Healthcare Antitrust, Settlements, and the Federal Trade Commission

James Langenfeld, Edwin Galeano, James Langenfeld, Edwin Galeano

• Publisher: Emerald Publishing Limited
• Year: 2018
• ISBN:
  9781787566019
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

This volume of Research in Law and Economics contains articles that address important legal and economic developments in the areas of healthcare, intellectual property and labor settlements, competitive effects, cartel overcharges, and the U.S. Federal Trade Commission ("FTC"). Four of the articles were initially presented at a conference on healthcare competition in Washington, D.C., which was sponsored by the American Antitrust Institute, this journal, and Navigant Economics. These articles explore practices that are under challenge in pharmaceuticals, where the Federal Trade Commission has been extremely active, as well as issues involving hospital and health insurance mergers. They are followed by a long and detailed discussion of the current and historic role of economists and economic analysis at the Federal Trade Commission. The next two articles analyze different aspects of the French economy, pre-trial labor settlements and the impact of e-commerce on franchisees. The volume ends with three technical economics articles – one on "upward pricing pressure", one on estimating price increases in cartel cases, and one critiquing a "meta-analysis" of research on the effectiveness of U.S. merger regulation. Taken together, these articles raise questions about appropriate competition policy, how to evaluate settlements and other firm behavior, and where economics and competition policy are headed.

A HISTORY OF THE FTC’S BUREAU OF ECONOMICS*

Paul A. Pautler

ABSTRACT

The Bureau of Economics in the Federal Trade Commission has a three-part role in the Agency and the strength of its functions changed over time depending on the preferences and ideology of the FTC’s leaders, developments in the field of economics, and the tenor of the times. The over-riding current role is to provide well considered, unbiased economic advice regarding antitrust and consumer protection law enforcement cases to the legal staff and the Commission. The second role, which long ago was primary, is to provide reports on investigations of various industries to the public and public officials. This role was more recently called research or “policy R&D”. A third role is to advocate for competition and markets both domestically and internationally. As a practical matter, the provision of economic advice to the FTC and to the legal staff has required that the economists wear “two hats,” helping the legal staff investigate cases and provide evidence to support law enforcement cases while also providing advice to the legal bureaus and to the Commission on which cases to pursue (thus providing “a second set of eyes” to evaluate cases). There is sometimes a tension in those functions because building a case is not the same as evaluating a case. Economists and the Bureau of Economics have provided such services to the FTC for over 100 years proving that a sub-organization can survive while playing roles that sometimes conflict. Such a life is not, however, always easy or fun.

Keywords: Bureau of Economics; FTC; History; Organization Theory; Antitrust; Consumer Protection

JEL classifications: N42; L40; D18

Table of Contents

• Preface and Acknowledgements 145
• Ch. I The Beginnings of the FTC and the Bureau of Economics 148
• Ch. II General Investigations, Economic Report Writing, & Research at the FTC 150
  • The General Investigation Period: Growth (1915-40) and Decline (1940-60) 150
  • Resurgence and Occasional Declines of Economic Reporting (1965-2012) 154
    • Competition Studies 155
    • Consumer Protection Studies 158
    • Studies of Regulation and International Trade Restraints 160
  • Bureau of Economics Working Papers (1977-2013) 161
  • Bureau of Economics Conferences and Roundtables 162
  • Reasons for the 1990s Decline in Economic Reporting 164
  • Use of Compulsory Process for General Investigations and Report Writing 165
  • Economic Support for Reports by the FTC Legal Organizations 167
• Ch. III The Rise and Fall of Systematic Data Collection and Reporting of Financial Statistics 1939-1984 168
• Ch. IV The Role of Economists in Antitrust at the FTC 172
  • Industry-wide Antitrust (Shared Monopoly and More) 176
  • Horizontal Merger Guidelines 1967–2010 178
  • Merger Investigations 180
  • Narrow Markets 181
  • Empirical Analysis Takes Off 182
  • The Litigation Onslaught of Summer 2007 183
  • The Pace Slows and Activity Shifts to Non-Merger Areas 185
  • Vertical Restraints and Mergers 186
  • Influence of Economists on Antitrust Cases 187
  • The New Antitrust Transparency, 2001-2013 188
  • Expert Witness Work and Litigation Support in Antitrust 189
  • Antitrust Case Generation and General Policy Analysis 193
  • Antitrust Policy Discussions 194
• Ch. V The Role of Economists in Consumer Protection 194
  • Economists and Trade Regulation Rules and Guides 196
  • Individual Case Reviews 199
  • Influence of Economists in Consumer Protection 203
  • Expert Witness Work and Litigation Support in Consumer Protection 205
  • Consumer Protection Policy Analysis and Case Generation 207
• Ch. VI The Role of Economists in Competition and Consumer Advocacy 207
  • The Substance of the Advocacy Program 208
  • Synergy between Research and Advocacy 209
  • The Competition Advocacy Process and History 210
• Ch. VII International Technical Assistance and Policy Coordination: Advice to Other Countries (1990-2013) 214
• Ch. VIII Congressional Opprobrium and Other Criticism of the Agency and the Bureau 218
  • Criticism of the Agency or the Bureau 219
  • Threats to the Bureau from Outside: Congress and the White House 221
  • Threats to the Bureau from within the Agency 223
• Ch. IX The Bureau of Economics’ Independent Voice and Influence on the FTC 225
  • Advice to Individual Commissioners 230
  • Conclusion 230
• Ch. X A Graphical History of the Economic Division and the Bureau of Economics 1915-2013 231
• Conclusion 235
• References 298
• Appendix A: The Bureau of Economics Organization over Time 310
• Appendix B: Changes in the Bureau’s Staff Mix and Skill Mix 1915 to 2013 318
• Appendix C: Francis Walker: The First FTC Chief Economist 321
• Appendix D: Bureau of Economics Chief Economists, recent FTC Chairmen, and U. S. Presidents 323
• Appendix E: Historical Data Table on BE and FTC 1915–2012 328
• Appendix F: Figures Displaying Changes in BE and the FTC Over the Years 336

