Wharton's Herbert Hovenkamp discusses his latest research on antitrust law.

Herbert Hovenkamp is a Wharton professor of legal studies and business ethics with a joint appointment at the Penn Law School. He’s also a prolific scholar in the area of antitrust law, a distinction that earned him the nickname “dean of American antitrust law” by  The New York Times in 2011. He spoke to Knowledge at Wharton about his latest research, which builds a compelling defense for antitrust policies that advocate protecting consumers over businesses.

An edited transcript of the conversation follows.

Knowledge at Wharton: You’ve recently completed two papers on antitrust policy. The first focuses on what you call progressive antitrust policy. “Progressive” is a word used in the news quite a bit these days, especially in the realm of politics. Can you talk about what this means for antitrust policy?

Herbert Hovenkamp: Progressives in general have tried to make antitrust policy more aggressive. That is, they don’t think markets work as well, and there ought to be more intervention on the part of the government against anticompetitive practices. The original progressive movement in the early 20th century had that motive, and the result was very significant expansion of the antitrust laws.

More recently, the Democratic Party has espoused what they consider to be a progressive approach that would use the antitrust laws more aggressively, particularly against big businesses in highly concentrated industries, which are industries that have only a small number of firms.

Knowledge at Wharton: You find a disconnect between progressive views about the role of the regulation and what you would call optimal antitrust policy. You say in the paper that progressives tend to have outsized expectations about what antitrust could accomplish.

Hovenkamp: Yes. Antitrust is only as good as the fact-finding powers of courts and our knowledge about economic theory, and there’s a lot of situations where we just don’t know as much as we need in order to make the economic world a better place by means of an antitrust decree.

“Antitrust is only as good as the fact-finding powers of courts and our knowledge about economic theory.”

I’ve always taken the position that antitrust needs to be a little bit more conservative or a little bit more cautious about proceeding against practices that it doesn’t understand very well. I’m concerned about overreaching on the part of this new wave of antitrust interventionism.

Knowledge at Wharton: There is a general feeling these days that anything big business does is automatically bad. Is that feeding into this somehow?

Hovenkamp: To a certain extent, the anger of the progressive antitrust movement is pointed at very large businesses. That was also true early in the 20th century. At that time, the culprits were Standard Oil, Ford Motor Co., U.S. Steel. Today, it’s more likely to be somebody like Amazon or Google, Intel, Microsoft. But the concerns are really not all that different. A lot of people are concerned that businesses have become too big, that they wield too much political power and, perhaps most importantly, that they injure smaller businesses that are unable to compete with then.

Knowledge at Wharton: What should lawmakers keep in mind when crafting an optimal progressive antitrust policy?

Hovenkamp: First of all, I don’t think antitrust policy should have as its goal keeping small businesses in the market. I think its goal should be to maximize the welfare of consumers. And consumers are usually best off when output is highest. High output translates into low costs and high quality, and that benefits consumers. The fact is that sometimes it takes a pretty big business to benefit consumers.

Small businesses frequently cannot compete with that because they have higher costs. Frequently, they cannot produce products that are as good of quality. When that happens, a trust policy has to choose sides, which is either protection of small businesses on one side or protection of consumers on the other.

Knowledge at Wharton: Let’s talk about your second paper, which looks at antitrust policies and inequality of wealth. What are some reasons that people try to use antitrust policies to redistribute wealth?

Hovenkamp: I think the main reason people would like to use antitrust policy to redistribute wealth is because Congress, or in some cases state legislatures, are not doing it by means that everybody agrees would be better. For example, the best way to redistribute wealth would be through a tax system or a welfare system. Those systems may not be particularly popular right now.

Antitrust has the advantage for redistributional purposes in that it uses very general, open-ended language that is capable of a wide variety of interpretations. It simply speaks of monopolization without really telling us what that term means, or competition without really defining that term. The thinking is that if we can’t get this from the legislature through explicit legislative action, maybe we can get it from the judges and the guys who are interpreting the antitrust laws.

“To a certain extent, the anger of the progressive antitrust movement is pointed at very large businesses.”

Knowledge at Wharton: You mention that the goal of antitrust law should focus on consumer welfare, but there’s also another school of thought that you write about in the paper that talks about general welfare. What is the difference?

Hovenkamp: General welfare is the total welfare of all participants in the market — producers, consumers and third parties that might be affected. By contrast, consumer welfare is concerned only with the welfare of consumers. Importantly, consumer welfare is much easier to measure in the context of antitrust litigation than general welfare is. General welfare always requires these very complicated balancing tests between harm to consumers on the one hand and benefits to producers on the other.

