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Is There an Antitrust Crisis in Big Tech?
This past week, the Democratic majority in the House of Representatives released an exhaustive report, Investigation of Competition in Digital Markets, which purports to demonstrate a looming crisis in today’s digital markets, to which the strict application of the antitrust laws is the obvious antidote.
The report attributes a famous remark to Louis Brandeis: “We must make our choice. We may have democracy, or we may have wealth concentrated in the hands of a few, but we cannot have both.” To the Democrats, the combined $5 trillion market value of four major tech companies—Amazon, Apple, Facebook, and Google—offers ample confirmation of the increasing concentration of wealth and power in a few hands. The report believes that these four firms, each in its own way, raise serious antitrust concerns because of their ability to control access to markets, block innovation by smaller rivals, impose onerous conditions on potential customers and rivals, and skew the organization of trade and commerce in ways antithetical to the general welfare.
Although the report does not speak about breaking up these companies, it does offer a long list of questionable recommendations to address current antitrust problems. Those recommendations include limiting the ability of “certain dominant platforms” from operating in “adjacent lines of business,” erecting nondiscrimination requirements in order to prevent various forms of “self-preferencing,” a “presumptive prohibition of mergers and acquisitions by dominant platforms,” and “prohibitions on abuses of superior bargaining power.”
At no point does this report consider, let alone rebut, any arguments against its far-ranging proposals. No short column can respond to each dire prediction and overwrought recommendation. And, to be sure, there are certainly valid ways to regulate digital industries by the traditional antitrust remedies that limit certain kinds of practices, like price-fixing and cartels. But the report does not allege that these four firms are guilty of these standard offenses. Instead, it seeks to deal with a range of merger issues and vertical practices (i.e., those relationships between a firm and its suppliers or customers) that resist any obvious solution.
A thoughtful analysis shows that the report’s proposals are likely only to make matters worse. For starters, the passages quoted above reveal the soft underbelly of the entire report. First, it is wholly improper to use raw measures of wealth as evidence of an illicit concentration of power. Total assets in the United States have been estimated at close to $270 trillion, offset by liabilities of about $146 trillion. The $5 trillion figure is tiny against that base, and is smaller still given that these four companies operate in distinct, if sometimes overlapping, niches.
In addition, the report is wrong to suggest that these four “giants” so control access to the marketplace that they “can pick winners and losers throughout our economy”—that is, to determine which companies will succeed and fail, apparently without regard to their market contributions. Sorry, but no: the tech venture-capital sector is home to thousands of startups that are part of a highly sophisticated financial market that outperforms any government agency in picking the winners and losers. That reality makes any effort to restrict access of major players to the merger and acquisitions market a serious blunder. To bolster its position, the report cites a recent article by lawyer-economists Scott Hemphill and Tim Wu, “Nascent Competitors,” which defends antitrust “enforcement even where the competitive significance of the nascent competitor is uncertain.” Hemphill and Wu postulate that some of these small buds could blossom into major players that could compete effectively against the established behemoths.
But prohibiting larger firms from acquiring smaller firms hurts not only the big companies but the little ones as well, as these “nascent” firms may explicitly benefit from acquisitions that cash out their innovation efforts. Hence, this prohibition will lead to a decline in startup activity while skewing the competitive balance between the firms that labor under the legal prohibition and their smaller direct competitors.
Nor is there any guarantee that a new startup will become an effective competitor if left to its own devices, as such a conclusion ignores the often critical efficiency gains that financial and technical support can furnish to these acquired firms. Why assume that these acquired striplings would have flourished on their own? Hemphill and Wu “bracket” the question of remedy, which is a luxury not available in the real world. The tech industry depends on rapid movement from planning to implementation, and any costly administrative oversight will delay urgently needed innovations. If a small firm can attract independent VC support to expand or go public it will do so, as did both Google and Facebook, by steering clear of large firm takeover offers that undervalue their true potential.
The report further misunderstands the reach of the antitrust laws when claiming that “the dominant platforms have misappropriated the data of third parties that rely on their platforms, effectively collecting information from customers only to weaponize it against them as rivals.” Data misappropriation is an evident wrong, but not one confined to large firms with monopoly power. Quite the opposite, any firm can misappropriate data that it receives in the ordinary course of business. Accordingly, contracting parties can, and usually do, develop private solutions to limit the misuse of data. Customer lists, for example, can be protected—and strong protocols can prevent employees and outside lawyers and accountants from engaging in insider trading.
