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?

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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

Aviv Nevo

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.

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