Torpedoes In the Water
FTC Chair Lina Khan and Antitrust Division chief Jonathan Kanter have set in motion a revolution in antitrust. The explosions are about to start with attacks on mergers and the insulin supply chain.
This week, the Federal Trade Commission sent out six subpoenas to dominant firms in the pharmaceutical industry. Biotech stocks rallied, while middlemen known as Pharmacy Benefits Managers panicked.
But this move was just one of many little noticed shifts from the agencies that have happened in the last year. Today, I’m writing about the revolutionary changes coming to antitrust that have been put in motion, but whose impact isn’t yet clear.
Plus, today’s weird monopoly is Northrop Grumman’s control over the U.S. nuclear arsenal.
Launches and Lag Time
One of the great tropes in war movies is the lag time between the launch of a slow-moving torpedo and its explosion. In the movie Pearl Harbor, seamen on scaffolding attached to their ship watch with a confused look as a torpedo slowly moves into the side of their boat. It’s an awful moment, where they have time to realize they are going to die, but cannot do anything about it. Then comes the explosion.
In Apple TV’s Greyhound, or the classic movie The Hunt for Red October, the launch of the seaborne missile creates a scene imbued with drama - we know it will explode as it is propelled through water, but unlike with a bullet or a missile moving through air, there is lag time to ponder the oncoming kinetic action before either a miss, or a crunch of metal and flesh.
Changes in bureaucratic procedure, though obviously not dramatic, have a similar lag time. The policy fight happens, then there is the lag time as the bureaucracies move around seating charts and guidelines, and finally, there’s an impact. The process can take a long time, especially when it comes to filing cases, because of the need to investigate, draft complaints, and move the whole process through the court system. It can take even longer if it’s a new or unused area of law, which requires policy formulation and information-gathering before the process of bringing cases can start. And of course this must all be preceded by the White House and Congress setting up the agencies in the first place with nominations.
Right now, we’re in that lag time, the period after the launch of a torpedo, but before it has struck. Let’s start with the policy shift, aka the launch. That started when the White House appointed enforcers with a dedicated mandate. And that took awhile.
The Department of Justice Antitrust chief Jonathan Kanter came into office in November of 2021, which was over a year after Biden was elected. His counterpart at the Federal Trade Commission, Lina Khan, was seated in June of 2021, four months earlier. Unlike the DOJ, the FTC is a commission and requires a majority vote to do anything. For about 100 days, Khan had a working majority, but then one of the commissioners Rohit Chopra left to run the Consumer Financial Protection Bureau. For seven months, she did not have a full majority, which gave her Republican colleagues a veto. Last month, Alvaro Bedoya joined the commission, giving Khan a majority.
Since being seated, Kanter and Khan, along with allies like Tim Wu at the White House, have launched an array of initiatives that will bear fruit. These are structural changes to how we police markets, the tectonic plates of economic ordering. As such, they are not what most political people notice when the initiatives are launched. But they will be noticed when the explosions start.
Mergers, Mergers Everywhere
The foundational initiative at both agencies is the joint effort to revise merger guidelines, which is the way that enforcers think about how to use antitrust laws. In April, I discussed the stakes, and showed how there was a secret and successful plot using these merger guidelines to unleash corporate power in the 1980s, and that this quiet revolution explains why our politics and economic order has become so consolidated and dysfunctional. Last week in The Conglomerate Problem, I described how, because of this shift, all industries created since the 1980s, such as cloud computing, most information technology, social media, mobile telephony, and other forms of data-intensive industries, grew up in an environment conducive to monopolization and empire-building conglomerates.
Kanter and Khan are trying to use the merger guideline process to restructure this environment, and bring back the legal tools to address the agglomeration of capital. Both of them withdrew existing merger guidelines, which are descended from the Reagan era, and have started a process to rewrite them to attack corporation concentration. That process has been going on for more than six months, and it is very different from how such guidelines were crafted in the past. The last time the guidelines were updated was in 2010, and during the entire time they were being rewritten, the FTC received just 32 total comments from the public.
