The competition safety instructions we need to remember

Andres Acevedo
Andres Acevedo
Advokat

If I had to choose between being alive today, or at any previous time in history, I would choose today. Thanks to the technological developments of the last centuries, today is a fantastic time to be alive. Would these developments  have been possible without free market competition? Probably not. Competition is a great tool that has served us well. But, like any tool, it can end up doing more harm than good if we disregard its safety instructions or use it beyond its intended purposes. 

An excellent new book written by the distinguished antitrust scholars Ariel Ezrachi and Maurice Stucke reminds us about the intended purpose and limitations of competition. This post discusses this inspiring book and concludes with 3 suggested implications of the book’s message for competition law practitioners.

Problems that competition cannot solve

Are you on social media? Me too. Do you find it meaningful? Me neither. To start off a discussion on whether the promise of competition has been oversold, let’s begin with the market we all love to hate: the social media market.

Most of us are fed up with social media. Instead of doing the challenging and important task that sits on top of our to-do list, we end up scrolling endless social feeds. Using social media used to be exciting and useful, but for many of us it now threatens the quality of our leisure time and our working hours. We also feel uncomfortable with how social media force us to act as pro bono suppliers of personal data, knowing that our data will be leveraged against us—to make us crave products we would be better off not buying.

How much can we rely on competition as a tool to solve problems on our markets?

The statistics bear out how fed up we are. A recent survey showed that only 24% of Swedes consider time spent on social media to be meaningful. The same survey also showed that nearly half of all users are concerned about corporations intruding on their personal integrity online. Yet, almost every internet user still uses social media regularly and a vast majority uses social media daily.

0 %

Of Swedes consider its use of social media to be meaningful

0 %

Of Swedes are concerned about Google and Facebook intruding on their personal integrity

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Of Swedes use social media, and 65% use social media daily

Why, then, do so many of us keep using social media even though we are this fed up? By now, we know why, partly thanks to former employees of the social platforms. We know that the social media companies deliberately design systems that make you addicted. By making you addicted, they can extract as much of your personal data as possible. This data they can then use to sell access to your attention to the highest bidding advertisers.

This means that our social media addiction or overuse is not an unfortunate byproduct of an otherwise benign digital service. Rather, our addiction and overuse of social media is an intentionally created cog that helps turn the social media profit wheel. Similarly, exploitation of our personal data is not a bug, it is the foundational feature on which the profitability of these social platforms is built.

But if we are fed up, and aware of the social media companies’ devious business models, how come things hasn’t already radically changed on this market? We have been taught throughout our lives that when services do not correspond to what the consumer collective demands, then competition on the free market will empower us, the consumers, to change things. The mere threat of us voting with our wallets should keep us safe. That’s at least what our capitalist intuition tells us. Why, therefore, hasn’t competition itself eliminated addictive features and ended the exploitation of our personal data?

The answer may be that competition on the free market simply cannot solve this problem. Perhaps there are many problems we face on different markets that competition cannot solve. Perhaps competition itself sometimes is the problem?

This question is the topic of an excellent new book, Competition Overdose: How Free Market Mythology Turned us from Citizen Kings to Market Servants, written by Ariel Ezrachi, the Slaughter and May Professor of Competition Law at the University of Oxford, and Maurice Stucke, Douglas A. Blaze Distinguished Professor of Law at the University of Tennessee. Competition Overdose is not Ezrachi and Stucke’s first book that challenges our notions about competition. In the 2016 book Virtual Competition: The Promise and Perils of the Algorithm-Driven Economy, they asked whether competition will work in the digital market, when the algorithms have taken over. In Competition Overdose, Ezrachi and Stucke up the ante and ask whether competition itself “isn’t always what it’s cracked up to be”.

When competition is toxic

As a competition law attorney, I spend countless hours interpreting rules that are meant to protect competition. But to do that well, I seldom need to think about competition itself as a concept. Whether there are different types of competition. Whether we collectively benefit from the competition. Whether competition always is good.

