Overzealous antitrust may prove anti-consumer

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Despite organizing many hearings around antitrust issues, U.S. Sen. Amy Klobuchar has been unable to convince her colleagues in the Senate to overhaul U.S. antitrust law. With no movement from Congress, the Minnesota Democrat's fellow progressive trust busters at the Federal Trade Commission (FTC) and Department of Justice (DOJ) are pushing for change from within the executive branch.

This month's big news was the announcement of the agencies' new draft merger guidelines. Unfortunately, the agencies' latest guidelines share Sen. Klobuchar's misunderstanding of modern markets.

The purpose of merger guidelines is to advise businesses of what types of mergers the agencies will challenge in court. The rule of law requires that people know whether something is legal or illegal; the guidelines play a role in that. Since 1968 the agencies have issued them to describe the current state of the law and how evolving economic learning applies.

The problem with the latest draft, which would supersede the 2010 guidelines issued under President Barack Obama's administration, is that the agencies have ventured from describing what the law is into promoting a contentious vision of what the current administration would like it to be. While the guidelines have traditionally focused on defining the state of the art in terms of merger law and economics, the current proposed guidelines elevate the holdings of outdated cases and passé economics to try to rewrite the law.

Perhaps the largest disconnect between the agencies' preferences and the state of the economics and law is around vertical mergers, which was also the topic of Sen. Klobuchar's latest hearing.

Vertical mergers, by contrast, involve companies that do not directly compete. In 2005, when Apple bought FingerWorks — the company responsible for the basic technology that ultimately became the iPhone touch screen — that was a vertical acquisition, which is similar to a merger and often lumped together under the term mergers and acquisition. FingerWorks did not compete with Apple but its product was a possible input into Apple's iPhone. The synergies between what Apple brought to the table and the innovation of the FingerWorks technology fostered the modern touch screen and smartphone, which ultimately helped consumers.

Consumer benefits from vertical mergers are not unique to the Apple example. These gains are one reason economists, the courts and the agencies — before this administration, at least — have been much more positive about vertical mergers. As economist Aviv Nevo (now director of the FTC's Bureau of Economics) and co-authors wrote in comments submitted to the agencies before Nevo joined the FTC, the economic "consensus would be to recognize that vertical mergers do have a more natural and fundamental relationship with the potential for merger-specific benefits or efficiencies."

That lesson has been lost at the antitrust agencies.

We can already see the disconnect between the agencies and the law. Over the past year, courts have handed them a series of losses on this issue. Most recently, the FTC lost its bid to block Microsoft from acquiring Activision. The court recognized the benefits of a video game hardware company (Microsoft) acquiring a software company (Activision). A few months earlier, the FTC already had tried the anti-vertical merger strategy in a failed challenge of Meta's acquisition of the virtual reality (VR) studio Within, best known for the extremely niche game "Supernatural."

Meta is best known in the VR space for owning the bestselling VR headset. Unlike the merger guidelines, the courts recognized that being a big player in headsets does not automatically give Meta market power in video games. Instead of harming competition, the merger likely helps competition and consumers.