This time, however, Khan and Kanter have done listening sessions with workers and business leaders, and collected over 5800 comments from the public - including from many of you. The merger guideline rewrite is also an ideological fight; Kanter has been more aggressive than Khan on this point, explicitly dismissing the old consumer welfare standard as largely incoherent and irrelevant in speeches before corporate antitrust lawyers. Mergers aren’t the only area of legal revival. Kanter, for instance, is revitalizing criminal law, upsetting the antitrust bar by suggesting a revival of criminal enforcement of laws against monopolization.
But the merger guidelines are the guts of the shift, because that’s where most antitrust action takes place, and that’s where the new operational details of what is and isn’t illegal will come from. It’s worth noting they aren’t operating in a vacuum. There’s Congressional support for merger control tightening; both Senator Mike Lee and Amy Klobuchar have legislation to strengthen merger presumptions. Khan and Kanter are increasingly implementing a consensus.
The shift is underway even before the guidelines are done. Khan has already blocked two vertical mergers - Lockheed-Aerojet and Nvidia-Arm - which is ground-breaking, and Kanter is attempting to block the Penguin-Simon and Schuster book publisher merger on labor and speech grounds, which is also a novel legal theory. But the FTC and DOJ are going to go further.
The merger guideline rewrite will likely include a host of new ways to enforce antitrust law among big tech conglomerates, private equity acquisitions, and nascent markets of emerging technologies. Microsoft-Activision is one such transaction, Amazon’s power in cloud computing is another, and Facebook’s roll-up of firms in virtual reality is another. “We all know that dominant incumbent platforms are most threatened at these moments of transition,” Khan told the Washington Post about the cloud, gaming, and virtual reality industries. “These moments of transition are also the ones that create the greatest chance of competition and create the greatest chance for entrepreneurs and start-ups to really enter and inject more competition into the market.”
What Khan and Kanter are doing is generating friction both within the antitrust bar and within the FTC staff. The legal establishment’s premier association, the American Bar Association, for instance, is riven with infighting after a number of its members attacked the ABA for having its leadership “in the pocket of big tech.” Meanwhile, according to FTC Watch, some FTC staff are upset because they are being forced to “pursue unfamiliar legal theories” on mergers that are “rarely pursued and often don't have recent legal precedent.” Such grumbling is only natural when new operational methods are being developed, and people used to doing things one way for decades are forced to change to a new and uncertain path. But that’s what policy change looks like.
The merger rewrite has been launched, and the impact will come later this year, when the new guidelines come out and are used in court challenges. That’s when we can expect fireworks.
Price Discrimination and Pharmaceuticals
The second key area is to take on a fundamental hidden problem that corrupts most of our markets, which is the shift in power away from producers and consumers, and towards middlemen. In her strategic memo sent at the start of her tenure, Khan highlighted the role of powerful middlemen in the economy.
Research documents how gatekeepers and dominant middlemen across the economy have been able to use their critical market position to hike fees, dictate terms, and protect and extend their market power. Business models that centralize control and profits while outsourcing risk, liability, and costs also warrant particular scrutiny, given that deeply asymmetric relationships between the controlling firm and dependent entities can be ripe for abuse.
The FTC has followed through on this in two ways. This week, the Federal Trade Commission voted to investigate middlemen in the pharmaceutical industry, known as pharmacy benefits managers, or PBMs. I’ve written about PBMs a number of times; PBMs are large firms that “negotiate rebates and fees with drug manufacturers, create drug formularies and surrounding policies, and reimburse pharmacies for patients’ prescriptions.” Each significant PBM is part of a major conglomerate like CVS or United Health, and these middlemen are known to be abusive towards independent pharmacies and consumers, determining which drugs can be prescribed and what they cost. The industry is filled with kickbacks and corruption, leading to anger among doctors, patients, and pharmacists.
In February, Khan opened up a comment docket, and 24,000 pharmacists, patients, and doctors poured in their views, angrily discussing the problems with PBMs. While there is generally animosity among the commissioners, the vote was unanimous to send subpoenas to CVS Caremark, Express Scripts, OptumRx, Humana, Prime Therapeutics, and MedImpact Healthcare Systems. With closely held data finally available to the FTC, such a study will likely end up providing the information to finally break the power of the PBMs. Already, drug makers beholden to PBMs are seeing their stocks go up, which shows how PBMs were strangling producers.