In Competition Overdose, Ezrachi and Stucke urge us to ask critical questions on what competition is and how it is deployed as a tool in our society. They also provide helpful frameworks for asking such questions. Ezrachi and Stucke describes competition as behavior that can exist somewhere along a quality spectrum, from toxic to noble.

Competition quality spectrum

When I look around, I see many markets today where competition seems to be on the toxic end of this spectrum. To me, competition is toxic if it sustains the type of social media business models I described in the beginning of this post. To me, competition is toxic if it leads to the type of industrial meat production we have in most parts of the world. To me, if you can’t see at least some examples of toxic competition around you, then you’re not looking.

The credit card market is used in Competition Overdose as an example of a market where companies “compete in devising ever cleverer ways to exploit consumers’ shortcomings—the result being that increasing competition delivers even worse products and services to us.”

Competition Overdose starts out by exposing the toxic nature of a number of such markets around us. It tells us about the competition between U.S. colleges that has gone toxic due to the college ranking system. Where competition harms not only the students and society at large, but also the colleges themselves. It tells us about competition on the European meat manufacturing markets. Where immense price pressure has led to substantial food quality degradation, cheating and the horse meat scandals.* It tells us about competition on the travel booking and credit card markets. Where companies compete by coming up with ever-more innovative ways of exploiting consumers’ weaknesses. Through drip pricing, hidden fees and other deceitful practices.

The reason we end up with markets like thesethat according to the book are not, as some would claim, isolated instances of market failuresis because we too often today rely too heavily on competition as a tool to achieve good outcomes for society. We repeatedly overdose on competition. Before we look at what Ezrachi and Stucke claims are the causes of these overdoses and their  proposals to prevent future overdoses, let’s remind ourselves why we cherish competition in the first place.

Why we foster competition

The classical origin story of capitalism and competition usually goes something like this. In the late 1700s, the Scottish philosopher Adam Smith observed the different nations that had formed across Europe, and he got curious. He got curious about why some nations are wealthy and others less wealthy. In Adam Smith’s attempts to get his head around the reasons for this, he ended up establishing what essentially constitutes the foundational principles of capitalism.

What Adam Smith came up with, in a nutshell, is that we can achieve wealth in a nation, not by actually setting out to create wealth for society, but by encouraging all individuals to create wealth for themselves. Put differently: for a nation to achieve a higher level of wealth, it should unleash a free market and ask its citizens to serve its own self-interest in competition with other citizens on this market.

The father of economics, Adam Smith

And why is that? Well, what Adam Smith’s theory claimed was that when the citizens compete against each other to serve their own self-interest, there are invisible forces at play that directs the outcome of all of that economic activity to a higher level of social benefit. Adam Smith famously called this force that directs self-serving actions to the benefit the society at large, the invisible hand.

During the last 200 years, real world experiments have shown that there could be something to Adam Smith’s theory. Competition and free markets seem to repeatedly create conditions for growth and wealth. Nations that have relied on competition and free markets have fared well.

It is really important, however, to recall—and Competition Overdose does a great job reminding us—that even Adam Smith himself recognized that the forces of competition and free markets must be tamed in order for those forces to work for us and not against us. The free markets and the invisible hand come with several safety instructions. If the safety instructions are ignored, then competition and the free market will fail to deliver outcomes that are beneficial for society.

"the idealized perfect competition portrayed in the economic textbooks has been squeezed out by the bad forms of competition-monopolistic or toxic or both"

Competition Overdose: How Free Market Mythology Turned us from Citizen Kings to Market Servants

First, Adam Smith recognized that competition must not be conducted in a manner that leads to unhealthy market power, through monopolies or cartels. If citizens can amass and abuse market power, then the invisible hand of the free market will fail to produce the societal benefit. That is why essentially all capitalist systems with free markets have competition laws. These laws prevent its citizens from creating market power through cartels or mergers and prohibit companies that already have market power from abusing that market power.

Second, Adam Smith recognized that there is a need for nation states to tax its citizens, so that the nation state can provide necessities that self-centered competition on the free market cannot provide. For example, free schools and poverty relief. Accordingly, even the most capitalistic societies have at least some level of tax financed mechanisms to provide necessities and to solve market failures.

