Google Canada Offices in Kitchener’s Innovation District

Antitrust in the crosshairs: How necessary is it to reform competition policy?

Victor Menaldo

Victor Menaldo

Victor, a Political Economy professor at the University of Washington and co-founder of the UW Political Economy Forum, has published widely on the intersection of technology, regulation, and politics and is currently working on a book on the “Fourth Industrial Revolution.”

A debate is raging over reforming American antitrust laws away from the Consumer Welfare Approach (and therefore away from first principles rooted in price theory and economics generally) and towards a more populist orientation. At best, this means tweaking the current paradigm to accommodate outcomes besides price and innovation to help strengthen our economy and political system. At worst, this may mean going after big and successful firms for political reasons and then reverse-engineering a skin-deep justification for doing so. Modern antitrust is nested within a larger context of logic and evidence-based  policymaking. Neo-Brandeisian approaches, which aim to look at the effect of sectoral concentration and firm size on inequality and democracy, may not yet offer a suitable replacement.
 
The biographies and personalities of Big Tech’s quirky founders dominate their origin stories: the once scrappy, garage dwelling Jeff Bezos or the somewhat cloying, hipster prince Jack Dorsey. Less is told about larger forces. We don’t tend to hear about how globalization created sophisticated supply chains across all economic sectors. Upstream firms (chipmakers such as Qualcomm and handset makers such as Apple) needed strong intellectual property and freer international trade and investment regimes to manufacture their wares in China and Taiwan. Downstream firms (Amazon and Facebook) needed Section 230, which granted them legal immunity for the content posted by their users, internet freedom in general, and laxer antitrust that tolerated network effects and ignored privacy concerns around consumers’ data. Digital platforms have in turn honed a business model without precedent, allowing them to rake in record profits and promise once unimaginable innovations, such as virtual reality.

Investments in information technology and artificial intelligence have rewarded precocious firms in general. Superstar firms beyond Big Tech have singularly exploited cloud computing and the compilation, analysis, and commercialization of data to provide revolutionary products, or even to just sell boring commodities such as soybeans in revolutionary ways. While not monopolies – they compete with other, less efficient firms – these companies are almost always big and quite profitable (1).

As the debate about whether and how to go after Big Tech has heated up over the last few years, antitrust law and its ancillary regulations have been widely misunderstood, mischaracterized, and caricatured by politicians, pundits, and citizens. These misconceptions matter. Getting the facts right about what antitrust has and has not empowered digital platforms to do makes it more likely that reforms will be well-informed and judicious. As a first order concern, it’s not obvious that antitrust is actually a solution to the problems raised by its critics.

We must first understand why we live in an era of large, superstar firms that earn outsized profits: it’s because they outcompete their rivals. Markets for all manner of goods and services have rewarded scale economies, running the gamut from smartphone manufacturing, on the “supply side”, to netizens’ information sharing habits, on the “demand side”. Enter Google, Facebook, Amazon, and Twitter: they managed to establish appealing, many-sided markets with a global reach that brings together consumers, advertisers, developers, and handset manufacturers. Their digital platforms enjoy so-called network effects, direct and indirect, with an ironic twist: they provide free services to users by exploiting their own digital footprint, serving both personalized content and ads. This amplifies the value an additional user or advertiser already obtains in that there are already so many users plugged in to start with. Potentially, it also creates an essential, if not addictive, set of products.

This is therefore not a typical story about “big bad” trusts helmed by predatory robber barons like Rockefeller and Carnegie. Many of these firms invented the very markets they dominate, such as Twitter (sorry, Parler!). Others superseded prior incarnations by offering consumers a better product, as Facebook did (sorry, MySpace!), or Netflix has (sorry, Blockbuster!). Amazon competes with brick-and-mortar retailers such as Walmart and Target, which are improving their online shopping in response. To be sure, Netflix raises its prices every so often, but for families who collectively watch at least one movie a week, membership is still much cheaper than competing options, such as purchasing DVDs, on-demand cable TV, or going out to a movie theater. The reason? Hulu, Amazon Prime Video, YouTube, and innumerable niche streaming services offer competing content. Therefore, it’s not clear there are steep barriers to entry-stopping new entrants from “giving it a go” in many of these markets, network effects or no network effects.

Nonetheless, some critics accuse Big Tech of “communicative capitalism,” that these firms profit off of users’ data without compensating them. There is no denying that – as a default, Big Tech has property rights over users’ digital footprint; their ownership of that information is key to making digital platforms in their current form work: it allows them to offer their services for “free” and to engage in an advertisement-based business model. Most of these firms monetize consumer data to better target ads to their users. Of course, these are ads users are always free to ignore.

