Misplaced Trust in Antitrust
I was mystified to see Robert VerBruggen’s story in the latest issue calling for “gentle approaches” to solving what he regards as a monopoly problem in the current dominant positions of Google/Alphabet, Facebook, and Amazon. My normally insightful colleague appears to have ignored the rich history of free-market legal and economic thought about the questions of competition and antitrust in favor of what has come to be known as “hipster antitrust,” which is not only contrary to the free-market tradition but, worse, draws much of its inspiration from the European Union.
It is important to get a couple of misconceptions out of the way first, before I get on to Robert’s specific arguments about the tech giants, because those misconceptions flavor the piece. To begin with, American antitrust law is not particularly concerned with size or market share, whatever Learned Hand might have said. Our bipartisan legal consensus in America holds that the primary issue for antitrust is consumer welfare, as the late, great Robert Bork argued in The Antitrust Paradox. It is the fact-based “rule of reason” not hypothetical concern about size that drives American antitrust law.
And a good thing too. What this means is that government is not empowered to steam in and break up companies that are increasing consumer welfare through efficiency and innovation in favor of their less efficient, less innovative, and less welfare-enhancing competitors.
This also means that when Robert says, “conservatives are keenly aware that capitalism works so well thanks to the magic of competition — and cannot work without it,” a coda must be added. Someone can achieve a position of complete dominance through being better at the competition than anyone else – and conservatives should not view such a situation as a lack of competition or, worse, an excuse for government to try to force competition. As long as there are no entry barriers to stop new competition, we can live with market dominance. Think Gillette – for years the only player in town when it came to razor blades because their blades were just so much better than anyone else’s. Then along came Dollar Shave Club and Harry’s to inject price and efficiency competition into a previous stagnant market. No intervention was necessary.
So, bearing that in mind, let’s turn to Robert’s specific concerns with the tech giants. You can tell he’s on shaky ground because he starts by praising the European Union, which wants to have “comparison shopping sites” prominently featured in Google Search results. In doing so, it relied on a market analysis that failed to consider Amazon a competitor to Google in online shopping, which might tell you something about the EU’s analytical capabilities. Yet even assuming the EU was correct in its description of the market, forcing the inclusion of comparison shopping sites might easily be detrimental to consumer welfare.
For example, if I want a new thermostat for my Jaguar because it has failed again, dammit, I’d like to be able to have somewhere I can buy that part pop straight up. If what I get instead is a comparison shopping site telling me that retailer X has some better qualities than retailer Y when it comes to buying Jaguar parts, it doesn’t help me much if, by the time I go through the medium of the comparison site, I find that retailer X doesn’t have the part (and especially so if retailer Y doesn’t have it either). Including the comparison site might very well be detrimental to my user experience of using Google, as well as to my consumer welfare. The EU’s logic is that Google should be forced to provide me with a worse user experience.
Robert’s second EU example – that Google provides Android software to the makers of smartphones for free – is yet more tenuous. As he says, “This is remarkably similar to the practice that got Microsoft in hot water two decades ago, when it sold Windows, its monopoly operating system, with its own Internet browser set up as the default, doing great damage to its rival Netscape.” And as we well know, because Robert mentions it later in the piece, Internet Explorer is no longer dominant, as market forces and creative destruction replaced it. Google Plus, meanwhile, did not fail because someone revealed that Google was trying to encourage media companies to use the social network, but because it was simply out-competed by Facebook – and not by MySpace, which induced vapors a decade ago because people wondered whether it would ever lose its “monopoly.”
What Google has done is supply massive amounts of consumer welfare at very little cost to the user. So has Amazon, Robert’s next target.
An example is implicit in the complaint Robert advances about Amazon’s dominance in the e-book market. They have that because they essentially invented a new way to read books that most of us find much more comfortable, affordable, and – yes – enjoyable than the old way. Its competitors are playing catch-up – and have not yet caught up. As Emil Duhnea points out, “It’s also noteworthy that Amazon itself suffered a similar fate in its attempt to enter the smartphone market with the failed Fire phone. Such details that don’t reinforce the image of an all-engulfing monopoly are best left out, though.” (Emil’s whole article is worth reading about the argument that Amazon is somehow bad for us).