Third, as Adam Smith wrote at length about in The Theory of Moral Sentiments, there are other values, beyond pure self-interest, that are beneficial to markets and society. These values include “humanity, justice, generosity and public spirit”. For markets to serve us rather than the other way around, we cannot let the markets be characterized solely by raw pursuit of self-interest. We also need to enshrine other principles and values into our markets.

In Competition Overdose, Ezrachi and Stucke argues that we all too often today end up overdosing on competition because we disregard these safety instructions that came with competition and the free markets. We do so by excessive deregulation, careless privatization, and an unfortunate overconfidence in the competitive process when we apply the competition laws.

Paraphrase of graph used in Competition Overdose to illustrate the consequence of overconfidence in competition.

Due to these overdoses and the toxic competition, the promise of competition fails to materialize. Instead of increased overall welfare for the many, toxic competition leads to excessive profits for the few, and sometimes benefits none at all. As Ezrachi and Stucke puts it: “the idealized perfect competition portrayed in the economic textbooks has been squeezed out by the bad forms of competition-monopolistic or toxic or both.

The reason this happens—that we again and again disregard the free market safety instructions—is not because consumers are lazy or because policy makers are not aware of them. Instead, Competition Overdose makes the case that four different culprits in today’s society actively push competition towards the toxic end of the spectrum. The culprits are: the competition ideologues, the lobbyists, the privatizers and the so-called game-makers. Let’s talk about these culprits.

The culprits pushing for toxic competition

The ideologues

The first culprit pushing us towards toxic markets, according to Stucke and Ezrachi, are the ideologues who push an oversimplified competition ideology. The oversimplified competition ideology, the book argues, uncritically advocates competition and the free market as the answer, irrespective of what the question is. The oversimplified competition ideology disregards the nuances of the promise of capitalism that even Adam Smith saw, and that a vast body of economic literature has discussed over the last centuries.

The narrative of an invisible hand that can solve all problems and that provides moral cover for our self-serving behavior is simple and appealing.

As the authors of Competition Overdose put it: “we are often attracted to simplified narratives”. Indeed, the narrative of an invisible hand that can solve all problems and that provides moral cover for our self-serving behavior is simple and appealing. But simple and appealing does not equal true. The oversimplified competition ideology also misleads by framing the alternatives we face as: either we chose unfettered free market competition, or, we chose planned economy communism.

The oversimplified competition ideology is so attractive that politicians across the political spectrum are pushing it when they have no better solutions to identified problems. Oversimplifications make for good sound bites. But to avoid ending up with markets on the toxic end of the spectrum, Ezrachi and Stucke argue that we must dare to question the oversimplified competition ideology. When more competition is proposed as the solution to a problem, we must first ask ourselves what outcomes we want and then question whether really more competition is the right tool to achieve these outcomes.

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The lobbyists

The second culprit, according to Ezrachi and Stucke, are the lobbyists. Remember here that while toxic competition may be bad most of us, it may be really profitable for certain companies. Some companies even depend on the toxicity for their very survival. Remember also that companies normally, by law, serve only one purpose: to earn profits for its stockholders. Thus, if a company’s profits are dependent on the toxic competition, then it is rational for the company to spend a portion of the profits to protect the toxicity. In other words, rational companies will sometimes use money to prevent politicians and regulators from intervening when competition has gone toxic.

Companies can use money to prevent intervention in different ways, depending on what is legal and customary in each jurisdiction. In the U.S., where political campaigns are normally not publicly funded, one readily available method to get politicians to do the company’s bidding, is to make what is euphemistically referred to as campaign contributions. Political scientists have shown how corporate campaign contributions lead to what Harvard professor Lawrence Lessig has referred to as substantive distortion, which means a distortion of the politicians’ policy making, as well as agenda distortion, which means a distortion of what issues the politicians spend time on.** Thus, cunningly targeted campaign contributions can prevent political decisions that threaten the toxic competition and can get policy makers to look the other way.