But it might very well be the case that if users instead had property rights to their data – imagine if tech platforms had to bid for access to their data through an auction – then we’d see new business models evolve, possibly ones centered less on capturing eyeballs by promoting sensationalist content. The upshot? Users might potentially engage with social media in a “healthier” manner and end up producing “higher quality” data based on a higher quality experience. For example, helping to solve social problems in crowd-sourced experiments in which users are paid for their time and insights. To make this tenable, users could organize into so-called customer unions to negotiate the terms and remuneration. Wouldn’t that be a nice alternative to doom scrolling?

But until that day comes, it is worth being honest about Big Tech’s larger contributions. Rather than ration the quantity of its products, Facebook has encouraged many more exchanges between businesses (big and small) and consumers than would have otherwise taken place. Amazon sells over 350 million products on its platform, providing consumers with endless choices, sometimes at extremely affordable prices. In polls that try to capture consumer surplus – the difference between what users would be willing to pay for goods and services versus what they actually pay – Americans value their use of search engines such as Google at almost $20,000 a year – bagging them amazing savings for a product that’s already free. Other platforms, including Netflix, charge prices that actually subsidize their users quite generously after properly accounting for these companies’ costs of capital.

Responsible for a huge swath of spending on R&D, digital platforms also continue to be a wellspring of innovation. The numbers are mind boggling: in 2019, Alphabet (Google’s parent) spent $26 billion on this, and Facebook spent $13 billion. More broadly, their yearly capital expenditures on things like equipment are formidable, if not absurdly high, also running in the billions of dollars. Big spending like this allows Big Tech to tinker with better products that will be used by new users, or used by the same user base for longer.

Of course, critics of Big Tech have a good argument when they point to mergers between rivals in the social media space, for example, as reducing competition. It may very well be the case that when Facebook purchased Instagram, this endowed Facebook with greater market power, even if it did not translate into higher prices for users. Perhaps fewer choices in this space, in turn, may have worsened the user experience; for example, subjecting users to more ads or greater algorithmic amplification of sensationalist content, Fake News, and conspiracy theories. Yet this fear is hard to square with the fact that there are several potential substitutes to Facebook and Instagram in the form of LinkedIn, Twitter, Pinterest, Reddit, YouTube, TikTok, and even the fledgling Clubhouse. Despite Facebook’s ability to achieve network effects, it does not appear, at least not prima facie, that this means steep barriers to entry – at least not yet.
 

Google Canada Offices in Kitchener’s Innovation District
Google Canada Offices in Kitchener’s Innovation District. Photo @ Dylan Carr for Unsplash.

Of course, none of these rosy facts and figures tell the whole story: these digital platforms are also psychological experiments, social laboratories, and public squares that influence what people across the world see, read, and believe; they shape our preferences, interests, and identity – and how we express ourselves politically. This may even occur in ways that individuals are not aware of. And it may have real world impacts, perhaps fueling conspiracy theories that would otherwise not spread beyond hardcore adherents, exacerbating polarization, and impacting elections.

However, it is always the case that users can simply change their social media experience by tinkering with sometimes hidden settings to opt out of algorithms that select and suggest content and instead revert back to the good old days of chronological feeds; indeed, each of the major tech platforms offer this alternative. Plus, users’ social-media activity has provided (true) information about candidates, promoted voter education, and offered corrections to misinformation about election integrity. And even though controversial, social-media platforms allow politicians to identify and target voters; more surgical pitches increase electoral turnout and political engagement. Finally, digital platforms have responded to criticism by becoming more aggressive content moderators, including Twitter’s de-platforming former President Donald Trump and Google’s decision to stop tracking users across websites, which they used to hoover up their data and better personalize ads.

Big Tech’s critics nonetheless assert that increased market concentration and monopolies in the tech sector explain “less entrepreneurship,” “restrictions on free speech,” “fewer privacy protections,” and “the abuse of consumer data.” Companies like Amazon are accused of harming players up and down the retail supply chain and “unfairly” pricing out brick and mortar retailers. They are also accused of exacerbating inequality and being too “systemically important” due to their size, market impact, interconnectedness, and “low substitutability”. Finally, there is the fear that Big Tech’s market power translates into political power and is bad for democracy. They may have even been a cause of the January 6th Capitol riot and, thus, partially responsible for the second impeachment of Donald Trump. They are certainly a reason why QAnon went viral.

Many Big Tech detractors have looked to antitrust to address these supposed problems. They seek to replace the so-called consumer welfare standard with a broader one rooted in the “protection of competition” and, generally, see bigness as a problem because it implies the accumulation of power, both economic and political. Neo-Brandeisians argue that what should matter when thinking about regulating markets, including Big Tech, is not necessarily whether the quantity of goods and services increases and prices, in turn, fall. Rather, we should focus on the overall number of competitors and their relative size and market power, no matter how firms obtained it. This recalls Supreme Court Justice Louis Brandeis’ efforts (1916-39) to interpret antitrust broadly and seek to curtail what he believed was Big Business’ potentially pernicious effect on democracy and the economic wellbeing of everyday merchants and workers.

