May 16, 2022

Should Antitrust Law Be Applied to Labor Markets?

By Liad Wagman

TL;DR:

  • An executive order by the Biden Administration calls for antitrust agencies to enforce competition laws “especially in labor markets.”
  • While economic analysis suggests that competition can enhance labor conditions, including in platform markets, applying antitrust law in labor markets can conflict with the FTC’s and DOJ’s existing frameworks.
  • Merger efficiencies can benefit buyers, raising the question of whether the Administration is trading off worker gain for consumer harm. 
  • Applying antitrust law to labor markets can also hinder productivity gains.

On May 11, 2022, the Senate voted 51-50 to confirm progressive privacy advocate Alvaro Bedoya to the Federal Trade Commission, significantly reducing the need for bipartisanship at the agency. The newly found Democratic majority grants FTC Chair Lina Khan, nearly one year into her tenure, the means to enact an aggressive antitrust agenda targeting larger companies. New competition rules, aggressive enforcement on deals, and more stringent guidelines on mergers are but a few items on the Chair’s to-do list

On July 9, 2021, President Biden issued an executive order that included the following statement: “To address the consolidation of industry in many markets across the economy, …  the Attorney General and the Chair of the FTC are encouraged to review the horizontal and vertical merger guidelines and consider whether to revise those guidelines.” According to the executive order, it is the policy of the Biden Administration to enforce the nation’s antitrust laws “especially in labor markets.” In response, the Federal Trade Commission (FTC) and the Department of Justice (DOJ) recently issued a Request for Information on Merger Enforcement, seeking “public comment on how the agencies can modernize enforcement of the antitrust laws regarding mergers.”

More specifically, the agencies seek information on how “new learning related to firm and market behavior” should inform the merger guidelines. Their aim is “modernizing merger guidelines to better detect and prevent anti-competitive deals.” One particular focus area, in line with the Biden Administration’s executive order, is on labor markets: “The agencies seek input on how to address the issue of buyer power in more detail in the guidelines. Labor markets are a key example of buyer power, and the agencies seek information regarding how the guidelines should analyze labor market effects of mergers.” 

This push by the Administration and the agencies to incorporate labor market issues into merger review frameworks, although reminiscent of misguided attempts by other authorities to incorporate privacy matters into antitrust enforcement, has some interesting implications. This push, in part, emanates from concerns about how digital platforms and other large employers treat workers or affect their work conditions.

Many digital platforms function as matchmakers between two or more sides; for example, Uber matches riders and drivers, Airbnb matches guests and hosts, Rover matches dog owners and dog sitters, Alphabet and Meta match viewers and creators, and Amazon matches buyers and sellers as well as delivery drivers and buyer-seller transacted products. As part of setting up the matchmaking process, platforms must set up rules and fee structures for market participants, including workers. However, unlike a government regulator that often acts as a third-party arbitrator between different stakeholders, a for-profit platform is directly involved in the business: it earns revenues from one or more sides. Balancing the interests of different users on both sides is a fundamental process facing all multi-sided platforms.

Economists have shown that a so-called asymmetric treatment of the different platform sides is a natural market outcome. For example, more riders on an on-demand ride-sharing platform can attract more drivers to participate, and more drivers can attract more riders. A certain degree of scale can allow the platform to provide additional services that benefit users on all the different sides, such as expanded analytical insights and product recommendations, more efficient match-matching capabilities, and the integration of other services. These positive spillover effects motivate platforms to subsidize the more price-sensitive side of their marketplaces, as well as to grow through mergers. Sometimes, the subsidized side even obtains the platform’s service for free or receives rewards for using the platform. Moreover, this asymmetric treatment of the two sides does not necessarily mean that one side benefits at the expense of the other, because more users on one side – buyers, for example – could make the platform more attractive to participants on the other side as well – workers, for example. As a result, workers sometimes even prefer the platform to subsidize buyers. In general, an asymmetric treatment of the demand and supply sides does not imply a reduction in economic efficiency nor in the total benefits of buyers, workers, and the platform.

Many platforms in fact subsidize the demand side by offering free services (e.g., search engines, social media services, and free shipping), or even negative prices (e.g., cash-back referral websites). To support such prices and subsidies, the platforms usually earn revenues from their other sides (e.g., advertisers, sellers, workers, and retail merchants). However, ongoing complaints, intensified by the COVID-19 pandemic, have raised the concern that large platforms and firms may mistreat, abuse, or exploit workers, or one side of the platform, or a subset of that side. For example, merchants were concerned about high transaction fees and anti-steering clauses of major credit card companies; some app developers complained about the high commission fees on Apple’s iOS ecosystem; some third-party sellers have been concerned that their contracts with e-commerce platforms may be subject to unfair terms; some legislators pushed ride-sharing platforms to treat drivers as employees rather than contractors; and some delivery workers reportedly felt squeezed by platform algorithms.