It’s not just an investigation. Next week, the FTC will vote on whether to address how PBMs drive up the price of insulin. (Any member of the public can sign up to speak for two minutes over Zoom at the FTC meeting where they vote.) PBMs do this by forcing insulin producers to give them rebates of up to 70% of the price of the drug in order to allow their brand of insulin to be sold to patients. The FTC could be resurrecting dormant authority to address predatory rebates using an expansive view of its authority to police unfair methods of competition.
The attack on dominant middlemen is part of a trend. In November of last year, roughly seven months ago, the FTC initiated a different and related investigation against price discrimination by dominant players in the food supply chain. In that one, at the behest of smaller grocery stores, the FTC sent subpoenas demanding information on contracts, supply terms, and pricing to Walmart, Amazon, Kroger, Procter & Gamble, Tyson Foods, Kraft Heinz, C&S Wholesale Grocers, McLane Co, and Associated Wholesale Grocers. That investigation should be ready relatively soon, and these too could lead to a revival of prohibitions of price discrimination.
These are not just attacks on industry sectors. In the new book Direct: The Rise of the Middlemen Economy, Kathryn Judge traces how middlemen have become key actors across the entire economy. Judge’s work validates Khan’s enforcement choices, and suggests a legal regime change in how middlemen operate will be meaningful.
Working for a Living
The last piece of the puzzle is bringing in labor, and this is a genuinely new area of antitrust. For about a hundred years, labor and antitrust law were treated mostly separately, with labor having its own branch of rules structured by the National Labor Relations Board and safety regulators. There is record low labor union density in America today, and new scholarship on consolidation in labor markets has shown significant market power over employees.
For instance, the Treasury Department put out a report summarizing research on how consolidation reduces wages by roughly a fifth, through a variety of contractual and institutional arrangements. Khan and Kanter are reacting to this environment. The Antitrust Division has brought several criminal cases against executives of firms who have illegally tried to block their employees from switching jobs, and that’s a novel use of antitrust law.
Meanwhile, the FTC is considering putting out a rule to bar the use of non-compete clauses in labor markets, which are contractual agreements where employees are barred from working for competitors. Non-competes harm workers and smaller firms trying to hire. I wrote about these in January of 2020, and they are a well-known problem covering tens of millions of workers and firms. The use of these agreements is something the DOJ Antitrust Division has gone to court to help stop.
Wither the Explosions?
Ok, so that’s a snapshot of what’s happening. There’s a lot more, especially on the consumer protection side, along with changes like strengthening right to repair rules and privacy/data restrictions addressing online advertising, but I tried to convey some of the big stuff that isn’t really being noticed right now.
What Kanter and Khan are doing is changing deep rooted bureaucratic practices implemented in the 1980s to institutionalize a certain pro-corporate ideology. This is a much harder task at the FTC, both because it’s an independent agency, and because it’s a commission instead of a place with a single director. But it isn’t easy at the DOJ either. A key goal is to bring the public into the process, another goal is to explicitly use the law in creative and unusual ways that have been dormant since the 1970s.
One consequence of these changes is blowback, from orthodox economic thinkers like Larry Summers and Jason Furman, as well as practitioners of antitrust in some of the agencies and in the bar. Another consequence is that the courts will need to wrestle with new antitrust theories, and so will Congress and state legislatures. That’s already starting to happen. I expect a lot of losses in the courts, and more debate in legislatures.
But let’s not overstate the blowback, mostly there’s consensus that something big needs to be done, and something big is actually being done. We just won’t know how big until the explosions start. But the torpedoes are in the water.
Weird Monopoly: Northrop Grumman and Nuclear Missiles
In 2018, Northrop Grumman bought one of the last remaining independent rocket engine makers, Orbital ATK. As a result, it has been able to exclude every other prime contractor from rebuilding the U.S. nuclear arsenal. It denied engines, for instance, to its main rival Boeing when bidding for the Air Force’s new ICBM contract. The Pentagon and FTC, who work jointly on defense mergers, learned from this error, and blocked a similar Lockheed-Aerojet merger earlier this year. But the original Northrop monopoly remains.
