Unlocking Innovation Through Antitrust Enforcement — ft. Lina Khan

26:06Welcome back. Here's our conversation with Lina Khan, Chair of the Federal Trade Commission. Chair Khan, thank you so much for joining us. It really is an honor. Great to be with you. So as you look at the state of antitrust today, which sectors in your view are most in need of regulation right now? Well, we're really on the other end of a 40-year natural experiment where starting in the late 70s and early 80s, there was a decision to become more hands-off when it comes to enforcing the antitrust laws and making sure that we're promoting vigorous competition. And so you've really seen for several decades now waves of M &A resulting in much more consolidated markets, be it in food and agriculture, be it in telecom, be it in mattresses, be it in parts of the cement industry, cat food, you know, eyeglasses.

27:03I mean, it's really not an isolated feature, but actually a systemic feature of our economy increasingly. I think there are, you know, a few ways to look at where you might want to prioritize addressing these issues. One is, what are the essentials for Americans as we're thinking about food, as we're thinking about housing, as we're thinking about health care and medicine? And so each of those sectors is very important for us. But if we're thinking about America's competitiveness globally and wanting to make sure we stay ahead, making sure we're also focusing on technology markets to make sure that it's vigorous competition that's allowing the best ideas to win and allowing America to stay ahead, that's really critical too.

27:44You mentioned that this is sort of a 40-year-long story. Why do you think America got so loose on regulation, particularly on regulating monopolies and I should say not regulating monopolies and not regulating M &A? What is the story there? Why did we do that? Well, it was a philosophical and policy decision that was premised in part on the idea that instead of the traditional skepticism of concentrated economic power in our country, we should actually view monopolies more favorably. We should assume oftentimes that they can deliver efficiencies that are going to be passed on to people. And so this was a shift that was executed under the Reagan administration.

28:29antitrust was ground zero, but we really saw a trend across different parts of the government and a whole paradigm shift in how we think about economic policy and how we think about the relationship between government and markets. And there was an assumption that markets will generally self-correct. And so the best thing when in doubt is for the government to get out of the way. I think we've seen in all parts of the economy areas where those assumptions have really either failed or led to pretty catastrophic outcomes. And so that's why you're seeing a reorientation, not just in antitrust, but also in how our administration has been doing industrial policy and how we've been doing trade policy.

29:10We've been really closing the gap between reality and theory to make sure that the decisions we're making are not premised on outdated assumptions, but are instead responding to modern day commercial realities and the state of the world in 2024. Chair Khan, one of the biggest, if not the biggest issue in the upcoming election is inflation. And I'm not sure people are able to make the connection between inflation and the concentration of industries. Can you help us make that connection? So look, the inflation that we saw peak a few years ago was initially instigated by the pandemic and major supply chain shortages that occurred in the wake of that.

29:50You had ports backed up. And then you had Russia's invasion of Ukraine. And each of those events directly contributed to a surge in prices. What's been really interesting to see and widely discussed these last few years is even as some of those supply chain disruptions have eased and things have gone back to normal, prices have not concurrently dropped, especially in areas like groceries. A few things that we've seen is that concentrated markets can lend themselves more, not just to collusion, but coordination when it comes to whether you're actually reducing prices even as costs go down or whether you're keeping them up.

30:34And so you can imagine a world in which inflation is giving cover for companies to exercise their pricing power to the fullest extent in ways they were not doing so previously. It can also provide cover, you know, in ways that are ultimately allowing them to grow their margins and not see those margins shrink as the underlying cost disruptions ease. So, you know, there's a lot of evidence out there. There's earnings calls where we're seeing executives directly acknowledge this fact. And so it comes up as part of the FTC's work. The other connection I'll note is concentration of production also concentrates risk.

31:15And what that means is that a single outage or a single disruption can have cascading effects in ways that lead to supply shortages and lead to price increases as well. We saw this in infant formula a couple of years ago where there was a single contamination in a single factory in the United States, and that resulted in shortages across the country. And so concentration can also contribute to inflation because it makes your markets more fragile and more susceptible to cascading effects when you have a single outbreak. I think sometimes the populace conflates antitrust or aggressive antitrust with being anti-corporation or anti-business.