PREFACE AND ACKNOWLEDGEMENTS

This manuscript provides a depiction of the Bureau of Economics (BE) as it currently exists and provides a descriptive history of how it got there.¹ The history is taken from written records to the extent possible, from discussions with current and former staff members, and from personal recollection. Much of the paper is purely descriptive and almost surely accurate. Some of the “facts,” such as the older data, are guesstimates culled from messy data in budget books and Bureau records. In each case, attempts were made to use “actual” data measured after the fact, rather than “planned” data, but that was not always possible. Telephone books, FTC Annual Reports, and Congressional Hearings were also used. I believe the budget and personnel numbers data are as accurate as can be obtained without a much more extensive and likely fruitless search of archives. The decisions about which studies, advocacy filings, etc., to mention (and which to ignore) are based largely upon the author’s opinion and are heavily weighted toward post-1970s work. This description and history does not provide much detail about the substantive economic issues in antitrust or consumer protection that were hot topics at any particular time. There is a massive literature on those issues (with several industrial organization, law & economics, antitrust, and marketing journals devoted to them) and BE economists have contributed to that literature, but for the most part, this history focuses on activity specifically by BE economists - that is a much narrower focus. Some of the history describing the impact of BE actions (e.g., the impact of early economic reports) is taken from secondary historical sources and may not be strictly true. Because BE is a relatively small subgroup of a small government agency, little is written about the organization. Thus, the history draws on articles focused on the FTC or on economics more generally. In certain sections, I discuss the influence of the organization within the FTC. This has to do with preferences of decision-makers, information flows up and down the decision-making chain, and how those preferences and flows were modified over time. This discussion requires reading between the lines at times and is, therefore, subject to significant uncertainty. I tried to avoid fiction or stories based only upon one source, but an observer can seldom be sure what “really” happened and can almost never know why it happened, even if he was fairly directly involved in a situation. I apologize in advance to anyone who was slighted or whose views or actions have been mischaracterized.

This history places more emphasis on the report writing and advocacy functions than it should, in part, because the author was involved in these functions for many years and because they form the “visible tip of the BE iceberg.”² The work on antitrust and consumer protection investigations, litigations, and rules, that has formed the vast bulk of the iceberg over the past 70 years, goes unseen by the outside world, and much of it also goes unseen by the FTC’s Commissioners. This manuscript also provides much more detail about how BE functioned since 1980 than for earlier periods, not because that recent period was necessarily more interesting, but because more detailed records and memories of that period were still available. Fortunately, the September 4, 2003 BE History Roundtable, initiated by Timothy Muris and Bill Kovacic, and organized by Denis Breen, greatly supplemented the written record regarding life in the Bureau of Economics from the 1950s through the 1970s.³ A record of that 2003 Roundtable (painstakingly edited by Alan Fisher) is available at https://www.ftc.gov/sites/default/files/documents/public_events/roundtable-former-directors-bureau-economics/directorstablegood.pdf

Much of this manuscript was written on nights and weekends during 2000, so I have to thank my wife, Beth, for putting up with the lost time and my endless references to “the history,” comments that she fairly quickly learned to (almost) completely ignore when they did not cause exasperation. Of course, much of the information was compiled while at work (for which I thank Jeremy Bulow, who allowed the activity) and additional drafting was done in conjunction with the FTC’s Bureau of Economics History Roundtable, held in September 2003. Follow-up drafting of the manuscript occurred intermittently in the 2000s, mainly around “the Holidays.”