In terms of measurement, consumer welfare has a huge measurement advantage. Furthermore, there are almost no cases where it really makes any difference. One of the things I advocate is that antitrust should give up on its quest for improving general welfare and instead focus solely on the welfare of consumers. That translates into preferring practices that produce higher outputs, and higher output generally makes the economy more efficient with benefits. So, a wider group of people. It’s more attractive distributionally because there’s a fair amount of evidence that says that competitive high output markets are better for more egalitarian wealth distribution than monopolized markets.

Knowledge at Wharton: You also note how that approach may be applied to the Googles or the Amazons of today.

Hovenkamp: The Amazon merger with Whole Foods has now been completed, and the Federal Trade Commission looked at it but decided not to challenge it. I believe that was the right [decision]. The arguments against those large firms are based very largely on the impact they have on smaller businesses. In the case of Amazon, it’s firms that make things and either compete with Amazon or supply Amazon. In the case of Google search, it’s based on many complaints from firms that operate competing search engines and things like that. What both sets of arguments lack, however, is any serious concerns about the welfare of consumers. Interestingly, very few of the complaints against either Google or Amazon come from consumers. Consumers, by and large, are very happy with all of the free stuff they get from Google because most of Google’s business model is based on giving things away. They’re also pretty happy with Amazon’s very low prices.

Furthermore, in both of those cases that success is sustainable only as long as those firms keep doing it. If Amazon should switch to charging monopoly prices, it would lose most of its business right away. Same thing would almost certainly happen in the case of Google. What I find very disturbing about the arguments against both Amazon and Google is the lack of any serious attention to the impact on consumers.

Knowledge at Wharton: It seems that often other businesses are arguing about this in the guise of protecting consumers when they really want to protect themselves.

“One of the things I advocate is that antitrust should give up on its quest for improving general welfare and instead focus solely on the welfare of consumers.”

Hovenkamp: Sure. In the case of Google, it’s companies like Microsoft, which has a competing search engine, or Yelp, which has a competing specialty search engine. In the case of Amazon, one of the largest complainants has been Walmart, which is owned by probably the richest family in the United States. However, Walmart has been primarily dedicated to very traditional brick and mortar retail sales. As greater and greater portions of the retail economy have switched to online buying, this has hurt Walmart a lot and has benefitted Amazon. A great deal of this complaining is nothing more than kind of a call to reverse a technological revolution in favor of firms that are committed to older ways of doing business that may have worked very well for them in the past but are not working so well today.

Knowledge at Wharton: That is pretty far away from the goals of antitrust law, correct?

Hovenkamp: They’re far away from where I think they should be. The congressional history isn’t as clean as anybody would want it to be, and there’s quite a bit of talking in the legislative history about the need to protect small business. But there’s never any viable theory and certainly not any theory in the last 20 or 30 years that has articulated small-business protectionism at the expense of consumers as a viable antitrust goal.

Knowledge at Wharton: You are saying that by using the consumer welfare consideration, you can both protect small businesses and consumers as long as the policy does both of those things, as opposed to just protecting the small business?

Hovenkamp: Yes. We’re not really so much protecting small businesses but giving them a chance to compete. It may require that they change their technologies. It may require that they enter into new areas that they are uncomfortable with. Let me just give you one very clear example that’s already happening: In the wake of the Whole Foods-Amazon merger, increasing numbers of grocery stores have gotten into home delivery of groceries. Today’s consumers like that, right? Consumers, particularly younger ones, are moving into the cities more. They are using their own cars less. They want their groceries delivered. Traditional grocery stores didn’t do it – certainly, Walmart didn’t do it, and Walmart now is trying to compete to an extent with online shopping in the grocery business. These are fundamentally good things because they benefit consumers, but they do put pressure on small businesses that have to make these technological or distributional changes, or else they’re going to suffer in the market.

Knowledge at Wharton: What’s next for this particular line of research?

Hovenkamp: I plan on doing some writing on what we call structuralism in antitrust, which is the idea that you need to pursue or condemn certain types of industries simply because of their structure and not worry so much about their anti-competitive practices. I think that idea is fundamentally wrong-headed. I think a certain structure might be a prerequisite to an anti-competitive outcome, but you still need the anti-competitive conduct in order to bring a form into condemnation under the antitrust laws.