I almost choked on my tea. Someone had written an article, and a good one at that, covering the same ground as the book I have been working on for the past year. It’s always good to have company when you’re trying to push into new spheres of thinking but there’s also a huge pressure in the world of limited attention to say something original. I choose to focus on the former point and I hope that this response will be taken in the intended spirit of collaboration. Perhaps with more people pushing in this direction we can move the dial further.
In their article “Cooperative Enterprise as an Antimonopoly Strategy”, Sandeep Vaheesan and Nathan Schneider explore the much-overlooked aspect of competition — the ownership structure of the firm — arguing that the “dominant model of investor-owned business and associated philosophy of shareholder wealth maximization exacerbate the pernicious effects of market power”. I couldn’t agree more, but would suggest that focusing on ownership limits the potential scope of their proposals. A company doesn’t need to be employee-owned to care about its workers, and if we look at governance instead of ownership we tackle shareholder wealth maximisation head on and on its own turf, with potentially transformative results.
Vaheesan and Schneider argue that there has been an unbalanced enforcement agenda in the last few decades. Authorities have shown leniency towards monopolies and have chosen to look the other way as industry after industry has been consumed in a wave of consolidation. But against small players — the ice skating coaches, the piano teachers and the church organists — enforcers have taken a hard line, cracking down on any attempt to organise.
Analytically, market power is market power and both big and small players are trying to do the same thing: they are trying to put more money in their own pockets, be they shareholders or workers, farmers, employees or co-op members. But there is a world of difference between your average employee and your average shareholder. The proportion of GDP that is extracted by shareholders amounts to a transfer of $2 trillion of annual income to investors, at the expense of consumers, workers and the planet. Meanwhile, 84% of all US-held shares are owned by the wealthiest 10%, and half of Americans don’t own any shares at all. It may not be the place of competition policy to redress that balance monetarily but neither should it systematically worsen the balance of power in society achieved by the markets.
The situation reminds me of the differential treatment of drug offences in the US in the 1980s (and, to a slightly lesser extent, today), with authorities taking a harsher stance towards those drugs typically taken by black people in the inner city ghettos versus the drugs of choice of the white middle-class in suburbia. Possession of 5 grams of crack cocaine would trigger a mandatory minimum sentence of 5 years, whereas you had to have on you 100 times more powdered cocaine to trigger the same punishment. Both types of drug users are trying to do the same, illegal thing: they are both trying to get high. But this difference in treatment within the criminal justice system accelerated the mass incarceration of black men in America.
The point of the antitrust system is to regulate the accumulation of power. So of course it matters who is accumulating that power and how much power they had already. This is why we look at countervailing buyer power as a defence in mergers and why recent deals have been approved based on the argument that consolidation was necessary to face up to even bigger competitors like Amazon or Netflix.
Vaheesan and Schneider propose rectifying the enforcement imbalance through the expansion of an antitrust exemption for what are sometimes called “good cartels”. The push-back to this kind of proposal is predictable and understandable but, I think, wrong. First is the question of who should decide which are the good cartels and which are the bad cartels? The competition authorities? The courts? Government? Personally, I am quite comfortable with the idea of elected representatives deciding which forms of cooperation we want to encourage and which we don’t, as long as it is done at a legislative level and not an on a case-by-case basis, and assuming that the answer is reached through adequate consultation. Those who want antitrust to remain the purview only of experts will not be so comfortable with this, and there are valid concerns as to political gaming of the system. But a poor system-designer eliminates feedback from the very users for whom their system is designed, and I think this could be such a feedback mechanism.
It is easy to characterise the ice skating coach, piano teacher and organist cases as the government wielding its might against the little guy. Commentators on the other side of the spectrum, like Josh Wright, say they were good cases (he voted to bring them, as an FTC Commissioner at the time) and that they didn’t hurt the little guy but instead protected him / her from other, medium, guys. I don’t know the cases well enough to pick a side but I think we should take note of the red flag when a competition authority is bringing a significant number of cases against organisations capable of far less sophisticated schemes than the global multi-national cartels, who tend to evade detection until someone blows the whistle.
