Keeping in Justice’s Good Graces
Skip to content
Podcast | Insight Unpacked Season 1: Extraordinary Brands and How to Build Them
Policy Nov 3, 2014

Keeping in Justice’s Good Graces

A discussion with Aviv Nevo on his tenure at the Department of Justice

Based on the research of

Aviv Nevo

The news is filled with high-profile antitrust matters, like the case against Apple and five major book publishers who colluded to raise the prices of e-books, or the merger between US Airways and American Airlines. But what happens behind the scenes at the Department of Justice (DOJ)—and what should companies do to stay in the DOJ’s good graces?

Add Insight
to your inbox.

Aviv Nevo, a professor of economics at Northwestern University and a professor of marketing at the Kellogg School of Management, recently returned from the DOJ, where he spent a year and a half as chief economist, in the position of Deputy Assistant Attorney General for Economic Analysis. Nevo agreed to speak with Kellogg Insight about his experience. (This interview has been edited for length and clarity.)

Kellogg Insight: Tell us about your role at the DOJ.

Aviv Nevo: I was the chief economist in the antitrust division. My role was twofold: to supervise the PhD economists on staff and to advise the head of the Antitrust Division, the Assistant Attorney General, on law-enforcement decisions involving antitrust. I was involved with civil and criminal cases, as well as competition advocacy work.

KI: Competition advocacy?

Nevo: A little-known function of the DOJ is to work with policy makers, and occasionally companies, to promote principles of competition. When Google Fiber entered Kansas City, for instance, some states tried to pass laws that would make it illegal for Google—or anyone except for a cable or telecomm company—to do the same elsewhere.

They did this under the pretense that Google’s entrance would be unfair to the cable companies that have invested heavily in their states—but it was pretty clear that it was actually in response to intense lobbying. The DOJ has no formal standing in a scenario like this, but it can explain the implications for competition to lawmakers considering these laws.

KI: Did you play a major role in the evaluation of the merger between US Airways and American Airlines?

Nevo: Yes, most of the analysis in that case was done under my supervision. We had three main concerns about the merger. The first was the direct loss of competition on routes where both airlines were flying. The second had to do with the concentration of slots at Reagan National Airport. Before the merger, US Airways had about 55% of the slots.

After the merger, they would have had almost 70% of the slots. That creates what economists call a “barrier to entry.” With only 30% of the slots up in the air, US Airways would actually be better off wasting an inefficient slot, rather than selling it to a competitor, in order to preserve its prices on other routes.

“The concern was that after the merger, airlines would find it even easier to coordinate.” — Aviv Nevo

The third was a system-wide concern. Over the last few years, airfare and various fees have increased. This has been driven, at least in part, by airlines coordinating their behavior. It’s not that the airlines actually get into a room and discuss how to increase fares and fees. Instead, one airline might increase prices, or start charging to check-in bags, and then the others follow. The concern was that after the merger, airlines would find it even easier to coordinate.

KI: How so?

Nevo: First, simply having one less competitor could make it easier. If a single airline refuses to go along with a fee increase, for instance, that could make the attempted increase fall apart.

Additionally, US Airways has had a tendency to disrupt coordination because of its unique hub structure. US Airways has hubs in relatively smaller cities and therefore has had to rely more than other airlines on traffic and revenue from connecting flights. Because passengers typically prefer to fly nonstop, US Airways has had to price aggressively, particularly during the two weeks prior to departure when the price of nonstop flights is very high. But other airlines priced connecting and nonstop flights similarly—as though they had tacitly agreed not to undercut each other by offering cheaper connecting service.

US Airways’ hub structure gave it an incentive not to go along with this behavior. But post–merger, it would gain access to hubs in larger cities, reducing its need to rely on connecting flights.

KI: What did the DOJ negotiate in order to address these concerns?

Nevo: We tried to give other competitors valuable assets that would make them stronger. Namely, we required divestiture of slots and gates at airports where they were constrained. There was a lot of demand for these slots and gates—and they were sold to the low-cost airlines like Southwest, Jet Blue, and Virgin American in order to make them more competitive with the legacy airlines. These low-cost carriers are particularly important because they try to undercut the legacy carriers: Southwest doesn’t charge for bags, for instance. By making the low-cost carriers stronger, we give them the ability to disrupt any attempts to further raise fares and fees.

KI: How do settlements like this happen? Is there a lot of haggling back and forth?

Nevo: Typically the way it goes is we bring any concerns we have to the companies’ attention and give them the opportunity to modify their deal. Some companies will try to play games and offer concessions incrementally. At that point, we usually just tell them: You hear our concerns—deal with them. Don’t try to work on the margins. Our leverage, of course is, the threat of litigation, which is very expensive for everyone involved.

KI: Do you find that companies are under more pressure to engage in anticompetitive behavior?

Nevo: On the merger side, perhaps. We’re in the midst of a merger wave because—as stock prices have soared—companies have money to spend on growth. Mergers and acquisitions are ways to spend it. This is fine so long as companies grow in synergistic ways. But if companies are growing by eliminating competition, that’s bad.

