Antitrust Fervor Hits Washington, but "Big" Isn’t Always "Bad"

COMMENTARY Government Regulation

Antitrust Fervor Hits Washington, but "Big" Isn’t Always "Bad"

Jul 2nd, 2019 5 min read
COMMENTARY BY
Diane Katz

Senior Research Fellow in Regulatory Policy

Diane Katz, who has analyzed and written on public policy issues for more than two decades, is a research fellow in regulatory policy.
Free enterprise allows consumers and investors to act in the present based on their own information and preferences. Phil Roeder/Getty Images

Key Takeaways

The internet is neither “failing” nor “broken” — nor is it in need of government control.

The nation is ill served when, as today, government attempts to graft 20th century rules to a 21st century market.

The incompatibility invites politics to substitute for law, and leaves regulators to define their own powers.

The House Judiciary Committee has hired a scholar popular for promoting government-forced corporate breakups to help with its new antitrust investigation of major online platforms. Antitrust pressure is also rising within the U.S. Department of Justice and Federal Trade Commission (FTC), which reportedly are divvying up investigations of Google, Apple, Amazon and Facebook.

According to Rep. David Cicilline, D-R.I., who chairs the House Judiciary’s antitrustsubcommittee, the investigations are necessary to reveal “how the market is failing, why the internet is broken and why it’s not functioning well, and then looking at what we need to do in terms of legislative action.”

There is no question that online platforms have reshaped human interaction and social conventions, as well as the global economy. The benefits are incalculable, of course. But the intense degree of disruption has also sown uncertainty and blight such as online propaganda, content mismanagement, fake news and lapses in privacy and security. Nonetheless, the internet is neither “failing” nor “broken” — nor is it in need of government control.

The antitrust fervor now coursing through the Washington establishment is a form of political reflex to “do something” in response to dramatic technological churn — benefits notwithstanding. And the tech titans make attractive targets. They have deep pockets and are decidedly unsympathetic. It’s much easier to scapegoat them than to parse the complexities of platform networks.

It is almost as if America has been transported back to the Progressive Era, when U.S. Supreme Court Justice Louis Brandis popularized the notion that corporate dominance and success were de facto proof of illegitimate means. Simply put, “Big is Bad” is back.

That dogma will not serve America’s best interests. This is not to say there are no bad actors or that markets are perfect. As with any human endeavor, rules are broken, and unintended consequences result. In such cases, the public interest is best served when the law is germane and unambiguous, and applied consistently by constitutionally appointed authorities.

None of which currently exists in the technology realm. The nation is ill served when, as today, government attempts to graft 20th century rules to a 21st century market. The incompatibility invites politics to substitute for law, and leaves regulators to define their own powers.

Recent antitrust cases indicate that government is ill-equipped to optimize markets — especially those driven by ever-changing technological innovation. Think IBM, Microsoft, and Google. Indeed, the likelihood of policy and regulatory blunders is very high, and the potential consequences — such as solidifying the dominance of incumbents for years to come — quite grave.

In contrast, consumers are much better equipped to punish wrongdoing. Indeed, technology has vastly expanded their capacity to do so. One’s opinion can be broadcast around the world in seconds.

The series of recent congressional hearings revealed considerable confusion on Capitol Hill about what constitutes market dominance and monopoly, versus unlawful anti-competitive business practices. Not all monopolies are illegal; some are “coercive,” but others are non-coercive.

Antitrust enforcement is intended to halt coercive practices — such as price-fixing, bid-rigging, group boycotts, and exclusionary dealing — or what the FTC deems as practices that are likely to restrict competition, increase prices, reduce product or service quality, or constrain innovation. Too often, antitrust authorities have overreached into instances of non-coercive monopoly or have misread market dynamics.

Since the Industrial Revolution, and especially in the Information Age, it is not unusual for efficient, competitive markets to comprise only a few big, innovative firms. This is especially true when there are high fixed costs or when a company debuts market-altering technology.

Unlike textbook examples of anti-competitive behavior, online networks exhibit extremely high levels of research and development, continual product evolution, frequent market entry and almost as frequent exit, and economies of scope and scale. Size simply does not correlate with anything recognizable as “consumer harm.” In many cases, the “network effects” of the leading platforms can be leveraged much more efficiently than a smaller service provider — which typically means lower cost and greater consumer choice.

Dominance today does not ensure dominance tomorrow. A platform titan can be quickly dethroned by a failure to maintain product or service quality, changes in consumer preferences or technological innovation. In fact, it is typically very difficult for large firms to integrate new technologies or adapt quickly to market changes. Indeed, there is a long list of corporations once thought to be indomitable but ultimately crushed.

Where is Netscape? America Online? Alta Vista? Myspace? Napster? Palm?

Corporations come and go more quickly these days. At the current churn rate, about half of the S&P 500 companies will be replaced over the next 10 years, according to the 2018 Corporate Longevity Forecast. In the past five years alone, the following once-iconic corporations have been displaced from the S&P, among others:

  • DuPont (50 years)
  • Alcoa (50 years)
  • Ryder Systems (35 years)
  • EMC Corporation (20 years)
  • Staples (19 years)
  • Yahoo (18 years)
  • Dell Computer (17 years)
  • Frontier Communications (16 years)
  • DirecTV (9 years)

The Progressive Era’s “public interest standard” drove antitrust policy for some 80 years, but gave way to a “consumer welfare standard” in the late 1970s. As noted by scholars with the Antonin Scalia Law School at George Mason University, the latter approach emphasizes substantive and procedural antitrust rules to benefit consumers over politically motivated enforcement actions that would chill aggressive, but beneficial, competitive conduct.

The notion that the dominant internet platforms are unchecked is erroneous. They are subject to a variety of federal, state and local laws, as well as taxes, financial reporting, shareholder disclosure and the full range of employment, health and safety, advertising, intellectual property, consumer protection and anti-competition laws, to name just a few.

If not calling for outright breakup, some critics of the dominant platforms are demanding utility-style regulation — as if it’s worth reliving the consumers’ experience of lousy cable TV service, or the ever-higher rates, frequent outages and deadly fires of electric utilities, or the contamination of crumbling public water systems.

The push for antitrust sanctions and a suite of other regulations on social media and online services should be rejected. Perhaps more than any other sector, technology’s entrepreneurial spirit is at risk of being crushed by Washington’s clumsy and ill-conceived interference.

The nation’s technological progress largely depends on upholding the fundamental principles of free enterprise, limited government, and property rights. To that end, Congress and the administration must embrace policies that protect internet freedom.

A good starting point is, as always, “first, do no harm.” The proper role of government in technology policy is quite limited. It should protect and defend citizens’ voluntary transactions (e.g., contracts, investments, acquisitions) and settle disputes in matters of law. Period.

When problems arise, more often than not they are better addressed through private action rather than government intervention. It is virtually impossible for government regulation to keep pace with technological change. What’s more, regulation tends to inhibit innovation and limit entrepreneurial activity, shifting labor and capital away from productive uses and into compliance activity.

Moreover, government bureaucracy is neither impartial nor altruistic. Free enterprise allows consumers and investors to act in the present based on their own information and preferences. Penalties for errors in judgment are swift and strict. In many instances, consumers and investors can exact more effective punishment than regulators.

“Big” is not synonymous with “bad,” nor are consumers necessarily ill-served by a market with only a small number of competitors. Anti-trust enforcement should be limited to actual instances of unlawful action intended to subvert competition (e.g., bid-rigging and price-fixing) rather than as a means to create a hypothetically ideal market.

This piece originally appeared in RealClear Policy