As for Quidsi, which at first blush looks like a classic example of predatory pricing, it is worth noting that Amazon isn’t a major player in the diaper market, for good reason – wholesale club prices for diapers are about the same price as Amazon’s. It is notable that after Amazon bought Quidsi, it tried for several years to run it as a profitable brand, and eventually had to close it down. Moreover, the claims about pricing come from “calculations by Quidsi executives” that are unclear whether they included Prime membership discounts, among other considerations.
But even if Amazon had used its greater efficiency to price Quidsi out of business, that still isn’t illegal under US antitrust philosophy. As the Federal Trade Commission says,
Pricing below a competitor’s costs occurs in many competitive markets and generally does not violate the antitrust laws. Sometimes the low-pricing firm is simply more efficient. Pricing below your own costs is also not a violation of the law unless it is part of a strategy to eliminate competitors, and when that strategy has a dangerous probability of creating a monopoly for the discounting firm so that it can raise prices far into the future and recoup its losses. In markets with a large number of sellers, such as gasoline retailing, it is unlikely that one company could price below cost long enough to drive out a significant number of rivals and attain a dominant position.
So even if Amazon did deliberately drive Quidsi out of business, that wouldn’t be illegal unless Amazon was using the same tactics to try to drive BJs, Sam’s Club, Walmart, and Target out of the diaper market. That plainly is not happening.
This is why the Supreme Court noted in Matsushita v Zenith Radio Corp. (1986), “There is a consensus among commentators that predatory pricing schemes are rarely tried, and even more rarely successful.” Putting the best possible spin on Amazon’s pricing for the hipster antitrust movement, you could possibly argue that Amazon is dominant in online only diaper delivery, but that is segmenting the market down to ludicrous levels – and again ignores the overall point that in America it is consumer welfare that matters.
Robert is perhaps on his soundest ground when he notes that disruptive innovators these days have a tendency to sell out to the tech giants, but even there he ignores Bastiat, and focuses on the seen rather than the unseen. There are tremendous regulatory forces in play today that encourage the Instagram sell-out over the Snapchat IPO.
Ever since the passage of the Sarbanes-Oxley law in 2002, Initial Public Offerings (IPOs) have become extremely onerous undertakings. This has meant that selling equity to public investors in an open market has become extremely difficult. Instead, equity is restricted to founders and private investors. In turn, this restricts investment opportunities for the public.
FinTech has shown some capacity to solve these problems, but regulators have not been open to it. Equity crowdfunding has not been embraced by the SEC, despite the passage of the JOBS Act in 2012. Moreover, the promised revolution of Peer-to-Peer business lending never really materialized, as regulators set their sights on these lenders and forced them to act like more traditional lenders, undermining the business model.
The result is that financial regulation aimed at stopping “too big to fail” actually created a problem of “too small to succeed.” Larger firms may have become entrenched because regulation makes it too difficult to lend to startups and skews the incentives when it comes to a successful startup growing or selling out to a larger firm.
So if Robert is looking for “gentle approaches” to dealing with the problems he thinks he has found, perhaps calling for financial deregulation would be appropriate – and in keeping with free-market legal and economic thought. But that’s not the case. The remedies he calls for are far from gentle, and would actually represent massive government intervention in the market – regulating tech firms as public utilities, for instance, something that the FCC is repudiating today when it comes to telecoms firms. Applying the First Amendment to these companies, as if they were government agencies, would also represent a massive change in America’s founding philosophy and the long-held distinction between public and private. The consequences of such a precedent could be literally ruinous.
In the end, Robert says that conservatives should “ensure that competition flourishes online.” I respectfully disagree. Conservatives should let private businesses rise – and fall – on their own merits. Indeed, if we are to reap the full benefits of competition and innovation, perhaps we should look again at abolishing antitrust entirely. As Judge Bork said, “[M]odern antitrust has so decayed that the policy is no longer intellectually respectable. Some of it is not respectable as law; more of it is not respectable as economics; and…a great deal of antitrust is not even respectable as politics.” That is still the case today.
Originally published to National Review.