Following Brandeis, both his original apostles and their successors have feared that big firms can get away with anticompetitive practices, chief among them acquiring their rivals, by manipulating the political system (2). For this reason, these scholars worry that the context in which big firms operate matters greatly: in conditions of high inequality and market concentration, large, wealthy trusts can corrupt politicians to cement their advantages, whether this means contributing huge sums to their electoral campaigns or bribing them outright. Therefore, big, dominant firms may pose serious threats not only to consumers, workers, and small businesses, but to the rule of law and democracy itself, especially during so-called Gilded Ages such as our own. Lina Khan, a leading proponent of the new populist approach, spells this out in “Amazon’s Antitrust Paradox” (3). She argues that American antitrust law was intended to circumscribe the “power” of big business, full stop.

Before the new generation of Brandeisians arose on the scene, pleas to use antitrust to protect small businesses, reduce firms’ economic clout and size, and eliminate monopolies – even if they reached that status by innovating their way to the top – were enshrined in the so-called structural approach to antitrust that preceded the Chicago School Revolution in the 1980s. True to its name, this approach prioritized market structure and, specifically, the number of firms, assuming that a fewer number of firms equaled a higher market price and vice-versa. Conversely, the Chicago School approach “effectively embraced concentration over competition” when it reconceptualized antitrust around consumer welfare.

The Chicago School founders – epitomized by Robert Bork and his book The Antitrust Paradox (3), the bible of the consumer welfare approach – would readily admit to this, as would their arguably more sophisticated post-Chicago, non-populist successors. While they are less certain than their progenitors that markets correct themselves on their own, both camps agree that policymakers cannot use a magic dial to change a market’s structure, nor can they conjure a greater number of small businesses out of thin air. Whereas structuralists focused on how concentrated a market is and advocated for muscular antitrust intervention in markets with few competitors, post-structuralists of all stripes recognize that the number of firms never maps on neatly to market power and prices. What modern industrial organization theorists realize is that the number and size of firms is just as much an outcome of the competitive process. How concentrated a market becomes may reflect prices, which invite or discourage entry, firms’ opportunity costs – alternative uses of their time, labor, factories, and machinery – and their access to capital. Over the long run, market concentration may reflect the most efficient scale that companies reach when they operate at the minimum of their long run average total costs; to achieve that scale, firms may grow larger, or shrink, or acquire other firms.

Of course, there is a limit to this: if firms buy up all their competitors, they may achieve market power indefinitely if they also raise barriers to entry. This means higher prices and perhaps less innovation – with Standard Oil during the early twentieth century as, arguably, the quintessential example of this. However, surprisingly, the evidence on whether these trusts actually commanded abnormally high levels of market power that stifled competition in ways that were bad for consumers, Standard Oil included, remains inconclusive.

For this and similar reasons, proponents of the consumer welfare approach are skeptical about regulation. Whatever the process that ultimately gets firms to this destination, the result is usually lower marginal costs due to lower average variable costs. In other words, larger firms are able to spread their costs of making an additional unit of a good over the same base (fixed costs).

Moreover, these reduced costs are sometimes passed onto consumers in the form of lower prices. Of course, if two merged firms are able to achieve sizable market power and do not fear new competitors entering the market, they may be able to act as price setters and, in some situations, set prices higher than before, even after factoring in greater cost savings from their larger scale.

However, even if there are outsized profits to be had by some, according to the consumer welfare approach this may represent a strong enticement for new outfits to enter the market and compete them away. So high prices eventually beget lower prices. Monopoly eventually begets competition.

More to the point: when antitrust authorities informed by the consumer welfare approach inquire into how concentrated a market is or promises to be after a merger between rivals – by availing the Herfindahl Index, for example – they are doing so fully understanding that this is, at best, an incomplete starting point.  Weighting the market shares of larger firms, as the Herfindahl Index does, is definitely helpful for arriving at a prima facie sense of how competitive a market is. But it is not a substitute for a market analysis of prices or projected prices based on the demand curve for a particular good – which summarizes consumers’ willingness to pay for it and how likely  they are to reduce the number of products they purchase as prices rise, especially if there are potential substitutes – and firms’ marginal costs (the supply curve).