31:56Can you cite specific examples of corporations that have been busted up and the ensuing benefit to the end consumer? Truly, antitrust is a gift to innovators and entrepreneurs. And what promoting open fair competition really means is that you have a system where the best idea can win, right? If somebody has a good idea, they're able to get funding for it. They have the talent and dedication and hard work to really commit that they actually have an opportunity to scale and fairly compete in the market rather than just get locked out because the big guys feel threatened by you and don't want you to have a fair shot.

32:35And so that's what antitrust is really about, is about wanting to make sure that the big guys are still having to look over their shoulder and say, hey, there's somebody clipping right behind me and I need to store to go faster. That's the system we want. That's the system that has allowed America to stay ahead globally. In terms of specific examples, I mean, you can go back to the antitrust lawsuit against IBM, the antitrust lawsuit against AT &T, the antitrust lawsuit against Microsoft. Each of these ended up being a critical point in which innovation was unlocked, be it in the personal computer, be it telecom, be it in the Web 2.0 revolution that we saw.

33:18Each of those was primarily a result of the fact that you had the government saying the existing incumbent couldn't block out this next generation of innovators. I'd love to get your view on AI, Chircan, and how you think it will affect or perhaps not affect the antitrust landscape in the next few years. What are you focused on when it comes to the AI industry right now? Well, look, AI is really interesting because, you know, it's still at a pretty early stage in terms of understanding what its precise trajectory will be. From the perspective of antitrust, we want to make sure that companies that already have a leg up because they're dominant in one layer of the stack are not using that dominance to squash out competition somewhere else.

34:06And so we've been scrutinizing some of these investments and partnerships that you see between the incumbents and between some of the newer model developers to understand, you know, is this going to be distorting independent decision making when it comes to strategic calls and competition? Is there going to be undue special privileges or exclusive access in ways that risk locking out some other competitors? These are the types of questions that we're asking. We're looking layer by layer across the stack. So looking at the chips, looking at the cloud, looking at the models to understand, you know, what are the key economic properties of each of these?

34:47And if we are seeing bottlenecks or choke points, how do we make sure that, A, those are not the results of illegal monopolization? And, B, they're not being abused or exploited in ways that's going to hurt competition? You know, I think it's an exciting moment and we want to make sure that the innovators get a fair shot rather than be locked out. Yeah, so this is something that we've been discussing a lot on this podcast. Those investments that you mentioned, the term we've been using is corporate incest, where it feels like you have big tech who are all buying stakes in each other's AI companies.

35:21And when I look at it, it feels as if this is sort of the way that you sequester monopoly power and monopoly influence without being regulated. And that is, instead of acquiring a company, you sort of stick your teeth in and establish dominance by investing in them. And we sort of saw this with Microsoft investing in inflection, and then suddenly all the employees that have inflection went to Microsoft. I don't know if you can speak to this specifically, but I'm just wondering what your take is on that view, this idea of influence not through acquisition, but through investment. It's a really good point.

36:00And to be effective as antitrust enforcers, you've got to keep up. and if there are particular business tactics or particular ways that control is being acquired and even though the mechanism looks different it's not a straight up acquisition but it's through some of these investments you know we need to focus on the market reality rather than kind of formalities around is it an acquisition formally yes or no and so we've been really skilling up internally. We've brought on a whole set of technologists to make sure that as we look under the hood, we have the capacity to understand what's going on.

36:39And just to step back, I mean, the whole premise of wanting competitive markets is that a market where you have lots of different independent nodes of competitive decision-making is going to lead to better outcomes than when you have just a single node of that competitive decision-making. And so that's really, as you think about wanting to preserve competitive markets, what you want to do is make sure that you have markets that are allowing, you know, a lot of different ideas to compete and see who gets out ahead. It felt like a watershed moment when Alphabet was found guilty of monopoly maintenance.

37:20And obviously, we're now moving to the remedy part of the trial. And my sense is amongst the remedies, there's fines. And I would argue that we can't come up or we don't seem to be able to come up with fines that aren't whittled down to something that's fairly meaningless for the company. There's the idea of some sort of oversight where you put a regulator in there. I don't know if you would argue that has had much effect. And then there's breakups as a remedy. And it strikes me that the only potential remedy for these companies in big tech that would have real teeth in terms of breaking their monopoly power is, in fact, breakups.

