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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. Continue Reading ...


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