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Don’t Panic Over Ad Tech

The Senate Judiciary Committee will hold an antitrust hearing on September 15 to examine Google’s 90 percent market share in online advertising. Senators who would normally support competition and limited government would be wise to remember that antitrust regulation is essentially just another government regulation that replaces the judgment of the marketplace with the whims of government officials and courts with a long history of getting these issues wrong.

The first principles that make private markets superior and government meddling harmful still apply to tech industries. If anything, the complexities and fluidity of the ad tech ecosystem should make lawmakers even more hesitant to interfere.

Showing that Google is guilty of monopolization means proving that Google has “monopoly power in the relevant market,” and that it willfully acquired or maintained that power “as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident,” under the precedent established by the Supreme Court in U.S. v. Grinnell Corp. in 1966.

That requires first defining the relevant market, which in this case is a major challenge for several reasons. First, these markets are multisided: Is the relevant market the market for advertisers, or is it the market for publishers that stand on the other side of Google’s intermediation? Second, there are a lot of different market segments, and they all overlap. Third, the market structure itself is changing at rapid speed.

Google is astonishingly successful, but Amazon, with its treasure trove of high-quality data, has already overtaken both Microsoft and Verizon in online advertising, and could rapidly become a compelling alternative to Google. There was a day when AOL and MySpace were thought to have an insurmountable lead, but we now know better. The dreary history of the U.S. government’s case against IBM is a cautionary tale: By the time the litigation was in its final stages, IBM was already in Miscrosoft’s rearview mirror. Google is far from the only game in town. According to a 2019 report, publishers used and average of six supply-side platforms (with plans to use eight or more in 2020) and four demand-side platforms.

Then there’s the question of Google engaging in anticompetitive practices to achieve or maintain its monopoly position. Are network effects, economies of scale and scope, and data access employed to stifle competition? Or are those just elements of this market that benefit consumers? It’s beyond question that Google provides services of enormous benefits to the public. For instance, consumers likely prefer a network with more advertisers and publishers on it, even if that may technically constitute use of network effects. Similarly, publishers and advertisers are able to reach their target markets more easily and accurately, which means much greater bang for the buck on the advertising side and fewer irrelevant ads for consumers. And paradoxically, the reduced transmission of raw data among different firms means that privacy and security may be more easily and accountably maintained by a Google than by multiple firms in a more fractured market.

Consumer harm is the standard for U.S. antitrust law and it would be hard to find much of it with Google’s ad tech. Harm is much easier to spot within the history of antitrust regulation.

As the antitrust cases against IBM and AT&T demonstrated, investigations of the dreaded monopoly power take little account of the technology industry’s actual history, which in the modern era has been one of relentless disruptive innovation. The answer to Microsoft’s supposedly fearsome “tying arrangement” of Internet Explorer to Windows was not antitrust litigation, but rather a disruptive innovation in the combination of search and browser.

Antitrust law consistently produces the very losses that it imagines it’s protecting the public from. Consider this classic example from Robert Bork’s 1978 book, The Antitrust Paradox. The basic danger of monopolies (and cartels) is that they may use their market power to reduce output and raise prices, thereby capturing profits well above competitive levels and imposing unfair losses on the public. Now suppose that through efficiency and innovation, a supplier of widgets has achieved 90 percent market share, and antitrust enforcers impose a settlement whereby no competitor in that market will be allowed to achieve more than 50 percent market share. Suppose the settlement is implemented, and the same efficiencies and innovations set in, and one of the competitors starts to approach market dominance. To avoid crossing the 50 percent threshold, it would have to reduce output. As a result, in a market cartelized by government action, prices must rise. Antitrust enforcement thereby creates, in the place of an imaginary monopolist, a very real price-fixing cartel, and a price-fixing cartel of the worst kind: one whose otherwise-ephemeral cartel discipline is enforced by the government’s own antitrust enforcers.

Antitrust enforcement all too often interferes with innovation in exchange for no tangible benefit. It’s hard to quantify social losses in the form of innovation and efficiencies that don’t happen. But undeniably, the looming threat of antitrust action has hindered business decisions that would have proved beneficial for consumers and wealth accumulation by entrepreneurs.  Antitrust has also certainly cost taxpayers plenty in public enforcement. Antitrust action has also introduced a public choice problem in that regulators may exercise their powers of overruling the allocative decisions of the marketplace in order to promote their own preferred policy positions. This dynamic leads to intense lobbying by regulated entities for both relief from antitrust regulation and for barriers to entry that limit competition from new entrants in the market.    

The decisions of the marketplace as to where to put capital and how to structure firms and sectors are a much better guarantor of consumer benefit than clumsy antitrust law. Markets move faster and have better information than regulators.  No depth of expert knowledge can know more about what people want than people do. It’s people who drive the market. Bureaucrats cannot predict what people will want, and have failed, often tragically, when they have attempted to do so. Markets are also more reliably objective than the whim of regulators or politicians.

The Judiciary Committee should take this opportunity to push back on antitrust regulatory enthusiasts. Better to let the market continue to work to produce innovations and serve consumers.