Keeping in Justice’s Good Graces

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 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.