tim brennan is a professor in the School of Public Policy at the University of Maryland, Baltimore County.
Published September 9, 2019
Antitrust theory and practice can be a bit of a snooze — except when it isn’t.
Last week, The Wall Street Journal (among other news sources) reported that the Justice Department is investigating whether the deal made by four automakers to accept California’s tough tailpipe emissions standards was a violation of federal antitrust law. Ford, Volkswagen, Honda and BMW, it seems, have agreed with the California Air Resources Board to adopt a 51.5 miles per gallon fuel efficiency standard, averaged across all of the cars each company sells, by 2026. Mercedes Benz reportedly backed off joining this agreement in response to the Justice Department investigation.
Mincing no words, The New York Times editorial page condemned the investigation as an illegitimate attempt to weaken environmental regulations in general, and those enacted by the Obama administration in particular. The Times condemnation way well be justified. But before getting there, it is worth taking this antitrust accusation seriously on its face. And what you’ll find is that this investigation doesn’t have a leg to stand on.
Count the Ways
One reason is that these four automakers sell less than one-third of the passenger vehicles in the United States. A collusive agreement creating a market share this modest may still be illegal under antitrust law if it harms consumers. But this hardly seems the case here since consumers will be able to turn to automakers selling into the other two-thirds of the market for competitive choices.
Indeed, it is far from clear that under merger guidelines going back in one form or another almost four decades — guidelines followed by both Democratic and Republican administrations — that even an outright merger among companies constituting only 30 percent of a market would be blocked under most administrations, not least by the merger-friendly Trump administration.
The real antitrust issue is whether the companies are colluding to fix the fuel efficiency of their cars at the expense of consumers who would willing to pay more at the pump in return for cheaper or zoomier models. But the design of the corporate fuel economy standard makes this an odd concern for antitrust.
A supporter of this investigation might alternatively argue that the fact California was a party to the agreement is immaterial. The real antitrust issue is whether the companies are colluding to fix the fuel efficiency of their cars at the expense of consumers who would willing to pay more at the pump in return for cheaper or zoomier models. But the design of the corporate fuel economy standard makes this an odd concern for antitrust. The fuel efficiency standard imposes virtually no constraint on competition among the four participants — or between participants and other car companies — in terms of the fuel efficiency for any given model of car.
It would be hard for Volkswagen, say, to claim that Honda violated the agreement by offering a Civic with gas mileage that was too high, since the subject of the agreement is the average fuel economy of corporate fleets — not whether the fuel efficiency of a Civic is better or worse than that of a Jetta. For that matter, it would be pretty hard to attribute an anticompetitive effect to an agreement that modestly drives up the average price of all cars sold when the “market” includes everything from a $16,000 Honda Fit to a $133,000 BMW M8.
This brings us to another point — a legal one. Whether it is in the public interest or not, an agreement among the four car companies and California is protected under two doctrines in antitrust law. The first, the Noerr-Pennington doctrine, says that firms, even competitors, can collectively seek policy changes from the government. To me (an economist, not a lawyer), this seems to follow from the First Amendment’s protection to assemble and petition the government. The second is the “state action” doctrine, protecting firms acting under state mandates that are “clearly articulated” and “actively supervised.” So, even if there were some credible theory of harm to consumers — which appears lacking — there is unlikely to be a legal avenue to challenge this agreement.
Sauce for the Goose
The lack of viable economic or legal justification to the investigation strongly points to a political purpose. And that, to use a term in current political parlance, is “sad,” though not unprecedented. In 1971 Richard Nixon asked the Justice Department to settle rather than pursue an antitrust case against the ITT conglomerate following a commitment from the company to help fund the 1972 Republican convention. The precedent, of course, does not make this current application of Justice Department power look good.
Actually, there’s reason to believe that neither party is immune from the impulse to use antitrust to advance goals outside its traditional purview. Last year I participated in an FTC hearing on the goals of antitrust. Others on my panel argued that the goals of antitrust should go beyond consumer economic benefit (in econspeak, “consumer welfare”) to include a host of other goals including reducing wealth inequality, preserving small businesses and protecting labor rights. There is even an antitrust clause in the Green New Deal.
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Having spent decades in and around antitrust, I’ve come to appreciate that its support and preservation rest on its being “off the radar” as a largely technical exercise in determining whether commercial conduct crosses lines that lead to significant consumer injury. The location of those lines and the burden of proof of showing when they are crossed may be controversial. But those controversies generally lie within a clear and more or less bipartisan sense that antitrust is primarily aimed at protecting competition in order to keep prices down.
Of course, it may be that environmental standards are too strict, or not strict enough. It may be that allowing California to set its own tailpipe standards amounts to an undue intrusion into interstate commerce. But these are not antitrust problems. The Trump administration’s investigation of the car companies is especially egregious because it seems to be aimed at harming the president’s political foes. It should also be seen as an unfortunate bellwether of current enthusiasm for using antitrust as a means to achieve broad political ends.