Going back to black drug dealers in the ghetto. Are the police on the right side of the law to arrest people? Yes. The spread of drugs and the resulting gang warfare and impact it has on those communities, all of those things justify the punishment of criminal activity. But stepping back and looking at the bigger picture, the real solutions may lie in employment opportunities, educational opportunities, community support and lifting depressed areas out of poverty. So maybe locking people up doesn’t really help and in a joined-up justice and economic system we would get that balance right.
That argument is about enforcement priorities — which cases antitrust authorities choose to spend their limited resources bringing — but there is also an argument about whether all cooperative restrictions should be presumptively unlawful or not. I think one of the problems is the narrow definition of market power as the ability to impact price and output. It is so hard to move away from the assumption that more ice skating, more piano lessons, more organ playing and more stuff in general is always good. But when we step back from our narrow but fascinating discipline and look at how the whole economic system works that starts to seem like an arbitrary, unhelpful and outdated objective.
Josh Wright tweeted that “an antitrust enterprise that requires at its core the identification of good and bad cartels is a recipe for antitrust as an instrument of crony capitalism and rent seeking”. I’ve got to ask: rent seeking by whom? The ice skating coaches? Really? Or is he worried that the big corporations would pile in on the loophole for cartel activity if such an exemption were created? Because Vaheesan and Schneider are worried about that too. And that whole antitrust enterprise is about distinguishing between pro-competitive conduct and anti-competitive conduct, and we can stick to apolitical economic models to make those decisions but it’s not as clean and straightforward as that because first you have to decide which economic models to apply, i.e. what counts as pro-competitive and what counts as anti-competitive. And we did that, and the dust settled, but a red flag like the one Vaheesan and Schneider highlight is exactly the kind of sign that we may need to recalibrate our thinking.
The core of Vaheesan and Schneider’s proposals centre around encouraging cooperative enterprise. It may be that corporate lawyers and organisational economists can help us out with this as there has always been tension between conduct that is permitted within the firm but prohibited or subject to approval if it happens outside the firm (think of the difference between organic growth to monopoly or growth through merger). Vaheesan and Schneider seem to be saying that we should treat a co-operative, owned by individual members, as we would a corporation, controlled by individual shareholders, and not as a collaboration between competitors. This means that we would allow such groupings on the basis of the efficiencies they generate due to the pooling of resources (which is the current position in relation to cooperatives) but also on the basis of the market dynamic they create through the pooling of individual power.
My position is that this goes beyond looking at ownership because what we are really talking about is the net effect of organisational conduct on a range of stakeholders, not just shareholders / cooperative members and consumers. This framing helps us explore the circumstances under which cooperation between individuals is beneficial, as we assume it would be if it took place within a “firm”, or when it would be harmful, as we assume it would be if it took place outside a “firm”. If we look beyond ownership towards governance then we can also think about how governance tools, including ownership, but also stretching to voting rights, consultation, representation and influence, can be used to “democratise” markets.
Which is to say that I can go most of the way on the journey with Vaheesan and Schneider before I fork off onto another path. They make the link between shareholder value and market power (see also this great paper by Joshua Gans, Andrew Leigh, Martin Schmalz, and Adam Triggs on monopoly and shareholder value as a driver of inequality) and I couldn’t agree more. They say that “Shareholder wealth maximization serves to accelerate monopolization of the economy and supercharge its socially harmful consequences”. There are limited ways for firms to maximise investor returns and establishing market power is a reliable one, indeed it is the whole point of competing with rivals for customers because if you can find a way to secure durable market power then you can bank those profits going into the future and move onto other ways to generate revenue (like rent-seeking).
I talk about this as the “shareholder value imperative” because if directors have a duty to maximise shareholder wealth then they are effectively being asked to shift negative externalities off the balance sheet and onto society. Which means that market failures, like market power, are not unfortunate side-effects of imperfect markets, they are baked into the business strategy of shareholder value firms.
