Over the weekend, CVS announced a proposal to acquire Aetna. The $69 billion merger would be the biggest deal ever in the health insurance industry, consolidating in a single entity the role of insurer, pharmacy, and pharmacy benefit manager. There’s good reason to think the deal—if approved by the Justice Department—would harm the public.
To get a better sense of how DOJ might view the deal, it’s worth reviewing another recent action: its move to block AT&T/DirecTV from acquiring Time Warner. That deal—first announced in October 2016—would join the biggest telecom company in the country with some of the most popular news and entertainment producers, creating a behemoth and driving further consolidation in the media and telecommunications industries. By concentrating control over distribution and content in a single company, the acquisition would create a Pandora’s box of perverse incentives and give the merged entity significant power over both rival companies and consumers. The public would pay more for the same or worse service, independent programmers and producers would find it even tougher to reach market, and the health and diversity of our media ecosystem would further suffer.
Most coverage of DOJ’s action has focused on the possibility that President Trump improperly directed the Antitrust Division to oppose the merger, given his disdain for CNN (owned by Time Warner). To be sure, there is sound reason to be concerned: Trump has repeatedly attacked CNN for unfavorable coverage, even tweeting a video of himself wrestling a CNN figure to the ground. Journalists reported that White House advisors discussed using the merger review process as potential leverage over Time Warner to seek favorable coverage. Given the administration’s disregard for the rule of law and Trump’s penchant for picking winners and losers, it is reasonable to wonder whether the White House interfered in DOJ’s enforcement decision. The prospect is disturbing, and—as my organization, the Open Markets Institute, has recommended—Congress should hold hearings to ensure no improper meddling.
But it’s worth looking beyond Trump’s potential involvement to recognize that—on the merits—DOJ’s decision to oppose the deal is significant. In recent decades the government has shifted to a permissive approach to merger enforcement generally—and especially towards vertical mergers, which join two companies operating at different levels of a sector, like AT&T/DirecTV and Time Warner. Traditionally, the government had viewed vertical tie-ups skeptically, recognizing that a merger between, say, a dominant shoe manufacturer and leading shoe retailer would position the new firm to hike costs for competing retailers and manufacturers, or discriminate against them in other ways. Through the 1970s, the antitrust agencies sued to block vertical mergers on these grounds.
Chicago School thinkers attacked this theory of harm, arguing that vertical tie-ups could unleash efficiencies and that anti-competitive conduct was highly unlikely. This argument was part of the radical shift in antitrust philosophy promoted by thinkers like Robert Bork and Richard Posner. While Congress had originally passed antitrust laws in order to safeguard against excessive concentrations of private power, the Chicago School argued that the only proper goal of antitrust should be to promote efficiencies, in the form of “consumer welfare.” With the election of Reagan and subsequent appointment of conservative judges, this drastically new conception of antitrust was stamped into policy and case law. While enforcement priorities have varied slightly between Democratic and Republican administrations, both parties adopted the Chicago School’s welfare-based vision of antitrust. In practice, this philosophy has meant policing only for conduct that leads to higher short-term prices or lower output, and privileging neoclassical theories over the realities of how dominant companies exercise power in a marketplace.
The DOJ’s suit is notable because it stands behind the idea that vertical mergers can be anti-competitive. The government’s case is compelling: its brief identifies the ways that AT&T/DirecTV could use Time Warner’s networks to extort competing distributors (who will pass on costs to consumers) and slow growth of new online distributors, the kind of anti-competitive harms that the Clayton Act seeks to prevent. The suit follows news that, before filing its complaint, the government had given the companies the option to divest some properties (reportedly either DirecTV or Turner Broadcasting, a unit within Time Warner), but the firms declined. That the Justice Department sought structural relief (which, by requiring divestitures, change the actual incentive structure of a company) over behavioral relief (which leaves untouched the anticompetitive incentives and instead asks companies not to abuse their newfound power) also suggests that the Antitrust Division is switching course. While structural remedies were a mainstay of merger enforcement through the 1990s, the Obama administration showed a preference for behavioral remedies, approving Comcast/NBC and Ticketmaster/Live Nation—two of the biggest vertical deals of the last decade—with behavioral conditions that many observers increasingly believe have failed.
This potential shift in enforcement—a willingness to litigate large vertical deals and a clear preference for structural fixes over policing conduct—comes against the backdrop of a nascent and growing anti-monopoly movement. Over the last decade, a handful of scholars and activists have been working to educate policymakers, journalists, and the public about how extreme consolidation has become a defining feature of the American political economy. Today sector after sector is controlled by a small number of firms, from airlines and rental cars to health insurers and eyeglass manufacturers. Growing research shows that excessive consolidation contributes to rising wealth inequality, falling wages, declines in new business formation, greater regional inequalities, shortages of drugs and critical supplies, and a host of additional systemic harms. Concentration of economic power also concentrates political power, positioning dominant firms to shape favorable laws and regulations that further feed and entrench their dominance. There are signs that concerns about monopoly are again becoming mainstream: politicians including Elizabeth Warren, Keith Ellison, Chuck Schumer, and Amy Klobuchar have all mentioned the need for restoring antitrust laws, and Democrats included antitrust as a key pillar of their “Better Deal” agenda.
Of course, a true renewal of our anti-monopoly tradition will require not just stricter enforcement but a shift in philosophy. Orienting antitrust around “consumer welfare” has deeply enfeebled the regime, replacing concerns about how power is distributed across our political economy with a series of calculations to gather whether prices have gone up. But the DOJ’s action marks an important step, creating opportunity for case law that strengthens future enforcement and drawing public attention to the stakes of mega-mergers. No doubt, antitrust must be guided by the rule of law, not by political whim. Whether the antitrust agencies continue to challenge anti-competitive vertical deals—even when not in the cross-hairs of the President—will be one key test of where the administration stands.