Why restraining big tech could require rewriting the law
By Steven Pearlstein
Members of a House subcommittee summoned the chief executives of Amazon, Apple, Facebook and Google on Wednesday to grill them on how their companies maintain, enhance and abuse their monopoly power.
Over the course of the five-hour hearing, it was hard to know who seemed sillier - the politicians outraged that profit-making companies had tried to buy up rivals and use their platforms to favor their own services, or the executives who couldn't understand why anyone would think that their companies had even the slightest bit of market power over suppliers and customers.
Of course, any honest search for who is responsible for the rise of Big Tech would also include the members of Congress themselves, who for three decades have sat on their thumbs as judges infatuated with free-market ideology were allowed to so hollow out American antitrust law that regulators are now almost powerless to restrain the tech giants. At this point, only a major rewrite of the industrial era antitrust statutes can bring the tech titans to heel.
The outlines of such a revision are contained in a number of written submissions made to the House antitrust subcommittee, including one by a dozen of the country's top antitrust economists and lawyers who conclude that "current antitrust doctrines are too limited to adequately protect competition . . . or stop anticompetitive conduct." They lay out a series of changes in the law to reverse a series of court rulings that have opened the door to over-consolidation in virtually every sector of the economy, nowhere more so than in tech, where there is a natural tendency of customers to want use the same software, communicate on the same network or transact business on the same platform as everyone else.
While this "network effect" explains much of the winner-take-all competition in the tech sector, mergers and acquisitions have also played a role. The four companies represented at Wednesday's hearings, along with Microsoft, have collectively bought 720 companies over the last 30 years, according to testimony from the American Antitrust Institute.
Google's purchase of YouTube and Waze, Facebook's purchase of WhatsApp and Instagram, Amazon's purchase of Zappos and Ring - all of these were given the green light by the Justice Department and the Federal Trade Commission. Hundreds of other deals were too small even to be reviewed. In only one of those 720 did the government move to block the deal - Google's purchase of travel software firm ITA - only to be rebuffed in court.
"We went from an antitrust culture [in the 1970s] where "the government always wins" to one where enforcers almost always lost, or where fear of losing caused the government not to act at all," wrote Bill Baer, who headed the Justice Department's antitrust division during the Obama administration, in his submission to the House subcommittee.
The economic premise behind the decades-long retreat from antitrust enforcement - much of it originating at the economics departments of the University of Chicago and the law school at George Mason University - is that three firms are sufficient to provide competition in any market, monopolies are only temporary and that mergers create efficiencies that are reliably passed on to consumers in lower prices. Business practices restricting customers or disadvantaging competitors - bundling products, exclusive contracts, pricing restraints and withholding services from rivals - once considered anti-competitive, are now assumed to be pro-consumer. And in deciding whether to block a merger or outlaw business practices, judges no longer take a broad look at the competitive landscape, but rely on technical economic analyses of how much prices will go up or down.
A reformed and modernized antitrust law would reject all of these presumptions, reverse those rulings and make clear that under-enforcement of the antitrust laws is a greater risk to the vibrancy of the American economy than over-enforcement.
For starters, there should once again be some bright lines that should rarely, if ever, be crossed. Companies with more than 40 or 50 percent market share should be prevented from buying any direct competitor, no matter how small, to protect current and potential competition.
Dominant firms in highly concentrated markets should also be barred from buying any company in an adjacent market, particularly ones that are also high concentrated. Such a provision would have prevented pharmacist CVS from buying health insurer Aetna, the AT&T phone company from buying the cable company Time Warner and Ticketmaster buying concert promoter Live Nation.
In highly concentrated markets, the legal burden should be with the companies to demonstrate that a merger or business practice would not reduce competition, rather than on the government to prove that it would - a huge difference in the world of antitrust litigation. In arguing its case, the government would be required to show only that a merger or business practice poses a credible risk of reducing competition, well short of the current burden to prove that competitive harm is likely or probable, or all but certain.
A 21st century antitrust law would also make clear to judges that the purpose of antitrust law is to protect and enhance competition not only because it lowers prices, increases choice and improves quality for consumers, but also because it stimulates innovation, reduces income inequality and reduces the concentration of economic and political power.
Recent court decisions, more narrowly, have declared that competition is enhanced by anything that benefits consumers, and what benefits consumers is lower prices. But in an economy in which some companies give away their services free (think Facebook and Google), a merger or business practice can reduce competition without raising prices. And in markets where companies serve multiple sets of customers (think credit card companies and their cardholders and merchants), what benefits some customers might harm others. Judges need to be reminded that economic efficiency is not the Holy Grail.
"In the search for quantification and scientific precision, economists have taken to defining too narrowly what competition means and how it should be measured," said John Kwoka, an economist at Northeastern University.
A broader analysis of competition would require judges and regulators to consider how U.S. prices compare to foreign prices and how profit margins company valuations compare to those similar industries. It would also look at the pace of innovation in the industry, the degree of competition among suppliers and distributors, the frequency with which companies enter the market, the power companies have over workers and suppliers and the prevalence of restrictive business practices.
In a more aggressive antitrust environment, firms justifying acquisitions on the basis of operating efficiencies and lower prices would be required to provide annual updates on whether those efficiencies and price declines were realized. That would allow judges and regulators to assess the reliability of such claims, which in most cases are grossly exaggerated. And judges should be given the authority to appoint independent economists to evaluate the economic analyses submitted by companies and regulators.
This would not be the first time that Congress has been needed to step in to revive and update the antitrust law - it happened in 1914, 1936, 1950 and 1976. Given our polarized political environment, it will take a Democratic president and a Democratic Congress to do it again.
There is urgency to this project. As we dither, European regulators have already taken the lead in trying to rein in the business practices of the tech giants, imposing billion-dollar fines and prompting complaints that their aim is to hamstring their transatlantic rivals. As we are discovering with other policy issues, the dysfunction of our public sector has begun to seriously erode the capacity of our private sector to adapt and innovate. The rest of the world is not about to wait while we get our act together.
The Washington Post