In jurisdictions where political campaigns are publicly funded and campaign contributions from corporations are frowned upon, such as Sweden and many other European countries, there are other ways of using money to prevent intervention. One way is to install a revolving door. Through the revolving door companies can reward former politicians and regulators, who have acted favorably towards the company, with well-paid positions as consultants, board members or executives. Over the years, the promise of the revolving door may start to influence the politicians and regulators decision making. As long as they play their cards right during their years of public service, the politicians and regulators will be able to conveniently change from a low-paid political career to a comfortable well-paid private sector career. When politicians and regulators, consciously or subconsciously,  start to take lucrative future private sector careers into consideration, it is less likely that they as public servants will stand up to industries that profit from toxic competition.

In one of the most famous examples of the revolving door, former German chancellor Gerhard Schröder joined a supervisory board for Russia’s state-owned gas company Gazprom shortly after stepping down as Chancellor. Can the revolving door affect political decision making?

The oversimplified competition ideology also provides politicians and regulators moral cover for using the revolving door. As long as the politician or regulator buys into the oversimplified competition ideology, she will always be able to find arguments justifying corporate-friendly policies that protect toxic competition.***

Unless we limit the lobbyists’ influence over our democratic processes and institutions, they will be able to set the agenda and we will keep ending up with markets on the toxic end of the spectrum. I believe that lobbyism, and other threats to the integrity of our institutions, is the most important factor to explain why we still have a lot of markets where competition is toxic. If Competition Overdose could have delved more deeply into any topic, this would be it.

The privatizers

The third culprit identified by Stucke and Ezrachi are the privatizers. If you buy-into the oversimplified competition ideology—claiming that competition is the answer, irrespective of what the question is—then privatization should always sound like a great idea. Eliminating a government monopoly to unleash the power of competition to let the invisible hand clean up wasteful spending. Sounds great. Sometimes, this works really well also in practice. However, as Ezrachi and Stucke puts it, “privatization, like competition, is not necessarily a panacea”.

Privatization of a nation’s water supply. A great way to tap into efficiencies or an idea that is dead in the water?

Competition Overdose sets out a number of examples of how privatization can lead to disastrous consequences: The privatized prison system in the U.S. that not only led to lower quality and human misery, but also higher costs for the taxpayers. The privatization of forensic services in the U.K. that was supposed to lead to faster, cheaper and better analysis, but instead resulted in years’ worth of unreliable forensic testing. The U.K. health system’s mixture of private and state providers that enables private providers to engage in “cream skimming” and thereby profit by free-riding off taxpayer funded health providers. The privatization of the English water supply system that was supposed to unlock efficiencies, but that instead led to inflated water prices compared to countries with non-privatized water supply systems. Similar examples exist across the globe.

Even Adam Smith recognized that certain necessities must be provided by a tax funded state, rather than profit seeking private enterprise. If we allow privatization to go too far, believing that it will inevitably lead to better outcomes, then we will end up with markets where competition is on the toxic end of the spectrum.

The gamemakers

The fourth culprit identified by Ezrachi and Stucke are what they call the gamemakers. By this, they refer to the digital platforms that we increasingly rely on for our daily transactions and social life. To name names, Facebook, Google and to some extent also Amazon. Yes, these digital platforms provide services that we do benefit from and that enable many other businesses. But, step by step over the years, the platforms have been pushing “toxic competition to degrade privacy so that it can profit from the personal data it harvests and hoards”. The platforms have turned its users into the product. Slowly, the platforms have been building what Apple’s former CEO Tim Cook referred to as the “data-industrial complex”. If the rise of the data industrial complex is allowed to grow uninhibited, amassing unprecedented market power, then we will keep ending up becoming the product, serving the market, instead of the market serving us.