This manuscript was improved greatly due to the help of numerous colleagues. Bob Brogan provided data for the mid-1930s and 1950s from Congressional Hearings and additional information on BE Director Francis Walker’s lineage. Denis Breen provided information on antitrust investigations from the late 1980s and 1990s, details regarding the process of the GM/Toyota joint venture, and input on economist work in advocacy and international outreach areas. That latter information was more recently provided by Dave Schmidt. Pauline Ippolito, Bob Brogan, and Lou Silversin provided helpful comments on various drafts. Thanks are also due to Mae Schwarz and her administrative staff for putting up with my review of their budget files and for compiling data in 2000. Many FTC colleagues contributed useful insights and information in various discussions and phone conversations. That group includes, among others, Keith Anderson, Ron Bond, Bob Brogan, Jerry Butters, Bob Easton, Pat DeGraba, Joe Farrell, Alan Fisher, Mack Folsom, Luke Froeb, Dan Hosken, John Hilke, Pauline Ippolito, Phil Jaynes, Jim Lacko, Jim Langenfeld, Mike Lynch, Joe Mulholland, Dennis Murphy, Philip Nelson, Steve Nelson, John Peterman, Dan O’Brien, Bill Rosano, and Lou Silversin. Thanks are also due to one of the FTC’s former attorneys and resident historian, Marc Winerman, for various historical tidbits about the early years of the Agency, the Kramer/Graham reference, as well as a review of an earlier draft to avoid confidentiality problems. Marc’s boss at the time, John Graubert, also helped with the General Counsel (GC) review. More recently, Bill Golden handled that review task for the GC. In addition, I must thank the BE ex-Directors who attended the 2003 History Roundtable for the information they provided and for the comments they gave me on a July 2003 draft that was circulated prior to the History Roundtable. In particular, Mike Scherer and Fritz Mueller provided extensive comments and new information about the 1960s and 1970s. They have also published work about that (and earlier) periods. In addition, Jonathan Baker and Jim Miller provided additional information regarding the 1980s and 1990s. Finally, I want to thank BE research assistants Sara Harkavy, Kata Mihaly, Marie Tansioco, and Scott Syms for their work on the charts and tables. Around 2000, Sara took the first crack at the figures (including my favorite – the drawing of the BE’s organization over the past 100 years), and Kata, now a professional economist at RAND, handled the updates after Sara moved on to graduate school at Columbia. Marie provided the update in 2005, and Scott updated the tables and figures again in 2010 and 2013. None of the individuals named above are responsible for the outcome.

The author was an economist and manager in the FTC’s Bureau of Economics from May 1978 to January 2014; through 17 different Bureau Directors and 12 Chairpersons.

Certain material from this history has appeared in Cooper et al. (2005), Froeb et al. (2009), Farrell et al. (2009), and Pautler (2014). Some segments of this history have appeared in modified form in Pautler (2015a, 2015b, pp. 59–94). Springer publishing kindly allowed reuse of that material.

CH. I THE BEGINNINGS OF THE FTC AND THE BUREAU OF ECONOMICS

Before delving directly into the early days of the Bureau of Economics (BE), a few words are necessary about the Federal Trade Commission (FTC or Agency) as a whole to put the Bureau into context. The work of economists at the Agency is very largely determined by trends that affect the entire Agency, so the history of the FTC is, in large part, the history of BE. The FTC began as a continuation and significant expansion of the Bureau of Corporations, an investigative organization in the Department of Commerce and Labor.⁴ President Woodrow Wilson originally conceived of the Agency as a body of experts that would interpret facts gathered from extensive investigations of industry and make recommendations to Congress, the President, the Attorney General, or the Courts for needed changes.⁵ Wilson did not, at first, intend to create a law enforcement agency, and the original version of the FTC Act passed by the House of Representatives limited th...