As for the conduct side, again the answer is “maybe.” Pressures on CEOs are intense these days. More CEOs might be pushing the envelope in order to placate their boards. One example is the increased use of the most-favored-nation (MFN) clause, which the DOJ has been looking at very closely. A MFN is a contract term where a seller promises to give a buyer the best possible price (or terms more generally). If the seller makes a better deal with someone else, it has to match the terms of that deal with the original buyer. This can reduce competition because it essentially gives the seller an incentive not to make competitive deals with anyone else: if they do, they also have to offer the more favorable terms on existing contracts.

KI: What advice do you have for companies who have to work with the DOJ?

Nevo: Every once in a while you see companies that think the antitrust laws do not apply to them because they may be very innovative or do a lot of good for consumers. Take the behavior of Apple and the book publishers in the e-book case. They believed that they could conspire because that was the only way they could compete with Amazon, who has a lot of market power. That is not the law. If they believed Amazon was abusing its position, they should have complained to the DOJ. Even if Amazon was abusing its dominance—and I am not saying that it was—that did not give them the right to conspire.

So my first piece of advice to companies who are concerned about anticompetitive behavior is to bring any concerns to the DOJ, or the Federal Trade Commission. That said, the role of antitrust agencies is to protect competition—it’s not to protect competitors. If you’re not a very efficient producer of something and someone more efficient comes in and competes very aggressively, that could harm you as a competitor, but that’s good for competition, usually. There are cases where perhaps it is not. You always have to determine: What’s the line? It’s a case-by-case analysis.

Another thing I would tell companies is that having good antitrust counsel is important. Getting good advice early and educating yourself in antitrust issues before they blow up can save a lot of time and money. As a company grows, just advising employees on what they can and can’t do, and executives on what deals they can and can’t make, can really go a long way.

Finally, if you do find yourself dealing with the DOJ, do so in an open way, rather than in a confrontational, aggressive way. That will usually take you further and lead to a better outcome.

Artwork by Yevgenia Nayberg.

Featured Faculty

Member of the Department of Marketing from 2008-2016 and Department of Economics (Weinberg) from 2004-2016

About the Writer
Jessica Love is editor in chief of Kellogg Insight.
Most Popular This Week
  1. What Went Wrong with FTX—and What’s Next for Crypto?
    One key issue will be introducing regulation without strangling innovation, a fintech expert explains.
    stock trader surrounded by computer monitors
  2. How Experts Make Complex Decisions
    By studying 200 million chess moves, researchers shed light on what gives players an advantage—and what trips them up.
    two people playing chess
  3. What Donors Need to Hear to Open the Checkbook
    Insights from marketing on how charities can grow by appealing to different kinds of donors.
  4. The Complicated Logic Behind Donating to a Food Pantry Rather than Giving a Hungry Person Cash
    If we were in need, we’d likely want money. So what accounts for that difference?
    Donating food is paternalistic aid
  5. To Improve Fundraising, Give Donors a Local Connection
    Research offers concrete strategies for appealing to donors who want to make an impact.
    Charity appeals that frame the message around local connection tend to be more successful as a result of the proximity effect
  6. Which Form of Government Is Best?
    Democracies may not outlast dictatorships, but they adapt better.
    Is democracy the best form of government?
  7. How You Can Make a More Positive Social Impact
    A 3-step guide to becoming a more thoughtful consumer and donor.
    person with money deciding which box to put it in.
  8. Podcast: What the FTX Meltdown Means for the Future of Crypto
    The implosion of the crypto exchange has sent the industry reeling. We dig into what happened and whether cryptocurrency, as a concept, can weather the storm.
  9. What Went Wrong at AIG?
    Unpacking the insurance giant's collapse during the 2008 financial crisis.
    What went wrong during the AIG financial crisis?
  10. How Much Do Campaign Ads Matter?
    Tone is key, according to new research, which found that a change in TV ad strategy could have altered the results of the 2000 presidential election.
    Political advertisements on television next to polling place
  11. What’s the Secret to Successful Innovation?
    Hint: it’s not the product itself.
    standing woman speaking with man seated on stool
  12. Immigrants to the U.S. Create More Jobs than They Take
    A new study finds that immigrants are far more likely to found companies—both large and small—than native-born Americans.
    Immigrant CEO welcomes new hires
  13. How Are Black–White Biracial People Perceived in Terms of Race?
    Understanding the answer—and why black and white Americans may percieve biracial people differently—is increasingly important in a multiracial society.
    How are biracial people perceived in terms of race
  14. Why Well-Meaning NGOs Sometimes Do More Harm than Good
    Studies of aid groups in Ghana and Uganda show why it’s so important to coordinate with local governments and institutions.
    To succeed, foreign aid and health programs need buy-in and coordination with local partners.
  15. How Has Marketing Changed over the Past Half-Century?
    Phil Kotler’s groundbreaking textbook came out 55 years ago. Sixteen editions later, he and coauthor Alexander Chernev discuss how big data, social media, and purpose-driven branding are moving the field forward.
    people in 1967 and 2022 react to advertising
  16. Why Are So Many Politicians Embracing Conspiracy Theories?
    Conspiratorial thinking has always been attractive in times of uncertainty—but it’s become more mainstream. An expert explains why, and whether anything can be done.
    Voting machine in a spider web
  17. What the New Climate Bill Means for the U.S.—and the World
    The Inflation Reduction Act won’t reverse inflation or halt climate change, but it's still a big deal.
    energy bill with solar panels wind turbines and pipelines
More in Policy