Our joint responsibility to prevent toxic competition

Can anything be done to prevent toxic competition and to keep the four culprits at bay? In the third and final part of the Competition Overode, Ezrachi and Stucke provide some ideas and frameworks on how we can make sure the free market works for us, rather than against us.****

In this chapter, Ezrachi and Stucke discuss what ultimately drives us as human beings, based on findings from the field of behavioral economics. They draw on such findings to conclude that “most of us are not greedy. We treat others fairly and expect to be treated fairly in return” and that “shared values like trust and fairness actually enhances the workings of the marketplace”.

With the conclusions they draw from behavioural economics, Ezrachi and Stucke lock horn with the Chicago School of Economics that has portrayed competition as warfare and human beings as self-serving and rational  homo economicus. A school of thought in which “greed and selfishness are repackaged as virtues” and that has had a huge influence on policy in many places—through politicians such as Reagan and Thatcher and through influential jurists such as Robert Bork. In contrast with the Chicago School of economics, Competition Overdose makes the case that “Trust and fairness are the foundation of our market economy, not greed and zero-sum warfare”.

By using games such as the “Ultimatum game” and the “Dictator game“, behavioural economists have found that human beings are not driven solely by self-interest, but also by values such as fairness.

With Competition Overdose, I believe Ezrachi and Stucke make a significant contribution to an incipient movement where thinkers from a diverse range of fields argue—based on robust research—that human nature is fundamentally decent and altruistic, not dishonest and selfish. When you’re finished with Competition Overdose, make sure to pick up the prodigious book Humankind: A Hopeful History, written by Dutch historian Rutger Bregman, to get a fuller picture of this profound movement. 

To be sure, Competition Overdose does challenge certain neoliberal ideas that still seem to pervade parts of the competition law communityespecially in the U.S. Yet, I would not characterize Ezrachi and Stucke’s positions and proposals as radical. After all, Ezrachi and Stucke are antitrust scholars who clearly subscribe to the idea that competition and free markets are fundamental ingredients for societies to prosper. Ezrachi and Stucke even acknowledge that we sometimes need to engage in zero-sum competition to allocate scarce resources, even if such competition may disregard our standard of fairness and morality. But—and here’s what I consider the most important take-away of the book—they warn us that this type of zero-sum competition comes with significant risks and costs and they urge us to learn how to distinguish between different types of competition.

First, to what extent does the competition actually serve us collectively, rather than force us to serve it? Second, to what extent can we compete without sacrificing our values and our integrity?

To distinguish between different types of competition, Ezrachi and Stucke propose that we ask two questions: First, to what extent does the competition actually serve us collectively, rather than force us to serve it? Second, to what extent can we compete without sacrificing our values and our integrity? The responsibility then to act, if competition does not serve us or violates our moral values, lies on all of us. On the state. On corporations. On ourselves as individuals.

This message of Competition Overdose really resonates with me. I also believe that us competition lawyers have a special responsibility to care for the nature of competition. Therefore, I would like to suggest 3 implications of the book’s message for us competition lawyers.

3 suggested implications for competition law practitioners

1.

Lawyers must (re)learn how to assess non-price parameters

To determine if competition on a particular market serves us collectively and is aligned with our morals and values, there is an array of parameters to consider. Does competition on that market lead to lower prices? Does it lead to better quality? Does it push innovation? Does it lead to a relevant level of choice? Does it increase safety? The list goes on. Unfortunately, however, the assessment in competition law cases again and again gets dumbed down to obsessing about only one of these criteria: Price. All other criteria be damned.

This is partly understandable—prices are easy to measure and model. But, while the sole focus on price may be convenient, it’s also misleading. Price is almost never the only important factor to the questions whether competition serves us and is aligned with our values. Price is even irrelevant in an increasing number of digital markets, where services ostensibly are free, but where we instead pay with our personal data.

Competition authorities sometimes myopically focus their investigations on only price levels, disregarding other important parameters. Similarly, many consider that public procurements focus too much on price, at the expense of other important criteria.