Today, two Congressmen, Mark Pocan and John Garamendi, wrote the Pentagon demanding that the DOD help the FTC investigate whether it can reverse the merger. "Post-merger,” wrote the two of them, “Northrop enjoys virtually unilateral power to set prices on some of the most expensive military weapons on the planet, nuclear weapons. It has dramatically reduced industrial base redundancies in the nuclear triad."
What I’m Reading
Kansas City startup is shutting down. Its founder blames a St. Louis corporate giant, Kansas City Star
US House to Clear Path for Ocean Shipping Reform Act to Become Law, The Maritime Executive
Rebooting the Arsenal of Democracy: Anduril Mission Document, Anduril Industries Palmer Luckey helped create the Oculus VR headset, which he sold to Facebook. He then started a defense contractor with Peter Thiel called Aduril. Our arguments on consolidation have had a significant impact on the way that Luckey thinks about innovation and policy, as this mission document shows. There are a lot of interesting embedded anti-monopoly ideas though I am skeptical of some parts.
How we all paid for the shipping giants’ $150 billion windfall, FreightWaves
Supreme Court Rejects Forced Arbitration for Southwest Airlines Baggage Workers, Wall Street Journal
UK Antitrust Authority Block a Merger of Two Waste Management Firms. Consolidation of waste management is a huge problem for U.S. cities.
Foreign Policy pushes Big Tech-funded ‘analysis’ against antitrust bills, New York Post
Inside the corporate dash to buy up dentists’ offices, veterinary clinics and pharmacies, The Globe and Mail
Iowa's Gray Blob Eats Corn on the Cob, Interplace
"From 2012 to 2017 Iowa lost 2,533 farms. That leaves 86,104 farms remaining. There were over 10,000 more farms in 1997 and nearly 20,000 more when I left Iowa in 1984. The amount of land dedicated to farming shrank by 59,000 acres.
Much of this reduction is from consolidation. The number of large farms (>2000 acres) grew 15% to 1,892 over five years. By comparison, there were barely 300 large farms in 1987. From 2012 to 2017 large farms had gobbled 10% of up mid-sized farms (500-999 acres). Small farms (fewer than 9 acres) grew 36% to 9,120. That’s a big jump in five years, but only 1000 more than 30 years ago."
Thanks for reading!
And please send me tips on weird monopolies, stories I’ve missed, or comments by clicking on the title of this newsletter. And if you liked this issue of BIG, you can sign up here for more issues, a newsletter on how to restore fair commerce, innovation and democracy. And consider becoming a paying subscriber to support this work, or if you are a paying subscriber, giving a gift subscription to a friend, colleague, or family member.
P.S. Shortage update from readers!
Back dated pricing is happening in Canada with fibreglass showers. We get ours from EMCO and they said that their supplier Maxx and Mirolin aren’t holding purchase order pricing. You can order today, but you’ll pay whatever the cost is when it gets shipped - sometime in the next 3-4 months!
The monopoly on chlorine tablets. I buy them about 1 time each year and a 25 pound bucket has pretty much doubled in price as a plant was destroyed and produced 40% of the market. Last year I paid about $100-$120 and this year it’s $180-$210.
We are heading for turbulent times as people facing decreasing freight cost would be tempted to lower their price. However, the war is causing a spike in our manufacturers' raw materials costs. That along with the spike in fuel will offset any decrease in ocean freight.
The Rooster Sriracha has stopped production until possibly early next year. The reason is quite complicated. If you use it regularly, be sure to stock up.
P.P.S. Never mind, this economist says there are no shortages.
PBMs as middlemen - between the producer and consumer, sucking money out of the system at the expense of both - hmmm, sounds a lot like the health insurance companies - between provider and "consumer" (also known, in the old days, as "patient"), sucking money out of the healthcare system -
In the case of many sectors we need more competition - in the case of PBMs and private health insurance companies, maybe we need elimination altogether ...
Some good news for the economy, even if delivered by torpedo.