Antitrust remedies, including breaking up firms, only complicate these processes. Nor is it likely that the antitrust law can provide a remedy against Facebook’s use of customer data to improve its advertising metrics—customers clearly like access to the Facebook network at zero price, and it is hard to think of any antitrust remedy that can fashion some optimal contract to deal with issues of explicit monopoly extraction.
Next, the report is unduly optimistic that its proposals will prevent dominant firms from imposing “oppressive contractual provisions” on their customers. The report first assumes that superior bargaining power allows dominant firms to make these impositions. Yet interestingly enough, the report does not cite any instances showing how this process works, nor does it discuss the recent Ninth Circuit antitrust case of Federal Trade Commission v. Qualcomm, where claims of contractual abuse were raised against Qualcomm, whose supposed victim was none other than Apple itself.
The Ninth Circuit systematically decimated the FTC’s claims that Qualcomm’s various practices were oppressive, reversing the draconian judgment below against Qualcomm by District Court Judge Lucy Koh. In her opinion, Judge Koh had erroneously concluded that Qualcomm could not limit the sale of its patented chips to persons who agreed to purchase a license to use Qualcomm’s patented technology. At no point did Judge Koh examine the various efficiency rationales for Qualcomm’s scheme before imposing a “permanent, worldwide injunction” that would have forced Qualcomm to renegotiate all of its existing contracts while placing severe limitations on new ones.
The report also fails to grapple with the traditional antitrust “rule of reason” doctrine, which holds that it is necessary to analyze the pluses and minuses of certain kinds of arrangements, such as tie-in contracts (whereby a customer who wants to purchase one product, like a printer, must buy another, like toner) or exclusive dealing (whereby a customer must give all of its business to a single supplier or customer). In ignoring this issue, the report misses the fundamental point that large firms should be allowed to engage in the same practices as their smaller rivals. It’s fair to assume that smaller players in a given industry are likely to price goods and services in an efficient manner. It is dangerous to postulate that these identical practices become abusive once a firm gains monopoly power.
Indeed, the report goes badly amiss by not addressing the well-established rule of United States v. Grinnell (1966) that the antitrust law does not attack monopolies arising from “growth or development as a consequence of a superior product, business acumen, or historical accident,” but only monopolies that are acquired through illegal means. Going after the former reduces the incentives to innovate, while going after the latter provides additional protections against illicit conduct, such as horizontal mergers that limit competition between rivals.
Of course, it is important to take seriously that Google in particular has engaged in “self-preferencing” activities by steering customers to its own products. That issue always arises when a single company (like a telecommunications carrier) sells products on a site that it operates. The rule of nondiscrimination proposed by the report may make good sense in an environment in which these platform operators act as common carriers, who have long been subject to duties to deal with their customers on FRAND (fair, reasonable, and nondiscriminatory) terms. But exactly how does this proposition apply to Amazon, which does not seem to be extracting monopoly rents by selling a vast array of goods and services (including its own) at low prices?
The bigger issue here is not economic aggrandizement, but rather the suppression of information on platforms such as YouTube, Facebook, and Twitter. This creates serious political risks, a situation for which antitrust law does not offer any ideal solution.
The report takes the overconfident view that it can fashion a broad set of remedies for a broad set of abuses. Yet the safer approach is to go after low-hanging fruit with traditional antitrust remedies, to guard against the systematic risk of regulatory overkill implicit in the report’s recommendations.
© 2020 by the Board of Trustees of Leland Stanford Junior University.
Published in Law
Does the left really care about concentration of wealth, as long as the wealth is concentrated in THEIR hands? Which seems to be the case.
This is my concern. I accept that antitrust law is not intended to address this specific danger, and I am loath to press the law into service beyond its intended function. I would like to believe that Section 230 constraints might reasonably be applied, but I’ve heard good arguments for and against.
Perhaps new legislation is required. (I can’t remember the last time I said that.) But, in any case, it’s too late for November.
