How to Humiliate an Economist

Judge Leo Sorokin had enough of the experts of American Airlines and JetBlue last week, calling their testimony "unnuanced" "glib" "misleading" "bias" "not soundly reasoned" and "absurd."

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Today I’m writing about a case that could spell the end of airline consolidation. And one reason is because the judge got tired of obviously dishonest economic experts, and said so in a brutal and delicious footnote.

The Antitrust Deep State

One of the healthier frames that Donald Trump introduced to the public discourse is the idea of the ‘Deep State,’ a network of people who are actually running the nation without accountability. While Trump pointed at people in the administrative state, others, such as Elizabeth Warren, have often noted that these quiet rulers operate as paid-off experts laundering their opinions at well-respected policy institutions like the Brookings Institution.

In antitrust, the place where the dirty laundry gets washed clean is in the economic consulting firms, with names like Compass Lexecon and Charles River Associates. Economists and expert witnesses, often tenured faculty members at well-known universities, have side gigs at these consulting shops working for merging parties in antitrust cases, for somewhere around $1350/hour. The University of Chicago’s Dennis Carlton, for instance, has made over $100 million in his career at Compass Lexecon. This industry creates a structural barrier to justice, as it’s almost impossible to bring an antitrust case without one of these people on your side, which raises the cost of litigation into the millions.

The expert witness business blurs the line between scholar and lobbyist. As one lawyer put it when asked what makes a good economic expert, the key is “to be able to be an advocate without seeming to be an advocate.” It’s an industry without accountability. For instance, Carlton at one point predicted that if AT&T couldn’t buy T-Mobile, then T-Mobile’s business would fall apart. The merger was blocked, and T-Mobile did quite well. But it didn’t matter, Carlton is still considered an important disinterested expert.

No one tracks who got things right and wrong, it’s a bit like a profession where everyone dresses up in white lab coats and puts stuff in test tubes and scribbles math-heavy models on white boards, but then never bothers to actually complete any experiments. Look, they say, we’re scientists, why else would be wearing these lab coats?

Anyway, the one check on this industry is the judiciary, and since economists are hired for their ability to convince judges, it’s not a very effective check. But last week, Leo Sorokin, a district judge from Massachusetts, gave Carlton and Compass Lexecon a very stern talking to about their bad behavior.

The End of Airline Consolidation

First, let’s discuss the case, which in itself is important. In 2020, Trump Secretary of Transportation Elaine Chao gave JetBlue and American Airlines permission to come together in what was called the Northeast Alliance (NEA), a joint venture in New York and Boston where the two airlines would fully integrate operations. Since 75% of JetBlue’s flights came to or from the two hubs, it was a quasi-merger. The NEA was part of a new wave of airline consolidation, which includes the attempt by JetBlue to buy Spirit. As I noted in March, previous waves to centralize the industry worked, because of a mix of lax antitrust and the structural incentives of deregulation.

Over the last twenty years, Delta bought Northwest, United bought Continental, American bought TWA, America West, and U.S. Air. On the low-cost carrier segment, Southwest bought AirTran, Alaska bought Virgin America, and JetBlue engaged in a quasi-merger with American Airlines via its Northeast Alliance. From over a dozen competitors twenty years ago, we are now down to four major airlines - United, Delta, American Air, and Southwest - and these control upwards of 80% of the industry, with a few smaller carriers managing the rest.

As a result, most people can only fly one or two airlines from where they are to where they are trying to go, so airlines don’t have to offer reasonable prices or customer service. Though it’s hard to find good pricing data that includes fees, it seems clear that U.S. airlines are costly and inefficient. In 2017, The Economist noted that the profit per passenger in the U.S. was three times that of Europe. At the time, dropping fuel prices had led to fare wars in Europe as airlines competed for customers, but not in the U.S. Instead, domestic airlines all just took higher profit margins.

The Biden Antitrust Division and Department of Transportation, however, have aimed to put a stop to airline consolidation with two policy moves, challenging both the Spirit-JetBlue merger and the JetBlue-American Airlines Northeast Alliance.

Last week, Judge Leo Sorokin ruled against the NEA on grounds that should not be surprising to any of us. The NEA, he said, further concentrated the industry, cut routes, and meant that American Airlines and JetBlue were no longer competing. The airlines had countered the Antitrust’s suit by claiming the joint venture helped them take on the biggest airline in the region, Delta. Judge Sorokin rejected that defense. Though American Airlines-Jetblue, he wrote, "claim their bigger-is-better collaboration will benefit the flying public, they produced minimal objectively credible proof to support that claim." Moreover, letting two firms cooperate to take on an even larger competitor, he wrote, ‘generally’ violates the Sherman Act. The judge’s ruling creates a “very substantial tailwind for DOJ” in its case against Spirit-JetBlue. So I think we can call airline consolidation dead for the moment.

