-Judge Stephen Breyer, long a leading scholar of antitrust and regulation, described the best situation as being an unregulated, competitive market in which "antitrust may help maintain competition." (9)

      Antitrust law aims to prevent the improper creation and exploitation of market power on a case-by-case basis while avoiding the punishment of commercial success justly earned through "skill, foresight and industry." (10) Thus, competition authorities like the FTC and the DOJ's Antitrust Division review mergers, investigate single-firm conduct, and prosecute collusion. (11) Private plaintiffs can pursue civil antitrust liability through suits in the federal courts. (12) To win their claims, enforcement agencies and private plaintiffs bear the burden of showing that the effect of a firm's activity is "substantially to lessen competition, or to tend to create a monopoly," (13) or to constitute a "contract, combination,... or conspiracy" in restraint of trade, (14) or to "monopolize, or attempt to monopolize" any line of business. (15)

      Antitrust is not, however, the only institution through which government addresses competition concerns and market failures. Congress can give regulatory agencies authority to intervene where they see the need to address competition and market structure--and Congress has often done so. With such statutory authority, "[i]n effect, the agency becomes a limited-jurisdiction enforcer of antitrust principles." (16) For example, the Department of Transportation (DOT) has jurisdiction to approve transfers of routes between airlines carriers, giving it a role in reviewing airline mergers. (17) The 1992 Cable Act gave the FCC authority to limit the share of the national cable market that a single operator could serve, thereby giving the agency some control over the industry's market structure. (18) The FCC has long regulated market entry and, through its control over license transfers, reviewed mergers and acquisitions in several sectors of the telecommunications industry. More recently, the FCC issued, (19) and then repealed, (20) "network neutrality" regulations intended to preserve ease of entry and a level playing field for digital services. The Food and Drug Administration (FDA), Securities and Exchange Commission (SEC), Department of Energy, and numerous other federal agencies have various powers that directly affect competition. (21) State regulation can be important as well in governing competition, particularly in the insurance and healthcare industries. (22)

      In contrast to the case-by-case approach of antitrust, regulation typically imposes ex ante prohibitions or requirements on business conduct. The Telecommunications Act of 1996, for example, required incumbent local telephone companies to grant new competitors access to parts of their networks and prohibited incumbents from refusing to interconnect calls from their customers to customers of competing networks. (23) With the rule in place, the FCC bore no burden of proving that a specific instance of network access was necessary for competition, or that a specific denial of interconnection would harm competition. In...