The very nature of a platform is a synthetic creation by Congress. There should be no reason why Congress can’t impose standards of behavior that if breached would lead to the loss of platform status. This would apply pressure exactly where it is needed and with an irresistible force. Congress in its laziness, ignorance, and/or malevolent interest in actually controlling information flow has not acted in this regard. The desperate move towards anti-trust is an attempt to throw responsibility onto the Justice Dept. Yes, this will produce immense heat and no light. However, every day there is an abuse of the platform law (behavior of a publisher and not of a platform) which Congress fails to address. The growing frustration will culminate in a nuclear war against the platforms where blind anti-trust destruction is all that is left. Oddly there is a candidate for a legitimate anti-trust suit and that is Amazon. As we speak the mindless lockdown is allowing Bezos to destroy what is left of retail in the United States. The very recent Great Barrington Declaration should give you a clue as to the nature of the unfair monopolistic business practice of hiding behind the promulgation of phony science. The number and the stature of the signers of this Declaration have probably forced the W.H.O.’s hand which is now recommending an end to the extreme lockdown.
If my analysis is too technically difficult for you to follow so you’d rather just dither away with solutions from a bygone era, I would recommend that you retire. Sorry to be this brutal to a Ricochet contributor emeritus. However, I am very afraid of the gross economic paralysis of this society. I mean it literally. If you don’t feel comfortable because of the technical nature of the new NIH virus for-profit industry or the Lords of the big platform manipulators you must get the right technical advice and get it soon. We need solutions NOW!! A huge number of small businesses representing a huge number of jobs will disappear. The strangulation of free speech and thought will continue. Richard, we need you but not as the grand old man of the libertarianism of the past but as a warrior in the fight we must fight right now. If I am a nasty little shmuck in saying this to you then so be it. Please let’s get moving!!!
Regards,
Jim
Jim, my impression was that the piece was a review of, specifically, the antitrust aspect of the challenges to these tech behemoths, and so the discussion focused on issues of competitiveness rather than the concentration of political control.
I thought it was good that Richard mentioned the latter in his penultimate paragraph, acknowledging that it is a serious concern, even as he concludes that an antitrust argument is an inappropriate route to remedy.
I would be willing to entertain the breakup of these tech giants as a prudent response to the political threat they represent — if such a breakup was a statutory act and could be justified within Constitutional constraints. But it doesn’t seem right to me to use a tool designed to prevent monopoly business practices when the problem is actually one of a potential abuse of a communication channel for political ends.
Of course, I’m not a lawyer.
Can you say more about this statement? –
“The rule of nondiscrimination proposed by the report may make good sense in an environment in which these platform operators act as common carriers, who have long been subject to duties to deal with their customers on FRAND (fair, reasonable, and nondiscriminatory) terms. But exactly how does this proposition apply to Amazon, which does not seem to be extracting monopoly rents by selling a vast array of goods and services (including its own) at low prices?”
What does the term “nondiscrimination” refer to? And how did the report propose it be achieved?
I am in favor of breaking the tech giants up and generally favor their approach.
The problem is that a Libertarian is hard pressed to ever find antitrust law application appropriate because they think the very law itself is an abuse of power.
The laws themselves are not capitalism in nature. They are distributism – attempts to make the economy more friendly to MORE competition and business owners rather than allowing a small number to grow big. It encourages competition and consumer choice.
The laws attempt to promote healthy business by protecting smaller businesses and consumers.
Libertarians don’t think such laws are necessary. I think history says otherwise.
I think, given the context, political nondiscrimination – political viewpoints.
I wrote about the issues of platform control of information & dialogue here: Do the Lord Chancellor and the Archbishop Approve?
An interesting ‘public square’ argument was made by Prager University in connection with the ‘restricted’ status assigned to its videos by YouTube. This argument is based on a 1945 Supreme Court decision in the case of Marsh v Alabama, in which the court ruled that Gulf Shipbuilding Company could not prohibit a Jehovah’s Witness from distributing literature in the the town of Chickasaw, Alabama, even though that town was Gulf Shipbuilding’s private property. The argument is that the precedent also applies to on-line communities, even though these do not involve physical presence…this argument was rejected, though, by both the district court and the Ninth Circuit…not sure whether there will be an appeal to the Supremes.