37:54Do you think we're going to see more breakups as a mix of the remedies offered if, in fact, we do see more of these companies found guilty of monopoly abuse? It's a great question. You're right. It was a landmark moment. It was a landmark opinion. It was the first time in modern history that we've had Section 2 of the Sherman Act, the core statute around monopolization, applied in a digital market in this way. And it was a really great opinion for a whole bunch of reasons, but it really showed the judge grasped the realities of how online search work and the properties of it in terms of just the incredible importance of scale, the incredible importance of certain types of user data to be able to, you know, gather the momentum and enjoy the accelerated growth that digital markets can provide.

38:43In terms of remedies, you know, this is a live question and I defer to our colleagues at the Justice Department to lay out for the judge what type of remedy they think is best. But historically, the remedies that have worked, that have been successful, have been ones that have opened up the market to competition in a market-based way rather than a regulator overseeing and the company basically having to ask permission to do things or not do things. You really want the kind of market incentives to be such that competition is organically entering and organically able to thrive. I think it's especially interesting when you face this question at technological inflection points like we do right now.

39:28And so it's, you know, we saw a discussion during the trial about not just search, but what search could mean for AI. And so I imagine that'll be, you know, a part of the conversation as well. You want to restore competition, not just for the markets of yesterday, but with an eye to the markets of today and tomorrow. Stay with us.

40:09Settle dinner plans. Send event invites and pin messages so no one forgets mom's 60th. And never miss a meme or milestone. All protected with end-to-end encryption. It's time for WhatsApp. Message privately with everyone. Learn more at whatsapp.com. This episode is brought to you by State Farm. Checking off the boxes on your to-do list is a great feeling. And when it comes to checking off coverage, a State Farm agent can help you choose an option that's right for you. Whether you prefer talking in person, on the phone, or using the award-winning app, it's nice knowing you have help finding coverage that best fits your needs.

40:46Like a good neighbor, State Farm is there.

40:51Hey, business owners. We know you know the importance of maximizing every dollar. With the Delta SkyMiles Reserve Business American Express card, you can make your expenses work just as hard as you. From afternoon coffee runs to stocking office supplies and even team dinners, you can earn miles on all your business expenses. Plus, you can earn 125 ,000 bonus miles for a limited time through October 29th. The Delta SkyMiles Reserve Business Card. If you travel, you know. Minimum spending requirements and terms apply. Offer ends October 29th, 2025.

41:25We're back with Profit Your Markets. I'd love to know how things sort of work inside the FTC, you know, how do you figure out which sectors you need to be taking a harder look at. And what are some of the criteria that you use when discerning which companies are monopolies and which aren't? So on the antitrust front, there are kind of two components of our work. One is merger enforcement, where we're primarily having to be in a reactive posture because we don't know what deals are going to come into the door and we do a case-by-case analysis. The other part of the work that we do is really focused on monopolistic practices.

42:04And sometimes these things interact, right? You see how mergers can be also allowing monopolies to persist. You can see oftentimes that it was a merger that ultimately allowed a dominant firm to really deepen that moat. So it's not like these are entirely siloed. But in the merger context, we do have to be much more in a reactive posture, depending on what firms are proposing. But for me, the biggest thing is where are we seeing some of the major pain points for Americans? And that's why we've been focused so on health care. So we review big pharma deals. We review mergers between hospitals. We've been scrutinizing these pharmacy benefit managers, these middlemen in the pharmaceutical supply chain.

42:48There was a lawsuit filed just last week. And we've had some pretty big wins. So when we scrutinized some of the patenting practices of big pharma, we found that they were listing with the FDA patents for certain parts of devices rather than patents for the core chemical ingredients or drug formulations in ways that was improper. And so we challenge those firms, including in areas relating to asthma inhalers, EpiPens. And several of those firms have already proactively agreed that they're going to be dropping the prices for things like asthma inhalers down from hundreds of dollars to just$35. And so healthcare as a general matter is a big area of focus.

43:32We've seen how blocking some of the big pharma acquisitions has actually resulted in partnerships that resulted in more innovation and resulted in more patients being served by some of these great discoveries. And so I would say healthcare is a big area of focus. thinking about some of these next generation markets is key because we've learned that trying to fix things on the back end in tech is just extraordinarily difficult right i mean these are markets where you have such significant network externalities such significant self-reinforcing advantages of data that the accelerated growth and momentum that happens once you achieve a certain degree of scale is so significant that it's really much better to prevent monopolization early rather than try to fix it a decade or more after the fact.

