Articles

Antitrust & Big Tech


The tech giants are a small group of really
big firms, which provide digital services to users. Most people mean a handful of firms that are
public facing, such as Facebook and Amazon, Apple, Netflix, and Google. Abbreviated sometimes
as the FAANGs. These new platforms creates a lot of social
welfare benefits for users, but at the same time, we know, and we increasingly are made
aware of the fact that those platforms come with a cost for users. I’m not one for government regulation and
a lot of oversight and getting their hands in there, but if these companies can’t do
it themselves, is that what it’s going to come to? I think eventually it would, you’re exactly
right, if they can’t do it themselves. We don’t quite know how to cope with these
new demands, which we perceive are indeed of the family of market failures, but on which,
due to the emerging nature of the phenomenon, we have very little knowledge and very little
experience in regulation. In March, you said we were maybe past the
point where tech companies could regulate themselves in terms of privacy. What should
we do now? I’m not a pro-regulation kind of person. I
believe in the free market deeply. When the free market doesn’t produce a result that’s
great for society, you have to ask yourself, what do we need to do? I think some level
of government regulation is important to come out of it. The consumer welfare standard was implemented
and incorporated into the antitrust analysis and competition analysis in the 20th century. Consumer welfare standard has now been with
us since, let’s say late 1970s, 40 years. Some people say that it’s too price-centric,
it doesn’t entitle antitrust enforcers to go after non-price cases. Harm to innovation,
harm to quality, harm to choice. The idea here is that when corporations grow too large,
they can wield excessive influence on public policy through all sort of tactics, including
capture and corruption. The term populist antitrust, or more frequently,
hipster antitrust, really just describes the trendy commentary now of against the consumer
welfare standard, evoking all of these other values that should be taken into account,
people say, when analyzing a merger or a business practice by a company. It can be jobs, it
can be income inequality, it could be an effect on the environment. The proponents of the antitrust counterrevolution
are in favor of a standard that they call the protection of competition, or the protection
of the competitive process. Professor Tim Wu from Columbia Law School talks about a
minimum of four firms in every and any market in the US economy, and once we reach a floor
of four firms, no mergers should be allowed in those industries. The history of American antitrust laws goes
back to the Industrial Revolution. With machines expediting labor, businesses like Rockefeller
Standard Oil and Carnegie Steel Company became so large that they shut out any competition.
They were called trusts back then, but today we call them monopolies. The first antitrust law was actually enacted
in Canada in 1889, followed by the Sherman Antitrust Act in the United States in 1890.
The initial impetus, as the name suggests, was the act against trusts. In 1914 Congress
created the Federal Trade Commission and passed both the Clayton Act and the Federal Trade
Commission Act. Under the administration of Teddy Roosevelt
in 1901, trust busting, the breaking up of monopolies by the government, became a household
phrase. Now, from that date onwards, enforcement is
going to increase. We are going to see cases against large trusts and big business organizations
like the Standard Oil of Rockefeller, or Alcoa in aluminum. We see more cases. Every and
any form of concentration, including very incipient, insignificant increments in market
share are prohibited, per se. You cannot merge, you cannot exclude a business competitor.
It is the same prohibition for all business transactions, regardless of their size, scale,
and possible efficiency. But in the 1970s, appeals court judge Robert
Bork changed the approach to antitrust by introducing economics, and shifting the focus
from protecting citizens to consumer welfare. Consumer welfare is any of the additional
value that we derive from the product or service that’s above and beyond what we pay. Suppose
a smartphone costs $200, and I choose to buy that smartphone for $200. I must derive at
least that amount of value from the smartphone for me, the consumer, to be rational in choosing
to purchase that phone. Everybody’s different. To me the smartphone may be worth $1,000 of
value to me, and I paid $200, and so, hey, I actually derived $800 of surplus. Bork really starts to rock the boat with his
book, and in previous papers, and says, “We need to look further, because not all such
mergers and anti-competitive types of business behavior are inefficient.” You’re always trying to ask the question,
post merger, whether the merged firm will be able to raise prices to consumers. By raising
prices, it would mean that consumers might be getting the same goods or services, but
now all of a sudden they’re paying more. Therefore, just numerically, you can see they’re deriving
similar values, assuming they’re deriving similar values as they did before, but now
they’re paying more. Lower consumer surplus, lower consumer welfare. The consumer welfare standard is ordinarily
associated with lower prices, but that is by no means the full story. If I’m buying
something, I might want a low price, I might want good credit terms, I might want prompt
delivery, I might want a higher or a lower quality, depending on how long I’m going to
use it, or what have you. All of those dimensions are, runs along which firms compete. If you think about Facebook, Facebook has
a core market in which it is a monopoly to social networks. Google has a core market,
which is a monopoly. You could say online advertisement or search engine. Netflix, same
for video streamings. On the other hand, that could be a perception.
They’re very successful because they offer a good product, but that does not mean that
they don’t necessarily compete with others. They all face substantial competition in one
respect or another. For instance, Amazon, which sells goods, has four percent of the
retail sales market. That is far from a monopoly, that is a highly competitive firm in a highly
competitive industry. Investments in R & D, which really are very
important, the growth of these companies, the growth in output, product launch, new
products put to the market, all that does not really denote or smell like monopoly. Google, say, has a very, very high percentage
of the search business, or traffic, if you will, but of course their real market is for
selling advertising. In that market they are far from a monopoly. Traditionally in economics you say a monopoly
is a firm that has 100 percent share in the market. Then a separate issue is what do you
define this market to be? What do you define the space? It is a complicated question that
economists and lawyers have spent a lot of time thinking about and studying. That is what the antitrust agencies do. They’re
not putting on blinders and looking solely at price. Price is often enough because it
can tell you, this is not good for consumers, or it can tell you, this is very good for
consumers, do you see any downside on non-price dimensions? A lot of Roosevelt’s trust busting, sometimes
it’s been overstated how much it really changed the economic power relationship, but it certainly
made people look to Washington to regulate businesses. We know from economic theory that in industries
with high fixed costs, that is the cost of building a fixed infrastructure, in such industries
sometimes it is more efficient to have a smaller number of firms than a large number of firms,
because you end up basically replicating the number of infrastructure by the number of
firms. If we go too far in that idea of protecting the competitive process, or in this idea of
protecting the structure of competition in itself, we risk losing a lot of efficiency.
The optimal standard for antitrust and competition policy is probably somewhere in the middle. I think the primary antitrust activity around
the world, with respect to these companies, has really been in Europe rather than the
US. The European competition agency has brought cases against Google for favoring its own
websites, such as Google shopping. In that decision, the European Commission
decided it was unfair from Google to preference its own comparison shopping service at the
expense of others. Google needed to leave some space, some living space and living profit
for other companies to operate on it’s platform. The European Commission, the EU’s administrative
body, has certainly been active in prosecuting companies for allegedly abusing their dominance
of European markets, especially in the area of high tech. The EU has leveled fines of
billions of dollars on firms like Google, Microsoft, and Intel. We’ll be testifying
about competition law approaches to monopoly and abuse of dominance in the US and at the
European Union. We welcome each of you and we thank you for your time. Now, the CEO of Google, Sundar Pichai, defended
his company, saying they do not manipulate searches. From the moment he stepped foot
on Capitol Hill he got bombarded with questions about possible bias. It started in the hallway. I don’t think this antitrust division is inclined
to do anything really, really adverse to the big tech dominant players. They’re looking
at it to make sure there isn’t anything exclusionary or nefarious going on.

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