How Narrowly Are We Going to Define Markets for Tech Antitrust?

One of the key points of contention in any antitrust analysis is defining the scope of the market in question. The more narrowly the scope of a market in which a business operates is defined, the easier it is to make a case that said business faces insufficient competition. Antitrust officials and other “big tech” skeptics presumably like this tactic because their cases suffer in many other areas, such as demonstrable evidence of consumer harm through rising prices. So even if these harms aren’t occurring now, they may occur in the future because of the dearth in competition, or so the argument goes.

Simply ignoring existing competitors by narrowing the field of analysis does not make them disappear, however. In fact, proceeding ahead with antitrust action, such as blocking or unwinding mergers and breaking up companies, based on insufficiently wide views of the market in question generally has the opposite of its intended effect.

Here’s an example of the trouble with narrowly defining a business’ relevant market. The market in which McDonald’s operates could be defined as fast food restaurants that serve burgers, fries, and shakes. In this case their competition would be limited to similar chains such as Burger King and Wendy’s.

However, it is well documented that McDonald’s and Starbucks consider each other to be key competitors. McDonald’s also faces competition from other fast food brands such as Chick-fil-A, Yum Brands (KFC and Taco Bell), and Subway, none of which serve burgers. If you expand the scope of the market even further to include “fast casual” restaurants, you see that McDonald’s faces significant competition even in the narrower burgers, fries, and shakes, segment from brands like Shake Shack and Five Guys.

The list goes on and on. Arguably the true scope of the market in which McDonald’s competes includes everything from grocery stores to high-end restaurants. The question they have to ask themselves is, “What will people do when they are hungry?”

The above is an easy thought experiment for established brands and businesses. Yet the fact that the digital/online economy remains a frontier of new business models does not stop the same dynamic from applying. Antitrust hawks around the world are hoping you won’t notice.

At the moment, there are active investigations in the U.S. and abroad into companies such as Alphabet (Google), Facebook, and Amazon. Investigators are, in part, looking into Google’s dominance as an online search service, Facebook’s dominance of social media (particularly given its ownership of Instagram), and Amazon’s dominance of online retail. Yet each of these are extremely narrow or even incorrect views of the markets in which these companies operate.

Amazon is not just in the online retail market. In addition to its various other businesses including Amazon Web Services and its video-streaming platform, Amazon competes in the broader retail market with all traditional brick-and-mortar firms. There are advantages and tradeoffs to both online and traditional retail. Some consumers may prefer seeing a certain product in person before buying it or being able to have it right away. Some may prefer shopping from the comfort of their homes and seeing consumer reviews. This varies person to person and product to product. Amazon’s share of the wider retail market? About 4 percent, pre-pandemic.

Facebook is seen as the dominant social media company, owning and operating the original Facebook along with Instagram and WhatsApp. Yet the largest single social media site in terms of total adult users as of 2019 is actually YouTube, which is owned by Google. Think about it. YouTube allows its users to build profiles, upload content, and like, share, and comment on each other’s posts. It is fundamentally a social media site.

Google is being scrutinized for its dominance in “search.” While Google has become synonymous with looking something up on the Internet, providing a search engine and any number of social media services to consumers free of charge are hardly sustainable business models in isolation. The true market in which both Facebook and Google operate, and thus compete, is in online advertising. In addition, Amazon is beginning to eat some of their lunch in this space.

Online advertising is just one part of the broader advertising marketplace. Facebook, Google, and Amazon all compete with traditional advertising media such as television, radio, print, and even billboards. Again, like in the retail marketplace, each comes with its own strengths and weaknesses for potential advertisers to weigh depending on the product and the target audience.

Assume for the sake of argument that a narrow scope of market is the proper approach for antitrust investigations and that Facebook and Google, despite Amazon’s growing competitive pressure, do represent some sort of competition problem in online advertising. Does this narrow-scope approach to antitrust help competition? Not likely.

Reports suggest both the U.S. Department of Justice and the U.K. Competition and Markets Authority are investigating the recent merger between Taboola and Outbrain. For those unfamiliar, these companies provide what is called “native” online advertising. These are ads that are designed to fit within the content of given website that may appear as recommended articles, videos, or other content. For example, a native ad may appear as a sponsored article within a series of other headlines or links.

In their press release, the combined firms explicitly outline how their merger will help them challenge Google, Facebook, and Amazon in the online advertising market. Yet regulators have tightened their blinders and seem to be only evaluating the native online advertising market versus the broader online advertising market. As a result, should antitrust action go forward, regulators may end up actually decreasing the number of realistic threats to Google, Facebook, and Amazon.

Antitrust investigators and policy makers may believe they’re strengthening their case by using a microscope versus a telescope when looking at the market. In reality, such an approach will only deliver pyrrhic victories, hobbling the ability of firms to offer robust competition in their wider relevant markets.