44:23Because as Prof G mentioned, you know, what the remedy looks like on the back end can be really challenging. And historically, the remedies that have worked most effectively have been breakups, because that's been what's needed to allow the market to be oxygenated. And so, you know, next generation digital markets will continue to be a focus as well. But we keep thinking about where are we seeing the biggest pain points for people, be it in healthcare, be it in food and agriculture, and that sort of thing. We had a pretty interesting conversation with Professor Rebecca Allensworth of Vanderbilt, particularly around this idea of the consumer welfare standard and how we're supposed to sort of quantify it.

45:04Because I think traditionally, the measure has been prices. I mean, if a company is operating a monopoly and they're raising prices, then that is considered consumer harm. But it sounds like under this new administration, it's a bit more expansive than that. I'd love to just get your view on what constitutes consumer harm. How do we actually measure how consumers are being harmed by monopoly powers? So the antitrust laws are written in a way that focuses on competition. They talk about preventing mergers that may substantially lessen competition. They talk about monopolization. What it looks like to protect competition is going to vary depending on the market.

45:51Right. And the key question is, what are the dimensions on which firms are actually competing in a particular market? There are going to be markets where the main dimension of competition is price, but there are going to be other markets where the main dimension of competing is going to be certain types of innovation, certain types of quality metrics. In labor markets, we sometimes see firms are watching what the other firm does in terms of are they offering better wages to their workers? Are they offering better benefits? And so the first issue is you need to understand what's happening in this market.

46:26How are firms competing? What are the dimensions on which these firms are competing? What is the trajectory of the market look like? And then make an assessment based on that. I mean, in digital markets, we've, of course, seen a whole set of services that charge zero dollars to their users, but their users' data is what's being monetized. And so you can imagine that privacy and how privacy protective certain services are could be a really important dimension of competition, something users care about, something companies are competing on. But it's really a very fact-specific analysis. So it absolutely makes sense theoretically to preventive medicine here and move in and apply some form of antitrust before these companies get too big and too strong.

47:13And it strikes me that that just begs the question or focus on AI, where chat GPT is being used by 92 % of corporate America, where NVIDIA has soaked up the majority of the market capitalization, and it's just dominant in terms of GPUs. But what would sort of preemptive or prophylactic approach antitrust look like when you have a single brand in an emerging market? Do you need to wait and see, or are there things you could do preemptively in terms of a remedy to do preventive medicine, if you will? So antitrust is a law enforcement regime. And so we can only act if and when there is a violation of the law.

47:49We can't really go in prophylactically and, you know, set just entirely new regulations or, you know, create new market structures. It's really pegged to our firms violating the law. Right. And it's not unlawful for a firm to be big. it's really about are they competing fairly or unfairly and are they using their dominant position in ways that is undermining competition that is preventing other companies from being able to compete fairly and so those are the types of things we are focused on you're right that we are already seeing some major players you know have a pretty significant leg up and the focus needs to be on making sure those firms are not acting in ways that are keeping out other rivals, right, in terms of how they're designing their contracts, in terms of how they're designing their products.

48:50And so, you know, it's been publicly reported that both the FTC and the DOJ are looking at some of these markets. But just the bigger point here is we went through, you know, a 20-year period where the big five technology companies, Apple, Facebook, Google, Microsoft, and Amazon collectively made over 800 acquisitions and not a single one of which was challenged at the time. And now there are lawsuits kind of retroactively identifying that some of those were missed opportunities and failing to stop those deals had a really negative impact on the market. It feels like the responsibility of preventive treatment sort of lands on Congress.

49:30I'm just wondering, to what extent does the FTC and do you personally communicate with Congress? Is there any sort of exchange of information there or are you just totally separate? We constantly communicate with members of Congress. I mean, we do so, you know, officially when we're up there testifying. We do so when they're asking for feedback or suggestions on legislation. Sometimes they ask for ideas on legislation. And so we have, you know, an agency of 1 ,200 people, some deep expertise in understanding how these markets work. And so we want to make sure we're sharing that expertise with Congress.

50:10On digital markets and AI in particular, I mean, you know, we have our law enforcement tools, which as you noted, we can only be reactive with. But we do have other tools where we can proactively do market studies. And so earlier this year, we launched an inquiry into the AI investments and partnerships that we're seeing to try to understand what are the contractual terms here? Are these contractual terms allowing the dominant firm to be in the driver's seat when it comes to competitive decision making at some of these model companies? Or are there other ways that these partnerships could be undermining competition?