A natural question then is whether platform competition and other economic forces can curb the labor conditions that have concerned policymakers. Economic research demonstrates that the answer is Yes. Specifically, research shows that a leading platform’s ability to impose costs on suppliers can be limited by the fact that the suppliers may shift more of their sales, or more of their higher quality service or products, to a competing platform. In particular, researchers find that in geographic areas where a leading platform faces more competition from another platform, a platform’s ability to impose costs on suppliers is more limited. That is, viable platform competition can limit a platform’s incentives to appeal to its demand side by raising costs on its supply side. Put differently, competition can limit a platform’s ability to increase sellers’ fees, because sellers have an outside option in the competing platforms. Competition among firms for talent can also lead to higher wages and better conditions for workers. 

At the same time, economic analysis also demonstrates that broadly in the U.S. economy, there are numerous situations where harms to the labor market are coupled with increased efficiencies in the product market, and thus gains to consumers. For example, if two firms are contemplating a merger and operate in the same labor market but sell in completely different product markets, how should an FTC or DOJ economist evaluate the tradeoff between a finding that (i) the merger could lower worker compensation, and may therefore harm competition in the labor market, and (ii) the merging parties will pass through lower labor costs to consumers in the product market? Some seem to suggest that the merger should be blocked as long as a type (i) finding exists. But why should one always want to sacrifice potential gains to consumers if they are coupled with harm to workers? Such tradeoffs can appear frequently in platform markets where labor is on one side and consumers are on the other side. The answer seems even less clear if one considers that workers themselves, when they are not working, are often consumers of the very same products and platforms in question.

It also merits consideration that if one replaces “labor” by “upstream firms,” then our nation’s current antitrust framework actually finds that the better bargaining position of the merging parties against those “upstream firms” is a potential efficiency of the merger. In other words, our nation’s current antitrust framework evaluates such a finding in favor of letting the merger through. If one argues that the labor market is fundamentally different from upstream firms or from small businesses, how does one draw the line to distinguish between a supply side that mostly comprises full-time workers, individual contractors and freelancers, mostly smaller businesses, or mostly medium-sized businesses – and should there even be such distinctions?

The emphasis on labor market harm could also become an obstacle to broader market and labor productivity gains. In fact, recent economic research finds that corporate consolidation in our nation over the past century has been largely driven by economies of scale – and that stronger economies of scale do not necessarily lead to stronger market power – but that the greater scalability of new technologies tends to lead to gains in industry output. 

In addition, consider a scenario where two firms propose to merge so that they can apply new automation technology, but the technology necessitates their merger in order to obtain sufficient scale. Those firms’ merger would reduce their existing employee headcount due to the automation technology, but it could also push those employees to refine their skillsets and become more productive in different, newer types of jobs, including jobs related to overseeing and monitoring the automation technology itself. Does such a merger constitute a competitive harm to the labor market and should therefore be contested? Wouldn’t such enforcement actions risk bringing the U.S. closer toward a market environment with rigid labor rules, that lacks momentum in labor upskilling – a more stagnant labor environment akin to the European Union’s?

To summarize, economic analysis demonstrates that the Biden Administration’s call to enforce antitrust laws “especially in labor markets” entails ambiguity in competition policy and raises a number of concerns. While competition can limit the ability of firms and platforms to get more from their supply side, some of the cost savings firms may obtain from their supply side when they merge, or from the scale afforded by the merger itself, can be passed on to consumers, as well as lead to enhancements in the product market. The merger can also position the merged entity to better compete with other incumbents. To determine that mergers are anticompetitive because they may lead to firms being in a stronger bargaining position vis-à-vis their supply side also conflicts with our existing antitrust frameworks, and can have shortcomings such as reduced labor productivity, even if the FTC and DOJ can somehow draw distinctions between different compositions of the supply side. 

Although FTC Chair Khan, in light of Commissioner Bedoya’s recent confirmation, is poised to enact an aggressive antitrust agenda, it is essential that any change in the FTC’s approach is informed by rigorous economic analysis, especially with regard to the Biden Administration’s push to enforce antitrust law in labor markets.

Liad Wagman is Data Catalyst Institute Competition Fellow and James B. Finkl Professor of Economics, Stuart School of Business, Illinois Institute of Technology. The views written here by Wagman do not necessarily reflect the views of the Data Catalyst Institute. 

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