So that’s the case and its importance. But what was equally compelling was the judge’s lack of deference to airline executives and expert witnesses, which is something I wish we’d see more often, since these parties have a strong incentive to mislead. Throughout his opinion, Sorokin called out the executives for lying, but he reserved his true venom for the consulting team from Compass Lexecon, composed of economists Dennis Carlton, Mark Israel, and Darin Lee. Sorokin dubbed their testimony in turn "unnuanced," "glib," "misleading," "bias," "not soundly reasoned," littered with "false assumptions," and "absurd." He wrote, “based on their historical ties to powerful airlines and the manner in which they expressed their opinions from the witness stand, the Court finds the defense experts’ testimony was tainted by bias."

Sorokin wasn’t anti-economist by any means, and praised the government’s experts. But he was clearly angry at the tidal wave of nonsense to parse out from the airlines. Judges often reserve snark for the footnotes of their cases, and this one was no exception. Here’s one particularly mean footnote targeted at Compass Lexecon’s Mark Israel.

Dr. Israel also testified about conversations he had with the defendants’ executives and lawyers... Though he admittedly took no notes during these conversations, which occurred more than two years before the trial, he claims they are “imprinted in [his] brain” because “[t]his stuff is what [he] do[es] all the time.” That is not credible. It also is undermined by his own concession, moments later, that he could not “recall the specifics” of trial testimony for which he was present only two weeks earlier.

Basically, not only was the judge tired of being lied to, but he was also annoyed that these experts didn’t put any effort into their lies. They are, after all, well-paid to do that.

This whole case is a humiliation not just for Compass Lexecon, but for some of the titans of the defense bar, who have been the ones crafting consolidation for decades. The case was masterminded by iconic lawyer Dan Wall, who repped the airlines before leaving to join Ticketmaster earlier this year. Wall is best known for beating the government over the Oracle-PeopleSoft merger challenge in the early 2000s, which made him a highly sought after practitioner. But he’s been on a losing streak, repping the Aon-Willis Towers Watson insurance brokers who abandoned their mergers, and now this AA-JetBlue Northeast Alliance fiasco. Wall is also a big talker in the bar.

At any rate, there are a lot of reasons for the defense bar and economic experts to denigrate the new enforcement-oriented agencies, as decisions like this are a sort of nightmare for lawyers and economists who have gotten used to selling weak and misleading arguments. Hopefully, more judges will start openly mocking the nonsense thrown their way by defense experts.

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cheers,

Matt Stoller

P.S. I got an interesting note from a long-time reader on how monopolistic corporations structure themselves to avoid all sorts of liability for their products and services, and in doing so open the door to fraud and scams. Erik Peinert wrote up why corporate behavior has turned this way in American Affairs, calling it the ‘fissured economy.’ I thought this was a good example.

Hi Matt,

I love the newsletter and have read for years. Thought I would pass along a weird market power example, that isn't a monopoly, but is emblematic of the insanity of market consolidation and private equity sucking the life out of the world.

I bought a used iPhone 12 Pro on FB marketplace in Nov 2021. I live in Canada. I used the phone without issue until January 2023, when it out of the blue stopped being able to connect to any Canadian wireless provider's network. 

After dozens of calls to my wireless provider (Bell Canada) and to Apple Canada, I was informed that my phone had been "blacklisted", meaning it was blocked from accessing any Canadian wireless network, because it had been reported lost in December 2022. This is where I found out there's a whole network of fraud whereby people sell their phone privately and then report the phone stolen/lost to their device insurance (AppleCare) and get a replacement. This replacement triggers the blacklisting of the original device's IMEI number. My situation was odd as it took so long for the blacklist to kick in, and because it didn't make sense for a person to wait 13 months from selling a phone to me, to reporting it lost/stolen. 

Apple/Bell have outsourced their device replacement and protection plan administration to a company called Likewize Device Protection Ltd, which is based in Texas and majority owned by Softbank. Both Apple and Bell said they had no way of addressing the issue, and I had to take it up with Likewize. I emailed them through their site multiple times and got no resolution. I finally found a phone number, and was given an email to escalate the situation. I'm also a non-practising lawyer, so I ended up having to threaten legal action and through internet sleuthing, guess the email addresses of their Canadian Director and US General Counsel, and CC them on the email to finally get some traction on the issue. As of this AM, it looks like after sending them screenshots of the FB marketplace chat from November 2021, they are unblocking my phone. 

The overall market issue is that Apple and the mobile networks have effectively offshored responsibility for their device insurance to a third party, and the third party is unreachable and has the power to unilaterally shut down a device with no warning. The totally unintended consequence of this I'm sure, is that people will be unwilling to use the private secondary market to purchase a phone, for fear that it will be blacklisted. The result being that more people will stay within the carriers and Apple's ecosystem of trading in their phones and only buying a new phone, for fear that they might spend $1000 and end up with an iPod (one of the Apple reps noted for me that the phone would still work on Wifi and could be use like an iPod, which was helpful).

Thanks,