Regulation that seeks to offset, mitigate or redirect this imperative — and competition law sits squarely within this category — must find ways to make firms internalise costs that would otherwise be externalised. We do this by punishing or prohibiting the impulse of firms to seek monopoly rents and we can also do it by forcing or encouraging companies to internalise stakeholder interests more broadly.
Vaheesan and Schneider acknowledge that alternative governance structures can generate benefits and mitigate the harms of market power. They even mention B Corps, with a slight confusion over the difference between B Corp certification and incorporation as a benefit corporation (it happens). They cite various studies showing that co-operatives generate efficiencies as well as broad-based wealth creation — i.e. the kinds of things we might label as “pro-competitive” if we were minded to.
They argue that co-ops don’t have to rely on conglomeration to achieve economies of scale because instead of buying up smaller operations and wiping out rivals they can expand through federation, which means that the smaller entities own the bigger ones and the cost savings flow down rather than up. They acknowledge that co-operative organisations may pursue market power but argue that it would be less harmful because such organisations will tend to cooperate on one aspect of business (e.g. purchasing) whilst continuing to compete for customers, employees and so on. I think this argument needs a bit more thought because few cartels collude on all aspects of business so the test must be on the extent of collusion and the effects of the cooperation.
They raise the point that one of the benefits of co-operative ownership is that a range of stakeholder views are automatically imported into the company governance, which means that such firms may require less external regulation. This balance between internal and external regulation is exactly what I have been exploring, but we can’t assume that co-operatives automatically adopt varied stakeholder interests (a customer co-operative may not care about the supply chain; and worker co-operative may not take account of the environment).
This is why looking at company governance, rather than ownership, could render some of the same benefits without getting stuck in the good cartel / bad cartel quagmire. Vaheesan and Schneider talk about granting more favourable antitrust treatment for co-operatives. I agree and support, in both spirit and person, initiatives by organisations like the Fairtrade Foundation in the UK to push authorities to issue clear guidance that collaborations that would otherwise be unlawful but with demonstrable public benefit should be permissible under certain circumstances. But I think we can go further and explore the possibility of systematically bringing stakeholder interests into antitrust analysis, such as by paying closer attention to who gets to buy divested assets (VC’s do not always make the most careful stewards) or by giving companies credit for stakeholder representation at the board level where a merger raises concerns in relation to that stakeholder group.
Importantly, shareholders should not lose their status as interested parties — they are a very important stakeholder group. But their needs must be balanced against the needs of society as a whole. The only justification not to bother balancing is if we think that allowing companies to pursue profits only on behalf of shareholders somehow indirectly benefits the rest of society. I am willing to accept the possibility that profit-seeking does benefit society — up to a point. But, I would speculate, we are well beyond that point, and have not in the meantime found a way to allow regulation to adequately fill the gap. So I think it’s time we stop relying on indirect benefits of market competition spilling over or trickling down and start building positive impact into the core of corporate activities and competition.
I also think it’s useful to think not just about how to help the little guy but how to nudge the big guy too. Senator Warren’s Accountable Capitalism Act attempts to do just that. If enacted it would place obligations on the largest companies to to apply for a federal corporate charter; to seek to create “a general public benefit” and to balance the “pecuniary interests of the shareholders … with the best interests of persons that are materially affected” by the company’s activities (borrowing from the benefit corporation language); and to have employee representation at board level (see the text of the bill here). The Act uses revenue as the threshold — it would apply to companies with over $1 billion in revenue — but a more nuanced approach below the revenue threshold would be to look at market power and place greater duties and obligations on the most powerful companies in the economy, no matter what their size, and regardless of whether such power is held unilaterally or through coordination.
The fundamental idea I am pursuing is that upping competition law enforcement, strengthening regulation and promoting stakeholder value as opposed to shareholder value are all ways to rebalance the distribution of power in society and that we would be leaving money on the table, so to speak, if we didn’t attempt to look under the hood of the corporation and change the fundamental driver within the company to compete only for profit. We can argue about how far antitrust can and should go on this, but for me it’s obvious that antitrust should have something to say about the mechanisms that make companies seek out market power in the first place.