Whatever the ethical merits of the consumer welfare approach, it boils antitrust down to something that regulators can measure and evaluate with data. This data looks at whether consumers are harmed by firms’ “unilateral conduct” (for example, an exclusive deal forged between an upstream producer and downstream distributor), decisions to merge, and potential for collusive behavior. The basic questions are: Are consumer prices higher than they would otherwise be because a firm with market power was able to ration quantity and therefore increase price? Is a firm with market power able to raise barriers to entry to make it less likely that other firms will enter the market to expand quantity and help drive down prices? Is it using its power to enter new markets and price out competitors, therefore reducing quantity and increasing price? To depress innovation?

One has to use quite rigid economic analysis and hard math to arrive at whether a firm both exercises and abuses market power in a particular market; not only does that market have to be defined first, but it has to be defined in relation to potential substitutes. One also has to make assumptions about consumer demand (how responsive it is to price increases) and supply (the costs incurred by firms producing/providing an additional unit of the good/service). And one has to use fine-grained data that observe real firms in real markets.

Consider how folks who work at the Federal Trade Commission simulate the potential effects of a merger between two rivals on subsequent quantities and prices. Antitrust economists usually start with the Hypothetical Monopolist Test, whereby they define what products are in the market and which ones are out. If a firm could not sustain a small but significant and non-transitory increase in price on at least one product in the market, then the market includes more than one competitor. And because these economists define the product space based on demand substitution, they are able to identify potential alternatives. For example, whether Folgers coffee is or is not an adequate substitute in the eyes of consumers for a latte from Starbucks. Then, to determine whether a merger between rival coffee brands would affect the price of a cup of java, they look at data from actual markets and compare prices: What is the difference in prices in markets with two versus three competitors? What effect does the entry or exit of a rival have on prices?

Then there are the anticipated impacts on innovation. Firm size is simply not a useful metric. Large firms, some of them monopolies, have given us some of the greatest innovations the world has ever seen, including software, smartphones, and the digital platforms and cloud computing infrastructure that connect the globe together and kept the world’s economies afloat during the COVID-19 pandemic. Even before the digital revolution, big firms (potentially monopolists) invented many useful, if not, essential products. AT&T invented transistors, radio astronomy, photovoltaic cells, the Unix operating system, and the C programming language. Xerox invented laser printers and computer-generated bitmap graphics. Indeed, beginning with Joseph Schumpeter, many economists demonstrate that it is the quest for monopoly profits that drives innovation in modern capitalist economies.

Of course, the government’s role in promoting these innovations should not go underappreciated. The combined efforts of the U.S. Armed Forces and NASA’s procurement policies during the Cold War and Space Race allowed transistors to flourish before they were commercialized by firms such as Apple in personal computers. Digital platforms exist by dint of strong intellectual property rights for upstream firms, like Section 230 (which protects Big Tech from liability for the content posted by users), and laxer notions of privacy and antitrust that have tolerated firms with network effects that compiled billions of users globally.

And claims about the negative impact that Big Tech and other companies have on our economy, society, and political systems beyond their effects on prices and innovation may turn out to be true. Yet, at the moment, they have not been proven. No framework has been proposed hitherto by the proponents of the “Neo-Brandeisian” antitrust school to adjudge their claims in a systematic and satisfactory manner – one that is transparent about assumptions, clear about logic, and objective regarding the analysis of evidence.

Antitrust is at a crossroads. This is largely because of Big Tech. We may in fact decide that we should wipe the slate clean and start again. Proposals to go big, by attacking bigness itself, abound, many of them emanating out of Capitol Hill. However, we should first make clear exactly why we have digital platforms at their current size in the first place, with business models that depend on access to data that is freely shared and products that cost consumers exactly zero dollars. And we should think of the tradeoffs involved in tinkering with laws that will lead to a different set of companies, with a different set of business models, and that will pose a different set of problems.

Before we do that, it may make sense to first propose an alternative framework that can predict individual, social, and political outcomes, as well as how to use data to actually test whether they are true in practice. For better or worse, the consumer welfare approach has allowed us to do that for decades when it comes to quantity, prices, and innovation. Can a new, unified post-consumer welfare approach do the same for the effect Big Tech has on users’ wellbeing? Social harmony? Political polarization? Radicalization? Democracy? We continue to wait for it to arrive.

 

References:

  1. Bessen, J., and Righi, C., “Shocking Technology: What Happens When Firms Make Large IT Investments?,” Boston University School of Law, Law and Economics Research Paper, 2019.
  2. Lamoreaux, N., “The Problem of Bigness: From Standard Oil to Google,” Journal of Economic Perspectives, 2019.
  3. Khan, L., “Amazon’s Antitrust Paradox,” The Yale Law Journal, 2017.
  4. Bork, R.. “The Antitrust Paradox: A Policy at War with Itself”, 1978.
Received: 25.02.21, Ready: 21.03.21. Editors: Anthony Pahnke, Jessica Brown.

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