Henry,
The reason I have spoken so harshly is that this kind of super deferential attitude is what precludes us from quickly getting to the point that we need to get to. It is completely obvious that anti-trust is a caveman’s club in the context of the internet. The difference created by Congress between a platform and a publisher is what the really pressing issue is. We need to get to the point and get there as soon as possible. We watched three and a half years of lunacy about Russian interference in the 2016 election. The Russians never had the capability to move the needle of the body politic a micron no matter what their intent. It was a moot point from day one and yes it was also a complete fraud. However, Google can tweak an algorithm, and instantaneously 4/5 of the traffic on perfectly legitimate conservative sites can be crushed. A week or two later after screams of protest they will simply say it was a “mistake”. There will be no repercussions on Google for having made this “mistake”. It would be easy enough to regulate that search algorithms on platforms like Google must always be transparent and all changes must be announced and published in advance. Any other behavior than this transparency should immediately expose them to lawsuits. Further, if the now transparent algorithms can be proven in court to be biased, thus not platform algorithms but the algorithm of a publisher with an editorial policy, then this too should expose the platform to even a class action lawsuit.
This can be done with a single piece of legislation. Republicans and all sane members of Congress (this may leave out many never-Trumpers) have every right reason to get on board and protect basic free speech in the information age. We must all get to the point quickly or we will lose credibility with the people and we should lose credibility with the people. Now is not the time to rest on one’s reputation as a former conservative or former libertarian. Now is the time to move conservative and libertarian principles into the information age and establish a solid foundation for the future.
Regards,
Jim
What shape might a consent degree take if a small internet search company (imagine a findx or DuckDuckGo bought and fortified by Google litigation rival Oracle) were to successfully pursue the kind of legal fight against Google’s internet search monopoly as MCI and others won against the Bell System in the 1982-4 AT&T consent degree on telephony?
If significant parts of the Google software were to become “open source”, could we possibly get several search engines (Baby Googles?) with Google’s breadth, speed, and accuracy, but with different ordering of results, so that for example, on some of them Breitbart or Citizen Free Press results on a new story might rise to the top far ahead of sources like Vox, Slate, and The Daily Beast (as Google presently tilts)?
Jim,
Hence my reference to Section 230 in a previous comment.
H.
Any discussion of Section 230 needs to mention the case Stratton Oakmont Inc vs Prodigy Service Co., which provided part of the rationale for that 1996 legislation.
In October 1994, an unidentified user of Prodigy’s ‘Money Talk’ bulletin board asserted that Stratton Oakmont and its president committed fraudulent acts in connection with an initial public offering. Stratton sued Prodigy, as well as the unidentified user, and argued that Prodigy was acting as a publisher. Prodigy claimed it was not liable, based on the precedent of an earlier case, Cubby v CompuServe Inc.
The Stratton court held that Prodigy was liable as the publisher of the content created by its users because it exercised editorial control over the messages on their bulletin boards in three ways: 1) by posting Content Guidelines for users, 2) by enforcing those guidelines with “Board Leaders”, and 3) by utilizing screening software designed to remove offensive language. The court’s general argument for holding Prodigy liable, in the face of the CompuServe case, was that “Prodigy’s conscious choice, to gain the benefits of editorial control, has opened it up to a greater liability (than) CompuServe and other computer networks that make no such choice.”
https://en.wikipedia.org/wiki/Stratton_Oakmont,_Inc._v._Prodigy_Services_Co.
(A nonvirtual-world analogy for this case might be a job printer which normally prints whatever its customers might request, but occasionally refuses certain jobs on grounds of offensive language, etc…not sure whether there have been any such actual cases.) In any event, the Stratton case outcome was intimidating to online service providers, suggesting that any discretion whatsoever as to customers/content could get them sued for a lot of money…the cloud was removed by Section 230, passed in 1996.
So the primary action is to revise Section 230 to remove ambiguity – not anti trust and not repeal section 230. And also, perhaps, put it to the courts to decide if political viewpoint discrimination falls under the discretionary outlines in Section 230 (which the American Public largely thinks it doesn’t), but the courts have a tendency to favor the Big Left and Money over the public where ambiguity is involved.
Although SCOTUS has been consistent on free speech issues, so who knows.
Henry,
Yes, exactly. Section 230 is where it is at. A platform is not to exercise editorial control. We should take this as a commandment from Gd, not as a casual suggestion. We must have this standard broken down into as clear a doctrine as humanly possible. We must have transparent algorithms so they can be checked for violation of the principle. The public must be assured that their government intends to enforce The Platform Doctrine (if that is what we should call it) and fully protect their rights on the information superhighway.
Mr. Orwell told us what to do.
Don’t let it happen. It depends on you.
Regards,
Jim