To enable competition law to help prevent toxic competition, competition lawyers must (re)learn how to asses and argue around non-price parameters. Alas, many in the competition law community disagree. They believe that competition law is suited only to assess price related parameters and that we should let other areas of regulation care about other parameters. I agree that other areas of regulation are important. Legislators and regulators must dispel any idealistic illusions of self-regulating industries and adopt and enforce regulation whenever necessary. But still, the competition law’s pliability enables it to fill regulatory gaps and to act as a second line of defence to protect the intended benefactors of competition against also other ills than inflated prices. Let’s use it wisely.

2.

Lawyers must dare to help their clients prevent toxic competition 

Many companies realize that toxic competition is commercially unsustainable in the long run. Therefore, they do not want toxic competition. However, these companies often feel that competition law stymies their ability to take action to deescalate toxic conduct. This is unfortunate. European competition law does have mechanisms built-in to enable conduct—both coordinated and unilateral—that deescalates true toxic competition, as long as the economic effects of the conduct are sufficiently beneficial. Yes, these mechanisms require cumbersome self-assessments. But, to paraphrase Theodor Roosevelt, nothing in the world is worth doing unless it means effort. 

Companies that genuinely care about the nature of competition on their markets can draw up plans on how toxic competition can be prevented. Then they can run the plans by their competition lawyers. The companies shouldn’t then allow—or hide behind—vague advise from the lawyers. If the company’s plan to prevent toxic competition risks triggering competition law concerns, then the companies should ask their lawyers to help adjust the plan to alleviate the concerns and emphasise the benefits.*****

3.

Law firms are allowed to hold themselves to higher standards

In Competition Overdose, Ezrachi and Stucke highlights that corporations can help prevent toxic competition by adopting goals that go beyond merely generating profits. This, I would like to suggest, in particular applies also for law firms. Law firms must realize that ethics and morals go beyond merely abiding by the minimum standards set out by a bar association. As Ezrachi and Stucke elegantly put it: “just as most of us hold ourselves to standards higher than ‘the rules of the game’—and we become collectively better off for behaving this way—the companies we work for should do likewise”. 

Law firms must realize that ethics and morals go beyond merely abiding by the minimum standards set out by a bar association.

Of course, attorneys must heed the particular calls of the legal profession. Individuals have a right of defence and to be presumed innocent until proven guilty. But such principlesthat originally were meant to protect human being, not corporations, from the state abusing its monopoly of violencecannot extended to provide moral cover for helping unscrupulous corporations to advance and protect toxic competition. Law firms are allowed to decline client projects and are, I would argue, sometimes morally obliged to do so.

As usual, if you have any comments on this post, reach out to me on andres@acevedolaw.eu.

* I found this chapter of Competition Overdose odd. The fierce competition to lower meat prices has led to industrial farming that anyone who has seen it with their own eyes would agree is immoral, disgusting and terrible for the environment. Competition Overdose strains a gnat and swallows a camel when it instead of questioning the nature of industrial meat production, focuses on the horse meat scandal.

** Lessig, L. (2011) Republic Lost, How Money Corrupts Congress – And a Plan to Stop It, Twelve.

*** In addition to influencing the politicians and regulators through donations and the revolving door, companies that wish to protect a profitable toxic competition can, and do, find other ways to protect toxic competition. For example, by sponsoring academic papers or “independent” think tanks and interest groups.

**** Competition Overdose is written from a U.S. perspective and most of the examples used in the book are from U.S. markets. However, it is obvious to me that the book’s caution against overconfidence in competition and the mechanisms that lead to toxic competition apply for any free market systems. Perhaps many American markets are particularly toxic. Perhaps the culprits pushing the oversimplified competition ideology have particularly strong foothold in the U.S. But we would be fools to think that toxic markets do not exist outside the U.S., or that the culprits pushing for toxic competition are not present also elsewhere.

***** Competition Overdose provides several examples of companies that have tried to draw up and execute plans to deescalate toxic competition, but failed. Sometimes they have failed because of competition law. Yes, these examples in Competition Overdose illustrate that aspects of the application of competition law, at least in the U.S., may need to change in order to allow industry to take self-deescalating action. However, my view is that competition law, at least in the European Union, allow for much more deescalating conduct than is actually taking place.