50:48And so using that market study tool proactively is one way that at the very least we can be vigilant. And Chair Khan, just as we wrap up here, a more personal question. Right out of the gates, there were some pretty high-profile cases that the DOJ and the FTC didn't get very far on. And I remember there was some publicity about morale at the FTC being really low. And I remember thinking, I didn't think you were going to last. And then over the course of the last couple of years, you've had some wins. And there's been a lot of reports that you're one of the few senior officials that seems to have allies and supporters on both sides of the aisle.

51:22It seems like, quite frankly, you're just doing very well. Well, just for the benefit of some of the younger people out there, you're extraordinarily young for someone in your position. I got to imagine you're the youngest chair in history at the FTC. What advice would you have? I mean, how did you personally feel when things were not going well? And what was your personal practice for trying to get through that? And what advice would you have for people when they face kind of – I just can't imagine the level of stress you felt during that period. And how did you deal with it? and what were your learnings and advice you'd have for other young people?

51:55Yeah, I appreciate the question. I mean, it's such an honor to be in this role. And, you know, for me, my North Star in all of this is like, what is the point of the tools and authorities we have, right? And how do we make sure we're using these authorities to make a real difference and solve concrete problems that Americans are facing, be it, you know, not being able to afford groceries, not being able to access quality health care, wanting to make sure that our markets are still allowing America to stay ahead globally. Like these are real tangible, concrete things that the FTC works on. And so really staying rooted in the issues and the substance is what motivates me.

52:37You know, I think the most important thing in these types of roles is making sure that you have the best team you can. And I've been really fortunate to have a really good team. It's really important to understand what are your own areas of comparative advantage and strength. And how do you build a team around yourself that is accounting for the areas where you don't have those comparative advantages? And so as we've been able to build out and make sure people are in the right lanes and we have a team that's really able to fire on all cylinders, we are seeing a historic level of activity from the FTC.

53:09And it's just been such an honor to be at the helm and be colleagues with such dedicated, talented civil servants. Lina Khan is chair of the Federal Trade Commission, which enforces the nation's antitrust and consumer protection laws. Khan got her start in antitrust as a business reporter and researcher examining consolidation across markets from airlines to chicken farming. Prior to joining the FTC, Khan served as a counsel to the U.S. House Judiciary Committee's subcommittee on antitrust, commercial and administrative law. She was also an associate professor at Columbia Law School. Chair Khan, thank you so much for joining us.

53:42This was great. Great to be with you. Thanks for having me. Thanks, Chair. Good to see you. Good to see you.

53:55Ed, what'd you think? The most talented young person in government today, probably. I mean, just pretty incredible. Well, that means one of three people. I mean, they're all 80 fucking years old. I mean, that's pretty low bar. I mean, come on. It's like, whatever. I was the most talented Jew on my basketball team. Ask me how many Jews are on the high school basketballs. Anyways. Oh, that's wrong. Is that wrong? Is that wrong? And even more importantly, Chair Khan, that sounds like a Star Trek movie. I mean, that just sounds like the badass in a Star Trek movie. Did you see or you're to ask your father the revenge of Khan, I think it was called.

54:38And William Shatner, Captain Kirk's nemesis, was Fernando Lamas. And he was actually quite good as Khan. It was very good. And it was Cher Khan. I think that's badass. Yeah, I agree with you. She's a total gangster. My attitude used to be, eventually every firm falls. And that's true. If you look at the most valuable firms from 40 years ago, I don't think any of them are on the list, maybe Walmart, that organically there's churn. And what I came to realize is that, yeah, but along the way, these companies really suppress innovation along the way. Anyways, I agree with that. I think she's outstanding.

55:11Yeah. I hope she also is sort of an inspiration for young people to get involved in government because I don't know, I think you look at government today and it does look so stale and old and it does look like a retirement home and sort of the least sexy place that you could work. And then you see people like Lina Khan who have just crushed it in all aspects of life. And, you know, she's having a real impact on our society and our economy in a positive way. and I think it's just sort of, she makes working in government look cool. And I think that's something we need more of. I love that.

56:06Fresh take on markets on Monday.

56:12Lifetimes

56:17You have me In kind reunion As the world turns And the dark flies In love, love, love, love